On March 18, 2013, the Financial Crimes Enforcement Network (FinCEN) issued guidance that explained that exchangers and administrators of convertible virtual currency (CVC) are considered money transmitters under the Bank Secrecy Act (BSA). Under the BSA, a money transmitter is required to develop and maintain a functional anti-money laundering (AML) compliance program and adhere to the applicable reporting and recording-keeping requirements. FinCEN further clarified its guidance in 2019 with FIN-2019-G001, which explained that entities that provide CVC anonymizing services, which are also known as “mixers” or “tumblers,” are also considered money transmitters under the BSA.
Blockchain technology allows for pseudo-anonymity for CVC users, but the shared ledger component of blockchain records transactions and users normally leave a traceable audit trail. The chain’s transaction history creates the ability to view all previous transactions and, under blockchain network protocol, changing one block requires changing all subsequent blocks in the chain. A CVC mixer or tumbler, however, is used to increase the anonymity of the source or owner of the CVC. A customer first sends their CVC to the customer’s individualized registered address with the mixer. The user’s
CVC is then mixed with hundreds of thousands of transactions and wallets until it is ultimately sent to an address the customer provides. Additionally, most CVC mixers do not collect personal data and allow customers to input a custom time delay before the CVC mixing begins. This process obscures the source of the CVC and makes it very difficult to determine the owner of the CVC and the transaction history. Bad actors generally enjoy the use of this mixing service because it prevents regulators and law enforcement from effectively identifying key information normally gathered through blockchain analysis.
FinCEN noted in FIN-2019-G001 that a money transmitter that operates in anonymity-enhanced CVCs for its own account or for the accounts of others (regardless of the frequency) is subject to the same regulatory obligations as when operating in currency, funds, or nonanonymized CVCs. “In other words, a money transmitter cannot avoid its regulatory obligations because it chooses to provide money transmission services using anonymity-enhanced CVC.”
For the first time, in October 2020, both the Department of Justice (DOJ) and FinCEN charged a crypto mixer with criminal and civil penalties.
Larry Harmon was the primary operator of U.S.-based bitcoin mixers Helix and Coin Ninja. In 2019, the DOJ charged Harmon with conspiracy to commit money laundering, operating an unlicensed money transmitting business, and conducting money transmission without a D.C. license. The DOJ found that Harmon, doing business as Helix, exchanged more than $311 million in bitcoin transactions. Most of these transactions were directly and indirectly linked with darknet marketplaces and other illicit markets where customers bought and sold illicit goods and services. Harmon actively marketed his bitcoin mixing services on the darknet and claimed Helix did not keep records of customer transactions and customers were able to delete all information after completing a transaction.
Separately, FinCEN imposed a $60 million civil money penalty against Harmon as the primary operator of Helix and Coin Ninja for failure to file as a money transmitter, as required by the BSA. This civil money penalty was imposed less than 18 months after FinCEN released guidance FIN-2019-G001, which explained that bitcoin mixing services are considered money transmitters under the BSA. In the assessment of civil money penalty, FinCEN stated it has the authority to impose a separate penalty for each violation of the BSA and determined the maximum penalty for this case was more than $209 million.
The DOJ criminal indictment and FinCEN civil monetary penalty are unprecedented in the convertible virtual currency market space. It can be perceived as a sign that regulators are catching up to the constantly evolving products and services and will continue to enforce actions against noncompliant entities. Digital assets market participants, especially money transmitters, can likely prevent regulatory scrutiny and enforcement actions by developing and maintaining effective BSA/AML compliance programs. Digital asset market participants that fall under FinCEN’s purview as money transmitters, or under state licensing requirements, should check their registration status, ensure compliance with all licensing requirements, and review their BSA/AML program to ensure the minimum regulatory requirements are met.
Guidehouse’s Global Investigations and Compliance practice has the expertise and experience to assist digital assets market participants with reviewing regulatory obligations and establishing BSA/AML and sanctions compliance programs. This extensive experience includes assisting digital asset market participants and money transmitters with BitLicense requirements and developing policies, procedures, and internal controls. Guidehouse’s team of experts includes former compliance officers at major financial institutions, regulators, prosecutors, and law enforcement officers in the U.S. and elsewhere. We combine that experience with years of BSA/AML and Office of Foreign Assets Control consulting knowledge and strong data analytics and information skills to develop, assess, enhance and implement compliance programs to help digital assets market participants effectively respond to regulatory inquiries and navigate compliance concerns.
Additional author: Jonathan Murray.