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How US authorities use old AML tools to remove cryptocurrencies

October 24, 2020

The ease of laundering money in the United States prior to 1970 amazes everyone. Before the Bank Secrecy Act (BSA) this year There were no federal regulations for banks to keep records of activity that fell into the “suspicious” category. There were also no uniform reporting requirements – it was the BSA that set the threshold of $ 10,000 that remains to date.

But it’s not like the BSA has banned money laundering from American shores. It wasn’t until 1986 that money laundering was classified as a federal crime, a milestone in the global fight against money laundering. Despite this classification, the proud American tradition of illicit funding continues to this day.

The technology behind banking made great strides long before the word “fintech” made mouth watering in boardrooms around the world. And obviously the globalization movement has grown quite a bit since 1970, Opening up new ways for Shell international companies to host money without identifying or incriminating information about the actual original owner of the funds.

How US authorities use old AML tools to remove cryptocurrencies
How US authorities use old AML tools to remove cryptocurrencies

And then bitcoin and a ton of other tokens came on its heels.

Enter FinCEN

For a long time it was not clear whether any of the traditional rules like the BSA would apply to cryptocurrencies. Already in 2013, The Financial Crimes Enforcement Network (FinCEN) assured the industry that anyone who exchanges “convertible virtual currencies,” that is, those that are easily exchangeable, qualifies as a money services company. These companies must register as MSB and are generally subject to the area of ​​responsibility of the BSA.

In 2013, however, regulators were still at a loss as to the technology behind Bitcoin. Last year, FinCEN made it clear that it is still paying attention. This year the regulator has expanded its ability to comply with this avowed authority.

FinCEN met Larry Dean Harmon, the operator of several bitcoin blending services, with penalties that set a precedent earlier this week. The Justice Department is filing criminal charges against the BitMEX leadership team for facilitating money laundering through the exchange.. And on Friday, FinCEN announced that the requirement that financial institutions must share customer information in international transactions as low as $ 250 will be expanded, expressly subjecting cryptocurrency companies to the same rules. We are experiencing great dynamism. Authorities are serious when it comes to BSA.

All US money laundering laws stem from the BSA of 1970, which was in fact the first of its kind in the world. The 1986 Money Laundering Control Act made violations a federal criminal offense affecting the DoJ and sometimes the FBI.

FinCEN itself was only founded in 1990. It takes care of the civilian side of money laundering, collects fines and lets financial institutions report on their systems in a way that the Justice Department doesn’t interfere. FinCEN became a tax office under the PATRIOT Act of 2001 when cutting illicit funds for terrorism was a top priority. In this role, FinCEN’s work may overlap with the Foreign Assets Control Office (OFAC), which leads the enforcement of penalties, and the Internal Revenue Service (IRS), which handles tax investigations.

In his own words, “FinCEN’s mission is to protect the financial system from illegal use and combat money laundering, and to promote national security through the collection, analysis and dissemination of financial information and strategic use by financial authorities.”

At the most mundane level This mission includes a number of filings from US financial institutions, including the registration of money service providers and overseas bank accounts.. Most relevant to illegal funding is the Suspicious Activity Report (SAR).

The SAR collection system came under fire in late September when a leak in FinCEN’s files revealed colossal flows of suspicious money that was not tracked. Something Commentators They saw the bureau’s increased focus on cryptocurrencies as hypocritical.

Enforce BSA on cryptocurrencies

Regarding recent actions like the ones mentioned above against BitMEX and Larry Dean Harmon, It is clear that regulators and law enforcement agencies are removing particularly outrageous examples of companies who voluntarily engage in illegal money.

Braddock Stevenson, attorney at law firm O’Melveny, left FinCEN’s enforcement department in January of this year. He described what we are experiencing as an effort “to move trading to the regulated sector, to the stock exchanges, because that’s where the transparency is and FinCEN can get the reports there”.

The emphasis on reporting fits the overall mission of FinCEN. The September SAR leak revealed that FinCEN doesn’t track (actually can’t track) every report received.. In 2018, director Kenneth Blanco said the office is receiving 1,500 SARs each month related to cryptocurrencies. In 2019, FinCEN reported over 850,000 SARs filed by money service providers alone, excluding other types of financial institutions.

The nature of FinCEN’s work is to ensure that financial institutions maintain some form of logging policy. “In order to have to present something, it has to be ensured that liability is built into the system,” said Casey Jennings, lawyer for the group for cryptocurrency and blockchain at Seward Kissel.. Jennings noted that intent actually plays a big part in FinCEN’s decisions about who to pursue:

“When FinCEN looked at the financial institutions compliance program and said, ‘Okay, this bank did everything it could and for some reason something got away with it.’ There was money laundering. As long as the financial institution has done its best, they are unlikely to be penalized. And if so, it won’t be a huge fine. “

That all sounds very well meant. However, as we have seen, the BSA also provides for criminal charges. While the Department of Justice has been involved in prosecuting crypto crimes for nearly a decade, it is generally reserved for fraud, theft, sanction evasion, or terrorist financing. BitMEX was different. BitMEX’s leadership team didn’t seem ideological, just greedy. But their platform, the Justice Department feared, could serve as a playground for the worst kinds of actors.

Andrew Jacobson, also from the blockchain and crypto group Seward Kissel, compared the massive seizure of crypto funds by the Justice Department from a terrorist financing network in August to BitMEX’s action, and greed was largely the same problem for regulators as they were about illegal sub-registrations led:

“Both goals can be achieved in parallel. If you are an exchange that processes millions of transactions weekly, possibly daily, and you or you don’t have an AML program, then you are helping to ease the bad deeds of these ideological actors. The fact that terrorists or anyone else can access their platform simply because, from a regulator’s point of view, you do not have the proper controls in place is also unacceptable. “

Regarding the move to stronger enforcement, a senior member of the Blockchain Caucus of Congress told Cointelegraph that it was not clear that the BSA’s AML regulations would prevail in cryptocurrencies: “Many commentators thought that the new laws would have to be passed in order for these parties to be targeted.”. He continued:

“The inclusion of the Banking Secrecy Act is a big problem. With all the other things, the CFTC, the SEC actions, they are all normative which means that they are all civil penalties. All that money. The BSA introduces criminal penalties and various investigative bodies. “

FinCEN is unlikely to start penalizing any crypto exchanges that do not meet the standards set by the BSA for banks.The Department of Justice will not initiate a search for executives at the Arthur Hayes level for any cryptocurrency exchanges registered outside of the United States and will not keep customer data at the BSA level. Braddock Stevenson commented, “We have not seen any action based solely on a lack of transparency issues with no additional link to more suspicious activity.” However, these regulators are putting pressure on the industry to tighten the limits of acceptable behavior.

Discrepancy between cryptocurrency and BSA requirements

Particularly complicated for cryptocurrencies is 31 CFR 1010.410 (f), known as the travel rule or travel rule Financial institutions are required to submit information about transactions with a value greater than $ 3,000. This threshold can go up to $ 250 as noted above. This information includes the names and addresses of the people who send and receive these funds. It makes sense if you run a bank and account information is easily accessible, but that disclosure is part of the reason wire transfers are slow.

Additionally, privacy is a central part of the mind of the cryptocurrency industry. While US regulators generally view the emphasis on privacy as a potential indicator of illegal activity, it’s not just about hiding illegal funds. If an exchange has all of the customer data and most US exchanges are already collecting it instead of waiting for a customer to cross the $ 3,000 threshold for a transaction, then that is white. Chop. That means importing the weak points of the traditional financial system into cryptocurrencies without necessarily guaranteeing the same level of protection.

Casey Jennings noticed this disparity and said:

“The whole idea of ​​cryptocurrencies is that there are no gatekeepers and the BSA requires gatekeepers to exist. These two terms do not match. But BSA is the best system we have right now. […] The other possibility would be for Congress to step in and create a new regulatory system, and I’m not sure anyone in the industry wants that. “

At the moment everyone works from the BSA, and since the DoJ claims authority over all crypto companies that come into contact with American servers, it is up to everyone to pay attention.

As with many interactions between cryptocurrencies and regulators, there is one negative PR problem: FinCEN and the Ministry of Justice view cryptocurrencies primarily as a money laundering tool. But when it comes to AML regulators, they have limited incentive to deal with the silver lining of cryptocurrencies.. The Securities and Exchange Commission’s role in cryptocurrencies has been controversial, but the SEC’s senior echelons have recognized that the technology could be a boon to US stock markets.

On the contrary, FinCEN and related AML agencies are strictly risk averse. This includes other areas of the Treasury such as OFAC and IRS, as well as the Department of Justice. FinCEN’s job is to hinder criminals who try to use their illicit profits. The office has no institutional incentive to take advantage of cryptocurrency technology, and in fact, it is not really their job. Likewise, it is not the Justice Department’s job to expedite transactions, nor is the IRS’s goal to ensure privacy. At best, these entities tolerate cryptocurrencies as a mission.

Right now the crypto industry is working with it if it wants to work with the United States. There doesn’t seem to be any upcoming legislation in sight to change the BSA’s obligations in relation to crypto, and the authorities who maintain it have doubled oversight in the industry.

We are likely to see FinCEN and the DoJ build their authority in the cryptosphere with further law enforcement efforts in the near future.. At the same time, they communicate with exchanges that are operated within their jurisdiction. As a result, there is no reason to doubt an imminent surge in user data collection and inter-exchange communication unless something dramatic shakes the picture.