The enforcement action serves as a reminder that virtual currency exchangers, regardless of size, must comply with the BSA.

By Todd Beauchamp and Charles Weinstein

The US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) does not care if you are a multinational corporation or an individual operating out of your garage; regardless of size, if you violate the Bank Secrecy Act (BSA), you are fair game for enforcement. The financial services industry was reminded of this recently when FinCEN announced that it had assessed a civil money penalty against an individual for “willfully violating the [BSA’s] registration, program, and reporting requirements.”

The matter involved a single individual, Eric Powers, who solicited purchases and sales of bitcoin on the internet, and completed those transactions with other individuals in person, through the mail, and by wire. FinCEN claimed that Powers’ activity included executing around 160 purchases of bitcoin for approximately US$5 million through in-person cash transactions with individuals he met through a bitcoin forum. In connection with Powers’ virtual currency-related activity, FinCEN asserted that Powers operated as a peer-to-peer (P2P) exchanger of convertible virtual currency, and thus, as a “money transmitter” under the BSA.

In announcing the action, FinCEN Director Kenneth Blanco referenced FinCEN’s 2013 guidance regarding the application of the BSA to certain virtual currency-related activities, in which FinCEN clarified that an “exchanger” of convertible virtual currency — or “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency” — is a money transmitter under the BSA. In that guidance, FinCEN stated that an exchanger that either “accepts and transmits a convertible virtual currency” or “buys or sells convertible virtual currency for any reason” is a money transmitter under FinCEN’s regulations.

As a money transmitter, Powers was required to register with FinCEN as a Money Services Business (MSB) and comply with the attendant requirements under the BSA, including developing, implementing, and maintaining an effective anti-money laundering program; filing Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs); and meeting certain recordkeeping requirements. Nonetheless, Powers “failed to register as a [MSB], had no written policies or procedures for ensuring compliance with the BSA, and failed to report suspicious transactions and currency transactions,” despite indications that he was aware of those obligations. In particular, Powers conducted a number of suspicious transactions through locations known to be associated with illicit activities (e.g., Silk Road and The Onion Router), yet never filed a SAR. He also conducted over 200 transactions in which more than US$10,000 in currency was transferred, but never filed a CTR.

Due to these failures, FinCEN assessed a US$35,000 fine against Powers, who agreed to a permanent ban that prohibits him from engaging in money transmission services or any other activity that would bring him within the definition of an MSB under FinCEN regulations. As Blanco suggested, any failure that “put[s] our financial system and national security at risk and jeopardizes the safety and well-being of our people, as well as undercut responsible innovation in the financial services space[,]” must be taken seriously.

While the monetary penalty against Powers may not be significant, the matter should not be ignored. Notably, this matter marks FinCEN’s first enforcement action against a P2P virtual currency exchanger, as well as the first time that FinCEN has penalized a virtual currency exchanger for failing to file a CTR. Time will tell whether this penalty is the first of more actions to come, but it nevertheless stands as a warning to the industry that FinCEN may become more aggressive in pursuing actions against virtual currency exchangers or other businesses engaged in virtual currency-related activities, regardless of size.