Criminal Cryptocurrency Is Not Small Change

When they want to catch today’s outlaws, law enforcements officers must follow the money right into cyberspace. Like the rest of society, felons are using the latest technology not only to steal cash but also to launder it to finance other illegal activities, including human trafficking, drugs and terrorism.

As the only agency with border search authority as well as exclusive access to trade and financial intelligence, Homeland Security Investigations (HSI), an arm of the DHS, investigates, disrupts and dismantles terrorist, transnational and other criminal organizations. The National Bulk Cash Smuggling Center specifically looks for ill-gotten currency obtained by exploiting U.S. customs and immigration laws.

In November 2019, the mission expanded when experts throughout the center recognized it was lacking staff with blockchain forensics and analytics skillsets. Chris Hoffmeister is a criminal analyst in the resulting Cryptocurrency Intelligence Program (CIP).

“We had done, in Britain, a very successful job at investigating crimes involving cryptocurrency, specifically the Silk Road investigation,” Hoffmeister explained during his presentation at the AFCEA NOVA Chapter Intelligence Community IT Day. “We had a primary investigative role in that investigation, and several other darknet market investigations since. But we have a very small set of people who, at the time especially, had the skills to do blockchain forensics and to trace money.”

It should come as no surprise, Hoffmeister said, that criminals are in business for profit, so nearly every criminal investigation has a financial aspect to it. By following the money, the HSI not only identifies the illegal funds but also targets the financial networks and third-party facilitators, or “gatekeepers,” he explained, who finance and launder illegal proceeds and activities.

Although the amount varies from year to year, Hoffmeister shared that in fiscal year 2019, HSI seized approximately $775 million in currency assets, a number that was probably closer to $1 billion in fiscal year 2020. “But what we end up seizing represents a sliver of the overall financial crimes environment worldwide. There are loads of estimates out there, but the amount of dirty money sloshing around the world is in the trillions, so we do what we can,” he related.

In addition to bulk cash, the HSI’s current focus is on items with stored value such as prepaid access devices and virtual assets, including cryptocurrency, Hoffmeister revealed.

“At the heart of what we do is what I like to call blockchain forensics,” he explained. By watching, analyzing and tracing a subject’s online activity, usually on the darknet, the CIP team can combine technical expertise with specialized software tools and partnerships not only with law enforcement but also private sector entities who specialize in watching analytics. This enables them to detect transactional activity through analytical heuristics.

Technical and investigative experts combine blockchain transactions to find clusters that can lead to a specific individual, Hoffmeister related. “Generally speaking, the whole goal of all of blockchain forensics is to identify these entities, trace their transactions, attribute them to live people and then de-anonymize those people using blockchain, Bitcoin and other cryptocurrencies. … The ledger technology that lets blockchain work is open source,” he added.

The CIP is focusing on cryptocurrency because it represents the next step in its mission to investigate financial crimes. Program members consider cryptocurrency and crypto transactions at the heart of money laundering laws.

“Transnational criminal organizations, or TCOs, launder money using crypto. It should come as no surprise that the savvy money brokers and money launderers who have facilitated international drug trafficking organizations and cartels and human smuggling networks have advanced in their use of technology just as everyone in the list of the legal financial sector," Hoffmeister stated. "Criminals follow the money, and they follow the technology of money just like anyone else.”

To hear more details about how the DHS, HSI and CIP have brought down criminal activities financed by cryptocurrency such as Bitcoin, tap into the presentation on the NOVA Chapter website.