Money Laundering Explained and Why Digital Identity Is Necessary?

November 2020
Money laundering is a term used to describe the illegal process of disguising a large sum of money generated by illegal or criminal activities, such as drug trafficking or terrorist funding, to be from a legitimate source. The illegal money is described as “dirty”, and hence the process of legitimation is called “laundering.” The group / individual involved in criminal activity will have to find a way to control the substantial funds and profits generated without being noticed by authorities. They do this by disguising money sources, changing form of funds and moving funds around.

The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organised crimes, and to investigate to what extent these funds are laundered. The report estimated that, in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7% (or USD 1.6 trillion) being laundered. These figures are just estimates as it is impossible to trace funds that are off the record with complete accuracy, but they provide an estimate of the magnitude of money laundering globally. 

There are various methods of laundering illicit funds. The most common way of money laundering is called “smurfing” or “structuring” cash - breaking a large sum of money into multiple small transactions and spreading it out over many different accounts to avoid detection of the regulators. We are also going to look into some conventional and uptrending ways of money laundering.

Cash Smuggling

One of the most common and oldest methods of money laundering is cash smuggling: moving cash from one place to another via cargo shipment, or hiring cash smugglers to carry the sum of money in carry-on baggage across borders. There are measures in place to try and prevent this; for example, It is illegal to export $10,000 currency from the United States without filing a Report of International Transportation of Currency or Other Monetary Instruments (CMIR). Criminals are also known to purchase a shipping business to hide the cash in cargo or goods to ship out of the country.

Electronic money transfer

Digital payments are growing at an annual rate of 12.7% and are projected to reach 726 billion transactions in 2020.The uprising of online banking, online peer to peer payments and mobile payments have made money laundering even more difficult to be tracked through electronic transactions. These transactions usually laundered through: 

Online Marketplaces - Many marketplaces like Amazon, Facebook Marketplace and Taobao were established in recent decades as ways for people to earn additional incomes. Sellers share their merchandise or service online, buyers can find what they want on these marketplaces, and sales are happening every second all over the globe. Abundant micro transactions are happening everyday on these marketplaces. With the volume of transactions happening, it has made it harder to track transactions and the owners of transactions.

Online gaming / gambling sites - Criminals can buy virtual gaming currencies online on these gaming on gambling sites whereas usually there may be no proper user registration required on these sites, or less stringent registration. Then criminals can convert the virtual currencies into real one to make them “clean”.

Cryptocurrencies - The increasing popularity of the cryptocurrencies trading are used for money laundering which people can easily access cryptocurrency exchanges online to buy and sell. Although it is not completely anonymous to trade cryptocurrencies online in most exchanges, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, difficult to detect, as money can be transferred or withdrawn leaving little or no trace of an IP address. Despite this, the transparent and immutable nature of blockchains has led to some such activities being identified and arrests being made.


Casino chips can sometimes be bought in cash without verifying the buyer’s identity, which creates a potential exploit for money laundering crimes. If casinos have international establishments, a customer requests his or her credits to be transferred overseas, and he/she can cash it out without being registered. 


Monetary instruments

The rapid growth of the global economy and internet infrastructure has made international trade an attractive avenue to move illicit funds through financial transactions associated with the trade in goods and services. There are many trade-based-money-laundering (TBML) techniques mentioned in the FATF report in 2006 of how criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy.


Other than securities, insurance policies are becoming more popular as a money laundering method. Criminals usually buy a single premium insurance policy instead of paying in an annual installments. They usually redeem it with a discount, paying penalties and fees in order to retrieve a “sanitized” check from the insurance company.  


Digital Identity 

In order to combat money laundering acts, digital identity has become an important part of the due diligence process of financial institutions, online payment service providers and even online businesses that involve transactions. In March 2020, the FATF released a guideline regarding how digital identity systems can be used to conduct certain elements of the customer due diligence (CDD) process.


Overall, there are many ways that digital ID systems can provide excellent verification options


  • Facilitate customer identification and verification at on-boarding

  • Support ongoing due diligence and scrutiny of transactions throughout the course of the business relationship,

  • Facilitate other customer due diligence (CDD) measures, and 

  • Aid transaction monitoring for the purposes of detecting and reporting suspicious transactions, as well as, general risk management and anti-fraud efforts. 


With a reliable digital ID system, it is easier to track bad actors who are trying to conduct illegal money laundering activities. It also provides credibility to service providers or merchants that help to fight against money laundering crimes. 


Blockpass provides a solution which is ideal for the customer due diligence. With fast and secure KYC and AML compliance, and the ability to flexibly, quickly and easily manage identities, it ensures regulatory compliance without the hassle traditionally associated with KYC. The Blockpass model is also ideal for industries like e-commerce, financial institutions, gambling and cryptocurrency, which can need to onboard a large number of users, as the Blockpass ecosystem has a pool of pre-verified users with secure and compliant identities that can be instantly signed up for any service that uses Blockpass. Aiming for the highest standards in regulatory compliance would go a long way to showing that a company is legitimate. When a fantastic compliance solution exists, why would a company not use it?