Failure to Register with FINCEN Sustains Guilty Pleas by Virtual Currency Exchangers
Ballard Spahr LLP
It is a potential crime to conduct a business that exchanges virtual currency and fail to register with the Financial Crimes Enforcement Network (“FinCEN“), even if the State in which one operates does not impose a similar licensing requirement. A federal district court in Louisiana has reaffirmed this principle in United States v. Lord, in which the defendants unsuccessfully sought to withdraw their pleas of guilty to offenses based on a failure to register with FinCEN.
The defendants are father and son. According to the court opinion, in 2013, they began to operate a bitcoin business through a website called localbitcoins.com, which advertised the services of other bitcoin exchangers. The defendants’ clients provided cash, credit card payments and wire transfers to the defendants to purchase bitcoins from a third-party online bitcoin broker on their client’s behalf, in exchange for commissions charged by the defendants. In the Spring of 2014, the third-party bitcoin broker warned the defendants that they were required to register with FinCEN because they were acting as virtual currency exchangers. Although the defendants allegedly misrepresented to the third-party online broker that they already had registered with FinCEN, the defendants did not actually register until November 2014. By that time, however, they already had exchanged more than $2.5 million worth of virtual currency. This registration delay was the basis of the charges relating to the defendants’ virtual currency business.
The defendants were charged in an indictment with conspiring to operate an unlicensed money service business (“MSB”), in violation of 18 U.S.C. § 371 and 18 U.S.C. § 1960, as well as 13 other offenses associated with the operation of their bitcoin business. Further, the last count in the indictment charged the son (but not the father) with participating in a separate conspiracy to distribute the drug Xanax through a “darknet” website.
After having entered guilty pleas to the conspiracy counts, but prior to their sentencing hearing, both defendants moved to withdraw their pleas of guilty. As explained by the district court:
Count 1 of the indictment charged Defendants with conspiracy to operate an unlicensed MSB under 18 U.S.C. § 371 (conspiracy) and 18 U.S.C. § 1960 (unlicensed money transmitting businesses). Under 18 U.S.C. § 1960, a person commits an offense when he “knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business.” The statute defines the term “unlicensed money transmitting business” as “a money transmitting business which affects interstate or foreign commerce in any manner or degree” and either (A) is operated without an appropriate money transmitting license in a State; or (B) fails to comply with the money transmitting business registration requirements under 31 U.S.C. § 5330 or regulations thereunder. 18 U.S.C. § 1960(b)(1)(A) and (B). Thus, the statute sets forth two separate methods by which the Government may prove that a defendant is an “unlicensed money transmitting business”: failure to obtain a state license where such a license is necessary, or failure to comply with separate federal registration requirements.
The government conceded that it could not prove the defendants guilty under the first method, because the State of Louisiana did not require a license for persons to exchange or broker virtual currency. Nonetheless, the government argued that a sufficient factual basis had been presented at the guilty plea hearing to uphold the defendants’ guilty pleas under the second method.
The court agreed. The court applied a multi-factor test under Federal Rule of Criminal Procedure 11(d)(2)(B) regarding whether a defendant may withdraw a plea of guilty prior to the imposition of sentence. The first and most important factor in this test – the one upon which we focus here – is whether the defendant has asserted his actual innocence of the offense to which he pleaded guilty. Analyzing this factor, the court concluded that the defendants had failed to show that they were actually innocent of the offense of conspiring to operate an unlicensed MSB.
The court first explained that all businesses which meet the regulatory definition of a MSB must register with FinCEN through the registration procedures set forth in 31 C.F.R. § 1022.380, which require a MSB in part to submit its registration form to FinCEN within 180 days of the date the business is established. The court further explained that the relevant regulations define a MSB as a business engaging in at least one of several different types of financial business. One of them is a “money transmitter,” which is defined under 31 C.F.R. § 1010.100(ff)(5)(A) as a person that engages in “the acceptance of currency, funds, or other value that substituted for currency from one person and the transmission of currency, funds, or other value that substituted for currency to another location or person by any means.” Under this analysis, the court concluded that the defendants’ business represented a “money transmitter” required to register:
. . . FinCEN released interpretive guidance in March 2013 clarifying the application of these regulations to businesses like that of Defendants. See Dept. of the Treasury, FinCEN, FIN-2013-G001 (March 18, 2013). This guidance clarified that though a user of a virtual currency like bitcoin is not an MSB, “an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.” See id. at 1 (emphasis in original). It is undisputed that Defendants failed to register with FinCEN until November 2014, well past the 180-day deadline for such registration, which commenced sometime in 2013 when Defendants first began their bitcoin exchange business. . . . Thus, because “it is unlawful to do business [as an MSB] without complying with 31 U.S.C. § 5330 and [31 C.F.R. § 1022.380]” regardless of compliance with any state licensing requirements, the Court finds that Defendants have not asserted their actual innocence of the crime to which they pleaded guilty in Count 1 of the indictment. 31 C.F.R. § 1022.380(e).
After discussing the remaining six factors, the court concluded that the defendants ultimately had failed to present a “fair and just” reason which would allow them to withdraw their guilty pleas (including the guilty plea to the conspiracy to distribute drugs entered by the second defendant).
The decision to prosecute here presumably was motived in no small part by the fact that one of the defendants also participated in alleged drug distribution. Nonetheless, the Lord case illustrates that eventually obtaining proper registration as an MSB will not necessarily insulate from prosecution a prior failure to comply with all licensing and registration requirements.