Japan Struggles with Cryptocurrency Money Laundering

Due to the poor regulation of cryptocurrencies, money laundering crimes committed by organized crime groups in Japan have increased significantly.  The Mainichi Shimbun, a major newspaper in Japan, has reported one specific case where up to 30 billion yen was discovered moving through overseas exchanges since 2016.

Gangs have developed a whole system to launder money without detection, utilizing meeting places and USB drives containing records of the gang’s profits from money laundering using various untraceable cryptocurrencies such as, Zcash, DASH and Monero, as well as the names of workers who convert and transfer the currencies.  The workers are typically Japanese students and engineers in their 20’s or 30’s that work by converting the money into Bitcoin or Ethereum at Japanese exchanges, and then send the cryptocurrencies out to multiple accounts at exchanges where forms of ID are not needed to open an account, such as YoBit, an exchange in Russia.  Once there, the Bitcoin or Ethereum is converted again to cryptocurrencies that use private trading logs, allowing both the receiver and the sender to keep their anonymity.  In order to hide their tracks, the workers make multitudes of transactions using various exchange operators, and work with overseas partners to convert the final transactions to the country’s physical currency.

The gangs stress that transferring the money in small amounts is key to avoiding detection.  A Chinese man who has worked with gangs in the past by providing records of money laundering data on USBs commented, “Gangs were attracted to the anonymity associated with cryptocurrencies from the beginning.  Now, its use is not limited to just money laundering, but is also being used as a venture to generate capital.”  

Zcash, DASH, and Monero are often referred to as the “three anonymous siblings” according to a senior official at the Financial Services Agency (FSA) with only one cryptocurrency exchange dealing with the “siblings” where criminals were able to transfer 58 billion yen.  This prompted the FSA to inspect other cryptocurrency exchanges, where they discovered many had weak regulations in place and were ordered to strengthen them immediately.  After Coincheck was sold to Monex Group, the new owners have expressed their intentions to end all trades dealing with any of the three “siblings.”

Various countries such as China, South Korea, India and the European Union have taken steps in order to deal with money laundering.  China shut down all exchange offices, while South Korea outlawed the usage of initial coin offerings.  India is currently in the process of outlawing the use of cryptocurrencies overall and the EU is currently looking to draft legislation that would increase protection of cryptocurrency users.  In an attempt to decrease money laundering in Japan, the FSA also introduced the revised Payment Services Act in April 2017 that requires cryptocurrency exchanges to register and provide identification documents, and allows the outside monitoring of accounts.  However, even with the revised laws in place, authorities found it difficult to track money back to the original source after it had been transferred overseas because criminals used accounts that did not require any ID.

In order to overcome this, the FSA stated that Japan alone cannot deter the money laundering, and that the only way to solve the problem would be with the cooperation of other countries.  According to an FSA official, “Even if trade is restricted to only domestic transfers or monitoring is enhanced, it’s still not enough to counter money laundering.  It would be best if all the group of 20 industrial and emerging nations and regions (G-20) would take the same steps towards prevention.”  Earlier this year in March, the G-20 agreed to improve the cryptocurrency system and introduce new regulations by July, but it is unclear whether or not all the nations can agree on the same rules and regulations in order to fight money laundering.


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