Earlier this month, we reported that Louis Ong, of Los Angeles California, was arrested and indicted on several counts of money laundering and operating an unlicensed money transmitting business.
We took a closer look at the case files in seek of answers to see if the HSI was just setting people up unjustly as it could be argued with Jason Klein, or if Ong was actually at fault. Naturally, the case files uncover much more than broadcast by the media, SHOCKER THERE, and explain a few things.
First and foremost, Ong is currently awaiting trail and presumed innocent until proven guilty. The HSI can do whatever they want, so we won't even bother commenting since it doesn't matter if anyone agrees with them or not.
With that said, the reason for this article is to outline where mistakes may have been made and what should have been done to operate in compliance with federal and state laws that may have prevent Ong from being arrested or even suspected in the first place.
This is with the hope that similiar situations can be avoided in the future if possible and that P2P and OTC traders find this information useful.
The No-Brainer
Ong, like many P2P/OTC traders, advertised on websites such as, or similiar to, Localbitcoins, Paxful, Remitano, etc... This is where the HSI first noticed Ong in December of 2014.
There's little anyone can do about public advertisements being seen by the HSI or any governing agency in their jurisdiction and this source is of little surprise.
That said, Ong advertised high dollar amounts and anonymity for cash trades. Two things that'll surely make FinCEN (Financial Crimes Enforcement Network) cringe at their very sight. To map this out in regular ad lingo to attract customers compared to how FinCEN sees this, we can compare those two items like this:
| Advertisement | FinCEN View |
HIGH DOLLAR AMOUNTS |
EXCEEDING THRESHOLDS |
ANONYMITY |
SUSPICIOUS & EXPLOITATIVE |
This was the first of many nails in the coffin of Ong leading to his arrest. It grabbed the HSI's attention, however, this in itself did nothing more than attract unwanted attention. It was not illegal, it was not in bad faith. However, the HSI used this as the basis to investigate Ong.
It's interesting how a few words promoting no illegal premises what-so-ever can elicit a federal investigation into someone without any reason or suspicion of wrong-doing. It doesn't sound like that's something the HSI or any law enforcement agency is supposed to do, but this is what they said they did.
Federal AML (anti-money laundering) Reporting 101
We interrupt this article to go over some basic irritations of doing business in the U, S, of A.
The take away from the previous section is to know your thresholds and know your customer or client (KYC). Anything over 1 penny has the potential to require identification under an aggregated scenario. Anything over 2 thousand dollars can be subject to obtaining identification if suspicious. Anything over 3 thousand dollars certainly requires some identification due to recording obligations and anything over 10 thousand dollars requires all kinds of intrusive knowledge.
The take away from the previous section is to know your thresholds and know your customer or client (KYC). Anything over 1 penny has the potential to require identification under an aggregated scenario. Anything over 2 thousand dollars can be subject to obtaining identification if suspicious. Anything over 3 thousand dollars certainly requires some identification due to recording obligations and anything over 10 thousand dollars requires all kinds of intrusive knowledge.
This is, of course, depending on which type of business you're operating. If you're not a money service business (MSB), which many argue they are not, then the paperwork is involved and lengthy. If you are federally registered as an MSB, then this is not as bothersome and the reporting requirement is streamlined. For example, unregistered operations are required to fill out form 8300, an 8 page pain in the ass as opposed to a kinder, gentler 2 page number offered to registered entities.
It's kind of like the difference between scraping fingernails across a chalkboard and being anywhere that necessitates a chalkboard to begin with. One scenario just sucks less than the other.
Likewise, SAR reporting for unregistered entities is done on the same 8300 pile of confusion as a CTR (cash transaction report) would be reported, whereas registered entities report on a smaller more precise form specifically designed for such activity.
There's nothing wrong with advertising in the manner in which Ong did, one must simply be wary of the reporting requirements if customers start rolling in and racking up the amounts. Then take the appropriate action which may well result in a report filing.
Also note, aggregated amounts count as single transactions and again this depends on registration whereas registered entities will report aggregates of up to 24 hours as opposed to unregistered entities which must account for aggregates spanning up to 12 months depending on the transaction. In other words, just because Joe Nobody bought 2 grand yesterday and 1 grand two days later, that doesn't mean you escaped filing a report.
This is true for anything and always has been. It doesn't matter what you sell, be it bitcoin or balsa-wood, if thresholds are exceeded a report is likely needed.
Failure to do so can result in a fine or worse. However, the real kicker is that you may not get slapped with that love letter for another 3 years or more after the transaction initially took place.
If all else fails, hire a professional to handle this crap for you.
In the case files the prosecution outlines cash trades clearly exceeding all thresholds and it's safe to assume based on the arrest, incarceration, indictment, and current heap of shit Ong is buried under, that he failed to file the proper reports outside of FinCEN report 107 which is the federal registration itself.
So we have advertisements for discrete large cash trades paired with a discrete ... large .. cash trade conducted by HSI agents posing as drug dealers. $12,000 large according to the complaint. No report of said trade to FinCEN, at least none was disclosed in the complaint, however one report and some self-incriminating advertisements does not an indictment yet.
Regardless, this was a strike one.
Knowledge is Power
Sadly, if the HSI has learned anything over time, it's how to setup a bitcoin trader so that his or her life may well be completely demolished.
In the past, such as with Jason Klein, the evidence was borderline and required further undercover action by agents to nail the coffin shut.
Not the case with Ong.
They conducted more trades with Ong and any hope of avoiding legal trouble went flying out the window as fast as a hacker jumping on an account discovered to lack any 2FA (two factor authentication).
The HSI initiated conversations both undercover and as none other than the HSI conducting an interview in which Ong voluntarily allowed.
After an undercover transaction conducted for 46+ bitcoins valued over $46,000 USD at the time (worth over a quarter million USD today) Ong stated:
I think you guys trust me because the very first question I asked you was were you law enforcement. Cause technically in Washington State, um, it's, the laws are kind of muddle because the Federal law says that, ah, you know, I am considered a user and not a business, an exchange. But the Washington State law, they put something that says what I am doing is, quote unquote, money transmission, which needs to be licensed. So the Federal says that I don't need to be licensed, and the State says that I do. So it's kind of like, so it's kind of like a gray area right now.
Some days I just don't know what else to do but hang my head in disbelief at the abundant ignorance to the actual laws that govern this activity in the United States. We do our very best to get the word out and encourage everyone in this industry to review our 2017 regulatory landscape article published earlier this year which features commentary from Joe Ciccolo of BitAML.
The law in Washington appeared way back in 2014 and has been updated as recently as 2017 with enforcement statutes for those found in violation. This is an excerpt from the aforementioned article regarding Washington:
In Washington, digital currency is included in the definition of "Money Transmission" in the Uniform Money Services Act (UMSA), chapter 19.230 RCW (18):
"Money transmission" means receiving money or its equivalent value (equivalent value includes virtual currency) to transmit, deliver, or instruct to be delivered to another location, inside or outside the United States, by any means including but not limited to by wire, facsimile, or electronic transfer. "Money transmission" includes selling, issuing, or acting as an intermediary for open loop prepaid access and payment instruments, but not closed loop prepaid access. "Money transmission" does not include: The provision solely of connection services to the internet, telecommunications services, or network access; units of value that are issued in affinity or rewards programs that cannot be redeemed for either money or virtual currencies; and units of value that are used solely within online gaming platforms that have no market or application outside of the gaming platforms.
Here's the problem with this entire thing. It really doesn't matter what Ong knew or didn't know because according to federal law you're guilty regardless if you knew the laws on this or not. It's rather unfair and some would even call it bullshit, but it's the law.
People generally don't kill other people regardless if they know the full extent of the law or enforcement of penalties. Something along the lines of "Oh well shit! If I'd of known I could get the death penalty for shooting my mother-in-law, I certainly wouldn't have done it" is not a valid defense. Nor is it with money transmission, so nothing in the described of the recorded evidence in the complaint is good for Ong, in fact it makes it more apparent that he was breaking the law.
That said, saying something and doing something are two different things. There's always a possibility that Ong was reporting correctly and who knows, maybe he was in the process of complying with Washington state law, we simply are not aware of these facts at this point but these are certainly things that would help get him out of the heap of trouble he may well be in currently.
He followed the above with this dandy:
"Yeah. well anyways, it's still a very grey area. and I don't think they are really enforcing it, it just got put into some stupid statute or something..."
I'm going out on a limb here and guessing he has since changed his position on that one. This is one of those cases of open mouth, insert foot.
The HSI also trailed him and witness his splitting the money up across several bank accounts. Which clearly looks like money laundering. However, there's no proof beyond that and I can assure you that this is common practice among bitcoin P2P/OTC traders. It's not to avoid reporting, launder money, or conduct any sort of illicit activity.
It's simply done to keep banks from stealing their money with ridiculous account freezes and things of that nature so despite the picture they are trying to paint here, Ong likely has a solid defense against this one since any number of professional traders would likely provide testimony supporting this practice.
Regardless, the lack of knowledge and self-incriminating statements made regarding the law, however inaccurate it may be, is certainly going to be damaging to the defense of this case.
PRO-TIP:
When being questioned by someone about something you don't know much about that can land you in prison. Kindly choose not to answer.
BONUS:
When being questioned by law enforcement, you have the right to SHUT UP. Exercise this right and it will serve you well. That's what that first part "you have the right to remain silent" is really all about. They don't want you to shut your mouth, YOU want you to shut your mouth.
When being questioned by someone about something you don't know much about that can land you in prison. Kindly choose not to answer.
BONUS:
When being questioned by law enforcement, you have the right to SHUT UP. Exercise this right and it will serve you well. That's what that first part "you have the right to remain silent" is really all about. They don't want you to shut your mouth, YOU want you to shut your mouth.
A very solid and worrisome, strike two.
See no Evil, Hear no Evil, Speak no Evil
Just when, by any stretch of the imagination, and assuming proper reporting and other things putting Ong in some sort of compliance with state and federal law, there was remotely any possible chance of giving Ong the slightest microscopic shred of hope for avoiding arrest and potential conviction, he once again developed a case of open-mouth-insert-foot.
If there ever was a time where ignorance and stupidity allegedly united to start a fire, this was it.
This is not to say Ong is either ignorant or stupid, although he might currently agree with both points, this is simply saying that it appears as though Ong might have been put in a bad situation and possibly made misguided decisions based on some very bad information or a clear misunderstanding of the facts.
The first of two critical mistakes was that an HSI agent ("AGENT1") told Ong that the address (wallet address) he was given on a particular transaction was that of her Boss, another HSI Agent ("AGENT2"), to which he did not question and sent. We can only hope the subsequent action he took was that of filing a SAR with FinCEN, because if not, he conducted illegal money transmission by a textbook definition. Moreover it would have been illegal even if he didn't know and would have been accountable regardless. At the time, Ong was indeed registered with FinCEN which covered his bases there, however, allegedly not with the state of Washington, and thus not in compliance with either state or federal law since the latter further comes into affect once again when not in compliance with the state.
The second is a series of statements that were likely the kiss of death for Ong, outside of the actual cash transactions. On February 1st, 2017 after being told the funds were from the sales of illicit narcotics Ong stated:
"I don't know anything about that, so, what you just told me, like, went over my head. I didn't hear that. So there is one thing I tell people s I don't really care what they use bitcoin for....it's better that I actually don't know."
On March 17th, 2017:
"I ave a request. I am not interested in what you buy or sell BTC for, so please do not mention it or have your friends mention it either. .."
...and for the hat trick, we have June 12th, 2017, just 4 months ago.
Allot of the remittance work that I do, though, it's very important that the people who buy from me are in close coordination and contact with the people that cash them out at the same time. Because you need to lock he rate... you don't want any....slippage risk.... For example, let's say you buy from me, right? It gets sent to Mexico in, like two minutes or whatever, right? And then, let's say you wait until the next day to cash out. What if he price goes down....
All three statements are pretty damaging but the last one is not only explaining how they are transmitting money, but helping them maximize profits when they launder money of which he was admittedly aware of. This may well be a very difficult charge to wiggle out of and Ong could very well be facing some serious prison time of up to 25 years.
Unfortunately, case files reveal nothing much in the way of anything for the defense to build much of a case around. Despite the fact that Ong retained Brian Klein, an attorney with virtual currency experience, it's possible that Ong is already fighting a losing battle and the fight hasn't even begun yet.
This is not just a strike three, but rather synonymous of the HSI pitching a no-hitter as it well may end up.
Predicted Outcome
As always, we'll offer our prediction on the potential outcome of this case, however worthless that my well be. It should also be noted that another twist to this particular plot was the involvement of USPS investigators who validate the initial complaint. 6 of Ong's transactions the HSI setup were handle by mail.
In this case, although Ong has already plead not-guilty, he can still take a plea bargain instead of going to trial where he would face some nearly impossible to overcome obstacles. The primary blows are his own words that would undoubtedly be presented.
In this case, although Ong has already plead not-guilty, he can still take a plea bargain instead of going to trial where he would face some nearly impossible to overcome obstacles. The primary blows are his own words that would undoubtedly be presented.
I doubt Klein is going to allow his client to be drug through the mud prior to what appears to be a rather possible eventual sentencing. He can get to that point allot easier without out further damage by negotiating a deal.
Most likely a Plea Bargain with an admission of guilt or no contest (no contende).
Which is sad considering Ong was a known member of the P2P community according to those who had met him. Scott Emick, an IT professional and P2P trader based in Ohio met Ong at a P2P traders meetup in Boston, MA last year and described the individual as a "decent guy".
We asked Mr. Emick if he had any thoughts he would like to share publicly on the Louis Ong case, P2P trading, and the regulatory landscape in general and I cannot think of a better way to end this article than with the his response as it is both spot on and a perfect conclusion to this piece.
His advice:
His advice:
"Expect the unexpected. You will be approached and tested." - Scott Emick
Article by dinbits
Image Credits:
Banner Image by dinbits.com staff
REFERENCES:
1. Federal Regulations (BSA)
12 U.S.C. ch. 13 § 1724
REFERENCES:
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
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
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)
Federal case 2:17-cr-00191-RSL-1 - United States of America Vs. Louis Ong
Federal case 17-3056-01-CR-S-MDH (Jason Klein)
Federal case 2:17-cr-00191-RSL-1 - United States of America Vs. Louis Ong
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