Money Services Business

We previously blogged on an advisory issued by FinCEN alerting financial institutions to the various financial mechanisms used by traffickers of fentanyl and synthetic opioids to launder the burgeoning proceeds of their illicit activities. In the years since, the volume of that drug trade has only increased, as tragically evidenced in part by the skyrocketing rate of fentanyl-related deaths per year – in the U.S. alone, rising from around 28,000 to almost 70,000 in the past five years.

Recognizing this as a global concern requiring transnational solutions to address it, on November 30 the Financial Action Task Force (“FATF”), an intergovernmental organization comprised of 38 national members and two regional organizations (the EU and the Gulf Cooperation Council), released a report, coordinated by the U.S. and Canada, on money laundering stemming from trade in fentanyl and synthetic opioids, with specific recommendations for counteracting the cash flow of the groups engaged in this activity.

The report attempts to focus greater attention on the transnational aspect of the global fentanyl trade. It notes that the trade is fueled by organized crime groups which are able to utilize a high level of sophistication both in the acquisition of drugs for sale and distribution, and in the subsequent laundering of proceeds.

Continue Reading  Countering Financial Flows From the Illicit Trade in Fentanyl and Synthetic Opioids

The “Highlights” — To Russia, With Crypto

The Financial Crimes Enforcement Network (“FinCEN”) issued on November 1 a Financial Trend Analysis regarding ransomware-related Bank Secrecy Act (“BSA”) filings during the second half of 2021 (the “Report”).  This publication follows up on a similar ransomware trend analysis issued by FinCEN regarding the first half of 2021, on which we blogged here.  

In the most recent analysis, FinCEN found that both the number of ransomware-related Suspicious Activity Reports (“SAR”) filed, and the dollar amounts at issue, nearly tripled from 2020 to 2021.  The notable takeaways from the Report include:

  • Ransomware-related SARs were the highest ever in 2021 (both in number of SARs and in dollar amounts of activity reported).
  • Ransomware-related SARs reported amounts totaling almost $1.2 billion in 2021.
  • Approximately 75% of ransomware-related incidents between June 2021 and December 2021 were connected to Russia-related ransomware variants.

The Report, which stated that the majority of these ransomware payments were made in Bitcoin, serves as a particular reminder to cryptocurrency exchanges of their role in both identifying and reporting ransomware-related transactions facilitated through their platforms.  The Report stresses that SAR filings play an essential role in helping FinCEN identify ransomware trends.

Continue Reading  FinCEN Reports Staggering Increase in Reported Ransomware Attacks

On October 19, 2022, the U.S. Attorney’s Office for D.C., on behalf of the Financial Crimes Enforcement Network (“FinCEN”), filed a civil complaint against Larry Dean Harmon (“Harmon”), seeking $60 million in civil penalties for alleged violations of the Bank Secrecy Act (“BSA”) in connection with Harmon’s involvement in now-defunct cryptocurrency services Helix and Coin Ninja LLC.  The complaint seeks to obtain a judgment on FinCEN’s 2020 Assessment of Civil Money Penalty against Harmon (“Assessment”), which is attached to the complaint and includes a detailed statement of facts.

As we have blogged, Harmon previously pled guilty to operating an unlicensed money transmitter business.  Harmon’s sentencing hearing in the criminal case has been continued, and he reportedly has been attempting to cooperate with the government.  It appears that the civil complaint may represent something of a formality:  it seeks to reduce the assessment against Harmon to an actual civil judgment, upon which the government can collect in theory, in anticipation of Harmon’s criminal sentencing and any potential additional matters in which he may attempt to cooperate.

According to the complaint, starting in 2014, Harmon operated Helix, a bitcoin “mixing” service, which Harmon allegedly advertised explicitly as a way for customers to conceal their identities from the government.  The statement of facts attached to the Assessment alleged that Harmon “publicly advertised Helix on Reddit forums dedicated to darknet marketplaces, actively seeking out and facilitating high-risk transactions directly through customer service and feedback.”  Such “mixing” services – designed to maximize anonymity – increasingly have drawn the ire of the government, as reflected by the recent and controversial action by the Office of Foreign Assets Control to sanction virtual currency “mixer” – or passive technology – Tornado Cash.  

Continue Reading  DOJ Files Lawsuit for $60 Million in Civil Penalties for Alleged BSA Violations by Crypto “Mixer”

Actions Highlight Risky Mix of Sanctions Law, Inadequate Transaction Monitoring and Dealing with Anonymity-Enhanced Cryptocurrencies

The Office of Foreign Assets Control (“OFAC”) and the Financial Crimes Enforcement Network (“FinCEN”) announced on October 11 simultaneous settlements with Bittrex, Inc. (“Bittrex”), a virtual currency exchange and hosted wallet provider. Under the OFAC settlement, Bittrex has agreed to pay $24,280,829.20 to settle its potential civil liability for 116,421 alleged violations of multiple sanctions programs. Under the FinCEN consent order, Bittrex agreed to pay a civil penalty of $29,280,829.20 for alleged anti-money laundering (“AML”) violations under the Bank Secrecy Act (“BSA”). FinCEN has agreed to credit Bittrex’s payment to OFAC against its penalty because it found that the alleged BSA violations “stem from some of the same underlying conduct”; thus, Bittrex’s total payments to the two regulators come to $29,280,829.20. 

According to the Department of the Treasury dual press release, the two settlements represent the first parallel enforcement actions by FinCEN and OFAC in the virtual currency and sanctions space. Also, it is OFAC’s largest virtual currency enforcement action to date. To further highlight the importance of the settlements, the press release quotes the OFAC Director Andrea Gacki and FinCEN Acting Director Himamauli Das, both sternly warning operators in the same environment as Bittrex to implement effective AML compliance and sanction screening programs.

It is conceivable that Bittrex, for years now, has been on notice that federal and state regulators are closely watching and expecting more comprehensive risk assessment programs and procedures from businesses transacting with virtual currency. As we previously blogged here, in 2019 the New York Department of Financial Services (“NYDFS”) denied Bittrex’s application for a Bitlicense, citing: “deficiencies in Bittrex’s BSA/AML/OFAC compliance program; a deficiency in meeting the Department’s capital requirement; and deficient due diligence and control over Bittrex’s token and product launches.”  In its letter denying Bittrex’s application, NYDFS set forth in detail the deficiencies it found in Bittrex’s BSA/AML/OFAC compliance program, noting that Bittrex’s compliance policies and procedures “are either non-existent or inadequate.”

As we will discuss, the FinCEN consent order highlights Bittrex’s alleged failure to address adequately the overall risk environment in which it operated, including transactions involving anonymity-enhanced cryptocurrencies, or AECs.  The consent order also highlights two repeated themes in enforcement actions: lack of adequate compliance staff, and a seemingly robust written compliance policy that was not matched by an effective day-to-day transaction monitoring system.

Continue Reading  OFAC and FinCEN Settle with Bittrex in Parallel Virtual Currency Enforcements

On Friday, the Department of Justice (“DOJ”) announced two developments:  First, the release of a 66-page report, The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets (the “Report”), issued under President Biden’s March 9, 2022 Executive Order on Ensuring Responsible Development of Digital Assets.  Second, the establishment of the Digital Asset Coordinator (“DAC”) Network, a nationwide group of prosecutors designated as legal and technical experts in digital asset cases.

We focus here on the regulatory and legislative recommendations of the Report, which seek to expand significantly the ability of the DOJ to investigate and prosecute offenses involving digital assets. The recommendations include increasing criminal penalties, extending statutes of limitations, expanding venue provisions, enhancing the government’s forfeiture powers, and prohibiting virtual asset service providers from “tipping off” the subjects of grand jury subpoenas received by the providers.  The recommendations also include making clear that the federal criminal law against maintaining an unlicensed money transmitter applies to peer-to-peer platforms that purportedly do not take custody or assume control over the digital asset being exchanged; ensuring that the Financial Crimes Enforcement Network (“FinCEN”) issues a final rule expanding the application of the Travel Rule under the Bank Secrecy Act (“BSA”) to digital asset transfers; and expanding or arguably clarifying that the BSA applies to platforms dealing in non-fungible tokens, or NFTs, including online auction houses and digital art galleries.

Continue Reading  DOJ Issues Report on Digital Asset Law Enforcement Seeking Expansive New Powers, and Launches New Crypto Prosecutor Network

Enforcement Trends, Crypto, the AML Act — and More

We are very pleased to be moderating, once again, the Practising Law Institute’s 2022 Anti-Money Laundering Conference on May 17, 2022, starting at 9 a.m. This year’s conference will be both live and virtual — and it will be as informative, interesting and timely as always. 

Travel Rule and Beneficiary Information Continues to Challenge Virtual Asset Service Providers

In late October, the Financial Action Task Force issued its long-awaited updated guidance on Virtual Assets and Virtual Asset Service Providers (“FATF Guidance”), an extremely lengthy and detailed document setting forth how virtual asset service providers (“VASPs”) and related virtual asset activities fall within the scope of FATF standards for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”).  The FATF Guidance is important to VASPs worldwide, as well as the more traditional financial institutions (“FIs”) doing business with them.  Because of its great breadth, we focus here only on its comments regarding implementation of the so-called “Travel Rule” for virtual assets.  This portion of the FATF Guidance is particularly relevant to the U.S. because, as we have blogged, the Financial Crimes Enforcement Network (“FinCEN”) proposed regulations in 2020 – still pending – which would change the Travel Rule by lowering the monetary threshold for FIs from $3,000 to $250 for collecting, retaining, and transmitting information related to international funds transfers, and explicitly would make the Travel Rule apply to transfers involving convertible virtual currencies.

The FATF Guidance has additional relevance to U.S. VASPs and FIs because, this month, the U.S. President’s Working Group on Financial Markets (“PWG”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller (“OCC”) (together, “the U.S. Agencies”) issued a Report on Stablecoins (the “Report”).  Stablecoins are digital assets designed to maintain stable value as related to other reference assets, such as the U.S. Dollar.  In the Report, the U.S. Agencies delineate perceived risks associated with the increased use of stablecoins and highlight three types of concerns: risks to rules governing AML compliance, risks to market integrity, and general prudential risks.  We of course will focus here on the Report’s discussion of AML risks, particularly because it repeatedly invokes the FATF Guidance, thereby illustrating the increasing efforts by governments to seek a global and relatively coordinated approach to addressing AML/CFT concerns regarding virtual assets.
Continue Reading  Global Developments in AML and Virtual Assets:  FATF Guidance and the Travel Rule, and U.S. Pronouncements on Stablecoins

On October 6, the Department of Justice (“DOJ”) announced the creation of a National Cryptocurrency Enforcement Team (“NCET”).  The DOJ press release is set forth in part below, without further commentary, other than to observe that the NCET’s stated goals are to address issues on which we repeatedly have blogged:  crypto exchangers and their AML

Government Alleges Systemic and Deliberate AML Failures

Filings Describe Tools for CVC Exchanges to Use for Customer Due Diligence and Transaction Monitoring

The Financial Crimes Enforcement Network (“FinCEN”) and the Commodity Futures Trading Commission (“CFTC”) announced on August 10 (here and here) settlements with the operators of the BitMEX cryptocurrency trading platform for alleged anti-money laundering (“AML”) violations under the Bank Secrecy Act (“BSA”), and for allegedly failing to register with the CFTC.  More specifically, FinCEN’s assessment of a civil monetary penalty and the CFTC’s consent order both involved the five companies operating the BitMEX platform: HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited (collectively, “BitMEX”).

BitMEX will pay regulators up to a combined $100 million civil monetary penalty; perform a “lookback” regarding the potential need to file additional Suspicious Activity Reports (“SARs”); and hire an independent consultant to conduct two reviews of BitMEX’s operations, policies, procedures, and controls, in order to confirm that BitMEX is not operating in the U.S., and that no U.S. customers are able to trade with the BitMEX platform.

According to the government filings, BitMEX is one of the oldest cryptocurrency derivative exchanges, with 1.3 million user accounts and a collection of annual fees in excess of $1 billion.  Combined, the government filings allege that for a period of six years between November 2014 and October 1, 2020, BitMEX offered trading of cryptocurrency derivatives to retail and institutional customers in the U.S. and worldwide through BitMEX’s website. Customers in the U.S. placed orders to buy or sell contracts directly through the website and BitMEX was aware that U.S. customers could access the BitMEX platform via virtual private network (“VPN”).

The civil penalty will be split between FinCEN and the CFTC.  However, the settlement involves an interesting “carrot” offered by the regulators:  $20 million of the penalty is suspended pending the successful completion of the SAR lookback and the two independent consultant reviews.

According to the government’s allegations, BitMEX deliberately ignored for years the most basic AML requirements, resulting in multitudinous violations and inviting – and even encouraging – its customers to launder illicit funds.  As we will describe, the government has alleged that BitMEX operated on the announced pretext that it was not subject to the BSA or U.S. commodities laws because it had no U.S. customers or operations, when senior management knew otherwise.
Continue Reading  FinCEN and CFTC Reach Groundbreaking $100 Million AML Settlement with BitMEX