This is a invitee post past times Eugene Illovsky, a partner at Morrison & Foerster inward Palo Alto. He advises on corporate compliance too represents companies inward their interactions amongst authorities investigatory, enforcement, too prosecutorial authorities.
What compliance expectations does the Department of Justice own got for businesses entering the virtual currency space? How tin a society encounter those expectations to remain out of problem amongst DOJ, or at to the lowest degree mitigate the effects of whatsoever criminal inquiry on it every bit good every bit its executives, employees too investors? H5N1 recent oral communication past times the Criminal Division head, Assistant Attorney General Leslie Caldwell, provides critical guidance on DOJ’s “approach to the emerging virtual currency landscape” too expands on its sentiment that “compliance too cooperation from exchanges, companies too other marketplace actors tin ensure that emerging technologies are non misused to fund too facilitate illicit activities.”[1]
DOJ’s View of How Virtual Currencies Are Used
DOJ is skeptical. While it knows virtual currency has “many legitimate actual too potential uses,” its enforcement opinion is informed past times the observation that “the inherent features of virtual currencies are just what brand them attractive to criminals.”[2] For instance, virtual currency systems “conduct transfers quickly, securely too amongst a perceived grade of anonymity,” own got an “irreversibility of payments made inward virtual currency too lack of oversight past times a fundamental fiscal authority” too own got the “ability to send international peer-to-peer transactions that lack at nowadays available personally identifiable information.”
Virtual currency thence “facilitates a broad attain of traditional criminal activities every bit good every bit sophisticated cybercrime schemes.”[3] For instance, “online dark markets” on the night spider web offering a “wide option of illicit goods too services” paid for inward virtual currency, including “more traditional crimes such every bit narcotics trafficking, stolen credit carte information, too hit-men for hire.” But at that spot has also been “a meaning development inward criminal activity.” Virtual currency has funded “the production of tike exploitation cloth through online crowd-sourcing.” It has been used to “buy too sell lethal toxins over the Internet,” to brand payments inward “virtual kidnapping too extortion” too to allow “near-instantaneous transactions across the footing betwixt perpetrators of phishing too hacking schemes too their victims.”
Virtual Currency Businesses every bit Financial System Gatekeepers
DOJ views these issues every bit a relatively small-scale occupation now, because “[f]ew virtual systems currently tin accommodate” the sort of “large-scale money laundering schemes involving government-issued currency.” But “as virtual currencies move to a greater extent than mature too amend understood past times criminals,” DOJ expects “an growth inward both individualized criminal activity too large-scale money laundering enterprises.”[4]
This agency “companies too individuals operating inward the virtual currency ecosystem are at a crossroads.” This is their jeopardy “to assist virtual currency emerge from its association amongst criminal activities.” But inward society to “ensure the integrity of this ecosystem too forbid its penetration past times crime, the manufacture must enhance the grade of its game on the compliance front.”
The authorities is thence enlisting this emerging line of piece of work organisation community every bit fiscal arrangement gatekeepers. DOJ oftentimes notes that the country’s banks “are our showtime line of defence against fraud, money laundering, terrorism financing too violations of sanctions laws.”[5] It expects cypher less here: “Virtual currency exchangers too other marketplace actors contain the front end line of defence against money laundering too fiscal crime.”[6]
And DOJ is non kidding. AAG Caldwell bluntly says, “industry participants are at nowadays on notice that criminals … brand regular utilization of” virtual currencies. Robust compliance programs inward virtual currency businesses are thence “essential to keeping criminal offense out of our fiscal system.” At a minimum, raising “the grade of its game” volition need the manufacture to exhibit “strict compliance amongst money services line of piece of work organisation regulations too anti-money laundering statutes.”
The Costs of Compliance—and of Noncompliance
DOJ expects virtual currency businesses “to own got compliance risk every bit seriously every bit they own got other line of piece of work organisation risk.” And they must retrieve nigh compliance broadly. On other occasions, AAG Caldwell has noted that compliance efforts “are likewise oftentimes behind the curve” too neglect to “prevent tomorrow’s scandals” because they “target the risk of regulatory or police delineate enforcement exposure of institutional too employee misconduct, rather than the risk of the misconduct itself.”[7] DOJ wants the focus to last on the broader “compliance risk” too non the narrower regulatory risk.
What nigh the cost? DOJ “recognize[s] that novel entrants inward emerging fields may detect that compliance requires a meaning expenditure of resources” too promises to last “context‑specific” inward analyzing the adequacy of compliance frameworks.[8] Nevertheless, “a existent commitment to compliance is a must, peculiarly given the meaning risks inward the virtual currency market.” The bottom line: “In the long run, investment inward effective compliance programs volition last good worth it, especially inward the trial a society has to interact amongst police delineate enforcement.”
That “interaction” amongst police delineate enforcement may good involve DOJ deciding whether to indict a society (and individuals) or hand it to a greater extent than or less variety of break. As AAG Caldwell says, “[i]f a money services line of piece of work organisation finds itself dependent to a criminal investigation,” DOJ volition facial expression to the so-called Filip factors inward its Principles of Prosecution of Business Organizations. In particular, it volition examine “the existence of an effective too well-designed compliance program” (Filip ingredient 5) too “a company’s remedial actions, including steps to improve upon an existing compliance program” (Filip ingredient 6).
As for Filip ingredient 5, “effective anti-money laundering too other compliance programs must last tailored to encounter the circumstances, size, construction too risks encountered” past times the business. For instance, “virtual currencies, amongst their perceived anonymity, pose risks that money transmitters such every bit Western Union produce non face.” The risks inward the virtual currency arena may last hard to bargain with, but DOJ’s sentiment is simple: “Industry participants must address those risks, fifty-fifty when it may last costly to produce so.” Filip ingredient half dozen requires that a society create a occupation if i occurs. That agency non solely that it must piece whatsoever hole inward the compliance program, but also “replace responsible management,” “discipline or terminate wrongdoers,” “pay restitution,” too “cooperate amongst the relevant authorities agencies.”[9]
Recommendations
Here are to a greater extent than or less specific steps for emerging virtual currency businesses to consider when ensuring their compliance efforts align amongst DOJ’s guidance too expectations:
It’s Never Too Early. Anticipate compliance issues every bit before long every bit possible inward the company’s lifecycle. Develop a compliance arrangement at the same fourth dimension that you lot are refining your production or service (and good earlier you lot interact amongst customers).
People, People, People. It’s hard to sympathize cryptocurrencies, too fifty-fifty harder to explicate them good to skeptical police delineate enforcement personnel. Make first-class compliance people run of your initial squad too include them inward of import decision-making.
Money, Money, Money. There must last the fiscal commitment to compliance that is required inward this manufacture space. While DOJ seems sympathetic to the “significant expenditure of resources,” it volition non probable move slowly on those whom it concludes own got skimped.
Think About the Technology’s Regulatory Future. The applied scientific discipline of, too related to, your virtual currency volition shape the government’s expectations. Take bitcoin for example. Unlike dollar bills, say, every bitcoin carries its ain transaction history. The blockchain is a world ledger of all bitcoin transactions. And novel products are beingness refined that tin analyze that blockchain too seek to create upwards one's heed every house a bitcoin has been too maybe fifty-fifty who transferred or held it. It may move possible to hand bitcoin a risk score, since those of suspicious provenance (for instance, those having i time been through a mixer or inward a night wallet) could last separated from those that are squeaky clean.
Instill a High-Integrity Culture Now for the Company You Will Become. The authorities has high expectations for those it views every bit running “gatekeeper” businesses. The regulatory bar is jump to larn fifty-fifty higher every bit large banks too fiscal institutions — amongst their established too highly professional person compliance staffs — prepare their ain virtual currencies. As “gatekeeper” businesses grow, they human face upwards pressures to last “ethical” too non just to encounter legal too regulatory minimums. Adopt a broad sentiment of compliance risk that focuses on the risk of misconduct too on reputational risk too so communicate that sentiment clearly too compellingly inward the onboarding process.
Conclusion
Emerging virtual currency businesses volition human face upwards progressively higher compliance expectations from DOJ. They tin maximize their potential marketplace value past times acting early on inward their lifecycles to install compliance systems too instill a high-integrity civilisation that volition enable them to encounter those expectations.
[1] Assistant Attorney General Leslie R. Caldwell Delivers Remarks at the ABA’s National Institute on Bitcoin too Other Digital Currencies inward Washington D.C. on June 26, 2015 (“June 26 speech”).
[2] June 26 speech.
[3] June 26 speech.
[4] June 26 speech.
[5] Assistant Attorney General Leslie R. Caldwell Speaks at Treasury Roundtable on Financial Access for Money Service Businesses inward Washington D.C. on Jan 13, 2015 (“[f]inancial institutions that own got money services businesses every bit customers own got a detail responsibleness to last attuned to the risks involved too non plow a blind middle to suspicious conduct”).
[6] June 26 speech.
[7] Assistant Attorney General Leslie R. Caldwell Delivers Remarks at the Compliance Week Conference inward Washington D.C. on May 19, 2015.
[8] June 26 speech.
[9] Principles of Prosecution of Business Organizations.
