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The U.S. Govt is aggressively prosecuting crypto cases – how to defend yourself

Thinking Beyond The Government Playbook - how crypto holders can proactively plan for and respond to aggressive U.S. Government enforcement tactics. By Benjamin J.A. Sauter; Evelyn B. Sheehan; and Amanda Tuminelli; Kobre & Kim LLP

U.S. prosecutors are becoming increasingly aggressive in their attempts to police digital asset markets — and more creative in their ability to follow through. Recent events highlight the ability of prosecutors not only to collect actionable intelligence about digital assets, but also to use that information to achieve law enforcement objectives across international borders.

More still, prosecutors have developed a playbook of aggressive tactics that they routinely deploy to flip the evidentiary burdens of proof against individuals with substantial digital-asset wealth, as well as to restrain their liberty and assets before a trial ever takes place.

By recognizing these tactics and acting proactively, individuals with substantial digital-asset wealth can reduce the real and present danger of this existential crisis in which they are forced to either effectively prove their own innocence or else forfeit their assets while awaiting trial in a jail cell.

The U.S. Government Is Poised To Unleash A Wave Of Aggressive Prosecutions In The Digital Asset Space

In a move that portends a new wave of enforcement activity, the U.S. tax authority (the IRS) recently served two “John Doe” summonses on major cryptocurrency exchanges Kraken and Poloniex, building on the highly successful and lucrative use of that tactic against Coinbase in 2016. These subpoenas, which are specifically intended to identify users who “may have failed to comply with internal revenue laws,” will provide prosecutors and tax collectors with the identities and account information of all U.S. individuals who transacted in at least the equivalent of US $20,000 on those exchanges in any year from 2016 to 2020.

In other words, the U.S. government is poised to receive a trove of new information about U.S. digital asset holders and their wallet addresses, which it will then use to probe compliance with tax laws and forensically connect those individuals to other activities of interest to law enforcement.

These actions are in line with the Biden administration’s increased scrutiny of cryptocurrencies, including recent proposed rules that would require individuals to report any cryptocurrency transactions with a fair market value of US $10,000 or more to the IRS. And an increase in attention from the IRS will likely result in an increase in criminal prosecutions by the DOJ for allegations of tax fraud, tax evasion and money laundering.

U.S. Authorities Have Global Reach

The government’s ability to trace digital assets is not limited to U.S. persons. The two cases below show enforcers’ ability and willingness to leverage sophisticated blockchain forensics tools and increased international cooperation to devastating effect across borders, leaving the odds extremely stacked against those within their crosshairs.

For example, in April 2021, Roman Sterlingov was arrested while flying through Los Angeles, California, for operating Bitcoin mixer Bitcoin Fog, which the DOJ has called the longest-running Bitcoin money laundering conspiracy on the darknet.
Roman Sterlingov warrantBitcoin Fog founder Roman Sterlingov remains in pretrial detention.

The DOJ worked with Europol and various arms of the Swedish government to investigate Sterlingov, a Russian-Swedish national, by analyzing records from cryptocurrency exchanges, email providers and financial institutions, as well as analyzing bitcoin transactions on the blockchain. Sterlingov currently remains in pretrial detention.

The government has also been showcasing its ability to track and recover digital assets connected to alleged crimes. In June 2021, the U.S. government successfully clawed back millions of dollars worth of digital assets paid in ransom following the Colonial Pipeline hack. In November 2020, the DOJ seized over US $1 billion worth of digital assets connected to the Silk Road. That same month, they also seized US $24 million worth of digital assets located in the US and owned or controlled by Brazilian Marcos Antonio Fagundes, at the request of the Brazilian government.

The “substitute assets” provisions of the US forfeiture statutes are yet another tool frequently leveraged by the DOJ in fraud cases involving digital assets. These provisions allow the government to go after assets that are completely unrelated to the charged offenses to compensate for the value of the crime charged – another example of the ways the government may widen the scope of their enforcement and asset recovery efforts.

U.S. Prosecutors Are Following An Aggressive Playbook In Digital Asset Cases

The prosecution’s playbook in cases involving digital assets raises mission-critical issues long before the ultimate question of guilt or innocence is ever decided at trial. The playbook has at least three key components designed to methodically prejudice the defense and generate leverage in favor of the prosecution: (1) the “dawn raid,” (2) pretrial detention, and (3) pre-trial asset seizure and forfeiture.

While these tactics are not necessarily unique to the digital asset context, prosecutors are deploying them in unique ways to exert pressure on defendants with digital-asset wealth. If potential defendants are not prepared, they can quickly find themselves fighting back with one, if not two, arms tied behind their backs.

First, unlike in many white-collar cases where prosecutors notify executives of an ongoing investigation and give them an opportunity to surrender voluntarily, prosecutors in digital asset cases often choose to conduct “dawn raids,” arresting and interrogating suspects and sweeping their homes for evidence in an unannounced, coordinated strike.

In these circumstances, a defendant may be arrested, detained, and deprived of critical property and business records before he or she has any idea what is happening. The loss of access to business records can be extremely prejudicial to the defense – and the government’s proclivity to conduct these dawn raids suggests that they are well aware of this fact. Man in jailSignificant pre-trial jail time is likely for defendants in crypto arrests.

Second, after making arrests in a dawn raid, prosecutors often try to keep defendants detained pending trial (often for years!) on a “flight risk” argument: that digital assets can be accessed from anywhere in the world and are therefore easily used to flee prosecution.

For this reason, defendants with substantial or even moderate digital asset wealth face unique challenges when seeking bail. Because digital assets are pseudo-anonymous and difficult to trace, prosecutors will often speculate that a defendant might have access to unknown amounts of digital assets as a reason why the court should conclude that the defendant poses a serious risk of flight and detain them pending trial.

In effect, prosecutors try to shift the burden to defendants to prove a negative: that they do not have access to significant digital wealth and, in any event, would not use it to flee. Among other things, this tactic presents defendants with a Hobson’s choice: forego their right to remain silent, make full disclosure of their digital assets, and voluntarily restrict their ability to access those assets—or else remain locked up pending trial in spite of their entitlement to a presumption of innocence.

What is more, having been deprived of their property and records during the dawn raid, defendants often find it difficult, if not outright impossible, to make the full financial disclosures required of them because they no longer have access to the relevant information as they sit in pretrial detention.

Finally, after seizing the defendant’s records during the dawn raid and then leveraging the extreme pressures of the bail process to force additional disclosures, prosecutors will then further tighten the screws by seizing assets that are supposedly related, sometimes even tangentially, to the alleged but still unproven crime. This can include not only directing exchanges or other service providers to surrender the defendant’s digital assets, but also using private keys or seed phrases confiscated during the dawn raid to move the defendant’s digital assets into government-controlled wallets.

Once again, the process for regaining these assets can practically require the defendant to forego their right to remain silent and shoulder the burden of proving that the assets are unconnected to the alleged crime, even in situations where the defendant needs the seized assets for their constitutional right to counsel of choice.

The February 2020 arrest of Larry Harmon on money laundering conspiracy charges provides a clear example of the government’s playbook at work. Harmon was a U.S. developer who created the Bitcoin mixer Helix, which the indictment referred to as a “money transmitting and money laundering business.”

Harmon’s assets were seized, and he was ordered detained in advance of trial based on the government’s argument that Harmon was a significant flight risk because of his digital currency holdings, despite Harmon’s disclosures that all of his wallets were previously seized when the government searched his residence in Belize.

Strategies for Fighting Back

Effectively countering the government’s playbook in digital-asset cases requires a multi-pronged and proactive defense strategy. Indeed, the playbook depends on defendants being unprepared and therefore susceptible to the information disparity generated by the dawn-raid seizures.

For companies and individuals concerned about a potential government investigation, the first step is often to proactively undertake a “clean funds” analysis of their assets, where forensic and legal experts assemble and analyze key evidence that the client’s assets were obtained through legitimate means. With this picture painted in advance of a dawn raid, potential defendants can rest assured that they (and their counsel or trusted custodian) will have the information they need to present a viable bail application, secure their counsel of choice, and defend against asset seizure or forfeiture attempts. Without these advance measures, once the dawn raid has taken place, the necessary information may remain out of reach until it is too late.

Defendants can also focus on properly shifting the burden of proof back onto the government while fighting for pretrial release. Aside from waiting for trial in the comfort of one’s home, avoiding pretrial detention means that defendants can more easily prepare their defense, work with their counsel, and gather and analyze exonerating documents.

Fortunately for defendants with digital assets, prosecutors cannot merely point out that such assets might exist, but also must prove that a defendant would likely use those assets to flee. Individuals can proactively work with counsel to develop the record that they are not a flight risk — such as by de-emphasizing ties to foreign countries, highlighting personal ties to the U.S., and assembling key financial disclosures — so that they have the information for an effective bail package at hand when necessary. Again, individuals who are caught off guard by a dawn raid may have a difficult time assembling the necessary records, which can mean many months or more waiting in a jail cell.

In some cases, a forfeiture action can present the opportunity for a defendant to turn the tables and seek evidence from the government. In the U.S., prosecutors must prove that the assets they seize are related to the underlying alleged criminal conduct, particularly if the defendant needs frozen or seized funds for counsel. This means that defendants may be able to demand that prosecutors produce evidence that supports the relationship between assets and alleged criminal conduct.

If they do not do so, defendants can be heard by a judge on these issues and potentially get their assets unfrozen. By putting pressure on the government to prove the connection between the alleged conduct and the seized assets, defendants not only minimize how much of their property can be frozen but may also obtain valuable information about the government’s underlying case, which can be used to defend the underlying charge. Again, having a clean funds analysis at hand will help rebut any speculative connections the government might try to make.

Conclusion: Fighting on Multiple Fronts Requires Skilled Counsel

With U.S. prosecutors adopting an aggressive, multi-faceted approach towards enforcement against cryptocurrency market players, companies and individuals who are concerned that they may be the target of a government investigation should prepare to mount a creative defense that meets the government on every front. That means hiring skilled counsel who understands not just criminal defense and trial strategy, but also the complex technical issues raised by digital asset holdings, including blockchain forensics, and asset forfeiture procedures.

About the Authors

Benjamin J.A. Sauter aggressively defends clients in the cryptocurrency and commodity derivatives industries against high-stakes government enforcement actions. Clients, ranging from major cryptocurrency exchanges to leading proprietary trading firms to company founders and executives, turn to Mr. Sauter for creative defense strategies when government investigations have festered or escalated and they are ready to adopt a more aggressive, trial-ready stance.

Mr. Sauter has represented many of the most important companies and individuals in this space in many of the most important enforcement matters over the last several years.

Evelyn B. Sheehan focuses her practice on advising high-net-worth individuals, institutional clients and their executives in cross-border investigations, government enforcement actions and related asset forfeiture matters. She counsels clients in global asset tracing investigations and recovery efforts, including of cryptocurrency, in which she leads offensive asset forfeiture actions in aid of civil claim monetization.

In addition, Ms. Sheehan regularly represents high-net-worth individuals confronting U.S. Department of Justice (DOJ) investigations and prosecutions in successfully defending against asset freezes and seizures, including of digital assets. She also counsels claimants and insurers in the cryptocurrency industry in securing restitution awards from large government forfeiture recoveries.

Amanda Tuminelli aggressively defends institutional clients and high-net-worth individuals against high-stakes criminal and regulatory investigations and enforcement actions. She also advises and defends clients in the digital currency industry with particular focus on investigations relating to fraud and other allegations of misconduct.


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