In a recent speech, the Under Secretary of Treasury’s Office of Terrorism and Financial Intelligence (TFI) warned of the growing threats to the U.S. financial system posed by virtual currencies. Addressing the Securities Industry and Financial Markets Association’s Anti-Money Laundering & Financial Crimes Conference, Sigal Mandelker spoke broadly of the U.S. government’s efforts to combat money laundering, terrorist financing, narcotics trafficking, corruption, and other types of illicit finance and national security threats.
In her speech, Under Secretary Mandelker specifically focused on ways in which criminals and other illicit actors are now using virtual currencies:
Kleptocrats and criminals are also attempting to find new ways around our controls to exploit the financial system. In recent years, we’ve seen terrorist groups, criminal organizations, and even rogue regimes like Venezuela experiment with and use digital and virtual currencies to hide their ill-gotten gains and finance their illicit activities. Recently, for example, Venezuela announced plans to create the “petro” digital currency to try and sidestep our powerful sanctions, which the United States imposed on the regime for its vicious assault on human rights and the rule of law.
Likewise, law enforcement authorities recently arrested a woman in New York who used Bitcoin to launder fraud proceeds before wiring the money to ISIS.
In TFI, we closely track technological innovations involving virtual currency and are aggressively targeting rogue actors attempting to use it for illicit purposes. Critical to our efforts is the regulatory framework and enforcement authorities we have in place that govern the use of virtual currency. Through FinCEN, Treasury regulates virtual currency exchangers as money transmitters and requires them to abide by Bank Secrecy Act obligations. We also use our strong enforcement powers to target those who fail to live up to their responsibilities.
Virtual currency businesses are subject to comprehensive, routine AML/CFT examinations, just like financial institutions in the securities and futures markets. We work in partnership with the IRS to examine virtual currency exchangers under our regulations for money transmitters. We also work in partnership with the SEC and CFTC to ensure that these businesses and those in your sector dealing in virtual currency appropriately address their AML/CFT BSA responsibilities.
We are also encouraging our international partners to strengthen their virtual currency frameworks. The lack of AML/CFT regulation of virtual currency providers worldwide greatly exacerbates virtual currency’s illicit financing risks. Currently, we are one of the only major countries in the world, along with Japan and Australia, that regulate these activities for AML/CFT purposes. But we need many more countries to follow suit, and have made this a priority in our international outreach, including through the Financial Action Task Force.
North Korea, Hizballah, Iran, and emerging technologies used by illicit actors are just a few examples of the many threats we face. They reinforce the importance of the international community coming together to combat bad actors and protect financial systems, markets, and institutions from abuse.
Under Secretary Mandelker also spoke about the critically important role of anti-money laundering compliance in the financial industry, and warned that “companies and individuals who do not adhere to our laws face stiff penalties,” noting that “[a]ggressive enforcement gives teeth to our powerful economic authorities.” She further explained that the financial industry must carefully study, and learn from, the enforcement actions taken by FinCEN and other Treasury departments:
Each of our actions, whether by FinCEN, OFAC, or other departments, provides an opportunity for the private sector to gain better insight into our compliance and enforcement priorities, and each action tells a story about our expectations and where that particular company fell short.
She then described FinCEN’s well-publicized enforcement action against BTC-e, a foreign virtual currency exchanger:
In the last year we have pursued actions against a number of non-U.S. companies and individuals for violating U.S. laws related to economic sanctions and money laundering, sending the very powerful message that we are intent on using our authorities no matter where in the world the illicit activity is taking place.
For example, FinCEN recently assessed a $110 million fine against BTC-e, an Internet-based virtual currency exchanger located outside the United States which did substantial business in our country. BTC-e exchanges fiat currency, as well as convertible currencies like Bitcoin and Ethereum, at one point serving approximately 700,000 customers across the world and associated with bitcoin wallets that have received over 9.4 million bitcoins.
Customers located within the United States used BTC-e to conduct tens of thousands of transactions worth hundreds of millions of dollars in virtual currencies, including between customers located in the U.S.
Yet BTC-e never registered as a money transmitter, even after FinCEN made clear through published advisories and other guidance that such exchangers were legally required to do so.
The company lacked basic controls to prevent the use of its services for illicit purposes.
As a result, they emerged as one of the principal means by which cyber criminals around the world laundered the proceeds of their illicit activity, facilitating crimes such as computer hacking and ransomware, fraud, identity theft, tax refund schemes, public corruption and drug trafficking.
In light of BTC-e’s failure to fulfill its AML obligations, Treasury took action both against the company and Russian national Alexander Vinnik, who directed and supervised BTC-e’s operations and finances.
We imposed a $12 million penalty on Vinnik and the Justice Department indicted him on 21 counts.
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