Illicit crypto transactions are getting more attention from the government

Published at: Sept. 19, 2020

The COVID-19 pandemic has forced governments worldwide to focus on bringing blockchain technology to their financial services, along with the needed regulatory upgrades to keep the burgeoning fintech industry clean.

For example, on Sep. 10, Switzerland — a global center for the wealth management industry, housing around $2 trillion or 27% of global offshore wealth — passed a reformed Blockchain Act that includes a new set of laws and regulations to support the growth of blockchain and decentralized finance companies in the country.

Related: Why Switzerland is becoming a “crypto nation” with a flourishing ICO market: Expert take

Furthermore, in a major milestone for the crypto industry, leading travel rule solutions nonprofit Travel Rule Information Sharing Alliance, or TRISA, from Ciphertrace and developer of the world’s first tracing tool for Monero, together with Sygna Bridge from CoolBitX announced their interoperability proof-of-concept, allowing crypto service providers from both platforms to meet the requirements as outlined by the travel rule. It is available to the public on GitHub.

The travel rule was introduced by the Financial Action Task Force in June 2019 and requires financial institutions participating in cryptocurrency transactions to exchange relevant beneficiary and originator Know Your Customer, or KYC, information. As a result, Virtual Asset Service Providers, or VASPs, between the two solutions can communicate compliance data with minimal disruption.

As Michael Ou, CEO of CoolBitX and creator of Sygna Bridge, explained: “In the last few years, several innovative solutions have appeared to help crypto and virtual asset businesses comply with anti-money laundering regulations that are beginning to develop around the world — each addressing the needs of different audiences. At the end of the day, money-laundering and terrorist financing are global issues that require the collaboration between different entities. This all begins with ensuring that the solutions are able to communicate effectively between each other. By adapting industry standards such as the IVMS101 and building tools to ensure correct translation and connectivity, Sygna Bridge and TRISA are working together to ensure that the cryptocurrency industry is growing and maturing in a positive direction.”

John Jefferies, chairman of TRISA, added:

“Achieving global interoperability for Travel Rule compliance across jurisdictions is vital for a successful sunrise phase. We are pleased to enable message interoperability and extend mutual VASP authentication in this Travel Rule proof of concept.”

According to statistics released by the United States Office on Drugs and Crime, up to $2 trillion is laundered on the global market annually, which bypasses the latest cryptocurrency KYC measures. Financial institutions could be missing up to 90% of cryptocurrency-related transactions, as they overlook lesser-known digital asset exchanges, according to the latest report by CipherTrace.

Until they are eventually caught by United States law enforcement, criminals prefer using cryptocurrency tumblers or cryptocurrency mixing services when paying for illicit goods and services that are transmitted with no oversight by governments or central banks, thereby obscuring the trail back to the fund’s original source.

Related: Illicit uses of cryptocurrency gaining attention around the world: Expert take

Nearly a month after announcing the largest-ever seizure of cryptocurrency assets used by terrorist organizations in a multi-agency investigation conducted alongside the Federal Bureau of Investigations, Department of Homeland Security Investigations and Internal Revenue Service Criminal Investigation, the U.S. Department of Justice showcased the results of a five-year operation targeting Mexican drug cartels on Sept. 3.

Robert Murphy, the Drug Enforcement Administration’s special agent in charge at Atlanta division, said:

“We have a Mexican drug cartel who initially came to our attention through U.S. Fish and Wildlife when they smuggled over 900 kilos of cocaine with frozen sharks.”

The indictment charged 12 defendants and two businesses with mail and wire fraud conspiracy, conspiracy to possess with intent to distribute controlled substances, and money laundering conspiracy. The charges carry potential penalties of up to life in federal prison with no parole.

A week later, on Sept. 10, the DEA announced the results of a six-month operation, “Crystal Shield,” again targeting Mexican drug cartels operating major methamphetamine transportation hubs in the United States. The operation led to “nearly 1,840 arrests and the seizure of more than 28,560 pounds of methamphetamine, $43.3 million in drug proceeds, and 284 firearms.” The U.S. Attorney General William Barr said more than 60 Mexican cartel figures have been extradited this year, and more are expected. Barr added:

“Unfortunately Covid has intervened and has tempered a lot of the progress we had been making, reduced our momentum.”

These U.S. Federal agencies have bolstered their cryptocurrency oversight and enforcement efforts for 2021 — which begins in October of 2020 — with millions of dollars in new funding to shore up national and international cryptocurrency investigations.

The IRS is already spending some of that funding on a bounty of up to $625,000 to anyone who can crack untraceable privacy coins.

The IRS’s federal whistleblower program

It should be noted that the IRS has a federal whistleblower law program for informants (including foreigners) who provide information that leads to the collection of taxes, whether from undisclosed fiat or cryptocurrency, and offering up to 30% of the resulting tax and penalty revenue.

At the direction of Senator Charles Grassley, Dean Zerbe, a partner at law firm ZMFF&J, was responsible for the modern IRS whistleblower law, which was signed into law in 2006. He also established the IRS Whistleblower Office and created an award program for tax whistleblowers while he was senior counsel and tax counsel for the chairman of the Senate Finance Committee, from 2001 to 2008.

This legislation led to the famous UBS tax evasion case that reverberated around the world. UBS, Switzerland’s largest bank, admitted to helping Americans dodge taxes, and it agreed to pay the U.S. government $780 million. In a departure from its own legal standards, the Swiss government also divulged banking client secrets. Alarmed by the affair, many U.S. depositors pulled their money out of UBS, and thousands of tax-dodging Americans came clean with the IRS. The IRS awarded $104 million to the banker-turned-whistleblower who helped the government uncover the massive scheme, which was the largest bounty ever granted to a single whistleblower in the U.S. at the time.

As Dean Zerbe explained:

“The IRS released its 2019 annual report on the whistleblower program — showing over $616 million dollars brought into the Treasury thanks to the work of tax whistleblowers speaking out about tax evasion. [...] The trend is clear that the IRS has embraced the modern mandatory tax whistleblower program created by my old boss Chairman Charles Grassley (R-IA) — and it is honest taxpayers who have most benefited.”

The report makes note that whistleblowers can be paid for FBAR violations (undeclared foreign bank accounts) as well as criminal fines.

However, “the top reason — 51%! — whistleblower submission is rejected is because the submission is not specific. [...] The IRS does not want submissions that are speculative. The IRS wants and welcomes submissions that are grounded — particularly those coming from credible whistleblowers — containing known facts, dealing with specific taxpayers and ideally, with documents in hand and involving recent/current tax evasion,” pointed out Dean Zerbe.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Selva Ozelli, Esq., CPA is an international tax attorney and certified public accountant who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.