Latest Ransom Scandals Highlight Crypto’s Role As Money Laundering Play

The Colonial Pipeline ransom was paid in Monero, an “untraceable” cryptocurrency designed for full privacy of transactions. Most of it, we got back, according to the Department of Justice. Then JBS, the world’s largest meat packer, was held hostage. As that story unfolds, Russians are often considered the boogey men behind it all. No one knows for sure whether the hackers are government-directed or not.

But one curious trend is happening in the world of high-tech thievery: cryptocurrency is the Miami penthouse of offshore money launderers, the receptacle of the ill-gained cash. And concern that governments will crack down on crypto because of ransomware hacks, and traditional tax evasion, has a lot to do with the recent sell off in Bitcoin, down around 40% in the last two weeks.

Moreover, if it’s new tech related; foreign money wants it. But some of that money wasn’t exactly earned the old fashion way, as that classic 1979 Smith Barney investment firm commercial once taught us.

New Tech, New Secret Stash

Cryptocurrency, blockchain projects soliciting investor capital, and even some traditional tech start-up investing are becoming ways in which the wealthy are trying to take money out of places like Russia and China.

Because of this, China’s government warned in May that it intended to curb Bitcoin trading and mining. Some government officials believe that Bitcoin, or some other mainline cryptocurrency, will just replace government backed fiat. Then there is the perennial issue of China not wanting its locals to take money out of the country. As it is, it is dealing with a strong yuan and trying to keep it from going to low into the 6s and maybe even sub-6.

China’s Vice-Premier Liu He said they needed to” crack down on Bitcoin mining and trading” to “resolutely prevent the transmission of individual risks.” Yeah, who believes that’s the reason?

The latest tech bull run is often compared to the dotcom boom of the early 90s. Crypto is twice that. After being a dud market for about two years, Bitcoin went from around $9,500 in May 2020 to over $60,000 this year. It has since crashed to around $40,600.

Still, if one considers crypto part of this past year’s tech bull market, consider all the money that has been pumped into it from wealthy investors just to get money out of the country where transparency is low, and corruption levels are high.

One Russian source who did not want to be quoted on the record said some investors buy into a crypto project knowing it is going to launch a token. They buy into these private placements which, in some cases, are used to boost the start-ups value. Thanks to the pretty anonymous world of crypto currency wallets, cash from ill-gotten gains (black market sales, corrupted official’s money, or basic tax evasion) can be easily invested in these projects and later withdrawn as perfectly legitimate proceeds from a cool new tech venture. Sort of dirty money in, clean money out.

“It’s not new,” he says. “Chinese, Saudi and Russian money has long been involved but the recent compliance initiatives — like ‘unexplained wealth orders’ in the UK and more scrutiny when it comes to real estate – means the tech sector has gained traction as an alternative.”

The rise of foreign money has turned Silicon Valley into a geopolitical minefield for venture capitalists and crypto startups, requiring American VC firms to make know-your-client judgement calls, which many of them don’t really want to do when a cash account with millions of dollars in it stands at the ready.

“You thought you’re in business. You’re actually in politics,” Mike Eisenberg, an early investor in WeWork, was quoted saying in Recode magazine back in 2019, as this issue starting popping up in the Valley. The entire Palo Alto area is crawling with Chinese, Saudi and Russian money.

A Russian Example: Money from Nothin’

Washington routinely singles out Russia for cyber attacks. NBC News reported on May 10 that a Russian hacker group called DarkSide said they were the geniuses behind the shutdown of that gasoline pipeline that created 1970s-era gas lines in the Carolinas. Other reports named different cyber gang.

President Biden said he had no evidence of any Russian foul play. “I’m going to be meeting with President Putin and so far there is no evidence based on, from our intelligence people, that Russia is involved. Although there is evidence that the actors’ ransomware is in Russia. They have some responsibility to deal with this,” Biden told reporters at the White House last month.

The great Russian hackers have become stories of legend of late. But the Russian tax evader is nothing new. What’s new is the tech investor angle, Russian independent investigative news publisher Novaya Gazeta reported on May 25.

Mikhail Abyzov, the former Russian Minister for Open Government is under investigation for such things. According to their General Prosecutor’s Office, they’ve already taken 32 billion rubles ($450 million) from his net worth, something they claim he earned in violation of government anti-corruption laws during his tenure as the Minister. For all the talk of dark money and bad guys in Russia, the average Russians do not like money laundering oligarchs and senior government officials.

Famous activist Alexey Navalny has made bashing them in public his claim to international fame. Navalny is in jail, perhaps for complaining too much about official corruption. Abyzov is in jail, supposedly as an example of it all.

Abyzov earned his first fortune in the 90’s after the fall of the Soviet Union. In a scheme strikingly resembling the notorious ‘loans-for-shares’ auctions, when the crown jewels of the country’s industry and natural resources were taken over by a handful of oligarchs for a song, he gained control over one of the largest energy groups in Siberia, SibGenCo. Then he took part in the controversial break-up of the state-owned electric monopoly RAO UES Russia, both really “old tech” companies.

He was in Russia’s Forbes billionaire list with his wealth estimated at $1.3 billion when he joined the Russian government in 2011, and then did even better under then-Prime Minister and one-term, placeholder President Dmitry Medvedev. By the time of his arrest in March 2019, Russian authorities claimed that he was hiding billions of dollars offshore, according to the Moscow Times.

According to the Russian press, the prosecutors believe that from 2011 to 2014 the former minister embezzled 4 billion rubles ($54 million) from SibGenCo and Regional Power Engineering Company. The money was allegedly used to purchase two villas in Italy which Abyzov used as his personal residences while soaring electricity prices in Siberia led to social unrest.

When he worked in government as recently as two years ago, according to the Russian prosecutors, he owned about 70 holding companies in Estonia, long known as an offshore money laundering and tech haven for Russian investors. He allegedly laundered $860 million in the Estonian branch of Swedbank, $770 million originating in Russia.

In February 2019, Swedbank found itself at the center of a Russian money laundering scandal. According to SVT journalists in Sweden, more than 135 billion euros of non-residents, mostly Russian clients, passed through its Estonian branch from 2008 to 2018. Abyzov was one of them.

Some 38 out of 70 offshore companies in reports of Swedbank were linked to Russia, and a part of them were integrated into the main Abyzov business group —known as RU.COM, according to Novaya Gazeta. Abyzov’s offshore companies participated, for example, in the purchase of shares of Elsib, Russia’s largest heavy power engineering company, which he could not have done at the time as a top government official.

Abyzov also co-owned Industrial Technologies CJSC, a company manufacturing regular and sniper rifles. He had plans of selling those in the U.S. while selling the rifles to the Russia Border Guards and the FSB, the Russian intelligence service. Then he switched to new tech in the U.S.  Abyzov began investing in American companies through the Bright Capital Fund, an under-the-radar Russian venture capital firm in Moscow. I wrote about this when it first came to light in 2019.

One of the companies his fund invested in, Quantenna, was a unicorn at the time which later sold for over $1 billion.

At the very least, Abyzov wasn’t dabbling in crypto. He is still waiting for trial and could face 20 years in jail.

China and ‘Crypto Threats’

China’s recent crackdown on cryptocurrency is due to two things: fear of a yuan replacement out of government control; fear of money leaving the country, which is illegal, even if the money wasn’t earned through illegal means. Only high net worth individuals can send money abroad, with some special cases for middle income Chinese. All have their limits as to how much money they can take out of the mainland. But that is impossible to track with Bitcoin and the alt-coins.

The relative ease of use of existing currencies such as Bitcoin and Ethereum worries China and is pushing them to act against crypto, Kristin Tate writes an op-ed in The Hill.

“The development mirrors an apparent, but not as well-defined, push by Biden administration officials and members of the media to sink, or at least control, the crypto market,” she wrote. “With recent public attention on the role of cryptocurrencies, there is a unique window for Washington to shape or strangle the rise of what it increasingly sees as a competitor and threat to its system of fiat currency.” 

China sees it that way too.

And Russia has long since held Bitcoin and other coins in dubious light. With both countries big on crypto and big on money laundering, connecting the two will be a short-term headwind for the crypto story. The IRS is looking into Binance for this reason, though they have not accused the Asian cryptocurrency exchange as doing anything wrong.

Meanwhile, hopefully the ransom attacks are not a long term problem for the rest of the crypto world, those of us who aren’t exactly capable of hiding $800 million in Estonian bank accounts or in Monero wallets.