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The Financial Crimes Enforcement Network (“FinCEN”) recently hit the founder and main operator of Helix and Coin Ninja with a civil fine of $ 60 million. These companies acted as “mixers” or “glasses” for virtual currencies like Bitcoin. A “mixer” or “tumbler” accepts the currency and transmits it in a way designed to avoid tracing back to its source.
The sanction against the founder / manager, Larry Dean Harmon, was in accordance with the Bank Secrecy Act (“BSA”) and corresponding regulations.1 A parallel criminal case is being prosecuted by the Department of Justice (“DOJ”) in the District of Columbia.2
FinCEN penalizes Helix and Coin Ninja for failing to maintain an effective anti-money laundering program
Harmon operated Helix from 2014 to 2017 and Coin Ninja from 2017 to 2020. Helix accepted Bitcoin from its customers and passed the virtual currency to recipients through a variety of mediums.3 Regulators said that this anonymization service was used for illegal activities and that Helix and Coin Ninja did not conduct proper due diligence on their customers.4
This is FinCEN’s first application action against a virtual currency mixer / tumbler. According to the FinCEN guide on virtual currencies published in May 2019, anonymization services for virtual currencies qualify as money transmitters under the BSA.5 Last year’s guide builds on FinCEN’s first guide to virtual currency published in 2013, which explained that convertible virtual currency exchangers and administrators, such as Bitcoin, are money transmitters under the BSA.6
FinCEN said Helix failed to register as a money services business; did not implement and maintain an effective anti-money laundering (“AML”) program; and failed to report certain suspicious activity. It also claimed that Coin Ninja failed to register as a money services business.
FinCEN analyzed 10 factors in determining that a $ 60 million fine was justified: (1) nature and severity of violations and harm to the public; (2) impact of violations on FinCEN’s mission to safeguard the financial system; (3) pervasiveness of offenses within the financial institution; (4) history and duration of violations; (5) failure to resolve violations; (6) financial gain or advantage as a result of the infringement; (7) cooperation; (8) the systematic nature of the violations; (9) prompt and voluntary disclosure of violations; and (10) sanctions by other government agencies.
Some considerations seemed to permeate FinCEN’s analysis of the above factors. First, despite operating in a high-risk industry (virtual currency transmission), Helix has failed to implement an AML program designed to detect BSA violations. Indeed, the company’s very function was to obfuscate the source of payments, but it failed to appoint a compliance officer or conduct sufficient due diligence on its transactions.7 Second, according to FinCEN, Helix did not voluntarily disclose potential breaches of the BSA and did not substantially respond to FinCEN’s preliminary assessment notice. Based on this, Helix was not granted a cooperation credit which may have reduced the hefty $ 60 million valuation.
Regulators continue to focus on virtual currency
As virtual currencies become more popular, regulators have issued guidelines to explain how these currencies fall within the purview of existing laws. For example, Helix’s enforcement action comes less than two weeks after the Attorney General’s Cyber Digital Task Force issued the DOJ’s Cryptocurrency Enforcement Framework (the “Report”), which detailed the agency’s plans. to increase control over the use of virtual currencies.8 The report explained the various federal agencies that play a role in enforcing the regulations applicable to cryptocurrency businesses. FinCEN is among them with its role in monitoring monetary services activities and potential violations of the BSA. Joining the DOJ and FinCEN are other family federal enforcement agencies, such as the Department of the Treasury’s Office of the Comptroller of the Currency and the Securities and Exchange Commission.
In addition to the effort to adapt virtual currencies to existing frameworks, there are also efforts in Congress to pass updates to anti-money laundering laws to more fully explain how virtual currencies are hedged.9
As the AML guidelines for cryptocurrencies continue to evolve, this most recent enforcement action shows that companies dealing in virtual currencies need to strengthen their compliance departments with the appropriate help of external consultants. This will help ensure that adequate policies are in place to detect AML problems and to better negotiate with regulators if problems arise.
1 In re Larry Dean Harmon d / b / a Helix, N. 2020-2, FinCEN Assessment of Civil Money Penalty (19 October 2020), https://www.fincen.gov/sites/default/files/enforcement_action/2020-10-19/HarmonHelix%20Assessment%20and%20SoF_508_101920.pdf; See also 12 USC §§ 1829b, 1951-1959 and 31 USC §§ 5311-5314, 5316-5332; 31 CFR Chapter X (https://ecfr.federalregister.gov/current/title-31/subtitle-B/chapter-X).
2 United States versus Larry Dean Harmon, No. 19-cr-00395-BAH (DDC, 3 December 2019).
3 In re Larry Dean Harmon, above note 1, al 2, 4.
4 Id.
5 Fin. Crimes Enforcement Network, United States Department of the Treasury, FIN-2019-G001, Application of FinCEN Regulations to Certain Business Models Involving Convertible Virtual Currencies, pp. 19-20 (9 May 2019), https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
6 Fin. Crimes Enforcement Network, U.S. Department of the Treasury, FIN-2013-G001, Application of FinCEN Regulations to Persons Who Administer, Trade, or Use Virtual Currencies (March 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf.
7 In re Larry Dean Harmon, above note 1, point 5.
8 V&E attorneys Fry Wernick, Branden Stein and Elizabeth Matthews gave a detailed update on the framework for cryptocurrency enforcement in a recent article: Cryptocurrency 101 – DOJ’s new cryptocurrency application framework provides guidance and promises of deeper control of virtual assets through intergovernmental collaboration.
9 Improve money laundering laws and increase comprehensive monitoring of criminal activity information in Shell Holdings Act, S. 2563, 116th Cong. (2019), available to https://www.congress.gov/116/bills/s2563/BILLS-116s2563is.pdf.
