What Is It? What Is It Not? What Can You Do With It (Good ... · What Is It? What Is It Not? What...

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What Is It? What Is It Not? What Can You Do With It (Good or Bad)? 2014 ACAMS - ACFE AML/Fraud Conference North Miami, Florida November 7, 2014 Stephan Robinson, CAMS - Special Agent, IRS-CI Brian Stoeckert - Managing Director, CoinComply

Transcript of What Is It? What Is It Not? What Can You Do With It (Good ... · What Is It? What Is It Not? What...

Page 1: What Is It? What Is It Not? What Can You Do With It (Good ... · What Is It? What Is It Not? What Can You Do With It (Good or Bad)? 2014 ACAMS -ACFE AML/Fraud Conference North Miami,

What Is It? What Is It Not?What Can You Do With It (Good or Bad)?

2014 ACAMS - ACFE AML/Fraud ConferenceNorth Miami, Florida

November 7, 2014

Stephan Robinson, CAMS - Special Agent, IRS-CIBrian Stoeckert - Managing Director, CoinComply

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Bitcoin

Concept, Background & History

How it works, Exchanges & Exchange Rates

Money Laundering Assessment

Terrorist Financing Assessment

Recent Events & Outlook

▪ Other Virtual Currencies

Case Examples & Questions

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This program assumes the audience’s general understanding of:

The U.S. Money Laundering Statutes

The Bank Secrecy Act (BSA) & Regulations

Narcotics Trafficking Methodologies

The terms “crime” & “criminally derived” refer to one or more Specified Unlawful Activities (SUA) generating proceeds

Questions Are Encouraged

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Money Laundering Definition: “Dirty” money is “laundered” to conceal and/or

promote the criminal activity associated with it▪ Narcotics Trafficking, Bribery & Public Corruption,

Prostitution & Human Trafficking, Illegal Gambling

▪ “Ponzi” Schemes, Health Care Fraud, Securities Fraud, Embezzlement, Mail & Wire Fraud, Hostage Taking ▪ Many other “specified” crimes

All money laundering conduct falls into one (or more) of three categories Illustrated by the “Money Laundering Model”

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Integration

Layering

Placement

Money Laundering Model

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Concept published in 2008 under pseudonym

Protocol launched in 2009

System began operating as the world’s first global virtual currency

Internet-based (P2P) medium of exchange

Neither issued nor backed by any sovereign jurisdiction

Not transacted through any country’s central bank or financial institutions.

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A virtual currency (system/economy)

whose value is set and fluctuates against many of the world’s “real” – Fiat – currencies.

In their virtual state, Bitcoin transactions are:

▪ 1) irreversible

▪ 2) substantially, but not entirely, anonymous

▪ 3) do not move through any country’s financial system or financial institutions

▪ 4) perceived as beyond the control of any government

System operates by trust/faith of all users

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Often referred to as Crypto-currency, the virtual Bitcoin system is attractive to persons:

Seeking to maximize their personal privacy

Who oppose government’s impact on its citizens and/or globalization

Criminals who wish to evade law enforcement detection & investigation, prosecution

▪ Avoid seizure of their illicit proceeds and assets.

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Physical Bitcoin-denominated Coins

Formerly manufactured & sold by Casascius

▪ A U.S. Company based in Utah ▪ See https://www.casascius.com

▪ Coins contain an embedded “private key”

Must be purchased by & shipped to buyer

▪ Via Bitcoin Transactions & Other currencies

Notified by FinCEN to register as a MSB

▪ Owner shut down business operations▪ Parked website in 11/2013

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Bitcoins can be created by anyone who downloads certain open source software

which is then used to solve a complex mathematical formula

▪ called a “Hash”

a process called “Mining”.

A completed hash is called a “Block” and serves as “proof-of-work”

▪ which is then verified by all of the members in the Bitcoin network.

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Once verified, the miner is granted twenty-five (25) Bitcoins for each verified block.

Blocks create 25 new bitcoins at present.

▪ “Block Reward” is an incentive for people to perform the computation work required for generating blocks

Roughly every 4 years, the number of bitcoins that can be "mined" in a block reduces by 50%

▪ Originally the block reward was 50 bitcoins

▪ Halved in November 2012.

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Users store their Bitcoins in a digital “eWallet”, “Bitcoin Wallet”, or “Wallet”

created by downloading software from Bitcoin

▪ Or several internet-based third party wallet vendors.

Once the wallet is established on a computer or mobile device, the user can receive and send Bitcoins.

Users who cannot mine must buy or otherwise obtain Bitcoins from a miner, a third party exchange, or another user.

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Sources of digital wallets include:

Bitcoin

WeUseCoins

▪ www.weusecoins.com

Coinbase

▪ www.coinbase.com

MyWallet

▪ https://blockchain.info/wallet

and several others

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The leading exchanges are Bitfinex (Hong Kong/BVI), Bitstamp (United Kingdom), BTC-E.com (Bulgaria), and LakeBTC.Com (BVI).

Users must exchange U.S. Dollars (USD) or another accepted currency

For an equivalent amount/value of Bitcoins

▪ Ticker symbols: BTC, XBT, or ฿▪ At the current exchange rate.

Several other, smaller exchanges

▪ Trades via FOREX: Bid, Ask, Low, High, Avg., Vol.

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Users exchange USDs or another accepted

currency, for an equal amount [value] of ฿ Historical USD-BTC exchange rate varied from $2

to $1,200

Some significant large fluctuations in 2013 & 2014

▪ Total BTC in 09/01/2013: 11,637,500

▪ Total BTC in 05/17/2014: 12,780,476

▪ Total BTC in 10/17/2014: 13,349,000▪ www.bitcoinwatch.com & www.bitcoincharts.com

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Mt. Gox KK (Japan)

Largest Bitcoin exchange until February 2014

▪ Ceased trading & filed for bankruptcy

Admitted “losing” 850,000 of customer’s & Mt. Gox’s Bitcoins

▪ Approx. $470,000,000 worth of (USD) value vanished▪ 750,000 & 100,000, respectively @ $552.9412 per ฿

Blamed Fraud and Computers & Software

▪ “There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble.”

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Recent BTC exchange rate moves (approx. $)

May 15 – Oct. 1, 2013 $90 - $130

Oct. 25, 2013 $200

Nov. 10, 2013 $325

Nov. 18, 2013 $500

Nov. 25, 2013 $800

Nov. 29, 2013 $1,125

Dec. 10, 2013 $980

Dec. 21, 2013 $525

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Recent BTC exchange rate moves (approx. $)

Jan. 1, 2014 $730

Jan. 10, 2014 $910

Feb. 15, 2014 $610

Mar. 3, 2014 $580

Mar. 10, 2014 $680

Apr. 12, 2014 $375

May 17, 2014 $450

▪ Data Credit: www.bitcoincharts.com

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September 1, 2013

Exchange rate: $124.02 - $145.11 = 1 BTC

▪ Average: $130.99 @ 11 different USD exchanges

September 1, 2014

Exchange rate: $504.00 = 1 BTC

October 17, 2014

Exchange rate: $377.02 - $450.00 = 1 BTC

▪ Average: $385.92 @ 17 different USD exchanges▪ A $114 – or 22.6% – loss of value in six weeks

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Rates for 35 other currencies are available:

Euro British Pound Sterling

Russian Ruble Ukrainian Hryvnia

Bulgarian Lev Canadian Dollar

Mexican Peso Brazilian Real

Argentine Peso Peruvian Nuevo Sol

Chinese Yuan Japanese Yen

Hong Kong Dollar Thai Baht

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Other currencies, Cont’d.

Singapore Dollar Indian Rupee

Israeli Shekel Swiss Franc

Norwegian Krone Swedish Krona

South African Rand Australian Dollar

All major geographic regions

Except for the Middle East

▪ Saudi Riyal is presently the only Middle Eastern currency for which Bitcoins may be exchanged.▪ Gov’t. policies, infrastructure, computer usage & internet access

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Used to pay for goods and services at both online and physical locations.

Transactions are conducted by a buyer sending an agreed upon quantity of Bitcoins (or a portion of one BTC) from their digital wallet

To the “address” of the seller’s digital wallet.

▪ Escrow services may be employed for large transactions

The number of “bricks-and-mortar” businesses accepting Bitcoins is low, but always increasing

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Many online resources available to identify or locate Bitcoin-accepting individuals and businesses

None of the largest internet-based companies, such as Amazon, eBay, or Apple* accept Bitcoins

▪ Overstock.com (12/2013) – by June 2014 TigerDirect.com (01/2014) – computers & electronics

▪ Virgin Galactic (11/2013) – spaceflight = $250,000

▪ Someone bought a Tesla S (12/2013) = $100,000+ (91.4)

▪ Cyprus – universal acceptance (02/2014)

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Silk Road: the most notorious Bitcoin-accepting business

Anonymous, underground black market site

▪ Based in the “Deep Web”

Any kind of illegal drug can be bought or sold.

▪ Silk Road accepts no payment types other than Bitcoins

Silk Road operators indicted/arrested

Website shut down by U.S. Gov’t. (10/2013)

▪ Bitcoin exchange rate dropped to $85

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U.S. leads in most Bitcoin adoption-related categories

Availability of physical businesses selling consumer goods & services varies widely

▪ Groceries House Wares

▪ Clothing Legal Advice

▪ Restaurants Other Services, Etc.

No large providers of local, national, or international transportation or tele-com services

▪ Other than Internet/ISP, VPN, Email, VOIP, and SMS

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Resources to Locate Bitcoin Acceptors:

Bitcoin Merchant Forum

▪ http://bitcoin.org/en/resources

BitcoinWiki

▪ https://en.bitcoin.it/wiki/Trade

Reddit

▪ www.redd.com/r/bitcoin

SpendBitcoins

▪ https://www.spendbitcoins.com/places/

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Recent Bitcoin Adoption Activity

PayPal, September – October 2014

▪ Partnered with Bitcoin Processors▪ BitPay

▪ Coinbase

▪ GoCoin

▪ To expand PayPal’s own merchant payments processing services

eBay, September 2014

▪ Announced possible Bitcoin processing applications▪ Through its Braintree unit

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Recent Bitcoin Adoption, Continued

Apple, July – October 2014

▪ Resumes sales of Bitcoin Wallet Applications▪ Still does not accept Bitcoins for direct sales

AirBaltic, July 2014

Latvian State-owned airline

▪ 50+ destinations & 25 aircraft

Dell.com, July 2014

Through partner Coinbase

Expedia.com, June 2014

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Bitcoin use differs from country to country

Depending on the availability of internet access

The level of technology acceptance/use

Societal trust regarding governmental operations and privacy

Basic awareness of the Bitcoin network and communities.

▪ See “Mapping Bitcoin’s Global Adoption” by Tyler Darden, http://www.zerohedge.com/print/474469.

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There are many legitimate uses for Bitcoins

As a Peer-to-Peer (P2P) Value Transfer System

▪ Bitcoin.org

▪ The Bitcoin Foundation▪ www.bitcoinfoundation.org

With any currency, financial vehicle/product, or VTS, there is a potential for misuse, fraud & criminal activity

Particularly if the Gatekeepers can be undermined manipulated or corrupted

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Usefulness of the Bitcoin system to launder money is relative & varied

Depending on where in the Money Laundering Model the illicit funds are located

▪ The type (form) of criminally derived funds involved

Money Laundering Model – or Cycle – Steps

▪ “Placement”

▪ “Layering”

▪ “Integration”

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Integration

Layering

Placement

Money Laundering Model

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Bitcoin, as a digital, internet-based currency:

A poor option for laundering the proceeds of contraband crimes

▪ Which generate large volumes of “real” currency

▪ The cash still must be “placed” into the financial system

▪ Then traded, via one of the exchanges, to purchase ฿▪ Volatility in the BTC exchange rates could significantly

impact the value of the laundered funds. ▪ Lose Value – More Likely

▪ Increase in Value - Perhaps

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Bitcoin exchanges are considered Money Service Businesses (MSBs)

Under the U.S. Bank Secrecy Act (BSA) and regulations – administered by FinCEN

▪ Subject to mandatory MSB registration

▪ Currency & Suspicious Transaction Reporting▪ Anti-Money Laundering & Customer I.D. Programs

FinCEN issued guidance regarding applicability of the BSA to virtual currencies

▪ FinCEN Document: FIN-2013-G001 (March 18, 2013)

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Criminal enterprise could spend the Bitcoins

However, the benefit of anonymous transactions is undermined

▪ By the limited number merchants/vendors/outlets accepting Bitcoins.

The same challenges exist for “White Collar” and “Cyber” criminals.

The “Placement” stage is bypassed

▪ Funds are already in the financial system

▪ Exchange Rate Risk & Few Spending Options Remain

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Significant advantages as a “Layering” tool:

Irreversible transactions

Substantial anonymity of transactors

Ability to convert Bitcoins “back” into thirty-five different countries’ currencies.

Many of the present online services involve currency exchanges & other financial services

▪ Assumes successful “Placement” of sufficient volumes of “dirty” cash occurs on a continuing basis.

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Significant advantages as a “Layering” tool:

Other online financial services include

▪ Investments & Securities Trading

▪ Precious Metals & Commodities

▪ IBC, Business Formation & Trusts, Etc.

However, most of these outlets involve “trusted” third parties

▪ Possible transaction reporting in foreign jurisdictions

Negatives include exchange rate volatility

▪ Risk of Fraud and/or Loss

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The same positives and negatives generally apply to “Integration” applications

The lack of places to spend Bitcoins

▪ Particularly in large amounts

Few exchanges able or willing to process transactions in excess of $10,000

▪ Exchanges must register w/ FinCEN▪ Likely U.S. transaction reporting requirements

▪ Subject to U.S. jurisdiction & judicial process▪ Further limit usefulness for successful criminal enterprises

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Presently, no commercial exchanges convert BTC into the currencies of

Colombia

Bolivia

Venezuela.

Geographically a better money laundering tool other than in the U.S. or South America

Europe

Asia

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Bitcoin, as a digital, internet-based currency:

More advantageous for T/F than M/L

Relative anonymity of participants

Transactions conducted outside of the financial system

Little or no exposure to regulatory or law enforcement scrutiny

Global access

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A digital wallet loaded on a “pay-as-you-go” mobile cellular device

Would be a useful logistical and operational tool

Difficult to trace or intercept

High-capacity USB flash drives (with or without encryption)

Small, readily concealable, and easily transferred between individuals

▪ Or transported across international borders undetected.

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Donors and Financiers

Likely have access to the financial system

▪ And Internet Services

Can use Bitcoin to send their support “off-the-grid”

▪ both concealing and layering their transactions in a single step.

The funds may later re-emerge in another jurisdiction

▪ as a different currency or under someone else’s control.

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Underground marketplaces and forums that accept Bitcoins

Provide potential access to contraband other than drugs

▪ including restricted goods & materials

▪ illegal services

▪ Tele-Comm. Services: ISP, Email, Cellular, VOIP, SMS

Such as the former Silk Road

Successor websites & illicit service providers

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Disadvantages remain formidable

The lack of physical outlets at which to spend Bitcoins & poor physical infrastructure

Limited types of goods and services available from online sources

Conversion back into any “real” currency requires the use of an exchange

▪ Which creates records - that can be traced

▪ May trigger currency and/or suspicious transaction reporting

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Disadvantages remain formidable, Cont’d.

Saudi Riyal is presently the only Middle Eastern currency for which Bitcoins may be exchanged

Limited or lack of access to reliable internet services throughout the region

▪ Many governments monitor/restrict internet access

Adversarial, Faltering or Failed Governments

▪ Throughout the Middle East & Horn of Africa

Low Bitcoin adoption among populations

▪ Poor Education & Technology Familiarity

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Bitcoin was the first deployed virtual currency

Most successful concept & system…so far

Highest adoption, scope, and transaction volume

▪ But so was Wang Labs

Several alternative & competitor systems

Particularly in response to Bitcoin adversity

▪ OTB: Other Than Bitcoin

Most OTB VC systems operate similarly

Usually differences in Mining, Supply & Security

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Adoption & volume of OTB VC systems is far below Bitcoin’s levels

Users & Vendors are limited to acceptance levels

Exchanges / Rates will be fewer, less transparent

All are essentially Internet-based systems

May or may not be truly Non-Sovereign

Or independent of OTB VC system operators May not covert to USD or limited other currencies

Value may not transfer outside of OTB VC system

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Some active OTB VC Systems

E-Gold

▪ First internet-based digital currency (1996 – 2007)▪ Prosecuted by FinCEN as an Unlicensed MSB

Litecoin

▪ Reported as #2, behind Bitcoin▪ www.litecoin.org

Peercoin

▪ Reported as #3, behind Bitcoin▪ www.peerecoin.net

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Some active OTB VC Systems, Cont’d.

Open Coin Project

▪ Based on "digital cash“ concept▪ A protocol to use the original idea of electronic cash in daily life

▪ Also developed a system consisting of minting software, wallet software, Etc.▪ Everything that is necessary to have a system for anonymous

electronic transactions

▪ www.opencpoin.org

▪ Not to be confused with Open Coin, Inc.▪ See Ripple – next slide

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Some active OTB VC Systems, Cont’d.

Ripple Protocol

▪ Open-source, distributed payment protocol

▪ Enables free and instant payments with no chargebacks

▪ in any currency, including dollars, yen, euros, bitcoins, and even loyalty points.

▪ Businesses of any size can easily build payment solutions such as banking or remittance apps, and accelerate the movement of money on Ripple▪ To move value like information moves today.

▪ www.ripple.com (formerly Open Coin, Inc.)

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Some active OTB VC Systems, Cont’d.

Freicoin

▪ Based on Bitcoin protocol with adjustments

▪ Smallest operating OTB VC system▪ www.freicoin.org

Linden Dollars

▪ VC system component of Second Life virtual world▪ Primarily used to pay for internal fees & purchases

▪ Controlled by Second Life operators

▪ Limited system to transfer value outside of Second Life

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Some active OTB VC Systems, Cont’d.

MintChip Challenge

▪ Research project by Royal Canadian Mint

▪ Invited software developers to create innovative digital payment applications using MintChip▪ a R&D phase technology available only to challenge participants.

▪ Developers and the public were also encouraged to share ideas for how a digital currency can be used.▪ Challenge ran for 4 months & closed.

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Different from Virtual Currencies

Non-sovereign issued medium of exchange

Peer-to-Peer Transactions

Operates outside any country’s financial system

Virtual Banking

Internet-based financial transactions

Transactions by / through a “trusted” 3rd party

▪ Usu. traditional bricks-and-mortar financial institutions

Operated within the global financial system

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Examples

PayPal

▪ Electronic Payments System

▪ Clears transactions through countries’ financial systems

Ally Bank

▪ Internet-based U.S. Financial Institution▪ Few, if any, physical locations

GreenDot Cards & Similar Products

▪ Stored Value / Funds Transfer System

▪ Operates within the traditional financial systems

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Examples, Cont’d.

Liberty Reserve

▪ Described as a VC, but Digital Currency is more accurate

▪ Operated as a virtual bank based in Costa Rica

▪ Within the traditional U.S. / Global financial system▪ USD & other currency-denominated Transactions

▪ Chose to ignore legal & regulatory requirements▪ Customer Identification Program (CIP)

▪ Know Your Customer (KYC)

▪ BSA Currency & Suspicious Transaction Reporting

▪ Shut down by U.S. Government in May 2013

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Much has been written about Bitcoin during the last 24-months

Several high-profile rises & declines in the BTC exchange rates

▪ Generated positive and negative publicity

▪ Encouraged the public’s curiosity about Bitcoin.

Commentators appear evenly divided, for and against.

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Much has happened Re: Bitcoin, of late:

The U.S. and other governments have sought to understand and regulate Bitcoin

▪ FinCEN has been aggressive recently▪ Issuing Guidance, Rulings & BSA Enforcement Actions

▪ IRS has issued guidance & rulings for tax treatment

Several countries have sought to regulate or ban Bitcoin transactions

Failure & Bankruptcy of Mt. Gox - major event

Several high-profile adoptors have emerged

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Other current events:

U.S. federal seizure warrant for a Mt. Gox KK subsidiary’s U.S. bank account

Securities & Exchange Commission (SEC) action against an alleged Bitcoin-based Ponzi scheme

A “Breach of Contract” lawsuit against Mt. Gox KK and others

A SEC application for a Bitcoin-based Exchange Traded Fund (ETF) investment product.

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Other current events, Cont’d.

Take-down of Silk Road

▪ Indictment and arrest of Operators & Facilitators

▪ Suspension (take-over) of website by U.S. Gov’t.▪ Seizure of 26,000 Bitcoins

Chinese Government’s decision to outlaw Bitcoin

Continuing FinCEN regulations

▪ Ongoing BSA Guidance / Enforcement / Prosecutions

Emerging VC competitors - “Bitcoin 2.0”

▪ Many believe all these things will strengthen Bitcoin

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Stephan Robinson, CAMS Office: 561-616-2038

Cellular: 561-719-9046

Facsimile: 561-616-2160

Address:

▪ 1700 Palm Beach Lakes Blvd.

▪ Suite 500, Stop 65-05

▪ West Palm Beach, Florida 33401

Email:

[email protected]

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Brian Stoeckert Managing Director

Chief Strategy Officer

CoinComply New York

Silicon Valley

1.917.554.9903 [email protected]

www.coincomply.com

@coincomply