How can we effectively combat the use of the internet for money laundering?

by Kilian Strauss
The internet increasingly becomes a key tool for money launderers.
What is money laundering?
According to UN estimates1, criminals across the world launder each year funds totalling between
USD 800m and 2 trillion derived from various criminal activities, such as drugs trafficking, arms
smuggling, trafficking in human beings, corruption, fraud and others.
This represents some 2-5% of global GDP and would constitute one of the most important
economic activities across the world, if so qualified. What it does however constitute is a
significant loss to economies, treasuries and people everywhere, as these sums bypass state
budgets and thus do not contribute to social spending. All they do is illicitly enrich criminal
individuals and groups.
Although money laundering and most related predicate crimes are outlawed across much of the
world, there are significant differences between different legislations, as some countries for
example do not consider tax evasion a crime or (alas!) the paying of bribes.
International efforts to combat money laundering
The laundering of illegal proceeds is not a new phenomenon: the international community has
been actively seeking to combat it for more than two decades, driven by the initiatives of a
number of developed countries, as well as a range of international institutions, above all the key
standard setting institution in the field, the Financial Action Task Force (or FATF)2. Its main
instrument are the Forty Recommendations on Combating Money Laundering and Terrorist
Financing, first adopted in 1990 and regularly amended since3. The Recommendations are
complemented by a number of key international conventions, above all the UN Convention on
the Suppression of Terrorist Financing of 19994, the 1988 United Nations Convention Against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances5, as well as the UN Convention
against Transnational Organised Crime of 20006 and the UN Convention against Corruption of
20037, as well as the corresponding regional instruments, such as the EU Directives on
Combating Money Laundering8 and Terrorist Financing and the relevant Council of Europe
Conventions9.
As a result, national anti-money laundering regimes and international co-operation mechanisms
across the world have been considerably strengthened over the past decade, making it
increasingly difficult for criminals to exploit loopholes in national legal frameworks. Most
developed countries banking systems have by now adopted measures that make it significantly
harder to launder funds through established financial channels.

www.unodc.org/unodc/en/money-laundering/globalization.html
www.fatf-gafi.org
3
http://www.fatfgafi.org/topics/fatfrecommendations/documents/internationalstandardsoncombatingmoneylaunderingandthefinanci
ngofterrorismproliferation-thefatfrecommendations.html
4
www.un.org/law/cod/finterr.htm
5
www.unodc.org/pdf/convention_1988_en.pdf
6
www.uncjin.org/Documents/Conventions/dcatoc/final_documents_2/convention_eng.pdf
7
www.unodc.org/unodc/en/treaties/CAC
8
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32015L0849
9
http://www.coe.int/t/dg1/legalcooperation/economiccrime/MoneyLaundering/default_en.asp
2

Kilian Strauss How to combat cyber-laundering

A new tool to launder illicit funds

As a result of this international clampdown against money laundering, criminals have started to
look for new tools and mechanisms to hide the origins of their ill-gotten gains and to channel
them from one location to another. What they want is a way to launder their illicit proceeds that
is all at once

quick,

discrete,

secure,

and global.

A near perfect tool meeting all these conditions is the internet: an extremely swift, relatively
secure, almost anonymous and truly global instrument. Due to its decentralised structure, the
internet has increasingly become the mechanism of choice of many criminals to channel funds
from one location to another, sometimes in mere minutes and, if handled professionally, without
leaving too many traces, in particular when resorting to the deep web. Although most of the
amounts thus shifted are currently thought to be relatively small compared to the overall volume
of funds laundered, the practice of using the internet as a tool to hide the origins of illicit funds
is growing fast. And as criminals and terrorists across the world get increasingly cyber-savvy,
they make more and more use of the above mentioned advantages of the internet, always staying
several steps ahead of law enforcement officers, who are only gradually getting to grips with the
virtually unlimited possibilities of the World Wide Web.
In order to successfully prevent and combat money laundering and terrorist financing over the
internet, we have to understand how illicit funds can be transferred by way of mouse clicks.
Typical examples of cyber-laundering
Let us therefore look at some typical examples of cyber-laundering, used both by criminals and
terrorists, as explained, by Minwoo Yun of Hansei University10: money can be laundered over
the internet through fake online auctions, online sales, online gambling websites as well as online
games, virtual worlds etc. One recent example of cyber laundering that went around the world is
Liberty Reserve, which allowed criminals to launder illicit funds in huge proportions (said to
total over USD 6bn). Other new means of payments that have the potential to be used by
criminals are the virtual currency Bitcoin or Second Lifes virtual currency, the Linden dollar.
Criminals also increasingly resort to the use of prepaid storage/payment cards, different forms of
e-money (e.g. ekash), paypal accounts or payments over mobile phones (mobile payments, e.g.
M-PESA).
The laundering of funds over the internet and through mobile phones is made particularly easy
by the growing use of peer-to-peer transactions, i.e. funds are directly transferred from one
individual to another, without the interaction of a third party, such as a financial institution, thus
avoiding financial oversight and potential detection. Besides, even if the funds transit through
the financial system, they may not always trigger alerts of detection software, especially if they
remain below certain thresholds. Illegal means can therefore often easily be moved around the
world, criminal proceeds laundered or terrorist organisations funded in ways that escape
detection by compliance systems or law enforcement.

10

www.itu.int/ITU-D/asp/CMS/Events/2011/CyberCrime/S3_Minwoo_Yun.pdf

Kilian Strauss How to combat cyber-laundering

How to combat cyber-laundering?

What can we do to prevent and combat money laundering and terrorist financing over the
internet? It is clear from the above that urgent and better action is required, in particular because
more and more financial operations will use new channels and new means of payment that bypass
the financial sector and therefore escape the oversight of financial regulators. We therefore have
to urgently take action in the four following areas, using the 4-I approach:
The 4-I approach
1) we need better IT knowledge
2) we need better ID checks online
3) we need better IP tracking
4) we need better IC (international co-operation)

Here is what needs to be done in detail:

1) All institutions involved in preventing and combating money laundering and terrorist
financing, especially supervisory and law enforcement bodies, urgently need to
strengthen their IT knowledge to keep up pace with criminals across the world. This
includes increased training and, if needed, the hiring of former hackers.
2) Criminals and terrorists often operate largely anonymously due to lax enforcement of due
diligence, in particular in areas outside the financial industry. We therefore have to
introduce better ID checks with new financial instruments (e.g. prepaid storage cards),
especially outside the financial sector. This could help reduce the use of anonymous
payments.
3) Cyber-savvy users can relatively easily avoid the tracking of their online identity by using
proxy servers and anonymisation software. Although a certain degree of online
anonymity is acceptable, especially in politically delicate regions of the world, financial
operations should never be conducted anonymously. We therefore need better IP tracking
of payments to prevent criminals from hiding their online identities.
4) Criminals can easily exploit the lack in international co-operation by moving from
country to country. We therefore need much better international co-operation and coordination to prevent and combat money laundering and terrorist financing. We have to
strengthen national and international efforts and instruments aimed at combating online
money laundering and terrorist financing, for example by allowing for faster exchange of
information and speeding up requests for mutual legal assistance.
If we want to effectively reduce the rising use and abuse by criminals of the internet for the
purpose of money laundering and terrorist financing in an effort to avoid national and
international regulators and law enforcement agencies, we have to take joint and co-ordinated
action that has to be swift, creative, effective and truly global.
2016 Kilian Strauss, published on www.academia.edu

Kilian Strauss How to combat cyber-laundering