US indicts alleged Russian money-laundering 'mastermind' behind US$4 billion Bitcoin Exchange

31st July 2017, Bachir El Nakib (CAMS), Senior Consultant, Compliance Alert (LLC)

Defendant Alexander Vinnik Was Arrested in Greece to Face Charges in the United States; Bitcoin Exchange Alleged to Have Received Deposits Valued at Over $4 Billion

The U.S.Finanacial Crimes Enforcement Network (FinCEN) the U.S. "AML FIU" on Wednesday July 26, 2017 fined one of the world's largest virtual currency exchanges more than $110 million for "willfully" violating U.S. anti-money laundering laws while processing nearly $300 million in bitcoin transactions since 2011. The failure to police transactions at the BTC-e exchange attracted ransomware purveyors, drug traffickers and a veritable who's who of tech-savvy criminal activity, authorities said.

FinCEN issued the civil penalty against BTC-e, which said on its website it was based in Bulgaria. The U.S. Attorney's Office for the Northern District of California also announced criminal charges against the entity.

Both authorities also targeted Russian national Alexander Vinnik, who allegedly is one of the operators of BTC-e. FinCEN fined Vinnik $12 million for his alleged role in the firm's anti-money laundering (AML) violations. Vinnik, 37, was arrested in a small beachside village in northern Greece earlier this week on a U.S. warrant and is accused of laundering at least $4 billion.

Vinnik and BTC-e were indicted by a federal grand jury on money laundering and other charges, federal prosecutors in San Francisco said in a statement issued Wednesday. They described Vinnik as "a primary beneficial owner" of BTC-e's managing shell company, Canton Business Corporation, and said numerous withdrawals from BTC-e bank accounts "went directly to Vinnik's personal bank accounts."

FinCEN described BTC-e as "an internet-based, foreign-located money transmitter" that exchanges fiat currency for virtual currencies Bitcoin, Litecoin, Namecoin, Novacoin, Peercoin, Ethereum, and Dash. It noted this was the first instance in which it penalized a foreign money transmitter for AML lapses.

AML lapses attract shady characters

BTC-e's intentional failure to spot and report "suspicious" transactions "attracted and maintained a customer base that consisted largely of criminals who desired to conceal proceeds from crimes such as ransomware, fraud, identity theft, tax refund fraud schemes, public corruption, and drug trafficking," FinCEN said in the penalty assessment made public Wednesday night.

"We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. anti-money laundering laws," Jamal El-Hindi, Acting Director of FinCEN. said in a statement released with the penalty. "This action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency."

BTC-e failed to obtain required information from customers beyond a username, a password, and an e-mail address, FinCEN said. It added that "BTC-e and its operators embraced the pervasive criminal activity conducted at the exchange."

"Users openly and explicitly discussed criminal activity on BTC-e's user chat. BTC-e's customer service representatives offered advice on how to process and access money obtained from illegal drug sales on dark net markets like Silk Road, Hansa Market, and AlphaBay," FinCEN said.

Federal prosecutors said BTC-e had "no system for appropriate 'know your customer' or 'KYC' verification."

Links to high-profile crimes

BTC-e also was linked to the laundering of funds from high-profile crimes around the world, U.S. authorities said.

It allegedly processed transactions involving funds hackers stole from what was at the time one of the world's largest bitcoin exchanges, Mt Gox, between 2011 and 2014, FinCEN said. It allegedly processed over 300,000 bitcoin in transactions traceable to that theft, as well as at least $3 million in transactions tied to ransomware attacks, FinCEN said.

BTC-e was also linked to the defunct Liberty Reserve, which FinCEN previously deemed "a financial institution of primary money laundering concern" under Section 311 of the USA PATRIOT Act of 2001, FinCEN said.

Customers in the United States used BTC-e to conduct at least 21,000 bitcoin transactions worth over $296 million and tens of thousands of transactions in other convertible virtual currencies. The company tried to hide its links to U.S. customers by instructing them to use "correspondent accounts held by foreign financial institutions or services provided by affiliates of BTC-e located abroad," FinCEN said.

FinCEN has for several years required that bitcoin exchanges operating in the United States register and enact anti-money laundering programs, making the United States a pioneer in virtual currency regulation. It considers such operations money transmitters for the purposes of AML compliance.

FinCEN: Company allowed transactions involving "bitcoin mixers"

BTC-e also allowed over $40 million in transactions on its platform involving so-called "bitcoin mixers," which avoids direct, traceable transfer of bitcoin between two bitcoin addresses, instead using temporary bitcoin addresses operated by the mixer to "complicate any attempt to analyze the flow of bitcoin," FinCEN said.

Many consider transactions involving mixers to carry significant money laundering risk as they exist to shield users identities, a service useful to criminals looking to hide the source of their wealth. BTC-e "lacked adequate internal controls to mitigate the risks presented by bitcoin mixers," FinCEN said.

BTC-e's website, which no longer is operational, said the entity was located in Bulgaria but organized or otherwise subject to the laws of Cyprus, according to prosecutors.

It purportedly "maintains a base of operations in the Seychelles Islands and its web domains are registered to shell companies in, among other places, Singapore, the British Virgin Islands, France, and New Zealand," prosecutors said.

This matter was investigated by the Internal Revenue Service-Criminal Investigation Division, Federal Bureau of Investigation, U.S. Secret Service, and Homeland Security Investigations.

In 2015 FinCEN fined another virtual currency firm, San Francisco-based Ripple Labs Inc, $700,000, over serious AML lapses. It appears Northern California, with its heavy concentration of technology firms, may be a center for AML enforcement in the virtual currency world.


* Reuters


* FinCEN

* Business Insider