Crypto Crime for Law Enforcement Officials: What Do You Need To Know About Compliance?

May 27, 2019
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In 2018, approximately $1.7 billion worth of cryptocurrency was stolen and/or scammed according to a report from CipherTrace, and $1 billion of it was taken from exchanges. The reality is that crypto crime is on the rise with 3.6 times more coins stolen in 2018 than in 2017.

But that’s not all. In addition to the crypto crimes perpetrated by computer scientists and funded by larger criminal groups with deep pockets, violent crypto crimes are also on the rise.

While crimes involving large sums of money and public figures are the ones that get the most media coverage, crypto crimes are happening in neighborhoods across the country. Law enforcement officials (LEO) need to start thinking on a local level to keep communities and citizens safe.

Today, crypto ATMs are filling cities. It’s highly likely that they’ll start popping up more and more in the near future. Long-term, crypto ATMs, people reporting crypto scams, and violent crypto crimes will increase, and law enforcement officials at all levels need to be prepared.

Bottom line, law enforcement officials might think they don’t have a horse in this race today. They might think crypto crime is an FBI concern. But things are changing fast.

Already, an estimated one in 10 Americans hold some form of cryptocurrency, and that number is growing. In addition, about five crypto ATMs are installed every day, and 56% of crypto ATMs are in the United States. The horse is leaving the stable, and local LEOs should already be on it!

It would be dangerously naïve to think crypto crime is just an FBI problem. But what should local law enforcement officials do to combat crypto crime?

The first step is learning about crypto crime from a compliance perspective. What are the regulations that crypto money services businesses (MSBs) are required to comply with?

Following are five compliance tips law enforcement officials should understand before crypto crime increases more in local communities and the learning curve gets too steep.

1. Learn The Lingo

The first step to detect, prevent, and solve crypto crimes is to learn how cryptocurrency works. There are a number of terms, like blockchain, DLT, digital wallets, initial coin offering, and altcoin, and each of these terms has a unique definition that is specific to cryptocurrency.

Not only do law enforcement officers need to know the terminology of cryptocurrency, but they also need to learn how transactions work, where crypto is stored, how it’s bought and sold, and why people choose one type of coin, wallet, or exchange over another. Without this knowledge, law enforcement officials won’t have the skills to identify and investigate anomalies and unusual behaviors indicative of crimes.

For example, an educated law enforcement official would know that finding a stack of Bitcoin ATM receipts in a suspected drug dealer’s car could provide valuable evidence that can be used to trace the money used in illegal drug transactions.

In addition, crypto ATM owners must comply with regulations that require them to collect Know Your Customer (KYC) information, which would provide law enforcement officials with details about the transactions.

2. Learn How Financial Criminals Work

Crypto Crime for Law Enforcement Officials - BitAML Blog

Most crypto crimes aren’t new. They’re just digital versions of financial crimes that have been around for a long time. Criminals know that cryptocurrency is decentralized, and since there isn’t a central agency controlling things, there are a lot of opportunities to create crypto variations of traditional financial scams.

Hacking crypto exchanges was the most lucrative for crypto criminals in 2018. The majority of cryptocurrency stolen in 2018 was taken through hacking according to research from Chainalysis. Hackers move money quickly and often to cover their tracks. They may also wait months before cashing out using multiple conversion services.

Phishing is another common crypto crime. Criminals have been found creating fake Twitter accounts, forum accounts, and email accounts as well as impersonating the IRS in order to scam crypto investors into providing account information that can be used to steal cryptocurrency.

Criminals also use cryptocurrency for money-laundering. According to the research from Chainalysis, 65% of stolen funds go through crypto exchanges while 12% go through peer-to-peer exchanges, and 24% go through other conversion services, including Bitcoin ATMs.

Just as law enforcement officials need to adapt their investigation methods to evolve with the growth of the internet and online transactions, they now have to adapt to investigate crimes involving cryptocurrencies.

3. Learn How Businesses In The Space Function

Cryptocurrency investors need places to cash in and out. Exchanges are businesses that provide a place for people to trade their cryptocurrencies for other digital currencies or for government-backed money, like U.S. dollars.

People can also buy and sell cryptocurrency at thousands of ATM kiosks around the world, use crypto debit cards, and make purchases at a growing number of online and brick-and-mortar businesses. Even companies like Microsoft, Square, Shopify, and accept bitcoin as payment.

Each of these types of businesses present opportunities for criminals to steal cryptocurrencies.

In recent years, numerous stories of crypto robberies have made headlines, including home invasions where criminals demanded the victims transfer all of their crypto investments to the thieves, incidents at in-person mixers and face-to-face trades, ATM robberies, kidnappings, and more.

These types of crimes – often violent – are growing, and local law enforcement officials need to be prepared to deal with them.

4. Learn How To Use The Free Tools That Already Exist

There is an impression that crypto is impenetrable, and crypto crime is impossible to investigate. However, a variety of resources and tools are available to help investigators. The best part is that a lot of them are free.

For example, investigators can use free blockchain explorer tools to investigate transactions, and some of these tools provide a great deal of detail.

Block Explorer is one of the most popular blockchain explorer tools, but different tools provide different information. Law enforcement officials should learn to use them to their fullest capacity to aid investigations.

For crimes involving crypto ATMs, Coin ATM Radar is extremely useful. The tool provides information about cryptocurrency ATMs, including locations, the operator’s contact information, and more.

When tracking down a criminal who used an ATM, a simple subpoena to the ATM operator can provide complete transaction records. Pair that with security camera footage, and solving a crypto crime is much easier.

5. Make Allies In The Space

Yes, there are bad people in the cryptocurrency space, but there are also a lot of good, smart people who comply with the regulations and want to help law enforcement officials catch cyber criminals.

By taking the time to learn who these people are, law enforcement can work with them to make investigations easier and more successful.

For example, BitAML helped law enforcement officials track an estimated $150 billion in human trafficking profits. When law enforcement officers get to know people like the BitAML team who have experience in traditional finance, compliance, and law, they’ll have valuable resources who are willing and able to help in investigating crypto crimes.

Key Takeaways about Crypto Crime and Compliance for Law Enforcement Officials

Everyone from beat cops to the bureaucrats in charge of local police departments must be ready, because fighting crypto crime will soon become a part of every law enforcement job as cities fill up with crypto ATMs and reports of crypto scams become commonplace.

Start now by learning the lingo, how criminals and businesses in the cryptocurrency space work, and how to use free tools to support investigations. At the same time, build relationships with people who are already working in crypto to develop strategies and solutions that will help detect and prevent crypto crimes.

BitAML offers training for law enforcement officials so they’re prepared to detect and investigate cryptocurrency crimes. Contact us today!


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