Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Posts Tagged ‘Money laundering’
Jun 03
2013

What Are the Feds Looking At? Bitcoin Industry, Stay Awake

On May 28, 2013, federal prosecutors unsealed an indictment charging seven men with allegedly operating an organization known as “Liberty Reserve,” which prosecutors allege was established for the sole purpose of creating an illegal digital currency that could be used to launder money. This is a case that anyone involved in businesses that rely in any way on bitcoins will definitely want to watch.

Prosecutors say that Liberty Reserve was used to aid in identity theft, computer hacking, and other illegal activities. The indictment alleged that Liberty Reserve was responsible for laundering more than $6 billion over the last seven years through 55 million transactions. The company allegedly has about one million users across the globe, including 200,000 in the United States.

The indictment comes just a few months after the Financial Crimes Enforcement Network (FinCEN), a branch of the United States Department of the Treasury, issued new guidelines stating that virtual currency exchanges should follow traditional money laundering rules. Virtual currencies, such as the well-known bitcoin, account for only a small percentage of global financial transactions, but their popularity is growing rapidly.

Like bitcoin, Liberty Reserve operated as a virtual currency exchange; however, there are some key differences between bitcoin exchanges and Liberty Reserve. Bitcoin transactions operate in a more transparent way than transactions on Liberty Reserve did. Bitcoin transactions are stored in a public ledger called a “block chain” to keep people from writing the equivalent of a bad check with bitcoins. It is that same public block chain that makes it possible to trace transactions years after they have occurred.

Earlier this month, federal authorities cracked down on Mt. Gox, the world’s largest bitcoin exchange. The basis of the crackdown on Mt. Gox was a failure to properly register as a money transmitter. There were no allegations by law enforcement that bitcoin currency itself violated state or federal law. Indeed, the Treasury Department regulations reflect that such currency is lawful, but subject to regulation.

This month’s actions by federal authorities against Mt. Gox and Liberty Reserve clearly show that law enforcement is monitoring virtual currency exchanges. Although there is no immediate reason to believe that a properly registered bitcoin exchange violates state or federal law, those companies operating virtual currency or bitcoin exchanges should be aware that law enforcement is following this trend and capable of quickly reacting to perceived violations of the law.

Apr 12
2013

Are Investors Lining Up Behind Another and Better Bitcoin?

We have written previously about Bitcoin, the new form of “peer-to-peer” currency whose proponents expect to be a game-changer in the world financial markets. It’s not clear yet what Bitcoin’s ultimate destination will be, as the currency has had a lot of scrutiny, and undergone a tremendous amount of volatility, lately.

In a recent 24-hour period, the value of a single Bitcoin on the largest Bitcoin exchange, Mt. Gox, was high as $266 and as low as $105. It’s hard to sustain a business model with that incredibly high volatility factor.

However, according to TechCrunch, angel investors and venture capitalists remain “hungry to invest in the ecosystem surrounding the decentralized digital currency.” In other words, investors want to create a different, and possibly superior, Bitcoin.

That currency is known as OpenCoin, which wants to create a decentralized global currency yet prefers to stay away from the moniker of “another Bitcoin.” The company behind OpenCoin has raised an undisclosed amount of venture-capital money to expand the open-source code behind Ripple, which is a virtual currency and payment system that aims to make it easy and affordable for anyone to trade any amount in any currency.

OpenCoin hopes to clear its transactions within minutes; to handle dollars, euros, and other currencies seamlessly; and to solve BitCoin’s security issues.

Some observers think OpenCoin has a greater chance of success than Bitcoin because it has been carefully conceived rather than just springing up from the minds of a few hackers, and because it doesn’t have a history of volatility and of facilitating illegal payments.

But it’s still a very long way before any of these artificial currencies catches on. We will be watching them carefully. We hope that financial regulators, both in the United States and world-wide, realize that these currencies can do a great deal of good, and that the Treasury Department doesn’t conclude that they are nothing more than vehicles for money laundering. Treasury’s recent announcement that dealers in Bitcoin-like currencies must obey money-laundering laws seems like an acceptably moderate approach.

Mar 19
2013

Treasury Department: Bitcoin Dealers Are Regulated Under Money-Laundering Laws

Timothy Lee at Forbes magazine has reported today that the Financial Crimes Enforcement Network (FinCEN), a branch of the Treasury Department, has issued new guidelines on the legal status of Bitcoin under U.S. money laundering laws. Essentially, Bitcoin dealers have now been placed under the nation’s anti-money laundering regulations and must comply with those rules.

Lee notes that Bitcoin exchanges, which exchange Bitcoins for conventional currencies, and most Bitcoin “miners,” which process Bitcoin transactions, must now register as Money Services Businesses (MSBs) under the Treasury regulations. Ordinary users of Bitcoins need not register.

Bitcoin is a peer-to-peer network that exchanges the virtual currency in a largely unregulated environment. Lately, Bitcoins have become acceptable for a number of types of transactions, and some see them as a currency of the future that transcends national borders.

Lee argues that the Treasury action is actually not a bad thing for Bitcoin’s future.

“FinCEN is clearly trying, in its somewhat bumbling way, to squeeze a square technological peg into its round regulatory hole. Reading between the lines, FinCEN is saying that if Bitcoin-based businesses fill out some paperwork and collect some information about their customers, then they’ll be left alone,” Lee writes.

Given the existence of U.S. anti-money-laundering statutes, Lee adds, “FinCEN’s guidance is probably the best Bitcoin fans could have hoped for: it sends a clear sign that America’s anti-money laundering regulators do not consider the currency a threat and isn’t going to try to force it to change or shut down.”

We tend to agree. There needs to be a balance between enforcing the money-laundering laws (which are designed as a tool against terrorism and other serious wrongdoing) and permitting the free exchange of commodities and currency. It appears that the Administration, so far, is striking the correct balance.

Mar 03
2013

New Zealand Court Hands U.S. a Victory in Kim Dotcom Piracy Case

A year ago, we wrote about the indictment in the Eastern District of Virginia of the executives and founders of Megaupload, one of the leading file-hosting sites on the Web. The charges were copyright infringement through the facilitation of piracy of copyrighted materials, money-laundering, and conspiracy. The site was shuttered after the indictment.

The case quickly got tied up in the U.S. Justice Department’s effort to extradite Kim Dotcom, Megaupload’s chief founder, from New Zealand, where he lives. After a series of setbacks, the DOJ just won a victory before a New Zealand appeals court. The extradition hearing is set for August 2013.

The issue before the appeals court was how much information the DOJ was required to turn over to Dotcom before the hearing. One of Megaupload’s defenses is that its activities were protected by the “safe harbor” provisions of the Digital Millennium Copyright Act, which protects Internet service providers from copyright liability for the activities of people who merely use their Web sites.

Dotcom wanted the DOJ to turn over, in advance of the hearing, information that it had about possible copyright infringement on the site – in other words, a good deal of the government’s evidence. Reversing a lower court, the New Zealand appeals court held that the DOJ need not turn over much of this material at this point.

“If a suspect was entitled to demand disclosure of all relevant documents on the basis that he or she wished to challenge not the reliability of the summarised evidence but rather the inferences that the requesting state seeks to draw from it,” the court wrote, then the extradition hearing process would not work properly. Rather, the suspect is entitled to a summary of the evidence but not to the government’s entire case at this juncture.

It thus appears that Dotcom will be able to get access to the DOJ’s entire case and to mount a full defense only if he is extradited to the United States and faces a criminal trial. But in order to hold such a trial, the DOJ will need to make a prima facie case at the extradition hearing, which Dotcom will be allowed to rebut, that Dotcom is guilty of the charged offenses. The appeals court said that this hearing will only involve a “limited weighing of evidence” and that the DOJ is entitled to some deference as to its reliability.

We have said before that this is a highly dubious prosecution. We are confident that despite this setback, Dotcom will get a full chance to present his case before an impartial tribunal.

Jan 16
2013

Bitcoins: Online Currency’s Uncharted Frontier

Bitcoin – it sounds like a token you might use to play skeeball at a beachside arcade. It is actually a relatively new, virtual online “currency” being used for payments across the Internet. While some observers have noted that the Bitcoin has been utilized primarily for purchases in the Internet “underworld,” the Bitcoin actually has gained traction more recently as a legitimate payment exchange. The Bitcoin might just be the surprise of the next generation of e-commerce and its progeny, mobile commerce.

The Bitcoin originated in 2009 with the issuance of the first Bitcoins by Satoshi Nakamoto, the pseudonymous person or group of people who designed the original protocol and created the peer-to-peer network. Users connect with other users rather than with a central issuer or server. This makes the Bitcoin attractive for illegal activities – authorities can’t pounce on a central office or simply seize one organization’s assets. The Bitcoin has no central issuing bank. Prices fluctuate a great deal; this past summer one Bitcoin traded at around $10. It is estimated that the monetary base of the Bitcoin is around $110 million.

There are several advantages to Bitcoins. They are largely unregulated. Also, payments can be made anonymously, leaving a minimal or no paper trail. Unlike credit cards, merchants do not face the hassle and uncertainty of “charge backs.” However, because of its past “underground” use, the Bitcoin lacks a reputation and general acceptance by mainstream merchants. For instance, the website “Silk Road” allowed users to buy and sell heroin and other illegal drugs provided they paid for their purchases using Bitcoins. Online gambling services have utilized Bitcoins with relative success.

While the past use of the Bitcoin has been limited, the new currency is picking up steam. Just a few days ago, BitPay, a payment solutions company, announced a large investment by a group of well-known tech investors. They see the Bitcoin as the next “PayPal” offering a fast payment method without the exchange of sensitive personal information that goes along with traditional credit card payments. Investors also see the benefits for small businesses, which can much more easily take payments from overseas using Bitcoins. Today, we can use Bitcoins to buy a wide array of products and services. This website provides links where we can purchase, for instance, jewelry, electronic cigarettes, natural cosmetics, and even survival products and dry cleaning, just to name a few offerings.

Just last month, the Bitcoin gained further acceptance when the Bitcoin-Central exchange owned by Paymium announced that it is partnering with registered PSP Aqoba and Frank Bank Credit Mutuel Arkea in order to legally hold balances in payment accounts within the European regulatory framework. However, as Bitcoins have not to date been backed by a governmental entity and several users have reported losses from fraud and hacking into their computers where they stored Bitcoins, continued use and acceptance will be affected by the reliability of the payment network, as well as any attempts to regulate it.

As use of the Bitcoin expands, regulators (particularly in the United States) may seek to regulate the currency. U.S. prosecutors tend to view anonymous payments with skepticism and suspicion.

Our view is that use of the Bitcoin network has expanded in large part as a natural reaction to overly zealous authorities enforcing anti-money laundering rules and policies against banks and individuals. Parties facing onerous reporting obligations and over-the-top fines have been seeking alternative payment methods. The FBI has shown some interest in Bitcoin (in an April 2012 report the FBI expressed concern about cyber criminals using Bitcoins). Last year, a spokesman for FinCEN stated that “The anonymous transfer of significant wealth is obviously a money-laundering risk, and at some level we are aware of Bitcoin and other similar operations, and we are studying the mechanism behind Bitcoin.”

However, we think the law will take some significant time to catch up with the fast-moving network. It remains to be seen whether current U.S. law can be applied to cover Bitcoins, or if specific legislation would be needed. Further, even if U.S. authorities seek to regulate Bitcoins, actual enforcement would be difficult as there are no stationary “assets” to be seized (not even a domain name or website). Bitcoins are typically stored in a “wallet” on a user’s computer. Authorities would in many instances be required to pursue each “peer” in the peer to peer network, which does not seem terribly practicable. In the interim, Bitcoins appear to be growing in use across industries and geographic locations.

Oct 24
2011

Ninth Circuit Upholds Dramatic Upward Departure in Fraud Case

Last month, the U.S. Court of Appeals for the Ninth Circuit upheld a very large upward departure by a U.S. District Judge in Nevada of more than 17 years above the recommended range under the Sentencing Guidelines, based on conduct that the defendant was never convicted of or even charged with. 

In this highly unusual case, David Kent Fitch was convicted by a jury of nine counts of bank fraud, two counts of fraudulent use of an access device, two counts of attempted fraudulent use of an access device, two counts of laundering monetary instruments, and one count of money laundering. The guidelines range for the offenses was 41 to 51 months. The sentencing judge sentenced Fitch to 262 months. The statutory maximum for the nonviolent crimes that Fitch was convicted of is 360 months.

The sentencing judge relied on a finding that there was clear and convincing evidence that Fitch had murdered his wife and that her death was the means that he used to commit his crimes — by gaining access to her accounts and taking her credit cards and personal information. The judge viewed the alleged murder as a serious aggravating factor. However, Fitch was never even charged with the murder after being investigated as a suspect.

As the dissent pointed out, to increase a sentence by 17 years under U.S.S.G. § 5K2.1 based on a finding of premeditated murder, there needs to be clear and convincing evidence. The majority stated that there was clear and convincing evidence to support the upward departure.

The Sixth Amendment guarantees that a conviction must rest upon a jury determination that the defendant is guilty of every element of the crime with which he is charged. Once there is a conviction, judges have enormous power to find the facts that will drive the sentence up or down. The sentencing judge has the power to sentence a defendant based upon facts not found by a jury up to the statutory maximum and a defendant has no right to a jury determination of the facts that the judge deems relevant.

The Ninth Circuit sustained the sentence, stating that there was no procedural error and that the sentence was not substantively unreasonable. The court did not find the sentence to be substantively unreasonable even though it was five times the recommended range under the guidelines. Under current Supreme Court precedent, a sentencing judge can consider sentences based on the “real crime” that occurred. This determination is made by a judge alone at sentencing and is to be based upon “clear and convincing evidence,” which the judge found here even though the government never charged Fitch with the murder.

This enormous upward departure cannot be justified. The government investigated Fitch for the conduct that the judge used to give him an additional 17 years in prison for, but did not even find enough evidence to charge him. Yet, the Ninth Circuit was able to find that the sentence should be sustained largely because it did not exceed the very high statutory maximum sentence of 30 years. This case could present the Supreme Court with the opportunity to define the meaning of substantive unreasonableness in sentencing.

Aug 13
2010

Lesson From Ex-Congressman’s Plight: Follow Rules, Come Clean

Federal prosecutors often take very seriously the prohibitions on illegal lobbying and on withholding the truth from the FBI. That’s one of the lessons that former U.S. Rep. Mark Siljander probably learned last month when he pleaded guilty to two federal charges relating to his alleged ties to an Islamic charity claimed to have funded money to international terrorists.

When Siljander was indicted in January 2008 on charges of money laundering, obstruction of justice, and conspiracy related to his dealings with the now-defunct Islamic America Relief Agency, then based in Columbia, Mo., the news created quite a stir. The alleged involvement of a conservative former Michigan congressman with a charity suspected of having terrorist ties made headlines. Siljander faced charges of money laundering and conspiracy, among other charges.

The money laundering and conspiracy charges will now be dismissed after Siljander’s July plea to illegal lobbying and obstruction of justice.

Prosecutors say, and Siljander has acknowledged, that he received $75,000 from the charity to push for its removal from a U.S. Senate Finance Committee list of charities assisting terrorism and that the group paid him with funds obtained from the U.S. Agency for International Development for work it was supposed to have done in Africa but didn’t.

Prosecutors also say that Siljander lied to the FBI about being hired to lobby for the charity. He told investigators that the money he received was actually a donation to help him write a book about Islam and Christianity.

No terrorism charges were ever made against Siljander, and the headline-grabbing money laundering and conspiracy charges were dismissed. But he still faces up to 15 years in prison and a fine of up to $500,000 after pleading guilty.
As is often the case in white-collar crime, the lesson is to follow the rules and if you do decide, for whatever reason, to speak to authorities – tell the truth.

Without the plea deal, Siljander could have been sentenced to life in prison. Since there is no minimum sentence for either charge to which Siljander pleaded guilty, he will face a much lighter sentence, including possibly probation, but more likely two to three years.

Jun 08
2010

Judge Weighs In on DOJ ‘Side Agreement’ With Bank

In a rare occurrence, a so-called deferred prosecution agreement entered into by the U.S. Department of Justice with a target of a criminal investigation has been subject to scrutiny by a federal judge, and the result wasn’t favorable to the government.

In fact, a judicial ruling in the case of a fired Miami bank executive appears to be a signal from the bench to the department that it needs to watch what actions it takes in connection with deferred prosecution agreements. These agreements are hardly ever reviewed by judges in the normal course, so U.S. District Judge William Dimitrouleas’s opinion is particularly telling.

The judge ruled that the department will have to defend against a constitutional claim made by Sergio Masvidal, the former banker, arising from a side agreement that was part of a deferred prosecution arrangement.

Masvidal was ousted as chairman of American Express Bank International in the wake of a 2007 deferred prosecution agreement entered into by the bank and the Justice Department, which had been looking into compliance by banks with laws aimed at finding bank accounts connected with drug trafficking. The bank paid $65 million as part of the settlement – and the day before the agreement, it entered into a side agreement with the department, in the form of a letter, not filed in court, that required Masvidal’s dismissal after the bank was sold.

Masvidal later found out about what he called a “secret letter” and claimed that it had destroyed his career in the banking industry and that he had had no chance to respond to it. He sued the Justice Department, seeking an apology that would remove the stigma caused by the letter. The department told his attorneys that it had voided and withdrawn the letter, but it stopped short of a formal apology.

Judge Dimitrouleas ruled that Masvidal had a right to proceed with his case against the department because he had been denied his Fifth Amendment right to due process. The case is continuing.

No doubt, the Justice Department will settle this case rather than allow its policies and procedures in deferred prosecution agreements to be aired in a public trial. And no doubt, it will eventually give Masvidal the formal apology that he wants. But in the meantime, an apparently innocent man’s career has been put into jeopardy, and a judge has weighed in on a dubious prosecutorial technique.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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