Apart from the fact it would look suspicious walking up to a BTC ATM with a duffle bag full of $$$ - whats stopping these people converting their cash reserves to BTC?
They absolutely can. There's nothing stopping them from doing so. But guess what, criminals don't even need to convert their money to Bitcoins to go about their business of doing crime. We have more criminals using fiat than cryptocurrency. But I guess I do understand why cryptocurrency might be their best choice. It would be much easier to hide the money. Try bidding a daffle bag full of cash.