Why does BitCoin and other types of Virtual Currency draw so much attention from the Taxing Authorities and the Federal Government?
This question is best answered with examples of Bitcoin related criminal prosecutions like those surrounding the take down of “Silk Road”.
“Silk Road” Take Down and 3 Arrests: A Tale of Woe.
The federal government fears that organized crime is using e commerce, and virtual currency such as BitCoin, as a means for money laundering and income tax evasion. The following story about a website called “Silk Road” is a great example of how this fear came into being.
Silk Road was created by a man from San Francisco named Ross Ulbricht. Mr. Ulbricht also went by the name “Dread Pirate Roberts.” Silk Road was an underground website created to sell a variety of illegal drugs along with other unlawful goods and services. The site was a fairly sophisticated criminal marketplace designed to keep all transactions anonymous. Thousands of drug dealers used the site to distribute hundreds of kilos of illegal drugs, goods, and services to more than 100,000 buyers. Silk Road was also used launder hundreds of millions of dollars that were received from buyers.
Site creators attempted to keep everything anonymous by creating a network of computers located around the world that concealed the IP addresses of the computers that used the network. This concealed the identities of the networks users.
The site was also designed to take only Bitcoin as payment, further concealing the identities and locations of the customers who were making the payments through the site.
Authorities took down Silk Road in October of 2013 after it had been in operation for a little over 2 years. On May 15, 2015 Ulbricht was forced to forfeit $183,961,921 and was also sentenced to life in prison.
The next to be sentenced to prison was Robert M. Faiella from Fort Myers Beach, Florida. Faiella was an underground Bitcoin exchanger who was operating an unlicensed fund transmitting business. His underground exchange was run on Silk Road. Since Bitcoin was the only way to pay on Silk Road the users needed to get Bitcoin from somewhere, and Faiella was happy to help.
Faiella would get orders for Bitcoin from Silk Road users that he filled through another site called BitInstant. BitInstant is a site that enabled customers to buy Bitcoin with cash anonymously. Customers of BitInstant didn’t need to supply any personal identifying information and the sit charged a fee for their services.
Faiella would get the Bitcoins from BitInstant then sell them to Silk Road users at a markup. The CEO of BitInstant had knowledge of Faiella’s actions and even actively assisted him. Together they exchanged around $1 million in cash in exchange for Bitcoin to give to the Silk Road users.
Robert Faiella was sentenced to forfeit $950,000 and serve 48 months in prison with 3 years of supervised release.
Arrest number 3 is no surprise. The CEO of BitInstant, Charlie Shrem, was sentenced to forfeit $950,000 along with 2 years in prison and 3 years of supervised release. Shrem was also the compliance officer for BitInstant, in charge of complying with all anti-money laundering laws.
Shrem knew that the Silk Road site was used in illegal drug trafficking and that Faiella was using the Bitcoin exchanged to give to customers of that site. Shrem even personally processed those orders and gave a discount to Faiella on high volume transactions. Along with all of that, Shrem never filed a suspicious activity report, further helping Faiella to avoid the governments anti money laundering restrictions.
It is very doubtful that any of these individuals paid any taxes on their illegal money. This story just proves the IRS’s suspicions were right; people are using Bitcoin for money laundering and tax evasion. More stories like this one simply make the John Doe summons more necessary and likely to succeed.
What are some of the more notable criminal prosecutions involving Bitcoin or other Digital Currency?
Excepts of official U.S. Government Announcements follow:
MICHAEL RICHO, 34, of Wallingford, was arrested for access device fraud, computer fraud, wire fraud, identity theft and money laundering where he was stealing bitcoins via an online phishing scheme on the dark web.
He posted fake links in online marketplaces that directed his victims to a fake login page that was virtually identical to various actual online marketplaces. When they attempted to login he stole their username and password. When his victims deposited bitcoins with the marketplace, RICHO withdrew the bitcoins before the individual could spend them and deposited the stolen BitCoin into his own bitcoin wallet. He subsequently sold the stolen bitcoins to third parties in exchange for U.S. currency. It was alleged that RICHO had over 10,000 stolen usernames and passwords stored on his computer.
RICHO faces Money laundering and Wire Fraud charges that each carry a potential 20-year imprisonment term, Access Device Fraud that carries a 10-year term, Computer Fraud punishable by a maximum five years’ impingement term, and Aggravated Identity Theft with a mandatory imprisonment term of two years.
A Multinational sting was conducted involving searches and arrests in four countries with the aim of dismantling a sophisticated and complex network of servers collectively known as “Avalanche.” The network was alleged to host greater than two dozen of the world’s most troublesome and malicious software along with several money laundering campaigns.
The Cyber Criminals that ran the network relied on an international infrastructure dedicated to facilitating privacy invasions and financial crimes. A multinational law enforcement coalition targeted the individual bad actors, and the network’s infrastructure to disrupt the criminal ecosystem in one major strike.
The sting was unprecedented in its scope, scale, reach and where 40 countries cooperated in taking down the Network and destroying the cyber infrastructure and disrupting all the malware systems that relied upon it to do harm.
Authorities stated that the only way to effectively combat international cybercrime is with a coordinated international law enforcement approach. The FBI stated it is as comfortable chasing international criminals in cyberspace with the help of their international partners as they are here at home.
Avalanche offered cyber criminals a secure infrastructure that was designed to avoid detection by international law enforcement and cyber security experts, that enabled criminals to conduct malware campaigns and money laundering schemes nicknamed “money mule” schemes. Malware was used to steal the online banking passwords and related sensitive information from victims. Once the victim’s computers we infected with Malware their computers were redirected through the Avalanche network of servers and ultimately rerouted to servers controlled by the end-user cybercriminals. Access to the Avalanche network was marketed to cybercriminals via postings on underground online criminal forums.
The sting operation seized, blocked and sinkholed / redirected traffic from the infected victim’s computers to servers controlled by law enforcement. Over 800,000 malicious domains associated with the Avalanche network were identified in this manner. The Malicious domains funneled information from the victims’ infected computers via the Avalanche servers back to the end user cybercriminals.
The criminal network launched ransomware attacks that encrypted victims’ computer files until they paid a ransom via electronic currency to the end-user cybercriminals. Other types of malware initiated fraudulent wire transfers or utilized “mules” who purchased goods with stolen funds, which enabled the cybercriminals to launder the stolen money they acquired via malware attacks or other criminal means.
The Avalanche network was known to be in existence from at least 2010 and was estimated to involved as many as 500,000 malware infected computers on a worldwide daily basis. The financial losses victims suffered via malware attacks are estimated to be in the hundreds of millions of dollars spread the worldwide.
The sting involved the U.S. Attorney’s Office, the FBI, Department of Homeland Security’s U.S.-Computer Emergency Readiness Team (US-CERT), the Shadowserver Foundation, Fraunhofer Institute for Communication, Registry of Last Resort, ICANN and domain registries from around the world. The Criminal Division’s Office of International Affairs, the Public Prosecutor’s Office Verden; the Luneburg Police of Germany; Europol; and Eurojust, located in The Hague, Netherlands; and investigators and prosecutors from more than 40 jurisdictions, including India, Singapore, Taiwan and Ukraine.
TRENDON T. SHAVERS, a/k/a “pirateat40,” was sentenced to 18 months in prison for securities fraud involving a Bitcoin-related Ponzi scheme. SHAVERS founded and operated a Bitcoin Savings and Trust that sold Bitcoin-based investments via the Internet. SHAVERS fraudulently obtained around 146,000 Bitcoin which was valued at $807,380 based on the average Bitcoin FMV over the entire duration of the fraudulent scheme.
He ran a classic Ponzi scheme by raising Bitcoins while promising spectacular returns and offering personal guarantees, while merely paying back older investors with newer investors’ Bitcoins.
He utilized an internet based public “Bitcoin Forum” to attract victims who lent Bitcoin in exchange for being paid up to seven percent interest weekly which amounts to an annualized interest rate of 3,641% per year while being promised the ability to withdraw their investments at any time. SHAVERS claimed the borrowed Bitcoin was being used to fund a market-arbitrage strategy which included lending Bitcoin to others for a fixed period; trading Bitcoin via online exchanges; and selling Bitcoin locally via private, off-market transactions. He personally guaranteed each victim to cover any losses in the event of a market change. He eventually failed to honor his investors’ redemption requests and his personal guarantee, and reneged on paying the agreed-upon rates of interest.
SHAVERS ultimately diverted investors’ Bitcoin to day trade on his own account via a Bitcoin currency exchange, and to pay his personal expenses. At the peak of the Ponzi Scheme, SHAVERS had in his possession, roughly seven percent of the Bitcoin in public circulation at that time. Ultimately 48 of the approximately 100 investors lost all or part of their investment.
SHAVERS was ordered to pay $1,228,660.93 in forfeiture, and $1,228,660.93 in restitution and to pay more than $40 million in disgorgement and prejudgment interest, and a civil penalty of $150,000.
More than 20 federal agencies, 94 U.S. attorneys, state and local partners, were assembled in what amounts to the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud at that time.
Websites Seized in The Operation Include Underground Markets Trafficking in Illegal Drugs, Firearms, Stolen Credit Cards, Fake Passports and IDs, Computer-Hacking Services, And Counterfeit Currency
The United States Attorney’s office, Justice Department’s Criminal Division, Federal Bureau of Investigation and Homeland Security Investigations seized the Silk Road 2.0 website and dozens of additional “dark market” websites offering illegal goods and services on a network of computers on the Internet designed to conceal the true IP addresses of the computers logged on the network. The IP addresses and servers hosting these websites were seized yesterday as part of a coordinated international law enforcement action and the law enforcement agencies of approximately 16 foreign nations working under the umbrella of Europol’s European Cybercrime Centre (EC3) and Eurojust.
“Underground websites such as Silk Road and Silk Road 2 are like the Wild West of the Internet, where criminals can anonymously buy and sell all things illegal.
The advertised goods and services included, among other things: illegal narcotics; firearms; stolen credit card data and personal identification information; counterfeit currency; fake passports and other identification documents; and computer-hacking tools and services.
The operation against the Dark Market Sites involved the seizure of over 400 Tor website addresses – known as “.onion” addresses – as well as the servers hosting them. Examples of some of the sites seized in the operation include:
The law enforcement authorities of Bulgaria, the Czech Republic, Finland, France, Germany, Hungary, Ireland, Latvia, Lithuania, Luxembourg, the Netherlands, Romania, Spain, Sweden, Switzerland, and the United Kingdom participated in the sting.
Manhattan U.S. Attorney Announces Charges Against Bitcoin Exchangers, Including CEO Of Bitcoin Exchange Company, For Scheme to Sell and Launder Over $1 Million In Bitcoins Related to Silk Road Drug Trafficking
Bitcoins were Used to Buy and Sell Illegal Drugs Anonymously on The Silk Road Drug Trafficking Website
Criminal charges were brought against ROBERT M. FAIELLA and CHARLIE SHREM, the Chief Executive Officer and Compliance Officer of a Bitcoin exchange company, whom engaged in a scheme to sell over $1 million in Bitcoins to users of “Silk Road,” to enable them to buy and sell illegal drugs anonymously and attempt to place the users beyond the reach of law enforcement.
SHREM was also charged with willfully failing to file any suspicious activity report regarding FAIELLA’s illegal transactions through the Company, in violation of the Bank Secrecy Act.
The prosecutors stated that law enforcement will aggressively pursue those who would coopt new forms of currency for illicit purposes.” Both defendants were charged with knowingly contributing to and facilitating anonymous drug sales and earning substantial profits along the way by enabling ‘Silk Road’ customers to conduct their illegal transactions by facilitating the conversion of their dollars into Bitcoins.
FAIELLA sold Bitcoins, which were the only form of payment accepted on Silk Road to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through a company based in New York, New York (the “Company”). The Company was designed to enable customers to exchange cash for Bitcoins anonymously, that is, without providing any personal identifying information, and it charged a fee for its service. FAIELLA obtained Bitcoins with the Company’s assistance, and then sold the Bitcoins to Silk Road users at a markup.
SHREM is the Chief Executive Officer of the Company that oversaw ensuring the Company’s compliance with federal and other anti-money laundering (“AML”) laws. Coincidentially, SHREM was also the Vice Chairman of a foundation dedicated to promoting the Bitcoin virtual currency system. SHREM, also personally bought drugs on Silk Road, and was fully aware that Silk Road was a drug-trafficking website and knew that FAIELLA was operating a Bitcoin exchange service for Silk Road users. Working together, SHREM and FAIELLA exchanged over $1 million in cash for Bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road.
They each were charged with one count of conspiracy to commit money laundering, which carries a maximum sentence of 20 years in prison, and one count of operating an unlicensed money transmitting business, which carries a maximum sentence of five years in prison. SHREM is also charged with one count of willful failure to file a suspicious activity report, which carries a maximum sentence of five years in prison.
The DEA’s New York Organized Crime Drug Enforcement Strike Force, the New York City Police Department, Immigration and Customs Enforcement – Homeland Security Investigations, the New York State Police, the U. S. Internal Revenue Service Criminal Investigation Division, the Federal Bureau of Investigation, the Bureau of Alcohol, Tobacco, Firearms and Explosives, U.S. Secret Service, the U.S. Marshal Service, New York National Guard, Office of Foreign Assets Control and the New York Department of Taxation and Finance participated in the investigation and prosecution.
Murgio used Coin.mx, an internet-based Bitcoin exchange, to process over $10 million in Bitcoin transactions in violation of federal anti-money laundering laws, and then obstructed a regulatory examination to hide his scheme.”
The Bitcoin exchange was illegally operated in violation of federal anti-money laundering laws and regulations, including those requiring money services businesses like Coin.mx to meet state licensing and federal registration requirements set forth by the United States Treasury Department. Substantial efforts were made to evade detection of their unlawful Bitcoin exchange via operating through a phony front company called “Collectables Club.” to open bank accounts, and too fool financial institutions into believing the unlawful Bitcoin exchange was simply a members-only association of individuals who discussed, bought, and sold collectible items and memorabilia.
Financial institutions were deceived where the exchange deliberately misidentified and miscoded Coin.mx customers’ credit and debit card transactions, in violation of bank and credit card company rules and regulations. Coin.mx customers were additionally instructed on how to mislead banks about the nature of the credit and debit card transactions the customers executed through Coin.mx by falsely telling banks that they were purchasing collectibles through Coin.mx, when Bitcoins were being traded. In all, more than $10 million of Bitcoin-related transactions were processed illegally through multiple financial institutions.
To future cloak the illegal bitcoin trading, Coin.mx gained control of HOPE FCU, a federal credit union in New Jersey with primarily low-income members via in excess of $150,000 in illegal bribes. After installing various co-conspirators on HOPE FCU’s Board of Directors, Coin.mx’s banking operations were transferred over to HOPE FCU.
MURGIO, 33, Pled guilty to one count of conspiracy to operate an unlicensed money transmitting business, which carries a maximum sentence of five years in prison; one count of conspiracy to commit bank fraud, which carries a maximum sentence of 30 years in prison; and one count of conspiracy to obstruct an examination of a financial institution, which carries a maximum sentence of five years in prison.
The FBI and the Secret Service and the NCUA assisted with the investigation and prosecution which was overseen by the Office’s Complex Frauds and Cybercrime Unit.
Bitcoin was utilized to enable a conspiracy to distribute controlled substances, money laundering and to facilitate transaction in criminally derived property. Authorities states the case demonstrated the ever-growing ways in which the virtual world is intersecting with, and being exploited by crime and criminals. Homeland security stated part of its mission was to dismantle the fraudulent financial operations of transnational criminal organizations by attacking the mechanisms where they can funnel their illicit proceeds freely and without detection,” They were targeting all illegally functioning new alternatives to traditional financial institutions that deliberately enable businesses and individuals to further their criminal schemes.”
The defendants in this case conspired to purchase $74,000 in bitcoins via proceeds traceable to drug sales and then used the bitcoins to buy bulk quantities of Alprazolam, Xanan and Mollies off the dark web from a dealer in Canada for further distribution.
Investigators described Bitcoin as a convertible “virtual” currency with an equivalent value in U.S. dollars (or any foreign domination for that matter), that functions as a medium of exchange like a currency in Internet-based environments, but does not have legal tender status. The equivalent value floats on the open market, with its price varying based on global supply and demand.
When acquired, Bitcoins must be sent to the user’s Bitcoin address. The address is an alphanumeric string analogous to a bank account number. Little to no personally identifiable information about the payer or payee is transmitted in a Bitcoin transaction. Only the Bitcoin addresses of the parties are needed for the transaction, which by themselves do not reveal any identifying information.
Bitcoin is not inherently illegal. However, its anonymity has made it the medium of exchange of choice for the black markets suppliers of illegal goods and services. Bitcoin has created a shadow banking system for criminals who use Internet-based black markets. Illegal drugs can now be obtained with a click of a button, rather than having to locate a drug dealer on the streets.
The Bitcoin were seized from the Silk Road server, acquired with the forfeiture of the Silk Road hidden website. Bitcoins were used to facilitate money laundering and thus constitute property involved in money laundering. Investigators stated that Silk road was a global cyber business designed to broker criminal transactions, and the forfeiture was designed to take the profit out of crime and signal to those who would turn to the dark web for illicit activity that they have chosen the wrong path. These Bitcoins were forfeited not because they are Bitcoins, but because they were, as the court found, the proceeds of crimes.”