How to Prevent Cryptocurrency Money Laundering in Nigeria

by Olateju Oluwatomisin
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Cryptocurrency money laundering.

Thanks to the youthful and tech-savvy population, cryptocurrency adoption has grown in Nigeria. This wider adoption led to another problem, which is cryptocurrency money laundering. 

The anonymity and lack of regulations associated with cryptocurrencies make it perfect for money laundering. The problems with money laundering are tax evasion, crime funding, and economic instability, among many others.

Preventing cryptocurrency money laundering is essential for the stability of Nigeria’s economy and the country’s financial integrity and creating a legal crypto-dependent culture.

This article will closely examine cryptocurrency and money laundering, the relationship between the two, and how the federal government can prevent cryptocurrency money laundering.

What is Cryptocurrency Money Laundering?

Cryptocurrency is a digital asset and currency built on the blockchain technology. The significant features of this technology include security, decentralization, and transparency.

Money laundering is making money or funds acquired through illegal means appear legal. This is usually done through a business or investment, which serves as a front to clean up the money. In summary, crypto money laundering involves using cryptocurrency to acquire money through illegal means. 

Unlike the traditional financial system, which is secure and anonymous, cryptocurrency is built on a system that requires no central authority to consent to transactions. This made it perfect for money laundering, given that no central authority is required to facilitate transactions, and its pseudonymous nature makes it hard to track each transaction.

Criminals employ different tactics designed to blur the money trail through cryptocurrency. It could be via any of the means listed below:

  • Mixing services
  • Exchange Hopping
  • Investing in Privacy-Oriented Cryptocurrencies
  • Placement
  • Layering

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Understanding Cryptocurrency Money Laundering in Nigeria

Cryptocurrency money laundering usually follows three steps:

  • Placement: When illegally acquired funds are introduced into the crypto market.
  • Layering: The money is covered up using different layers of investment or transactions.
  • Integration: Here, the money has completed the laundering process and is reintegrated into the traditional financial system by being converted into fiat currency or bought assets.

Challenges of Preventing Cryptocurrency Money Laundering

The challenges of preventing crypto money laundering in Nigeria can be divided into two: Nigeria’s specific problem and Cryptocurrency-specific challenges.

  1. The Nigeria-specific challenges

  • Poor regulatory framework

The existing regulatory framework does not address the leak between cryptocurrency’s legal and illegal use. It must be more comprehensive and consistent, making enforcing anti-money laundering (AML) measures difficult.

Until recently, cryptocurrency exchange platforms, merchants, and traders were not bound by the Know-Your-Customer (KYC) requirements and similar requirements to prevent money laundering.

  • Financial exclusion

A large part of the Nigerian population is unbanked. This makes it challenging to monitor the financial activities of large numbers of people. Also, most banked individuals are dissatisfied with the services of traditional banking systems. This makes them turn to cryptocurrency, which gives them perks like being decentralized, fast, and secure.

Read also: Understanding the Fundamentals of Crypto Assets: A Comprehensive Guide

  • Limited enforcement capability

The effort agencies and regulatory bodies also need more resources and expertise in technology and workforce to investigate cryptocurrency-related crimes thoroughly.

  • Corruption and enforcement incapability

There are widespread corrupt practices in Nigeria’s public offices, among public officers, and the high and mighty in society. The activities of these people undermine the efforts to stop money laundering.

  • Poor public awareness

The public awareness of the risk and the potential for cryptocurrency to launder money is relatively unknown to many Nigerians. This makes them vulnerable to scams and schemes designed to launder money.

  1. Cryptocurrency-specific challenges

As mentioned earlier, decentralism and anonymity are among the biggest challenges facing cryptocurrency regulations. Those factors make it one of the best ways to launder money globally.

Cryptocurrency or web3 space are technology-driven, so catching up with them means regulatory policies must become as innovative as the space. The inability of regulatory bodies to keep up with emerging technology and innovations will create a lapse in regulatory measures.

Other crypto-specific challenges are technology complexity, global reach, high adoption rate, and cross-border transactions.

Peer-to-Peer as an Agent of Cryptocurrency Money Laundering in Nigeria

Ray Youssef, CEO of NoOnes, disclosed to TechCrunch that “peer-to-peer (P2P) transactions in Nigeria represent a staggering $500 billion business.”

P2P platforms allow users to circumvent regulations like the Anti-Money Laundering Directive (AMLD) and Know Your Customer (KYC), hindering transaction monitoring. 

With lax KYC requirements and an unregulated nature, these platforms facilitate anonymous cash and cross-border transactions, making them attractive to criminals. 

Such cross-border transactions disrupt the inflow of dollars, vital to Nigeria’s economy, and impact stability in the foreign exchange market. Efforts to regulate P2P platforms are crucial to combat cryptocurrency money laundering and protect the struggling economy.

Regulatory Framework for Combating Crypto Money Laundering

The Money Laundering (Prevention and Prohibition) Act 2022 is a cornerstone, mandating stringent measures against illicit financial activities.

The Central Bank of Nigeria (CBN), in December 2023, issued guidelines for Virtual Asset Service Providers (VASPs), which mandate registration, Know Your Customer (KYC), and Anti-Money Laundering (AML) requirements. 

However, more is needed to tackle the menace of money laundering in Nigeria.

Read also: A Comprehensive Guide to Nigerian Data Privacy Laws

Additional Strategies to Prevent Cryptocurrency Money Laundering in Nigeria

In the existing framework, the regulatory bodies have to enforce the following;

  1. Implement and enforce KYC policies

This is the first of the many steps to ensure cryptocurrency stakeholders, including VASPs, are registered and verified by the federal government. With KYC, users are no longer shrouded by the anonymous nature of cryptocurrency. 

Virtual Asset Service Providers (VASPs) are the intermediate bodies that offer services such as cryptocurrency exchanges, management of digital assets, and wallet-providing services. They facilitate cryptocurrency trade. 

VASPs must mandate users to submit personal information means of identification like government-issued IDs, selfie verification, and proof of address.

  1. AML regulations

Anti-money laundering policies are designed to detect and prevent money laundering activities. The process relies on a network of computer programs, individuals, and organizations to monitor transactions and flag and report suspicious ones to the relevant authority. 

AML will be effective when Banks, VASPs, NFIUs, and enforcement agencies collaborate, share information, and share regulatory standards. Such collaboration will discourage money laundering because money flow can be tracked to offenders, who will then be arrested and prosecuted.

  1. Collaboration with international organizations

Cross-border cooperation is essential in combating cryptocurrency money laundering due to the borderless nature of digital assets, which criminals exploit. 

International collaboration will be fruitful when collaborators share similar regulatory standards and enforce sanctions when necessary.

Read also: Nigeria Tech Startup Ecosystem: Key Players and Success Stories 

Bridging the Technology and Expertise Gap

The federal government can level the playing field by leveraging technology and training financial regulatory personnel regularly. 

This keeps them informed of the latest in the field and upskill them to match the day’s challenges.

  1. Blockchain analytics tools

Blockchain analytics tools analyze blockchain data to identify patterns and anomalies that could indicate illegal activities. These tools help trace the flow of funds and link wallet addresses to their owners.

These tools leverage blockchain technology’s transparent and immutable nature to trace and analyze cryptocurrency transactions. The program is trained to identify standard money laundering practices.

Popular blockchain analytic tools are Chainalysis, CipherTrace, and Elliptic. Governments, financial institutions, and crypto businesses trust these tools to identify and mitigate risks associated with money laundering and other similar activities.

  1. Education and awareness

Knowledge is power, and the government can empower stakeholders and the general public by educating them about the potential risks and signs of money laundering. 

Part of the training should include how crypto money laundering can lead to capital flight and the influence on the country’s dollar reserve, which affects the exchange rate and, conversely, the cost of living.

The war against cryptocurrency money laundering is not for the government alone. Still, there is little awareness for every member of society here, and there is an excellent place to start for the Nigerian government.

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The rise of cryptocurrency in Nigeria is a blessing and a curse. On the one hand, it presents a promising avenue for financial inclusion and economic growth. However, it presents the risk of money laundering. 

It is necessary to prevent cryptocurrency money laundering for the growth and stability of the crypto industry and, most notably, Nigeria’s economy. By understanding the methods used for illicit activities, the government can strengthen the existing regulatory frameworks, empower regulatory bodies with knowledge and tools, and foster international cooperation. 

Collaboration among regulators, financial institutions, VASPs, and international bodies. Nigeria can ensure a secure, transparent, and sustainable cryptocurrency ecosystem, fostering trust and promoting legitimate use.

Edited by Priscilla Ajayi.

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