Last week, the United States Attorney’s Office for the Southern District of New York unsealed an indictment against global cryptocurrency exchange KuCoin and two of its founders, Chun Gan and Ke Tang, for allegedly conspiring to operate an unlicensed money transmitting business and conspiring to violate the Bank Secrecy Act (“BSA”) by willfully failing to maintain an adequate anti-money laundering (“AML”) program.  KuCoin also was charged with operating an unlicensed money transmitting business and a substantive violation of the BSA. Further, the Commodity Futures Trading Commission (the “CFTC”) filed a complaint on the same day in the United States District Court for the Southern District of New York alleging that KuCoin violated the Commodity Exchange Act (the “CEA”) and related regulations.

The indictment alleges that KuCoin failed to design and implement procedures to prevent it from being used for money laundering and terrorist financing, failed to maintain reasonable procedures for verifying the identity of customers, and failed to file any Suspicious Activity Reports.  When distilled, the indictment alleges that KuCoin had no real BSA/AML compliance program at all, because it pretended to not have any U.S. customers.  This allegation is familiar theme in similar U.S. enforcement actions, including those against Binance.

The CFTC civil complaint specifically alleges that KuCoin illegally dealt in off-exchange commodity futures transactions; solicited and accepted orders for commodity futures and swaps, and leveraged, margined, or financed retail commodity transactions without registering with the CFTC as a Futures Commission Merchant (“FCM”); failed to diligently supervise its FCM activities; operated a facility for the trading or processing of swaps without registering with the CFTC as a swap execution facility or designated contract market; and failed to implement an effective customer identification program.

Continue Reading  KuCoin and Founders Charged with Operating Illegally as Money Transmitter and Futures Commission Merchant

Today we are very pleased to welcome guest blogger Lili Infante, who is the CEO of CAT Labs – a tech company building digital asset recovery and quantum-resistant cryptography tools to fight crypto crime.  Lili previously spent a decade as a DEA Special Agent with the U.S. Department of Justice and pioneered an early federal task force focusing exclusively on crypto and dark web crimes. Lili has led numerous major crypto-related investigations to include the takedown of Hydra – the largest crypto-powered dark web criminal organization and money laundering platform in the world.

We reached out to Lili because her work is fascinating and increasingly important.  Law enforcement agencies, the U.S. Treasury Department and other regulators are focused on vulnerabilities and potential gaps in the United States’ anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) regulatory, supervisory, and enforcement regimes in regards to the use and misuse of virtual assets and decentralized finance.  Virtual assets can be the vehicle of choice for terrorist financing, fraud schemes, and state-sponsored cyber crime.  Meanwhile, agencies such as the Financial Crimes Enforcement Network (FinCEN) struggle to find proposed regulatory solutions.

This blog post again takes the form of a Q&A session, in which Lili responds to questions posed by Money Laundering Watch about investigating crypto-related illicit activity and recovering digital assets. We hope you enjoy this discussion on this important topic. – Peter Hardy

Continue Reading  Fighting Crypto Crime:  A Guest Blog.

It is challenging for law enforcement to track down and trace illicit activities conducted through digital currencies. The process can be very time- and resource-intensive.  Further, securing charges and arrests, and subsequent convictions, often requires the strong support of traditional sources of evidence, such as fact witness testimony and electronic communications.  Nonetheless, blockchain analytics is a key component of the government’s ability to pursue such cases.

On March 12, a jury in the United States District Court for the District of Columbia found Roman Sterlingov guilty on charges of money laundering conspiracy, so-called “sting” money laundering, operating an unlicensed money transmitting business, and violations of the D.C. Money Transmitters Act.  We blogged about the initial criminal complaint issued against Sterlingov here.  Sterlingov allegedly laundered $400 million through Bitcoin Fog, a bitcoin mixing service which can be used to obscure the origins of cryptocurrency transactions. 

Shortly before the trial and guilty verdicts, the Court issued an order addressing the admissibility of expert testimony related to blockchain analysis software under the factors established by the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc. to assess the reliability of expert testimony under Federal Rule of Evidence 702.  This blog post focuses on that order.

Specifically, the Court addressed proprietary software used by the private digital asset forensic firm Chainalysis, Chainalysis Reactor (“Reactor”), and whether expert testimony by witnesses propounded by the government – Luke Scholl (“Scholl”) from the FBI, and Elizabeth Bisbee (“Bisbee”) from Chainalysis – could rely upon Reactor under Daubert.  Reactor is a software used to dissect bitcoin transactions, utilizing techniques like co-spend analysis to connect multiple addresses to a single entity. The defense raised significant concerns about the reliability of Reactor.

The Court found the expert testimony admissible under Daubert.  Importantly, the Court also noted that while Reactor was important to the government’s case, it was not the sole basis for the prosecution’s theories. Other evidence, such as materials found in Sterlingov’s possession, online forum posts, IP analyses, and traditional blockchain tracing, also supported the prosecution.

The Court’s decision has potentially significant implications for future cases involving cryptocurrency transactions and digital currency-related crimes. It establishes a precedent regarding the potential admissibility of evidence derived from such software tools and underscores the evolving challenges and complexities of investigating financial crimes in the digital age.

Continue Reading  Blockchain Analysis and Related Expert Testimony Admissible In Criminal Trial

With Guest Speaker IRS Criminal Investigation Special Agent Jonathan Schnatz

We are very fortunate to have Special Agent Jonathan Schnatz as our guest speaker in this podcast on international efforts to investigate tax evasion and money laundering, and how they relate to criminal investigations and civil audits of U.S. businesses and individuals.

Special Agent Schnatz

We previously have blogged on actions taken by the DOJ’s “Task Force KleptoCapture,” an interagency law enforcement task force with a mandate to target sanctioned Russian and pro-Russian oligarchs. While explicitly launched in May 2022 as a direct response to Russia’s full-scale invasion of Ukraine, the task force’s mission is consistent with the U.S. government’s characterization of Russia as a kleptocratic regime (see our post here) and the Biden Administration’s promotion of anti-corruption as a “core United States national security interest” (see our posts here and here).

This week, DOJ announced (via both a press release and a filmed podium announcement by Attorney General Merrick Garland) a series of enforcement actions in five separate federal cases in districts up and down the East Coast, dealing with money laundering and evasion of sanctions, in several cases centered on quintessentially oligarchic luxury goods: high-end real estate and superyachts.  The enforcement actions also emphasize the continuing themes in these cases of the use of shell companies, proxies and lawyers to allegedly evade sanctions.

Continue Reading  The American Front in Russia’s War on Ukraine: DOJ’s “Task Force KleptoCapture” Continues Focus on Operations of Sanctioned Oligarchs

Third of Three Posts in a Related Series on Recent AML and Money Laundering Prosecutions

As we have blogged, the Department of Justice (“DOJ”) has been busy lately in regards to money laundering and Bank Secrecy Act (“BSA”) / Anti-Money Laundering (“AML”) prosecutions.

In our first blog post in this three-part series, we discussed a significant prosecution of an individual, and two related corporate non-prosecution agreements involving the gaming industry.  In our second blog post, we discussed two unusual prosecutions involving, respectively, an executive of a bank and an alleged AML specialist working with small financial institutions.

In our final post of this series, we will discuss the prosecution and sentencing of a lawyer who allegedly became part of the massive fraud and money laundering scheme perpetrated by his cryptocurrency client.  Specifically, on January 25, lawyer Mark Scott (“Scott”) was sentenced to 10 years in prison for allegedly laundering approximately $400 million in connection with a fraudulent cryptocurrency scheme known as “OneCoin.”  Scott was a former partner at the international law firm of Locke Lord.  Although the alleged facts and circumstances of this case are both extreme and lurid, it nonetheless reminds lawyers of the need to be careful about getting too involved in the businesses of their clients, particularly in the presence of multiple red flags.

Continue Reading  Former Big Law Lawyer Sentenced to 10 Years in Prison for Allegedly Laundering $400 Million in Crypto Client Funds

Second of Three Posts in a Related Series on Recent AML and Money Laundering Prosecutions

The Department of Justice (“DOJ”) has been very active in the Bank Secrecy Act (“BSA”) / Anti-Money Laundering (“AML”) space, as reflected by a recent series of individual prosecutions and corporate non-prosecution agreements (“NPAs”).  

In the first blog post in this series, we discussed a significant prosecution of an individual, and two related corporate NPAs, involving the gaming industry.  In our final post, we will discuss the prosecution and sentencing of a lawyer who allegedly became part of the fraud and money laundering scheme perpetrated by his crypto client.

In this second post, we will discuss two unusual prosecutions involving, respectively, an individual executive of a bank and an alleged AML specialist working with small financial institutions.  

As we previously noted, all of these cases, although all unique, are also united in certain ways – particularly in regards to the need for institutions and professionals to perform sufficient due diligence regarding the conduct and source of funds of high-risk clients and customers.

Continue Reading  Criminal Case Round-Up: Recent Prosecutions Involving Financial Institution Officers

First of Three Posts in a Related Series on Recent AML and Money Laundering Prosecutions

The Department of Justice (“DOJ”) has been very active in the Bank Secrecy Act (“BSA”) / Anti-Money Laundering (“AML”) space, as reflected by a recent series of individual prosecutions and corporate non-prosecution agreements (“NPAs”). 

In this first blog post, we will discuss a significant prosecution of an individual, and two related corporate NPAs, involving the gaming industry

In the next related post, we will discuss two unusual prosecutions involving, respectively, an individual executive of a bank and an alleged AML specialist working with small financial institutions.  

In our final post, we will discuss the prosecution and sentencing of a lawyer who allegedly became part of the fraud and money laundering scheme perpetrated by his crypto client.

Although these cases are all unique and interesting in their own way, they are also all united in certain ways – particularly in regards to the need for institutions to perform sufficient due diligence regarding the conduct and source of funds of high- or higher-risk customers, and the related need for institutions to ensure that their own employees are not undermining the institutions’ AML compliance programs.

Continue Reading  Criminal Case Round-Up: Recent Prosecutions Involving Casinos

Farewell to 2023, and welcome 2024.  As we do every year, let’s look back.

We highlight 10 of our most-read blog posts from 2023, which address many of the key issues we’ve examined during the past year: criminal money laundering enforcement; compliance risks with third-party fintech relationships; the scope of authority of bank regulators; sanctions

A Huge Monetary Penalty for Sprawling Allegations – But Will Zhao Receive a Prison Sentence?

As the world now knows, Binance Holdings Limited, doing business as Binance.com (“Binance” or the “Company”), has entered into a plea agreement with the U.S. Department of Justice (“DOJ”).  

Binance is registered in the Cayman Islands and regarded as the world’s largest virtual currency exchange. It agreed to plead guilty to conspiring to willfully violating the Bank Secrecy Act (“BSA”) by failing to implement and maintain an effective anti-money laundering (“AML”) program; knowingly failing to register as a money services business (“MSB”); and willfully causing violations of U.S. economic sanctions issued pursuant to the International Emergency Economic Powers Act (“IEEPA”). Despite the plea agreement, Binance will continue to operate.

Changpeng Zhao, also known as “CZ,” also pleaded guilty to violating the BSA by failing to implement and maintain an effective AML program. Zhao is Binance’s primary founder, majority owner, and – until now – CEO. As part of his plea agreement, Zhao has stepped down as the CEO, although he apparently will keep his shares in Binance.

As part of its plea agreement, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total criminal penalty of $4,316,126,163. Binance also entered into related civil consent orders with the Financial Crimes Enforcement Network (“FinCEN”), the Commodity Futures Trading Commission (“CFTC”), and the Office of Foreign Assets Controls (“OFAC”). Zhao also entered into a consent order with the CFTC.

The allegations are vast and detailed, and much digital ink already has been spilled regarding this matter. Our discussion therefore will be relatively high-level. Distilled, the government alleges that Binance – under the direction of Zhao – tried to hide the fact that it operated in the U.S., purposefully avoided any meaningful AML compliance, and consequently laundered many millions of dollars’ worth of cryptocurrency involving extremely serious criminal conduct, including terrorism, child pornography, and U.S. sanctions evasion.

As for Zhao, and as we will discuss, whether he will go to prison – and if so, for how long – is an open and very interesting question. His sentencing currently is scheduled for February 23, 2024.

Continue Reading  Binance Settles Criminal and Civil AML and Sanctions Enforcement Actions for Multiple Billions – While its Founder, Owner and Former CEO Zhao Pleads Guilty to Single AML Crime