Former Prosecutor Laurel Rimon On Money Laundering: “What’s Identified Is A Fraction of What Goes On.”

Bitcoin, Blockchain and the Law, Crime, News, Regulation | May 14, 2018 By:

Banks and financial institutions are long accustomed to new and changing regulations aimed at preventing money laundering and terrorist financing. Now, a new set of Customer Due Diligence Requirements issued by FinCEN have taken effect.  

But for emerging “money services business” (MSB) – especially those engaged in cryptocurrency, coin offerings, and blockchain technology – so-called “Know-Your-Customer” practices are still being developed, and misunderstandings of the requirements linger, which could create problems. Even though the new rules don’t apply to MSB entities, they offer insight into regulators’ concerns and key considerations for new MSBs, particularly with increasing regulatory oversight around blockchain, cryptocurrency and token sales.

Laurel Loomis Rimon, senior counsel with O’Melveny in Washington, DC, advises MSBs to begin thinking more proactively about money-laundering risks associated with their business, even if they are not overtly targeted by the new customer due diligence rules. “Knowing that FinCEN’s new Customer Due Diligence rule goes into effect on May 11th, banks and other financial institutions have spent the last two years readjusting their AML programs to capture beneficial ownership information that wasn’t required before,” says Rimon. “While money services business are not subject to the new rule, some are following it nonetheless as a matter of caution and risk management. There could ultimately be a price to pay for MSBs that don’t have in place robust ‘know-your-customer’ policies.”

Rimon served as Deputy Chief of the Financial Investigations and Litigation Unit, Asset Forfeiture and Money Laundering at the Department of Justice. She also served as General Counsel for the Office of Inspector General at the US Dept. of Homeland Security. While an Assistant US Attorney in the District of Columbia, she successfully directed the money laundering prosecution of the “e-gold” enterprise, one of the earliest digital currencies.  

She talked with Block Tribune about the new Customer Due Diligence rule and its potential impact on the cryptocurrency business. 

BLOCK TRIBUNE: So we have the customer due diligence requirements issued by the FinCEN. What will be the effect immediately?

LAUREL RIMON: Well, with respect to the covered institutions, so primarily banks, they will have an obligation to make sure their customer identification programs take into account a variety of things, but most especially are identifying the beneficial owners of anyone who owns 25% or more of any of their what they call legal entity customers. So that’s a sort of deeply packed idea that involves a number of different steps that banks and other financial institutions have to take to make sure that they know who’s behind the corporate name for any of their corporate customers.

BLOCK TRIBUNE: Haven’t they been doing this all along?

LAUREL RIMON: Yes and no. They have been required all along to have a specific customer identification program, and that requires certain pieces of documentation and record keeping regarding the types of identification they need to get. But they have not been required to dig behind a corporate name for example, and identify who the actual owners of that corporation are. And they haven’t been required explicitly, although I think they have been required sort of based on just general AML principles to conduct a monitoring of their customer identities. So it’s a big change. FinCEN has given financial institutions two years to implement this because it involves a lot of steps in various customer identification software programs and other systems that the institutions have to use to try to get this information.

BLOCK TRIBUNE: Were there rampant violations of the spirit of this law going on beforehand?

LAUREL RIMON: I don’t know if it’s violations. I mean, obviously it wasn’t required to dig into the beneficial owners. Has that led to difficulty in tracing assets and identifying instances of money laundering? I think for sure that’s true. There’s no question that it makes it much harder to trace financial transactions when you have layers of companies, whether legitimate or not, it just makes it a lot harder to identify who the true actor is.

So I don’t know that there’s a sense that there was a sort of a rampant use of say, shell companies, to launder money. I mean certainly that happens and is done frequently, but I think it’s just the sense that now is the time to make sure that the customer identification that the banks and financial institutions were doing is done in a meaningful way. And it’s not meaningful if you sort of stop at the point where the customer says, ‘Well, my name is corporation xyz,’ and they don’t tell you anything more about the actual people behind that.

BLOCK TRIBUNE: So as a former prosecutor, what’s your estimation of how much money laundering is going on? Right now, cryptocurrency companies are not subject to this new law. So is there a lot going on? Is it a minor thing? Tell me in your perspective what’s going on.

LAUREL RIMON: Yeah, I mean, I wouldn’t be the person to really quantify it, but I mean, it’s significant. And what’s identified is a fraction of what goes on. The money laundering laws are very broad, so what constitutes money laundering technically speaking is pretty broad. Any transaction in the proceeds of criminal activity is technically money laundering, so I’m sure that FinCEN and the Department of Treasury have made attempts to sort of quantify what percentage of our financial institutions have laundered funds going through there. But I mean, I would describe it as a consistent activity that runs through the course of all of our financial institutions, because most crime is aimed at gathering profits. So the movement of value from one person to another is a key aspect and driver of criminal activity.

And that’s just as true for sort of the blockchain cryptocurrency market as anywhere else, because you know, there was this sense, at least for a while, that this was going to be, you know, highly private, unregulated, and out of the sight of financial law enforcement.

I think it’s certainly an issue. Everybody recognizes it’s an issue. And the legitimate companies in the cryptocurrency and blockchain space are making enough effort to get compliant with the rules that are out there.

BLOCK TRIBUNE: When will cryptocurrency companies be subject to these new rules in your estimation?

LAUREL RIMON: It’s unknown. FinCEN has not specifically said that they will be or hinted at when they might be. So there is some sense, and I do see some companies anticipating that they might apply to them and building in some version of the beneficial ownership requirements to their own AML programs. But it’s really hard to say. For myself, I’m less focused on there being a specific date when these rules will explicitly apply to money services businesses, although that could be in the next coming couple years or so, but that’s just a guess. And more on the fact that I think the new rule does tell institutions that are not regulated by it something about what they should be doing and what the regulators are going to look at. I don’t think it’s enough for any company, whether subject to this CDD rule or not, to just stop when they run into a corporation and they don’t know anything about who owns it.

Money services businesses, like most cryptocurrency exchanges and other crypto companies still have an obligation to identify their customers and understand who they are. What their business is. Where their funds come from. Based on a risk assessment. So I think this provides some information about the type of things regulators will be looking for.

BLOCK TRIBUNE: Presuming that it’s inevitable that they will get around to instituting these rules on cryptocurrencies, won’t this drive people towards the more ultra high-privacy coins?

LAUREL RIMON: Well, I guess I’m not sure exactly what you mean. 

BLOCK TRIBUNE: Well, there are coins that are harder to trace, like Zcash, and a few others. They may not be as easy to regulate as say, bitcoin is, that has a ledger that’s public. So what I’m saying is won’t that just drive people further underground if they’re truly engaged in criminal activity?

LAUREL RIMON: It may do so, I mean there’s always gonna be sort of a black market for this type of financial activity. But the goal is to make it harder for these funds to move through all of the financial transaction methods that are out there. I think that the rules will apply to any company, whether it’s a public blockchain or not, whether it’s easily traceable or not. The same rules that require the companies to do some identification of their customer is going to apply either way. So to some extent the idea of greater privacy is a fallacy unless that company is taking a position that it’s going to operate outside of any regulation, which is gonna be a huge risk. But they can’t really offer any more privacy than any other company under the laws that they exist. They may choose to do so in a way that may get them in trouble with regulators later. We’ve certainly seen companies take that position and then end up being prosecuted. But you can’t really offer more privacy I don’t think, if you’re gonna operate in the open.

BLOCK TRIBUNE: Some people would argue that government regulation is too onerous. You’re a part of the system. Do you think that’s a fair assessment?

LAUREL RIMON: I think in some ways it’s a fair assessment right now, and it is quite onerous for entrepreneurs who are trying to get into the blockchain based value transfer business. I think it’s extremely onerous, particularly because you have the federal government and all of the state governments that purport to regulate much of this activity. And their requirements for being licensed and registered are not all the same. It’s not clear which ones apply and which don’t. And so the cost is pretty high. I think the general principles behind regulating the activity are good, and I think the regulation itself is not bad. But there needs to be some uniformity and consistency and we’re still waiting for FinCEN to clarify what type of activity really needs to be regulated. So I think right now it’s sort of an over-broad application. And I think it will eventually narrow down. And it may take some of these companies fighting back against the regulation and saying no, I don’t think this applies and litigating that. Which is a risk for those companies.

But yeah, I think it is quite onerous at this point for good reason, and that the companies who buy into the reason for the regulation, even if they engage with the regulators and push back a little bit, but as long as they’re showing that they are participating in the effort to prevent money laundering and tariff financing passing through their system they’ll be okay.

BLOCK TRIBUNE: When money laundering does occur, is it mostly – and I know that you can’t give me real hard specifics – but in your opinion, is it mostly organized crime? Is it terrorism? Or is it just tax evaders?

LAUREL RIMON: Interesting. I mean, in my experience, and I prosecuted money laundering cases for maybe 15 years or so out of my whole time at DOJ, but tax evasion would be lower on the list of what I personally have seen. Probably the biggest category is just going to be moving the proceeds of fraud. That’s the largest category. But you see child pornography with the back page indictment recently.


LAUREL RIMON: You see that type of thing. And the e-Gold case that I prosecuted over a decade ago had that same type of thing, credit card fraud, running through it. Child pornography. So I think your probably largest category is going to be just outright fraud. And then you have direct trafficking, direct proceeds that move into our system of currency at a very high rate. So those are sort of two big categories, but you know, anything that generates profits can lead to money laundering.

BLOCK TRIBUNE: Even with all these rules, money laundering still seems to be going on. Is it the fact that the crooks are so inventive, or is it just that this is such a broad swath of what is possible that it’s impossible to stamp it all out?

LAUREL RIMON: Yeah I think as long as you have any sort of transfers of value, currency, digital currency, fiat currency, exchange of property, you’re going to have money laundering. It’s going to be a constant in our system. It’s gonna be a question of trying to make it harder. Trying to identify the bad actors and the big actors in the space. And sort of squeezing people to the edges and making it harder. But you know, as long as you have any sort of crime that’s generating profit and people wanting to pass it to another person or hide it, you’re gonna have money laundering. And so I think it’s gonna be there for the long-term.

But these regulations do make a difference. The more that suspicious activities are reported, provides information to law enforcement about what to look for, I think it does make a difference.