Image credit: Zach Copley, https://www.flickr.com/photos/zcopley/

What the FLA? Judge rules Bitcoins can’t be laundered

Ruling contradicts federal money laundering statutes

This week, financial criminals are likely strategizing money laundering schemes involving Bitcoin. On Monday, a Florida judge ruled that, under the laws of that state, Bitcoin is not considered a form of money — and therefore cannot be laundered. The headline certainly raised my antenna, as we’ve seen numerous money laundering cases and prosecutions related to Bitcoin over the past few years. So what transpired in this case, and how did it lead to the judge’s decision?

The defendant, Michell Abner Espinoza, agreed to a transaction with undercover Miami Beach Detective Ricardo Arias, trading a stash of Bitcoins for $30,000 in phony cash. The detective told Espinoza he intended to exchange the digital currency for stolen Russian credit-card numbers. When Espinoza didn’t end the conversation, Arias arrested him on one count of operating as an unauthorized money transmitter and one count of money laundering.

Am I missing something here?

Arias likely thought he had a cut and dry case, but in reviewing the details, it seems that Arias did a better job of entrapping Espinoza than catching him in the act of actual money laundering. At the end of the day, it is not relevant to Espinoza what Arias intended with his new stash of Bitcoin. In order to arrest Espinoza for actual money laundering Arias would have had to follow the trail of fake cash he provided his mark to see if Espinoza claimed it as income, or went about the structuring process. Problem is — he gave him fake money!

Florida Judge Teresa Pooler then seemingly ignored the straight facts of the case and chose an iron-clad, but completely different interpretation, in her ruling that focused solely on the definition of ‘money.’

“The Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it the equivalent of money,” said Pooler in her eight-page opinion. “This court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”

This ruling contradicts what is happening on a federal level, considering that the U.S. is now applying the anti-money laundering (AML) rules initially written to govern traditional financial organizations to all digital cash companies. Perhaps even more interesting is that established institutions such as Silicon Valley Bank (SVB) are jumping onboard, exploring ways to incorporate Bitcoin customers into its mix of services. This presents a number of daunting problems to SVB and other financial organizations, not the least of which is to figure out how to “know” your customer to comply with KYC and other anti-money laundering regulations when anonymity is key to Bitcoin’s appeal.

A column in American Banker points out that this trend has opened the door for new startups that are specifically geared to help banks understand and analyze Bitcoin transactions for patterns that might indicate criminal use. While customer anonymity somewhat remains in place, these startups help banks use the chain of transactions encoded on a public ledger, called a blockchain, to connect a Bitcoin address to a person or entity through analysis or even a simple Google search. This would allow a banking institution to essentially “know” its customer, even if it can’t quite “know” the customer’s customers.

Pooler’s odd ruling could simply reflect Florida’s current stance on digital currency and money laundering, which contradicts the federal government’s position. As a result, any precedents set by her opinion are likely limited to Florida. Ellen Zimiles, the global head of investigations and compliance at Navigant Consulting, believes that existing federal rules governing money laundering are much broader than Florida’s statute: “It may have an extensive impact in Florida, but I think [Treasury’s Financial Crimes Enforcement Network] will look at it and see if it’s consistent with their interpretation.”

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CEO of the Alacer Group. Sharing the latest news in financial crimes and best practices that enable financial institutions to prevent money laundering.

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Richard Paxton

Richard Paxton

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CEO of the Alacer Group. Sharing the latest news in financial crimes and best practices that enable financial institutions to prevent money laundering.