Crypto and Money Laundering: Still a ways to go for Law Enforcement, Regulators to Catch Up with the Crooks

Detractors of digital assets, or crypto, typically point to the utilization of crypto to pursue nefarious activities such as money laundering. Rules exist for financial transactions regarding “know your customer” (KYC) and “anti-money laundering” (AML), but they are enforced to various degrees depending on the jurisdiction.

Debacles like periodic acts of fraud, the collapse of FTX, and allegations of criminal activity, highlight a gap in regulations.

In the early days of crypto, many crypto exchanges skipped over more traditional compliance protocols like KYC and AML rules. Today, it is different, and most digital asset marketplaces require identifying information from both buyers and sellers.

Analytic and crypto intelligence firms have rapidly moved to offer technology to trace transactions and monitor activity. Regulators and law enforcement entities have teamed up with these firms to aid in investigations while building up their bench of tech-savvy executives.

So where are we today? Is it time to sound the all-clear, as bad actors may no longer pursue a life of criminality funded by crypto?

CI recently connected with Stephen M. Kohn, a Founding Partner and Attorney at Kohn, Kohn, & Colapinto LLP. Kohn is the author of the forthcoming book Rules for Whistleblowers: A Handbook for Doing What’s Right, his seventh book on whistleblowing that includes a guide to exposing workplace wrongdoing. Our discussion on digital assets is shared below.

What is your opinion on digital assets and money laundering? Hasn’t law enforcement caught up yet to the technology?

Stephen Kohn: Digital assets are not immunized from the laws governing money laundering. The basic principles are Know Your Customer, which also means you must know who the beneficial owner of the asset is, and Suspicious Activities. If there are suspicious activities, a form known as a Suspicious Activity Report, or SARS, must be filed. So, if you’re in the digital asset space, you’re not immunized from these requirements, and companies have been sanctioned for violating both the SARS requirements and the Know Your Customer requirements.

if you’re in the digital asset space, you're not immunized from these requirements, and companies have been sanctioned for violating both the SARS requirements and the Know Your Customer requirements Click to Tweet

Law enforcement is clearly struggling. That is why the enactment of the Anti-Money Laundering Whistleblower Improvement Act is so critical because people employed or working in the digital asset space are covered under this whistleblower law. They can file anonymous and confidential claims and receive significant awards. So, it’s very clear that within digital assets, the role of whistleblowers will become premium.

Can you explain how or why firms are not adhering to KYC rules?

Stephen Kohn: It’s very simple. If you can get away with it, you do crime. If people know that you can’t detect the crime, they most likely will engage in it because it can be highly profitable. So, without detection, white collar crime and fraud traditionally runs rampant. That’s why these whistleblower laws are passed, and that’s why the new anti-money laundering whistleblower law, which is enforced by FinCEN, will play a critical role in policing digital assets. FinCEN already has jurisdiction over digital assets. They have sanctioned companies that trade in Bitcoin and other forms of digital assets already, and with the help of whistleblowers, they should be able to radically enhance their enforcement abilities.

It's very simple. If you can get away with it, you do crime. Click to Tweet

What about big crypto exchanges that launched prior to regulators enforcing KYC/AML rules. Do you anticipate more enforcement actions going forward because many of these marketplaces were defacto operations for bad actors?

Stephen Kohn: With the whistleblower law? Absolutely, yes. The fact that FinCEN could take enforcement action against these digital asset markets is very significant. Now, specifically for the precedent they set, and the messages they send to employees or participants in these markets, the two cases they brought are really a blueprint on what whistleblowers should look for and how significant the enforcement action can be.

Why do you believe the Swiss are using crypto to flout rules?

Stephen Kohn: Unfortunately, Swiss banking is a notorious hotbed for money laundering, illegality, secret accounts, and tax evasion. There are trillions of dollars in dark money in Switzerland.

Now, our IRS law really targeted offshore illegal banking for the U.S. The new money laundering law can target significant illegal conduct in Switzerland beyond U.S. tax evasion.

What kind of regulation do you think is necessary?

Stephen Kohn: FinCEN is in the process of approving rules and regulations governing whistleblowing. These rules must accommodate the reporting of digital asset crime, and FinCEN has to carefully evaluate how to encourage and incentivize insiders to report these violations.

The laws also permit anonymous and confidential disclosures. Again, how will FinCEN, and the Department of Justice, which also must accept anonymous claims, implement these rules? Will they be effective? Will whistleblowers worldwide understand what their rights are? And understand what they should be looking for? And understand the precise procedures they need to follow?

We are looking, with the AML whistleblower law, at a radical enhancement of all enforcement activities related to digital currencies. The issue now is: will FinCEN and the Justice Department implement the law as intended by Congress?

Do they need to be regulated similarly to existing securities laws?

Stephen Kohn: Yes, the framework of the Dodd-Frank Act is working remarkably well, both in the United States and transnationally. That statutory framework was duplicated in the AML law, specifically the anonymous and confidential reporting and the mandatory financial reward of 10 to 30% of the sanction.

The mandatory reward encourages a partnership between the whistleblower and law enforcement because the bigger the bust, the bigger the award. Whistleblowers only get compensated for the money obtained from the wrongdoer. If it’s implemented right, this will work.

Does the crypto industry need whistleblowers?

Stephen Kohn: Crypto, because of the inherent secrecy in so much of the movement of the monies, absolutely needs whistleblowing. It’s just begging for it. This is one of the most important areas for whistleblowing, given the inherent secrecy of these transactions.

Crypto, because of the inherent secrecy in so much of the movement of the monies, absolutely needs whistleblowing Click to Tweet

Is any jurisdiction getting it right?

Stephen Kohn: No, because there’s been no legal framework to set up a proper enforcement mechanism. Now there is. So, we can sit at the edge of our seats and see if FinCEN and Justice will do their job and set up the enforcement mechanisms that are needed.

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