The U.S. Department of Justice has recently engaged in a number of high-profile investigations and prosecutions of Bitcoin and digital currency-related companies and entrepreneurs.
Two prominent and headline-grabbing examples: In 2014, the DOJ prosecution of Bitcoin pioneer Charlie Shrem, resulting in a guilty plea and sentence of two years imprisonment. And more recently the DOJ, in coordination with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), entered into a settlement agreement with Ripple Labs Inc. to resolve a criminal investigation. That settlement resulted in $700,000 in civil money penalties and the company having to undertake extensive remedial measures.
What many of these law enforcement actions have in common, including the two just mentioned, is a single federal criminal statute on which they rely, in whole or in part. That statute is 18 U.S.C. § 1960, which makes it a federal crime to operate an unlicensed money transmitting business. Of all the criminal charges federal prosecutors can investigate and bring, few are as easy to prosecute and as hard to defend against as a 1960 charge.
To understand why this is so, you need to understand what 1960 says today, how it has changed over time, what changed as a result of the Patriot Act in 2001, and how it is commonly interpreted.
18 U.S.C. § 1960 Today
As it stands today, 1960 provides, in pertinent part:
Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both. (Emphasis added.)
1960 then goes on to list three categories of unlicensed money transmitting businesses, which are, in a summarized fashion:
1. Those operating in a state that requires that business to be licensed and makes it a misdemeanor or felony not to do so.
2. Those that fail to comply with Treasury Department regulations covering such a business (e.g., registering with FinCEN).
3. Those that transmit money known to the transmitter to come from or intended to finance criminal activity.
Importantly, in the first two categories (state licensing and Treasury Department compliance), 1960 on its face does not require the DOJ to prove that the defendant knew that he, she, or it needed a specific state license or had to comply with Treasury regulations.
A 1960 charge is a serious offense. It is a felony and punishable by imprisonment of up to 5 years and/or a hefty fine. Also the property connected to a violation can be seized and subjected to civil and criminal forfeiture.
18 U.S.C. § 1960 Before 2001
Before 2001, 1960 was significantly different, and it was much more difficult to prosecute. The Patriot Act amended the statute to eliminate the “loophole” requiring a defendant to know that he, she, or it was operating illegally. Pre-2001, the relevant opening portion of 1960 read:
Whoever conducts, controls, manages, supervises, directs, or owns all or part of a businessknowing the business is an illegal money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both. (Emphasis added.)
In addition, the first category of unlicensed money transmitting businesses before 2001 read:
[Those] intentionally operated without an appropriate money transmitting license in a [s]tate where such operation is punishable as a misdemeanor or a felony. . . (Emphasis added.)
The second category (Treasury Department compliance) was unchanged with the Patriot Act, and the last category, which focused on money laundering concerns (as noted above), was a new addition.
The Patriot Act’s removal of “knowing the business is an illegal money transmitting business” in the first part of 1960 and “intentionally” in the first category of unlicensed money transmitting businesses has had major repercussions.
How 18 U.S.C. § 1960 Has Been Interpreted
According to the DOJ and the few courts that have confronted the issue (with reported decisions), 1960 is now a general intent crime, meaning there is no criminal intent required to be guilty of committing it. A defendant only has to commit the specific prohibited act to be found guilty (e.g., a defendant only has to be operating a money transmittal business in State X without the required state license).
The changes to 1960 as a result of the Patriot Act are important for the emerging Bitcoin and digital currency industries, which are under intense law enforcement scrutiny. This is because only three states (SC, NM, MT) do not have money transmission licensing regimes. For the 52 other states and territories, that do, the requirements can be confusing and complex. Knowing if you need a state license is not always so clear, especially with certain innovative business models. And the Treasury Department has numerous requirements that are burdensome and complicated to implement properly, even if registering with FinCEN is itself relatively easy and straightforward.
It should also be emphasized that an individual or group of individuals can be charged with a 1960 offense. 1960 is not limited to entities that are incorporated or otherwise have some formal legal status.
Overall, as it stands today, the DOJ’s view on 1960 is that it does not matter if a defendant knew he, she, or it had to comply with the law’s provisions, as long as the DOJ can prove that that defendant did not comply, that defendant can be charged with and found guilty of a 1960 violation. This view obviously provides the DOJ with tremendous discretion in bringing a 1960 charge and with a relatively low hurdle for securing a conviction. Thus, if an individual or business accidentally failed to get a state license or violated a minor Treasury Department rule, for example, they could face a felony prosecution.
All that said, attorneys defending a client charged with a 1960 violation have argued that despite the Patriot Act changes to 1960, there remains a criminal intent requirement, and some judges have agreed to a certain limited extent. For example, in U.S. v. Talebnejad, a father, mother, and their son were charged with violating 1960 because they operated two money transmitting businesses in Maryland without the necessary state license, where it is a crime do so “knowingly and willfully.” The district court held that the federal prosecutor needed to prove that the family acted “knowingly and willfully” as the state law requires. The prosecutor appealed, and the Fourth Circuit reversed, finding that the Patriot Act amendments removed any intent requirement. A dissenting appellate judge held that the Patriot Act only removed 1960’s previous intent requirement if the underlying conduct was tied to a federal offense (category two: Treasury Department compliance), not if the charge was predicated on a failure to abide by state regulatory requirements (category one).
Of course, in response to a 1960 charge, a savvy criminal defense attorney will not only potentially raise the issue of criminal intent (possibly with some success), but he or she will also explore a number of other potentially fruitful defenses, depending on the facts and circumstances of the case. One is arguing that the client was not operating as a business but rather in a personal capacity (e.g., only buying and selling the bitcoins for personal investment purposes). Another is appealing to the prosecutor’s broad discretion and explaining that, for example, the failure to register with State X was an accidental oversight done by an otherwise fully compliant client. As one last example, a defense attorney may also be able to argue successfully, that the client failed to comply with the law based on the advice of competent legal counsel (which can offer a complete defense to the charge).
But none of these potential defense arguments, or any others for that matter, take away from these facts. 1960, as the DOJ interprets it, provides almost unfettered prosecutorial discretion, making it a relatively easy criminal charge to bring and secure a conviction. And because the courts so far have appeared to line up behind the DOJ’s interpretation, it can be a very difficult charge to defend.
Brian E. Klein is a partner at litigation boutique Baker Marquart LLP, where his practice focuses on criminal and regulatory defense and civil litigation. He has extensive experience representing clients involved with Bitcoin (including many leading entrepreneurs and start-ups), and he formerly served as a federal prosecutor in Los Angeles from 2007-2012. In July 2015, a client he represented in federal court facing a single criminal charge of a 1960 violation had his case dismissed before trial.
In this backgrounder and for the purposes of argument, Mr. Klein assumed that 18 U.S.C. § 1960 applies to bitcoin and digital currencies and the people and businesses that utilize them in some manner (e.g., a bitcoin exchange).