Earlier this week, Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network (FinCEN), spoke to attendees of the Annual Money Laundering Enforcement Conference in Washington D.C., sponsored by the American Bankers Association and the American Bar Association. Her remarks addressed several money laundering enforcement priorities including continued focus on money transmitting businesses, crowdfunding sites, casinos, and FinCEN’s recently proposed rules for registered investment advisers, discussed previously here. Additionally, the director’s remarks included a discussion of FinCEN’s Bank Secrecy Act (BSA) and anti-money laundering (AML) focus on the virtual currency industry as well as the real estate industry.
IRS: an active ingredient in the alphabet soup of virtual currency regulators
Director Calvery’s prepared remarks included specific reference to assistance provided by FinCEN to train IRS examiners who conduct BSA examinations in the virtual currency industry. Among other concerns, FinCEN expects these examinations to help them locate compliance failures by virtual currency exchangers, administrators, and other agents. This FinCEN/IRS partnership provided the government its first civil enforcement action against a virtual currency exchanger back in May of this year. In that action, Ripple Labs, Inc. and its subsidiary XRP II, LLC agreed to pay a $700,000 civil monetary penalty and to take remedial action such as registering as a money service business with FinCEN and implementing an effective AML program. According to FinCEN, Ripple boasted the second largest virtual currency, or cryptocurrency, measured by market capitalization next to Bitcoin.
While the director’s remarks focused on IRS examiners conducting BSA examinations, this virtual currency expertise will likely come in handy for IRS agents conducting income tax audits or criminal investigations of taxpayers or businesses who are involved in virtual currency transactions. As has been widely reported, the IRS published guidance in March of 2014 announcing that it will treat virtual currency, such as bitcoin, as property for federal income tax purposes. Thus, virtual currency is not actually currency in the eyes of the IRS. Importantly, the IRS Notice only covers so-called convertible virtual currency, such as bitcoin. Convertible virtual currency is simply virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency, such as U.S. dollars. Anyone interested in the federal tax ramifications of virtual currency transactions should consult a qualified tax professional for advice.
Adding to the regulatory complexity, virtual currency businesses and entrepreneurs, especially online trading and exchange platforms, also need to be mindful of the activity of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in this space. The SEC has initiated a number of enforcement actions in this arena including against entities making unregistered offerings and numerous alleged Ponzi scheme based on purported investments in virtual currencies. Not to be outdone by FinCEN, IRS, and the SEC, the CFTC also initiated its first ever civil enforcement action against a virtual currency options trading platform this year, filing a consent order involving San Francisco-based Coinflip, Inc. and its CEO. That order confirmed the CFTC’s view that virtual currency is a commodity under the Commodity Exchange Act.
Cash real estate transactions also drawing scrutiny from FinCEN
Director Calvery devoted a portion of her recent remarks to FinCEN’s concerns over money laundering and BSA vulnerabilities in a largely unregulated corner of the real estate market. With respect to transactions involving money borrowed via banks, non-bank lenders, or government-backed mortgage issuers, BSA reporting and AML regulations generally apply. However, as noted by Ms. Calvery, approximately 22% of real estate transactions are “all cash” deals according to the American Association of Realtors. Thus, these deals are not currently covered by AML regulations and, according to FinCEN, are ripe for exploitation by money launderers, terrorist financiers, and other illicit actors. The director explained that FinCEN is attempting to work with various state regulators involved in the real estate industry to address this concern. Ms. Calvery’s remarks specifically emphasized that this segment of the real estate industry “has our attention.”