“BSA/AML Considerations for Digital and Virtual Currencies”


Published on

Presented at ACI's National Forum on Virtual & Digital Currency and Payment Systems

Published in: Law, Economy & Finance, Technology
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

“BSA/AML Considerations for Digital and Virtual Currencies”

  1. 1. #ACICurrency Virtual&DigitalCurrencyandPaymentSystems John Beccia General Counsel and CCO Circle Internet Financial, Inc. “BSA/AML Considerations for Digital and Virtual Currencies” Constance Choi Samuel Rosenthal Partner Squire Patton Boggs June 24-25, 2014 Tweeting about this conference? Azba Habib Deputy General Counsel Payward, Inc. (Kraken)
  2. 2. #ACICurrency Evolution of Virtual Currency
  3. 3. #ACICurrency High LevelAnalysisforVirtualCurrencyCompanies • Key Questions • Am I an MSB under the BSA? • 7 categories including money transmitter • Do I fall under any exemptions? • 6 exemptions under the BSA • If so, what do I need to do to comply with my AML obligations? “Digital currencies are just a financial service and those who deal in them are a financial institution. Any financial institution and any financial service could potentially pose an AML threat. It depends on whether folks have the controls in place to deal with those money laundering threats and that they are meeting their AML reporting obligations.” – Jennifer Shasky Calvary, FinCEN Director
  4. 4. #ACICurrency Regulatory Landscape • Regulators’ focus is the on and off ramps for Bitcoin to fiat exchange • Concern is use of digital currency for money laundering and terrorist financing due to anonymous nature and inability to understand counterparties • Law enforcement is blind to Bitcoin benefits (their mission is to follow the money and catch criminals no matter what tool is used)
  5. 5. #ACICurrency Regulatory Landscape • FinCEN guidance on March 18, 2013 • Interpretive guidance – not a new “rule-making” • Focused on transfers to/from fiat into digital currency • Defined administrators and exchangers (“users” are exempt) • More guidance was issued in January 2014 relating to miners and investors • Open issues and additional guidance: • Travel Rule • Guidance/regulations from OFAC, SEC, CFPB, CFTC, &FFIEC • State money transmitter statutes/regulations • International regulations
  6. 6. #ACICurrency A Whole New Vernacular • “Real currency” - the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance. • “Virtual currency” - a medium of exchange that operates like currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. • “Convertible virtual currency” - a type of virtual currency that either has an equivalent value in real currency, or acts as a substitute for real currency. • “User” - A user is a person that obtains virtual currency to purchase goods or services. • “Exchanger” - An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. • “Administrator” - A person engaged as a business in issuing a virtual currency and who has authority to redeem such virtual currency, i.e. release and withdraw from circulation. • “Centralized virtual currency” - A convertible virtual currency having a centralized repository. • “Decentralized virtual currency” - A convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.
  7. 7. #ACICurrency Compliance Issues Speaker: John A. Beccia General Counsel and Chief Compliance Officer Circle Internet Financial, Inc.
  8. 8. #ACICurrency AML Compliance • First determine if you are a regulated entity or whether you are exempt • Understand where your customer is located and that you are in compliance with laws of those jurisdictions • Firms that are treated as money transmitters must comply with FinCEN guidance and relevant state money transmitter laws • Companies must have an AML program that includes: • Know Your Customer (KYC) procedures • Transaction monitoring • Regulatory reporting (SARS) • Uncertain guidelines make it difficult to operate in certain jurisdictions, evaluate new products and services and form strategic partnerships
  9. 9. #ACICurrency Compliance Program Checklist  Establish a strong tone at the top and commitment to compliance  Appoint a compliance officer to ensure that you have adequate resources  Prepare risk assessments for customers, products and services  Develop policies and procedures that outline roles and responsibilities  Conduct training and communicate frequently about risks  Establish regulatory change management program to track new regulations (coordinate with industry groups such as DATA and Bitcoin Foundation)  Audit programs at least annually (further testing may be needed)  Create procedures for exceptions and escalating risk incidents  Develop relationships with regulators, prepare for examinations.  Provide ongoing reports to management, boards, and investors.
  10. 10. #ACICurrency Four Pillars of an AML Program AML Officer Policies, Procedures and Controls Independent Audit Training
  12. 12. #ACICurrency Red Flags • Customers provide insufficient, incomplete or suspicious information that can not be verified • Customers or transactions in high risks geographic regions • Certain patterns of transaction activity (volumes, velocity, structure, etc.) • Attempts for single user to purchase/sell digital currency from numerous different bank accounts • Anything that doesn’t pass the smell test
  13. 13. #ACICurrency Directors and Officers: When Are They at Risk for AML/BSA Sanctions? Speaker: Samuel Rosenthal Squire Patton Boggs, LLP 2550 M. St., N.W. Washington, D.C. 20037 202-457-6321
  14. 14. #ACICurrency What is the climate? •Decreasingly less Tolerance for AML/BSA Infractions •Go After Individuals Who Either Engage in Criminal Activity, or Who Could Have, But Failed to, Prevent that Activity.
  15. 15. #ACICurrency Congressional Oversight Intensifies • Senate Banking Committee hearing March 7th  Comptroller of the Currency, Hon. Thomas J. Curry  Treasury Undersecretary for Terrorism and Financial Intelligence, Hon. David Cohen  Governor, Board of the Federal Reserve, Hon. Jerome H. Powell 15June17,2014
  16. 16. #ACICurrency Chairman Tim Johnson (D – SD) • Chairman’s opening remarks: “The government depends on bank compliance programs to detect and prevent money laundering... And [as] the recent major penalty cases [show], U.S. banks failed to deal effectively with funds from non-U.S. banks or affiliates... How can we ensure uniform compliance and enforcement of U.S. and international rules?” “We should consider today the full range of remedies in cases like these including BSA injunctions from the industry [for] those individuals who violate the rules...” 16June17,2014
  17. 17. #ACICurrency ARE REGULATORS FOCUSED ONLY ON LARGE BANKS? Testimony of the Comptroller, Tom Curry: “Although many of our recent enforcement actions have involved large banks, BSA is an issue for institutions of all sizes. In fact, as large banks improve their BSA/AML programs and jettison higher risk lines of business, we are concerned that money-launderers will migrate to smaller institutions.” 17June17,2014
  18. 18. #ACICurrency SEC - Mary Jo White “Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible. That is something our enforcement division has always done and will continue to do. Companies, after all, act through their people. And when we can identify those people, settling only with the company may not be sufficient. Redress for wrongdoing must never be seen as ‘a cost of doing business’ made good by cutting a corporate check.”
  19. 19. #ACICurrency OCC -- Chairman Curry “We believe at the OCC that you need to hold CEOs and the boards of directors accountable for BSA/AML policies and procedures and their compliance program.” “we are looking at our authority under Section 8 of the FDIC Act to actually remove from office or prohibit from banking those individuals that violate BSA programs. So we are looking to try to tighten up the legal duties and authorities of individuals at banks and then to enable us to take an appropriate level at the civil, administrative level, and potentially to assist the criminal authorities.”
  20. 20. #ACICurrency Enforcement Actions outside the virtual currency context Highly Publicized Consent Orders: • JP Morgan Chase (January 2013) • Citibank (April 2012) • HSBC (October 2010) • Bank of Montreal (April 2013) 20June17,2014
  21. 21. #ACICurrency Liability and Consequences Directors, Officers, Employees = Institution Affiliated Parties (IAPs)  Formal Agreements  Cease & Desist Orders  Civil Money Penalties  Removal/Prohibition Orders  Restitution Orders for losses caused or unjust enrichment 21June17,2014
  22. 22. #ACICurrency Recent OCC Enforcement Actions • JPMC Bank, N.A., Columbus, Ohio (January 2013): Insufficient internal controls, independent testing, customer due diligence, risk assessment, and SAR processes (monitoring, investigating, and decision-making) Lack of enterprise-wide policies and procedures to ensure foreign branch suspicious activity involving customers of other bank branches was effectively communicated to other affected branch locations and AML operations staff Lack of enterprise-wide policies and procedures to ensure that, on a risk basis, customer transactions at foreign branches were assessed, aggregated, and monitored. 22June17,2014
  23. 23. #ACICurrency JPMC Bank • Failure to maintain adequate BSA compliance program, file SARs, and conduct appropriate due diligence on foreign correspondent accounts  ensure independence of AML compliance staff;  ensure clear lines of authority and responsibility for BSA/AML and OFAC compliance with respect to lines of business and corporate functions;  require new products and services be subject to high level compliance review;  ensure all customer due diligence processes are automated and accessible; and  conduct look back of certain account/transaction activity and SAR filings. 23June17,2014
  24. 24. #ACICurrency Security Bank • Five Directors & Executive Officers of Security Bank, N.A., North Lauderdale, Florida (January 2013)  2010 C&D Order - safety and soundness and BSA deficiencies, including inadequate AML program and SAR violations  Former officers and directors failed to ensure bank complied with BSA/AML requirements and failed to comply with May 2010 C&D Order  Directors approved appointment of Secretary of Board who previously had been convicted of tax evasion, a violation of 12 U.S.C.§1829  Former CEO brought high risk business to Bank knowing it was ill-equipped to monitor and control the accounts. 24June17,2014
  25. 25. #ACICurrency Security Bank • Directors & Officers of Security Bank Civil Money Penalties assessed against each director & officer between $8,500 and $20,000. Personal C&D Orders requiring each director and officer to: (i) notify any depository institution of the C&D Order prior to accepting any position (ii) notify OCC each time application is made for employment with a depository institution (iii) obtain “appropriate” BSA / AML training; and (iv) provide “appropriate” BSA / AML training for bank officers and directors within the individual’s supervision and control. 25June17,2014
  26. 26. #ACICurrency FIRST BANK OF DEL., WILMINGTON (NOV. 2012).  Bank failed to adequately oversee MSB and third party payment processor relationships and related programs (e-payments) and services.  Concurrent Civil Money Penalties of $15 million  Bank assets sold and its charter revoked by Delaware Bank Commissioner “To make money, First Bank of Delaware entered into risky lines of business and chose to disregard its [BSA] responsibilities. As a result of its failure to implement systems and controls to identify and report suspicious activities, as required by the BSA, financial predators were able to victimize consumers.” 26June17,2014
  27. 27. #ACICurrency FBD: AMLCO • AML Compliance Officer − Failed to effectively provide day to day management of BSA/AML compliance program in light of risk profile and volume of activity − No notification of Board and personnel of suspicious activity − Failure to escalate – shortcomings of monitoring system 27June17,2014
  28. 28. #ACICurrency FINRA Enforcement Actions • FINRA Rule 3310 (2002) - minimum standards for AML compliance programs for broker-dealers consistent with BSA: follows four pillars. • FINRA stepping up enforcement of AML violations:  in 2012, 49 enforcement actions against broker- dealers for AML violations  reflects a 36% increase from the 36 AML-related cases concluded in 2011 28June17,2014
  29. 29. #ACICurrency Increased Attention on Management “We believe at the OCC that you need to hold CEOs and the boards of directors accountable for BSA/AML policies and procedures and their compliance program.” “Most of the problems we find in BSA/AML programs are attributable to the following root causes: - the strength of an institution's compliance culture; - its willingness to commit sufficient resources; - the strength of its information technology and monitoring processes; and - its risk management. The health of a bank's culture starts at the top. And so it's important that senior management demonstrate a commitment to BSA/AML compliance. Employees need to know BSA compliance is a management priority and that the compliance function will receive the resources it needs to succeed, including training and first-rate information technology.” 29June17,2014
  30. 30. #ACICurrency New Enforcement Mechanism at OCC • Major Matters Supervision Review Committee  established by the Comptroller in late 2012 to review all large bank enforcement actions including BSA violations, BSA CMPs involving large banks, and all prohibitions/removals against individuals for BSA violations.  five members chaired by OCC’s Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner (currently, John C. Lyons).  other members include: the Chief of Staff; the Senior Deputy Comptrollers for Bank Supervision Policy and Community Bank and Large Bank Supervision; and the Chief Counsel. 30June17,2014
  31. 31. #ACICurrency New Guidelines Forthcoming on Corporate Governance Impacting BSA/AML Compliance “The OCC is in the process of drafting detailed guidance to banks on sound corporate governance processes... including business line accountability for BSA/AML compliance and the independence of the compliance function.” Written Testimony of the Comptroller. 31June17,2014
  32. 32. #ACICurrency Possiblenew legislationintroducedSept. 16, 2013by Rep. Waters • A clear shot across the bow of directors and officers: • (7) Without serious consequences for institutions and individuals who fail to protect financial institutions from illicit financial activity – including significant fines, banning individuals from the industry, and prison sentences for those who seek to actively evade anti- money laundering controls, financial institutions and individuals will continue to avoid compliance with U.S. anti-money laundering rules and regulations. • (8) Effective anti-money laundering programs must emphasize sound corporate governance including business line accountability and clear lines of legal responsibility for individuals, including board members and chief executive officers. 32June17,2014
  33. 33. #ACICurrency  Newlegislationwouldaddthefollowingtoexisting laws: Heaviercivilmoneypenalties. Penaltiesformerenegligence. ExecutiveBranchmustjustifylighttreatment. Clawbackofcompensationforexecutives. “Removalandprohibition”ofindividualsviolatingAMLlawsfrom operatingintheindustry. Whistleblowerprotectionsextendedtothefinancialindustry. 33June17,2014
  34. 34. #ACICurrency ‘‘(1) requiretheheadofcompliance foreachbusinesslineofsuch institutiontomakeregularreportsdirectlytotheboardofdirectorsandthe chiefexecutiveofficerofsuchinstitutionon thebusinessline’scomplianceactivities; ‘‘(2)requiretheboardtocertifyeachreportreceivedpursuant to paragraph(1); ‘‘(3) ensure adequate staffingandfundingforentitieswithinthe institutionresponsibleforcompliancewiththerequirementsofthis subtitle;and ‘‘(4)periodicallytesttheeffectivenessoftheinstitution’sprogramsfor compliancewiththerequirementsofthissubtitle.” 34June17,2014
  35. 35. #ACICurrency Overview of allegations involving digital currency • Liberty Reserve Indictment • Mt. Gox seizure warrant • Silk Road • Allegations by the Government in miscellaneous cases involving bitcoin • Future outlook
  36. 36. #ACICurrency Liberty reserve • $6 billion money laundering scheme • 7 owners and associates indicted • Liberty Reserve was incorporated in Costa Rica in 2006 • At least 200,000 customers in the U.S • Processed more than 12 million transactions annually • Not registered in the U.S. as a money-transmitting service.
  37. 37. #ACICurrency Allegations and Legal Procedures Allegations that the system was designed to attract criminals and criminal activity through the website Indictment  Money Laundering under 18 USC 1956-1957  Conspiracy to operate an unlicensed money transmitting business under 18 U.S.C. 371  “Operation of” an unlicensed money transmitter business under 18 U.S.C 1960 Restraining order  Bank Accounts Seizure order  Domain names Injunction against continued use of the webservice
  38. 38. #ACICurrency The Filings The Indictment The charging document in this case contains allegations relating to the following offenses: OFFENSES: (Ct. 1) conspiracy to commit money laundering: an illegal agreement, plus an overt act. (Ct. 2) conspiracy to operate an unlicensed money transmitter business. (Ct. 3) operation of an unlicensed money transmitter business. FORFEITURE
  39. 39. #ACICurrency Count 1: 18 U.S.C. 1956(h) One simple element: an agreement to engage in money laundering. Penalty: the same as the offense which is the object of the conspiracy. The object of the conspiracy here: • Engaging in monetary transactions using funds which were derived from unlawful activity which is prescribed by the statute: • What is a “monetary transaction?” Any of the following to the extent that it affects interstate or foreign commerce “by, through or to a financial institution.”  Deposit  Withdrawal  Transfer  Exchange • What is “criminally derived property?”  Property, constituting or derived from, proceeds obtained from a criminal offense.  “specified unlawful activity” includes crimes ranging from those involving banks or other financial institutions to drug offenses to terrorist offenses to environmental crimes.
  40. 40. #ACICurrency Allegations supporting count 1. “Criminal design of Liberty” • Didn’t use confirming identification, such as a credit card. • Once registered, could do transactions with other users of Liberty. • Rather than allowing direct funding or withdrawals, required users to go through exchangers. • Liberty recommended exchangers in countries such as Malaysia, Vietnam, Russia and Nigeria, which do not require heavy regulation.
  41. 41. #ACICurrency Count 1: “Criminal Use of Liberty” “The merchants who accepted Liberty were overwhelmingly criminal in nature.” At least one defendant admitted: Liberty was “illegal” and everyone in USA knows “LR is [a] money laundering operation that hackers use.” • Traffickers of stolen data and credit cards. • Peddlers of Ponzi schemes. • Computer hackers • Unregulated gambling. • Underground drug dealing.
  42. 42. #ACICurrency Count 1: “Criminal concealment” Couldn’t get a license in C.R., and so created a portal that involved use of “fake data.” After FinCEN Notice, Defendants falsely stated to C.R. authorities that it had been sold, when in fact it was operating underground using shell companies. Began transferring funds to other accounts in different countries.
  43. 43. #ACICurrency Count2: Conspiracytooperatean unlicensedmoney transmitterbusiness No allegation that defendants agreed to use unlicensed money transmitter businesses; but rather: 1. LR was unlicensed. 2. Used money transmitters in other jurisdictions who in fact were unlicensed. 3. From Nov. 29, 2011 to Dec. 6, 2011, caused $13.5 million in accounts in C.R. to be transferred to a shell company in Cyprus.
  44. 44. #ACICurrency Count 3: operation of an unlicensed money transmitter business LR was the unlicensed money transmitter business. Unclear what money transfers form the basis for count, although clear that substantial wire transfers took place: • $13.5 mill. From C.R. to Cyprus in November-December, 2011.
  45. 45. #ACICurrency Forfeiture allegations Criminal Forfeiture: • Subject to proof beyond a reasonable doubt standard. • Requires evidence of intent. • Need not await separate proceeding (as in civil forfeiture), but can be resolved at same trial as criminal case.
  46. 46. #ACICurrency Liberty reserve - proliferation • Liberty Reserve required only email address to open an account • Laundered company and customer money through shell companies in Costa Rica, Cyprus, Australia, China, Hong Kong, Morocco, Russia amongst others • 7 exchangers owned/administrators by the principals, also indicted • 35 other exchanger website, domains now seized (civil forfeiture) • Exchangers providing money transmission services to LR by taking from US persons, since LR did not have any funding option connected to a financial instrument of any kind
  47. 47. #ACICurrency Liberty reserve – actions taken • Patriot Act, Section 311 - Special Measures  Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern • US issued 30 requests pursuant to Mutual Legal Assistance Treaties (MLAT)  Costa Rica, Netherlands, Cyprus, Australia, Canada, China, Hong Kong, Morocco, Spain, Switzerland, Sweden, Norway, Luxembourg and Russia.
  48. 48. #ACICurrency Mt. Gox seizure • Department of Homeland Security seizure warrant – Unlicensed Money Transmitter, Not registered with FINCEN • @ Dwolla , Mutum Sigillum LLC, c/o Mt.Gox(USA) , with Veridian Credit Union • 3 days before Bitcoin 2013 conference*
  49. 49. #ACICurrency MT. Gox – seizure warrant (D. Md. 2013) “A company called ‘Mt. Gox,’ is the world's largest bitcoin exchange, and it operates out of Tokyo, Japan. Mt. Gox has a subsidiary company known as “’Mutum Sigillum LLC.’" “An online payment processor, known as Dwolla, is located in Iowa. Bank records show a number of deposits to the Mutum Sigillum account at Wells Fargo originating from international wires sent from Sumitomo Mitsui Bank in Japan. The wires indicate that the transfer is in the name of Mt. Gox Company Ltd. for the benefit of the Mutum Sigillum LLC account7657841313.” “The funds being sent to Dwolla are those of Mt. Gox customers that withdraw said funds from Mt. Gox and direct their transfer to Dwolla.”
  50. 50. #ACICurrency MT. Gox (cont’d) A Confidential Informant (CI-1), who resides and banks in Maryland “establish[ed] a new account, while in Maryland, with both Mt. Gox and Dwolla. After funding his Mt. Gox account with U.S. funds, he exchanged the currency in his Dwolla account for bitcoins. During the past six months, CI-1 exchanged the bitcoins back into U.S. dollars, which he directed Mt. Gox to transfer to Dwolla on his behalf. The funds were then credited to his Dwolla account.” “According to bank records, this transfer was completed through the subsidiary, Mutum Sigillum LLC. This demonstrates that Mutum Sigillum LLC is engaged in a money transmitting business but is not registered as required with FinCEN.”
  51. 51. #ACICurrency US v. Ulbricht (SDNY 2013) •Four counts: • Ct. 1: conspiracy to engage in narcotics trafficking. • Ct. 2: CCE • Ct. 3: Computer Hacking conspiracy • Ct. 4: Money laundering conspiracy • Forfeiture of any profits or proceeds of illegal activity.
  52. 52. #ACICurrency Count 1 (narcotics conspiracy) •“Dread Pirate Roberts”: • Operated website in which thousands of drug dealers operated. • Contracted for a Silk Road user to hire a hit man to kill another user who was threatening to expose users on Silk Road. • Conspired to possess drugs; • Used a “communication facility” to further drug trafficking;
  53. 53. #ACICurrency Count 2 (CCE) •Count 1, but with 5 other persons with whom the defendant occupied a position as an “organizer” and supervisor” and •Obtained substantial income from the operations.
  54. 54. #ACICurrency Count 3 (computer hacking) •Silk Road provided a platform for the purchase and sale of malicious software: • Password theft; keyloggers; remote access tools.
  55. 55. #ACICurrency Count 4 (money laundering) • Used bitcoin-based payment system to disguise (l) transaction participants and (2) their locations. • Relied on theory that the defendant used bit-coin to engage in transactions involving illegal activity – namely narcotics trafficking. • Possible defense: virtual currency does not involve a “monetary instrument” within the meaning of the money laundering statutes. • IRS 2014-21. “Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.”
  56. 56. #ACICurrency US v. FAIELLA AND SHREM •4 COUNTS: • Ct 1: OPERATING AN UNLICENSED MONEY TRANSMITTING BUSINESS (Faiella) • Ct. 2: OPERATING AN UNLICENSED MONEY TRANSMITTING BUSINESS (Shrem) • Ct. 3: Money Laundering Conspiracy • Ct. 4: Failure to file a Suspicious Activity Report • Forfeiture
  57. 57. #ACICurrency Miscellaneous cases involving bitcoin United States v. Michael Mancil Brown (Nashville, Tenn. 6/2013): Extortion and wire fraud scheme involving former presidential candidate Mitt Romney’s tax returns. Brown devised a scheme to defraud Romney, PWC and others by falsely claiming that he had gained access to the PWC internal computer network and had stolen tax documents for Romney and his wife, Ann D. Romney, for tax years prior to 2010. Money to have been paid through a bitcoin account.
  58. 58. #ACICurrency SEC v. Shavers (E.D. Tex. 2013) • Shavers, operating under the Internet name “pirateat40,” offered and sold BTCST investments over the Internet, raising more than 700,000 BTC in principal investments from BTCST investors, or more than $4.5 million based on the daily average price of BTC when the BTCST investors purchased their BTCST investments. 11. In the November 3, 2011 solicitation on the Bitcoin Forum, Shavers wrote that he was in the business of “selling BTC to a group of local people” and offered investors up to 1% interest daily “until either you withdraw the funds or my local dealings dry up and I can no longer be profitable.” 14. On or about November 22, 2011, in a post on the Bitcoin Forum, Shavers wrote: “As with any movements in the market up or down I have enough order activity going on that my risk is very limited. In most cases the coins go uncovered less than a few hours, I have yet to come close to taking a loss on any deal. With that said, in the event there was a huge change in the market and I needed to personally cover the difference I am more than willing to do so.” • “[r]isk is almost zero”
  59. 59. #ACICurrency Bitcoin–fbiintelligenceassessment4/24/12) • “Bitcoin Virtual Currency, Unique Features Present Distinct Challenges for Deterring Illicit Activity” Medium level of confidence that criminals will use this as forms of payment given that exchange rate has risen sharply  Low level of confidence malicious actors will exploit Bitcoin  High level of confidence Bitcoin can be target of malware, botnets, etc.  Bitcoin May be used as a means to move or steal funds and make “donations” to illicit groups
  60. 60. #ACICurrency • The Problem: • Without a centralized authority, law enforcement faces difficulties detecting suspicious activity, identifying users, and obtaining transaction records – problems that might attract malicious actors to Bitcoin. Bitcoin might also logically attract money launderers and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers. • The Solution: • “the FBI assesses with medium confidence that law enforcement can identify, or discover more information about malicious actors if the actors convert their bitcoins into a fiat currency. Third-party bitcoin services may require customers to submit valid identification or bank information to complete transactions. Furthermore, any third-party service that qualifies as a money transmitter must register as a money services business with the Financial Crimes Enforcement Network (FinCEN) and implement an anti-money laundering program.” FBI Assessment (cont’d)
  61. 61. #ACICurrency Safeguard measures • Recognize the need for a Compliance/AML program (primarily a CDD process that makes sense while staying true to frictionless nature of the payment system) • Need legal counsel, • Banks and other financial institutions must be informed as to the business model. • Avoid conduct giving rise to claims that the system was marketed or pandered to criminals. • The most drastic response will result from conduct giving rise to claims that the defendant acted “knowingly” or with “reckless disregard.”
  62. 62. #ACICurrency 62June17,2014 Samuel Rosenthal Squire Patton Boggs, LLP 2550 M. St., N.W. Washington, D.C. 20036 (202) 457-6321