FBI and DoJ Officials Offer Advice on How Digital-Currency Firms Can Stay Out of Legal Trouble

Payments entrepreneurs and veterans alike view Bitcoin and other so-called cryptocurrencies as the new land of opportunity, but with the territory comes a considerable amount of legal risk. Federal authorities busted the Liberty Reserve and Silk Road ventures, the latter because it attempted to hide illegal activity by requiring customers to use only Bitcoin. And just last week the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen) issued rulings saying that two cryptocurrency companies were money-services businesses subject to various reporting and record-keeping requirements. Dismayed digital-currency partisans are already dubbing FinCen’s decisions the “October surprise.”

So how can cryptocurrency companies, whose transactions can be hard to track and whose business models differ from banks and other traditional financial-services companies, stay out of trouble? That was a question presented at a panel Sunday at the Money20/20 conference in Las Vegas. The best strategy is to have an effective anti-money-laundering (AML) program and to implement so-called know-your customer and related policies in much the same way that regulated financial firms do, according to panelists from the FBI and the U.S. Department of Justice. “If you’re providing a financial service, you’re [on] the front lines, you’re the ones actually seeing the activity go through your system,” said Catherine “Alden” Pelker, an analyst in the FBI’s money-laundering intelligence unit. She added that private companies play a “vital role” in keeping the financial system honest.

“If you had every single company in this space that really did have an effective anti-money-laundering and compliance program, criminals would not be able to move the volumes of funds and the types of funds through the system that they currently are able to,” she said.

Addressing the question of how does a company know if it’s under investigation, the receipt of a “target letter” or “subject letter,” which precede or accompany subpoenas, likely signals that a customer or the company itself is being investigated for possible financial crimes, according to Kathryn Haun, an assistant U.S attorney in the Justice Department’s Organized Crime Strike Force. “If you receive a target or subject letter, that’s probably the most clear-cut indication that you’re a target or subject because we don’t send those out lightly,” she said.

Neither Haun nor Pelker would talk about specific cases, but they insisted that the federal government is not itching to come down on a rising new industry. Many digital-payments executives as well as merchant acquirers have criticized the feds for allegedly assigning policing roles to payment processors to prevent fraudulent merchants from getting access to payment services through which they can fleece consumers.

“Law enforcement is not out there just waiting for you to trip up on a minor technicality, contrary to popular opinion and perspective,” said Pelker. What will attract the attention of authorities, she and Haun said, is a large volume of payments that may indicate lax AML controls.

It’s getting harder for both the private and public sectors to stay ahead of cryptocurrencies. Haun said she’s aware of least 650 such currencies, but panelist Scott Dueweke, director, identities and payments, at Chantilly, Va.-based Agilex Technologies, a consulting firm to the federal government on tech matters, said he’s heard of about 1,100. Five to 15 more appear each week, he said. The number of cryptocurrencies has grown into “an unmanageable…haystack” that is too big for individuals to keep on top of without new, automated monitoring technology, according to Dueweke.

Another panelist, Azba Habib, regulator counsel for BitPay Inc., an Atlanta-based Bitcoin merchant processor, agreed that keeping ahead of the new payment methods is an increasingly big job. “It’s so hard to scale and keep up,” she said. BitPay is continually adding monitoring tactics and controls to ensure that its merchants sell only legal goods and services, she said.