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 Is Crypto Mixing Money Laundering 

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Michael Santos

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Introduction

In May 2021, Roman Sterling was arrested on federal criminal charges related to his role as administrator of Bitcoin Fog, a long-running Bitcoin mixing service.

Federal prosecutors accuse Sterling of laundering more than 1.2 million bitcoins during the ten years he operated Bitcoin Fog. 

According to the Criminal Investigation Department of the Internal Revenue Service (IRS), Sterling and his company allowed customers to merge their cryptocurrency transactions with other transactions to prevent anyone from tracking their payments.

What is cryptocurrency mixing?

Mixers are companies offering cryptocurrency commingling services for a fee to help people conceal or disguise the source or owner of particular cryptocurrency units. To federal law enforcement, crypto mixing companies pose a high risk of facilitating criminal activity, including money laundering. 

Is the federal government signaling that crypto mixing is always a crime?

Technically, all a crypto mixer does is mix different streams of crypto. 

The way it happens in real life is that the owner of a cryptocurrency such as Bitcoin, for example, transfers money from her wallet to a mixer.

The mixing service mixes or blends that bitcoin with other users’ cryptocurrencies and then transfers the mixed cryptocurrency so as to leave no connection between the original bitcoin and the final destination. 

It’s important to note that ordinary, law-abiding people can use crypto mixing services when wanting to maintain the anonymity of their funds, without illegal motives. In fact, when crypto mixers have been called into federal court so far, they call themselves a “privacy service” used by law-abiding people mindful of security, rather than a service used by criminals seeking to launder their funds.

Undoubtedly, some criminal actors also use crypto mixing services to launder ill-gotten gains and hide the origin of their illicit proceeds by mixing them with legal ones.

Crypto operators (and not just mixing services) may be at risk of interaction with the FBI, IRS, and other law enforcement agencies as part of broad investigations into wrongdoing in the crypto space.

Criminal Charges Against Crypto Mixers

Federal officers arrested Sterling while he was in transit through the US. The charges against him had been filed under seal, presumably unbeknownst to Sterling.

The three-charge criminal complaint against Sterling charges him with: 

  • money laundering conspiracy (18 United States Code 1956(h));
  • operating an unlicensed money transmitting business (18 United States Code 1960(a); and
  • conducting money transmission without a DC license (DC Code 26-1023(c). 

Sterling is currently awaiting trial on those charges. 

If convicted, conspiracy to commit money laundering carries a maximum sentence of 20 years in prison; operating an unlicensed money transmitting business under federal law carries up to 5 years in prison. 

Sterling founded Bitcoin Fog in 2011, a decade before his arrest.

As administrator of Bitcoin Fog, Sterling advertised Bitcoin mixing and tumbling services on Bitcoin forums. He touted how Bitcoin Fog could mix a person’s bitcoins into a pool with other users to eliminate any chance of finding someone’s payments and make it impossible to prove any connection between a deposit and a withdrawal.

For obvious reasons, these sorts of financial activities are of profound interest to federal money laundering enforcement agencies. 

Many criminal offenders are known to convert illegally gotten gains into virtual currencies and then commingle the money with others using mixing services to make it harder for law enforcement to trace and recover.

The government amassed evidence against Sterling in part via undercover operations.

 In 2019, undercover US Internal Revenue Service Criminal Investigations (IRS-CI) agents transacted with Bitcoin Fog, in one case sending messages to Bitcoin Fog’s administrator (Sterling) that explicitly stated that they hoped to launder illegal money. 

Bitcoin Fog completed the IRS undercover agent’s transactions without responding. This is strong evidence that the company ignored its legal obligations under AML or anti-money laundering laws.

The FBI, DOJ, and the rest of the federal law enforcement apparatus are highly focused on anyone marketing themselves as cryptocurrency mixers on the internet or elsewhere.

Indeed, in February 2020, Larry Harmon, former CEO of crypto website Coin Ninja, got arrested for his operation of Helix, another suspected cryptocurrency laundering service. 

Harmon’s charges included the same three counts that Sterling is facing:

  • money laundering conspiracy (18 United States Code 1956(h));
  • operating an unlicensed money transmitting business (18 United States Code 1960(a); and 
  • conducting money transmission without a DC license (DC Code 26-1023(c). 

Helix also functioned as a bitcoin “mixer” (or “tumbler”) from 2014 to 2017 and allowed customers to send bitcoin to designated recipients in a manner designed to conceal the source or owner of the bitcoin.

Thus, while it is not a crime per se to operate a crypto mixing service, anyone operating or working for a bitcoin mixer service has to be concerned about getting embroiled in a crypto money-laundering conspiracy investigation. Simply put, people must first put a lot of guardrails in place to operate in this space.

In addition, law enforcement’s focus seems trained on 

  • mixer administrators who knowingly conspire with illicit actors to launder criminal proceeds; and
  • mixers that don’t register as a Money Service Business (MSB) or meet anti-money laundering requirements.

Is Crypto Money?

Crypto operators must realize that they are likely to lose the argument that they are not money service businesses because crypto is not money.

First, because the DOJ considers cryptocurrency operators as money services businesses, they come within the purview of the Bank Secrecy Act. The Bank Secrecy Act helps federal law enforcement keep tabs on money laundering and other criminal risks. 

Early criminal defendants like Harmon in the Helix case took a shot at getting the court to rule that mixers are not money service businesses under state or federal law because crypto is not money. Therefore, if crypto is not money, the defendants did not run afoul of registration requirements or of laws that apply to money transmission. 

So far, the Helix court, which is the same court overseeing the Bitcoin Fog case, disagrees. The Helix Court found that the term “money” commonly means a medium of exchange, method of payment, or store of value. The Court held that “Bitcoin is these things.”

Moreover, Helix’s business received Bitcoin to send to another location or person in order to mask the original source of the Bitcoin. Under the relevant authorities, that qualifies as money transmission.

To read more about crypto registration requirements for money service Businesses (MSBs), click here: 

INSERT TASK FORCE BLOG and Crypto Laundering Blog

As noted above, one essential way to stay in the good graces of federal law enforcement is to comply with the Bank Secrecy Act and all MSB registration requirements.

Keeping on top of anti-money laundering protocols and Know Your Customer rules is paramount for anyone operating money services businesses in the crypto space. 

That’s because the primary concern in the Bitcoin Fog and Helix mixing services criminal cases appears to be their ties to a network of hidden websites networked to businesses around the globe known to sell illegal goods like guns and drugs and services like hacking and money laundering. 

In fact, the government contends that many companies that are known to law enforcement to engage in illegal activity worldwide recommend “bitcoin mixing services” to their customers to erase any trace of where their crypto coins originated. 

And tellingly, mixers such as Bitcoin Fog and Helix are alleged to use new addresses for each transaction to hamper law enforcement’s ability to track and trace.

The charges allege that Helix moved over 350,000 bitcoin – valued at over $300 million at the time of the transactions – on behalf of customers, with the most significant volume coming from shady and illegal markets. 

It is these evident connections to illegal markets that most concerns law enforcement in the cases filed so far. For example, the government alleges in the Helix criminal complaint that:

“The defendant operated Helix as a money-laundering service integrated with his broader [illegal] darknet site . . . [which] allowed users to search across multiple darknet markets for products listed by various vendors, particularly narcotics vendors.” 

In addition, to prosecute these crypto mixing cases, the evidence law enforcement is gathering includes:

  • bitcoin transaction records; 
  • records of online conversations between mixing service operators and sellers of illegal goods;
  • records of online conversations between mixing service operators and undercover agents;
  • records of the operation of multiple unlicensed MSBs;
  • records of forged documents; and
  • Witness testimony; 
  • false tax returns, and 
  • evidence recovered from physical and electronic search warrants.

Key Takeaways

Crypto is considered “money” for federal anti-money laundering statutes and other money transmission laws.

Crypto operators, including crypto mixers, have to follow anti-money laundering registration requirements and other protocols such as “know your customer” rules.

Federal undercover agents will engage with crypto operators to determine if they follow anti-money laundering laws.

Law enforcement is most concerned with crypto operators who are intentionally conspiring to launder the proceeds of crime. 

CONCLUSION

The appetite for prosecuting criminal violations in the cryptocurrency markets is only increasing. The federal government is focused intently on those businesses that most readily can facilitate money laundering activities, but everyone in the crypto space should remain alert. 

Prison Professors, an Earning Freedom company, works alongside (not in place of) civil and criminal defense counsel to help clients proactively navigate through investigations and prosecutions. Our team also helps clients prepare mitigation and compliance strategies.

If you have any questions or are uncertain about any of the issues discussed in this post, schedule a call with our risk mitigation team to receive additional guidance.

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