Across Latin America, transnational criminal organizations, transnational gangs, and extra-regional actors supporting authoritarian regimes are exploiting growing cracks in the region’s weak financial regulations by transferring parts of their financial holdings to cryptocurrency, thereby avoiding detection and asset seizures. Opportunities for criminal use of crypto have significantly increased in the past few years; a growing number of high corruption governments, which also act as money laundering havens, are actively courting unvetted crypto investors with purposeful deregulation and opacity.
Across Latin America, transnational criminal organizations that move billions of dollars a year in illicit profits are transferring parts of their financial holdings to cryptocurrencies as a way of avoiding detection and asset seizures. Many different groups, including the Mexico-based Cartel Jalisco Nueva Generación (CJNG) and Sinaloa Cartel, Central America-based MS-13 (Mara Salvatrucha), and Brazil-based PCC (Primeiro Comando da Capital), are discovering growing cracks in the regional anti-money laundering architecture that make the switch to cryptocurrencies increasingly attractive. The drop in value of most digital currencies may slow the trend in the short term, but as prices stabilize it will likely continue to grow in the mid to long term.
While criminal use of cryptocurrencies is a global problem, Latin America, in particular, is a region where criminal groups take advantage of “unregulated exchanges that do not require registration information and proof of identification for tracking purposes,” per one specialized report. These groups often deposit Bitcoin into exchange accounts and trade it for various altcoins, obscuring the original source account.
There are multiple cases that demonstrate this trend, offering a useful but incomplete view of the magnitude of the changes underway. Blockchain systems are designed to make tracing transactions anonymous and even aggressive regulatory efforts around the world are in their infancy. As such, conceptualizing the expansion of blockchain systems in Latin America relies on compelling anecdotal evidence and analysis of the potential threats rather than quantitative data. For example, in December 2022, the Drug Enforcement Administration (DEA) found that the CJNG used Binance, the world’s largest cryptocurrency exchange, to move $15 million to $40 million in illicit proceeds from the sale of cocaine and methamphetamines, combining new products and new laundering methods.
The December 2021 murder of a PCC leader in Brazil led to a Sao Paulo police investigation that found widespread use of cryptocurrency by the gang, including a $7.8 million transaction. In that same month, the US Treasury Department designated the PCC as a major criminal organization. In a separate Brazilian case, the so-called “Pharoah of Bitcoin” ran a pyramid scheme, reportedly taking in $67 million from local and international investors, and is now enmeshed in allegations of murder, drug trafficking, and money laundering.
Our fieldwork in the Northern Triangle of Central America (El Salvador, Honduras, and Guatemala) has found that the MS-13 transnational gang, designated by the US government as a major criminal organization since 2012, is increasingly demanding payment in Bitcoin for transporting cocaine to Mexico and in extortion cases. Given that almost all the gang’s criminal activity is cash-based and growing rapidly, the ubiquity of Bitcoin ATMs and the ease of convertibility to dollars has made it more convenient and safer to use blockchain wallets than hoarding physical money in safe houses.
In addition to transnational criminal activities, state-run Bitcoin operations like Chivo Wallet in El Salvador have been widely used by transnational groups to scam users of millions of dollars. Finally, Russia and its allies in the hemisphere, such as the Maduro regime in Venezuela, have developed cryptocurrencies specifically designed to evade US and EU sanctions by bypassing the Western currency markets. A Russian national living in Uruguay designed and advised the development of the Venezuelan Petro crypto currency, a value transfer only useable between Venezuela and Russia through Russian banks. While not directly tied to transnational organized crime, the Maduro regime is widely recognized as financing itself through the sale of cocaine and illegally mined gold, meaning that much of the value transferred through the Petro system is likely derived from criminal activity.
The growth of cryptocurrency in transnational criminal organizations is difficult to quantify, but likely accelerating. This trend has been made possible by the growing number of high-corruption jurisdictions where deregulation is purposeful, and the currencies are welcomed for their opacity. The percentage of global cryptocurrency in Latin America has grown from about 6 percent in 2017 to 16 percent in 2020. Most of Latin America lacks robust banking regulations or Know Your Customer (KYC) requirements, while efforts in the hemisphere to regulate cryptocurrencies are in their infancy, including in the United States. With the exception of Mexico and Venezuela, the vast majority of the countries across the region have only ad hoc regulations or notional discussions of regulations. The promotion of cryptocurrency by high-corruption countries provides growing access to and uses for these currencies in markets that are almost completely unregulated and unmonitored.
El Salvador has come under increasing scrutiny for its disregard for any regulation. More than a dozen senior members of President Nayib Bukele’s administration and legislative allies have been sanctioned by the United States and had their visas revoked because of massive corruption. Additionally, the World Bank is withholding hundreds of millions of dollars in loans because of those concerns and government corruption.
The concerns began September 2021, when Bukele used his growing authoritarian power to make his country the world’s first to declare Bitcoin legal tender on par with the US dollar, which is already El Salvador’s legal currency. The law requires all major businesses accept Bitcoin and, while few people use the currency regularly, the cryptocurrency is both easy to use and easy to convert, which is at least a partial explanation for why the MS-13 and other gangs are pushing into its use. In addition to offering no regulation or monitoring of Bitcoin transactions, El Salvador also offers residency and citizenship based solely on Bitcoin purchases, creating a haven for those seeking safe harbor from prosecution for any crime. Further concerns about corruption emerged after Bukele tweeted about trading Bitcoin naked using funds from the national treasury, held in his private wallet, while losing an estimated $22 million with no accountability, transparency, or oversight.
Paraguay, a small, landlocked, and isolated nation in South America that is already a money laundering haven, is moving to follow El Salvador’s blueprint for luring cryptocurrency business. While there are few public cases of the use of cryptocurrency by transnational criminal groups in Paraguay, financial crimes prosecutors and police investigators say that there are multiple cases. A number of factors make prosecuting such cases impossible.
One factor is that former president Horacio Cartes, who retains enormous economic and political influence, as well as the sitting vice president, who has a direct hand in cryptocurrency regulation, both have been designated “corrupt actors” by the US government and had their US visas revoked. The designations, also applied to Cartes’ US-based businesses, were compounded by public US allegations of both men’s financial and political ties to the Lebanese-base Hezbollah, a designated terrorist group.
The interest of Cartes and his political acolytes still in power is a cause for concern because he is also the owner of the country’s largest business conglomerate, which includes banks, hotels, media organizations, and cigarette factories. Cartes’ economic power, access to the judiciary, and control of the media work together to keep many cases, including several tied to cryptocurrency money laundering, from coming to light.
Paraguay’s competitive advantage is that it is the only country in the world that is solely reliant on renewable energy (hydroelectric power), meaning Bitcoin mining is relatively cheap and electricity is relatively plentiful. Since 2018, Paraguay has promoted itself as a Bitcoin hub. It is also one of the key corners of the Tri-Border region, along with Brazil and Argentina, where money laundering, cocaine trafficking, contraband, and other illicit activities by groups like the PCC dominate.
While data is sparse, there is compelling case evidence and fieldwork research that shows transnational criminal organizations and transnational gangs are increasingly using cryptocurrencies to move and hide the profits from their illicit activities. A growing number of countries overwhelmed by endemic corruption, weak or non-existent regulatory infrastructure, and deliberately opaque crypto policies, help create an exceptionally fertile environment for this growth.
Given that how—and even if—to regulate cryptocurrency is an ongoing global debate, there is no quick policy prescription to keep transnational organized crime organizations from migrating to these systems to reduce the risk of asset tracing and seizure. However, US policymakers can take some steps to slow the trend.
A first step is the development and implementation of basic KYC regulation and transparency in jurisdictions promoting the use of cryptocurrencies comparable to those in the formal banking structure. This form of regulation of the banking sector is a fundamental pillar of avoiding designation by the US State Department as a money laundering haven. These conditions should be met to avoid being named, shamed, and sanctioned by the Financial Action Task Force (FATF) in the form of being placed on its gray list and black list jurisdictions. This should be accompanied by US efforts to keep countries from granting citizenship based on cryptocurrency investments that likely incentivize fleeing justice in other jurisdictions. Such a policy could be achieved by refusing to recognize these types of citizenship documents. Finally, the United States can play a key role in helping regional institutions such as the Organization of America States (OAS) and regional development banks establish common crypto guidelines and regulations across the hemisphere.
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Douglas Farah is the president and founder of IBI Consultants, a national security consulting firm focusing on transnational organized crime and extra-regional actors in Latin America, working with the US government, research foundations, and private clients. Marianne Richardson is the research coordinator at IBI Consultants and holds an MA in public affairs from the University of Texas at Austin.
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