location email icon

Los Angeles: 310.556.3007

How Not to Use Bitcoin

By admin of MillarLaw A Professional Corporation On Sunday, February 22, 2015

The use of Bitcoin has both legal and potentially illegal applications. Bitcoin is just a contemporary version of the Informal Value Transfer System, (“IVTS”) which in some countries is known as the Hawala. The IVTS has been used for international money transfers according to the Financial Crimes Enforcement Network (FinCen) for the following reasons:
“IVTS-type networks operate in parallel with formal financial institutions or as a substitute or alternative for them. United States citizens, persons (legally or illegally) residing in this country from foreign countries, and individuals living in other nations may prefer or need to use IVTS in lieu of formal financial institutions for various reasons as described below:

  • the political instability, inadequate payment systems, and/or an unstable financial sector that exist within a country;
  • a lack of easily accessible formal financial institutions in remote areas of some countries;
  • transfers that are more efficient, reliable, and cheaper than formal financial institutions. (For example, a wire transfer of funds using banks involves fees charged to the sender and receiver, may take from two to seven days to complete, and may be delayed or lost. Funds moved through IVTS are available within 24 hours, with minimal or no fees charged to the participants.);
  • to avoid paying higher foreign exchange rates. (Funds sent through traditional transfers are converted to the currency of the recipient’s country; the fee charged for exchange rate conversion is set by the institution. IVTS operators, who speculate in currency exchange rates, charge lower fees.);
  • to avoid currency reporting controls. (The United States, along with many foreign governments, has established currency reporting requirements for financial institutions. Some expatriates and citizens distrust governments and wish to circumvent any reporting of their financial activities.);
  • to avoid paying taxes; or to ensure anonymity since there may be minimal or no records maintained; in other words, no paper trail exists.”

The last two points are the most troublesome. In the recent case involving three bank officials of now a defunct Swiss bank (“Weglin”) among the counts charged in the Superseding Indictment are charges for under (TITLE 26, UNITED STATES CODE,SECTION 7212(a) AND TITLE 18, UNITED STATES CODE, SECTION 2.). superseding indictment states:

The Grand Jury further charges:
146. From at least in or about 2002 up through and including in or about 2011, in the Southern District of New York and elsewhere, URS FREI, the defendant, did corruptly obstruct and impede, and endeavor to obstruct and impede, the due administration of the Internal Revenue Laws, to wit, XXXX engaged in a corrupt endeavor to, among other things, conceal from the IRS undeclared accounts owned by U.S. taxpayers at Wegelin.”

This approach to prosecuting bank officials under the general “Omnibus Conspiracy” laws under the Internal Revenue Code, may have broad application for individuals who have used or contemplate using the IVTS, including Bitcoin, for purposes of avoiding

(1) currency controls (such as those imposed by China or India), or;
(2) Sanctions orders, such as those imposed by the U.S. against Iran, Syria and Cuba, or;
(3) paying taxes or filing Information Returns. Information returns, include the following FinCen Form 114 (Report of Foreign Financial Account), Internal Revenue Code Form 3520, (Report of Foreign Gift Devise or Bequest), Form 5471,(Return of Controlled Foreign Corporation), Form 8938,(Statement of Specified Foreign Financial Assets)

The use of the Omnibus Conspiracy laws enables the government to reach many more participants in the sequence of events (such as family participants) in schemes to avoid reporting and avoid taxation. As Bitcoin attempts to legitimize it role as a financial intermediary and service provider it can be expected to cooperate in requests for records from the government, thus, hoping to avoid being charged criminally or civilly.

For taxpayers who have used the IVTS to conceal financial transactions and wish to come forward, there are a number of options, depending upon the facts. We at MillarLaw are expert in evaluating and implementing plans to bring U.S. taxpayers into compliance with federal and state tax reporting and disclosure laws.

The choice to come forward or wait to be caught can be summarized by the following quote
from William Shakespeare:

“It is not in the stars to hold our destiny but in ourselves”

Tags: , , ,

Millar Law A Professional Corporation

1900 Avenue of the Stars, STE 2300 | Los Angeles, CA 90067
Phone: 310.556.3007 Fax: 310.861-1863
| Los Angeles Law Office Map