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Basic Manual on the Detection and Investigation of the Laundering of Crime Proceeds Using Virtual Currencies

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а Basic Manual on the Detection And Investigation of the Laundering of Crime Proceeds Using Virtual Currencies June 2014 The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. Countries and areas are referred to by the names that were in official use at the time the relevant data were collected. Any trademarks used throughout this manual are the property of their respective owners. This publication was produced with the financial support of the U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs. Opinions, conclusions and recommendations expressed in the publication belong to the author(s) and do not necessarily reflect the view of the Department of State. This publication has not been formally edited. Cover photo: Antoaneta Petrova. 1 1 Introduction As a custodian of the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption, UNODC possesses significant comparative advantages for delivering assistance in the anti money-laundering and asset forfeiture areas. The UNODC mandate in these areas was strengthened by ECOSOC resolution 2004/29, which specifically states that UNODC should “continue its work against money-laundering, subject to the availability of extra budgetary resources and in cooperation with relevant regional and international organizations participating in activities designed to give effect to applicable international instruments and relevant standards for combating money-laundering, through the provision to Member States, upon request, of training, advisory assistance and long term technical assistance”. In 2012, at the request of the GUAM Secretariat, and with the financial support of the Bureau for International Law Enforcement and Narcotics Affairs of the US Department of State, the UNODC Regional Office for Central Asia launched the project “Strengthening capacities of the GUAM Member States to cooperate at the national and regional levels in combating money-laundering as well as in seizing and confiscating crime proceeds”. The project seeks to promote a regional approach to counter money-laundering in the GUAM Member States (Georgia, Ukraine, Azerbaijan and Moldova) and, at the same time, to strengthen inter-agency cooperation of these States at the national levels. The purpose of this manual, which has been drafted in the framework of the above mentioned project, is to provide practical information for investigators and prosecutors on the detection, investigation, prosecution and seizure of crime proceeds laundered through the use of virtual currencies. 2 2 Acknowledgements The authors would like to thank all of those who provided input, advice and feedback on the content of the manual. The manual has been drafted under the technical guidance of the UNODC Global Programme against Money Laundering, Proceeds of Crime and the Financing of Terrorism (GPML) and Global Programme on Cybercrime. Expert contributions were provided by the UNODC consultants Messrs. David O’Reilly, Giorgi Jokhadze and Yevheniy Umanets. Contributions were also provided by representatives from the GUAM states. 3 3 Table of Contents Module 1: Introduction to Virtual Currencies ……………………………………………… 5 Module 2: The Challenges Presented by Virtual Currencies ….…………………… 37 Module 3: Detection and Investigation of Laundering Crime Proceeds Using Virtual Currencies ……………………………………………………..……. 73 Module 4: Seizure of Virtual Currencies ………………………………………….……… 133 Annex 1: Bibliography ……………………………………………………………………….…… 157 Annex 2: Glossary …………………………………………………………………………..………. 167 Annex 3: Examples and Analysis Pertaining to the GUAM Countries …………. 176 Annex 4: List of Designated Agencies in the GUAM Countries ……………...……. 187 Annex 5: Samples Answers to Self-Assessment Questions ………………...……… 201 Basic Manual on the Detection And Investigation of the Laundering of Crime Proceeds Using Virtual Currencies Module 1 Introduction to Virtual Currencies Module 1 : Introduction to Virtual Currencies 6 1 Summary The purpose of this module is to provide a general overview of the history and concepts of electronic money and virtual currencies. The information contained in this module is important background material that forms the basis and context for the modules that follow. To understand the genesis of virtual currencies, a brief history of virtual currencies is provided, including some of the most famous examples of virtual currencies and virtual currency exchanges. This is followed by definitions of the key terms that will be used throughout these modules, as well as relevant legal definitions. Providing clear definitions helps to refine the scope of the discussion, as well as preventing miscommunication and confusion. A description of some of the more common types of electronic money and virtual currencies is then provided, including a categorisation model for virtual currencies. It is very important from an investigative point of view to understand the interfaces between electronic money, virtual currencies and the traditional financial system. Some of the most common interfaces are discussed and finally, the current state of legal regulation of virtual currencies is provided. Several case studies of virtual currencies are included, with particular attention paid to the Bitcoin network, considering its topical nature and the particular challenges raised by this technology. 2 Learning Objectives By the end of this module you will: Know the key terms in the area of electronic money and virtual currencies. Be aware of the main types of electronic money and virtual currencies. Understand the interface between virtual currencies and the traditional financial system. Know the current state of legal regulation of electronic money and virtual currencies. Know what bitcoins are and how they work, as an example of a cryptocurrency. Module 1 : Introduction to Virtual Currencies 7 3 History of Virtual Currencies Virtual currencies are not a new concept, with multiple virtual currencies having come and gone over the past decade. This section provides a brief summary of some of the most famous virtual currencies and currency exchanges. One of the first popular virtual currencies was E-Gold. First established in 19961, E-Gold allowed users to open an account with a value denominated in grams of gold (or other precious metals) and the ability to make instant transfers of value to other E-Gold accounts. It was reported that in 2005 E-Gold had 2.5 million account holders, performing daily transactions with a typical value of US$6.3 million. In 2007, E-Gold was indicted by a grand jury in the US, accusing the company of money-laundering, conspiracy and operating an unlicensed money transmitting business, ultimately leading to the shut down of E-Gold by the US courts2, 3. E-Gold spawned a range of imitators such as e-Bullion.com, Pecunix.com and others. In 1998, WebMoney was established and continues to experience significant growth, with almost 25 million users at the time of writing4. The WebMoney system is based on providing its users with the ability to control individual property rights for valuables (assets) stored by other participants of the system (known as Guarantors)5. Liberty Reserve, established in 2006, and operating until 2013, allowed users to register and transfer money to other users with only a name, email address and date of birth. No efforts were made to verify the identities of its users. In 2013 the US Department of Justice charged Liberty Reserve with operating an unregistered money transmitter business and money-laundering for facilitating the movement of more than $6 billion in illicit proceeds6. Bitcoin is a decentralised, peer-to-peer payment network that is powered by its users with no central authority or middlemen. Satoshi Nakamoto published the 1 “Feds accuse E-Gold of helping cybercrooks”, NBC News, May 2007. (Source: http://redtape.nbcnews.com/_news/2007/05/02/6346006-feds-accuse-e-gold-of-helping- cybercrooks) 2 “Internet currency firm pleads guilty to money laundering”, The Industry Standard, July 2008. (Source: http://web.archive.org/web/20090414185759/http://www.thestandard.com/news/2008/0 7/22/internet-currency-firm-pleads-guilty-money-laundering) 3 http://en.wikipedia.org/wiki/E-gold 4 http://www.wmtransfer.com/eng/about/statistics/index.shtml, WebMoney statistics retrieved April 2014. 5 http://en.wikipedia.org/wiki/WebMoney 6 “’Black Market Bank’ Accused of Laundering $6B in Criminal Proceeds”, ABC News, May 2013. (Source: http://abcnews.go.com/US/black-market-bank-accused-laundering-6b- criminal-proceeds/story?id=19275887) Module 1 : Introduction to Virtual Currencies 8 first Bitcoin specification and proof of concept to a cryptography mailing list in 20097. Since that time, the value of bitcoins has fluctuated wildly, ranging from approximately US$0.30 in 2011 to US$1135 in 20138. The operation of the Bitcoin network is discussed in detail in the Bitcoin case study below. 4 Definition of Terms The definition of terms is important to prevent duplication of effort and unintended confusion. This is particularly relevant in the area of virtual currencies where numerous related
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