Cryptocurrencies, corruption and organised crime: Implications of the growing use of cryptocurrencies in enabling illicit finance and corruption

This Anti-Corruption Helpdesk brief was produced in response to a query from a U4 Partner Agency. The U4 Helpdesk is operated by Transparency International in collaboration with the U4 Anti-Corruption Resource Centre based at the Chr. Michelsen Institute.

Query

Please provide an overview of the role of cryptocurrencies in the financing of organised crime.

Summary

Cryptocurrency is becoming an increasingly popular tool for organised crime groups (OCGs) to conduct illicit activities. OCGs can exploit the inherent pseudonymity and decentralised nature of cryptocurrencies to conduct money laundering and other crimes related to corruption. Criminals can use cryptocurrencies instead of the formal banking system to move large sums of money which entails a potentially lower risk of being detected by law enforcement or the traditional financial institutions which are required to submit suspicious transaction reports.

The development sector can play an important role in mitigating the risks associated with the criminal use of cryptocurrency. Relevant actions include coordinating the development and implementation of regulatory and legislative frameworks, educating the public about the risks of cryptocurrency use and strengthening law enforcement agencies’ capacity to dismantle criminal networks.

Main points

• Cryptocurrency is not only restricted to cybercrime but is used for all types of crimes that involve the transmission of monetary value. This includes money laundering, financial sanctions evasions and other corruption related crimes such as bribery and embezzlement.
• There are constraints associated with the use of cryptocurrencies in criminal activities, such as the volatile value fluctuations, which contribute to the reluctance of criminals to use cryptocurrencies for long-term investments.
• International development agencies can play a role in mitigating the criminal use of cryptocurrencies. This includes coordinating the development and implementation of regulatory and legislative frameworks, encouraging bilateral and multilateral coordination to establish networks for experience sharing, and supporting platforms for public-private collaboration.
• However, resources spent by donors to curb crypto-related corruption imply an opportunity cost. Donors will need to determine whether the same resources would be better spent on improving traditional law enforcement practices or other development priorities.
• This is a pertinent consideration given that although the use of cryptocurrency in criminal activities is increasing, cryptocurrency transactions related to criminal activities represent only a limited share of the criminal economy compared to cash.

Contents

1. Background
2. The link between cryptocurrencies and organised crime
3. Attributes of cryptocurrencies that make them attractive to organised criminal groups
   1. Anonymity/pseudonymity
   2. Cryptocurrency onramp/offramp
   3. Regulatory ambiguity/lack of regulation
   4. Global reach
4. The role of cryptocurrencies in facilitating corruption
   1. Bribery
   2. Embezzlement
5. The role of cryptocurrencies in facilitating other forms of IFFs
   1. Money laundering
   2. Financial sanctions evasion
6. Mitigation strategies for development agencies
   1. Strengthening the regulatory environment
   2. Capacity building and use of new technology
   3. Public-private collaboration

Caveat

The virtual assets industry encompasses not just cryptocurrencies like Bitcoin and Ethereum, but also non-fungible tokens (NFTs) and other digital assets. However, this Helpdesk Answer focuses primarily on cryptocurrencies, not least as the studies suggest that, as yet financial crime represents only a small portion of overall trading activity related to NFTs (Elliptic 2022).

Authors

S Elsayed (TI)

Reviewers

Sophie Lemaître (U4), Vincent Freigang and Matthew Jenkins (TI)

Reviewers

Date

28/03/2023

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