FinCEN Cracks Down on Suspected Money Laundering

Arrests related to Money Services Businesses (MSBs) not complying with Anti-Money Laundering procedures are a familiar topic in the Digital Currency industry. The former CEO and Compliance Officer of the Bitcoin Exchange BitInstant, Charlie Shrem, pled guilty late last year to transmitting $1 million inBitcoin connected with the Silk Road.

“Charlie Shrem knowingly facilitated the purchase and use of Bitcoins by others to buy illegal drugs on the Silk Road site. He willfully abdicated his duties as compliance officer of BitInstant, putting illegal profit ahead of legal and ethical responsibility. Now Shrem has been made to answer for his crimes,”
— – Preet Bharara, the United States Attorney for the Southern District of New York.

Shrem was sentenced to two years in prison, three years of supervised release and ordered to forfeit $950,000. In imposing the sentence, Judge Rakoff explained, “There’s no question that Mr. Shrem, over a period of many months, was knowingly, willfully, and to some extent excitedly, even passionately involved in activity that he knew was a serious violation of the law and that was promoting the evil business of trafficking in drugs.”

These results were not enough to sway Coin.mx Founders Anthony R. Murgio, 31, from West Palm Beach and Yuri Lebedev, 37, from Jacksonville who were arrested on the 21st July. The two Florida men are facing charges for operating an unlicensed money transmitting business.

According to a press release from the FBI, the men in question have been operating the exchange with intent to launder money.

“Since at least late 2014, Murgio, Lebedev, and their co-conspirators have knowingly operated Coin.mx, a bitcoin exchange service, in violation of federal anti-money laundering laws and regulations, including those requiring money services businesses like Coin.mx to meet registration and reporting requirements …”
— – Press Release

In the United States it is required that any money services business must register with the Department of Treasury with few exceptions.

“Virtual currency businesses (VCB) may also be MSBs requiring registration. Note that failure to register when required to do so or obtain necessary state licensed, can lead to jail time. ”
— – Money Transmitter blogspot

To become a registered MSB, it isn’t restricted to where your business is located, but where you conduct your business. It is necessary at federal level and state level, and the costs involved are hefty. The federal registration requires companies to maintain due diligence on their customers and to assign a compliance officer. Becoming compliant in every state in the USA costs anywhere between $5 million and $10 million and allegedly takes a year at the very least.

According to a signed complaint which has now been unsealed, a search warrant was granted to monitor the emails of Murgio. Coin.mx did not register as an MSB and knowingly operated their business under another company name to avoid detection. “MURGIO, LEBEDEV, and their co-conspirators engaged in substantial efforts to evade detection of their scheme by operating through a phony front-company, “Collectables Club,” and maintaining a corresponding phony “Collectables Club” website. In doing so, they sought to trick the major financial institutions through which they operated into believing that their unlawful Bitcoin exchange business was simply a members-only association of individuals who discussed, bought, and sold collectable items, such as sports memorabilia,” stated the FBI Press Release

In addition to these allegations, the report discussed the connection between Coin.mx and a specific type of ransomware ‘Cryptowall’. When a computer becomes infected, large quantities of the user’s files become encrypted on the Victim’s computer server, rendering them inaccessible. The text provided directs the victim to a site which gives instructions on how to pay the ransom in Bitcoin, and Coin.mx is one of the listed sites.

“From reviewing communications from Coin.mx employees to ANTHONY MURGIO, the defendant, which were recovered from MURGIOS email acccount, I learned that MURGIO and Coin.mx knowingly processed payments from ransomware victims from at least in or about April 2014, through at least in or about June 2014,”
— – Joel Decapua Special Agent of the Federal Bureau of Investigation

When an MSB is faced with such issues, it is their responsibility to file a Suspicious Activity Report (SAR) with FinCEN. This accusation, is similar to which Shrem plead guilty to and could suffer similar consequences.

In the complaint filed at the New York federal court, the prosecutors allege that the company Coin.mx has laundered $1.8 million in Bitcoin since 2013. “In addition, in the course of the scheme, MURGIO transferred hundreds of thousands of dollars to bank accounts in Cyprus, Hong Kong, and Eastern Europe, and received hundreds of thousands of dollars from bank accounts in Cyprus and the British Virgin Islands, in furtherance of the operations of his unlawful business,” said the press release.

Legacy banking institutions are also coming under fire and are rife with AML issues. FinCEN takes the matters very seriously, but the results appear to be slightly different. Recently, FBME Bank joined Banco Delta Asia, a Macau-based bank used by North Korea, and the Commercial Bank of Syria as the only financial institutions currently subject to a final rule under the Patriot Act identifying them as representing a primary money laundering concern. Myanmar as a country has also been identified as a money laundering concern.

FinCEN issued a notice on July 17, 2014, that it found FBME (formerly the Federal Bank of the Middle-East) to be of primary money laundering concern under Section 311 of the USA PATRIOT Act. A related notice of proposed rule-making (NPRM) was issued in which FinCEN proposed the imposition of special measure five against FBME.

“Under special measure 5, a financial institution may be prohibited from opening or maintaining a correspondent account or a payable-through account,”
— –  US Commodity Futures Trading Commission

FinCEN is imposing special measure five against FBME for the following reasons:

1. FBME is used by its customers to facilitate money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasion, and other illicit activity internationally and through the U.S. financial system;
2. FBME has systemic failures in its anti-money laundering controls that attract high-risk shell companies, that is, companies formed for the sole purpose of holding property or funds and that do not engage in any legitimate business activity;
3. FBME performs a significant volume of transactions and activities that have little or no transparency and often no apparent legitimate business purpose.

FBME have rejected the Final Rule on their website, saying that it fails to give appropriate weight to the evidence of forensic investigations and reports, and FBME state that the allegations are unwarranted.

“FBME Limited states that it is confident that the compliance of FBME Bank’s systems, personnel and performance is consistent with the highest standards of international anti-money laundering (AML) controls and know-your-customer (KYC) practices, and considers the position taken by FinCEN to be disproportionate to the underlying facts, the conduct of FBME Bank and the interests of depositors and counterparties”
— – FBME Ltd

FinCEN is undeterred, “The finalization of this rule is significant,” said Jennifer Shasky Calvery FinCEN Director, “because it demonstrates that the United States will not allow a compromised foreign bank to send dirty funds through the U.S. financial system.”

Regulation and compliance are an ongoing narrative in the bitcoin space. Coming under the scrutiny of FinCEN comes with high risks, and those that choose to take this route must understand the consequences, particularly as history shows potential to repeat itself.