In April 2019, Mexican police detained human trafficker Ignacio Santoyo in a plush section of the Caribbean resort of Playa del Carmen after linking him to a prostitution racket spreading across Latin America.
Yet it was not the 2,000 women Santoyo is alleged to have sexually exploited and blackmailed that ultimately led to his capture, but the bitcoin he is speculated of using to help launder the proceeds of his operations, officials declared.
According to law enforcement authorities, the cryptocurrency is emerging as a new front in Latin America’s fight against gangs battling for control of vast criminal markets for drugs, drugs, sex, and people.
“There’s a transition to committing crimes in cyberspace, like acquiring cryptocurrencies to launder money … and the pandemic is accelerating it,” stated Santiago Nieto, the Mexican finance ministry’s financial intelligence unit (UIF) head.
Neither Santoyo, who is in jail, nor lawyers representing him could be contacted for comment, and they have not disclosed publicly on the case in the past. The Mexican attorney general’s office declined to comment while the case remained open.
Santoyo’s arrest staged an early success for new law in Mexico – one of only two nations in Latin America, with Brazil, to pass such legislation – that seeks to take the intractable problem of how law agencies can track the use of bitcoin and other cryptocurrencies designed to hide users.
The law requires all certified cryptocurrency trading platforms to report transfers above 56,000 pesos ($2,830). It was passed in 2018, but it took many months to implement the system, which is still a work in progress.
Bitcoin’s use to launder money is enormously increasing among drug gangs such as the Jalisco New Generation Cartel (CJNG) and the Sinaloa Cartel of arrested kingpin Joaquin “El Chapo” Guzman, U.S. and Mexican authorities say.
Mexican President Andres Manuel Lopez Obrador has suffered record levels of gang-fueled violence during his first two years in office. The prospect of cartels hiding their profits in lightly-regulated spaces is a significant concern.
The sums involved in the few cases uncovered are typically thousands or tens of thousands of dollars. According to the government and financial-intelligence firms, they represent a drop in the ocean compared with organized crime’s hard cash laundry – estimated at $25 billion a year in Mexico alone.
Yet larger sums have begun to crop up across the region over the last three years, with a team of international police breaking up three Colombian drug gangs laundering millions of dollars via cryptocurrencies, authorities say. In Mexico, the hope is that the new rules will help snare big fish.
The only thing more challenging than smuggling drugs across borders is getting the money back to cartels, officials say. Cash is heavy, and moving it exposes traffickers to high risk. Putting it into banking systems geared to identify dirty money is perilous, too.
UIF chief Nieto said offenders typically divide their illicit cash into small amounts and deposited them in various bank accounts, a technique is known as “smurfing.” The threshold for banking activities that raise red flags is $7,500.
They then use those accounts to buy a set of small amounts of bitcoin online, he added, obscuring the money’s origin and allowing them to pay associates elsewhere in the world.
In Santoyo’s case, officials who had been pursuing him for months said they finally tracked him down after he bought sufficient bitcoin to trigger an alert under the new law. Moreover, when making his transactions via a registered platform, Santoyo left personal details, including his phone address and number.
According to government records seen between May and November 2018, Santoyo and his sister acquired some 441,000 pesos ($22,260) in bitcoin on Bitso, a trading platform in Mexico and Argentina.
Bitso, one of 11 registered crypto trading platforms in Mexico, declined to comment.
Mexican authorities also have their sights set on the “Bandidos revolution team”, a gang federal prosecutors suspect of stealing millions of dollars through cyberattacks on large banks.
In May 2019, authorities detained suspected gang leader Hector Ortiz in Guanajuato’s central state after he spent “tens of thousands of dollars” on bitcoin.
That triggered the bitcoin threshold sensor, enabling investigators to trace Ortiz via his phone.
Neither Ortiz nor the lawyers representing him could be reached for comment. The Mexican attorney general’s office declined to comment because the case remains open.
DELVING INTO DARK WEB
Rolando Rosas, head of the Cyber Investigations Unit (UICOT) at the Mexican attorney general’s office, said it was puzzling to track criminals’ use of bitcoin, even with the new law.
UICOT has about 120 people on its staff. But to be ambitious, it needs about four times that, he added.
The work is painstaking and often frustrating.
The new law has led to 1,033 bitcoin threshold alerts being triggered so far this year. Investigators must chase up each one to check if it could be suspicious and whether the user is linked to any cartels or criminal behavior.
Even then, such a system can only identify transactions with registered trading companies. Rosas acknowledged his team had limited visibility of dealings in the dark web and unregulated platforms, which U.S. and Latin American officials say mask the true scale of laundering.
According to government data, about 98% of all Mexico’s transactions above the 56,000-peso threshold in 2020 were flagged by one registered crypto platform in the CJNG cartel’s home state of Jalisco.
That, said UIF chief Nieto, suggested the CJNG could be active in money laundering via cryptocurrencies. But it is too early to estimate how much money is involved in Mexico’s crypto laundry because data is still scarce, he added.
In another sign of the lengths to which organized crime will avoid moving hard cash, U.S. officials have told Reuters that cartels are also turning to Chinese “money brokers” who use burner phones and Chinese banking apps to transfer funds.
A drop in seizures of hard currency over the past decade – from $741 million to $234 million in 2018 – suggests newer technologies, including cryptocurrency laundering, are gaining ground, according to the U.S. Drug Enforcement Agency (DEA) report published in January this year. Most of the money came from Colombian and Mexican cartels, it said.
The DEA told Reuters the use of digital currencies by such cartels – or Transnational Criminal Organizations (TCOs)- was an “emerging and increasing trend to launder illicit proceeds”.
“Both Colombian and Mexican TCOs are increasing their use of virtual currency because of the anonymity and speed of transactions,” said spokesman Michael Miller. “It is assumed the use of virtual currency will only increase in the future.”