On October 1, 2020, federal prosecutors filed criminal charges against the founders of BitMex, an offshore cryptocurrency derivatives exchange. BitMex executives are charged with violating the Bank Secrecy Act (BSA) and conspiring to violate the BSA by willfully failing to establish an adequate anti-money laundering (AML) program.
On the same day, the Commodity Futures Trading Commission (CTFC) filed a civil action accusing BitMex executives of failing to register with the commission, evading U.S. anti-money laundering rules, and violating other AML measures.
BitMex is incorporated in the Seychelles and has a history of doing business in the United States, despite being legally prohibited from serving U.S. customers. The company is known for trading derivatives of cryptocurrencies including Bitcoin, Ether, and Litecoin. BitMex is one of the world’s largest cryptocurrency exchanges and allows customers to register and trade only by providing a verified email address, without any additional information.
According to American law enforcement agencies, despite being prohibited from serving U.S. customers due to lax AML and Know Your Customer (KYC) measures, BitMex actively courted U.S. users, and even openly advertised that “No real name or other advanced verification is required.” Prosecutors claim that by allowing customers to conduct financial transactions anonymously, BitMex was being used to launder proceeds from criminal activity, and allowed users to trade with people located in sanctioned countries.
A significant percentage of BitMex’s trading volume and profits come from U.S. customers, despite the fact that American users cannot legally use it and other international cryptocurrency exchanges like it.
Like BitMex, many cryptocurrency exchanges are registered to do business in the Seychelles and other jurisdictions where AML and KYC regulations are lax or nonexistent. In fact, according to research by New CipherTrace, three quarters of the cryptocurrency businesses registered in the Seychelles have poor KYC policies, making the island nation a haven for money-laundering activity.
BitMex CEO Arthur Hayes, co-founder Benjamin Delo, Chief Technology Officer Samuel Reed, and head of business development Gregory Dwyer were charged with violating the BSA and conspiring to willfully fail to maintain an adequate AML program. The BSA is the primary U.S. law that governs AML and KYC requirements, which banks and other financial institutions must follow.
The government claims that BitMex and the individual defendants violated anti-money laundering regulations by failing to implement appropriate KYC procedures and failing to verify the identity of their customers. People visiting the site from the U.S. received a warning and were blocked from registering, but could use VPN software to mask their location. As a result, prosecutors claim that BitMex could be used to fund terrorist activities and other criminal activity.
BitMex’s website clearly stated that it could not be used by persons in the United States. However, regulators require businesses to take more active steps to prevent U.S. users from using the site.
The company claimed to have made changes to their Customer Identification Program that would exclude US users, but the CFTC complaint alleges otherwise.
According to the CFTC, BitMex executives received numerous warnings that they needed to improve the AML program and implement KYC standards in order to comply with U.S. and international cryptocurrency regulations, but failed to heed these warnings.
According to the indictment, beginning in 2014, BitMex illegally offered leveraged retail commodity transactions, futures, options, and swaps on digital assets to people in the United States without being registered with the CFTC, as required by U.S. law. Now, BitMex executives are facing the possibility of significant jail time.
Holding executives at financial institutions with poor AML controls personally liable has a long precedent. But enforcement agencies have only recently started targeting executives at cryptocurrency exchanges and other virtual asset markets. BitMex is one of the more recent and high-profile examples of executives at a cryptocurrency trading platform being targeted for poor AML policies.
According to prosecutors, BitMex had no way to monitor customer's transactions and, therefore, failed to comply with anti-money laundering regulations. Federal officials also claim that BitMex is made up of a maze of corporate entities, including HDR Global Trading Limited, 100x Holdings, ABS Global Trading, Shine effort, and HDR Services, which are all owned and operated by the same people.
The criminal indictment and civil complaint against BitMex and its executives indicate that the CFTC and Department of Justice will be closely monitoring digital asset exchanges in 2021, targeting activities that undermine the integrity of the market. They also make clear that international financial intermediaries that do business with people in the United States run the risk of being charged for violations of U.S. laws.
Allegations of money laundering and other financial crimes are serious. Conviction carries significant penalties, including hefty fines and the possibility of jail time. As the federal government has expanded the definition of money laundering to include a broad range of financial activities, the likelihood of being charged with money laundering has increased significantly.
Federal criminal defense attorney Hope Lefeber has been defending people accused of money laundering and other financial crimes for more than 30 years. She began her career as an enforcement attorney with the United States Securities and Exchange Commission (SEC). Today, she uses that experience to defend people who have been accused of financial crimes in federal court.
Ms. Lefeber has earned a reputation as a fierce and tenacious litigator who is highly regarded by her colleagues in the federal bar, federal judges, and her clients. Prosecutors know that when she takes on a case, she will be meticulously prepared and will aggressively defend her clients’ constitutional rights. She has a deep knowledge of federal criminal law, and has successfully defended executives at Fortune 500 companies, businessmen and women, lawyers, doctors, and other high-profile clients who have been faced with federal criminal charges.
If you have been charged with a crime in federal court, contact Hope Lefeber today to schedule a confidential consultation to discuss your case.