US enforcement agencies are turning up the heat on crypto-related crime
8 min read
On the evening of Jan. 7, Anatoly Legkodymov, founder of the cryptocurrency exchange Bitzlato, was arrested in Miami. The following day, the United States Department of Justice (DOJ) unsealed a complaint in federal court charging him with “conducting a money transmitting business that transported and transmitted illicit funds.” According to the DOJ, Bitzlato failed to meet U.S. regulatory safeguards, including Anti-Money Laundering requirements.
Less than a month earlier, former FTX CEO Samuel Bankman-Fried was arrested in the Bahamas. In a statement, U.S. Attorney General Merrick Garland said, “The Justice Department has filed charges alleging that Samuel Bankman-Fried perpetrated a range of offenses in a global scheme to deceive and defraud customers and lenders of FTX and Alameda, as well as a conspiracy to defraud the United States government.”
Garland stated, “The U.S. Department of Justice will aggressively investigate and prosecute alleged criminal wrongdoing in the financial system and violations of federal elections laws.” But is it really a new day? Will U.S. law enforcement be able to go after alleged crypto criminals at home and abroad?
According to Oberheiden PC attorney Alina Veneziano, who represents executive clients under criminal investigation against U.S. Securities and Exchange Commission subpoenas and DOJ fraud allegations, the answer is yes.
“Attempts to reign in this new, unrestrained industry were inevitable,” Veneziano tells Magazine. She believes that federal government agencies are increasing their investigative efforts toward crypto crime and will utilize all the tools at their disposal — subpoenas, summons and inter-governmental sharing of information.
“For example, only last year, the SEC increased the size of its Crypto Assets and Cyber Unit in an effort to investigate more fraudulent crypto asset schemes and better protect investors in the crypto markets.” Veneziano also believes the Internal Revenue Service will further enforce U.S. tax laws for cryptocurrencies.
Former federal prosecutor Grant Fondo also sees an increase in activity. Now a trial attorney and founder of the Digital Currency and Blockchain Technology practice at Goodwin, Fondo believes that this is the result of the current bear market, widespread acceptance of cryptocurrency and the government’s obligatory focus on crime.
“I think anytime there is a course correction and/or an economic event like a crypto winter, that can also increase activity […] When assets go down, people get hurt, and if people are mixing funds and things, it can create problems,” Fondo tells Magazine. Add to that the prolific global adoption of crypto, more people involved and the DOJ’s concern about any asset used for illicit activity, and Fondo sees beefed up enforcement as an inevitability.
In 2021, the DOJ created the National Cryptocurrency Enforcement Team (NCET) to handle investigation and prosecution of criminal misuse of cryptocurrency. NCET would combine the expertise of the agency’s Money Laundering and Asset Recovery Section and the Computer Crime and Intellectual Property Section. In 2022, the DOJ also created the Digital Asset Coordinator (DAC) Network. Under the leadership of NCET, designated federal prosecutors from U.S. attorney’s offices around the country would be assigned to the DAC Network. Each office’s DAC will be the digital asset subject matter expert and the first, investigative source of information.
What types of crimes ?re they going after?
According to a DOJ report submitted to the presidential administration in September, the agency believes that cryptocurrency is the preferred payment method for ransomware and other digital extortion activities. As an example, the DOJ referred to a ransomware attack in May 2021 on the Colonial Pipeline. According to the report, the attack forced the company to shut down a gasoline and jet fuel pipeline for days. This resulted in fuel shortages around the country, including several airports. The attackers demanded and received a ransom paid in Bitcoin.
The report also says, “Cryptocurrency is used to raise funds for terrorist organizations and other nation state threat actors.” The DOJ states that its largest cryptocurrency seizure disrupted the funding campaigns of ISIS and other terrorist groups. The agency took down a fraudulent ISIS website operation that purported to sell N95 masks and other protective equipment during the height of the COVID-19 pandemic.
Veneziano believes that these crimes are not new — they’ve just adapted to cryptocurrency. “We are likely not looking at the creation of brand new crimes but are instead more likely to see the crypto element incorporated into other offenses, such as crypto tax evasion, crypto theft, unregistered crypto offerings, crypto money laundering, etc. Due to the nature of the blockchain, it is likely to be confined to federal offenses as opposed to state crimes,” Veneziano says.
Fondo suggests that wire fraud is also a big factor. “So, you’ll notice in a lot of the criminal indictments, they allege wire fraud. Wire fraud is agnostic to the type of asset, whether it’s a security, a commodity, whatever — doesn’t matter.” Historically, criminals would use the telephone, aka the wires, to commit fraudulent acts. Today, wire fraud refers to crimes committed using any type of telecommunications technology. According to Fondo, if you move digital assets around using the wires, and you commit fraud, it’s a crime, and most indictments in the crypto space fall into that category.
For example, in a statement on Dec. 14, 2022, U.S. Attorney for the Southern District of New York Damian Williams “announced charges in two separate indictments against the founders and promoters of two cryptocurrency Ponzi schemes known as IcomTech and Forcount,” both with conspiracy to commit wire fraud.
According to the DOJ, victims purchased IcomTech and Forcount investment products using cryptocurrency, cash, checks and wire transfers. They were then given access to an online portal where they could monitor dubious returns. “While Victims saw ‘profits’ accumulate on the schemes’ respective online portals, most victims were unable to withdraw any of these so-called profits and ultimately lost their entire investments.” All the while, IcomTech and Fourcount’s promoters skimmed hundreds of thousands of the victim’s funds, withdrew it as cash and spent the loot on promos for the Ponzi scheme, luxury goods and real estate.
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What other agencies are involved?
Venziano believes that collaboration between government agencies on crimes is nothing new and should be expected in the crypto sphere. Venziano says, “Consider a crypto fraud scheme involving a new token. The SEC will be involved if the token is unregistered and satisfies the definition of an ‘investment contract’ under the Howey test,” an analysis based on a Supreme Court decision.
She continues, “The IRS will also be involved where there is tax evasion or the failure to report crypto sales and dispositions. Further, the DOJ may initiate an investigation where money laundering or other illicit activity is present. There is even a call for greater collaboration from the private sector to combat crypto fraud.” Additional agencies, including the Financial Crimes Enforcement Network (FinCEN), the Federal Bureau of Investigation, Immigration and Customs Enforcement, the Secret Service and the Department of Homeland Security have all participated in cryptocurrency investigations.
In the Bitzlato case, the DOJ teamed up with the Department of Treasury’s Financial Crimes Enforcement Network. In a joint press conference with officials from the DOJ, Deputy Secretary of the Treasury Wally Adeyemo said that FinCEN is officially identifying Bitzlato as a “primary money laundering concern” in connection with Russian illicit finance. Adeyemo thanked the DOJ “for being such great partners” on this action but also on “going after this ecosystem more broadly.”
Do politics affect who the government investigates?
According to Fondo the answer is yes and no. The DOJ is part of the Executive Branch of government and the president nominates its leader, the Attorney General. The U.S. Senate is tasked with confirming the president’s nominee.
“Generally, it is an agency that is agnostic in a sense as to who the president is,” Fondo says. When he was a federal prosecutor, Fondo believed that he was completely immune to whoever was in the White House. On the other hand, whenever national actors are involved, Russia or China for example, Fondo says that a potential case escalates in significance. Since the DOJ gets lots of leads and complaints, so they have to prioritize resources and decide which ones to pursue.
“A case that involves a national actor, stealing trade secrets, stealing assets, funneling assets (to Russia) to fight, say, the war in the Ukraine, that will rise well above something else that’s an otherwise more typical crime. So, in that way, the DOJ is more political.”
Fondo also believes that when there is a national scandal, like Enron, Bernnie Madoff or the fall of FTX, the government is more apt to jump in and get more involved. “When something hits the press, like a major incident, there is more pressure to get charges more quickly,” Fondo says.
Venziano points out that crypto activity isn’t limited by geographic borders and can affect overseas markets in a matter of seconds. “Crypto activity can certainly affect international politics, demanding cooperation between the United States and enforcement agencies in other nations. Take the Bitzlato case as an example. The DOJ received significant operational and informational assistance from other agencies — both domestic and international — including Customs and Border Protection and also EUROPOL and Dutch and Belgian authorities,” Venziano says.
In the U.S., there are no federal laws on the books specifically regulating the use of cryptocurrency. Different regulatory agencies have taken responsibility and have written rules for the oversight of different digital assets. Sooner or later, Congress is expected to move legislation to the president’s desk, formally defining cryptocurrencies and how they are to be regulated.
In the meantime, Fondo believes that the lack of clarity, and even disagreement among regulators, leads to ambiguity that crypto-centric companies struggle with. In essence, it’s hard to follow the rules if you don’t know what they are, especially on the civil, as opposed to the criminal, side of things.
Nonetheless, he believes that the industry has matured in recent years, and “there are a lot of great actors out there trying to do the best they can with regulatory uncertainty, but also trying to meet the demands of the market. But, when there’s a situation, a crime is a crime is a crime. If the government sees something that looks like fraud, it doesn’t really matter what the asset is, and they think it’s significant enough and worthy of chasing, they’ll do it.”
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