Helix was linked to and associated with “Grams,” a darknet search engine also run by Harmon, and moved over 350,000 bitcoin — valued at over $300 million at the time of the transactions — on behalf of customers, with most of that volume coming from darknet markets.1 Harmon explicitly advertised Helix to customers on darknet marketplaces as a way to conceal transactions from law enforcement. As part of his guilty plea, Harmon agreed to forfeit more than 4,400 bitcoin, valued at more than $200 million at recent prices, and he faces a maximum penalty under 18 § U.S.C. 1956(a)(1) of up to 20 years in prison and a fine of $500,000, or twice the value of the property involved in the transaction.2
Weaponizing Federal Rule of Evidence 404(b)
The DOJ first charged Harmon in December 2019 with three crimes: conspiracy to launder monetary instruments, operating an unlicensed money transmitting business, and money transmission without a license.3 Harmon pled guilty to the first and most serious charge of conspiracy to launder monetary instruments.
In the lead-up to securing the guilty plea, the government filed a motion to admit evidence of other crimes under Federal Rule of Evidence 404(b), which the court granted. Rule 404(b) prohibits the use of any other crime, wrong, or act to prove a person’s character, but such evidence may be admissible for other purposes such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of evidence.4 Pursuant to a recent amendment effective December 1, 2020, in a criminal case, the prosecution must provide reasonable, written notice of its intention to offer such evidence at trial, and articulate the purpose for which the evidence will be offered.5
Of course, the real reason prosecutors like to use 404(b) evidence is the not-too-subtle message to the jury that the defendant is a bad person with a proclivity to break the law. Here, the government claimed that Harmon had communications with darknet administrators and vendors about selling illegal narcotics, stolen credit card information, fraudulent identity documents, and illegal firearms. This evidence was ostensibly relevant to show that Harmon was aware that Helix was used for various illicit purposes, contrary to his defense argument that Helix was just a “privacy service” used by law-abiding individuals who were simply mindful of security.
The court granted the government’s motion to admit such evidence under Rule 404(b) on July 31, and Harmon pled guilty shortly thereafter.
This kind of evidence is a powerful tool for prosecutors and we can expect it will be used in future cryptocurrency-type prosecutions, where the government will want to imply that people use these services for nefarious and illegal reasons. It may be that once cryptocurrency becomes more of an accepted and common financial instrument, juries will be less susceptible to these claims.
Parallel Actions by DOJ and FinCEN
Meanwhile, this case shows that criminal and civil authorities are working together to target suspicious cryptocurrency transactions. In November 2020, we reported that the Financial Crimes Enforcement Network (“FinCEN”) hit Harmon with a $60 million civil monetary penalty pursuant to the Bank Secrecy Act (“BSA”) for failing to register Helix as a money services business, failing to implement and maintain an effective anti-money laundering (“AML”) program, and failing to report certain suspicious activity.6 This penalty was the first-ever effort by FinCEN to target the use of cryptocurrency mixers to facilitate money laundering and demonstrated the government’s commitment to pursuing these types of entities.
The government has a growing number of tools to punish criminal activity involving virtual assets. FinCEN primarily administers and implements the BSA, including maintaining a database that stores reports of suspected money-laundering transactions. FinCEN provides investigatory assistance to the DOJ and will refer matters if potential crimes are identified. These parallel actions highlight how regulators can and will pursue and prosecute cryptocurrency businesses via multiple avenues under the Cryptocurrency Enforcement Framework.7
Harmon’s case is the first involving a cryptocurrency mixer that has resulted in a conviction.8 While the Helix case is the first of its kind, more cases involving cryptocurrency mixers are slated to come. In April 2021, U.S. law enforcement arrested and charged Roman Sterlingov, the administrator of the bitcoin mixer Bitcoin Fog, with similar money laundering and unlicensed money transmission charges related to his alleged operation of the mixer.9
With the federal government’s continued focus on regulating cryptocurrency businesses, these recent enforcement actions show that companies dealing in virtual currencies, and particularly cryptocurrency mixers, need to build and strengthen their compliance departments and AML programs to better detect compliance issues as they arise. Experienced outside counsel can provide valuable advice in strengthening such programs and better negotiate with regulators if an issue is identified.
1 Press Release, Dep’t of Justice, Ohio Resident Pleads Guilty to Operating Darknet-Based Bitcoin ‘Mixer’ That Laundered Over $300 Million (August 18, 2021), https://www.justice.gov/opa/pr/ohio-resident-pleads-guilty-operating-darknet-based-bitcoin-mixer-laundered-over-300-million.
2 Id.
3 Indictment, Dkt. No. 1, U.S. v. Harmon (D.D.C.), Criminal No. 19-cr-395 (BAH).
4 Fed. R. Evid. 404(b).
5 Fed. R. Evid. 404(b)(3).
6 In re Larry Dean Harmon d/b/a Helix, No. 2020-2, FinCEN Assessment of Civil Money Penalty (October 19, 2020), https://www.fincen.gov/sites/default/files/enforcement_action/2020-10-19/HarmonHelix%20Assessment%20and%20SoF_508_101920.pdf
7 In October 2020, the V&E Report provided a details update on the DOJ’s Cryptocurrency Enforcement Framework: https://www.velaw.com/insights/cryptocurrency-101-dojs-new-cryptocurrency-enforcement-framework-provides-guidance-and-promises-of-heightened-scrutiny-of-virtual-assets-through-intergovernmental-collaboration/
8 Wall Street Journal, Operator of Helix Bitcoin ‘Mixer’ Pleads Guilty (August 18, 2021), https://www.wsj.com/articles/operator-of-helix-bitcoin-mixer-pleads-guilty-11629328791?mg=prod/com-wsj.
9 Press Release, Dep’t of Justice, Individual Arrested and Charged with Operating Notorious Darknet Cryptocurrency “Mixer” (April 28, 2021), https://www.justice.gov/opa/pr/individual-arrested-and-charged-operating-notorious-darknet-cryptocurrency-mixer.
