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The indictment of twelve Russian intelligence officials may be the most vivid illustration yet of how cryptocurrencies have been used for criminal purposes to “Attack America in new and unexpected ways.” But “Criminals who think that they are safe on the Darknet are wrong. We can expose their networks, and we are determined to bring them to justice” explained U.S. Deputy Attorney General and the Chair of the Task Force on Market Integrity and Consumer Fraud, Rod J. Rosenstein:
“Emerging [virtual] currencies have the potential to transform the world, and to do so in a positive way. But criminals are also increasingly using virtual currency to perpetrate fraud schemes and conceal the proceeds. . . . The basic point is that fraud in the digital age knows no boundaries.”
Ever since taking the helm as the U.S. Department of Justice’s first Digital Currency Counsel in September of 2017, Michele R. Korver has been fielding questions regarding cryptocurrencies from U.S. Attorney’s Offices nationwide , developing policy on cryptocurrency prosecutions and forfeiture procedures, and coordinating cryptocurrency related multi-jurisdictional—international, national and state—money laundering investigations.
These money laundering cases go hand-in-hand with prosecutions involving the sale of controlled substances, as cryptocurrencies are believed to be the most oft-used means of payment around the world for illegal goods and services on encrypted dark websites which serve as an ever-growing shadow banking system for crypto criminals. Moreover, from her position at the Money Laundering and Asset Recovery Section (MLARS) in Washington D.C., Korver can tap into the deep bench of talent in this area at MLARS, other DOJ Criminal Division sections such as the Computer Crimes and Intellectual Property Section (CCIPS), and a myriad of federal law enforcement and regulatory agencies.
Korver began working collaboratively with global law enforcement, the Department of Homeland Security, and private technology companies in multi-jurisdictional investigations to dismantle transnational criminal organizations in 2013, to counter cross-border threats posed by cryptocurrencies— including money laundering, terrorist financing, importation of illegal goods, fraud, and tax evasion. That same year, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN)—which collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes— imposed registration requirements on money services businesses (MSB) which transmit funds in virtual currencies; and in a first of its kind virtual currency case, the DOJ shut down the $6 billion Costa Rica-based virtual currency exchange Liberty Reserve and then shuttered the $1.2 billion drug trafficking dark-web market Silk Road for a host of federal criminal violations, including money laundering.
Using the long arm of U.S. law, Korver became a pioneer in prosecuting crypto-crime cases from the onset, all over the world.
The Italian Mafia Brussels Drug Trafficking Organization – multinational criminal cartel
Multinational criminal cartels — like the Italian Mafia Brussels Drug Trafficking Organization (IMB) — sell illicit drugs via the darkest corners of the web, in exchange for crypto assets with varying levels of anonymity. These organizations often store their assets in wallets, instead of banks or exchanges which are subject to Know Your Customer/Anti-Money Laundering (KYC/AML) rules, in order to conceal their illicit activity with tentacles in multiple countries around the world.
The IMB organization imported MDMA, manufactured in the EU into the U.S. via the mail from various countries in Europe, and sold it on various dark websites in exchange for Bitcoin. Selling Ecstasy in exchange for Bitcoin on the dark web allowed IMB to secretly transfer Bitcoin P2P across several borders from one country to the next — France, Belgium, Romania, U.S. — by relying on cryptography, to evade taxes, to launder illicit proceeds, and to attempt to conceal their identities.
Nevertheless, led by Korver’s prosecution team in Colorado, U.S. and European enforcement officials who “worked tirelessly and collaboratively, in multiple countries, in coordinated early morning raids, simultaneously arrested numerous members of the IMB organization in Belgium and Romania,” effectively dismantling their international dark web ecstasy ring. The IMB boss, Filip Lucian Simion — who plead guilty to one count of conspiracy to import into the U.S. controlled substances, and one count of conspiracy to launder money — will be sentenced in Denver on September 26, 2018, according to court documents filed in the District of Colorado.
While the full scale of misuse of cryptocurrencies by the multinational criminal cartels are unknown, the European Union (EU) mafia market value has been reported at almost 110 billion euro, about 1% of EU GDP with money laundering focused on dark web markets, MSB, casinos, slot machines, games and betting. EU’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) in a recent report stated that the key issue to be addressed concerning cryptocurrencies — preferably by the G-20 — is their anonymity which hinders cryptocurrency transactions from being adequately monitored by law enforcement, regulators or taxmen.
Operation Dark Gold – first of its kind nationwide darknet cryptocurrency launderer arrests
“In a first nationwide undercover operation targeting over sixty-five darknet vendors in nineteen states, more than 40 dark-web drug-linked cryptocurrency money launderers were arrested as part of a sweeping federal effort by the DOJ at the end of June” announced the Department of Justice on June 26, 2018. The Money Laundering and Asset Recovery Section coordinated the nationwide investigation, working with more than 40 U.S. Attorney’s Offices throughout the country which lead to the opening of more than 90 active cases.
The darkweb consists of masked IP addresses and a hidden internet that people don’t have access to without a specific way to get there usually through a certain web browser. “For the past year, undercover agents— [posing as a money-launderers on Darknet market sites, exchanging U.S. currency for virtual currency] —have been providing money-laundering services to these dark net vendors, specifically those involved in narcotics trafficking,” said Homeland Security Investigations (HSI) Special Agent in Charge Angel Melendez who led the operation from New York. From there they could trace transactions from large-quantity shipments of illicit drugs.
The windfall was huge after the takedown of these illicit vendors in Operation Dark Gold. The nationwide undercover operation produced more than $20 million dollars in cash and cryptocurrency, including Bitcoin. The Justice Department also seized more than $3.6 million in gold bars. As Drug Enforcement Agency (DEA) New York Special Agent in Charge James J. Hunt stated:
“At this crucial time of unprecedented drug related deaths, one of the greatest threats we face is cyber drug trafficking. Because the Darknet invites criminals into our homes, and provides unlimited access to illegal commerce, law enforcement is taking steps to identify and arrest those involved. I applaud all the agencies who participated in this groundbreaking investigation.”
Melendez declined to give specifics on how the department had linked client wallets to drug transactions, saying simply, “there are tools and technologies that law enforcement uses to conduct blockchain analysis.”
Bitcoin Maven — first of this kind charge in the Central District of California
For more than three years, Theresa Tetley, also known as “Bitcoin Maven”, operated an
illegal, unlicensed money transmitting business exchanging fiat for cryptocurrencies, which fueled a black-market financial system in the Central District of California, according to a July 9, 2018, release from the United States Attorney in Los Angeles. The investigation was conducted by DEA and IRS-CI.
Customers, which included DEA agents, regardless of the source of their funds, utilized Bitcoin Maven’s services — exchanged Bitcoin for cash or vice versa — without fear of being the subject of reports filed with the federal government for certain transactions that otherwise would be reported, in exchange for a premium fee.
Bitcoin Maven, who admitted to operating an unlicensed bitcoin-for-cash exchange business and laundering bitcoin that was represented to be proceeds of narcotics activity, was sentenced to 12 months and one day in federal prison, three years of supervised release, and a fine of $20,000.
“Cryptocurrencies with anonymity features impede investigations of flow of money which in turn allows illicit transactions to occur outside of the regulatory perimeter”, — explained Assistant United States Attorney Puneet V. Kakkar of the Organized Crime Drug Enforcement Task Force Section. AUSA Kakkar prosecuted Tetley, receiving legal advice and assistance from Korver on this new and complex area of criminal law.
“Fundamentally, we must maintain the integrity and accessibility of the global financial system and protect it from abuse,” Thomas Ott, associate director of Enforcement Division at the Financial Crimes Enforcement Network, said: “As we continue to see technology evolve and integrate into the U.S. and global financial system, we must ensure that it does so in a way that allows for the transparency needed to protect the financial system.”
Therefore, “We should also consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies, services intended to obscure transactions on blockchains (i.e. cryptocurrency tumblers or mixers) and cryptocurrency mining pools”, — added Robert Novy — deputy assistant director of the Secret Service’s office of investigations.
With the best efforts of international law enforcement agencies being dwarfed by technological challenges related to anonymity-enhanced cryptocurrencies and growing demand for cryptocurrencies illicit use—Korver’s job will be a tough act to follow.
Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.