Topic: BitInstant CEO arrested by FBI (Read 6700 times)

The first source is the complaint filed by the Manhattan US Attorney.

http://www.justice.gov/usao/nys/pressreleases/January14/SchremFaiellaChargesPR/Faiella,%20Robert%20M.%20and%20Charlie%20Shrem%20Complaint.pdf

The official statement by the US Attorney's Office is here.

http://www.justice.gov/usao/nys/pressreleases/January14/SchremFaiellaChargesPR.php

A link to the Reuters article quoted in the OP is the first thing in the OP.

Pardon me for bothering but where can I find a link to read the article or whatever the first source is?

he could not resist poking the stick into the capitalist hornets nest,,,throw in some bath salts & funny money ~ good to go !

:\

~imho the eyebrows is what sealed the case lolllzzz^^

That kinda sums it up.  Fun fact for those playing at home.  You can't discharge govt fines and fees in bankruptcy.  So punitive really is punitive.

Sometimes fines are meant as licensing fees.

Other times they are intended to ruin a company and its principals forever.

Guess which category Wachovia, HSBC and JPMorgan get, and which Charlie Shrem will get.

How can he pay the fines? They've taken control of all his BTC. Personally, I think they will try to hammer him, but it depends very much on who he is serving up to the feds. If he spills all, he might get away with a short term. If not, 20 years.

I would agree.  But I doubt it goes to court.  The prosecutor will threaten 25 years, and settle something on the order of 3 to 5 plus ruinous fines.

No doubt but I guess it comes down to how far is he willing to go.  Knowing HSBC executives for example laundered billions and faced not a day in jail will he still seek the max jail time for the employee of this company in order to prove a (hypcritical) point?  Or will he be satisfied with destroying the company along with probation and a plea?  I guess we'll find out soon enough.

After watching the New York regulatory hearings is there any doubt the prosecutor is looking to prove a point?

Well that is up to a jury.   I think the conspiracy charge might be beatable and the operating an unlicensed money transmission business is likely just garbage to pad the complaint.  Still the charges on willfully failing to file mandatory reports seem pretty hard to beat.  

The civil penalties (which would be against Charlie and the company jointly) are $25,000 per incident.  The complaint never states the number of incidents but if we assume ~$1M /$500 = 20,000 transactions.  Now the other party often exceeded the limits (which Charlie had to clean up) so lets say it was only 10,000 incidences which mandated reporting @ $25,000 penalty each that is $250 million?  Ok say it was only 5,000 and the govt can only prove 2,000 of those.  At $25K a pop that is still $50M likely more than the combined assets of both the company and the man.

The criminal penalties for willful non-compliance are 5 years, 10 years if in connection with another crime.
http://www.law.cornell.edu/cfr/text/31/1010.840

Granted I am not a lawyer and this isn't legal advice but lets assume he beats or has dismissed all the other charges.  The charge for willfully violating the BSA while less tha money laundering still carries some weight.  Then again maybe they let him plead out.  Maybe the prosecutor will accept 5 years probation, and enough fines to force the company into bankruptcy as the "pound of flesh".  If the prosecutor has a strong case and is looking to prove a point, he could go for a lot more.   Reading the complaint the prosecutor appears to be holding a good hand (at least on the lesser charges) so a lot will depends on what the prosecutor wants to do.

ftfy

Literally, at times.

http://www.nydailynews.com/news/national/new-mexico-man-sues-authorities-anally-probed-8-times-article-1.1507651
http://www.youtube.com/watch?feature=player_embedded&v=EQ6xemaR6Og

Nobody said life was fair. In particular, nobody said the legal system was fair. "The law is an ass" sums it up best.

What shitty legal system. The people you want to see rot in prison, like Trendon Shavers, will get off without a scratch and Charlie will rot. Fuck the world.

Essentially you're saying Charlie is fucked. What is the penalty for that then? 20 years and fines? Just fines?

The actual charge is "conspiracy to engage in money laundering" not money laundering.
http://www.justice.gov/usao/nys/pressreleases/January14/SchremFaiellaChargesPR/Faiella,%20Robert%20M.%20and%20Charlie%20Shrem%20Complaint.pdf
(see count #3)

A conspiracy charge (and this applies to any crime) doesn't require all conspirators to be directly engaged in the underlying crime.  If they were, the prosecutor would just charge them with the underlying crime (it is often easier to prove than the conspiracy).  All that is requires for a conspiracy charge is for each person to further the underlying crime by action and intent.  

Of course the fact that BitInstant is/was a MSB, and Charlie was the compliance officer, isn't going to go over well in court.

Pro tip #1: Don't register as a MSB if you intend to violate the obligations of a MSB.
Pro tip #2: Don't accept the role of the company compliance officer if you will feel tempted to break those rules in the future.

Yes, I understand the difference. Please reread what I wrote to begin with. Or follow this...

My naive definition of 'money laundering'* is moving money that was obtained through illegal means in order to conceal its illegal derivation.

The point is that, if this be the definition (again, perhaps naive), then if the money was not obtained illegally, nothing one does with that money is to be considered 'laundering'.

So in my mind, it comes back to whether or not selling XBT for FRN is in and of itself illegal. And if not, does associating through a venue that is also used for illegal purposes make it illegal? My guess is that this is a defensible position.

Though I'll agree with you - the feds usually make whatever they want stick.

Governments and Empire have been the running the silk road drug empire since it was donkeys on gravel road.

Ever heard of the Opium wars.

Actually, he's not being charged with money laundering, but conspiracy to commit money laundering. This means he is not alleged to commit money laundering himself, but helped others do it. He logically cannot have committed money laundering (disguising the illegal origin of money), as the illegal trades on Silk Road happened after BitInstant/Charlie sold Bitcoins to BTCking. What we have here is called "reverse money laundering", when "clean" money is used to commit crimes.

That being said, I regrettably agree with Goat that it does not look good for Charlie. Even though it does not look like he committed money laundering, that's not enough to get him off the hook.

Government says a lot of things, and does a lot of other things.

Selling BTC for fiat will be defined as money laundering by totalitarians if it isn't already.

Oy Vey. What if, what if... whaat iiiif?

I think de gubmint must first establish that 'it' (presumably BTCKing selling XBT for FRN) is illegal. I think this is already a stretch goal. Ever sell bitcoins for cash, Goat? (Don't answer that, just think about whether you might have once found yourself in an instance where you might) Sketchy website or not, I don't think this is, in and of itself, illegal.

Not sure. If the money is not known to be used for an illegal purpose, can any of the activity constitute laundering?

I would hope there is room here for a good lawyer to beat this.

AFAIK, it is not illegal in and of itself to sell XBT for FRN. Agreed?

The fact that this sale happens on a site that also facilitates the illegal sale of drugs would seem irrelevant to me. Well, not _irrelevant_, but defensible. The FRN <> XBT transaction itself is not rendered necessarily illegal by association (at least I would think).

If there was such a thing as an 'illegal website', it would simplify the government's position. It might conceivably make such FRN <> XBT transactions happening upon such a site to be necessarily illegal. But I don't think there is any such thing as an 'illegal website'.

And if the FRN <> XBT transactions are not illegal, how could facilitation of any such transactions be money laundering?

Yes, I understand that statutory definitions require reporting of any 'suspicious activity'. However, if the activity (by BTCKing) is known (by Shrem) to not be illegal in and of itself, how could it be suspicious?

cue(wrath);

ETA: I would not be surprised if the wording "illegal website" was included to puposefully inflate the possible reaction in the mind of the reader. I expect this trope to be repeated throughout whatever proceedings will follow.

There are several oddities in the complaint. As just one example, the assertion is made therein that SR was an 'illegal website'. WTF is an illegal website? Sure, it was a website that allowed some of its users to engage in illegal activity. But the distinction between that and 'illegal website' is significant.

HSBC's "deal" involved paying $5B, accepting a $20B plus prison time suspended sentence with 5 year probation, and the not so subtle threat that if HSBC went down it would take down the US financial system, and plunge the country back into recession.

Not sure that is going to work here.

if his counsel advised him to stop and the did not, then he deserves the Darwin award  

When did Shrem's lawyer tell Shrem that what he was doing was illegal?  If Shrem's lawyer did say that, then did Shrem have to report himself to the feds under 31 USC 5318(g)?  Or is he protected from being a witness against himself under the Fifth Amendment?

While I agree that the case might not go well for Shrem, it isn't quite as open-and-shut as you imply.  If Shrem has a good lawyer, maybe they'll try to negotiate a settlement similar to the HSBC case.

Assuming what is alleged in the complaint is true, it's not clear whether what Faiella did was illegal.  Selling bitcoins is not illegal per se. Does it become illegal when done in a venue known for illegal drugs?

The case against Shrem is a bit more complicated.  He's charged with willfully failing to report Faiella to the feds.  Was that illegal?  That depends on whether Shrem thought what Faiella was doing was illegal.

How a judge and jury would view this conduct is uncertain, but history suggests it would not be looked upon favorably.  Two decades ago, Gary Tucker went to prison for selling grow lights.  Maybe a present-day jury would be more sympathetic to Shrem, and maybe not.

It's a reference to this:

http://nymag.com/news/features/tide-detergent-drugs-2013-1/

lol. yeah, IIRC is right. I missed the soap category.

IIRC, they did sell a good bit of gardening equipment, from grow-lights to shovels. Maybe someone sold some Lava soap or something there.

(or the shovels were moved to their weapons site... I think they were sold in gardening, though, which was an actual category, at least a couple years ago or whenever it was I last visited.)

That's roughly what happened with me. I didn't take Bitcoin seriously or bother reading much on it until I learned about Silk Road (I think it was actually Chuck Schumer, just recently at the NY conference, who made the video of himself browsing in disgust). It was a pretty significant proof-of-concept. That's when I said "wow, people are actually doing something NEW with this." Before that, it was just some goofy online currency weirdos used. I'd guess it's similar with all the people being introduced to Bitcoin and hearing that it has marginally lower fees... if you either trust someone with your money or spend weeks downloading a blockchain after more weeks researching it.

If that was proof-of-concept, I'd call this proof-of-failure... or at least an alert that there's still a good ways to go -- not with BTC (there've been some pretty awesome developments lately... don't think anyone can complain about a lack of innovation in the privacy dep't), but communications. They're a good bit dependant on each other. If your communications aren't secure, it doesn't really matter how obfuscatable Bitcoin transactions are. I used PGP in the early days of BTC, but it's too much of a hassle unless you're only talking to a small handful of people each week. Frankly, stuff like selling someone coins he claims to resell on a "black market" wouldn't even cross my mind to encrypt, though I don't run a $multi-million MSB. The Windows GPA software is terrible and crashes pretty frequently. Very user-unfriendly.... built-in email tools are pretty decent if you're willing to spend a few minutes reading up on it and downloading the software. GPG's not totally secure by itself, though, even if the user-friendliness problem were solved... but now that I think about it, I can't really recall a story where government put in much effort trying to break cryptography (well, trying to break INTO encrypted documents, anyway). I'm not sure I've ever seen the words "government brute-forced" together. I guess they generally still use crusty old tactics, which is still quite effective.

How much soap was sold at SR? Please be serious here ...... it was a place to sell illegal drugs, not soap.

It's an analogy.  Of course he was selling bitcoins and not TVs.

What if he was selling laundry detergent?  There have been cases where laundry detergent was traded for drugs.  Is it illegal to sell soap?  What if they customer wants 10 boxes of soap?

Try actually reading the complaint.

And you know what the FBI found in his inbox do you? Nothing to do with selling TV's is my best guess.

How exactly did he launder money?  Shrem is accused of having customers who were probably junkies.  It was dumb, yes, but it doesn't seem to meet the legal definition of money laundering.

What if I want a TV and my neighbor offers to sell me his?  Nothing wrong with that, right?  What if I think that my neighbor is a pothead?  Does my paying for the TV suddenly become money laundering?  What if my neighbor spends that money on drugs?

The case against BTCKing is even more of a stretch.  What he is accused of doing is taking orders and passing them along to BitInstant.  The customers paid BitInstant without him touching the money.  Merely arranging a deal between buyer and seller is money laundering?  Wow.

May need to send out a remote-controlled robot in our place around courthouses... 1 person arrested is 1 too many.

This forum search capabilities are the worst.

Heard these news, rushed to find more info on the forums, and what do I get? 2012 threads? Had to use advanced search, which is not perfect. In the end I just stumbled on this topic in "unread" section.

I guess most of early adopters have used SR in one way or another, and some % of those early adopter became big. Me, myself, first heard about bitcoin in some thread about SR on 4chan, not the other way around.

Continue to lose the cold civil war by default, until .gov decides it's democide time and takes it hot.

Hey, that's the US government for you. Is it fair? No. Is it what they do? Yes. I don't think water-boarding people at secret locations was fair either but as they say in the States, "what are you gonna do"?

>0%, while <0 fucks are given about the legal distinction, because all the BTC is going to be auctioned off in a completely above-board, non-crony fashion according to BurtW.

Remind me - what % of stuff sold on SR wasn't "illegal drugs"?

And all the people on SR who had nothing to do with trading drugs or any other "illegal" thing will be persecuted as "guilty by association", because GBA's not indefensible bullshit, at all!

I bet this is the tip of the Silk Road iceberg. Take down the main man, pressure him to name names, the rest will be an ugly mess for a few years to come. Charlie Shrem won't be the last big name in the bitcoin community to be arrested.  The Feds love breaking up drug rings, good for their resumes. And SR was about an easy target as you could imagine. People using SR got told BTC was totally anonymous lol

Man, seems like there is always something shady going on.

The FBI has read his (unencrypted) inbox. I think you might find a lot of talk in there about stuff other than just "selling btc for cash". Just a guess

so the CEO got arrested for supplying BTC to someone who does legal cash sales?   I don't get it.

Fincen directive is from 2013 in case you haven't noticed. Before March 2013 Fincen stuff was not applicable to crypto, was it?

But I give up you got more time than me - you win - whatever you say. 

I've given up on the Bitcoin community's common sense long ago.

Even if true, nobody has still claimed selling Bitcoins for cash is illegal.  Even in the "made up complaint" that was never stated.

A complaint, by definition, is stuff made up (and so are laws, except the laws of physics)

Just that the entity making it up, has lots of firepower.

Nobody has said selling Bitcoins for cash is illegal.  It might help if you stopped making stuff up and actually read the complaint.

BTCking claimed that selling btc for cash is legal, if you read the complaint

So why should he have used PGP et cetera?

Was there any Fincen directive in 2012, saying that it isn't? No.

http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

Of course he could not know that 2 years later the rules were changed retrospectively

In 1932 owning gold was legal and in 1933 it was made illegal, bad for you if you bought gold and your name was on the jeweler's client list  

Or exercising any civil liberty whatsoever (they're all "illegal").

Lots of people use encrypted email. Particularly advisable if you are laundering drug money.

Dooh, how many people actually are willing and able to use PGP? People who cannot buy bitcoins themselves and need BTCking? And even PGP leaves trace who is communicating.

Ah right. Thx for info. Amazingly simple. Not even using encrypted email. That really isn't very smart.

He was the top BTC vendor on SR for selling coins. All the feds had to do was make an order and ask trustcash (payment processor) who's email address was used to sign up for the service, then seize the inbox and read all the unencrypted Shrem laundering emails. BTCKing apparently used his profits to get high out of his gourd on SR narcotics which is probably why he was so sloppy and prone to clusterfuckness

So he was a vendor at SR? The report I read said he was a "buyer". A vendor makes much more sense of course.

Very interesting that the FBI just happened to "hit upon" one of the big players in bitcoin though. Makes me think:
1) They have details of lots of SR sellers, and are starting with the "big fish".
2) There are lots more arrests to come

If you read the complaint, all they did was buy bitcoins off the SR vendor.
That led them to his email "BTCking@safe-mail"
Since safe-mail is not safe, nor encrypted, the feds obtained his entire inbox
Nothing was deleted or encrypted so every single email Shrem sent to this guy was sitting there waiting for the FBI.

No magic FBIz blockchain mining or informants were needed. Seize email inbox, read emails.

wow - Charlie Shrem was a "player" on Silk Road? Wonders never cease. Who's next on the list of bitcoiners that were into SR and hope they never get found out?

This has nothing to do with his nationality, nor is it a crackdown on bitcoin exchanges in general or BitInstant in particular. Here's the smoking gun:
If that's true, there's nothing more to be said. You can't make a point of banning someone for illegal activity, then tell them on the down-low that they're not really banned after all and that their illegal activity is A-OK as long as everyone thinks they're banned. That's not a good strategy for staying out of prison.

Iran? Pakistan International Airlines? Gotta love racially-motivated prosecution! Fits perfectly with their "everyone in Pakistan is a terrorist because we drone striked them!" propaganda.

this dude it sounds like he was deep in the game + was he an Iranian national?..some connection he name dropped PIA in relation to political fringe groups getting funded with bitcoins back in 2012! :\

More victimless "criminals" having the boot stamping on their face forever. Just a matter of time before every single localbitcoins seller is prosecuted for not harming anyone, because "economic liberty must be destroyed"!

Two bitcoin exchange operators charged in money laundering scheme

Reuters:

"Federal prosecutors in New York announced charges against Charlie Shrem and Robert Faiella, both operators of bitcoin exchange businesses, for attempting to sell $1 million in the digital currency to users of the underground black market website Silk Road, which was shut down by authorities in September.

According to the charging document, Shrem, 24, chief executive officer of the exchange BitInstant.com, changed cash into bitcoins for Faiella, 52, who ran an underground bitcoin exchange through the username BTCKing on Silk Road's website. The criminal complaint says that Shrem, in addition to knowing that Faiella's business was funneling money into Silk Road, also used Silk Road himself to buy drugs."