2021-03-26 13:27:53

DOJ Activity On Cryptocurrency: A Six-Month Review – Criminal Law

The U.S. Department of Justice (“DOJ”) has focused on
cryptocurrency in the last six months, while consumer interest hits
all-time highs.  The cryptocurrency market is not unlike the
cannabis market from several years ago—drawing a wide range
of participants with a variety of motives to a rapidly growing and
novel space.  In this environment, the crypto-curious should
keep in mind that transacting with unscrupulous actors can place
companies and individuals in the crosshairs of law
enforcement.  This alert summarizes the most significant
developments and highlights from criminal cases by DOJ from the
fall of 2020 through the first quarter of 2021. 

DOJ’S CRYPTOCURRENCY ENFORCEMENT FRAMEWORK AND AMLA
2020

In October 2020, DOJ released its Cryptocurrency Enforcement
Framework (the “Framework”),1 which it
developed as part of the Attorney General’s Cyber-Digital Task
Force.  The Framework contains three
sections:2 (1) Threat Overview; (2) Law and
Regulations; and (3) Ongoing Challenges and Future
Strategies.  The first section details the ways in which
criminals have used cryptocurrency to fund and facilitate illegal
activity, including drug and firearms trafficking, terrorist
financing, and other online criminal activity. 

The second section explains the existing statutory and
regulatory tools that DOJ and others (such as U.S. Treasury
Department’s Financial Crimes Enforcement Network
(“FinCEN”), Office of Foreign Assets Control
(“OFAC”), the Securities & Exchange Commission
(“SEC”), the Commodity Futures Trading Commission
(“CFTC”), and the Internal Revenue Service
(“IRS”)) have available to regulate cryptocurrency.
 

Anti-Money Laundering (“AML”) standards under the Bank
Secrecy Act3 (“BSA”) must be considered
in assessing cryptocurrency risks, as all financial institutions
and money services businesses (“MSBs”)—including
those that conduct business in virtual currency—are required
establish an AML program.  In short, a program must be
reasonably designed to prevent money laundering and terrorist
financing, including monitoring transactions for suspicious
activity and reporting suspicious transactions to relevant
regulators through Suspicious Activity Reports
(“SARs”).  The AML program obligations extend to all
MSBs, which are defined as entities that do business “wholly
or in substantial part” within the United States, irrespective
of whether the entity is based in the United
States.4

The third and final section of the Framework discusses
challenges and strategies for law enforcement in prosecuting
criminals.  Although cryptocurrency presents challenges
because it is decentralized and cross-border, DOJ emphasized that
it will prosecute conduct that touches financial data or other
computer systems within the United States, even if the actors
reside outside the country.  The DOJ outlined business models
that have high risk profiles but aren’t subject to sufficient
controls.  These business models include public cryptocurrency
exchanges, private peer-to-peer exchanges, and cryptocurrency kiosk
operators.  All are subject to regulatory requirements and are
priority enforcement targets given their past misuse.  

Then, in December, Congress passed the Anti-Money Laundering Act
of 20205 (“AMLA 2020”), the most
significant anti-money laundering statute in nearly two decades,
which took effect on January 1, 2021.  AMLA 2020 made clear
that the Bank Secrecy Act applies to cryptocurrency. 
Specifically, it expressly expanded the reach of the BSA to
businesses engaged in the trade of “value that substitutes for
currency,” e.g., cryptocurrency.  AMLA
2020’s definition of financial institution also expressly
includes virtual currency businesses that essentially serve as
money transmitters.

Among other things, AMLA 2020 increases civil and criminal
penalties for BSA violations and provides large rewards to an
expanded category of whistleblowers who report violations, up to
30% of the amount recovered by the government.  The new law
also allows nearly anyone with relevant knowledge to become a
whistleblower, including compliance personnel or in-house counsel,
although this latter category must navigate issues of privilege and
confidentiality. 

ENFORCEMENT ACTIVITY

Throughout the fall DOJ and its partner agencies brought
significant cryptocurrency actions as well, including a large
parallel civil-criminal proceeding by the U.S. Attorney’s
Office for the Southern District of New York (“SDNY”) and
the CFTC against BitMEX, a cryptocurrency exchange and derivative
trading platform.  Also charged were BitMEX’s CEO and
various entities and individuals associated with founding, owning,
or operating the platform.  SDNY indicted the CEO and three
other individuals for willful violations of BSA by failing to
establish and maintain an adequate AML program.6 
In parallel, the CFTC filed a civil action against five entities
and three individuals that own and operate BitMEX for running an
unregistered trading platform and for violating a litany of CFTC
regulations, including failing to implement an AML
policy.7  Although incorporated in the Seychelles,
the exchange platform serves U.S.-based customers.  BixMex
continues to operate, and in February 2021, BitMEX reported that a
total of $1 trillion had been traded on its platform in the past
year.8  

The SDNY indictment alleges that BitMEX failed to implement any
AML policy after it was on notice that it was being used to launder
the proceeds of a cryptocurrency hack, and was made aware of
Iranian customer activity.  The indictment also alleges that
BitMEX did not file any Suspicious Activity Reports
(“SARs”).  The CEO of BitMEX is expected to
surrender to authorities on April 6, 2021.9

In November 2020, DOJ seized the largest cache of cryptocurrency
to date: thousands of bitcoins valued at approximately one billion
dollars.10  The seizure is connected to DOJ’s
filing of a civil forfeiture action against the alleged criminal
proceeds of the Silk Road website, the notorious
online marketplace whose founder, the “Dread Pirate
Roberts” is serving a life
sentence.11  

Although the BitMEX actions and the Silk Road bitcoin seizure
drew headlines for their size, cryptocurrency enforcement in recent
months has not been limited to high-dollar cases.  Last month,
Treasury’s Office of Foreign Assets Control (“OFAC”)
announced a settlement with BitPay, Inc., a payment processing
company for merchants to accept digital currency as payment for
goods and services.12  BitPay agreed to pay a civil
penalty of over $500,000 to settle allegations that it violated
multiple sanctions programs by allowing persons presumably located
in North Korea, Iran, and other sanctioned countries to transact
through BitPay’s platform with merchants in the United States
and elsewhere using digital currency.  The government cited
BitPay’s possession of location information—including
Internet Protocol (IP) addresses and other data—about those
persons prior to their engaging in the transactions.  However,
BitPay failed to screen the locations of its buyers, instead only
screening the merchant customer.  The fix was apparently easy
for BitPay; the company reported that it now blocks IP addresses
from sanctioned areas from using its platform to process payments
and has added a customer identification
tool.13 

Familiar securities fraud schemes are also charged in the
cryptocurrency space, as demonstrated by the prosecution of John
McAfee, the founder of the McAfee antivirus software.  The
SDNY charged Mr. McAfee and the executive adviser of his
cryptocurrency team with various fraud and money laundering
conspiracies arising out of the promotion of a
cryptocurrency.14  According to the indictment, one
of the schemes involved defendants’ purchase of cryptocurrency
altcoins and then use of McAfee’s Twitter account to tout these
altcoins to investors, without disclosing their own investments, in
a “pump and dump” scheme.  This conduct allegedly
made defendants millions of dollars after they sold their
investments following their Twitter hype.  

The second alleged scheme also used McAfee’s Twitter account
to promote alleged fraud.  Specifically, the defendants
allegedly promoted the sale of digital tokens to investors on
behalf of initial coin offering (“ICO”) issuers, without
disclosing that the ICO issuers were compensating them out of the
funds raised by their promotional activities.  According to
the indictment, McAfee and others received more than $11 million in
undisclosed compensation.   

The DOJ and partner agencies are providing new incentives for
whistleblowers, and increased penalties for BSA violations creates
a number of risks—including legal trouble and reputational
damage—for operators of cryptocurrency exchanges and
others.  Keeping pace with AML controls that reflect the risk
encountered in their businesses is necessary.  First,
cryptocurrency-related businesses should include whistleblower
policies and reporting systems as essential components of their
compliance programs.  Second, businesses should hire advisors
and compliance officers who understand this emerging industry and
the risks presented by the company’s specific geographic
location, customers, and products and services.  

Although this alert addresses only the enforcement by DOJ and
partner agencies, other countries have made cryptocurrency an
enforcement priority as well.  Most recently, India’s
government proposed a law banning cryptocurrencies and making it
illegal to own, issue, mine, trade, or transfer
crypto-assets.15  Current owners would reportedly
have six months to liquidate their holdings.

Footnotes

1 See https://www.justice.gov/opa/pr/attorney-general-william-p-barr-announces-publication-cryptocurrency-enforcement-framework

2 See https://www.justice.gov/archives/ag/page/file/1326061/download

3 35 U.S.C. § 5311 et seq.

4 See 31 CFR §
1010.100(ff).

5 Pub. L. No. 116-283, §§
6001-6511.

6 See https://www.justice.gov/usao-sdny/pr/founders-and-executives-shore-cryptocurrency-derivatives-exchange-charged-violation

7 See https://www.cftc.gov/PressRoom/PressReleases/8270-20

8 See https://blog.bitmex.com/bitmex-platform-hits-usd1-trillion-in-365-day-volume-with-excellent-platform-performance/

9 See https://www.tbstat.com/wp/uploads/2021/03/Hayes_BitMEX.pdf

10See https://www.justice.gov/usao-ndca/pr/united-states-files-civil-action-forfeit-cryptocurrency-valued-over-one-billion-us

11See https://www.justice.gov/usao-sdny/pr/ross-ulbricht-aka-dread-pirate-roberts-sentenced-manhattan-federal-court-life-prison

12See https://home.treasury.gov/system/files/126/20210218_bp.pdf

13See id. at 2-3.

14See https://www.justice.gov/usao-sdny/pr/john-david-mcafee-and-executive-adviser-his-cryptocurrency-team-indicted-manhattan

15See https://www.reuters.com/article/uk-india-cryptocurrency-ban/india-to-propose-cryptocurrency-ban-penalising-miners-traders-source-idUSKBN2B60QP

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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