On July 26, FinCEN, in coordination with the U.S. Attorney’s Office for the Northern District of California (“NDCA USAO”), assessed a $110,003,314 civil money penalty against BTC-e a/k/a Canton Business Corporation (“BTC-e”) for willfully violating the Bank Secrecy Act (“BSA”), and a $12 million penalty against Alexander Vinnik, a Russian national who is one of the alleged operators of BTC-e, for his role in the violations.  FinCEN’s press release indicates that this is the first enforcement action it has taken against a foreign-located money services business (“MSB”) doing business in the United States.  As we previously have blogged, FinCEN released interpretive guidance in March 2013 stating that an administrator or exchanger of virtual currency is an MSB under the BSA unless a limitation or exemption applies.

In a parallel criminal investigation, Vinnik was arrested and detained in Greece and charged in a 21-count superseding indictment brought by the NDCA USAO and DOJ’s Computer Crime and Intellectual Property Section. The superseding indictment alleges that Vinnik and BTC-e operated an unlicensed MSB doing business in the U.S., in violation of 18 U.S.C. § 1960, and committed money laundering, in violation of 18 U.S.C. §§ 1956 and 1957, by facilitating virtual currency transactions involving various crimes, including computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. The superseding indictment also provides some clues to the fate of the collapsed virtual currency exchange Mt. Gox, once reportedly the largest such exchange in the world.

According to the superseding indictment, BTC-e, one of the largest virtual currency exchanges by volume in the world, was “one of the principal entities used to launder and liquidate criminal proceeds from digital currencies, including Bitcoin, to fiat currencies, including U.S. dollars, Euros, and Rubles” (i.e., currencies established by government regulation or law). The superseding indictment further alleges that BTC-e “catered to criminals” by lacking “basic anti-money laundering controls and policies.” Specifically, FinCEN’s Assessment cites BTC-e for numerous BSA violations, including failures to: register as an MSB; implement a written AML program; verify customer identification; monitor for and report suspicious activity; and comply with recordkeeping requirements. “Instead of acting to prevent money laundering,” FinCEN stated in its press release, “BTC-e and its operators embraced the pervasive criminal activity conducted at the exchange.” The Assessment recounts that users of BTC-e “openly and explicitly discussed conducting criminal activity through the website’s internal messaging system,” and that BTC-e “received inquiries from customers on how to process and access proceeds obtained from the sale of illegal drugs on darknet markets.” All such activity went unreported by BTC-e.

Jamal El-Hindi, Acting Director for FinCEN, intends this action to be a “strong deterrent” to anyone – located in the U.S. or abroad – seeking to use virtual currency exchanges to facilitate illicit activity; the FinCEN press release declares: “Regardless of its ownership or location, the company was required to comply with U.S. AML laws and regulations as a foreign-located MSB[.]” IRS Criminal Investigation Chief Don Fort echoed the Acting Director’s message in a press release issued by the DOJ on the same day: “Mr. Vinnik is alleged to have committed and facilitated a wide range of crimes that go far beyond the lack of regulation of the bitcoin exchange he operated . . . The takedown of this large virtual currency exchange should send a strong message to cyber-criminals and other unregulated exchanges across the globe.”  The superseding indictment notes that BTC-e’s website stated that it was located in Bulgaria yet subject to the laws of Cyprus; its managing shell company, Canton Business Corp., was based in the Seychelles but affiliated with a Russian phone number and had web domains registered to shell companies in countries including Singapore, the British Virgin Islands, France and New Zealand.

The superseding indictment also touches on a sore point in the still-nascent history of virtual currency: the notorious collapse of Mt. Gox, formerly one of the largest virtual currency exchangers in the world.  Mt. Gox, based in Japan, suffered a series of hacks; consequently, several hundred million dollars’ worth of customers’ bitcoins were stolen.  The superseding indictment alleges that Vinnick obtained “a sizable portion” of the funds stolen from Mt. Gox and then laundered them by moving them through BTC-e and another virtual currency exchange in order to attempt to conceal them.  According to the superseding indictment, numerous withdrawals from BTC-e administrator accounts went to Vinnick’s personal bank accounts.  (The former head of Mt. Gox currently has his own set of legal problems).

Finally, the superseding indictment references one of the more bizarre chapters in virtual currency and government enforcement: the prosecution of former DEA Special Agent Carl Mark Force and former Secret Service Special Agent Shaun Bridges, who allegedly used BTC-e to launder the proceeds of crimes which they committed in connection with being part of the government team investigating the notorious Silk Road (the virtual currency exchange and drug bazaar allegedly maintained by Ross Ulbricht, a/k/a the Dread Pirate Roberts, who was convicted in federal court in 2015 of conspiring to launder proceeds and distribute narcotics).