Monday, December 29, 2014

Money Laundering, “Money” and Bitcoin

This post examines an opinion a U.S. District Court Judge who sits in the U.S. District Court for the Southern District of New York issued in August in a federal prosecution involving Bitcoin.  U.S. v. Faiella, 2014 WL 4100897 (2014).  
If you are interested, you can find a press release describing the original indictment here. Basically, it charged
ROBERT M. FAIELLA, a/k/a `BTCKing’ an underground Bitcoin exchanger, and CHARLIE SHREM, the Chief Executive Officer and Compliance Officer of a Bitcoin exchange company, for engaging in a scheme to sell over $1 million in Bitcoins to users of `Silk Road,’ the underground website that enabled its users to buy and sell illegal drugs anonymously and beyond the reach of law enforcement. Each defendant is charged with conspiring to commit money laundering, and operating an unlicensed money transmitting business. . . .
After the indictment came out, Faiella, who was  
charged with one count of operating an unlicensed money transmitting business in violation of 18 U.S. Code § 1960 Indictment (Count One), and one count of conspiracy to commit money laundering in violation of 18 U.S. Code §1956(h), Indictment (Count Three).
U.S. v. Faiella, supra.
As Wikipedia explains, money laundering
is the process in which the proceeds of crime are transformed into ostensibly legitimate money or other assets. However, in a number of legal and regulatory systems the term money laundering has become conflated with other forms of financial crime, and sometimes used more generally to include misuse of the financial system (involving things such as securities, digital currencies, credit cards, and traditional currency), including terrorism financing, tax evasion and evading of international sanctions. 
After he was indicted, Faiella
moved to dismiss Count One of the Indictment on three grounds: first, that Bitcoin does not qualify as `money’ under Section 1960; second, that operating a Bitcoin exchange does not constitute `transmitting’ money under Section 1960; and third that Faiella is not a `money transmitter’ under Section 1960. 
U.S. v. Faiella, supra.  The judge held a hearing on Faiella’s motions, and then issued the opinion this post examines.
He began with the issue of whether Bitcoin constitutes “money.”  U.S. v. Faiella, supra.
The judge explained, initially, that
`money’ in ordinary parlance means `something generally accepted as a medium of exchange, a measure of value, or a means of payment. MERRIAM–WEBSTER ONLINE, (last visited Aug. 18, 2014). As examples of this, Merriam–Webster Online includes `officially coined or stamped metal currency,’ `paper money,’ and `money of account’ -- the latter defined as `a denominator of value or basis of exchange which is used in keeping accounts and for which there may or may not be an equivalent coin or denomination of paper money.’ Id.

Further, the text of Section 1960 refers not simply to `money,’ but to `funds.’  In particular, Section 1960 defines `money transmitting’ as `transferring funds on behalf of the public by any and all means.’ 18 U.S. Code § 1960(b)(2) (emphasis added).

Merriam–Webster Online defines `funds’ as `available money’ or `an amount of something that is available for use: a supply of something.’ MERRIAM–WEBSTER ONLINE, supra. . . . Bitcoin clearly qualifies as `money’ or `funds’ under these plain meaning definitions. Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions. See, e.g., SEC v. Shavers, 2013 WL 4028182 (U.S. District Court for the Eastern District of Texas Aug. 6, 2013) (`It is clear that Bitcoin can be used as money. It can be used to purchase goods or services. . . . [I]t can also be exchanged for conventional currencies. . .’).

If there were any ambiguity in this regard -- and the Court finds none -- the legislative history supports application of Section 1960 in this instance. Section 1960 was passed as an anti-money laundering statute, designed `to prevent the movement of funds in connection with drug dealing.’ U.S. v. Bah, 574 F.3d 106 (U.S. Court of Appeals for the 2d Circuit 2009) (citing House of Representatives Report No. 107–250(I), at 54 (2001)).

Congress was concerned that drug dealers would turn increasingly to `nonbank financial institutions’ to `convert street currency into monetary instruments’ in order to transmit the proceeds of their drug sales. Senate Report 101–460, 1990 WL 201710 (1990). Section 1960 was drafted to address this `gaping hole in the money laundering deterrence effort.’ Senate Report 101--460 Indeed, it is likely Congress designed the statute to keep pace with such evolving threats, which is precisely why it drafted the statute to apply to any business involved in transferring `funds . . . by any and all means.’ 18 U.S. Code § 1960(b)(2).
U.S. v. Faiella, supra. 
Next, the judge found that Faiella’s
activities on Silk Road constitute `transmitting’ money under Section 1960. [He] argues that while Section 1960 requires that the defendant sell money transmitting services to others for a profit, see 31 C.F.R. § 1010.100(ff)(5)(1)(2013) (defining `money transmission services’ to require transmission of funds to `another location or person’), Faiella merely sold Bitcoin as a product in and of itself. But, as set forth in the Criminal Complaint that initiated this case, the Government alleges that Faiella received cash deposits from his customers and then, after exchanging them for Bitcoins, transferred those funds to the customers' accounts on Silk Road. . . .

These were, in essence, transfers to a third-party agent, Silk Road, for Silk Road users did not have full control over the Bitcoins transferred into their accounts. Rather, Silk Road administrators could block or seize user funds. . . . Thus, the Court finds that in sending his customers' funds to Silk Road, Faiella `transferred’ them to others for a profit.
U.S. v. Faiella, supra. 
The judge then found that Faiella
clearly qualifies as a `money transmitter’ for purposes of Section 1960. The Financial Crimes Enforcement Network (`FinCEN’) has issued guidance specifically clarifying that virtual currency exchangers constitute `money transmitters’ under its regulations. See FinCEN Guidance at 1 (`[A]n administrator or exchanger [of virtual currency] is an MSB [money services business] under FinCEN's regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.’ (emphasis in original)).

FinCEN has further clarified that the exception on which defendant relies for its argument that Faiella is not a `money transmitter,’ 31 C.F.R. § 1010.100(ff)(5)(ii)(F), is inapplicable. See FinCEN Guidance at 4 (`It might be argued that the exchanger is entitled to the exemption from the definition of “money transmitter” for persons involved in the sale of goods or the provision of services. . . .However, this exemption does not apply when the only services being provided are money transmission services’).
U.S. v. Faiella, supra. 
And, finally, he explained that Faiella
claims that applying Section 1960 to a Bitcoin exchange business would run afoul of the rule of lenity, constituting such a novel and unanticipated construction of the statute as to operate like an ex post facto law in violation of the Due Process Clause.

The Supreme Court has repeatedly stated that the rule of lenity is `reserved . . . for those situations in which a reasonable doubt persists about a statute's intended scope even after resort to “the language and structure, legislative  history, and motivating policies' of the statute.”’ Moskal v. U.S., 498 U.S. 103 (1990) (quoting Bifulco v. U.S., 447 U.S. 381 (1980) (emphasis in original)).

Here, as noted, there is no such irreconcilable ambiguity requiring resort to the rule of lenity. Further, defendant's argument that this case constitutes ex post facto judicial lawmaking that violates the Due Process Clause is undermined by Faiella's own statements to the operator of Silk Road that Bitcoin exchanges have `to be licensed,’ and that law enforcement agencies might `seize [his] funds. . . .
U.S. v. Faiella, supra. 
The judge therefore denied Faiella’s motion to dismiss.  As this press release notes, he pled guilty early in September.  You can read more about the facts in the case here. 

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