A top Treasury Department official warned Monday that the department is serious about cracking down on digital currency businesses that don’t comply with trade sanctions, anti-money laundering and bank secrecy laws.
Sigal Mandelker, U.S. Department of the Treasury undersecretary for terrorism and financial intelligence, said “bad actors are trying to leverage virtual currencies to make an end-run around our laws and regulations.”
She said the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, estimates $1.5 billion in funds were stolen in just the past two years from hacking attacks on virtual currency exchangers and administrators used to generate revenues for bad actors and that 47,000 suspicious activities reports, or SARs, have been filed mentioning virtual currency since 2013.
James Gatto, blockchain and digital currency team leader at Sheppard, Mullin, Richter & Hampton in Washington, D.C, said digital currency businesses had better pay attention, because issuing guidances and making public remarks is often a precursor to government enforcement actions. “Typically I would not be surprised to see enforcements come after this activity,” he said.
In her remarks to the CoinDesk Consensus, an annual conference of companies, investors and educators in blockchain technology and cryptocurrency in New York City, Mandelker stressed the Treasury Department considers enforcement of banking and trade sanctions regulations to be an important component of protecting U.S. national security. Mandelker served as deputy assistant attorney general in the criminal division of the U.S. Department of Justice from 2006 to 2009, and was a partner at Proskauer Rose before assuming her current post in June 2017.
In prepared remarks that were posted on the department’s website Monday afternoon, Mandelker noted that as the U.S. Treasury Department under the Trump administration has brought “unprecedented” pressure with economic sanctions countries including Iran, North Korea and Russia. “As regimes and bad actors are cut off from the global financial system, they search for alternatives, which has resulted in some countries and rogue actors trying to turn to digital currencies to offset the impact” of sanctions.
She said Iran, Venezuela and Russia have launched or announced their intention to launch national digital currencies, with some countries publicly stating the intent is to evade U.S. sanctions.
As an example of just how digital currency is used to launder money, she cited the U.S. Department of Justice’s recent indictment of Park Jin Hyok, who allegedly is part of North Korea-sponsored hacking team known as the Lazarus Group that is accused of stealing $81 million from Bangladesh’s Central Bank, among other heists. Mandelker said the organization used virtual currency and exchanges to transfer the stolen and extorted funds.
“We traced some of the money through fraudulently opened accounts at exchanges, as it chain-hopped from one blockchain to another around the world,” she said. “We then worked closely with law enforcement and international partners to identify those responsible.”
Gatto said, “one of the messages that became clear is that they are focused on that and are working on countermeasures to still be able to track those transactions. Like any situation with bad actors, it is a cat-and-mouse game.” Gatto said virtual currency exchanges have been used in some cases unwittingly in money laundering schemes.
Mandelker said FinCEN has received tens of thousands of SARs since 2013 mentioning bitcoin or virtual currency, with half of the reports filed by currency exchanges or administrators themselves.
But for those businesses that aren’t voluntarily cooperating, she cautioned that when IRS or FinCEN examiners show up, they will be looking for whether you (1) registered with FinCEN as a money services business, (2) developed, implemented and maintained an anti-money laundering program designed to prevent money laundering and terrorist financing, and (3) established record-keeping and reporting measures, including filing SARs and currency transaction reports.
“We will be checking whether you did all this right from the start of your business—not just after you got a call from regulators or law enforcement,” she said in her remarks.
Gatto said of Mandelker’s speech and recent guidances issued by the Treasury Department, including the Office of Foreign Asset Control: “When you see all that activity, it is a message. We always say you have to be in compliance in the first place, but if you think that there hasn’t been enforcement or [that] other people are doing it and take solace in that, you are probably sadly mistaken.”