Cryptocurrency and Money Laundering

By admin of MillarLaw A Professional Corporation On Sunday, February 18, 2018

In a recent enforcement action FinCEN, the Financial Crimes Enforcement Network levied an $8 million fine on a California card club for violation of the Anti-Money Laundering provisions of the Bank Secrecy Act. (“BSA”). One of the more common claims is the cryptocurrency is negotiable at casinos and card clubs resulting in Money Laundering opportunities. The BSA imposes specific reporting requirements on gambling establishments for just this very reason.

A player at an on-line casino or sports book who uses cryptocurrency to fund his/her account can “cash out” in cryptocurrency and transfer cryptocurrency to a casino or card club to complete the conversion to cash. In this manner if the casino or card club is lax in its reporting the player is able to conceal his/her gambling wins and avoid (evade) taxation.

The transaction does not, of course, need to be limited to gambling winning for the objective of using a casino or card club cage is to “cash out” regardless of the nature of the underlying transaction. The transfer could involve avoidance of currency controls, or money transfer sanctions, or any other action which requires concealment. This is classic Money Laundering.

The IRS CI have announced creation of a cryptocurrency task force. The focus of the Task Force will likely be on “cash out” locations and reliance on Suspicious Activity Reports (“SAR”) required under the BSA. It is th failure to issue SARs the resulted in the $8M fines discussed above.

Cryptocurrency by its very nature tempts taxpayers to evade propoer income tax reporting. The IRS-CI Task Force has obtained over 14,000 records of cryptocurrency customers of Coinbase, a “Public Exchange”, IRS-CI will use those records to identify likely targets for criminal investigation. It will also use SARs and information obtained under information exchange agreements to pursue suspected tax evaders and money launderers.

The 2017 individual income tax returns are due April 15, 2018. Taxpayers with cryptocurrency should file their returns and properly report their cryptocurrency gains and losses. If they have prior years with unreported or under reported income taxpayers should consider coming forward before being contacted by the IRS.