According to cybercrime experts, as the legitimate use of digital currencies grows, so does the abuse.
When cops apprehended scammer Evan Leslie McMahon in March 2019, they discovered much more than just the bootleg Netflix logins that allowed his clients to watch The Witcher on the cheap.
The hacker in his early twenties also had nine electronic wallets containing an alphabet soup of cryptocurrencies – bitcoin, bitcoin cash, ethereum, digibyte, XRP, stratis, bitcoin gold, and litecoin – that he purchased with the proceeds of his crimes.
McMahon avoided jail when he was sentenced in April last year for "providing a circumvention service" and "dealing with the proceeds of crime," receiving an intensive correction order that allowed him to serve his two-and-a-half-month sentence in the community.
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However, he forfeited the cryptocurrency, which was initially worth $460,000 but had risen to an estimated value of $1.2 million by the time of his sentencing, making it the largest stash of tokens seized by the commonwealth to date.
According to court documents, McMahon used 175 PayPal accounts with aliases such as Zac Kentish, Izabella Sjogren, and Samuel Binns to collect fees from customers of his websites, HyperGen, WickedGen, Autoflix, and AccountBot.
According to federal authorities, he then converted some of the proceeds into cryptocurrency.
PayPal declined to comment when asked how McMahon managed to open 175 accounts with the company and what this said about its anti-money laundering systems.
"We devote significant resources to identifying, investigating, and stopping improper or potentially illegal activity on PayPal," a spokesman said.
Seizures of cryptocurrency are increasing.
According to Austrac, the criminal use of cryptocurrency is no longer limited to online scammers like McMahon, who ran a series of websites selling logins to Netflix, Spotify, and other subscription sites that he bootlegged using software that automatically generated the keys.
"As legitimate use of cryptocurrency increases, we're seeing a sort of comparable increase in abuse," says Michael Tink, Austrac's national manager of intelligence operations, who oversees teams focused on cybercrime, national security, and money laundering.
"For example, where a crime group might have previously sent money offshore using the banking sector or a remittance dealer, in some cases – not many – we might see them trying to deposit criminal proceeds through a digital currency exchange provider and send money to a counterpart offshore using cryptocurrency itself," he says.
Tink is quick to point out that using cryptocurrency to launder the proceeds of crime is still "fairly" niche – but it is growing.
While the seizure of McMahon's wallets was the largest crypto bust in Australia at the time, larger amounts have since been frozen by regulators investigating possible fraud.
The Australian Securities and Investments Commission obtained federal court orders in October last year freezing bitcoin estimated to be worth between $7 million and $22 million that were allegedly related to what the corporate watchdog claims was an unlicensed superannuation investment scheme run by Gold Coast couple Aryn Hala and Heidi Walters. In court documents, Asic claimed that at least $2.4 million in investor funds had been used to buy crypto-assets. Asic's investigation is ongoing, and no charges have been filed.
Large amounts of cryptocurrency have also been seized by law enforcement agencies in other countries. The US FBI seized 3,879 bitcoins last month, claiming in documents filed in the American federal court system that they are the proceeds of a $216 million fraud perpetrated against insurance company Sony Life by employee Rei Ishii. Ishii has been charged with fraud in Japan and has yet to stand trial.
Authorities allege bitcoin was used to launder ill-gotten gains in another crypto seizure case before US courts involving 9.881 bitcoin (approximately $590,000).
Between May 2019 and February 2021, suspected money launderer Fernando Berrocal, a perfume industry businessman, picked up US$2.3 million ($3.2 million) in bulk cash from locations both inside and outside the US, according to an affidavit filed in forfeiture proceedings in the federal court system by a Homeland Security agent.
In the affidavit, Homeland Security agent James Barden stated that the money was made up of "$1 million in illegal gambling proceeds and $1.3 million in narcotics proceeds."
Furthermore, bank accounts owned or controlled by Berrocal received "$1,789,628.40 in proceeds generated by various financial frauds, many targeting elderly US residents," according to Barden.
He accused Berrocal of having "multiple commercial and personal bank accounts and shell-companies in the United States and elsewhere," as well as "multiple virtual currency accounts and/or Bitcoin addresses" that were used to launder dirty money.
"Berrocal conducted numerous financial transactions, many involving virtual currency, specifically bitcoin, to launder and transfer criminally derived proceeds from the United States to individuals and organisations outside the United States," Barden said.
According to the agent, Berrocal admitted that the bitcoin was the proceeds of his criminal activity "during a consensual interview with law enforcement" in March of last year. No charges have been filed, and the investigation is still ongoing.
The regulators are keeping an eye on things.
Last year, cryptocurrency had another moment in the spotlight, with the Commonwealth Bank announcing it would allow customers to buy, hold, and transfer tokens through its app, ads for trading platforms dominating bus stops, and the treasurer, Josh Frydenberg, talking about bringing exchanges – which are prone to collapsing – into Australia's regulatory system.
But sceptics believe the hype hides a terrible truth: cryptocurrencies are fantastic for speculators but, despite numerous attempts, aren't much use as a means of exchange unless you're buying something you shouldn't be.
"Paying for things the government doesn't want you to buy was the first actual payment use case for cryptos – the Silk Road drug market – and it's still about the only one," says David Gerard, author of two books on cryptocurrencies and a keen and critical observer of the sector.
"People only use crypto for payments when they can't use good money for some reason, so they use this stuff instead." This has morphed into large-scale ransomware. Ransomware existed prior to crypto, but not on this scale – that's entirely due to cryptos."
Meanwhile, dirty money from crime continues to flow into a crypto ecosystem fuelled by speculative investment, which has driven the price of bitcoin up from a few hundred dollars in 2015 to close to $60,000 today, despite frequent crashes.
"The crypto system is not technically a Ponzi scheme – it just works like one," Gerard explains.
"Early buyers can only be compensated with money from later buyers." The entire goal is to sell magic beans to people for real money and persuade them that these objects are the future of anything other than being skinned.
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"The general answer is: there is no such thing as a get rich quick scheme, magic does not occur, and if there is ever 'one weird trick,' it is one weird trick for picking your pocket."
Austrac has little insight into what is going on in this thriving market. Currently, exchanges that register with it are only required to report suspicious or large movements of cash into their coffers or payments out – not crypto transfers between market participants.
Tink, on the other hand, claims that the notion that transactions on the blockchain – the distributed ledger that records crypto transactions – are completely anonymous is incorrect.
"Our analysts also have access to other open source commercially available and more classified tools and data sets that help them track transactions as they occur through the blockchain and also link that to other data and criminal intelligence holdings," Tink says.
He points out that one advantage of the blockchain technology that underpins cryptocurrencies is that the data is publicly available.
"You may not always know who is behind a specific coin address, but it allows you to track transactions through other data sets." It enables analysts to investigate attributing wallet addresses to real-world people."
