Does Bitcoin make money laundering easier?

Bitcoin ICOs are making regulators nervous

The proliferation of unregulated digital currencies has made it difficult for regulators to determine how to maintain the advantages of blockchain technology while still protecting consumers.  Cryptocurrencies are used in instant and irreversible transactions that are pseudonymous, decentralized, and encrypted.  Many new companies are springing up that incorporate blockchain tech and many of them accept cryptocurrency as part of their fundraising efforts in an “Initial Coin Offering” or ICO.

Proponents tout the public ledger system that blockchain systems use to permanently record each transaction without any opportunity to alter the ledger afterward.  This should make it more difficult for would-be money launderers, but regulators have expressed concern about this type of process being used to get around existing banking and securities protections to defraud customers.  The loose collection of laws that could apply to blockchain companies dealing in cryptocurrency can make it more difficult to find and expose bad-actors.

How ICOs can make money laundering easier

When legitimate customers participate in an ICO, a money-launderer can get them to use their exchange to turn those coins into cash.  Since they are willing to offer better prices as a premium to wash their funds, many customers are drawn to lower pricing.  The legitimate customer is paid more than he could have gotten at a regulation-friendly exchange, and the bitcoins are not as easy to trace to criminal behavior.  Criminals might also shop for an ICO that does not have robust know-your-customer practices and simply buy into the ICO themselves.  On the other hand, digital currency systems do not allow the ledger to be changed once the entry has been made.  This means that transactions are open and traceable, though they may still be tied to an anonymous pseudonym.

ICOs must comply with U.S. Securities Law.

Late last month, the Securities and Exchange Commission released an investigative report in which it said companies that planned to use distributed ledger or blockchain-enabled ways to raise capital must take appropriate steps to comply with the U.S. federal securities laws.  In the report, the SEC focused on “Initial Coin Offerings” or ICOs – where new blockchain tech companies accept cryptocurrency as part of their fundraising efforts.  The influx of ICOs recently has regulators worried that new exchanges will make it easier for money-launderers.  More exchanges mean that a criminal can shop for an exchange that is less cooperative with authorities and more lax on verification processes.

The SEC may treat an ICO as a “security”

The SEC has taken the position that any virtual organization or capital-raising entity that uses blockchain technology must also abide by the foundational principles of U.S. securities law.  In the report, they state, in part, that:

U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or the technology used to effectuate a particular offer or sale.

Many regulators don’t fully understand this emerging technology and the possibilities that it entails.  Nor do they understand that poorly planned policies could do more harm than good.  Meanwhile, with the regulatory environment is closer to the “wild-west” than “1984”, the SEC has posted guidelines to help consumers identify fraudulent investment schemes.

While the industry doesn’t have as many direct regulatory requirements, intermediaries in virtual currencies should know and research how regulations surrounding money-laundering.  If you need help or advice concerning a digital currency exchange, call attorneys who are up-to-date on SEC developments.  Call the law firm of Christensen & Jensen today.

Source: SEC investigative report

Apple stock scheme lands Utah man in prison

wall-street-HPursuant to the Utah Pattern of Unlawful Activity Act (“UPUAA”), the state must prove that an individual engaged in a “pattern of unlawful activity.”  As defined by the statute, a “‘[p]attern of unlawful activity’ means engaging in conduct which constitutes the commission of at least three episodes of unlawful activity.”  The UPUAA lists approximately 64 violations of Utah law that constitute unlawful activity for purposes of the UPUAA.  A Violation of the Utah Uniform Securities Act is included within the offenses that constitute “unlawful activity” under the UPUAA.

In a case that has involved an investigation and lawsuit by the Securities and Exchange Commission (“SEC”), a federal prosecution for obstruction of justice and providing false information, and state charges for securities fraud and engaging in a pattern of unlawful activity, Third District Judge Elizabeth Hruby-Mills recently sentenced Roger S. Bliss to a minimum of four years in the Utah State Prison.  Mr. Bliss’ sentence follows his guilty plea to four counts of communications fraud and one count of engaging in a pattern of unlawful activity.  Judge Hruby-Mills said that Mr. Bliss’ four year sentence will run consecutively with his one-year prison term imposed from federal court as it relates to the charges of obstruction of justice and providing false information.

SEC Files Suit

In February 2015, the SEC sued Mr. Bliss in Utah federal court.  In its complaint, the SEC alleged Mr. Bliss solicited investors by offering them a membership in purported investment club.  Mr. Bliss communicated to potential investors that he could day trade (speculation in securities) Apple stock for annual returns of 100 to 300 percent and that he had not lost money on a day trade in the last six years, the SEC said.

In order to further entice investors, Mr. Bliss told them that he was trading more than $300 million in assets.  However, the SEC has said that Mr. Bliss’ brokerage account actually showed losses of at least $3 million over a three year period, with an ending balance of only $32,000.

According to court papers filed by the SEC, Mr. Bliss allegedly structured the scheme as an investment club following a meeting with attorneys, whereby the attorneys told him that structuring the scheme as an investment club would keep him from having to register as an investment adviser or a broker-dealer.

SEC Obtains TRO and Asset Freeze

On the same day the SEC lawsuit was filed, a Utah federal court also entered a temporary restraining order and asset freeze against Mr. Bliss.  In July 2015, the SEC filed a motion for an order to show cause, claiming that Mr. Bliss had violated the court’s asset freeze when he failed to disclose ownership of a catamaran and had the boat removed from his property five days after the asset freeze was entered.  In response to the SEC’s motion, Mr. Bliss said in a sworn declaration that his brother-in-law, Kevin Fortney, who had not been named in the SEC’s lawsuit, owned the boat but stored it at his house in Bear Lake during the off-season.

Mr. Bliss Held in Contempt

Following the statements in Mr. Bliss’ sworn declaration, U.S. District Judge Robert J. Shelby held Mr. Bliss in civil contempt.  Judge Shelby stayed any sanctions against Mr. Bliss, and, instead, referred the matter to the U.S. Attorney’s Office for the District of Utah for a consideration of whether criminal charges should be brought against Mr. Shelby for criminal contempt.

Mr. Bliss and Mr. Fortney Indicted in Utah Federal Court

In August 2015, Mr. Bliss and Mr. Fortney were indicted by a federal grand jury for allegedly lying about the ownership of the catamaran during the SEC’s investigation.  Mr. Bliss ultimately pled guilty to the federal charges, and was sentenced to a one-year prison term.

As previously noted, State charges were also filed against Mr. Bliss in connection with his alleged Apple investment scheme, including four counts of securities fraud and one count of engaging in a pattern of unlawful activity.  The State was able to include a charge for engaging in a pattern of unlawful because they had alleged four “episodes” of securities fraud attributable to Mr. Bliss.  A charge under the UPUAA is a second degree felony, but also carries the potential penalties of cost of suit, restitution, disgorgement, or other reasonable restrictions that may be placed on the future activities or investments of the individual, including ordering the dissolution or reorganization of any enterprise as defined by the UPUAA.

Mr. Bliss Ordered to Pay Restitution in Addition to Prison Time

Mr. Bliss ultimately pled guilty to the State charges, which led to the court imposing a four-year sentence against him.  In addition to sentencing Mr. Bliss to prison, the court also ordered him to pay approximately $21 million in restitution to the victims of his securities scheme.