Introduction
The rise of Virtual Asset Service Providers (VASPs), including cryptocurrency exchanges, digital wallets, and decentralised finance (DeFi) platforms, has revolutionised the financial landscape by offering fast, global, and often anonymous transactions. However, these same characteristics make the VASP sector an attractive target for organised criminals who misuse VASPs for money laundering and outlines key preventative measures businesses in the sector should adopt.
How do organised criminals exploit VASP’s for money laundering?
Organised criminals exploit VASPs in many ways, including:
1. Exploiting Anonymity and Privacy Features
Many virtual assets, particularly cryptocurrencies, offer pseudonymity, meaning transactions are recorded on a public blockchain but the identities of the parties involved are not always easily traceable.
What methods are used?
- Using Privacy Coins – Cryptocurrencies like Monero (XMR), Zcash (ZEC), and Dash (DASH) offer enhanced anonymity by obfuscating transaction details
- Mixing and Tumbling Services – Criminals use cryptocurrency mixers to blend their illicit funds with legitimate transactions, making it difficult to trace the original source
- Multiple Wallet Transfers (Chain Hopping) – Moving funds across multiple wallets and different cryptocurrencies to create a complex transaction trail.
2. Exploiting Decentralized Finance (DeFi) and Peer-to-Peer (P2P) Platforms
DeFi platforms and P2P exchanges provide borderless, permissionless financial services, which criminals exploit to bypass AML regulations and Know Your Customer (KYC) checks.
What methods are used?
- Using Decentralised Exchanges (DEXs) – Unlike centralised exchanges, DEXs do not require user verification, making them an ideal tool for laundering money
- Flash Loans and Smart Contract Manipulation – Criminals exploit DeFi protocols to move large sums of money anonymously and without collateral
- P2P Trading with Fake Identities – Criminals use fake or stolen identities to buy and sell cryptocurrency without leaving a trace
3. Using Virtual Assets for Cross-Border Money Laundering
Since cryptocurrencies can be sent anywhere in the world in seconds, criminals use them to move illicit funds across borders without traditional banking oversight.
What methods are used?
- Crypto-to-Fiat Conversion via Unregulated VASPs – Criminals convert virtual assets into fiat currency through exchanges in jurisdictions with weak AML enforcement
- Cross-Border Transactions Using Multiple Exchanges – Money launderers transfer funds between multiple exchanges in different countries to obscure the origin of the money
- Smuggling Digital Assets Using Hardware Wallets – Unlike cash, cryptocurrency can be transported across borders undetected via USB-like hardware wallets or paper wallets
4. Laundering Money Through Non-Fungible Tokens (NFTs) and Virtual Gaming Economies
The NFT and gaming industries provide new opportunities for criminals to move money through digital assets.
What methods are used?
- Fake NFT Sales – Criminals buy and sell NFTs at inflated prices to legitimise illicit funds
- In-Game Currency Laundering – Organised crime groups use virtual game economies to exchange illicit funds for digital goods and later sell them for real-world money
- Using Digital Art and Collectibles as Value Transfer Mechanisms – Since NFTs lack standardised valuation, criminals exploit them for disguising money laundering transactions
5. Exploiting Weak KYC and AML Controls in VASPs
Some crypto exchanges and wallet providers do not have strict KYC/AML requirements, making them vulnerable to money laundering schemes.
What methods are used?
- Creating Multiple Accounts with Fake Documents – Criminals open multiple exchange accounts using stolen identities
- Structuring Transactions Below Reporting Limits – Depositing and withdrawing amounts just below regulatory thresholds to avoid detection
- Using Third-Party Money Mules – Recruiting individuals to conduct transactions on their behalf to distance themselves from illicit funds
What Virtual Asset Service Providers Should Be Doing to Prevent Money Laundering
1. Implement Strong Customer Due Diligence (CDD) and Know Your Customer (KYC) Procedures
VASPs must verify customer identities to prevent criminals from using fake accounts or anonymous transactions.
Best Practices:
- Mandatory Identity Verification – Require government-issued IDs, proof of address, and biometric verification for all users
- Source of Funds Verification – Demand documentation proving the origin of virtual assets used in transactions.
- Enhanced Due Diligence (EDD) for High-Risk Customers – Apply extra scrutiny to:
- High-volume traders
- Users from high-risk jurisdictions
- Politically exposed persons (PEPs)
2. Monitor Transactions and Report Suspicious Activity
VASPs must implement real-time monitoring systems to detect and prevent money laundering activities.
Key Red Flags to Watch For:
- Multiple rapid transactions across different cryptocurrencies
- Users attempting to bypass KYC by using VPNs or TOR networks
- Frequent crypto-to-fiat conversions with no clear economic rationale
- Use of privacy coins or mixing services to anonymize transactions
3. Establish a Comprehensive AML Compliance Program
VASPs should adopt industry best practices to prevent criminal exploitation.
Key Compliance Measures:
- Appoint an AML Compliance Officer – A dedicated professional responsible for monitoring compliance and reporting suspicious transactions
- Implement Blockchain Analytics Tools – Use services like Chainalysis, Elliptic, or TRM Labs to track suspicious crypto transactions
- Maintain Transaction Records – Store customer transaction data for at least five years to comply with financial regulations
- Conduct Regular Audits – Ensure AML policies are being followed and that transaction monitoring systems are effective
4. Cooperate with Law Enforcement and Regulatory Authorities
VASPs must work with financial intelligence units (FIUs), regulators, and law enforcement agencies to enhance AML enforcement.
How to Cooperate Effectively:
- File Suspicious Activity Reports (SARs) – Report any unusual or suspicious transactions to the appropriate authorities
- Comply with International AML Regulations – Follow guidelines set by:
- The Financial Action Task Force (FATF)
- The Financial Crimes Enforcement Network (FinCEN)
- The European Union’s AML Directives (AMLDs)
- Participate in Information-Sharing Networks – Collaborate with other VASPs, financial institutions, and regulators to combat financial crime.
Closing Remarks
The Virtual Asset Service Provider (VASP) sector is a high-risk area for money laundering, as criminals exploit anonymity features, decentralised platforms, and regulatory gaps to clean illicit funds. Without proper safeguards, VASPs can become facilitators of financial crime.
By implementing strict KYC procedures, monitoring transactions, enhancing AML compliance, and cooperating with authorities, VASPs can protect themselves from legal risks and strengthen the global fight against financial crime.
As global regulators increase scrutiny, compliance is not just a legal requirement—it is essential for business integrity and industry credibility. Strengthening AML controls will ensure the long-term success of the virtual asset sector while preventing criminal networks from exploiting it for illicit financial gain.
