Perspective on Crypto Enforcement
OFAC, banking regulators and criminal enforcement authorities agree: there are big cases to be made in the crypto space. The latest example is OFAC’s October 2022 sanctions enforcement action against crypto-trading platform Bittrex, Inc. That action was taken in conjunction with FinCEN, which found that Bittrex violated the anti-money laundering provisions of the Bank Secrecy Act. The Bittrex action itself follows the Department of Justice’s announcement of funding for a National Cryptocurrency Enforcement Team that will focus on crypto platforms.
The harsh crypto enforcement environment reminds us of how prosecutors thought about money service businesses (MSBs) in the mid 2000’s, when we worked as prosecutors for the legendary Robert Morgenthau at the Manhattan District Attorney’s Office. Mr. Morgenthau told us to focus on how bad money moved. As a result, we investigated and prosecuted unlicensed and unregulated MSBs. The theory was that if we focused on the places bad guys used to launder money, we would find money launderers to prosecute and, more broadly, make it harder for them to operate by shutting down their service providers.
Stated another way, we looked at MSBs for the same reason people rob banks: that’s where the (bad) money was. Where’s the bad money today? Regulators and law enforcement believe it’s in crypto, and that it’s easy for bad guys to abuse crypto platforms to commit crimes. That’s why regulators and prosecutors are drawn to it like flies to honey.
Every enforcement action, including Bittrex, criticizes the risk and compliance controls employed by the investigation’s target. It was the same for banks and MSBs. Regulators and prosecutors react negatively when financial service companies fail to employ the types of controls they expect. The solution is obvious: invest in risk and compliance controls.
On that front there is good news and bad news.
The bad news is that banks have spent billions of dollars over the last twenty years developing risk and compliance best practices – and enforcement agents are going to expect to see that level of sophistication even in a newly-opened crypto company. That sounds expensive.
The good news is it doesn’t have to be. The billions spent by banks means that crypto companies do not have to re-invent the wheel. Instead, they can leverage what banks have already developed and adjust those controls to confront their own risks.
A dollar spent today figuring out how to execute risk assessments, on-board clients, monitor for suspicious activity, and perform sanctions screening is not only necessary if regulators come calling, but in the long run will help change the perception that the industry is friendly to money launderers.
For further information please contact:
- Arthur D. Middlemiss at arthur.middlemiss@lbkmlaw.com or +1.212.826.7001
- Adam S. Kaufmann at adam.kaufmann@lbkmlaw.com or +1.212.826.7001
The foregoing is for informational purposes only. It is not intended as legal advice and no attorney-client relationship is formed by the provision of this information.