A Seattle sting operation has resulted in the arrest of Louis Ong from Los Angeles, a bitcoin trader, who has been charged with multiple counts of money laundering.

Once again, it's the HSI who is up to this, once again it's the HSI who setup a bitcoin trader, and once again the trader was unfortunately ill prepared and accepting cash for bitcoin without being in compliance with federal and state laws despite being registered with the Financial Crimes Enforcement Network.

Like Jason Klien and the Mansy case of recent news, Ong was targeted by the Department of Homeland Security Investigations who basically did the exact same thing they have been doing with many others. Conducted transactions with a bitcoin trader while undercover posing as drug dealers, human traffickers, etc.. and in this case the HSI met face to face with the defendant obtaining a mountain of damning evidence his lawyer, Brian Klien, vows to fight.

Louis has pleaded not guilty, and he plans to vigorously defend himself against the charges,” Brian Klein, Attorney.

Climbing Mountains

That might be easier said then done. This is due in part, to the way the federal law is ridiculously written so that it can easily be twisted to fit just about any situation, and also due in part to possible negligence on behalf of Ong.

For example Ong told HSI agents that he "didn't know or care" what his customers used bitcoin for and that it was "better off" he didn't know. This is a compliance violation of KYC laws that govern this type of activity federally whereas under KYC laws not only are financial institutions and money service companies, of which category a virtual currency business (VCB) would fall, required to obtain the identity of a customer when specific thresholds or aggregates are met or exceeded, but a reasonable effort to gain knowledge of the source of funds, final destination, and purpose of the transaction(s).

“One thing I tell people is I don’t really care what they use the bitcoin for,” said Ong, according to charges. “The only thing is … for me it’s better that I actually don’t know.”

That may come back to bite him in the ass as his own statement tends to indicate he may not have been doing things properly, however, it's important to note that this is merely what Ong told the HSI and not necessarily what he did. Many traders who do their best to remain in compliance have standard procedures for obtaining this information when thresholds are met or over the course of the relationship with the customer.

Additionally many traders take a look at transactions when they are suspicious and not just because it's the federal law, but because traders prefer not to involve themselves in fraudulent activity and specifically when that activity leads to them themselves getting scammed. 

The HSI's Finest?

Even if the above is true, for what reason did the HSI even investigate Ong for in the first place? Where is the reasonable suspicion? 

Agents say that Ong charged 7%+ for bitcoin trades and that this in itself was "unreasonable" and possibly leading to the "suspicion", however, if that's what they based it on they based it on a blatant lack of the facts. 7% or more is nothing.

In fact I can't think of many professional traders who would even conduct peer-to-peer trades for a measly 7%. 20% and even up to 30% for some trading methods is not unheard of or even a surprise.

What they are referring to are some large OTC exchanges like GDAX and Bitstamp or services like Coinbase and itBit. Sure you can set a market price and obtain coin for 1% or so if your get the buy, but to do this OTC requires copious amounts of documentation, approvals, funds wired, and generally a waiting period  which can be anywhere from a few hours to several days.

To purchase immediate bitcoin with a credit card or other method for example is not even sold at 1% at the largest company of this sort on the planet, Coinbase. They charge a convenience fee on top of their normal fee which ends up costing you closer to 5% or 6%, which is barely under what Ong was selling for.

If anything 7% is suspicious because its so low, however, that's not why the HSI called it so. They said they thought it was too high. Hell, it's hard to buy Gold or Silver at 7% sometimes and instantly and locally more like 8% or 9% is normal. 

The HSI is either grossly misinformed not accurately stating their reason for suspicion in the Ong case, but whatever the reason, it's irrelevant at this point, Ong has been arrested and indicted on 5 counts of money laundering and one count of operating an unlicensed money-transmission business.

Legal Operations

The most disturbing thing about the Ong case is the fact that he was seemingly operating legally and was at least registered with FinCEN. However, registration is the simple, quick, and easy part. There's allot more to it which Ong may have not been operating in accordance with.

This is the first known case where an independent trader who was federally registered has been investigated and arrested by undercover HSI agents.

That registration may save his ass, it also may not. It would certainly show intent and possibly even compliant operations if he can show progression or some sort of written compliance plan and AML policy that he can prove existed at the time of arrest. It could result in a fine for a violation rather than potential prison if so. At the very least it might be taken into consideration when (if convicted) he is sentenced.

Regardless, in the state of Washington, it is not legal nor has it been for years, to sell bitcoin to it's residents without a money transmission license or exemption. Washington recently put new amendments to it's money transmission laws further clearing up any possible doubt with enforcement laws for those found in violation of the Uniform Money Services Act (USMA), 19.230 RCW, which includes virtual currency. 

In Washington, digital currency is included in the definition of "Money Transmission" in the Uniform Money Services Act (UMSA), chapter 19.230 RCW: "Money transmission" means receiving money or its equivalent value to transmit, deliver, or instruct to be delivered the money or its equivalent value to another location, inside or outside the United States, by any means including but not limited to by wire, facsimile, or electronic transfer.

Like Texas, New York, and a handful of other states and jurisdictions in the United States, Washington is very clear and informative of it's position and the law in the state on virtual currency. They explain this on the Washington State Department of Financial Institutions (DFI) webpage in plain English in addition to references to UMSA regulations that govern this activity.

Furthermore, federal law requires that an organization be registered federally, have a written AML (anti-money laundering) policy, be periodically trained (AML/KYC) and this training must be recorded, have written and current procedures (controls), and have a qualified and designated compliance officer appointed and listed with contact information on the federal registration. 

Ong may not have complied with regulations. He is slated for court in April (2018) and faces charges,aforementioned, for laundering an alleged $290,000 USD.

Article by dinbits
Image Credits: 
Banner Image by dinbits.com staff

1Virtual Currency Regulation in Washington
2. Virtual Currency Interim Guidance


1. Federal Regulations (BSA)
12 U.S.C. ch. 13 § 1724
12 U.S.C. ch. 16 § 1813
15 U.S.C. ch. 2B § 78a
31 US Code 1022.380 - Registration of money services businesses
18 U.S. Code § 1960 - Prohibition of unlicensed money transmitting businesses

2. Washington State Regulation and Guidance
Washington State Uniform Money Services Act (USMA), 19.230 RCW
Washington DFI Guidance, Bitcoin and Virtual Currency Regulation
3. Additional case references
Federal case 17-3056-01-CR-MDH (Sal Mansy)
Federal case 17-3056-01-CR-S-MDH (Jason Klein)

The opinions expressed by authors of articles linked, referenced, or published on dinbits.com do not necessarily express, nor are endorsed by, the opinions the of dinbits.com or its affiliates.

Post a Comment

Powered by Blogger.