Justice Department hires expert counsel to evaluate company compliance programs

This week, the U.S. Department of Justice (DOJ) announced the hiring of Hui Chen as a “full-time compliance expert”. In this role, Ms. Chen will be tasked with assessing the compliance programs of companies under DOJ investigation. This information will aid prosecutors weighing criminal charges of companies and individuals, including any remedial compliance measures. As you may recall, Ripple agreed to resolve a DOJ criminal investigation in exchange for a settlement agreement which called for a lengthy series of remedial compliance measures.

According to the DOJ, the hiring of Ms. Chen serves to indicate how serious the Justice Department is taking compliance. (As if the bitcoin community needed a reminder.) Officials, however, were quick to emphasize that a compliance program review is but one of several factors prosecutors will consider. This makes sense. FinCEN, which regulates bitcoin MSBs and conducted the parallel civil enforcement investigation of Ripple, considers multiple factors, including the violations themselves (i.e. volume, severity, time period, etc.); any corrective action undertaken by the institution; self-reporting efforts; level of cooperation with regulators; and, any past history of regulatory exams and prior violations.

It’s unlikely any of these individual factors will be cast aside anytime soon. However, the DOJ has signaled its intention to scrutinize how seriously companies take their compliance obligations, and to what degree the circumstances they find themselves are of their own making. Ms. Chen will, in the words of the DOJ, determine whether a company’s compliance program is “thoughtfully designed and sufficiently resourced, or essentially window dressing”. Now might be a good time to ask yourself which description applies to your compliance program.

Joe Ciccolo is the President of BitAML, a bitcoin compliance company helping BTM operators, exchanges and trading platforms comply with FinCEN and state regulations. Joe is a seasoned AML expert having worked for both large and mid-sized financial institutions before defecting from legacy banking. He can be reached anytime at [email protected].

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Earlier this month, FinCEN released the latest edition of its SAR Stats publication, a compilation of quantitative and qualitative data gathered from SAR filings. The (overly and conspicuously) comprehensive 44-page report contained detailed analysis of SAR narratives, emerging trends among SAR filings, and highlights from within each of the financial sectors, including MSBs.

Often overlooked, SAR Stats has historically stood as a reliable indicator of FinCEN sentiment and in some cases may even portend future regulatory actions. This publication, chock-full of valuable insights and behavioral tells, is a great way to get inside the regulator mind. The recent edition of SAR Stats is no exception.

While the bulletin did not contain any explicit references to bitcoin or digital currency, a closer look reveals several invaluable takeaways for the industry.

For starters, FinCEN indicated that SAR filings within the MSB industry generally contained less specificity within the narrative field, and in many cases minimal detail concerning the underlying suspicious or unusual activity. To reinforce this point, FinCEN claimed that “[i]n more than 100,000 instances filers should have furnished more detail relative to the suspicious activity being reported. Greater detail and context better assists in identifying a more accurate and discernable variety of trends.” Ouch!

While it’s true that bitcoin MSBs comprise a statistical minority of all MSBs, this in no way should negate the warning shot fired by FinCEN. The quality of information and attention to detail within your SAR filings is a direct reflection of your AML program and commitment to regulatory compliance. Regulators want to see detailed yet concise narratives. Describe what you found and why it’s suspicious or unusual. As my colleagues in the regulatory and law enforcement community often say, your SAR narrative should “tell me a story.”

Back to the SAR Stats publication. FinCEN analysis also determined that in reference to the type of suspicious or unusual activity, MSBs checked the “Other” box with greater frequency than any other financial sector. This too should be cause for concern. The obvious reaction might be to suggest FinCEN update or add more boxes (please no!) to better reflect the realities of new and emerging financial technologies. While perhaps true to a degree, selecting “Other” on a recurring basis could suggest to regulators the absence of understanding routine money laundering typologies. After all, there’s no shortage of possible options to select when describing the suspicious or unusual activity you’ve identified. The “Other” box is widely viewed in the AML compliance world as a last resort.

Notwithstanding the optics of checking the “Other” box, the SAR filer is obligated to specify the activity within an open text field. Two of the three emerging terms in this field, “Flipping” and “Excessive Activity”, exhibited annual increases of 203% and 304%, respectively, according to FinCEN. It’s likely that these increases were fueled, in part, by the growth of bitcoin MSBs. Flipping, at first glance, might seem more at home in the investment services sector with reference to the frequent buying and selling of assets. However, in the context of MSB SAR filings, it might describe customer-initiated high velocity arbitrage exchanges of BTC. The same could be said for the term “excessive activity”.

Interestingly enough, in the previous edition of SAR Stats, FinCEN warned of bitcoin speculators simultaneously arbitrating in multiple instruments and strategies. It was their contention that while not illegal, “speculation can share a transaction footprint with other activities that might be suspicious, (such as activity associated with High Yield Investment Programs (HYIP), or outright criminal, such as Ponzi Schemes involving Bitcoin.” If the increased use of these terms does indeed reflect the growth of bitcoin MSBs, there’s clearly a consensus among SAR filers as it pertains to both transactional velocity and high-dollar denominations.

Well, there you have it; the latest edition of SAR Stats. However, the fun doesn’t have to stop here. This publication is just one of a treasure trove of open-source documents FinCEN makes available to the public. Too often, these free (repeat free) resources go largely unnoticed. Take every advantage of resources such as SAR Stats, as well as other transcripts and public documents posted on FinCEN’s website. Better yet, do yourself a favor and signup for their mailing list to receive immediate notification of such announcements. Staying informed and ahead of the curve will enable better decision making and long-term planning, especially in times of continued regulatory malaise. Stay compliant!

Joe Ciccolo is the President of BitAML, a compliance company devoted exclusively to helping bitcoin ATM operators, exchanges and traders comply with FinCEN and state AML regulations. Joe is a seasoned AML expert having worked for both large and midsized financial institutions before defecting from legacy banking. He can be reached anytime at joe[email protected].

Poloniex a very popular U.S. based cryptocurrency trading exchange platform will block New York residents from services beginning August 8th 2015. Users of the site have been issued an email warning letting them know they must remove funds if they reside in NY.

“In accordance with the New York State Department of Financial Services, Poloniex will no longer be allowed to provide services to residents of the State of New York starting on August 8th, 2015. If you are a resident of New York, please take appropriate measures to withdraw your funds by 11:59pm Eastern Daylight Time on August 7th, 2015. For more information or for further assistance, please contact our support staff by going to poloniex.freshdesk.com.”
— Poloniex Bitcoin Exchange

On the 24 of June the BitLicense was adopted by New York legislation and is now recognized by The New York State Department of Financial Services (NYDFS).

Bitcoin and virtual currency businesses must apply for a license within 45 days from its initial announcement of which August 8th is the deadline for all virtual currency operations to comply.

“Any person engaged in virtual currency business activity that fails to submit an application for a license within 45 days of the effective date of this regulation shall be deemed to be conducting unlicensed virtual currency business activity.”
— BitLicense Transcript

Recently, Shapeshift another very popular cryptocurrency exchange based in Switzerland also blocked services in the State of New York in protest of the BitLicense.

Founder Erik Voorhees believes the license is unethical, and exposes personal user information creating Please Protect Consumers in protest against mass data collection and sharing of personal user information. ShapeShift was praised by many in the Bitcoin community for it’s stance against state regulation and data collection.

Andreas Antonopoulos tweeted to fans after this announcement and his perception of what Shapeshift accomplished:

“Kudos to ShapeShift for refusing to become a honeypot of PII just to satisfy NY regulators.”
— Andreas Antonopoulos

Data collection is believed by the community to be unethical after revelations recently revealed by Edward Snowden about the illegal surveilance of millions of America citizens by the NSA.

More companies are expected to follow Shapeshift and Poloniex in protest of unethical as well as unconstitutional and unreasonable regulation. Let this message speak loud and clear to other states such as California that these types of unwarranted regulations will only stifle innovation and most likely block your state from participating in the development of an amazing and phenomenal technology.