If anyone asks, you didn't learn it from me

Summary

This script delves into the underworld of crypto money laundering, revealing how criminals use cryptocurrencies to clean illicit gains. It traces the history of money laundering back to notorious figures like Al Capone and Pablo Escobar, outlining the three-step process: placement, layering, and integration. The script highlights the unique challenges and techniques in crypto laundering, such as the use of coin mixers, Peel chains, and chain hopping, and discusses real-world cases like the Bitfinex hack. It concludes by emphasizing the neutral nature of cryptocurrencies, which can be tools for both good and bad.

Takeaways

• 💰 Cryptocurrency has become a new avenue for money laundering, with an estimated $8.6 billion laundered in 2021.
• 🌐 The process of money laundering involves three main steps: placement, layering, and integration, which are similar in both traditional and crypto contexts.
• 📈 Cryptocurrencies are paradoxically more traceable than fiat money due to the public and transparent nature of blockchain technology.
• 🔄 Criminals often use coin mixers and peel chains to distance themselves from the source of illicit funds, making the money trail harder to follow.
• 💡 The term 'money laundering' originates from Al Capone's alleged use of laundromats to disguise the source of his illegal income.
• 🌍 The scale of global money laundering is enormous, with the United Nations estimating between $800 billion and $2 trillion laundered annually.
• 🏦 Traditional money laundering often involves buying cash-intensive businesses to integrate illicit funds into the economy.
• 🔒 Cryptocurrency exchanges typically require identity verification, complicating the process of converting illicit crypto to fiat money.
• 💼 The script mentions real-world cases of money laundering, including the Bitfinex hack and the arrest of a couple in Manhattan.
• 🛑 Crypto money laundering is not only about cleaning profits from cybercrimes but also about disguising the source of real-world illicit gains.
• 📊 Crypto laundering can be cheaper than traditional methods, providing an incentive for criminals to use cryptocurrencies for such purposes.

Q & A

How much crypto was laundered in 2021 according to the transcript?

According to the transcript, $8.6 billion worth of crypto was laundered in 2021.

Why did Pablo Escobar have a cash problem?

Pablo Escobar had a cash problem because he had so much cash that he would have to write off $2 billion every year due to it being lost or damaged.

What was the origin of the term 'money laundering' as mentioned in the script?

The term 'money laundering' originated from the 1920s and 1930s in Chicago, where Al Capone was said to have bought laundromats to disguise the source of his illicit income.

What is the estimated amount of money laundering globally according to the United Nations?

The United Nations estimates that between $800 billion and $2 trillion are laundered every year globally.

What are the three steps of traditional money laundering as described in the script?

The three steps of traditional money laundering are placement, layering, and integration. Placement involves placing the money into the legal world, layering is about moving the money around to distance oneself from it, and integration is reuniting the money with the owner as legitimate profits.

How are cryptocurrencies more traceable than fiat money?

Cryptocurrencies are more traceable than fiat money because all transactions are recorded on a public, transparent, and permanent blockchain.

What is a coin mixer in the context of crypto money laundering?

A coin mixer is a third-party service that mixes cryptocurrencies from different users, including dirty and clean ones, to make the funds harder to trace back to their original source.

What is a Peel chain and how is it used in crypto money laundering?

A Peel chain is a method where a small number of coins are shuffled into mini wallets to avoid raising suspicion, and then a tiny portion of these cryptos is converted into fiat money at each step, repeating the process many times to distance the funds from their original source.

What is chain hopping in the context of crypto money laundering?

Chain hopping is the process of converting funds from one cryptocurrency to another, such as from Bitcoin to Monero, a privacy coin, to further obfuscate the source of the funds.

Why was the crypto broker Suex sanctioned by the US?

Suex was sanctioned by the US because it was found to have exchanged tens of millions of dollars worth of cryptocurrencies, many of which originated from large frauds and thefts.

How does crypto money laundering differ for crypto cyber crimes versus real-world crimes?

For crypto cyber crimes, the profits are generated in cryptocurrencies, which then need to be laundered. For real-world crimes, the profits are generated in fiat money, which is then converted into cryptocurrencies for the purpose of laundering.

Outlines

00:00

💰 Cryptocurrency Laundering Techniques

This paragraph delves into the issue of money laundering through cryptocurrencies, highlighting the $8.6 billion laundered in 2021. It provides historical context by mentioning Pablo Escobar's and Al Capone's methods of laundering their illicit gains. The script explains the three-step process of money laundering: placement, layering, and integration. It also discusses the unique challenges and methods associated with crypto money laundering, including the use of coin mixers and the need to convert crypto to fiat currencies while avoiding detection by exchanges that require identity verification.

05:01

🔑 Advanced Crypto Laundering Strategies

The second paragraph explores advanced strategies used in crypto money laundering, such as the Peel chain, where small amounts of crypto are shuffled into multiple wallets to avoid suspicion, and chain hopping, which involves converting funds between different cryptocurrencies to obfuscate their origin. It also touches on real-world cases, including the Bitfinex hack and the arrest of a British gang using an online beauty products business as a front for drug trafficking, illustrating how criminals use cryptocurrencies not only to launder profits from cybercrimes but also to disguise the source of illicit funds in the physical world. The paragraph concludes by emphasizing that while cryptocurrencies themselves are not inherently bad, they can be misused for illegal activities.

Keywords

💡Money Laundering

Money laundering is the process of making illegally-gained proceeds (i.e., 'dirty money') appear legal (i.e., 'clean'). The term originates from the 1920s and 1930s when Al Capone allegedly used laundromats to disguise the origins of his illicit gains. In the video, money laundering is connected to both historical figures like Capone and modern issues such as crypto money laundering, illustrating its relevance and evolution over time.

💡Cryptocurrency

Cryptocurrency refers to digital or virtual currencies that use cryptography for security and operate independently of a central bank. The video discusses how cryptocurrencies, due to their decentralized nature and the public transparency of blockchain transactions, present unique challenges and opportunities for money laundering, with billions of dollars worth of crypto being laundered annually.

💡Placement

In the context of money laundering, 'placement' is the first step where illicit funds are introduced into the financial system. The video describes how criminals buy legitimate businesses, especially cash-intensive ones, to integrate their illegal money into the economy, as seen in the historical account of Pablo Escobar's operations.

💡Layering

Layering is the second step in money laundering, where the funds are moved around to distance the criminal from the source of the money. The video explains how this is done by investing in shell companies or moving money across borders, and it is further exemplified by the use of coin mixers and Peel chains in crypto money laundering.

💡Integration

Integration is the final step in the money laundering process, where the now 'clean' money is re-integrated into the economy and made available for the criminal to use without suspicion. The video uses the example of the Cali cartel's complex organization to illustrate the complexity of this step in traditional money laundering.

💡Blockchain

A blockchain is a decentralized and public digital ledger that records transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks. The video points out that while cryptocurrencies are more traceable due to the blockchain, they still offer opportunities for money laundering due to their pseudonymous nature.

💡Coin Mixer

A coin mixer, as mentioned in the video, is a service that mixes cryptocurrencies from multiple sources to obfuscate the trail of transactions, making it harder to trace the origin of the funds. This is a common technique used in crypto money laundering, as it exemplifies the layering process by mixing 'dirty' and 'clean' funds.

💡Peel Chain

A Peel chain is a method used in money laundering where a small portion of the illicit funds is gradually converted into another form of currency or asset. The video describes how this technique is used in crypto money laundering by transferring small amounts of cryptocurrency into multiple wallets and then converting them into fiat money incrementally.

💡Chain Hopping

Chain hopping involves converting funds from one type of cryptocurrency to another, often from a more traceable coin to a privacy-focused one like Monero. The video explains that this method is used to add another layer of complexity to the money laundering process, making it more difficult for authorities to track the funds.

💡Crypto Cyber Crimes

Crypto cyber crimes are illegal activities that generate profits in cryptocurrencies, such as online scams, ransomware, or theft. The video distinguishes these from real-world crimes that generate fiat money, which then needs to be converted into crypto for laundering purposes, highlighting the different pathways through which criminals can profit from illegal activities.

💡Fiat Money

Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold, but rather by the government that issued it. The video discusses how criminals often need to convert their illicitly obtained fiat money into cryptocurrencies to launder it, emphasizing the need for exchanges that can convert these funds without triggering identity verification.

Highlights

$8.6 billion worth of crypto was laundered in 2021, indicating the scale of crypto-related financial crimes.

Crypto money laundering involves bending and breaking financial rules, echoing historical precedents like Pablo Escobar's money laundering methods.

Escobar's cash problem led to the loss of $2 billion annually, highlighting the challenges of managing illicit funds.

Money laundering through businesses like jet services and jewelry stores was Escobar's solution to legitimize his wealth.

The term 'money laundering' originates from Al Capone's use of laundromats to disguise illegal income in the 1920s and 1930s.

The United Nations estimates $800 billion to $2 trillion are laundered annually, with cryptocurrencies being a recent trend.

Crypto money laundering follows three steps: placement, layering, and integration, similar to traditional money laundering.

Placement involves putting illicit funds into legitimate businesses, especially those with high cash transactions.

Layering is the process of mixing clean and dirty money to obfuscate the origin of funds.

Integration reunites the laundered money with the criminal, now appearing as profits from a legitimate business.

Cryptocurrencies are more traceable than fiat money due to the public and transparent nature of blockchain transactions.

Crypto money laundering requires converting crypto to fiat money, which can be challenging due to identity verification requirements at exchanges.

Cryptocyber crimes generate profits directly in cryptocurrencies, while real-world crimes convert fiat money to cryptos for laundering.

The 2016 Bitfinex hack resulted in the theft of $4.5 billion in bitcoin, with the perpetrators using various laundering techniques.

Coin mixers and Peel chains are methods used to distance criminals from stolen crypto funds by mixing and redistributing them.

Chain hopping, converting funds between different cryptocurrencies, is another laundering technique used to avoid detection.

The US sanctioned Suex, a crypto broker involved in exchanging cryptos from large frauds and thefts into cash.

Crypto money laundering can also be used to disguise the source of illicit money, as seen in a British police case involving an organized crime gang.

Crypto money laundering can be cheaper than traditional methods, providing an incentive for criminals to use cryptocurrencies.

Cryptocurrencies themselves are not inherently bad; they are tools that can be used for both legitimate and illicit purposes.

Transcripts

$8.6 billion worth of crypto was laundered in 2021.

So how do they clean their dirty

crypto and get away with it?

Understanding this will show you how rules in

finance can be bent and even broken.

In order to explain this, we need

to go back to the 1980s in Columbia.

There was a son of a farmer named Pablo Escobar.

He created one of the largest drug cartels in history.

At the height of his power,

he made over $420 million weekly.

That's the most expensive home in the

US paid off in about four days.

But he had a problem - a cash problem.

Escobar had so much cash he would have

to write off $2 billion every year because

it was either lost or damaged.

You can't just go into the bank with

$400 million and say, hey, Susan, that's a

great color on you and make a deposit.

He needed to find a way

to make that money look legitimate.

And boy, did he find a way.

Escobar's money was laundered through dozens of

businesses, like a jet service, jewelry stores,

a brokerage, and much, much more.

So where does the term money laundering even come from?

In the '20s and '30s Chicago was controlled by Al Capone.

Capone ruled an Empire built on the three

pillars of society - bootlegging, prostitution and narcotics.

Again, he had a problem, a cash problem.

The police and IRS were on his back.

He had to funnel his money somewhere.

And the legend goes that Capone

started buying laundromats all over town.

And let me tell you, he

was great at the laundry business.

Somehow, every shop he

bought instantly saw sales skyrocket.

So whether it's fraud, extortion or drug

trafficking, all criminals have the same problem.

Now, according to the United Nations, between $800 billion

and $2 trillion are laundered every year.

The latest wave is through cryptocurrencies.

Now, crypto money laundering has some specific issues and risks

that we'll see in a moment, but it

shares three steps with traditional money laundering.

Let's say you have some questionable

money that you'd like to spend.

Step one is placement.

This is notoriously the most dangerous step.

You need to place your money into the legal world.

Now, there are many ways to do this,

but the most common is to buy a

legitimate business, ideally one that runs predominantly on

cash because cash is harder to track.

Maybe you'll buy a club, a beauty salon or a

car wash after your legit business is set up, it's

time to start mixing, blending clean money with dirty money.

You want to boost your real businesses' cash,

but not by too much.

This is step two - Layering. So your money is sitting in

the account of some legit business.

Now I need to move it around, distancing

yourself from it in order to make the

paper trail more difficult to track.

A classic example is to invest the money in

some anonymous shell company within a tax haven.

Think oligarchs, royals and the Panama Papers.

Or you could move the money into different countries

around the world, maybe purchasing stocks or gold.

But we're not done yet,

because step three is integration.

At this point, the money is reunited with

you and you're free to enjoy the profits

from your totally legitimate and thriving business venture.

But depending on the size of your

operation, this system can get quite complicated.

Here's the organization map of

the $7 billion Cali cartel.

This is where cryptos may be able to help.

We're going to talk about real life cases and busts.

But first, there are two major

differences when it comes to cryptos.

One, cryptos are actually more

traceable than Fiat money.

Sure, it's true that the decentralized model of finance

is less regulated and scrutinized than regular finance, and

this can provide some degree of cover.

But all crypto transactions are recorded on the

blockchain, which is public, transparent, and there forever.

Two, let's say you got cryptocurrencies through a crime.

Sooner or later, you need to convert those

cryptos to Fiat money, like euros or dollars.

You need to launder that money through an exchange.

But you can't just open up a Coinbase account

and say nothing to see here, just passing through.

Most exchanges require identity verification, which would

tie you directly with the dirty tokens.

You can't do that, but there is a workaround.

Let's distinguish between the two types of crime.

First are cryptocyber crimes.

These are illegal activities that

generate profits in cryptos.

These could be online scams, ransomware or theft.

Second is real world crimes like

weapon sales, trafficking or drugs.

These are different because they generate profits

in Fiat money like US dollars.

And then criminals convert those into cryptos

with the purpose of laundering them.

Believe it or not, I have

a favorite crypto cyber crime.

These are the masterminds.

In 2016, they hacked Bitfinex, one

of the largest crypto exchanges.

These two cracked the system and

stole what's now worth $4.5 billion in bitcoin.

It turns out the FBI was hunting

them for years before finally making arrests.

The couple was captured in their Manhattan apartment

with all kinds of incriminating evidence, making this

not only the biggest, but the strangest financial

bust in the history of the US.

They had a laundering problem.

They were able to buy some gold

NFTs and space pants, the essential stuff.

But 80% of the Bitcoin they stole was untouched.

Now let's check their laundry list.

A couple hasn't been charged with theft, but

they're accused of conspiracy to commit money laundering

and to defraud the United States.

So how did they do it?

It all comes down to layering.

This is the part where you

distance yourself from the stolen funds.

The first trick they use is a coin mixer,

which is exactly what you think it is.

It's a third party service that takes cryptos from

a bunch of different users, mixes them all together,

dirty cryptos right there with clean ones from many

different addresses before finally handing them back to you.

Immaculate and much, much harder to trade.

It's like taking dirty popcorn off the floor, putting

it back in the batch, and shaking it up.

The problem is that mixers tend to

be under surveillance from the government.

So many launderers take this a

step further, adding even more layers.

Everyone's favorite couple also use

what's called a Peel chain.

A Peel chain is basically when you shuffle a

small number of coins into mini wallets in

attempt to not raise any suspicion.

Then at each passage, you convert just a tiny

portion of these cryptos into dollars, rinse and repeat,

doing that hundreds or even thousands of times.

If Escobar was around, he probably would

be using this trick right now.

But it's always a good idea to diversify strategies.

The Bitfinex couple also use

something called chain hopping.

That's where you convert funds from one cryptocurrency to

another, like Bitcoin to Monero a Privacy coin.

This is looked at as a bit

shady, but it's not necessarily illegal.

So for the police, it's a case by case call.

Just last year, the US sanctioned Suex they're

a crypto broker that exchanged tens of millions

of dollars worth of cryptos, many of which

came from large frauds and thefts.

They're located at the Federation Tower in the

heart of the financial district of Moscow, and

are known to convert cryptocurrencies into bags of

cash with very few questions.

And of course, Suex claimed they didn't

know where the shady money came from.

But hold on, because crypto money laundering isn't just

about cleaning and using the profits of cybercrime.

It's also used to disguise

where illicit money comes from.

- Who's this?

It's the tax man.

And he's looking at you.

Now, what does he see?

He sees a young fella

with a big fancy house,

unlimited cash supply, and no job.

Now, what is the conclusion the tax man makes?

This is a problem crypto can actually help with,

converting real world profits into clean money.

In 2020, the British police arrested

a gang involved in organized crime.

Basically, the group supplied drugs to this

vast system of couriers who would sell

the product and then deliver back profit.

Spoiler alert: 18 people got 140 years in prison.

What's most interesting is the

two things investigators found.

First, the group was using an online beauty products

business as the front for their full time gig.

They were mixing cash like classic money laundering.

Second, the agents confiscated two phones, these phones

showed that traffickers were regularly giving cash to

a broker that would convert that dirty cash

into Bitcoin, take a small fee and send

the Bitcoin back to the fellows.

Here the data shows that they not only clean

over £1 million through Bitcoin, but also that the

crypto money laundering was cheaper than traditional laundering.

There's an incentive to launder through crypto.

So to sum it up, it's important to

say that there's nothing inherently bad about cryptocurrencies.

It's just a tool think of like a shovel.

It can be used to build a garden or bury a bot.

So should we ban shovels?