Blockchain Forensics and Crypto Sanctions Detection by Authorities

When someone sends Bitcoin to a wallet linked to a sanctioned entity, it doesn’t vanish into thin air. Every transaction is permanently recorded on the blockchain. That’s not a flaw-it’s the key tool law enforcement and regulators use to track money that’s supposed to be hidden. Blockchain forensics isn’t science fiction. It’s the daily work of agencies tracking ransomware payments, drug market proceeds, and sanctions violations using public ledger data.

How Blockchain Forensics Actually Works

Most people think cryptocurrency is anonymous. It’s not. It’s pseudo-anonymous. Wallet addresses don’t have names, but every transfer leaves a trail. Blockchain forensics tools follow those trails. They don’t need passwords or backdoors. They use patterns.

Take the Helix case. In 2016, an undercover agent sent Bitcoin from the AlphaBay darknet marketplace through a mixing service called Helix. Investigators didn’t know who ran it. So they did something simple: they looked at the commission payments. Every time Helix laundered money, it took a cut. Those cuts went to the same few wallets over and over. By mapping those patterns across thousands of transactions, they traced the money back to Larry Dean Harmon. He was convicted in 2024 and sentenced to three years in prison.

Modern tools do this automatically. Platforms like Elliptic and TRM Labs scan millions of transactions daily. They don’t just look at one blockchain. They track movement across Ethereum, Bitcoin, Solana, and others. They flag wallets that receive funds from known darknet markets, ransomware operators, or sanctioned entities. They even spot when someone tries to break up a large sum into smaller chunks to avoid detection-a tactic called “smurfing.”

The Hidden Patterns: How Criminals Try to Hide-and How They Get Caught

Criminals aren’t dumb. They use mixers like Wasabi and Tornado Cash to shuffle coins between hundreds of wallets. They move funds through decentralized exchanges (DEXs) to avoid centralized platforms that require identity checks. They use privacy coins like Monero-or try to. But even these aren’t foolproof.

New research like MPOCryptoML uses machine learning to detect complex laundering patterns. It doesn’t just look at direct transfers. It analyzes the entire network: who sends to whom, how often, how much, and in what sequence. It identifies fan-in/fan-out patterns (many small deposits into one wallet, then one big withdrawal), gather-scatter patterns (money collected from dozens of sources, then sent to many destinations), and stack patterns (layered transfers designed to confuse).

In tests, this method improved detection accuracy by over 10% compared to older tools. Why? Because it doesn’t just look at individual transactions. It looks at behavior. A wallet that receives $50 from 50 different sources, then sends $2,400 to one exchange, behaves like a mixer-even if it’s labeled as a “charity wallet.”

How Authorities Use This to Enforce Sanctions

Since 2022, sanctions on Russian entities, North Korean hackers, and Iranian terror groups have increasingly targeted crypto. The U.S. Treasury, EU regulators, and the UK’s FCA now require exchanges and wallet providers to screen all transactions against updated sanctions lists.

But listing addresses isn’t enough. Criminals create new wallets every day. That’s where blockchain forensics comes in. If Wallet A is linked to a sanctioned entity, and Wallet B receives funds from Wallet A-even indirectly through 12 other wallets-the system flags Wallet B as high-risk. It doesn’t matter if Wallet B was created yesterday. The connection is still there.

TRM Labs has identified five common sanctions evasion techniques. While the exact details aren’t public (to avoid giving criminals a playbook), we know they include:

• Using cross-chain bridges to move funds between blockchains and obscure origin
• Layering transactions through non-KYC DeFi protocols
• Creating fake NFT sales to convert fiat to crypto and back
• Using peer-to-peer (P2P) platforms to bypass exchange monitoring
• Coordinating multiple wallets across jurisdictions to fragment detection

Regulators don’t just wait for violations. They proactively monitor. The Internet Watch Foundation, which tracks child exploitation content, works with blockchain forensics firms to trace payments made in crypto to websites hosting illegal imagery. That’s not financial crime-it’s human trafficking. And the blockchain leaves a trail.

What Businesses Must Do to Stay Compliant

Crypto exchanges, payment processors, and even traditional banks that touch crypto now have legal obligations. If they fail to detect a sanctioned transaction, they can face fines in the millions-or lose their licenses.

Bitget, one of the world’s largest exchanges, uses Elliptic’s platform to screen every deposit and withdrawal. Their system doesn’t just check a list of bad addresses. It analyzes the transaction history of every wallet. If a user tries to deposit Bitcoin that passed through a mixer linked to North Korean hackers, the transaction is blocked before it clears.

Smaller firms can’t afford enterprise tools. But they still need to act. Basic steps include:

1. Integrating a blockchain analytics API (like Chainalysis or CipherTrace) for real-time screening
2. Blocking transactions from known mixer addresses
3. Flagging wallets with high-risk transaction patterns (even if not on a sanctions list)
4. Training staff to recognize red flags: sudden large transfers, frequent small deposits from unknown wallets, or transactions routed through privacy tools

Compliance isn’t optional anymore. In 2025, the Financial Action Task Force (FATF) requires all member countries to enforce these rules. New Zealand, where this is being written, has updated its AML/CFT Act to include virtual asset service providers. Non-compliance isn’t a fine. It’s a criminal offense.

The Future: More Data, More Power, More Complexity

The blockchain is growing. Every day, new chains emerge. New privacy tools are built. Criminals adapt. But so do investigators.

Tools now analyze smart contract interactions-like when someone uses a DeFi protocol to swap tokens in a way that hides the source. They track NFT sales used as money laundering fronts. They even monitor Telegram groups and Discord servers where hackers coordinate crypto transfers.

The biggest shift? Real-time detection. Five years ago, investigations took months. Now, systems flag suspicious activity in seconds. A wallet receives funds from a sanctioned entity? The exchange freezes it before the user even tries to cash out.

And because blockchain records never disappear, every past transaction becomes a potential clue. A wallet that looked clean in 2022 might be linked to a sanctioned actor in 2025-once someone connects the dots using newer data.

What This Means for Regular Users

If you’re just buying Bitcoin to hold, or using Ethereum to pay for a service, you won’t notice this system. But if you’ve ever used a mixer, traded on a non-KYC exchange, or received crypto from an unknown source, you’re already in the system’s crosshairs.

There’s no way around it: if your crypto touches a sanctioned wallet-even once-you risk having your funds frozen. Your account may be flagged. You may be asked to prove the source of your funds.

This isn’t about privacy. It’s about accountability. The same technology that lets you send money globally without banks also lets criminals hide. Authorities aren’t trying to stop crypto. They’re trying to stop criminals who use crypto.

What’s Next?

Governments are pushing for global standards. The EU’s MiCA regulation, the U.S.’s Executive Order on Digital Assets, and New Zealand’s updated AML rules all point to one thing: blockchain forensics is now part of the financial infrastructure.

Crypto businesses that ignore it will fail. Regulators who don’t invest in it will be outmatched. And criminals? They’re still trying to outsmart the system. But the ledger doesn’t lie. And the trail only gets longer.