A FinCEN First: Peer-to-Peer Virtual Currency Exchanger Dinged
Written by Shari R. Pogach, NAFCU Regulatory Paralegal
Last week, the Financial Crimes Enforcement Network (FinCEN) announced a civil money penalty assessment against Eric Powers for willful violations of the Bank Secrecy Act (BSA) registration, program and reporting requirements from December 2012 through September 2014. So what was it that he did or did not do? Well, according to FinCEN, Powers did not: register as a money services business (MSB); have or implement any written policies or procedures to ensure BSA compliance; detect and report any suspicious activity transactions; or report any currency transactions.
Eric Powers operated as a peer-to-peer exchanger of convertible virtual currency and as FinCEN guidance FIN-2013-G001 indicates, was required to register as an MSB. As a peer-to-peer exchanger of bitcoin, purchasing and selling it to and from others, Powers conducted over 1,700 transactions as a money transmitter. As money transmitters, peer-to-peer exchangers must comply with the BSA obligations that apply to MSBs, including registering with FinCEN; developing, implementing and maintaining an effective anti-money laundering (AML) program; filing Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs); and maintaining certain records.
Powers advertised his intent to purchase and sell bitcoin to others on the internet. He made sales and purchases by either physically delivering or receiving currency funds in person, sending or receiving funds through the mail or coordinating transactions by wire through a depository institution. He also indicated he would direct transactions, on behalf of his customers, at other virtual currency exchangers (such as Mt. Gox). FinCEN also found that Powers participated in online discussions about AML compliance, including specific conversations about registering as an MSB that indicated his awareness of BSA requirements.
According to FinCEN, Powers processed numerous suspicious transactions without filing any SARs. His bitcoin wallet addresses were associated with over a hundred transactions totaling more than $12,000 with customers doing business on the darknet website Silk Road. In addition, his records showed Powers conducted multiple transactions of almost $90,000 with customers who had email addresses using The Onion Router (TOR) – a service that helps conceal a user’s location and identity and used to access the darknet. He conducted transactions with one customer three times for approximately $170,000 after this person appeared in the news offering alternate ways to access darknet marketplaces with the shutdown of Silk Road. A basic search on the internet for the customer’s screen name provided identifying information, including the customer’s name, yet Powers did not have the information in his records.
Powers conducted over 200 transactions involving the physical exchange of more than $10,000 in currency but did not file a single CTR. In one instance, he purchased nearly $19,000 worth of bitcoin for a customer from a business and mailed the payment in cash. Powers made 160 purchases of bitcoin for approximately $5 million through in-person cash transactions, conducted in places such as coffee shops, with a person identified through a bitcoin forum. Of these, 150 were in-person cash transaction and made at separate times for over $10,000 during a single business day. He also made a purchase of 216 bitcoins from the same individual in exchange for a payment of approximately $30,000 in cash sent through the mail. Powers also paid approximately $60,000 in cash to a customer in exchange for approximately 500 Bitcoins.
This was FinCEN’s first enforcement action against a peer-to-peer virtual currency exchanger and the first time it has penalized an exchanger of virtual currency for not filing CTRs. Powers cooperated with FinCEN’s investigation, was assessed a civil money penalty of $35,350 and agreed to an industry bar preventing him from providing money transmission services or engaging in any activity that would make him a money services business. FinCEN Director Kenneth A. Blanco stated, “It should not come as a surprise that we will take enforcement action based on what we have publicly stated since our March 2013 Guidance—that exchangers of convertible virtual currency, such as Mr. Powers, are money transmitters and must register as MSBs.”
