Blockchain Tracing: The U.S. Government’s Newest Tool to Combat Foreign Crime
On May 13, 2022, U.S. Magistrate Judge Zia M. Faruqui of the District of Columbia took the unusual step of unsealing and issuing a Memorandum Opinion captioned “In Re: Criminal Complaint” to explain the court’s conclusion that probable cause existed to authorize a federal criminal complaint against an individual for transmitting over $10 million worth of bitcoin between the United States and an Office of Foreign Assets Control–sanctioned nation, violating the International Emergency Economic Powers Act (IEEPA) and defrauding the United States, in violation of 18 U.S.C. § 371.
Although the criminal complaint remains sealed, the Memorandum Opinion states the allegations involve an individual, identified as “Defendant,” who used U.S.-based IP addresses from a U.S. residence and at least one U.S.-based online financial institution and U.S.-based virtual currency exchange to conspire to operate an online financial platform based in a comprehensively sanctioned company that advertised its design as one that could evade U.S. sanctions through untraceable virtual currency transactions.
Magistrate Judge Faruqui’s opinion is notable for three reasons:
- Magistrate Judge Faruqui is sending a clear signal that parties cannot expect to hide on the blockchain. Federal magistrate judges rarely issue memorandum opinions to explain their reasons for issuing federal complaints, and here there seemed little question as to whether there was probable cause that Defendant used U.S.-based institutions to direct bitcoin to a sanctioned nation. The court noted that Defendant failed to use basic operational security, and the government simply “follow[ed] the (virtual) money” to establish probable cause because Defendant identified themself as part of “know-your-customer requirements when setting up an account with the virtual currency exchange and did not mask their IP address, which resolved to a U.S. address.
- Criminal enforcement of sanctions violations via blockchain transactions will follow the foundation laid by OFAC at the civil level. Seemingly espousing a “whole-of-government” approach, Magistrate Judge Faruqui concluded that the criminal complaint demonstrates that civil liability is not the ceiling for liability: “The Department of Justice can and will criminally prosecute individuals and entities for failure to comply with OFAC’s regulations, including as to virtual currency.” Op. at 8. In his opinion, Magistrate Judge Faruqui outlines OFAC’s guidance and activity over the past two years to promulgate regulations and enforce virtual currency–related sanctions, describing OFAC’s settlements with wallet management company BitGo, Inc., and payment processor BitPay (described by Sidley in March 2021), and virtual currency exchanges Suex and Chatex. Op. at 2-8. Magistrate Judge Faruqui concludes on this record of OFAC action that “[t]his Court adopts OFAC’s guidance” because OFAC’s “broad definitions [of the statutory terms of IEEPA] carry the force of law.” Op. at 6, quoting Zarmach Oil Servs., Inc. v. U.S. Dep’t of the Treasury, 750 F. Supp. 2d 150, 156 (D.D.C. 2010) (citation omitted).
- Blockchain analysis will be the prosecutor’s tool of choice in cyber investigations. Deputy Attorney General Lisa Monaco recently described sanctions as “the new FCPA [Foreign Corrupt Practices Act].” And, as Sidley wrote last September, blockchain analysis is the law enforcement tool that will unleash cyber sanctions. Magistrate Judge Faruqui, who has written extensively about using cryptocurrency tracing in federal investigations and who previously prosecuted cases involving terrorists’ use of cryptocurrency, appears to presage that blockchain tracing is the future of not just sanctions investigations but any that involve the movement of virtual currencies.
Accordingly, parties at each stage of blockchain transactions should carefully review their sanctions compliance procedures, in light of the OFAC guidelines cited by Magistrate Judge Faruqui, to address liability and enforcement risk.