Cryptocurrencies Mirrored a New Gold Rush, Then Ended Up Similarly: With Scammers Going to Jail | JD Supra
Despite the excitement that surrounded original cryptocurrencies like Bitcoin, the dust eventually settled, revealing that only a few early investors got rich and many others lost their life savings. But it was not long before crooks found a different way to make crypto profitable: money laundering. Due to cryptocurrency’s novelty, decentralization, and gap in enforcement while we await regulations from federal agencies, this illegal practice developed and took off. Today more than ever, whistleblowers are crucial in helping identify, prosecute, and improve the fight against fraud.
Money laundering is generally carried out in three steps: placement, layering, and integration. Placement occurs once a client discretely places “dirty” or illegally obtained funds in a larger system, usually by making fake purchases. Next comes layering, which is when the intermediary blends their existing “clean” money with the dirty money, often in tax havens like Switzerland or the Bahamas for added secrecy. Finally, integration, when the intermediary returns the now mixed-up money back to the owner who is free to use it.
The most famous money laundering scheme was run by Al Capone, who bought hundreds of laundromats (giving the practice its name) in Chicago, operating fake cleanings of nonexistent sheets and clothes with criminally obtained money, then getting his own money back as profits from the shop.
While the use of digital currency by money launderers seems like a safer option than walking into a bank with a stack of ill-obtained bills, safeguards still exist to crack down on criminal use of the coin. Bitcoin’s blockchain, or record keeper, shows a history of transactions and allows for anyone to trace the origin of funds. Crooks may get by the layering step thanks to the ease of business, since the millions of transactions able to be made in a few seconds makes it very difficult to discern clean and dirty money. But if the funds can be traced back to individuals, it is not a risk-free practice. In a recent case, investigators were able to identify the buyers and masterminds behind the laundering of $4.5 billion in stolen cryptocurrency (US v. Lichtenstein).
The difficulty in keeping up with the fast-pace of crypto transactions emphasizes the need for whistleblowers who can point investigators to where crypto laundering is occurring. Whistleblowers on the inside are often in the best place to report on fraud and aid in government investigations along the way. With the paranoia of a whistleblower on the other side of their computer screen, crypto-crooks may feel the deterrent effect in motion.
Same Methods, Same Charges
Every time a new technology is introduced, a delay exists between the use of the technology for illegal conduct and the necessary regulation to stop those illegal uses. A cat-and-mouse game takes place between criminals and regulators until the proper laws are drafted, signed, and put into action. But money laundering is hardly a new practice, and crypto money laundering is just a more sophisticated version of the same beast U.S. agencies have been slaying since Capone. Therefore, the judicial system treats them as good old fashioned money laundering, relying on the Bank Secrecy Act. As a result, the burden of precaution is put on intermediaries.
The authorities’ imposed BSA obligations onto actors in the crypto sphere in multiple ways that helped with steady regulation of the technology. First, crypto platforms are considered to be money services businesses (“MSB”) and are therefore required to register with the Department of Treasury and get a license authorizing their activity. Second, they are subsequently required to establish an anti-money laundering system within their business and prove its efficiency. Third, they are subject to the “know-your-client” (KYC) rule of the BSA, which requires the platforms to identify buyers and keep records of transactions. Finally, as MSBs they are required to report suspicious transactions to the authorities as Suspicious Activity Reports (“SARs”). Violations of these provisions are often what lands crypto companies in the hot seat. Despite all attempts to deny jurisdiction to the court (In re Tether & Bitfinex Crypto Asset Litigation) or to define cryptocurrencies as other types of assets (US v. Stetkiw), the courts always found an infringement to at least having been made on the BSA by managers of MSBs (US v. e-Gold Ltd, US v. 50.44 Bitcoins, US v. Lord) that allowed to convict the defendants. These rules ensure that crypto exchanges are taking precautionary measures themselves, shifting the burden of responsibility for policing the exchange’s activities from regulators to the exchange itself. No more playing dumb.
Common arguments used by crypto exchanges to avoid liability are ineffective with this regulatory framework. Intermediaries can let go of their blissful ignorance when arguing that they did not know what was happening on their platform. The Bank Secrecy Act requires them to know what is going, and by who. Some may also try to argue that there is a lack of jurisdiction. Crypto exchanges may say they have no American users, but reinforced KYC procedures and further investigation would reveal that they actually do. Some companies believe they operate entirely outside of the U.S. with no American customers, but lax enforcement of bans on U.S. users often allows some to slip through the cracks, granting the U.S. jurisdiction after all. The reason is simple: even operated outside of the U.S. territory, money laundering has an influence on the U.S. economy and serves fraud that can harm the American society.
Obtaining solid information is always a hurdle for law enforcement of any kind, and crypto policing is no exception. While the regulations are being drawn up, whistleblowers are as essential as ever in alerting authorities to ongoing schemes. Anyone with knowledge of illegal practices or deficiencies in the security of a crypto platform can file an anonymous whistleblower tip to the SEC, CFTC and/or FinCEN and be eligible for a financial award if their information leads to an enforcement action.
Whistleblowers and informants have already been central in uprooting crypto-driven money laundering schemes, and courts have taken the protection of their identities very seriously (US v. Murgio), whether they be victims of fraudulent schemes or participants put under pressure. Until airtight, crypto-specific laws are in place, whistleblowers will have to be the ones to alert authorities to these crimes.
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