Criminals Exploiting DeFi to Launder Money

A new report highlights how bad actors are using decentralized finance (DeFi) services to launder money and transfer funds. 

On Thursday, the US Treasury Department published its first risk assessment of decentralized finance. 

The report states that lawbreakers are using decentralized finance (DeFi) services to launder money and transfer funds. It highlights that many DeFi services covered by the Bank Secrecy Act (BSA) are failing to comply with anti-money laundering and countering the financing of terrorism (AML/CFT) obligations. The US government claims criminals are exploiting this gap.

The report states:

“Illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK)… are using DeFi services in the process of transferring and laundering their illicit proceeds. [And] exploiting vulnerabilities in the U.S. and foreign AML/CFT regulatory, supervisory, and enforcement regimes as well as the technology underpinning DeFi services.”

It recommends upping US AML/CFT supervision of virtual asset activities, including DeFi services. And increasing compliance by virtual asset firms with BSA obligations. 

Also noted are vulnerabilities such as the lack of implementation of international AML/CFT standards by foreign countries. As well as poor cybersecurity practices on the part of DeFi services.

Bolstering DeFi Compliance

The Bank Secrecy Act is a 1970 law in the United States that requires banks and other financial institutions to help the government prevent money laundering and other illegal activities. This law makes it mandatory for financial institutions to keep records of cash buys of negotiable instruments. It also requires that institutions report cash transactions over $10,000, and any suspicious activity. Congress has beefed up the law several times since.

As the report states, the US Government is concerned about the DeFi industry’s record in this area. The report acknowledges that “several entities… are developing AML/CFT and sanctions compliance solutions for DeFi services.” 

However, criminals may still try to find ways to exploit these tools. The US government believes the industry needs to do more work to meet compliance requirements. The US Treasury is working with the industry to improve these tools and promote responsible innovation in the DeFi space.