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North Korea and Scammers Use DeFi for Money Laundering, U.S. Treasury Warns

The U.S. Treasury warns of North Korea and scammers exploiting DeFi platforms for money laundering, highlighting the need for stronger compliance with AML and CFT regulations.

U.S. Treasury Department
U.S. Treasury Department

DeFi's Illicit Finance Risks and Anti-Money Laundering Compliance

Decentralized finance (DeFi) services that do not comply with anti-money laundering (AML) and terrorist financing regulations pose the most significant illicit finance risk in the cryptocurrency sector, according to the U.S. Department of the Treasury's first analysis of hazards associated with DeFi.

Criminal Use of DeFi and Need for Enhanced AML Regulations

The Treasury Department found that thieves, scammers, ransomware cyber criminals, and actors for the Democratic People's Republic of Korea (DPRK) are using DeFi to launder proceeds from crime. The department recommends assessing possible enhancements to U.S. AML and countering the financing of terrorism (CFT) requirements as they apply to DeFi services and seeking input from the private sector.

Private Sector Collaboration in Risk-Mitigation Strategies

Brian Nelson, Treasury's undersecretary for terrorism and financial intelligence, encouraged the private sector to use the risk assessment findings to inform their risk-mitigation strategies. The report warns that DeFi services often do not implement AML/CFT controls, allowing for pseudonymous and instantaneous layering of proceeds.

DeFi Projects Promoting Lack of AML/CFT Controls

The report cites instances where DeFi projects have promoted a lack of AML/CFT controls as a primary goal of decentralization. ShapeShift's 2021 transformation to a decentralized exchange to avoid customer information collection for AML/CFT compliance is noted.

DeFi representative image
DeFi representative image

Consequences of Non-Compliance and Exploitation by Criminals

When DeFi entities fail to comply with regulatory requirements and AML/CFT controls, criminals are more likely to exploit their services successfully, including circumventing U.S. and United Nations sanctions.

Strengthening AML/CFT Supervision and Guidance for DeFi Compliance

The report recommends the U.S. government strengthen AML/CFT regulatory supervision and consider providing additional guidance for the private sector on compliance checks for DeFi services. This assessment is part of President Joe Biden's executive order on crypto from last year.

Challenges in Identifying Individuals Behind DeFi Activities

DeFi can pose challenges in determining the individuals behind business activities, but centralization or decentralization is not a factor when determining coverage under the Bank Secrecy Act. Nelson noted that some entities claiming full decentralization engage in activities closer to traditional finance.