From the U.S. Government Accountability Office, www.gao.gov

Transcript for: How Virtual Currencies Are Used in Human and Drug
Trafficking

Description: Virtual currencies are being used to facilitate illicit
activities, including human and drug trafficking. GAO was asked to look
into this issue and federal efforts to prevent it. We talk GAO's Gretta
Goodwin and John Pendleton to learn more. 

Related GAO Work: GAO-22-105462, Virtual Currencies: Additional
Information Could Improve Federal Agency Efforts to Counter Human and
Drug Trafficking

Released: January 2022

[Music]

[John Pendleton:] Virtual currencies present opportunities that come
with substantial risk. 

[Holly Hobbs:] Hi and welcome to GAO's Watchdog Report. Your source for
news and information from the U.S. Government Accountability Office. I'm
your host, Holly Hobbs. Virtual currencies are increasingly being used
to purchase goods and services. But as its use increases, so do concerns
that virtual currencies are being used to facilitate illicit activities,
including human and drug trafficking. GAO was asked to look into this
issue and federal efforts to prevent it. Today, we'll talk with two
directors who led work for our new report about virtual currencies.
Joining us are Gretta Goodwin, a director in our Homeland Security and
Justice team, and John Pendleton, a director in our Financial Markets
and Community Investment team. Thanks for joining us. 

[Gretta Goodwin:] Thank you for having me, Holly. 

[John Pendleton:] Thanks, Holly. 

[Holly Hobbs:] So, Gretta, can we start with--what do we mean by virtual
currencies? 

[Gretta Goodwin:] Holly for starters, virtual currencies are an
increasingly acceptable form of payment, and they work much like credit
cards or the dollar. Now, a main difference between virtual currencies
and other forms of payment is that the virtual currencies generally
aren't government-issue legal tender or issued by a bank, much like a
credit card might be. 

[Holly Hobbs:] And how are these being used in trafficking? 

[Gretta Goodwin:] We looked at two types of human trafficking--labor
trafficking and sex trafficking. We did not identify any significant use
of virtual currencies for labor trafficking. We did, however, identify
virtual currency as a payment option used to facilitate sex trafficking.
So platforms in the online-commercial sex marketplace might accept the
virtual currency as a payment for ads. And these ads can be used to
direct potential clients to other sites, other platforms, or locations
where sex trafficking might occur.  

[Holly Hobbs:] And what about drug trafficking?

[Gretta Goodwin:] So virtual currencies have been used to buy and sell
illegal drugs on dark web marketplaces for a number of years. At the
time of its seizure back in 2013, the Silk Road was one of the most
prominent dark web marketplaces. The Silk Road was being used by
thousands of drug dealers to distribute hundreds of kilograms of illegal
drugs. It was designed to include a Bitcoin-based payment system to help
conceal these illicit transactions. Drug cartels and transnational
criminal organizations have also used virtual currencies to launder
their trafficking profits.

[Holly Hobbs:] So how does it work?

[Gretta Goodwin:] So, money couriers can deposit large volumes of cash
from their illegal drug activities into a virtual currency kiosk to
convert those dollars into virtual currency. Once the illicit proceeds
are converted, they can be easily transferred to another virtual
currencies user's wallet or transferred back to cash. And that reduces
the risk associated with transporting bulk currency. It also provides
some anonymity with the transfers from the illegal proceeds. 

[Holly Hobbs:] And, John, given the nature of virtual currencies, that
they're meant to be anonymous, what do we know about how often they're
being used in illegal activities? 

[John Pendleton:] Well, Holly data are scarce here because, as you know,
perpetrators of crimes prefer to hide in the shadows. That said, banks
and other financial institutions are required to file what's called
Suspicious Activity Reports--often SARs for short-- with Treasury if they
know or even suspect that a transaction may involve illicit activity.  

[Holly Hobbs:] So what do those SARs tell us? Were there any trends?

[John Pendleton:] We looked at those SARs and we did see an increase in
them referencing virtual currency in human or drug trafficking since
2017. SARs that referenced virtual currency terms quadrupled actually
from over 10,000 in 2017 to over 40,000 in 2020. And SARs that mentioned
both virtual currency and drug trafficking saw a fivefold increase over
the same period. Those trends are definitely upward, and in this case,
that's the wrong direction. One of our findings was that data on the use
of virtual currency in human and drug trafficking cases is not being
consistently captured at federal agencies, and this is particularly
concerning given the trends here.

[Holly Hobbs:] So you just talked a little bit about the banks
responsibility. What's the federal role in countering the use of virtual
currencies to facilitate crimes? 

[John Pendleton:] Well, the federal role is complicated, in part because
it involves a number of U.S. government agencies. Broadly, they fall in
a couple of categories--either financial regulatory agencies or law
enforcement. Treasury agencies include FinCEN, the Financial Crimes
Enforcement Network, and the IRS. And they're responsible for overseeing
virtual currency service providers such as virtual currency exchanges
and kiosk. FinCEN has the authority to enforce anti-money laundering
authorities and requirements of Bank Secrecy Act. Requirements in such
and virtual currency exchangers must register with FinCEN and keep
records, such as customer identification information, and make reports
about those. A law enforcement can investigate and prosecute individuals
and businesses who use virtual currency to commit crimes. And law
enforcement can and has seized virtual currency if it's been deemed to
be used in human and drug trafficking crimes.

[Holly Hobbs:] Gretta, we identified some significant challenges in
these efforts. What are they? 

[Gretta Goodwin:] So agencies face challenges in identifying and
tracking virtual currency kiosks, including the information on their
physical addresses. Now, FinCEN imposes some requirements for the
operators of these kiosks. But while these kiosk operators are required
to register with FinCEN, they're not required to routinely report the
specific locations of their kiosk. And so having limited information
about the location of a virtual currency kiosk can make it difficult for
agencies to effectively identify and track where they are. Another
challenge was that criminals are increasingly just taking advantage of
the global nature of virtual currency. Criminals can use currency
exchanges that are located in another country, and that could be a
country that has little to no anti-money laundering compliance
requirements. And that helps the criminals evade identification and
detection by law enforcement.

{MUSIC:}

[Holly Hobbs:] So we just heard from Gretta and John that virtual
currencies are increasingly being used to facilitate human and drug
trafficking, but that federal law enforcement faces significant
limitations of being able to accurately track when and how, and how
often virtual currencies are being used in these crimes. So, John, did
we make any recommendations to federal agencies to help improve their
efforts? 

[John Pendleton:] Yes, we made a number of recommendations. In the
public version of the report, we recommended that FinCEN and IRS review
virtual currency kiosk registration requirements. This would help detect
when virtual currency made through illicit activities goes from the
shadows to fiat currency that can be harder to hide. 

[Holly Hobbs:] And last question, what's the bottom line of this report?
John, let's start with you. 

[John Pendleton:] Virtual currencies present opportunities but come with
substantial risk. And federal agencies have sought to counter the
illicit use of such virtual currency in human and drug trafficking
through interagency collaboration, developing in-house expertise, and
fostering partnerships with commercial and academic institutions, but
still face significant challenges going forward.

[Holly Hobbs:] And Gretta? 

[Gretta Goodwin:] So additional information could improve the federal
agencies efforts. For example, the federal government could do more to
consistently capture data on the illicit use of virtual currencies in
human and drug trafficking activity. Also, collecting additional data on
virtual currency kiosks, such as the physical addresses, could improve
the information that law enforcement has available to them to identify
the source of illicit transactions. 

[Holly Hobbs:] That was Gretta Goodwin and John Pendleton talking about
GAO's recent review of virtual currencies. Thank you both for your time. 

[Gretta Goodwin:] Thank you, Holly. 

[John Pendleton:] Thank you very much for having me, Holly. 

[Holly Hobbs:] And thank you for listening to the Watchdog Report. To
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