The Financial Crimes Enforcement Network (“FinCEN”) recently hit the founder and primary operator of both Helix and Coin Ninja with a $60 million civil monetary penalty. These companies served as “mixers” or “tumblers” for virtual currencies such as Bitcoin. A “mixer” or “tumbler” accepts currency and transmits it in a manner designed to prevent tracing the transmission back to its source.
The penalty against the founder/operator, Larry Dean Harmon, was pursuant to the Bank Secrecy Act (“BSA”) and its corresponding regulations.1 A parallel criminal case is being prosecuted by the Department of Justice (“DOJ”) in the District of Columbia.2
FinCEN Penalizes Helix and Coin Ninja for Failing to Maintain an Effective AML Program
Harmon operated Helix from 2014 to 2017, and Coin Ninja from 2017 to 2020. Helix accepted Bitcoin from its customers and transmitted the virtual currency to recipients through a variety of means.3 Regulators alleged that this anonymizing service was used for illicit activities and that Helix and Coin Ninja failed to conduct proper due diligence on its customers.4
This is FinCEN’s first enforcement action against a mixer/tumbler for virtual currency. According to FinCEN guidance on virtual currencies published in May 2019, anonymizing services for virtual currencies qualify as money transmitters under the BSA.5 Last year’s guidance builds upon FinCEN’s first guidance on virtual currency published in 2013, which explained that exchangers and administrators of convertible virtual currency, such as Bitcoin, are money transmitters under the BSA.6
FinCEN alleged that Helix failed to register as a money services business; failed to implement and maintain an effective anti-money laundering (“AML”) program; and failed to report certain suspicious activity. It also alleged that Coin Ninja failed to register as a money services business.
FinCEN analyzed 10 factors in determining that a penalty of $60 million was warranted: (1) nature and seriousness of the violations and harm to the public; (2) impact of the violations on FinCEN’s mission to safeguard the financial system; (3) pervasiveness of wrongdoing within the financial institution; (4) history and duration of the violations; (5) failure to terminate the violations; (6) financial gain or benefit as a result of the violation; (7) cooperation; (8) systematic nature of violations; (9) timely and voluntary disclosure of violations; and (10) penalties by other governmental entities.
A few considerations seemed to permeate FinCEN’s analysis of the above factors. First, despite operating in a high risk industry (transmitting virtual currencies), Helix failed to implement an AML program designed to detect violations of the BSA. Indeed, the company’s very function was to obfuscate the source of payments, yet it failed to designate a compliance officer or conduct sufficient diligence on its transactions.7 Second, according to FinCEN, Helix did not voluntarily disclose the potential violations of the BSA and did not respond substantively to FinCEN’s pre-assessment notice. Based on this, Helix was not afforded cooperation credit that may have reduced the hefty $60 million assessment.
Regulators Continue to Focus on Virtual Currency
As virtual currencies become increasingly mainstream, regulators have issued guidance to explain how these currencies fall under the purview of existing laws. For example, the Helix enforcement action comes less than two weeks after the Attorney General’s Cyber Digital Task Force issued the DOJ’s Cryptocurrency Enforcement Framework (the “Report”), which detailed the agency’s plans for increasing scrutiny into the use of virtual currencies.8 The Report explained the various federal agencies that have a role in enforcing regulations applicable to cryptocurrency businesses. FinCEN is among them with its role in policing money services businesses and potential violations of the BSA. Joining the DOJ and FinCEN are other familiar federal enforcement agencies, such as the Department of the Treasury’s Office of the Comptroller of the Currency and the Securities and Exchange Commission.
In addition to the effort to fit virtual currencies into existing frameworks, there are also efforts in Congress to pass updates to AML laws to more comprehensively explain how virtual currencies are covered.9
While AML guidance for cryptocurrencies continues to evolve, this most recent enforcement action shows that companies dealing in virtual currencies need to strengthen their compliance departments with appropriate help from outside counsel. This will help ensure proper policies are in place to detect AML issues and to better negotiate with the regulators should an issue arise.
1 In re Larry Dean Harmon d/b/a Helix, No. 2020-2, FinCEN Assessment of Civil Money Penalty (Oct. 19, 2020), https://www.fincen.gov/sites/default/files/enforcement_action/2020-10-19/HarmonHelix%20Assessment%20and%20SoF_508_101920.pdf; see also 12 U.S.C. §§ 1829b, 1951-1959 and 31 U.S.C. §§ 5311-5314, 5316-5332; 31 C.F.R. Chapter X (https://ecfr.federalregister.gov/current/title-31/subtitle-B/chapter-X).
2 U.S. v. Larry Dean Harmon, No. 19-cr-00395-BAH (D. D.C., Dec. 3, 2019).
3 In re Larry Dean Harmon, supra note 1, at 2, 4.
4 Id.
5 Fin. Crimes Enforcement Network, U.S. Dept. of the Treasury, FIN-2019-G001, Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies, pp. 19–20 (May 9, 2019), https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
6 Fin. Crimes Enforcement Network, U.S. Dept. of the Treasury, FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (March 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf.
7 In re Larry Dean Harmon, supra note 1, at 5.
8 V&E Lawyers Fry Wernick, Branden Stein, and Elizabeth Matthews provided a detailed update on the Cryptocurrency Enforcement Framework in a recent article: Cryptocurrency 101 – DOJ’s New Cryptocurrency Enforcement Framework Provides Guidance and Promises of Heightened Scrutiny of Virtual Assets through Intergovernmental Collaboration.
9 Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings Act, S. 2563, 116th Cong. (2019), available at https://www.congress.gov/116/bills/s2563/BILLS-116s2563is.pdf.
