MONEY LAUNDERING CASES INVOLVING CRYPTOCURRENCY: AN OVERVIEW AND HOW TO DEFEND THEM
Author:
Federal Cryptocurrency Money Laundering Defense Lawyer John Helms
Federal criminal cases involving money laundering and cryptocurrency have become much more common in recent years. Cryptocurrency is a relatively recent innovation, but sophisticated criminals have found innovative ways to use it to help cover their tracks. This article will examine trends in federal cryptocurrency money laundering cases and how to defend them.
WHAT IS MONEY LAUNDERING?
Money laundering means taking “dirty money”—that is, money from crime–and “cleaning” it so that it looks like it is from a legitimate source. This helps to avoid suspicion from law enforcement.
Here is an example. People who buy and sell illegal drugs almost always use cash, because, unlike checks or credit cards, cash is very hard to trace. But if a person is caught with a huge amount of cash with no explanation of where it came from or why the person has it, this can be strong evidence that the person is involved in a lot of crime. So, a person who gets a lot of cash income from drug sales will probably want to make it look like that cash is from legitimate activity, or at least disguise its source.
Money laundering is a crime because it helps to hide or promote other crimes. The federal laws that define money laundering are at 18 U.S.C. §§ 1956 and 1957. They are very complicated.
To illustrate this, at a money laundering trial involving an alleged violation of section 1956(a)(1), here is what the judge tells the jury that they must find beyond a reasonable doubt in order to find the defendant guilty:
First: That the defendant knowingly conducted [or attempted to conduct] a financial transaction;
Second: That the financial transaction [or attempted financial transaction] involved the proceeds of a specified unlawful activity, namely _______________ (describe the specified unlawful activity);
Third: That the defendant knew that the property involved in the financial transaction represented the proceeds of some form of unlawful activity; and
Fourth: That the defendant intended to promote the carrying on of the specified unlawful activity.
[or, Fourth: That the defendant knew that the transaction was designed in whole or in part to conceal or disguise the nature, location, source, ownership, or control of the proceeds of the specified unlawful activity.]
With respect to the second element, the government must show that, in fact, the property was the proceeds of ______________ (describe specific unlawful activity), which is a specified unlawful activity under the statute.
With respect to the third element, the government must prove that the defendant knew that the property involved in the transaction were the proceeds of some kind of crime that is a felony under federal, state, or foreign law; although, it is not necessary to show that the defendant knew exactly what crime generated the funds.
Fifth Circuit Criminal Pattern Jury Instructions, § 2.76A.
The bottom line, however, is that the person laundering money must know that the money is from some sort of crime, and the person must either be trying to promote that illegal activity or trying to conceal or disguise the source of the funds.
Many internet-based crimes are usually followed by money laundering to obscure the source of the criminal proceeds. These include:
-Email or social media fraud scams that trick people into sending money to someone.
-Ransomware attacks involving sending funds electronically to the attacker.
-Internet theft, such as by hacking into bank accounts or stealing identities.
-Dark web transactions in illegal goods or services.
Each of these types of crimes will involve an electronic transaction in some type of funds. For example, a romance scam may trick victims into wiring large amounts of money to someone they have met through social media who they think is in love with them. The scammer will want to make it as difficult as possible for law enforcement to find them, so they will want to launder the ill-gotten gains before they finally take control of the funds.
One traditional way to do this is to recruit someone in the United States, called a “money mule,” to open a bank account in a company or false name and have the scam funds wired into this account. The person then wires those funds into an overseas account that is difficult for U.S. authorities to reach. The money mule may be paid just to open the account and send funds out and may be tricked into believing that the funds are really legitimate and that they are simply helping a friend.
Cryptocurrency, however, has offered new and more sophisticated ways to launder money.
WHAT IS CRYPTOCURRENCY?
To understand how cryptocurrency can be used in money laundering, it is first necessary to understand what cryptocurrency is.
A cryptocurrency is a digital, encrypted, and decentralized medium of exchange. Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
- Ashford, “What Is Cryptocurrency,” Forbes Advisor, February 16, 2023 (available at https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/).
Every transaction in a given cryptocurrency is recorded on the cryptocurrency’s blockchain.
A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.
Id.
The fact that there is an electronic record on the blockchain of every transaction would seem to create an electronic paper trail that law enforcement could use to “follow the money” to its source. Several products enable law enforcement to do just that. These are called “blockchain tracers.” They include TRM Labs’ Graphic Visualizer, QLUE, Lukka Blockchain Investigator, and Chainalysis.
HOW IS CRYPTOCURRENCY USED FOR MONEY LAUNDERING?
A number of technologies and strategies, however, enable money launderers to make it extremely difficult for law enforcement trace cryptocurrency transactions on the blockchain. Here are some examples:
Mixers. A mixer is a service that combines the funds of many users, jumbles them up, and then, later, sends the funds out to a new address controlled by each user. Sometimes, a user’s funds can be sent to the user’s new address at randomized times and in partial amounts. This makes it difficult to trace specific funds from the user’s original address to the new address or from the new address back to the original address. See Chainalysis, “Crypto Mixers and AML Compliance,” August 23, 2022 (available at https://www.chainalysis.com/blog/crypto-mixers/). Money launderers can send dirty money to a mixer to break the money trail on the blockchain so that it is difficult for law enforcement to trace it.
Chain Hopping. Chain hopping involves a transaction that converts funds from one cryptocurrency to another. In this way, the money “hops” from one blockchain to another using what is called a cross-chain bridge. Traditional blockchain analysis does not permit tracing funds beyond that bridge between the two chains.
One way to use chain hopping is to transfer funds from one blockchain to another and into an anonymous wallet, which hides the owner of the wallet. Under U.S. “know your customer” banking regulations, an exchange that works with anonymous wallets cannot have customers within the United States. See U.S. Treasury Department, FinCEN Guidance FIN-2013-G001, March 18, 2013. Therefore, a money launderer can try to avoid U.S. regulations and transfer illicit funds into an anonymous wallet by hoping from one blockchain to another, transferring funds to an overseas account, and, transferring funds from that overseas account to an anonymous wallet through a cryptocurrency exchange that does not comply with U.S. know your customer regulations.
Nested Services. Nested services are provided by a person or entity who has an account on a regular exchange. The nested service provider acts as an intermediary between one party and another who want to make a transaction using the exchange. A party with dirty funds can trade them for clean funds by, for example, using an over-the-counter (“OTC”) broker who uses the exchange to transfer an equivalent amount of funds for clean funds from another party. The involvement of the OTC broker disguises the source of the dirty funds from the exchange and the other party. See D. Grau, “What Law Enforcement Needs to Know About Crypto Money Laundering,” Cognyte, August 8, 2023 (available at https://www.cognyte.com/blog/anti-money-laundering-cryptocurrency/).
A North Korean hacking organization known as the Lazarus Group has made extensive use of OTC brokers to launder stolen cryptocurrency used to fund North Korea’s weapons of mass destruction and ballistic missile programs. The U.S. Treasury Department’s Office of Financial Asset Control (“OFAC”), has imposed sanctions on three individuals for their involvement in facilitating North Korea’s stolen cryptocurrency money laundering through OTC brokering activity. See U.S. Treasury Dept. Press Release, “Treasury Targets Actors Facilitating Illicit DPRK Financial Activity in Support of Weapons Programs,” April 24, 2023 (available at https://home.treasury.gov/news/press-releases/jy1435).
EXAMPLES OF RECENT MONEY LAUNDERING PROSECUTIONS AND ENFORCEMENT ACTIONS INVOLVING CRYPTOCURRENCY.
Money laundering prosecutions involving cryptocurrency have been increasing around the country in the last few years. Here are some examples:
ChipMixer (United States v. Nguyen, Case No. 23-MJ-528, in the United States District Court for the Eastern District of Pennsylvania). This case involved a dark web Bitcoin mixing service called ChipMixer. It allegedly concealed the location of its servers by operating as a Tor hidden service and did not collect any information about its customers. It allegedly helped to launder money for darknet markets, fraud, ransomeware, hacking schemes, and other criminal activities. The case is ongoing.
Bitcoin Fog (United States v. Sterlingov, No. 1:21-CR-399, in the United States District Court for the District of Columbia). Bitcoin Fog was a mixer that moved over 1.2 million bitcoin, which was valued at approximately $400 million at the time of the transactions. Most of it came from darknet marketplaces and was tied to illegal narcotics, computer crimes, identity theft, and child sexual abuse material. The defendant in the case was found guilty on all counts of money laundering after a jury trial on March 12, 2024.
Helix (United States v. Harmon, No. 1:19-CR-395, in the United States District Court for the District of Columbia). Helix was a darknet-based Bitcoin mixer. Helix moved over 350,000 bitcoin – valued at over $300 million at the time of the transactions. Helix serviced darknet markets and even partnered with a darknet market called AlphaBay to provide money laundering services for the market’s customers. The operator of Helix pleaded guilty to one count of money laundering, but he has not been sentenced yet.
Samourai Wallet (United States v. Rodriguez et al., No. S2-24Cr. 82, in the United States District Court for the Southern District of New York). Samourai Wallet was a cellphone app that gave users access to alleged money laundering services, including a mixer called “Whirlpool” and a service called “Ricochet,” which allegedly helped disguise a transaction by creating multiple unnecessary third-party transactions, known as “hops,” between the sender and the recipient.
The Lazarus Group. In 2023, the United States Treasury Department’s Office of Foreign Asset Control (“OFAC”), imposed sanctions on a Chinese OTC trader and a Hong Kong OTC trader who provided nested services to launder stolen cryptocurrency into fiat money. They were acting on behalf of The Lazarus Group, which is a group of North Korean organization that uses hacking techniques to steal money to fund North Korea’s nuclear weapons and ballistic missile programs.
Pig Butchering Proceeds Case (United States v. Li et al., No. 2:24-CR-311, in the United States District Court for the Central District of California). “Pig butchering” is a type of investment scam that originated in China. It refers to the practice of fattening a pig before slaughter. In this case, the two defendants allegedly operated a syndicate to launder the proceeds of a large pig butchering scam. The scam participants allegedly recruited people to open bank accounts in the name of shell companies to receive the fraud proceeds from the victims. The funds were then sent to a bank in the Bahamas, converted into cryptocurrency, and sent to virtual wallets where they could be accessed.
Cartier (United States v. Cartier et al., No. S2-24-CR-133, in the United States District Court for the Southern District of New York). This case involves a purported member of the Cartier luxury goods family. The defendants are accused of laundering Columbian cocaine sales proceeds back to Columbia by converting U.S. dollars into a cryptocurrency called Tether, converting Tether back to U.S. dollars, and sending the U.S. dollars to back to Columbia. Tether has become popular with money launderers because, among other things, once a transaction is made on Tether’s blockchain, it cannot be reversed or recaptured.
Rule (United States v. Rule, No. 6: 22-CR-64, in the United States District Court for the Eastern District of Texas). Randall Rule allegedly helped to launder proceeds from romance fraud scams. The Government’s trial brief describes the allegations against him as follows:
In order to conceal the source of the transactions, Rule converted the funds into BTC and, at times, transferred the funds between other accounts as a preliminary step before converting the fiat currency to BTC. Rule converted the funds to BTC by purchasing BTC from an exchange and by purchasing BTC from peer-to-peer BTC traders. Rule then directed the transfer of the BTC to designated wallets for the criminal organizations managing the fraud schemes. BTC tracing shows these funds were usually sent to overseas exchanges, such as Binance, and the account holders were usually from Nigeria or Ghana. These two countries are known to federal law enforcement agents as the location of criminal organizations which perpetrate scams against U.S. citizens.
Government’s Ex Parte Trial Brief, United States v. Rule, No. 6:22-CR-64, at 2 (EDTX, May 3, 2024). Mr. Rule is currently representing himself. He is asserting a variety of “sovereign citizen” arguments that have been rejected hundreds of times by every court that has considered them. His trial is currently scheduled for the summer of 2024.
The cases described above show that federal law enforcement around the country will aggressively pursue money laundering charges involving cryptocurrency.
DEFENDING CRYPTOCURRENCY MONEY LAUNDERING CASES.
Obviously, trading in cryptocurrency is not illegal. In order to prove someone guilty of money laundering involving cryptocurrency, the Government must prove that the accused was knowingly dealing in funds from illegal activities and that, through financial transactions, the accused either intended to further those activities or intended to conceal the illegal nature of the proceeds or the recipient.
If the Government can prove that illegal proceeds were involved, it will be difficult, if not impossible, for the accused to prove affirmatively that he or she did not know that and did not intend to further or conceal those activities. This is known as trying to prove a negative. However, in any criminal prosecution, of course, the Government must prove the accused guilty beyond a reasonable doubt, and the accused is not required to prove anything. In most cases, therefore, the defense lawyer must be able to explain why the Government’s evidence does not prove knowledge and intent beyond a reasonable doubt.
Depending on the expected sophistication of the jury, a defense lawyer may need to convince jurors that dealing in cryptocurrency is legitimate, legal, and not suspicious, by itself. Normally, with planning and skill, this can be done through detailed cross-examination of the Government’s witnesses.
The next step, however, is to convince the jury that the Government’s evidence is not enough to prove, beyond a reasonable doubt, knowledge of illegal proceeds and the intent to promote illegal activities. This will probably be more difficult, and it depends on the proof the Government can present. Each case has different facts and evidence, so there is not one way to do this, but in my opinion, the fact that a lawyer may be a good advocate in a simple case is not enough. Money laundering is complicated. Cryptocurrency is complicated. An effective lawyer in this kind of case needs to have mastered these complexities and must also be able to communicate complex facts and theories to jurors who walk into the courtroom knowing nothing about them.
Cryptocurrency money laundering cases usually involve very large amounts of alleged criminal proceeds. This means potentially very long prison sentences. In other words, there is a whole lot at stake. Anyone who is faced with criminal charges involving money laundering and cryptocurrency should do everything possible to hire the best lawyer possible for this specific type of case.
Related
Money Laundering Defense: Understanding Cryptocurrency Trading and Legal Consideration
source: https://johnhelms.attorney/money-laundering-cases-involving-cryptocurrency-an-overview-and-how-to-defend-them/
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