Few groups have been as early and as active in attempting to understand the implications of digital currency and blockchain technology as US law enforcement.
Despite expanded use and investment, cryptographic currencies such as bitcoin continue to be widely used for illicit activities. Dark market operators and extortionists were early and aggressive in their attempts to capitalize on the digital payment network and its cash-like approach to transactions, a trend that continues.
As evidence, the Department of Justice, US Attorney’s Office for the Northern District of California (DOJ), appointed Kathryn Haun as its first Digital Currency Crimes Coordinator this June. The position finds Haun heading up a multi-agency task force in San Francisco and comprised of representatives from the Federal Bureau of Investigation (FBI), Homeland Security Investigations (HSI), the Internal Revenue Service (IRS) and Secret Service (USSS), among several other federal and state organizations.
In an interview, Haun countered some of the misconceptions that have sometimes proliferated among the technology’s enthusiasts, many of whom seek to portray the interests of her agency and the US government as at odds with a currency that operates without government backing.
Haun stressed that the DOJ and others tasked with policing financial crimes have finite resources, and are not engaged in pursuing a broad agenda against bitcoin. Rather, she suggested that the agency she works for and the wider digital currency and blockchain community share a common ground, arguing that a safer environment for consumers, with clear regulations to separate bad actors, is in the best interest of all.
Haun told CoinDesk:
“Everyone benefits from clarity. The players in the ecosystem, the businesses, the government – everyone benefits from knowing which laws and regulations apply for digital currency and how those laws apply.”
Haun portrayed efforts by agencies such as the DOJ as supportive of the goal of clarifying the application of existing US laws and regulations on the matter. Further, she emphasized that while the DOJ does not write the law, it does play an active role in presenting US judges with cases that will inform future rulemaking.
Startup compliance
According to Haun, an example of the balance federal agencies are attempting to strike is the DOJ’s joint effort with the Financial Crimes Enforcement Network (FinCEN) that ended in Ripple Labs and a subsidiary being fined $700,000 for violations of the Bank Secrecy Act.
Haun suggested that, while Ripple Labs may have been investigated for conduct that occurred early in its days as a digital currency-focused startup, it was not part of any “particular special initiative or drive” to examine the entire industry.
“Due to Ripple’s extensive remedial efforts, including its commitment to enhancing its existing anti-money laundering and know your customer procedures, among other factors, we decided not to prosecute Ripple criminally but instead reached a settlement agreement,” Haun explained.
Haun pointed out that there were no indictments or criminal charges brought against Ripple Labs or its executives, framing the resolution as a compromise between a US agency with a responsibility to ensure financial firms are compliant with the law and a startup that was operating in a fast-moving environment.
She said this reflects the understanding among financial agencies that smaller or early-stage companies may not necessarily have one employee whose only job is to serve as an AML or compliance officer.
“Perhaps that individual has a number of different roles in the company. But the fact that a company is small or just starting out doesn’t mean it doesn’t need to have a compliance program in place, because these are important issues for a company of any size or stage to have addressed in the beginning,” she continued, adding:
“As is often said there is no one-size-fits-all compliance program, and at the end of the day it depends on any given entity’s customer base, risk level and other factors unique to that entity.”
Investigation pipeline
Haun further expanded on how cases are brought to her attention as Digital Currency Crimes Coordinator, suggesting that they are sourced through a variety of means.
Agents may receive leads directly from financial institutions, or develop them through other sources. Alleged victims, she said, may sometimes report crimes directly to the department through federal and local law enforcement.
Ultimately, she stressed there was no one answer to how leads for cases were developed and no one particular investigative agency with sole responsibility for bringing the investigations.
“It’s like asking ‘which agency handles crimes committed with cash?’” she said. “The answer is that no one single agency or unit alone does – as with other forms of payment, crimes committed with digital currency or using new financial technology span many areas, and accordingly, numerous different agencies and units within those agencies are involved in these investigations.”
As evidence of this, she pointed out that some of the digital currency cases publicly prosecuted so far have been markedly different in subject matter, categorizing the case against former DEA Special Agent Carl Force and former Secret Service Agent Shaun Bridges as fundamentally a public corruption case, while Ripple Labs was more a white collar matter and Silk Road more a global narcotics conspiracy.
Although the department has seen an influx of extortion scams involving bitcoin, she said the nature of illegal activities committed with the technology is capable of expanding across “almost all varieties” of crime.
As for companies that have relocated outside the US in a protest of increased laws and regulation, she suggested that this doesn’t necessarily play into the agency’s considerations about enforcing existing laws.
However, she did stress the wide mandate the DOJ has to prosecute criminal activities does not depend solely on physical location of an individual or entity, adding:
“Let’s say an exchange is engaged in laundering illegal proceeds, and the underlying criminal activity is here, that under the law is sufficient to affect the jurisdiction of this district. Likewise if the exchange is doing business in the district or purposefully directing their business activities here, that may also be sufficient. The law is not such that a company has to be physically headquartered here in order to fall within the jurisdiction here.”
Role and responsibilities
The new role is an outgrowth of Haun’s experience with transnational and organized criminal syndicates, identity theft, money laundering, and cybercrime; all specialties that led her to an early awareness of the technology.
“About three years ago, I started focusing on the area of digital currency and mobile payments. We saw more organized criminal enterprises were turning to the deep web to buy and sell their goods and services, and also we started to see a lot of overlap with marketplaces where you could buy illegal items with bitcoin or other digital currencies,” she recalled. “So, I started asking ‘What is bitcoin?’”
Today, Haun’s role, while constantly evolving, has her coordinating the district’s cases involving digital currencies and new financial technologies; keeping abreast of new developments in the industry and conducting training with other agencies on the technology.
“The office was very supportive of the efforts to focus on these new technologies. That makes a lot of sense since our district covers the entire bay area and in many ways Silicon Valley is ground zero, where a lot of the action and investment in this sphere is happening in the US,” she explained.
Her personal education process, Haun said, continues to this day. She attends conferences as her casework allows, and presides over regular meetings (she did not comment as to how regular) of a task force where government agencies share information on cases involving digital currencies.
According to Haun, the task force started as an informal group of government agents who needed to better understand how to navigate the complexities of investigating and prosecuting crimes in this environment. Early questions, she said, focused on subjects ranging from how Tor mail accounts worked to best practices for seizure warrants for cases involving bitcoin.
Haun is also involved in attempts to bring together law enforcement officials with members of the bitcoin and blockchain industry. However, she emphasized that such professional outreach is focused on uniting participants in both fields toward common goals for the public good.
Haun concluded:
“We have to be able to do our job irrespective of whether we face criticism. We can’t shy away from prosecutions that might be unpopular. Our job is to pursue justice and enforce the law.”
Kathryn Haun is speaking at Consensus 2015 in New York. Join her at the TimesCenter on 10th September. A list of the event speakers can be found here.
DOJ headquarters image via Shutterstock