Money Services Business

The Treasury Inspector General for Tax Administration, or TIGTA, issued last month a Report, entitled The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance, which sets forth a decidedly dim view of the utility and effectiveness of the current Bank Secrecy Act (“BSA”) compliance efforts by the Internal Revenue Service (“IRS”).  The primary conclusions of the detailed Report are that (i) referrals by the IRS to the Financial Crimes Enforcement Network (“FinCEN”) for potential Title 31 penalty cases suffer lengthy delays and have little impact on BSA compliance; (ii) the IRS BSA Program spent approximately $97 million to assess approximately $39 million in penalties for Fiscal Years (FYs) 2014 to 2016; and (iii) although referrals regarding BSA violations were made to IRS Criminal Investigation (“IRS CI”), most investigations were declined and very few ultimately were accepted by the Department of Justice for prosecution.

Arguably, the most striking claim by the Report is that “Title 31 compliance reviews [by the IRS] have minimal impact on Bank Secrecy Act compliance because negligent violation penalties are not assessed.”

A primary take-away from the Report is that an examination program lacking actual enforcement power is, unsurprisingly, not very effective.  The Report also highlights some potential problems which beset the IRS BSA Program, which include lack of staffing, lack of planning and coordination, and delay. Although the Report’s findings clearly suggest that what the IRS BSA Program really needs are resources and enhanced enforcement power, the repeated allusions in the Report to a certain purposelessness of the current BSA examination regime nonetheless might help fuel the current debate regarding possible AML/BSA reform, with an eye towards curbing regulatory burden.

The Report made five specific recommendations to the IRS for remedial steps. We will focus on four of those recommendations, and the findings upon which they rest:

  • Coordinate with FINCEN on the authority to assert Title 31 penalties, or reprioritize BSA Program resources to more productive work;
  • Leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy;
  • Evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and
  • Improve the process for referrals to IRS CI.

Continue Reading U.S. Treasury Report: IRS BSA Program “Has Minimal Impact on Compliance”

Address Emphasizes Role of SARs in Fighting Illegal Activity, Including Drug Dealing Fueling the Opioid Crisis

Kenneth Blanco, the Director of the Financial Crimes Enforcement Network (“FinCEN”), discussed last week several issues involving virtual currency during an address before the “2018 Chicago-Kent Block (Legal) Tech Conference” at the Chicago-Kent College of Law at Illinois Institute of Technology. Although some of his comments retread familiar ground, Blanco did offer some new insights, including the fact that FinCEN now receives over 1,500 Suspicious Activity Reports (“SARs”) a month relating to virtual currency. Continue Reading FinCEN Director Addresses Virtual Currency and Touts Regulatory Leadership and Value of SAR Filings

Earlier this month, the District Court for the Central District of California imposed a prison sentence of one year and a day, with three years of supervised release, on defendant Theresa Lynn Tetley, who had pleaded guilty to: (i) the unlicensed operation of a digital currency exchange due to failure register with the Financial Crimes Enforcement Network (“FinCEN”), in violation of 18 U.S.C. § 1960(a) and (b)(1)(B), and (ii) a money laundering charge, in violation of 18 U.S.C. § 1956(a)(3)(B), arising out of an undercover “sting” operation run by the Drug Enforcement Agency and Internal Revenue Service-Criminal Investigation involving the attempt to conceal proceeds supposedly obtained by selling drugs.  Tetley also was ordered to pay a $20,000 fine and forfeit 40 Bitcoin, $292,264 in cash, and 25 gold bars that were the alleged proceeds of her illegal activity.

The Court imposed a sentence significantly lower than the sentence of 30 months requested by the government, a recommendation which already was lower than the advisory sentencing range recommended by the Federal Sentencing Guidelines (“Guidelines”) of 46 to 57 months in prison, as calculated by the U.S. Probation Office.

Tetley, a 50 year old woman living in Southern California, is a former stockbroker and real estate investor. She operated her digital currency exchange under the alias “Bitcoin Maven” for over three years, running an unregistered Bitcoin for cash exchange service.  According to the government, her service “fueled a black-market financial system” that “purposely and deliberately existed outside the regulated bank industry” and which catered to an alleged major darknet vendor of illegal narcotics.  According to the defense, however, the defendant “departed from a lifetime of integrity and good deeds and showed terrible judgment by failing to comply with federal registration requirements and buying bitcoins from individuals who represented themselves as engaged in criminal activity.”

In this post, we will drill into this sentencing and the parties’ respective positions, which provide a window into the prosecution and sentencing of alleged crimes involving both digital currency and undercover money laundering operations — and into the process for the sentencing of federal crimes in general, and how other factors which are entirely unrelated to the facts of the specific offense can be important.  Further, the Tetley case is interesting in part because it represents a sort of “hybrid” case — seen from time to time in money laundering cases involving professionals — which straddles both the typically very different realms of “pure” financial crime cases and illegal narcotics cases.  The government sentencing memorandum is here; the defense sentencing memorandum is here. Continue Reading Unlicensed Bit Coin Exchange Operator Sentenced to One Year and a Day for Attempted Money Laundering in Undercover Sting Operation and Failure to Register with FinCEN

Last week, President Donald Trump issued an Executive Order banning “all transactions” and “dealings” by any individual or entity in the United States that involve “any digital currency, digital coin, or digital token” issued by Venezuela.  This Executive Order was instituted just under a month after President Nicholas Maduro launched the pre-sale of “petro,” a cryptocurrency backed by the Venezuelan government’s crude oil reserves.  Since its inception, the petro has been met with deep skepticism by both the market and the Venezuelan legislature, but President Maduro—through petro’s official website—claims it has raised over $735 million in its pre-sale.  The opposition in the Venezuelan legislature has denounced petro as an illegal issuance of debt.

We previously have blogged about alleged money-laundering violations by Venezuelan oilmen and OFAC’s designation of the Vice President of Venezuela as a Specially Designated Narcotics Trafficker.  This is only the most recent in a long line of sanctions targeting the Venezuelan government and its state-controlled oil industry.

On the back of this new Executive Order, the Office of Foreign Assets Control (“OFAC”) has issued new FAQs relating to virtual currency, both to regulate the petro and assert its power in the virtual currency space.  As one might suspect, OFAC has decided to treat virtual currency in the same way it treats fiat currency and other property: if the individual is on Specially Designated Nationals (“SDN”) list, transactions are barred no matter what form of currency is used.  If a United States citizen or entity is involved, or is otherwise subject to United States jurisdiction, they “are responsible for ensuring that they do not engage in unauthorized transactions prohibited by OFAC sanctions.”  The OFAC FAQs specifically request “technology companies; administrators, exchangers, and users of digital currencies; and other payment processors” to develop compliance plans.  Obviously, these compliance plans would have to take into account blockchain and virtual currency technology that is constantly evolving. Continue Reading U.S. Bans Venezuela’s Oil-Backed Virtual Currency, “Petro,” and Announces Plans to Publish SDNs’ Virtual Currency Addresses

As digital currency continues to evolve, it continues to pose unfolding compliance, regulatory and criminal law challenges.  We will present two webinars on this topic in September, in which we will discuss issues posed under the Bank Secrecy Act and the money laundering and federal securities laws, among other issues.

The first webinar, “Current Trends in Criminal Law:  The Mechanics of Virtual Currency, from Legitimate Use to Misuse,” will be presented through Lawline, on September 7 at 11:30 am ET.

The second webinar, “Eye on Virtual Currency and Blockchain Technology,” will be presented through Ballard Spahr LLP, on September 19 at 12:00 pm ET.  Our colleague Odia Kagan also will participate in this free webinar, which also will discuss some of the data privacy issues posed by digital currency.

We hope that you join us.  You may review the webinars and register through the links provided above.  The innovative blockchain technology that is at the heart of digital currency likely will be embraced increasingly by more “traditional” financial institutions, so these issues have broad relevance.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.

As digital currency becomes more ubiquitous, state and federal regulators across the United States, as well as regulators in many other countries, are examining how existing regulatory structures need to be adapted to account for unique aspects of digital currency. News from both India and Australia reflect different approaches to the ever-evolving world of digital currency and potential money laundering risks associated with that currency.  As we previously have blogged, U.S. enforcement personnel aggressively have asserted jurisdiction over international digital currency operations.  As we will discuss, it appears that digital currency businesses will find themselves having to comply with a kaleidoscope of various Anti-Money Laundering (“AML”) regulatory regimes across the globe. Continue Reading As Digital Currency Spreads, So Does its Global Regulation: India and Australia Enter the Fray

On July 26, FinCEN, in coordination with the U.S. Attorney’s Office for the Northern District of California (“NDCA USAO”), assessed a $110,003,314 civil money penalty against BTC-e a/k/a Canton Business Corporation (“BTC-e”) for willfully violating the Bank Secrecy Act (“BSA”), and a $12 million penalty against Alexander Vinnik, a Russian national who is one of the alleged operators of BTC-e, for his role in the violations.  FinCEN’s press release indicates that this is the first enforcement action it has taken against a foreign-located money services business (“MSB”) doing business in the United States.  As we previously have blogged, FinCEN released interpretive guidance in March 2013 stating that an administrator or exchanger of virtual currency is an MSB under the BSA unless a limitation or exemption applies.

In a parallel criminal investigation, Vinnik was arrested and detained in Greece and charged in a 21-count superseding indictment brought by the NDCA USAO and DOJ’s Computer Crime and Intellectual Property Section. The superseding indictment alleges that Vinnik and BTC-e operated an unlicensed MSB doing business in the U.S., in violation of 18 U.S.C. § 1960, and committed money laundering, in violation of 18 U.S.C. §§ 1956 and 1957, by facilitating virtual currency transactions involving various crimes, including computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. The superseding indictment also provides some clues to the fate of the collapsed virtual currency exchange Mt. Gox, once reportedly the largest such exchange in the world. Continue Reading FinCEN Takes First Action Against Foreign-Located MSB—“The Virtual Currency Exchange of Choice for Criminals”—For Willfully Violating U.S. AML Laws

On Monday, the state of Florida moved a step closer towards amending its money laundering statute to include the nefarious use of bitcoin and other virtual currencies. The bill, H.B. 1379, has sailed through a committee vote and will now be presented to the floor. If the bill passes, it will serve, in pertinent part, to define bitcoin and “virtual currency” (“VC”) as “monetary instruments” within the meaning of the state’s money laundering statute; in the same vein, bitcoin will be defined as a “medium of exchange in electronic or digital format that is not a coin or currency of the United States or any other country.” Continue Reading Florida Lawmakers Seek to Bring Virtual Currency into the Fold

It is a potential crime to conduct a business that exchanges virtual currency and fail to register with the Financial Crimes Enforcement Network (“FinCEN“), even if the State in which one operates does not impose a similar licensing requirement. A federal district court in Louisiana has reaffirmed this principle in United States v. Lord, in which the defendants unsuccessfully sought to withdraw their pleas of guilty to offenses based on a failure to register with FinCEN.

Law and Justice

The defendants are father and son. According to the court opinion, in 2013, they began to operate a bitcoin business through a website called localbitcoins.com, which advertised the services of other bitcoin exchangers. The defendants’ clients provided cash, credit card payments and wire transfers to the defendants to purchase bitcoins from a third-party online bitcoin broker on their client’s behalf, in exchange for commissions charged by the defendants. In the Spring of 2014, the third-party bitcoin broker warned the defendants that they were required to register with FinCEN because they were acting as virtual currency exchangers. Although the defendants allegedly misrepresented to the third-party online broker that they already had registered with FinCEN, the defendants did not actually register until November 2014. By that time, however, they already had exchanged more than $2.5 million worth of virtual currency. This registration delay was the basis of the charges relating to the defendants’ virtual currency business. Continue Reading Failure to Register with FINCEN Sustains Guilty Pleas by Virtual Currency Exchangers