Enforcement

Bitcoin Enables Drug Dealing, Just as Major Banks Do


(Updates a previous version of this story to reflect, in the fourth paragraph, that the banks reached deferred prosecution agreements and includes, in the sixth paragraph, comments from attorneys representing Shrem and Reid.)

Two weeks ago, Pascal Reid and Michel Abner Espinoza were arrested by police in Miami and charged with using the virtual currency Bitcoin to launder money. The week before, Charlie Shrem, co-founder and chief executive officer of BitInstant, was arrested in New York getting off a plane from Amsterdam. Shrem was charged by federal prosecutors with conspiracy to commit money laundering linked to alleged sales of more than $1 million in Bitcoins to people who wanted to buy drugs on Silk Road, a now defunct online marketplace.

The arrests underlined growing concerns among U.S. law enforcement officials that Bitcoin has become the preferred currency of the criminal underworld and that currency exchanges such as Shrem’s have become the enablers of drug trafficking and other nefarious enterprises. But you know who else has a history of enabling nefarious criminal enterprises? Banks.

HSBC (HSBC) in December 2012 agreed to a $1.9 billion settlement with the U.S. government over charges it failed to monitor $670 billion in wire transfers and $9.4 billion in purchases of U.S. currency. According to the U.S. Department of Justice, Mexican cartels deposited hundreds of thousands of dollars a day at HSBC México branches, placing the cash in boxes specially designed to fit the dimensions of the teller windows. Wachovia, now part of Wells Fargo (WFC), also admitted its failure to report suspected cartel money going through the bank as part of a $160 million settlement it reached in 2010. ING (ING) and Standard Chartered (STAN:LN), among others, have settled similar cases.

The banks got deferred prosecution agreements. Assistant Attorney General Lanny Breuer, in announcing the HSBC settlement, argued that a criminal indictment would have posed too great a risk to the financial system and potentially cost thousands of jobs. In other words, HSBC was too big to prosecute. No bank employees were charged.

Shrem, on the other hand, faces a potential prison sentence of 30 years in a case in which the amounts are a rounding error next to those HSBC and Wachovia handled. “I think there’s a double standard of justice that’s being administered by the [Eric] Holder Department of Justice,” says Jimmy Gurulé, a former federal prosecutor and Treasury Department enforcement official who is now a professor at Notre Dame Law School. “One standard for large global banks and their officials, and another standard for everyone else.”

Shrem’s attorney, Marc Agnifilo, says his client “denies that he laundered money and we anticipate that we’ll contest these charges in court.” Reid has pleaded not guilty. His lawyer, Ronald Lowy, accuses the state government of scapegoating his client “in an effort to make media waves to discourage the use and transfer of Bitcoins.” Espinoza’s lawyer could not be reached.

Some Bitcoin proponents have seized on this disparity to make an argument against money-laundering laws. Libertarians see the statutes as one more way the government, under the guise of protecting us from criminals, exerts control over our lives. A piece last May in American Banker by e-money researcher Jon Matonis was titled “Money Laundering Is Financial Thoughtcrime.”

Seen one way, the decision to prosecute Bitcoin entrepreneurs is evidence that the government is at least taking the currency seriously. We’ll really know it’s important, though, when the Justice Department decides it’s too risky to prosecute financial institutions such as Shrem’s.

The bottom line: U.S. authorities are bringing money-laundering charges to try to shut down Bitcoin companies.

Bennett_190
Bennett is a staff writer for Bloomberg Businessweek in New York.

Later, Baby
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