A Guide to Anti-Money Laundering for Crypto Firms

IRS Seizes $3.36 Billion Crypto Stash Originally Stolen from Dark Web Drug Market

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On November 7, 2022, the US Department of Justice (DOJ) announced that the Internal Revenue Service (IRS) had seized over 50,676 unlawfully obtained Bitcoin from defendant James Zhong. According to the press release, the defendant pled guilty to committing wire fraud in September 2012 when he stole over 50,000 Bitcoin from the Silk Road dark web internet marketplace. The charge carries a maximum sentence of 20 years in prison.

The plea comes almost a year after law enforcement seized the crypto from Zhong’s home. According to court documents, officials found the Bitcoin in an underground safe and on a single-board computer that was hidden in a bathroom closet under blankets in a popcorn tin. During the search, officials also found $661,900 in cash and 25 Casascius coins (physical Bitcoin) worth approximately 174 bitcoin. 

Valued at over $3.36 billion, the stolen crypto marks the US’ second largest financial seizure to date. The largest was a February 2022 seizure of stolen Bitcoin worth $3.6 billion.

Dark Web Drug Market Defrauded

Appearing on the Dark Web in 2011, Silk Road was an online black market where users could buy and sell illegal drugs anonymously. In 2012, the defendant sought to defraud Silk Road of its money and property by creating a string of false accounts and triggering over 140 transactions in rapid succession to trick the marketplace’s withdrawal-processing system. After releasing approximately 50,000 Bitcoin into Zhong’s accounts, the defendant transferred it to a variety of separate addresses that he controlled to obfuscate the source of the funds and launder the proceeds. 

Shut down by the FBI in 2013, Silk Road’s creator and operator was convicted of seven offenses in 2015, including conspiring to commit money laundering, and sentenced to life imprisonment.

Digital Assets Development Framework

Pursuant to Executive Order (EO) 14067, effective from March 2022, the DOJ issued a report to the White House on the role of law enforcement in detecting, investigating, and prosecuting criminal activity related to digital assets. In part three of the report, the DOJ called for an expansion in the federal government’s ability to seize and keep cryptocurrency. Several updates to the existing law were proposed, including:

  • Amendments to the Commodities Exchange Act (CEA) to provide criminal and civil forfeiture authority for commodities-related violations, such as securities and commodities fraud
  • Lifting the monetary limit on the administrative forfeiture of cryptocurrency, which is currently capped at $500,000
  • Amending United States Sentencing Commission (USSC) §2S1.3 to more accurately reflect the gravity of Bank Secrecy Act (BSA) violations that facilitate money laundering and other illicit activity

The Evolution of Crypto Crime

According to blockchain analytics firm Chainalysis, hackers have stolen more than $3 billion in crypto so far this year, breaking the previous record of $2.1 billion set in 2021. While hackers previously focused on attacking crypto exchanges, cross-chain bridges are increasingly being targeted as exchanges have tightened their security. 

In May 2022, blockchain analytic firm Elliptic reported that more than $4 billion in illicit crypto had been laundered through cross-chain bridges, DEXs, and coin swaps. In particular, Elliptic identified RenBridge, through which criminals have laundered over $540 million in illicit cryptoassets

To stay ahead of crypto crime trends, compliance teams should ensure their blockchain analytics solution functions in real-time to receive cryptoasset risk insights that provide enhanced visibility and allow for faster reaction times.

A Guide to AML for Crypto Firms

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Originally published November 11, 2022, updated November 11, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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