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Federal Authorities are Targeting Cryptocurrency Schemes

bitcoin and cryptocurrency

Federal Authorities are Targeting Cryptocurrency Schemes

When news of Bitcoin’s creation first started circulating in 2009, federal authorities had immediate concerns. Not only did this new decentralized and unregulated market present significant potential for tax evasion, but it also presented significant risk for other types of criminal activity to fly under the radar. By using Bitcoin instead of fiat currencies to conduct illicit transactions, criminals could – and did – escape the scrutiny of federal authorities in many cases.

For federal authorities, these concerns still exist today. Although agencies such as the Internal Revenue Service (IRS) and the U.S. Department of Justice (DOJ) have found ways to identify parties to cryptocurrency transactions, the extraordinary volume of these transactions and the near-constant introduction of new digital currencies means that federal agents and prosecutors are having trouble keeping pace. With that said, they are still doing everything they can, and they are using the substantial resources they have at their disposal to target illicit cryptocurrency transactions by all means available.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

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John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

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Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

One recent case in particular sheds light on the tactics federal authorities are using to identify and prosecute individuals who use Bitcoin and other cryptocurrencies for criminal purposes.

DOJ Announces Guilty Plea in Bitcoin Money Laundering Scheme

On June 29, 2021, the DOJ announced that a man calling himself “Doctor Bitcoin” had pleaded guilty to illegally operating a “cryptocurrency conversion business”. According to the DOJ, the defendant, “admitted he ran a business that converted U.S. dollars to cryptocurrency, primarily Bitcoin, for a fee . . . [and] frequently sent BTC to customers’ crypto wallets without taking additional steps in verifying the source of the cash . . . .” The DOJ’s press release also states that the defendant, “promised not to get involved in the details of [his client’s] business dealings, but told [his client] how to circumvent financial institution reporting requirements by keeping deposits under $9,500, and directed [his client] to lie to financial institutions about the purpose of the business.”

The DOJ charged “Doctor Bitcoin” with violating federal laws (i) requiring registration as a money transmitting business with the U.S. Department of Treasury; (ii) requiring money transmitting businesses to verify customers’ names, birth dates, and addresses; and, (iii) requiring currency transaction reports for high-value cash-in transactions.

Here are some additional noteworthy facts about the case:

1. The Laws Under Which the Defendant was Charged are Not Specific to Cryptocurrency or Online Transactions

While the defendant in this case was charged specifically in relation to his services of converting cash to Bitcoin, the laws under which he was charged have been in the U.S. Code for years. These laws include the Money Laundering Suppression Act of 1994 and the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970 (commonly known as the Bank Secrecy Act (BSA)). It is not uncommon for federal authorities to use older laws to pursue charges for novel crimes—even if the laws predate the means by which these crimes are committed.

2. The Defendant Likely Could Have Faced Additional Charges

Based on the facts disclosed in the DOJ’s press release, it appears that the defendant could have potentially faced additional charges. For example, the press release states that the defendant admitted to “converting between $550,000 and $1.5 million” in cash to Bitcoin for purposes of helping his client evade federal detection. Thus, this appears to be a fairly straightforward case of money laundering, and the circumstances appear ripe for conspiracy charges as well.

Under 18 U.S.C. Section 1956, the crime of money laundering is defined as follows:

“Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity . . . knowing that the transaction is designed in whole or in part—(i)to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or (ii)to avoid a transaction reporting requirement under State or Federal law, shall be [guilty of money laundering].”

Under 18 U.S.C. Section 371, the crime of conspiracy is defined as follows:

“If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be [guilty of conspiracy].”

Both of these statutes could potentially apply to cases in which individuals use Bitcoin and other cryptocurrency transactions to help others conceal the source of funds and avoid federal reporting requirements—as “Doctor Bitcoin” admitted to doing according to the DOJ.

The DOJ’s press release indicates that “Doctor Bitcoin” is facing up to a five-year sentence based on the allegations to which pleaded guilty. Money laundering carries up to a 20-year prison sentence and a fine of $500,000 or twice the value of the property involved in the transaction, whichever is greater under 18 U.S.C. Section 1956. Conspiracy carries statutory fines and up to a five-year prison sentence under 18 U.S.C. Section 371. Thus, it is possible that defendants charged in similar cases in the future could face significantly greater penalties.

3. The DOJ Charged the Defendant Via Criminal Information

The DOJ’s press release indicates that “Doctor Bitcoin” was charged via a criminal information. A criminal information is a charging document that allows federal prosecutors to bring charges without seeking a grand jury indictment. Rather than needing to present a compelling case to a panel of grand jurors, federal prosecutors can obtain a criminal information by submitting the relevant facts to a magistrate judge (or other judicial officer in some cases).

This is notable because charging via criminal information was historically reserved for cases in which time was of the essence and requiring prosecutors to take their case before a grand jury was likely to result in additional harm to victims of the defendant’s crime. However, magistrate judges have shown increased willingness to issue criminal informations in recent years.

Based on the information contained in the DOJ’s press release, the conduct at issue in the “Doctor Bitcoin” case was not time-sensitive. Yet, prosecutors were still able to pursue charges without an indictment. This trend will presumably continue, and this means that more defendants will find themselves facing serious criminal charges without having had the opportunity to defend themselves before a federal grand jury.

Cryptocurrency Prosecutions are On the Rise

This is just one in a long string of recent examples of cases in which the DOJ has targeted individuals and organizations for Bitcoin and other cryptocurrency-related crimes. The IRS is cracking down on cryptocurrency-related offenses as well. Here are some additional recent examples of federal cases involving Bitcoin and other digital currencies:

  • Founders and Executives of Crypto Derivatives Exchange Charged with BSA Violations – In October 2020, the DOJ charged the founders and executives of an offshore cryptocurrency derivatives exchange with, “willfully failing to establish, implement, and maintain an adequate anti-money laundering (‘AML’) program,” at the exchange. The DOJ further alleged that they allowed the exchange, “to operate as a platform in the shadows of the financial markets,” and facilitate transactions involving proceeds from criminal activity.
  • DOJ Files Civil Complaint for Forfeiture of $1 Billion in Bitcoin – In November 2020, the DOJ filed a civil complaint seeking forfeiture of approximately $1 billion in Bitcoin resulting from the takedown of Silk Road and its founder, Ross Ulbricht, in 2015. The DOJ worked with IRS Criminal Investigations (IRS CI) to analyze Silk Road Bitcoin transactions and identify the destination of the cryptocurrency in question.
  • Founder Faces Multiple Charges After Fraudulent Initial Coin Offering (ICO) – In December 2020, IRS CI announced the indictment of the founder of the Oyster Pearl cryptocurrency. The allegations against the founder include conducting a fraudulent initial coin offering (ICO), failing to report and pay tax on his cryptocurrency proceeds, and dumping his Pearl tokens resulting in substantial losses to investors.
  • McAfee Founder and Executive Advisor Indicted for Cryptocurrency Fraud and Money Laundering Conspiracy – In March 2021, the DOJ secured indictments against John David McAfee and Jimmy Gale Watson Jr., who served as an executive adviser to the McAfee software company’s cryptocurrency team. The charges listed in the indictment included conspiracy to commit commodities and securities fraud, wire fraud, and conspiracy to commit money laundering stemming from alleged, “schemes relating to the fraudulent promotion to investors of cryptocurrencies qualifying under federal law as commodities or securities.”
  • Cryptocurrency Fraud Leads to 15-Year Sentence for Money Laundering and Other Crimes – In July 2021, the DOJ secured the conviction of a foreign citizen who was charged with defrauding thousands of victims in violation of federal securities fraud, wire fraud, and money laundering laws. According to the DOJ, the defendant, “induced victims to use cryptocurrency such as Bitcoin . . . to purchase shares in a scheme . . . [and] promised victims astronomical returns tied to the price of gold. Instead, the funds provided by victims were transferred to [the defendant’s] personal bank accounts . . . .”

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Our former DOJ white-collar prosecutors provide experienced defense representation for individuals and organizations facing cryptocurrency-related federal investigations. If you need experienced defense counsel, you can call 888-680-1745 or contact us online for a free and confidential consultation.

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