Seller Beware! Avoiding Criminal Prosecution as an Unlicensed Money Service Business

By Courtney Schaefer

As the use and acquisition of Bitcoin and other virtual currencies become more prevalent, the marketplace for their sale and transfer grows accordingly.  Anyone interested in entering this business would be well-served to familiarize themselves with the rules and regulations governing money services businesses, as well as their application to virtual currency.  Increasingly, individuals who disregard these formalities and engage in the exchange of Bitcoin and other convertible virtual currencies for cash without obtaining the proper registrations find themselves subjected to federal criminal prosecution.

18 U.S.C. § 1960 defines an unlicensed money service business as:

“A money transmitting business which affects interstate or foreign commerce in any manner or degree and –

(A) is operated without an appropriate money transmitting license whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable;

(B) fails to comply with the money transmitting business registration requirements under 31 U.S.C. § 5330; or

(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or supply unlawful activity.”

Money transmitters, as financial institutions, are subject to regulation under the Bank Secrecy Act.  They are therefore subject to certain requirements overseen by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).  As early as 2013, FinCEN set forth its position that its money transmitting regulations applied to “persons creating, obtaining, distributing, exchanging, accepting or transmitting virtual currencies.”

Since that time, prosecutions for violations of 18 U.S.C. § 1960 in connection with persons acting as brokers, finders or exchangers of virtual currency have been brought in federal courts across the country in jurisdictions such as Maine, Michigan, Missouri, Louisiana and New York, to name a few, based on the illegal sale and/or exchange of virtual currency.   The following are just a few examples of these prosecutions and the sentences received.

United States v. Mansy – D. Maine 2:15cr00198

Over the course of nearly two years, Sal Mansy bought and sold about $2.4 million worth of Bitcoin online for profit using the bank account of a company he owned and operated to funnel these transactions, without registering with FinCEN.  Mansy pleaded guilty to an indictment charging him with operating an unlicensed money transmitting business and aiding and abetting such conduct in violation of 18 U.S.C. § 1960. He was sentenced to one year and one day in prison and ordered to forfeit $118,000 worth of cash and Bitcoin based on his role in the illegal operation of an unlicensed money service business.

United States v. Michael & Randall Lord – W.D. Louisiana 5:15cr240

Following an unsuccessful bid to vacate their guilty pleas, Michael and Randall Lord were respectively sentenced to 106 and 46 months of incarceration for their roles in a conspiracy to operate an unlicensed money service business (note: Michael Lord also pleaded guilty to one count of drug conspiracy).  The Lords engaged in the online purchase and sale of Bitcoin, and they retained a commission from each sale.  Based on the large volume of currency being purchased, they were advised by the online vendor that they were required to register with FinCEN.  The Lords falsely represented to the vendor that they were registered and in fact waited another four months before registering with FinCEN. By that time, their business had exchanged over $2.5 million in Bitcoin for customers across the country.

United States v. Jason Klein – W.D. Missouri 6:17cr3056

Jason Klein was sentenced to five years of probation after pleading guilty to an information charging him with conducting an unlicensed and unregistered money transmitting business.  Klein illegally advertised his services as a Bitcoin exchanger online without registering with FinCEN or the State of Missouri as a licensed money transmitter.  On five separate occasions in a little over a year, Klein exchanged Bitcoin for cash – ranging from $1,000 to $15,000 – and collected a total of $2,122 in exchange for these services.

While many of these defendants may have been engaged in the sale or exchange of virtual currency for criminal or nefarious purposes, it is easy to imagine how an individual lacking such motives but unacquainted with the definition of a money service business and the accompanying regulations may inadvertently find themselves receiving unwanted scrutiny from federal investigators.

At Shulman Rogers, we assist our clients to understand what is required and prevent exposure to criminal liability.  For those who find themselves the subject of these an investigation, we are prepared to deploy our criminal defense experience and nuanced understanding of cryptocurrencies to launch an effective defense.

 

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Courtney Schaefer, Shulman Rogers’ Financial Regulatory and Compliance Practice

 

 


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