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Unlicensed Bit Coin Exchange Operator Sentenced to One Year and a Day for Attempted Money Laundering in Undercover Sting Operation and Failure to Register with FinCEN

Earlier this month, the District Court for the Central District of California imposed a prison sentence of one year and a day, with three years of supervised release, on defendant Theresa Lynn Tetley, who had pleaded guilty to: (i) the unlicensed operation of a digital currency exchange due to failure register with the Financial Crimes Enforcement Network (“FinCEN”), in violation of 18 U.S.C. § 1960(a) and (b)(1)(B), and (ii) a money laundering charge, in violation of 18 U.S.C. § 1956(a)(3)(B), arising out of an undercover “sting” operation run by the Drug Enforcement Agency and Internal Revenue Service-Criminal Investigation involving the attempt to conceal proceeds supposedly obtained by selling drugs.  Tetley also was ordered to pay a $20,000 fine and forfeit 40 Bitcoin, $292,264 in cash, and 25 gold bars that were the alleged proceeds of her illegal activity.

The Court imposed a sentence significantly lower than the sentence of 30 months requested by the government, a recommendation which already was lower than the advisory sentencing range recommended by the Federal Sentencing Guidelines (“Guidelines”) of 46 to 57 months in prison, as calculated by the U.S. Probation Office.

Tetley, a 50 year old woman living in Southern California, is a former stockbroker and real estate investor. She operated her digital currency exchange under the alias “Bitcoin Maven” for over three years, running an unregistered Bitcoin for cash exchange service.  According to the government, her service “fueled a black-market financial system” that “purposely and deliberately existed outside the regulated bank industry” and which catered to an alleged major darknet vendor of illegal narcotics.  According to the defense, however, the defendant “departed from a lifetime of integrity and good deeds and showed terrible judgment by failing to comply with federal registration requirements and buying bitcoins from individuals who represented themselves as engaged in criminal activity.”

In this post, we will drill into this sentencing and the parties’ respective positions, which provide a window into the prosecution and sentencing of alleged crimes involving both digital currency and undercover money laundering operations — and into the process for the sentencing of federal crimes in general, and how other factors which are entirely unrelated to the facts of the specific offense can be important.  Further, the Tetley case is interesting in part because it represents a sort of “hybrid” case — seen from time to time in money laundering cases involving professionals — which straddles both the typically very different realms of “pure” financial crime cases and illegal narcotics cases.  The government sentencing memorandum is here; the defense sentencing memorandum is here.

Unlicensed Money Services Business Charge

As we previously have blogged in detail, FinCEN has declared administrators or exchangers of digital currency – including popular crypto currencies such as Bitcoin – to represent money transmitting businesses which must register with FinCEN as money services businesses (“MSBs”), which in turn are governed by the Bank Secrecy Act (“BSA”). The government’s sentencing memorandum in Tetley notes that 18 U.S.C § 1960 requires money transmitting businesses to comply with federal registration requirements under 31 U.S.C. § 5330. Specifically, money transmitting businesses must register as MSBs with FinCEN – a process which itself is relatively simple.  However, the status of being a MSB covered by the BSA then subjects the entity to several obligations established under the BSA, including:

  • Development, implementation, and maintenance of an effective written AML program that is reasonably designed to prevent the MSB from being used to facilitate money laundering or financing terrorist activities;
  • Reporting transactions that the MSB knows, suspects, or has reason to believe are suspicious (including funds derived from illegal activity or the use of the transmitter to facilitate illegal activity) and involve at least $2,000 in funds;
  • Filing a report of each deposit, withdrawal, or exchange of currency or other payment or transfer by, though, or to the MSB which involves more than $10,000; and
  • Like other financial institutions governed by the BSA, an MSB is required to verify customer identity, conduct due diligence on its customers, file reports with the government, and create and maintain records pursuant to the BSA.

Tetley apparently did none of the above. In its sentencing memorandum, the government emphasized that Tetley’s operation was “by all means, a professional business and not a hobby.” The government highlighted that she held herself out to be a business by advertising under a tradename, “Bitcoin Maven,” on localbitcoins.com.  She also operated as a business by maintaining ledgers of her activities for customers and possessing a money counter.  Finally, the government highlighted the significant amount of proceeds allegedly exchanged through the illicit business – between $6 million and $9.5 million over three years.

It is not entirely clear from the parties’ sentencing memoranda exactly how the advisory sentencing range under the Guidelines was established, which is a critical process. Piecing together information from the competing memoranda, it appears that the U.S. Probation Officer calculated an advisory Guidelines range of 46 to 57 months in prison, based on a “final offense level” of 23 and Tetley’s lack of criminal history under the Guidelines  (which – long story short – are a very complicated, regimented, and numbers-driven set of rules for federal district courts to consider when imposing criminal sentences).  Working backwards from this number, and because Tetley pleaded guilty and therefore presumably received a three-point reduction for “acceptance of responsibility,” she apparently had an offense level of 26 prior to the three-level reduction for accepting responsibility. Her offense level also was driven apparently by the Guidelines provision under Section 2S1.3 for failing to register as an MSB, rather than the different Guidelines provision under Section 2S1.1 for the money laundering charge, and was driven primarily by a 18-point enhancement above the base offense level of six for the amount of funds involved in the offense (that is, $3.5 million to $9.5 million, resulting in a 18-offense level increase under U.S.S.G. § 2B1.1(b)(J), which is incorporated by reference by Section 2S1.3).  Following the math, the defendant presumably also must have received a two-level increase for some “offense specific” enhancement, although the public record does not reveal what exactly that was (the options include a two-level enhancement for transmitting proceeds represented to be earned from drugs; a two-level enhancement for dealing in funds over $100,000 within a single year as an unlicensed MSB; or a more complex “grouping” calculation involving the interplay of the two different criminal charges).  Regardless of the precise calculations, the bottom line lesson here is that the amount of funds transferred drove the Guidelines calculation.  Further, what the Tetley case clearly demonstrates is that, in any money laundering prosecution, the advisory Guidelines range can skyrocket very quickly due to several factors.

Although the government stressed the amount of transferred funds involved in the failure to register offense, the defense countered that the raw number of funds which led to the very significant 18-level increase in the Guidelines offense level overstated the seriousness of the actual offense because it did not represent any losses suffered by any of the defendant’s customers, or actual profits to herself; rather, the number simply reflected the net amount of unlicensed transactions.

Money Laundering Charge Under the Undercover “Sting” Provision: A Digital Currency Crime Which Relied on Traditional Cash Pay Offs

The money laundering charge focused on the interactions between the defendant and an undercover agent from the Drug Enforcement Administration. The undercover agent approached Tetley for a Bitcoin-for-cash exchange and emphasized the importance maintaining anonymity in the transactions.  The defendant agreed and allegedly stated — in a statement arguably embodying the “willful blindness” doctrine of knowledge of wrongdoing — that she did not want to know the source of the Bitcoin.  The defendant reassured the agent at a later point that she did not disclose to the IRS the identity of customers and generally did not keep track of whether any cash transaction exceed $10,000.  The defendant met the undercover agent on three separate occasions for a Bitcoin-for-cash exchange in the amounts of $45,000, $70,000, and $300,000, provided in envelopes or grocery bags.  At the second meeting the undercover agent expressly told the defendant that his Bitcoins were the proceeds of the sale of narcotics.  The defendant continued with the transaction and was arrested at the third meeting.

The money laundering charge to which Tetley pleaded guilty, 18 U.S.C. § 1956(a)(3), is the infrequently-used “sting” provision of the money laundering statutes, which is used to prosecute defendants who fall for undercover operations, in which guilt can be established if the government proves the requisite intent and knowledge that the property involved in the financial transaction at issue was “represented to be the proceeds of specified unlawful activity, or property used to conduct or facilitate specified unlawful activity,” with the term “represented” to mean “any representation made by a law enforcement officer or by another person at the direction of, or with the approval of, a Federal official authorized to investigate or prosecute violations of this section.” Money laundering charges resulting from “sting” undercover investigations are treated identically by the Guidelines as “real” money laundering offenses involving proceeds from actual illegal conduct.

In addition to the three discreet undercover transactions, the government also highlighted in its sentencing memorandum that the defendant allegedly “exchanged over $6 million in Bitcoin for cash for one of her customers, whom she knew as “‘David'” – and who turned out to be William James Farber, charged by the government elsewhere for “being a large darknet vendor of narcotics on the marketplace AlphaBay, which was subsequently shut down by law enforcement.”

The defense countered in part that Tetley actually was quite unsophisticated and “left a trail a Boy Scout could follow,” suggesting both that she did not set out to commit a broad-ranging and complex crime, and that she would never commit another crime. Specifically, according to the defense, Tetley was easy to locate, did not use code words, traded openly, and used her real name when asked.

Competing Sentencing Positions

The government sought a sentence of 30 months, asserting that such a sentence would serve both to punish the defendant for her specific conduct and to “deter individuals from operating unlicensed money transmitting business,” which “provide an avenue of laundering money for those who use digital currency for illicit purposes,” including the darkweb.  The government argued that by “targeting unlicensed exchangers, the government is able to prevent, or at least curb, the opportunities for actors utilizing digital currency illicitly to convert those proceeds to fiat currency.” However, when recommending a sentence below the advisory Guideline range, the government recognized as mitigating factors that the defendant had no prior criminal history and had a caretaking role in her family.

Needless to say, the defense memorandum stressed the defendant’s caretaking role in her family – specifically, the defendant’s unique role in helping to care for a sister who reportedly suffers from a severe learning disorder, complicated by the relationship with a second sister described as suffering from serious mental health issues.  Presumably, this argument carried a great deal of weight in obtaining a sentence that was significantly below the advisory Guidelines and which likely represented, relatively speaking, a defense victory. Indeed, the government’s sentencing memorandum suggests that the defendant routinely and knowingly tried to assist drug dealers in hiding illegal proceeds by flouting regulatory requirements so as to offer anonymity to her clients, looking the other way when confronted with indicia of illegal activity, and profiting accordingly.

Perhaps to address that argument in part, the defense sentencing memorandum also mounted a “sentencing disparity” argument by noting that two other defendants in unrelated cases involving unregistered virtual currency exchanges had been sentenced to 48 months in prison, even though they had declined to plead guilty prior to indictment (unlike Tetley), and whose cases arguably involved greater illicit profits, catering to criminals, and in one instance, a prior criminal conviction.

As noted, the Court imposed a sentence of one year and a day.  The practical import of the extra day is that Tetley now qualifies for “good time” reductions from the Bureau of Prisons, up to approximately 15% of the sentence imposed, whereas a sentence of “only” a year would have guaranteed 12 straight months of incarceration, potentially served entirely or in large part at the local federal detention center, rather than at a slightly-less-unpleasant federal prison facility.

More to Come

The Tetley case was not the first such prosecution, nor will it be the last.  The Department of Justice has filed similar charges against at least one individual involved in digital currency in the Eastern District of Michigan for allegedly laundering proceeds and failing to register as a money services business; this action has not proceeded to verdict. Needless to say, there will be more to watch in this space.  The Federal Bureau of Investigation alone reportedly has over 100 active investigations involving digital currency and alleged money laundering, narcotics trafficking, kidnapping and other offenses.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 205

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About this Author

Jessica Case Watt, Ballard Spahr, Deleware attorney, Commercial Litigation, Mortgage Banking, Securities Enforcement and Corporate Governance Litigation
Associate

Jessica Case Watt is an associate in the Litigation department. Ms. Watt practices complex commercial litigation, with experience in cases involving breach of contract, fraud, and disputes related to lending and finance agreements. She has experience representing commercial lenders in pursuing foreclosure actions to judgment and sale in the State of Delaware.

Ms. Watt practices corporate litigation, including matters of corporate control, corporate governance, statutory and contractual disputes, statutory demands for inspection of corporate books and records, and breach of fiduciary...

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 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He also counsels clients through every stage of a tax controversy – from audit through administrative appeal to litigation and collection.

Before entering private practice, Mr. Hardy spent more than a decade as a federal prosecutor. He served as an Assistant U.S. Attorney in Philadelphia, where he focused on fraud and tax cases. He also served as a trial attorney for the Department of Justice’s Tax Division in Washington, D.C., where he tried cases in a number of federal districts and helped write the Department's Criminal Tax Manual.

A national thought leader on the subject of criminal tax and money laundering law, Mr. Hardy is the author of  Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a well-reviewed and comprehensive legal treatise on the litigation of criminal tax, money laundering, and Bank Secrecy Act cases, published by Bloomberg BNA. He also serves as an adjunct professor at Villanova University School of Law, where he teaches a class on criminal and civil tax penalties in the graduate law program.

215.864.8838