Prosecution of Crypto Mixer Reflects Increased Regulatory Scrutiny

Monday, September 27, 2021

On August 18, 2021, Larry Dean Harmon pled guilty to conspiracy to launder money for his role in the operation of +$300 million-dollar bitcoin “mixing” service.  The plea followed a separate $60 million civil penalty by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).  This client alert examines the enforcement action and criminal case against Mr. Harmon and offers key takeaways for participants in the digital asset space.

BACKGROUND

In its indictment, the Department of Justice alleged that a business operated by Mr. Harmon called Helix provided a “mixing” or “tumbling” service to fee-paying customers.  Generally speaking, a “mixer” transmits bitcoin or other digital assets from a sender to a recipient in a manner intended to conceal or disguise the identities of the parties involved and the ultimate location or control of the assets. 

Here, Helix was specifically advertised as a way to conceal transactions from law enforcement, and to allow individuals to convert bitcoin that could be traced to darknet transactions through blockchain records to “clean” or “untainted” bitcoin.  All told, Helix is purported to have exchanged 354,468 million bitcoin on behalf of its customers. 

In February 2020, the Department of Justice announced the indictment and arrest of Mr. Harmon, following a years’ long investigation in coordination with FinCEN and the Federal Bureau of Investigation. 

FINCEN ENFORCEMENT ACTION

As relevant background, FinCEN has taken the position that “exchangers,” or entities “engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency,” likely are “money transmitters.”[1]  FinCEN has also issued guidance establishing that “money transmitters” are one of several entities that qualify as a “money services business” (MSB) subject to the BSA and FinCEN regulation.[2]

In October 2020, FinCEN assessed a civil monetary penalty (CMP) of $60 million against Mr. Harmon for the operation of Helix as an unlicensed money services business.[3]  Specifically, FinCEN determined that Mr. Harmon, doing business as Helix, willfully failed to register as a money services business with FinCEN.  FinCEN also determined that Mr. Harmon failed “to implement and maintain an effective anti-money laundering program,” as is necessary to reduce the risks posed by money transmission, and in fact “actively aided cybercriminals” to avoid safeguards in place with other digital asset exchanges.[4]  Finally, FinCEN determined that Mr. Harmon failed to report nearly 2,500 transactions through the filing of suspicious activity reports commonly referred to as “SARs.” 

Notably, the assessment against Mr. Harmon was the first-of-its-kind against a digital asset MSB by FinCEN.  However, there can be little doubt that FinCEN’s penalty was representative of an increased U.S. focus on policing AML violations and compliance deficiencies within the industry.  For example, just a few weeks prior, FinCEN announced the assessment of an even larger CMP—$100 million—against digital asset exchange BitMEX for the failure to implement and maintain an effective AML program and to appropriately report suspicious activity.[5]

CRIMINAL PROSECUTION

Turning to the criminal prosecution by the Department of Justice, Mr. Harmon’s indictment charged him with two counts related to operating an unlicensed money transmitting business and with conspiracy to launder monetary instruments.  

Mr. Harmon had previously filed a Motion to Dismiss Count Two (Operating an Unlicensed Money Transmitting Business under 18 U.S.C. $ 1960(a)) and Count Three (Money Transmission Without a License under D.C. Code $ 26-1023(c)) prior to pleading guilty to Count One (Conspiracy to Launder Monetary Investments).  In his Motion, Mr. Harmon argued that the relevant money transmitting regulations did not apply to the unique act of mixing bitcoin that he was alleged to have engaged in, because those regulations were aimed at traditional currency transactions.  While Mr. Harmon’s novel arguments gained the attention of the District Court for the District of Columbia, resulting in a 49-page July 2020 opinion in which the court addressed the arguments at length, the court ultimately denied the Motion to Dismiss, ruling that bitcoin constituted “money” within the meaning of the District of Columbia’s Money Transmission Act and that Helix’s business qualified as  an “unlicensed money transmitting business” under the Bank Secrecy Act. 

After the denial of the Motion to Dismiss, Mr. Harmon agreed to plead guilty to Count One of the indictment.  Specifically, Mr. Harmon admitted that he was responsible for laundering the equivalent of approximately $311 million worth of bitcoin (at the time of the transactions), further agreeing to forfeit 4,400 bitcoin (valued today at nearly $200 million).  Given the massive dollar value of the bitcoin involved in this case, taken with the fact that Mr. Harmon was engaged in the business of money laundering and knew that the underlying funds were intended to promote drug offenses, the advisory sentencing guidelines had put Mr. Harmon’s potential exposure at life in prison.  In return for his agreement to plead guilty and cooperate with the government, Mr. Harmon now faces a maximum of 20 years in prison at sentencing.    

TAKEAWAYS

U.S. law enforcement agencies and regulators have long expressed concern regarding the potential use of digital payments to conceal illicit financial activity, and these actions reflect the U.S. government’s desire to bring greater oversight and regulation to digital assets through targeted prosecution.

In its 2020 Report of the Attorney General’s Cyber Digital Task Force: Cryptocurrency Enforcement Framework, the Department of Justice stated that “illicit uses of cryptocurrency typically fall into three categories: (1) financial transactions associated with the commission of crimes; (2) money laundering and the shielding of legitimate activity from tax, reporting, or other legal requirements; or (3) crimes, such as theft, directly implicating the cryptocurrency marketplace itself.”[6]

Here, Mr. Harmon seemingly offered a service facilitating all three of the foregoing illicit uses of digital assets through the operation of the Helix mixing service.  Given the DOJ’s stated position that such conduct poses a “criminal and security threat,”[7] it is not surprising that the Department would engage in a high-profile prosecution of Mr. Harmon.  It is also unsurprising that such conduct would form the basis for a first-of-its-kind FinCEN enforcement action.  In reality, the parallel actions here were almost certainly intended to send a message to the market that the US will investigate and prosecute those would attempt to use digital assets in furtherance of illegal conduct.

At a more granular level, however, it must be noted that the actions taken against Mr. Harmon and Helix largely revolved around registration failures.  Similar to Al Capone famously being convicted for tax evasion, it was Helix’s operation as an unregistered money services business that formed the foundation for the FinCEN enforcement action and two of the three criminal counts here.  Put differently, the mere creation of a mixing business was not the basis for many of the claims here, but the fact that mixing will often (if not always) constitute a regulated activity. 

To that end, these actions also reflect a broad push by the US government to oversee the digital asset space through—among other methods—registration and reporting requirements such as those contained in FinCEN regulations.  For example, by making clear that many digital asset businesses may be subject to regulations requiring, among other things, robust AML and Combatting the Financing of Terrorism (CFT) programs, the US government effectively shifts some of the burden of preventing illicit uses of digital assets to the private sector.  

Accordingly, businesses or individuals in the digital asset space must be extremely mindful of their potential regulatory obligations, including but not limited to money transmission regulations that can apply to a wide variety of business models.  Indeed, while it is a common refrain that “cryptocurrencies are unregulated,” the actions taken against Mr. Harmon provide ready proof of the contrary.

Butzel Long continues to track, analyze, and advise on a variety of issues regarding the legal and regulatory landscape facing digital assets. 

William Kraus
734.213.3434
krausw@butzel.com

Theodore Eppel
248.258.2905
eppel@butzel.com

[1] U.S. Dept. of the Treasury, Fin. Crimes Enf’t Network, FinCEN Guidance FIN-2019-G001, Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (May 9, 2019). 

[2] See, e.g., Bank Secrecy Act Regulations - Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011); 31 CFR § 1010.100(ff). 

[3] FinCEN Assessment of Civil Penalty, In the Matter of Larry Dean Harmon d/b/a Helix, No. 2020-2. 

[4] Attachment A to FinCEN Assessment of Civil Penalty, In the Matter of Larry Dean Harmon d/b/a Helix, No. 2020-2. 

[5] FinCEN Assessment of Civil Penalty, In the Matter of HDR Global Trading Limited, 100x Holdings Limited, ABS Global Trading Limited, Shine Effort Inc. Limited, HDR Global Services (Bermuda) Limited d/b/a BITMEX, No. 2021-2.

[6] Report of the Attorney General’s Cyber Digital Task Force (July 2, 2018).

[7] Id.

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