We used to assume that crime happened in predictable places: dark alleys and dicey street corners.
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In reality, some of the biggest crimes in the world are occurring in home offices and in family basements: some of the most sophisticated and damaging financial crimes just need an internet connection. A recent study by the Center for Strategic and International Studies and McAfee (a subsidiary of Intel) put the cost of cyberespionage and cybercrime in the U.S. at $100 billion each year. That represents about 1% of the country’s gross domestic product.
It’s not just hackers and identity thieves riding the virtual crime wave. These days, the internet has also become a vehicle for money launderers, drug dealers and the black market.
Criminals like the internet because they think it’s anonymous. But anonymous is a relative concept. Most any time that goods and services change hands for compensation – even over the internet – it can be traced. Even Bitcoin. While you can take steps to keep your identity private when using Bitcoin for transactions, those transactions are stored on a network. That means it’s never completely a secret.
You think Charlie Shrem would know that. Shrem is the CEO/founder of BitInstant and a self-proclaimed millionaire at the age of 24. BitInstant is a Bitcoin exchange which heated up over the past two years. The company attracted considerable attention, including Cameron and Tyler Winklevoss, who invested $1.5 million into the company.
But today, the company looks very different. As does the website. It looks like this:
The website went dark (or, um, light) after Shrem was arrested earlier this week on charges of money laundering, operating an unlicensed money transmitting business and willful failure to file a suspicious activity report. Shrem has been charged alongside Robert M. Faiella, an underground Bitcoin exchanger.
Accroding to the complaint, Faiella would receive orders for Bitcoin to fill through his exchange. He would then sell them to consumers on the now-defunct Silk Road for a profit. Silk Road is an online black market shut down by the FBI in the fall of 2013. The government has been closing in on a number of those involved in Silk Road which was known, among other things, to be a virtual pharmacy for illegal drugs of all kinds – paid for in Bitcoin, the only currency accepted on the web site. Ross William Ulbricht, the administrator of the site known as “Dread Pirate Roberts” was previously arrested on charges including money laundering and drug trafficking.
The feds allege that Shrem knew exactly what Faiella was doing when he used the Bitcoin exchange. In fact, the feds claim Shrem knew all about Silk Road since he used the site to buy drugs such as cocaine for his own use. Despite what he knew about Faiella and the site, Shrem did not file a suspicious activity report, as is required. Instead, he encouraged Faiella to continue his business because it was profitable for BitInstant – and for his own pockets. Together, Shrem and Faiella are said to have laundered over $1 million for illegal purposes.
You can read the entire indictment here:
The takedown was the result of an ongoing investigation of the New York Organized Crime Drug Enforcement Strike Force. The Strike Force pools together federal agencies as well as state and local law enforcement in order to tackle drug and financial crimes. Those agencies include the Drug Enforcement Administration, the Federal Bureau of Investigation, U.S. Immigration and Customs Enforcement, the Bureau of Alcohol, Tobacco, Firearms and Explosives, the U.S. Marshals Service, the Internal Revenue Service, and the U.S. Coast Guard.
If you’re surprised to see IRS on that list, don’t be. While neither Shrem nor Faiella have been charged with tax crimes (yet – and yes, I’m totally editorializing), the Criminal Investigations division of the IRS (IRS-CI) is often called in to assist with financial crimes cases. The why is simple: IRS-CI has expertise in following the money. And that’s exactly what needed to happen here.
Of course, there were some challenges, acknowledges Toni Weirauch, the Special Agent-in-Charge of the New York Field Office of IRS-CI. Following the money when it is digital currency can be “much more difficult than traditional cash” requiring a high level of expertise and attention to detail. The underlying premise is the same: unpeeling financial layers. It just so happens that instead of ledgers and statements with dollar signs, the financials can look a lot like this:
Once the layers were peeled back, however, the underlying crimes look more traditional. Money laundering – whether dollars or bitcoins – is at its most basic, hiding or flipping money. Most commonly, it’s used to conceal “dirty money” gained through criminal activities so that it can appear “clean” or legitimate.
So what kind of criminal activities caught the eye of investigators? Weirauch had a simple answer: drugs. There was, she says, evidence of “all kinds of drugs, all kinds of crimes” occurring on Silk Road. As the drug investigation grew, spearheaded by the DEA, the financial aspects of these accompanying transactions got a second look. And that’s when IRS and the Task Force noted that BitInstant, which specialized in helping people remain anonymous, appeared to not be filing appropriate financial reports for suspicious transactions. In fact, it appeared to be doing just the opposite: facilitating those transactions.
These investigations into Silk Road and related entities have uncovered a number of alleged crimes, a number of participants and a lot of cash. With so much money at stake, I wondered whether these big name arrests – like Ulricht and Shrem – would make a difference. Weirauch was pretty quick to say that it does. She pointed to the Silk Road website, which has been shut down, as a success story. She says that it does create an “immediate deterrence.”
Together with the Task Force, IRS-CI is “going after some very big players” and those names are making news. And while sometimes, it feels like those who do the crime don’t get the time, that’s what happens in these matters. Weirauch points to the potential for really lengthy prison sentences for these kinds of crimes, especially those involving drug and money laundering, as a real warning shot to future criminals. In this case, the money laundering conspiracy charges for each of Shrem and Faiella carries a maximum sentence of 20 years in prison; operating an unlicensed money transmitting business carries a maximum sentence of five years in prison; and the failure to file a suspicious activity report carries a maximum sentence of five years in prison.
So is this it? Do these arrests mean that the work is over? S/A Gregory Tranchina, the Public Information Officer for IRS-CI, and Weirauch, are both quick to say that this is an ongoing investigation. There is, Weirauch believes, still “a lot to still uncover.” But these arrests are already making it harder to hide the kinds of behaviors that were allowing criminals to operate under the radar.
Of course, the use of Bitcoin isn’t illegal, reminds Weirauch. However, the use of a new, alternate currency doesn’t give you a pass to not abide by the rules and regulations. It is, she says, still “so new, so different.” And criminals, she says, can be “creative and inventive when they want to get their crime done.” She paused, telling me, “I hate to use the word sophisticated.” I laughed. I get that a lot from law enforcement. It sounds almost complimentary – and that couldn’t be further from the truth.
But when crimes are so new and the waters are still so murky – and criminals are so inventive – how can taxpayers protect themselves from falling into a trap? Weirauch advises common sense and due diligence. In particular, she says, avoid companies that try to get you to structure your money (divide larger deposits into separate deposits to avoid detection). Exercise due diligence by asking questions about protocols and required anti-money laundering policies (though it’s not completely a panacea: BitInstant had one of those, too). Most important, ask yourself whether the company sounds legitimate.
Simply put, you have to be smarter than the criminals. Especially since, according to Richard Weber, Chief IRS Criminal Investigation, “Criminals are always seeking new ways to launder money and conceal their profits.”
Fortunately, it’s the job of law enforcement to stay a step ahead, “Historically,” Weber says, “as law enforcement closes down one avenue, criminals find new vehicles to move funds and evade detection. IRS-CI special agents have the skills needed to adapt and change with the evolution of financial crimes.”
As for Bitcoin? The goal of the task force – and CI – isn’t to shut it down, it’s to shut the bad guys down. “Virtual currency is a new concept that can drastically change the way business is conducted around the world,” Weber says. “As with any new product, criminals will find a way to exploit virtual currency. We aren’t out to stifle innovation; it is criminal exploitation that we are after. With the click of a mouse or a swipe of a smart phone, virtual currency is moving and reaching people all over the world. Anonymity and lack of regulation makes these currencies susceptible to money laundering, as we’ve seen in recent cases of Liberty Reserve and Silk Road. CI is dedicated to investigating the illicit use of any currency, virtual or fiat.”
Shrem has denied that he’s done anything wrong and is out free on $1 million bond, though he is under house arrest because of the potential for flight risk. He has, however, since resigned his position as vice chairman of the Bitcoin Foundation, a nonprofit which promotes the use of bitcoins around the world.
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