Crypto-Based Money Laundering: A Growing Threat to Banks

Case Study and Detection Strategies

Introduction

Cryptocurrencies have transformed global finance by enabling fast, decentralized, and borderless transactions. Contrarily, this same innovation has opened new channels for criminals to move illicit funds beyond the reach of traditional oversight.

Crypto-based money laundering has become a serious and escalating concern for financial institutions worldwide, especially as regulatory frameworks lag behind technological advancements.

This blog examines how cryptocurrencies are exploited for laundering, presents a case study involving a state-sponsored actor, and outlines actionable strategies for banks to detect and mitigate this evolving threat.

Understanding Crypto-Based Money Laundering

Crypto-based money laundering involves using cryptocurrency networks and assets to disguise the origins of illicit funds. Unlike traditional laundering, it operates with unmatched speed, technical sophistication, and global reach.

Common Tactics Include:

Utilizing privacy coins such as Monero or ZCash
Obscuring trails through mixing services and tumblers
Moving assets via decentralized exchanges (DEXs) with minimal or no KYC requirements
Converting tokens through cross-chain bridges
Exploiting NFTs and DeFi platforms for layering

Consequently, these methods make traceability extremely difficult, allowing criminals to reintroduce “cleaned” assets into the financial system under the guise of legitimate activity.

Case Study: Lazarus Group and the Harmony Bridge Hack (2023)

Background

Particularly, in June 2023, hackers stole approximately $100 million in cryptocurrency by compromising the Harmony Horizon Bridge, a cross-chain protocol used to transfer assets between Ethereum, BNB Chain, and Harmony networks.

Attribution

U.S. authorities attributed the attack to Lazarus Group, a North Korean state-sponsored entity already under international sanctions.

Laundering Process

Stolen funds were moved into intermediary wallets.
Assets were fragmented and funneled through Tornado Cash, a U.S.-sanctioned crypto mixer.
Portions were bridged across multiple blockchains to mask origin.
Funds were converted to privacy coins and ultimately cashed out via offshore exchanges.

Implications

Once anonymized, these assets can seamlessly re-enter the global financial system—posing significant risks to banks that may unknowingly process deposits or investments linked to laundered crypto.

How Banks Can Detect Crypto-Based Laundering

Banks must treat cryptocurrency exposure as an integral part of their Anti-Money Laundering (AML) framework. Following are structured approaches to identify and mitigate crypto-driven risks.

1. Monitor for Crypto Exchange-Linked Transactions

Flag accounts exhibiting:

Large or frequent transfers involving known crypto exchanges
Multiple small deposits (indicative of structuring or smurfing)
Cash-heavy accounts suddenly engaging in crypto transactions

2. Integrate Blockchain Analytics Tools

Collaborate with vendors such as Chainalysis, Elliptic, or TRM Labs to:

Trace the origin and path of blockchain transactions
Identify wallets tied to ransomware, mixers, or darknet markets
Receive real-time alerts when interacting with sanctioned entities

3. Strengthen KYC and Source of Funds Checks

Update onboarding and review procedures to:

Capture details on crypto trading and wallet activity
Require declarations of crypto holdings or conversions
Verify the legitimacy of funds during large crypto-to-fiat conversions

4. Use AI-Driven AML Monitoring Systems

Deploy intelligent systems to detect:

Irregular crypto transaction patterns
Round-tripping (funds leaving and returning within short periods)
Inflows from unregulated or high-risk jurisdictions

5. Maintain Dynamic Internal Risk Lists

Continuously update internal blacklists of:

Unregulated or high-risk exchanges
Addresses flagged by regulators or law enforcement
Wallets linked to fraud, sanctions, or terrorism financing

Active participation in:

Financial Intelligence Units (FIUs) such as FIU-IND (India)
Industry networks like FATF and local AML consortiums

Such collaboration enhances early warning capabilities and collective defense against emerging laundering typologies.

Conclusion

Cryptocurrency is no longer a fringe innovation—it’s mainstream. Correspondingly, with its rise comes the inevitable surge in criminal misuse. Particularly, the Lazarus Group’s laundering of $100 million through cross-chain bridges, mixers, and privacy coins underscores the scale and sophistication of today’s threats.

Banks can no longer rely on conventional AML measures. Contrarily, they must evolve, integrate blockchain intelligence, and adopt crypto-specific compliance frameworks.

Specifically, early detection, adaptive monitoring, and cross-industry collaboration are now imperatives—not options—to safeguard the integrity of the global financial system.

Action Points for Compliance Teams

Conduct periodic crypto exposure assessments for high-risk accounts
Integrate blockchain analytics APIs into transaction monitoring workflows
Train compliance teams in blockchain forensics and typology analysis
Establish clear escalation workflows for suspicious crypto-to-fiat conversions