US makes Bitcoin exchange arrests

A good excerpt from page 13.<p>&quot;Shrem email accounts reflect that &quot;BTCKing&quot; not only obtained his supply of Bitcoins through the Company, but did so with extensive support from SHREM. Even though SHREM quickly realized that &quot;BTCKing&quot; was reselling Bitcoins on Silk Road, which SHREM knew to be a marketplace for illicit drugs, SHREM went out of his way to facilitate &quot;BTCKing&#x27;s&quot; business. Among other things, SHREM: permitted &quot;BTCKing&quot; to continue doing business with the Company, despite initially threatening to &quot;ban&quot; him based on his illegal activity; personally ensured that &quot;BTCKing&#x27;s&quot; orders with the Company were filled everyday; gave &quot;BTCKing&quot; discounts based on his large order volume; sought to conceal &quot;BTCKing&#x27;s&quot; activity from the Co-founder and the Cash Processor to prevent &quot;BTCKing&#x27;s&quot; orders from being blocked; advised &quot;BTCKing&quot; how to evade the transaction limits imposed by the Company&#x27;s own AML policy; let &quot;BTCKing&quot; conduct large transactions without ever verifying his identity, in violation of federal AML laws; and failed to file a single Suspicious Activity Report about &quot;BTCKing,&quot; [sic] despite the obvious &quot;red flags&quot; raised by &quot;BTCKing&#x27;s&quot; dealings with the Company.&quot;<p>If all that is alledged is true, that&#x27;s pretty damning and this isn&#x27;t just a general bitcoin crackdown.

I find it hilarious that they take this guy down and nobody from HSBC does a perp walk. I guess it&#x27;s who you know and how much you can pay off, ya? This has everything to do with the threat Bitcoin represents. HSBC literally paid a 2 Billion dollar fine against specifically money laundering on behalf of organized drug cartels. The investigation took years and not a single HSBC employee has done a perp walk.<p>Oh, and since when does selling BTC anywhere, including Silk Road, constitute a crime? It&#x27;s what you buy with BTC, or any other currency, that is the crime.

There seems to be a general lack of understanding here on HN that <i>money laundering is incredibly harmful to society</i>. It allows organised crime to operate with great ease. It facilitates the corrupt in any walk of life, be it political, corporate, or even law enforcement.<p>Any money-trading entity needs to keep track of who money is coming from and going to and to monitor their transactions. The recent billion-dollar HSBC settlement is an example of a failure to properly monitor transactions, it is not clear that there was any criminal conspiracy involved [1]. That&#x27;s very different from this BitInstant charge: the operators are accused of knowing that one of their customers was reselling hundreds of thousands of dollars worth of BitCoin on SilkRoad where the transaction was anonymous, which means it can be used to launder money. Worse still, they&#x27;re accused of helping this guy circumvent their own monitoring systems so that they weren&#x27;t obliged to report him. This is serious stuff.<p>[1] The criminal charges from that case were dropped as part of a settlement, but that&#x27;s an entirely separate contoversy. Failure to correctly charge possible criminals in once case does not make it ok in another.

It&#x27;s worth reading the indictment: <a href="http://www.scribd.com/doc/202555785/United-States-vs-Charles-Shrem-and-Robert-M-Faiella" rel="nofollow">http:&#x2F;&#x2F;www.scribd.com&#x2F;doc&#x2F;202555785&#x2F;United-States-vs-Charles...</a>. At least read the e-mail exchanges starting on pages 10 and 12.<p>What the article doesn&#x27;t make clear is that the charge isn&#x27;t for just selling BTC to Silk Road users. The charge is that Faiella purposefully targeted Silk Road users, sold them BTC at a markup, and Shrem coordinated with him to bypass BitInstant&#x27;s anti-money laundering mechanisms and deliver the actual Bitcoin.

This is not an attack on Bitcoin <i>per se</i>, but an attack on blatant money laundering:<p>US Attorney for the Southern District of New York, Preet Bharara, who filed the charges: &quot;truly innovative business models don’t need to resort to old-fashioned lawbreaking, and when Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act&quot; [1].<p>This is different from HSBC&#x27;s case because while HSBC was negligent in implementing proper anti-money laundering procedures Shrem was actively aiding his clients in their money laundering. That has not been <i>proven</i> in the case of any of HSBC&#x27;s U.S. executives, at least so far.<p>[1] <a href="http://www.ft.com/intl/cms/s/0/a994436a-8770-11e3-9c5c-00144feab7de.html?siteedition=intl#axzz2rTXVAoxC" rel="nofollow">http:&#x2F;&#x2F;www.ft.com&#x2F;intl&#x2F;cms&#x2F;s&#x2F;0&#x2F;a994436a-8770-11e3-9c5c-00144...</a>

Note that this isn&#x27;t an arrest just for operating a Bitcoin exchange. It&#x27;s specifically to do with Silk Road.

For me, the biggest shock is that Shrem is on the board of the Bitcoin Foundation and was involved in this stuff. The Bitcoin foundation is one of the strongest voices in Washington about Bitcoin.<p>This is a big hit to the credibility of Bitcoin in the near to midterm future.

I am sure this will get down voted, but I can&#x27;t help but find it interesting (Gov going after them after this recent HSBC news) HSBC was involved with drug cartels and much more and just had to pay a 1.9 billion dollar fine (sounds like a lot, but keep in mind its about 5 weeks of profits) <a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211" rel="nofollow">http:&#x2F;&#x2F;www.reuters.com&#x2F;article&#x2F;2012&#x2F;12&#x2F;11&#x2F;us-hsbc-probe-idUS...</a>

If my understanding is true, then bitcoin isn&#x27;t really relevant here. They could have been selling hand written money tokens to people that they then used to pay their drug dealer with. The allegations are about intent and money laundering.<p>If this is all as presented, this is good for bitcoin. The fact that a criminal has been caught is good. The fact that they were using bitcoin to commit their crime makes it doubly good they were arrested as it reflects badly on the community.

In related news: <a href="http://www.globalpost.com/dispatch/news/regions/americas/united-states/140121/hsbc-paying-2-billion-drug-money-laundering-cartel" rel="nofollow">http:&#x2F;&#x2F;www.globalpost.com&#x2F;dispatch&#x2F;news&#x2F;regions&#x2F;americas&#x2F;uni...</a>

I am very supportive of the Bitcoin Foundation, but it doesn&#x27;t look good to have your Vice Chairman [1] taken down on money laundering charges.<p>1 - <a href="https://bitcoinfoundation.org/about/board" rel="nofollow">https:&#x2F;&#x2F;bitcoinfoundation.org&#x2F;about&#x2F;board</a>

Seems like they were arrested for selling bitcoins to silk road users en masse. Is this just a US law oddity or is that what passes for money laundering these days?

From reading the complaint; it seems that the BTCKing guy was advertising his services on Silk Road and was active on the forums. Which means that he was knowingly violating the laws on money transmission and specifically the know your customer aspects.<p>It&#x27;s pretty clear that in the not too distant future it will be illegal to not make a good faith effort to identify anyone you are selling bitcoins to.

Complaint: <a href="http://www.scribd.com/doc/202555785/United-States-vs-Charles-Shrem-and-Robert-M-Faiella" rel="nofollow">http:&#x2F;&#x2F;www.scribd.com&#x2F;doc&#x2F;202555785&#x2F;United-States-vs-Charles...</a>

This seems a bit ridiculous considering the half a TRILLION dollars that were laundered for drug cartels by the American bank Wells Fargo.<p>Am I missing something?

There is a bit more information here, not much to be had anywhere I see, though.<p><a href="http://business.time.com/2014/01/27/bitinstant-ceo-charlie-shrem-arrested-for-alleged-money-laundering/" rel="nofollow">http:&#x2F;&#x2F;business.time.com&#x2F;2014&#x2F;01&#x2F;27&#x2F;bitinstant-ceo-charlie-s...</a>

Meanwhile, the US allows the Sinaloa to move drugs in the US:<p><a href="http://world.time.com/2014/01/14/dea-boosted-mexican-drug-cartel/" rel="nofollow">http:&#x2F;&#x2F;world.time.com&#x2F;2014&#x2F;01&#x2F;14&#x2F;dea-boosted-mexican-drug-ca...</a>

People are gonna have to learn to play by the rules. They are obviously paying attention.

The legality of crypto-currencies in the US ultimately hinges on whether Wall St. execs can make money off them. If they could &quot;frontrun&quot; bitcoin trades, &quot;naked short sell&quot; into bitcoin exchanges, and execute &quot;wash trades&quot; to fix the price of bitcoins, then not only would bitcoin be declared legal, but we would see the US government using it and have it forced down the throats of middle-class pension funds.<p>But Wall St. can&#x27;t control bitcoin. So JP Morgan CEO Jamie Dimon denounced it as &quot;terrible&quot; and predicted its downfall. Source: <a href="http://rt.com/usa/chase-ceo-bitcoin-terrible-downfall-100/" rel="nofollow">http:&#x2F;&#x2F;rt.com&#x2F;usa&#x2F;chase-ceo-bitcoin-terrible-downfall-100&#x2F;</a><p>Then JP Morgan filed patents on its own crypto-currency, one that it can rig with frontrunning, naked short selling, and wash trades. Source: <a href="http://www.ft.com/cms/s/0/e230307a-61c4-11e3-aa02-00144feabdc0.html#axzz2rjvqMuDn" rel="nofollow">http:&#x2F;&#x2F;www.ft.com&#x2F;cms&#x2F;s&#x2F;0&#x2F;e230307a-61c4-11e3-aa02-00144feabd...</a><p>As for bitcoin, I predict we&#x27;ll increasingly see it in the news headlines linked to: (1) illegal drugs, (2) child porn, and (3) terrorism. These are the exact same smear tactics we&#x27;ve seen before used against P2P filesharing.<p>And we&#x27;ll see lots more bitcoin arrests like these.

Seems like solid evidence that the reason the US govt is so comfortable with Bitcoin is that they have a handle on anonymizing the blockchain as needed.<p>Also maybe an example of crypto over-confidence.

&quot;and operating an unlicensed money transmitting business&quot; <a href="http://bnowire.com/inbox/?id=2158" rel="nofollow">http:&#x2F;&#x2F;bnowire.com&#x2F;inbox&#x2F;?id=2158</a><p>And they reveal the hand they&#x27;ll use to shut it all down.

I&#x27;ve been worried about random people opening up exchanges, pools and other BTC transaction web applications. There are so many regulations, particularly in Anti-Money Laundering and Compliance that complicate business. People need to be careful and realize exchanges aren&#x27;t a business you jump into on a whim.<p>The worst is, if you innocently run a site like this and don&#x27;t have the correct AML protections, the baddies will use your service for their goals. You will be in trouble for not having the appropriate controls in place.

The Justice Department press release is the ultimate source for all these stories and is the most informative: <a href="http://www.justice.gov/usao/nys/pressreleases/January14/SchremFaiellaChargesPR.php" rel="nofollow">http:&#x2F;&#x2F;www.justice.gov&#x2F;usao&#x2F;nys&#x2F;pressreleases&#x2F;January14&#x2F;Schr...</a><p>I guess this bodes poorly for the people who were hoping to get their coins back from Bitinstant: <a href="http://bitinstant.info/" rel="nofollow">http:&#x2F;&#x2F;bitinstant.info&#x2F;</a>

This is no different from many of the companies that Andreessen-Horowitz, Y Combinator, Sequoia, KPCB, and other big names have invested in. In fact, it&#x27;s just the tip of the iceberg.<p>More arrests will likely follow. I wouldn&#x27;t be surprised if Dwolla and&#x2F;or Veridian Credit Union is next. They were one of the largest pipes to the Silk Road.<p><a href="http://www.plainsite.org/flashlight/case.html?id=2434524" rel="nofollow">http:&#x2F;&#x2F;www.plainsite.org&#x2F;flashlight&#x2F;case.html?id=2434524</a>

Here&#x27;s Andy Greenberg&#x27;s excellent article on today&#x27;s events--<p><a href="http://www.forbes.com/sites/andygreenberg/2014/01/27/winklevoss-funded-bitcoin-startup-ceo-arrested-in-silk-road-investigation/" rel="nofollow">http:&#x2F;&#x2F;www.forbes.com&#x2F;sites&#x2F;andygreenberg&#x2F;2014&#x2F;01&#x2F;27&#x2F;winklev...</a>

A better headline: &quot;U.S. makes money-laundering arrests&quot;

Title is very sensationalist and almost gave me a heart attack.

&gt; <i>&quot;It is unfortunate Silk Road continues to make the headlines in association with Bitcoin - this is the dark side of Bitcoin, which the vast majority of digital currency users have no association with.&quot;</i><p>Every currency or commodities of value have a dark side. A significant percentage of British notes have traces of cocaine, occasionally you see ones with blood on them. I&#x27;d consider blood diamonds to have just as sinister connotations as bitcoin.<p>Discussing this reminds me of the scene in Beverley Hills Cop, where the character Michael Tandino is murdered for stealing a wad of bearer bonds.<p><a href="http://en.wikipedia.org/wiki/Bearer_bond" rel="nofollow">http:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Bearer_bond</a>

I wonder how central figures in Bitcoin feel about this. The headlines aren&#x27;t helpful but in the longer run if the Feds drive down or out the number of bad guys using Bitcoin that would seem to help it&#x27;s image over the long run.

HSBC admitted to laundering $800M for drug cartels. No arrests.

Criminalizing BTC is a sure sign of fear from the US&#x2F;UK banking system. But you cannot criminalise maths, you can only do that with mathematicians like Alan Turing.

what about coin base and bitpay do they have any anti money laundering issues? Is the burden of AML KYC fall on the merchant or on coin base bitpay?

The difference between HSBC money laundering and Bitcoin&#x27;s money laundering is more political hands involved with HSBC&#x27;s profits.

Without being upset, I&#x27;m curious what the difference is between this type of arrest and various traditional banks that were civilly fined for money laundering, but not criminally charged.<p>I doubt many FBI agents would hesitate to pursue a big bank. But they don&#x27;t seem to be able to, even when there are civil fines given. What causes that, I wonder?

&quot;Drug law enforcement&#x27;s job is to investigate and identify those who abet the illicit drug trade at all levels of production and distribution, including those lining their own pockets by feigning ignorance of any wrong doing and turning a blind eye.&quot;<p>Start with congress for making drugs illegal in the first place.

&gt;&gt;&gt; Given that everyone involved was an American citizen.<p>I guess this is the moral of the story. Don&#x27;t do this stuff within the confines of the US? Find a nice island paradise (I hear Vanuatu is nice this time of year) and do your business from a country that has no extradition treaty with the US.

Interesting that they charged them with the money transmitting and laundering charges. I suspect it is hard to get someone indicted for just trading in coin since to the average lay person that probably seems like baseball collector cards or something.

How is what these people were arrested for different than what Coinbase does?

HSBC just had to pay a 2b fine for money laundering, I guess the US gov doesn&#x27;t accept BTC yet...

tangential to the story, but can someone explain to me why the government hates bitcoin(or rather, why people seem to think this)? It&#x27;s a public ledger of all payments, seems like a pretty good thing for the IRS.

For me, the worst part is I went to high school in Brooklyn with this guy. Ugh.

so uncool, much dogecoin to invest