The Treasury Committee’s inquiry into economic crime is one of the most wide-ranging of the committee’s current workstreams, and its conclusions are keenly awaited.
As well as assessing the effectiveness of the anti-money laundering regime in the UK, MPs have been examining the impact of economic crime on consumers.
The committee’s last meeting saw the National Crime Agency and Serious Fraud Office confirm that tackling money laundering was a strategic priority for both organisations, and make the case for reform of the law on corporate criminal liability. (See our related blog).
Donald Toon, director of prosperity (economic crime and cybercrime) at the NCA, said that one of the fundamental issues for law enforcement was cyber-enabled criminality, and specifically the break in the traditional geographical link between the crime, the offender and the victim.
“We have a challenge of frauds carried out online where the perpetrators may be thousands of miles away in very, very difficult to reach jurisdictions,” he said. “That is a real challenge for law enforcement, particularly around mass-market or volume fraud.”
The NCA warns in its strategic assessment of serious and organised crime that criminals will increasingly use cryptocurrencies to move illicit funds across borders, partly because of the relatively high price of bitcoin in particular.
However, the main message for MPs at the hearing was that the threat posed by virtual currencies must be kept in perspective.
Despite the well-documented explosion in cryptocurrencies, property transactions and old-fashioned cash were still more likely to be at the heart of major criminality, said Mr Toon.
In particular, he refuted the committee’s suggestion that bitcoin had become the “crook’s currency of choice”.
He argued that although the total value of bitcoin in circulation was substantial, it paled into insignificance compared to the scale of international money laundering as a whole.
While virtual currencies were undoubtedly being used to facilitate illegal sales on the dark web, he said, their value was inevitably undermined by their inherent volatility, instability and risk.
“Most criminals are like most of us: we like to be certain that the value we get out at the end of a transaction is at least as much as the transaction we put in,” he told the committee. “At the moment, there is a real issue about volatility in virtual currencies.”
In practice, although there was the potential for cryptocurrencies being used to finance terror or bribe corrupt officials, Mr Toon told the committee that so far there had been little evidence of either.
So, while the use of virtual currencies for nefarious purposes was likely to be a growing problem, he said he did not see it eclipsing, in the short to medium term, money laundering through standard financial transactions or through cash.
Having said that, he rejected the charge that he and his colleagues were in any way complacent over the potential criminal use of cryptocurrencies. “All I am trying to say…is that it is important that we place virtual currencies in the context of the whole money laundering problem,” he said.
Pressed specifically over the traceability of transactions, Mr Toon admitted that this was a complex question, with the answer depending partially on the particular currency and the jurisdiction. “It would not be fair to say there is a blanket problem of traceability, but tracing virtual currency transactions is difficult, complicated and can be blocked,” he said.
There could, however, be a technological answer. In a recent speech, Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority, said the new technology which gave criminals access to sophisticated tools could also be used to tackle financial crime, citing distributed ledger technology as a means of improving the traceability of transactions. “These same technologies, when used for good, could also be game changers in the fight against financial crime,” he said.
His thoughts echoed those of Christine Lagarde, head of the International Monetary Fund, who used her blog to urge regulators to “fight fire with fire”, taking advantage of the same innovations that power cryptocurrencies ultimately to control them.
The distributed ledger technology that enabled instant global transactions could be used to create registries of standard, verified, customer information along with digital signatures, said Ms Lagarde, while biometrics and artificial intelligence could enhance digital security and identify suspicious transactions in close to real time.
When drawing up its conclusions, the committee will need to reflect on the extent to which cryptocurrencies currently facilitate economic crime and their potential to do so in future – no easy task given the rapid pace of technological development in this area and the frantic attempts of regulatory bodies to keep pace.
In reaching that judgment, it must weigh up the risk of cryptocurrencies, and the technology that underpins them, being exploited to criminal ends, against their potential to transform the international financial landscape for the better.