When it rains it pours and it's pouring. For the third time in one month another peer-to-peer bitcoin trader has plead guilty to operating an unregistered and/or unlicensed money transmitting business. In a nutshell, they're all in trouble because they sold '(traded)’ bitcoin.
Why? Because the Financial Crimes Enforcement Network (FinCEN) an other federal agencies as well as a handful of state regulators say that the activity involved in conducting these transaction constitutes money transmission.
Note: See our current regulatory map for a state-by-state synopsis of the current landscape.
This time the defendant is Sal Mansy, of Portland, Maine and his company TV Toyz, LLC and he was directly charge with Operating an Unlicensed Money Transmitters Business.
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| Figure 1 - Mansy Arrest Warrant |
However to be clear, in
at least one case, United States of America Vs. Jason R. Klein, the only illegal activity that appears to have
taken place was setup by the federal government themselves to elicit the
offense he was charged with (money laundering). New York bitcoin trader,
Richard Petix, was also charge for selling a whopping 37 bitcoins.
Now Sal Mansy has plead
guilty to the exact same charge. Although unlike the 37 bitcoin Petix sold or
the near $30,000 which was that of Klein's sales, Mansy went for gold. He sold
over $2 million dollars worth of bitcoin in exchange for cash money in USD
currency.
$2.4 million to be
exact.
It doesn't matter if
you're selling bitcoin or bananas, if you sell 2.4 million in cash of anything
anywhere, someone somewhere is going to notice and take a closer look. They did
and Mansy is proof of that.
Let's clarify one thing,
however; when the term "bitcoin trader" is used, we are not referring
to those trading on regulated exchanges such as Bitstamp or GDAX. This is
completely legal without further paperwork required. We are referring to P2P
traders who become responsible for their own KYC (know your customer), AML
(anti-money laundering) policies, and BSA (Bank Secrecy Act) reporting by
omitting a regulated 3rd party and selling directly to the buyer.
According to FinCEN and
as is evident with the cases of Petrix, Klein, Mansy, and others before them
this type of activity is regulated and required registration with the federal
government and might further require a state license in certain jurisdictions.
Concerning Data
That said, that isn't the
major concern with the Mansy case. With the other two cases, they were a bit
vague, but did appear to warrant no reason for an investigation to begin with.
It appeared as if the government targeted them randomly for no reason at all.
In the Klein case, the IRS agent who conducted the trades state he merely found
Klein online advertising cash/bitcoin trades online (on localbitcoins.com).
This is not the case
with the Sal Mansy case, this case contains some disturbing information in
regards to why the government began their investigation in the first place.
In one of several
motions to dismiss the case, Mansy's attorney, Luke Rioux tried to get the
case thrown out for a number of reasons and to setup the defendants argument
the section "Facts According to the Government" present the
facts based on the testimony of SA David Fife who appeared on May 6, 2015
before Magistrate Judge John Rich III.
The motion reads:
HSI Portland, ME initiated has initiated case to investigate individuals operating unlicensed money service businesses (MSBs) using Bitcoin and/or operating on or through “darknet” websites ... will specifically target individuals seeking face-to-face transactions involving bulk U.S. currency in exchange for digital Bitcoin transfers. Such individuals are being targeted due to a potential ability or willingness to facilitate unlicensed U.S. currency to Bitcoin conversions for people who desire the greatest anonymity and who are potentially attempting to avoid BSA reporting requirements and/or hide the source or destination of their financial activity.
This is the first
recorded evidence indicating that at least since 2014, the government is
targeting bitcoin traders for no other reason other than the fact that they are
bitcoin traders. Unlicensed bitcoin traders as Rioux put it (See Figure 2) in
the motion to dismiss titled "DEFENDANT’S MOTION TO DISMISS THE
INDICTMENT BECAUSE 18 U.S.C. § 1960 IS UNCONSTITUTIONALLY VAGUE AS APPLIED AND
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF".
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| Figure 2 - Motion to dismiss |
This is likely the first
actual recorded evidence of a government agency in the United States targeting
bitcoin traders for no other reason other than their practice of trading of
bitcoins for cash. It was suggested in the Klein trial, however the testimony
of SA David Fife certainly confirms that this is the case. This means this has
been ongoing for years.
Another thing these
cases have in common are the dates. They started in 2014 and into 2015, 2016,
and likely haven't discontinued.
It also should not come
as a surprise considering that FinCEN and other agencies flat out stated that
they would be enforcing the law.
Moreover, attorney for
the defense made an attempt to get the case dismissed using just about every
single excuse that many traders use to explain why the law does not apply to
them.
Motion to Dismiss Shooting Spree
Multiple motions to
dismiss were shot down by the court one by one with 20+ pages of motions
followed by orders from the court denying each motion is detail.
United States District Judge, George Z Singal
denied the motion stating that not only was this not a valid defense, he
pointed to multiple cases where courts had ruled in this exact same manner that
whereas bitcoin is not recognized as currency, it can be used as a medium of
exchange and does indeed have value.
This is the "have
your cake and eat it too" defense. Everyone wants bitcoin to work like, or
better then, money until it's exceedingly advantageous for it not to be money.
It didn't fly.
"Defendants’ most developed argument, that the IRS’s treatment of virtual currency as “property” means that virtual currency cannot be “money” in other contexts, has been expressly and persuasively rejected by other courts. See, e.g., Murgio, 209 F. Supp. 3d at 709; Sec. & Exch. Comm’n v. Shavers, No. 4:13-CV-416, 2014 WL 12622292, at *6 (E.D. Tex. Aug. 26, 2014)."" - United States District Judge, George Z Singal
The
law isn't clear. The second thing the
defense tried was to explain that the law wasn't clear on this, bitcoin, or
even money transmission. Rioux points out various areas of 18 U.S.C. § 1960
where things are "vague" and not clear as to what constitutes
"money transmission" and how bitcoin fits into that model.
The court didn't buy
that one either and rejected the argument along with the last attempt made by
the defense.
Defendant
Didn't Know In the final motion to dismiss the common "I
didn't know" defense was presented and even a 1st year law student
could have told you this one would go nowhere since it simply doesn't matter
whether or not you think the law is fair or right, it's the law.
The defense complains that in 2001 the wording was changed which eliminated
the need for prosecutors to prove the defendant intentionally broke the law; or
even knew of the law or that they knew any money transmission took place during
a transaction they were involved with. This is probably the most dangerous
regulation that affects peer-to-peer virtual currency traders operating
illegally since they simply cannot be certain the party they are transacting
with is not:transmitting money, laundering money, or otherwise participating in
any other illegal activity. They may place liability on the one selling the
virtual currency or cause a crime to be committed inadvertently.
For example, inadvertent
transactions (violations), where another party involved in the transaction
intends to transmit money and does so. Any parties involved who are not
aware of this are still liable. Before 2001, this was not
the case and the all parties had to specifically know what was going on to be
held liable and in some cases the prosecution had to prove the intent of the
defendant to commit the crime.
This loophole was closed
in 2001 and the court shot this one down as well and the motion was denied as
were the ones before it.
So how could one not
know they were transmitting money? Other than the fact they sent money to their
own bitcoin wallet, then sent that bitcoin to another person via the blockchain
or escrow, which in itself is not necessarily money transmission, the problem
arises when another party is involved which may or may not be known by the one
selling the bitcoin.
In the figure below we
have the following steps (Figure 2 below).
A. Mary contacts John in need of $32,000. Mary is in another country.
B. John contacts Trader to purchase bitcoin for cash.
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| Figure 3 - LBC bitcoin trade workflow |
C. John exchanges cash for bitcoin with the Trader, but doesn't tell him about Mary.
D. Trader unknowingly sends money to, or release escrow to, Mary's wallet on behalf of John.
E. Scenario 1: Trader thought the bitcoin was sent to John, whereas in fact it was sent to Mary.
- or -
E. Scenario 2 where Trader sends or releases bitcoin to John's wallet who then sends bitcoin to Mary.
That can be considered money-transmission in either case depending
on the circumstances and both situations are very common transaction workflows
on LBC, Paxful, Bitquick, and other similarly operating P2P platforms that
facilitate this kind of activity.
Scenario
1 is simply
transmitting money where the trader was clueless as to the fact the wallet
belonged to Mary or more likely both Mary and John had access. Scenario
2 is the facilitation of money transmission where the trader
facilitated the transmission via bitcoin whereas John would have been unable to
otherwise send Mary the funds without approaching the traditional financial
system. Again the trader is unaware of the money transmission taking place and
has no idea he facilitated the transaction, yet the trader is still liable and
can be charged with a crime.
Additionally a Scenario
3 could exist where John and/or Mary were involved in money
laundering, financing terrorism or other illegal activity that inadvertently
involved the trader behest his or her knowledge that it took place.
In all cases this is
considered regulated activity that is prohibited without federal registration (unless
otherwise exempt, for example banks are exempt), a state license in some
jurisdictions, or an exemption allowed and typically in writing addressed to
the entity by the authority governing the activity.
If addition to the
courts explanation in the denial of the motion to dismiss, the prosecution file
its own opposition to the motion. In that filing, US district
attorney Michael J. Conley explains why the scenarios above are regulated
and considered money transmission.
As referenced in § 1960(b)(1)(B), § 5330 governs the registration of money transmitting businesses with the Secretary of the Treasury. See § 5330(a)(1). Under § 5330(d), a “money transmitting business” includes any “person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system,” is required to file reports under section 5313, and is not a depository institution.
This may or may not be
referring to IVTS transactions, but it appears as if that is exactly what they
are referring to and FinCEN has made is very clear that IVTS (Informal
Voluntary Transfer System) transactions are regulated transactions.
Another key word to take
notice of as it was presented by the prosecution is the word
"business" and "as a business". In the Klein case, we argue
that Klein may have been able to shelter himself under the "personal
investment" umbrella had he not advertised on Localbitcoins soliciting the
exchange on LBC. Joe Ciccolo, President of BitAML, spoke with dinbits.com on the Klein case
and proposed a question as to if Klein had not solicited on LBC
using the words "exchange", would he still have been
investigated? Ciccolo also stated that the industry could use further
clarification on this from FinCEN.
With Mansy however, the
volume of 2.4 million is going to be a hard sell as a personal investment and
to put the final dagger in the heart of that argument, his username was his
company name and his company is also indicted. Note that the company was a
limited liability company and not a corporation, the key words being limited
liability. There's no shelter to hide under in regards to these charges and
even if it were a corporation, charges could also still be faced by it’s
officers and management.
The Grand Scale
This may or may not be
referring to IVTS transactions, but it appears as if that is exactly what they
are referring to and FinCEN has made is very clear that IVTS (Informal
Voluntary Transfer System) transactions are regulated transactions.
Another key word to take
notice of as it was presented by the prosecution is the word
"business" and "as a business". In the Klein case, we argue
that Klein may have been able to shelter himself under the "personal
investment" umbrella had he not advertised on Localbitcoins soliciting the
exchange on LBC. Joe Ciccolo, President of BitAML, spoke with dinbits.com on the Klein case
and proposed a question as to if Klein had not solicited on LBC
using the words "exchange", would he still have been
investigated? Ciccolo also stated that the industry could use further
clarification on this from FinCEN.
With Mansy however, the
volume of 2.4 million is going to be a hard sell as a personal investment and
to put the final dagger in the heart of that argument, his username was his
company name and his company is also indicted. Note that the company was a
limited liability company and not a corporation, the key words being limited
liability. There's no shelter to hide under in regards to these charges and
even if it were a corporation, charges could also still be faced by it’s
officers and management.
Unlike Klein who had a
mere 30 trades at the time of his arrest and had been setup by the IRS to
conduct about $30,000 in cash for bitcoin trades, Mansy had volume.
Approximately 2.4 million dollars of volume across over 3000 trades with well
over 1000 different trading partners of which undercover agents were one or
more of.
This also clearly
verifies undercover agents hold LBC accounts and actively trade.
Mansy operated under the
LBC username TVTOYZ.COM (Figure 4 below) and someone has logged into the
account as recent as 3 months and 3 weeks ago in 2017.
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| Figure 4 - Mansy LBC Account |
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| Figure 5 - Mansy account last seen stats |
Mansy conducted over 2.4
million in USD in bitcoin transactions over the course of 2 years. It all
pumped through his LLC, TVTOYZ.COM, his personal accounts, and exchanges.
On several occasions,
little did Mansy know that he was selling bitcoin to an undercover agent there
to see if he was actually selling bitcoin without being registered with FinCEN.
In the opposition filing by the prosecution they state that neither Mansy or
TVTOYZ.COM could be found to be registered with FinCEN or located in the MSB
registrant database at the time they began their investigation.
Agents opened two trades
with Mansy via LBC on December, 2014 in the amount of $376.06 USD and in
March of 2015, in the amount of $1500.00 USD which at the time, were both small
amounts with bitcoin around $331 and $266 per coin respectively. The latter
$1500 equated to 5.1 bitcoins and is now worth over $10,000 at current market
rate ($2157).
Enter Coinbase
Coinbase reported Mansy
as having purchased nearly $600,000 worth of bitcoins and questions Mansy
himself as to the nature of his business. They directly asked Mansy if he was a
registered MSB to which Mansy replied:
"Yes I buy and sell them [bitcoin] on localbitcoins.com, ebay, and blogs the funding source is my business bank account"
Coinbase explained to
Mansy that "“…selling Bitcoin on a website like localbitcoins.com
places you in the category of a [money service business] according to FinCEN"
and Mansy replied:
"Please tell me you’re kidding now what the hell do you care what I do with my Bitcoins after I buy from you. If you don’t want me to buy from you it’s your lost there’s many many places I can buy them from by the way your services too expensive and too slow. . . . The IRS put bitcoin as a property category so according to the IRS it’s property it’s not currency so what the hell do you care or the government care what do I do with my property if I want to sell it or burn it. . . there are hundreds of sellers on localbitcoins.com so all of them are MSB ????? I don’t think any of them is an MSB."
Which is simply not true
at all, in fact many traders were already registered with FinCEN by the time
this discussion occurred (which spanned from June of 2014 to January of 2015)
and there had been countless discussions on LBC forums in regards to this.
Coinbase explained that he
would need to register as a money service business with FinCEN in order to
continue doing business with them and gave him instructions on how to do so to
which he replied:
But I not an MSB I only so bitcoins I buy them from you or somebody else and resell them like product. I can’t afford to hire an officer and do all that I don’t make that much money off this business. I do claim all the profit on my taxes of my business as a business income.
Coinbase explained that
unless Mansy was in compliance with federal regulations, they would be unable
to continue doing business with him and his account remained disabled.
This particular evidence
is very damaging to Mansy. It clearly outlines that he was made aware of the
fact that activity he was involved with and the trades he conducted were
considered regulated activity, given instructions on how to comply legally,
explained with US agency to contact, and warned him to the point of account
closure so the Coinbase could avoid aiding the activity where they themselves
could have faced fines.
Yet, Mansy did nothing.
He kept buying bitcoin and selling them in a manner that was considered
regulated activity and the prosecution further states:
Section 1960, as currently written, applies to whoever knowingly conducts . . . an unlicensed money transmitting business," 18 U.S.C.A. § 1960(a), and defines "unlicensed money transmitting business," in relevant part, as "a money transmitting business which affects interstate or foreign commerce . . . and . . . fails to comply with the money transmitting business registration requirements" set forth in 31 U.S.C.A. § 5330 or accompanying regulations, 18 U.S.C.A. § 1960(b)(1)(B). There is no question here that the Government must prove the Talebnejads' knowledge as to all of the factual elements of the crime: that they were conducting a money transmitting business that affected interstate commerce and that was unregistered. Therefore, § 1960(b)(1)(B) sets forth a constitutionally valid general intent crime, just as § 1960(b)(1)(A) does. Nothing in the statutory language--such as the use of the word "willful"--suggests that the Government must additionally prove knowledge of the law. Further, it is not relevant that Congress made no change to § 1960(b)(1)(B) when it amended § 1960(b)(1)(A); there has never been a question as to whether a conviction under § 1960(b)(1)(B) required proof of the defendant's knowledge of the law.
The law didn't require
Mansy to know about the registration requirements for his activity to be a
crime, however the prosecution went further in their response to the order to
dismiss which claimed Mansy didn't know he was supposed to be registered and
presented evidence proving otherwise. Given the Coinbase evidence, is revealed
that Mansy was very well aware of the registration requirements at least as of
June 2014.
Note: Agents did not purchase bitcoin from Mansy until
December of 2014.
June 2014 ... December
2014... a full 6 months after Mansy was made aware of the registration
requirements, he conducted a trade with an undercover agent. Then he did it
again in March of 2015, 9 month after he learned of the requirements.
He was indicted and
arrested 8 months later and this case has been going on ever since, only
recently resulting in a plea of guilty to the charges to which he faces up to 5
years in prison and fines not to exceed $250,000.
To add insult to injury
and press salt in the open wound, the indictment included civil forfeiture
where agents seized around $600,000 worth of cash and assets including
$75,000 is cash across 2 bank accounts, his lake-front home and property (worth
around $500,000.00 according to Realtor.com), and his company TVTOYZ, LLC.
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| Figure 6 - Forfeiture |
To add insult to injury
and press salt in the open wound, the indictment included civil forfeiture
where agents seized around $600,000 worth of cash and assets including
$75,000 is cash across 2 bank accounts, his lake-front home and property (worth
around $500,000.00 according to Realtor.com), and his company TVTOYZ, LLC.
Potential Outcome?
Unlike the case with
Jason Klein, who might have been able to fight a bit harder and get his case
dismissed, Mansy clearly violated the law, he was told he was violating the
law, and continued to violate the law. He also did a significantly larger
volume in 2.4 million in bitcoin sales than Klein.
Whereas we feel the
Klein case was a bit unjust, we cannot find any excuse to justify the
actions of Mansy. There's a good chance that he could end up serving prison time. Micheal and Aaron Lord recently received 46 months and 106 months plus 1 and 3 years of
probation respectively for doing far less volume than Sal Mansy.
Whatever the outcome may be, one major concern arising from this case (and others) is the specific targeting of P2P bitcoin traders by HSI (Homeland Security Investigations) investigators.
Whatever the outcome may be, one major concern arising from this case (and others) is the specific targeting of P2P bitcoin traders by HSI (Homeland Security Investigations) investigators.
This is just one in a string of cases coming to light recently
indicating the United States not only plans to enforce virtual currency
regulation ... that enforcement began years ago.
Artwork: Banner image created dinbits.com staff
References
- Federal case 17-3056-01-CR-MDH
- Motions to Dismiss (Bitcoin is not money)
- Motion to Dismiss (Wording)
- Opposition to Motion to Dismiss (Prosecution)
- Order, Motion to Dismiss Denied
- Mansy Indictment
- Various docket materials
- Arrest record
- Plea Agreement
- Jennifer R. Taylor and Emre N. Ilter of McDermott Will & Emery LLP (Ref.5)
- FinCEN guidance publications
- FIN-2014-R001
- Footnote 8: "However, a user wishing to purchase goods or services with Bitcoin it has mined, which pays the Bitcoin to a third party at the direction of a seller or creditor, may be engaged in money transmission. A number of older FinCEN administrative rulings, although not directly on point because they interpret an older version of the regulatory definition of MSBs, discuss situations involving persons that would have been exempted from MSB status, but for their payments to third parties not involved in the original transaction. See FIN-2008-R004 (Whether a Foreign Exchange Consultant is a Currency Dealer or Exchanger or Money Transmitter - 05/09/2008); FIN-2008-R003 (Whether a Person That is Engaged in the Business of Foreign Exchange Risk Management is a Currency Dealer or Exchanger or Money Transmitter - 05/09/2008); FIN-2008-R002 (Whether a Foreign Exchange Dealer is a Currency Dealer or Exchanger or Money Transmitter - 05/09/2008). "
- Footnote 9: "As noted in footnote 8 above, however, a user engaging in such a transaction, which pays the Bitcoin to a third party at the direction of the counterparty, may be engaged in money transmission."
- FIN-2013-G001
- Joe Ciccolo, CAMS CFE AMLCA & President, BitAML
- Publication "Domestic and Foreign Money Transmitters Face Complex Hazardous Web of Federal and State Laws and Regulations". Financial Fraud Law Report by A.S. Pratt & Sons
- Realtor.com (Mansy home value)
- Google Maps (Mansy home value)
- 31 US Code 1022.380 - Registration of money services businesses
- 18 U.S. Code § 1960 - Prohibition of unlicensed money transmitting businesses
- 31 US Code 1022.380 - Registration of money services businesses
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