Cryptocurrency and Money Laundering: Digital Money Felony Arrests
Posted on by Michael Lowe.
Money mules here in Texas can face very serious felony charges, even if they were unwilling or clueless participants in an illegal scheme that usually involves money laundering. Marks can still get arrested: that is where an experienced criminal defense is particularly important.
Of course, these money mule scams involve all sorts of things. However, in my practice, I am aware of more and more of these unsuspecting victims being asked to help in the purchase of Bitcoin or other forms of cryptocurrency by fraudsters who have gained their trust.
- For details, read Money Mules: Fraud Victims Become Criminals Facing Arrest in Texas.
Why cryptocurrency? The sky is the limit, according to many experts, in how digital money can be used by those outside the law to further their illegal business enterprises. Cryptocurrency’s presence online offers not only a new playing field as a “novel threat,” but new venues for “traditional offline crimes,” and may be evolving into a new “hybridization” combining the two. For more, read: Mackenzie, Simon. “Criminology towards the metaverse: Cryptocurrency scams, grey economy and the technosocial.” The British Journal of Criminology 62.6 (2022): 1537-1552.
What is Cryptocurrency?
At its core, cryptocurrency is a means of exchange. Cryptocurrency is digital money: it is money, but not the kind that can be held in your hand or stashed in a mattress. Instead, it is stored online in a “digital wallet” and transactions are recorded in an online ledger referred to as the “blockchain.”
Three important points of note: cryptocurrency transactions can be done anonymously. These transfers happen in an instant; there is no “float” in cryptocurrency transactions. Finally, these online transactions are very conducive for international transactions that may take significantly longer in more traditional financial dealings.
…a type of digital currency that you can use to buy goods or services or to invest. You use regular currency – such as the U.S. dollar – to buy these cryptocurrencies, some of which are called tokens, and then you can spend with vendors that accept them. There are thousands of different kinds of cryptocurrencies traded publicly. They are not yet fully regulated and are unsecured unlike the money in your traditional bank account.
No central authority or government oversees cryptocurrency creation or any transactions of Bitcoin, Ethereum, or the like. Unlike checking accounts at a local Texas financial institution there is no protection provided by the Federal Deposit Insurance Corporation (FDIC). This has its own risks and rewards.
For instance, while it is understood that cryptocurrency is much more difficult to counterfeit than traditional money, it is vulnerable to other forms of fakery such as bots artificially making trades in order to sway the market price. For more, read the analysis of Bitcoin washing in “More Than Half of All Bitcoin Trades Are Fake,” written by Javier Paz and published by Forbes on August 26, 2022.
One reason that criminal enterprises have found digital money, or cryptocurrency, so inviting is this lack of regulation combined with its anonymity and core trustworthiness if protections are maintained. Bitcoin and other cryptocurrencies are therefore becoming more and more viable as the means of exchange in illegal transactions involving weapons, drugs, human trafficking, fraud, and various cybercrimes. It is very important in money laundering, where traditional currency (dollars, euros, pesos) obtained in criminal operations can be transferred into untraceable clean revenue or profits (i.e., laundered).
How Does Cryptocurrency Money Laundering Work?
The goal of any money laundering plan is to take illegally obtained money and hide its identity or origins from law enforcement so that it can be used without arrest or incarceration. Cryptocurrencies like bitcoin offer great opportunities to launder illegally obtained cash or currency.
This is done by first taking the illegal cash or currency (dollars, euros, etc.) and buying Bitcoin, Ethereum, etc., with it. Of course, this transaction will be placed in the digital ledger, or “blockchain.” This can be traced by law enforcement.
The next step is to circumvent that tracing. Dodging that trace can be done in various ways, such as:
- Using a “mixing service,” which is an online service that erases the tracing information;
- Finding one or more “money mules,” who buy the cryptocurrency and risk that transaction being traced back to them. The mule then transfers the cryptocurrency to gift cards, prepaid debit cards, virtual gambling chips, etc., that can be forwarded to the fraudster in a way that does not leaving a trail to them;
- Exchange services like Coinbase where users can convert their Bitcoin, Ethereum, etc., to cash without identification. Of course, the cash may be traceable in these scenarios; or
- Purchasing cryptocurrencies promoted for their anonymity (“privacy coins”), such as Dash, Monero, and Zcash.
Federal Investigations into Cryptocurrency Criminal Activity
While Texas law has its own set of laws defining illegal cryptocurrency activity, most legal investigation and prosecution is done at the federal level. An assortment of federal agencies can work independently or in tandem with each other and state officials in the investigation of “cryptocrimes.” They include:
- Commodity Futures Trading Commission
- Department of Justice MIMF Unit
- Federal Bureau of Investigation
- Federal Trade Commission
- Internal Revenue Service
- Secret Service
- Securities and Exchange Commission.
State and Federal Charges of Money Laundering using Cryptocurrency
Money laundering has been defined as a felony crime by Texas state law and federal statute. Anyone discovered to have used cryptocurrency in a money laundering enterprise may face charges under either of these felony prosecutions, both of which can result in very severe sentences upon conviction.
Texas Money Laundering Statute
Pursuant to Chapter 34 of Title VII of the Texas Penal Code, money laundering is deemed as follows:
(1) a state jail felony if the value of the funds is $2,500 or more but less than $30,000;
(2) a felony of the third degree if the value of the funds is $30,000 or more but less than $150,000;
(3) a felony of the second degree if the value of the funds is $150,000 or more but less than $300,000; or
(4) a felony of the first degree if the value of the funds is $300,000 or more.
Notice that a money laundering conviction under state law can result in a first degree felony conviction with a life sentence.
Federal Money Laundering Law
Congress defined the federal crime of money laundering in the Federal Money Laundering Control Act of 1986, codified at 18 U.S.C. §§ 1956 and 1957. Upon conviction for money laundering in federal court, application of the United States Sentencing Guidelines can result in 20 years imprisonment and a fine up to $500,000.
- For more, read Money Laundering and Federal Sentencing Guidelines.
Attorneys and Financial Institutions
The Department of Justice Manual for use by all AUSAs includes instructions on how these federal laws can be used to investigate and prosecute not only individuals and organizations involved in illicit transactions, but specifically attorneys and financial institutions that have been discovered as part of an organization’s money laundering web. See, The United States Department of Justice Manual §9-105.000.
Money Laundering and Other Possible Federal Cryptocurrency Felony Charges
Key to federal investigations and prosecutions are the multi-faceted indictments that can result from a series of cryptocurrency transactions. AUSAs are very creative in maximizing the possible punishments facing the accused by accompanying money laundering charges pursuant to 18 U.S.C. § 1956 with other serious federal felony charges. These include:
1. Drug Trafficking
More and more often, cryptocurrency like Bitcoin is used in the manufacture, sale, distribution, and transportation of illegal controlled substances or drugs in violation of 21 U.S.C. § 841 as it crosses the Texas state line at some point and enters into the federal jurisdiction. Drug trafficking charges can result in life imprisonment upon conviction if the AUSA can show that someone died as a result of the trafficking drugs. For more, read Drug-Induced Homicide Prosecutions in Texas: Overdose Murders.
2. Tax Evasion
Failing to report income constitutes the crime of federal tax evasion as defined in 26 U.S.C. § 7201. Tax evasion can be alleged when the accused has placed revenue or funds in cryptocurrency and failed to report it. Sentencing here can involve five (5) years incarceration in a federal facility along with a fine of up to $100,000.
Cryptocurrency can be part of allegations of wire fraud in violation of 18 U.S.C. § 1343, bank fraud , and/or securities fraud in violation of 18 U.S.C. § 1348. Wire fraud is particularly conducive to cryptocurrency situations, as it forbids transmission by wire communications anything that helps further an illegal scheme or artifice.
It is against federal law to steal property including cryptocurrency or cash as detailed in 10 U.S.C. § 921. Anyone, including unwitting money mules, can face federal theft charges if there is evidence that they participated in unlawful gain of cryptocurrency. The punishment here, upon conviction, depends upon the amount in controversy proven to have been stolen.
Federal Focus on Cryptocurrency Arrests
Governments around the world are working to advance their investigation and prosecution of cryptocurrency crimes, particularly money laundering using Bitcoin and other cryptocurrencies. The United States government has passed laws that try to identify both cash and customers in the banking industry with regulations that mandate things like (1) the reporting of cash transactions over $10,000.00 and (2) risk assessment of customers (called the “Know Your Customer” rules). For more, read “Cryptocurrency and anti-money laundering enforcement,” written by Katherine A. Lemire and published by Reuters on September 26, 2022.
Of course, savvy criminal organizations have responded here with retaliatory tactics such as keeping transactions in small amounts, like $1500 or less; and using reputable citizens as unwitting money mules to assist in the laundering conversion of illicit revenue to clean cash.
Today, the Justice Department is dedicated to investigating and prosecuting cryptocurrency crimes, often in joint operation with other agencies. One effort is through its Market Integrity and Major Frauds Unit (“MIMF”). The focus of MIMF is to prosecute fraud and market manipulation through cryptocurrency. According to its website, “[s]ince 2019, the Unit has charged cryptocurrency fraud cases involving over $2 billion in intended financial losses to investors from around the world.”
Operation Crypto Runner in Texas
Another powerful effort to combat cryptocurrency crime is through the DOJ’s efforts in Organized Crime Drug Enforcement Task Forces (OCDETF), such as Operation Crypto Runner here in Texas. Last fall, the Office of the United States Attorney General for the Eastern District of Texas announced 21 arrests based upon various involvement in “…transnational money laundering networks, including those that laundered millions of dollars stolen from United States fraud victims through romance scams, business email compromises, technical support schemes, and other fraud schemes.”
This was a joint task force effort through the OCDETF, involving the U.S. Attorney’s Offices; the Dallas Field Office of the United States Secret Service; and the Inspector in Charge of the U.S. Postal Inspection Service. As of November 2022, Operation Crypto Runner claimed to have disrupted over $300,000,000.00 in annual money laundering transactions. The almost two dozen arrests were said to be “…just the beginning.”
Senior Citizens Indicted for Federal Felonies Involving Cryptocurrency Money Laundering
While there is a recognition of elder abuse and taking advantage of senior citizens in money mule schemes, this does not prevent law enforcement from investigating and prosecuting individuals over the age of 60 years for serious felony crimes. For instance, in the November 2022 announcement there is an acknowledgement of the Elder Abuse Prevention and Prosecution Act (EAPPA) and the DOJ’s Elder Justice Initiative (EJI) as well as the Eastern District of Texas’ initiative to track down and prosecute those committing “transnational elder fraud.”
- For more on elder fraud, read: Elder Crimes: Federal Prosecutions and The Elder Justice Initiative.
The reality of elders being especially vulnerable targets does not stop federal agents from pursuing charges against them. If there are facts to support allegations that they are willing or complicit in illegal activity, they will be charged with any number of federal crimes.
Included within these November 2022 Operation Crypto Runner indictments were the following charges; please notice the ages (65; 76; 71; and 64) of those facing numerous federal felony convictions here, quoting from the release:
- U.S. v. Zenobia Walker, 6:20-CR-91-JCB/KNM (11/19/2020): Zenobia Walker, 65, of Temple Hills, Maryland, pleaded guilty on January 6, 2022, to conspiracy to operate an unlicensed money transmitting business and was sentenced to 18 months in federal prison on November 2, 2022. Walker was involved in a scheme in which she received cash by mail, money orders, wire transfers, and cashier’s checks obtained from victims of romance scams and from victims of other fraud schemes. The funds were deposited into Walker’s personal bank accounts and withdrawn and deposited into other bank accounts in order to exchange the funds for cryptocurrency. Between December 2019 and September 2020, Walker exchanged $308,800.00 for cryptocurrency on behalf of her foreign co-conspirators.
- U.S. v. Lois Boyd, et al., 6:21-CR-43-JDK/KNM (6/16/2021): Lois Boyd, 76, of Amelia Court House, Virginia, pleaded guilty on June 14, 2022, to a violation of the Travel Act. Boyd, also a member of the Konda Organization, is alleged to have conspired with others to receive victim money derived from a variety of fraud schemes and launder the proceeds through cryptocurrency. Boyd routinely structured deposits in order to avoid transaction reporting requirements and to conceal the nature and source of the criminal proceeds. Boyd and others in the Konda Organization exchanged the criminal proceeds for cryptocurrency and directed the cryptocurrency to wallets under the control of their foreign co-conspirators. In August 2020, Boyd and others traveled to Longview, Texas, where they attempted to exchange more than $450,000 for Bitcoin.
- U.S. v. Randall V. Rule, et al., 6:22-CR-64-JDK/KNM (5/18/2022): Randall V. Rule, 71, of Reno, Nevada, and Gregory C. Nysewander, 64, formerly of Irmo, South Carolina, were named in an indictment returned by a federal grand jury charging them with money laundering conspiracy, money laundering, and a conspiracy to violate the Bank Secrecy Act. According to the indictment, Rule and Nysewander are alleged to have conspired with others to launder the proceeds of wire fraud and mail fraud schemes through cryptocurrency. The defendants converted funds from romance scams, business email compromises, and real estate scams, and other fraudulent schemes into cryptocurrency and sent the cryptocurrency to accounts controlled by foreign and domestic co-conspirators. The defendants and their co-conspirators made false representations and concealed material facts, in order to avoid discovery of the fraudulent nature of deposits, wires, and transfers, such as providing instructions to co-conspirators and victims to label wire transfers as “loan repayments” and “advertising.” The defendants also made false representations and concealed material facts when completing account opening documents and when communicating with financial institutions and cryptocurrency exchanges. During the course of the conspiracy, Rule, Nysewander, and their co-conspirators allegedly laundered more than $2.4 million. Rule and Nysewander are also charged with willfully violating the money services business requirements of the Bank Secrecy Act.
Criminal Defense Against Cryptocurrency-Related Charges
Cryptocurrency money laundering charges, often coupled with other felony charges like fraud or conspiracy, require an aggressive criminal defense not only because of the rapidly evolving technology at the core of cryptocurrency situations, but because the applicable laws (statute; case precedent) are changing in order to try and address these new situations and scenarios.
These cases are technical, complex, and voluminous matters for the government. The criminal defense attorney must be ready to grade the prosecution’s papers both legally and factually as well as undertaking an independent defense investigation into an area that many do not understand. Blockchain? Virtual wallets? Exchanges? Fiat off-ramps? Not everyone knows what these things are, much less how they work.
Legally, prosecutors and investigators must prove up all criminal charges with authenticated and admissible evidence that supports each element of each crime claimed to have been violated by the accused. It is their burden to prove all of this beyond a reasonable doubt. Overcharging in a cryptocurrency case is entirely possible, particularly when an international criminal enterprise is suggested to be involved.
From a defense perspective, there must be a preliminary review of the investigatory procedures themselves. Has due process been violated in a failed or faulty search and seizure? How did investigators track the money or cryptocurrency to the accused? What do the search warrants show for the accused’s financial transactions or computer databases? Illegal searches and seizures can result in evidence being excluded (“suppressed”), with charges dropped or reduced as a result.
Another defense concern is tying the prosecution’s evidence to each legal element of each crime found in the charges laid against the accused. For instance, one key element in cryptocurrency cases involving money laundering, fraud, or tax evasion is the need to prove intent.
If the accused lacked the intent or purpose to commit the crime, then that element cannot be proven by the government. Insufficient evidence is a viable defense.
For more information, read:
- Money Laundering and Federal Sentencing Guidelines
- 5 Things to Know About Money Laundering in Texas
- Prominent Dallas Attorney Ray Jackson Arrest in Drug Money Laundering Scheme: a Criminal Defense Perspective
- Things to Know about Wire Fraud Today: It’s a Big Deal
- Financial Institution Fraud (FIF): Criminal Defense Overview.
For more information, check out our web resources, read Michael Lowe’s Case Results, and read “The Early Part of a Texas Criminal Case in State or Federal Court.”
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