Treasury working closely with the IRS for examination
Some surprising facts regarding the state of the A cryptocurrency (or crypto currency) is a digital asset des... More environment recently came from the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Speaking in August 2018 at the Chicago-Kent Block (Legal) Tech Conference, FinCEN’s Director, Kenneth Blanco, shed light on the agency’s approach to virtual currency and financial innovation. He also touched on some key problems persisting in the cryptocurrency space, which are reflected in the mushrooming number of complaints regarding suspicious transactions received by the agency. The talk also included some important revelations regarding actions FinCEN is taking in regulation and compliance designed to thwart theft, scams and the use of cryptocurrencies for nefarious purposes. These range from broader emphasis on enforcing Anti-Money Laundering (AML) rules to renewed scrutiny of anonymizing services to delegating the Bank Secrecy Act (BSA) examiner role to the IRS.
FinTech Breakthroughs or Break-ins
Blanco took a balanced approach to the new possibilities created by innovation in FinTECH vs. the dangers of criminals and other bad actors misusing crypto technologies. “Innovation in financial services can be a great thing—providing customers greater access to an array of financial services and at faster speeds than ever before,” explained Blanco. “However, as industry evolves and adopts these new technologies, we also must be cognizant that financial crime evolves right along with it, or indeed sometimes because of it, creating opportunities for criminals and bad actors, including terrorists and rogue states.”
“Many victims out there who may never be made whole again, and harm can be done with devastatingly increasing speed, breadth, and obscurity in the digital world.”
Kenneth Blanco, Director of FinCEN
He went on to describe how the laws and regulations of the BSA are designed to guard against these threats, but they can only do so much on their own. Protecting the financial system while safeguarding what he called the “incredible innovations within the FinTech space” requires compliance with existing AML and CFT (Combating the Financing of Terrorism) regulations. He also warned, “we will hold companies and individuals accountable when they disregard their obligations and allow the financial system to be exploited by criminal actors, whether in wire transfers or cryptocurrencies.”
Calls SARs “critical” to cryptocurrency investigation work
Blanco also lauded this substantial increase in SAR filings over the past few years as a great success. The agency now receives more than 1,500 SARs per month describing dubious activity involving virtual currency. These come from both money service businesses (MSBs) in the virtual currency industry itself and other financial institutions. He said that new techniques for identifying suspicious activity in virtual currency provide unique insight into certain financial crimes. “By helping us identify and investigate this illicit activity, the industry can focus on legitimate applications and innovations, and stamp out negative perceptions of virtual currency as the coinage of the dark web and bad actors,” explained Blanco.
Citing the recent BTC-e case—the agency’s first action against a foreign-located MSB and its most recent civil action involving virtual currency—and the crucial role SARs played in that investigation he went to on to say, “This information is critical to our mission of keeping our country strong, our financial system secure, and our families and communities safe from harm.”
New techniques for identifying suspicious activity in virtual currency provides unique insight into certain financial crimes.
Blanco’s remarks underscore FinCEN’s stated view that individuals and businesses involved in accepting and transmitting anything of value that substitutes for currency, including virtual currency, are considered money transmitters. Therefore, they must register with FinCEN according to rules in the BSA.
“Thus, our regulations cover both transactions where the parties are exchanging fiat and convertible virtual currency, but also to transactions from one virtual currency to another virtual currency,” explained Block. “In short, individuals and entities engaged in the business of accepting and transmitting physical currency or convertible virtual currency from one person to another or to another location are money transmitters subject to the AML/CFT requirements of the BSA and its implementing regulations.” According to FinCEN rules, this also applies to anonymizing services (commonly called “mixers” or “tumblers”). Since they accept and transmit convertible virtual currency they, therefore, have regulatory obligations under the BSA.
The sheriff is in town and deputized the IRS
Blanco underscored the need for money transmitters to understand and implement AML, for instance. In order to comply with their obligations under the BSA, virtual currency money transmitters must do three things:
1) Register with FinCEN as a money services business
2) Develop, implement and maintain an AML program designed to prevent the MSB from being used to facilitate money laundering and terrorist finance
3) Establish recordkeeping, and reporting measures, including filing SARs and Currency Transaction Reports (CTRs).
These requirements also apply to domestic and foreign-based convertible virtual currency transmitters who conduct a substantial part of their business in the U.S., even if they have no physical presence there.
While a testament to the growing success of oversight by agencies like the SEC and FinCEN, this growth of SARs, especially since it has continued throughout 2018, also points to a degree of lawlessness that persists in the cryptocurrency markets. The agency is working hard to ensure that virtual currency MSBs understand and comply with these regulatory obligations. Part of that effort involves working closely with delegated BSA examiners at the IRS. FinCEN claims that together with the IRS they have examined 30% of all registered virtual currency exchangers and administrators since 2014.
“And there is no question we have noticed some compliance shortcomings, concluded Block. “All financial institutions should be implementing a strong AML program long before they first receive notice that an examination is forthcoming. We have been surprised to see financial institutions establish an adequate number of compliance staff and take appropriate steps to meet their regulatory requirements only after they receive notice. Let this message go out clearly today: This does not constitute compliance. Our goal is to ensure that all virtual currency money transmitters undergo regular, routine compliance examinations—just like every other U.S. financial institution.”
Blanco punctuated the point by saying, “We will hold companies and individuals accountable when they disregard their obligations and allow the financial system to be exploited by criminal actors, whether in wire transfers or cryptocurrencies.” Non-compliance with FinCEN’s regulations can cost upwards of $25,000 for each day of non-compliance. BTC-e was fined one hundred and ten million dollars.
On September 4, 2018, ShapeShift, a well-known mixing service, announced it was implementing a mandatory Know-your-Customer (KYC) program. Perhaps as a sign of FinCEN’s tougher stance, the company cited regulatory pressure in its decision. https://www.bloomberg.com/news/articles/2018-09-05/crypto-world-rocked-after-long-time-advocate-voorhees-backpedals. According to Bloomberg when asked whether the move was in response to specific regulatory requirements, Voorhees replied, “this is a precautionary move to derisk the company amid an ever-changing legal grey area.”
Read the full text of the speech here https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-2018-chicago-kent-block