FinCEN Takes Action Against Bitcoin Mixer for Violating the Bank Secrecy Act

Foley & Lardner LLPOn October 19, 2020, The Financial Crimes Enforcement Network (FinCEN) announced its first action against a bitcoin mixer: a $60 million civil penalty against Larry Dean Harmon. Harmon was the founder and operator of Helix (2014-2017) and Coin Ninja (2017-2020), both of which FinCEN said were unregistered money services business (MSB).

FinCEN’s investigation into Harmon’s companies showed that Harmon “operated Helix as a bitcoin mixer, or tumbler, and advertised its services in the darkest spaces of the internet as a way for customers to anonymously pay for things like drugs, guns, and child pornography.” Harmon’s related criminal indictment defined a bitcoin mixer or tumbler as “enabling[ing] customers, for a fee, to send bitcoins to designated recipients in a manner which was designed to conceal and obfuscate the source or owner of the bitcoins.” Indictment ¶ 4. Helix was heavily trafficked, attracting at least 356,000 bitcoin trades and $311 million dollars of transactions in its more than three years of operation. FinCEN alleged that Coin Ninja operated in the same manner. Through these companies, “Harmon engaged in transactions with narcotics traffickers, counterfeiters and fraudsters, as well as other criminals” and actively deleted any customer information collected.

FinCEN alleged that Harmon willfully violated the Bank Secrecy Act (BSA) and its implementing regulations by “(a) fail[ing] to register as a money services business; (b) fail[ing] to implement and maintain an effective anti-money laundering (AML) program; and (c) fail[ing] to report certain suspicious activity.” Assessment of Civil Money Penalty p. 2-3. FinCEN determined that Coin Ninja also failed to register as a MSB. Id. at p. 3. The maximum penalty for these violations was $209,144,554. Id. In reaching the ultimate $60,000,000 penalty, FinCEN considered the following factors:

  1. Nature and seriousness of the violations and harm to the public: FinCEN considered the allegations against Harmon to be “serious and egregious.” Id. at 4. 
  2. Impact of violations on FinCEN’s mission to safeguard the financial system: FinCEN said that Helix’s programs “totally and completely” disregarded the safeguards of the BSA. Id. at 5. 
  3. Pervasiveness of wrongdoing within the financial institution: “Helix openly flaunted existing regulatory requirements and went out of its way to create ways for darknet customers and vendors to avoid law enforcement detection.” Id.
  4. History and duration of violations: FinCEN noted only the operating time of Helix (over three years) but did not note the operating time of Coin Ninja. Id
  5. Failure to terminate the violations: FinCEN pointed out that after closing Helix, Harmon operated Coin Ninja for over two years, until February 6, 2020. Id. at 6. 
  6. Financial gain or other benefit as a result of violation: Helix “made a significant financial gain” but failed to expend resources on BSA compliance. Id
  7. Cooperation: Helix agreed to two tolling agreements. Id
  8. Systemic nature of violations: “Helix’s systemic failure to report potentially suspicious activity led to shortcomings that denied potentially critical information to the BSA database for at least a three-year period.” Id.
  9. Timely and voluntary disclosure of violations: FinCEN did not consider this factor. 
  10. Penalties by other government entities: FinCEN considered that in December 2019, Harmon was charged in related criminal charges for: (1) conspiracy to launder monetary instruments under 18 USC § 1956(h); (2) operating an unlicensed money transmitting business under 18 USC §1960(a); and (3) money transmission without a license under D.C. Code § 26-1023(c).

This decision is notable for a number of reasons:

  1. This Treasury FinCEN enforcement action comes just as investment interest in bitcoin is beginning to surge again and as bitcoin is poised to see broad commercial use. PayPal announced on October 21, 2020 that, starting early next year, its customers will be able to use bitcoin and other crypto assets to buy goods and services from PayPal’s 26 million merchants around the globe. The day after that announcement, bitcoin’s market price hit an 18-month high as no less an authority than Paul Tudor Jones opined on Squawk Box, “I think we’re in the first inning of bitcoin, and it’s got a long way to go.”
  2. This is one of the first enforcement actions since FinCEN issued a statement on its approach to enforcing the BSA, providing clarity on its approach to bringing compliance or enforcement actions due to potential or actual BSA violations. For further information on FinCEN’s August 18, 2020 statement, please see “FinCEN Expands View of Compliance Requirements.”
  3. The Harmon action relied on FinCEN’s 2013 Guidance and updated 2019 Guidance, that financial institutions that are mixers and tumblers of convertible virtual currency are money transmitters under the BSA and have corresponding programmatic requirements, including maintaining an anti-money laundering (AML) policy. 
  4. This case shows continued interest in the cryptocurrency industry and shows that vigorous enforcement applies broadly across all financial institutions.
  5. FinCEN coordinated the Harmon investigation with the U.S. Department of Justice’s Computer Crimes and Intellectual Property Section, the U.S. Attorney’s Office for the District of Columbia, the Federal Bureau of Investigation, and the Internal Revenue Service Criminal Investigation division.

Ultimately, this action demonstrates that now is a good time for financial institutions and cryptocurrency businesses that fall within FinCEN’s scope to evaluate their AML/BSA compliance programs – including internal due diligence processes, training materials, and reporting procedures. Failure to do so can have expensive consequences and could attract a wide range of governmental scrutiny.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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