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The Latest on Cryptocurrency, Offshore Tax Avoidance and Money-Laundering, and Whistleblowing: A Report from OffshoreAlert Miami 2019

Posted  May 3, 2019
By Michael Ronickher

“A diverse collection of the hunters and the hunted.”

That’s how the Wall Street Journal described the OffshoreAlert Conference in 2009. The 2019 conference was no different, bringing together those who work in the offshore industry, the government enforcers who try to stop the unscrupulous among them, and the asset recovery professionals who pursue lost funds. Alongside them were whistleblowers and their lawyers, who play a huge role in exposing and stopping misdeeds.

This year, a few themes stood out in the conference. First, as at any financial gathering these days, cryptocurrency was on everyone’s lips, especially its use in fraud. Second, the conference continued its long focus on offshore tax avoidance, bribery, and money-laundering. Running throughout was a robust discussion of the critical role of whistleblowers in countering all these abuses.

Cryptocurrency and Fraud

Crypto was the dominant topic of the conference, with numerous panels addressing its various forms, the hype and the reality, the many ways it can facilitate fraud, and efforts to rein in its abuse. Given the focus of the conference, and this blog, we’ll skip past the legitimate uses of crypto (convenience, instant transfers, and serving the unbanked) and get straight to the abusive.

One panel broke out the common types of crypto abuses:

  • Financial Crimes: Crypto’s instant transactions, portability, and international reach mean it can be used as a new tool for the furtherance of tax avoidance, money-laundering, and bribery.
  • Scam Initial Coin Offerings: The first offering of a particular cryptocurrency for sale, called an Initial Coin Offering or ICO, can be a means of preying on the unsophisticated. Some ICOs are completely fabricated, with phony bios of nonexistent team members and technical whitepapers copied from other, legitimate cryptocurrencies.
  • Pump and Dump Schemes: Crypto can provide a new variation of the classic pump and dump scheme, where owners of a stock try to drive the price up before selling off their holdings at an artificial peak. In the crypto world, this is common at the ICO stage, or even beyond, whenever false claims can hype up demand and permit the originators or dominant holders of the cryptocurrency to earn massive phony profits.
  • Ponzi Schemes: Crypto investments can also be used as the vehicle for a traditional Ponzi scheme, where new adopters are necessary to give artificial returns to the early adopters. Given that crypto is widely misunderstood, it can be the perfect cover for a bogus scheme.
  • Traditional Theft: Crypto also provides criminals new opportunities for theft. They can hack investors’ crypto wallets and steal their currency; they can set up fake wallets to bilk counterparties; and they can set up phony crypto exchanges to steal customers’ money.

Thankfully, the conference made clear that regulators have taken notice and are beginning to find their feet in enforcing the law in this new arena. The SEC, CFTC, and IRS all assert regulatory control over cryptocurrency under certain circumstances. For the SEC, a given cryptocurrency must qualify as a security, or the “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The SEC developed its application of this test to cryptocurrency in its now-famous report on The DAO, a German crypto ecosystem. Similarly, as this blog has previously reported, the CFTC has the authority to regulate crypto as a commodity. The IRS has taken the position that cryptocurrency investments are assets that should be treated like any other for tax purposes, permitting it to tax returns on crypto investments. Through its Criminal Investigations Division, the IRS also pursues money-laundering crimes committed with cryptocurrency.

On a panel, Martin Zerwitz, Senior Counsel in the SEC’s Cyber Unit, described some of the areas his agency is targeting to curb crypto abuses. The SEC has challenged fraudulent ICOs and penalized companies for failing to register their cryptocurrency as a security. It has also targeted promoters: paid boosters of crypto tokens who have failed to disclose that they are being paid for doing so. The SEC has also looked at exchanges and investment funds investing in cryptocurrencies, which may, depending on the circumstances, need to register as broker-dealers or exchanges.

Combatting Offshore Tax Avoidance, Bribery, and Money-Laundering

The rise of crypto continued as a theme in conference discussions of combatting offshore financial crimes like tax avoidance, bribery, and money-laundering. In numerous panels, law enforcement professionals described the growing use of cryptocurrency to try to avoid the eye of the law. With new Bitcoin ATMs coming online around the world, moving money across borders has never been easier. Indeed, one panelist noted that the old adage of “follow the money” has had to become “follow the value”, because cryptocurrency and trade-based money laundering have meant that traditional money trails sometimes do not even exist.

Law enforcement has adapted to match. The conference featured a panel devoted to the j5, aka the Joint Chiefs of Global Tax Enforcement, a coalition announced in July 2018 that brings together the tax enforcement agencies of the U.S., U.K., Canada, Australia, and the Netherlands. It was formed in response to the shifts in the international tax landscape to coordinate actions against tax evaders and money launderers. The panelists, the two top criminal tax enforcers in the U.S. and Netherlands, emphasized that one of the j5’s main goals is permitting quick interaction between agents internationally, a critical step to match the new speed of money movements.

Whistleblowing Is a Strong and Necessary Counter

Two special agents of the FBI, presenting on that agency’s new Latin American anti-corruption and anti-money-laundering initiative, made a complementary point: the manifold new ways to avoid detection mean that traditional law enforcement tools are more important than they have ever been.

One of the key components: whistleblowers. By working with cooperating informants, law enforcement is able to learn about tax evasion, bribery, and money laundering that might otherwise escape detection. Even when it has been detected, it can be hard to unravel and prosecute with out the assistance of those on the inside.

Thankfully, this increased need for whistleblowers is matched by a growing recognition and reward of their value. Throughout the conference, those charged with enforcing our laws to stop fraud, bribery, tax evasion, and other financial crime emphasized the critical role of whistleblowers. For example, a panel moderated by Constantine Cannon Partner Eric Havian featured the heads of the SEC, CFTC, and IRS whistleblower programs, all of whom work daily with whistleblowers who want to help put a stop to untoward behavior. As we report here, the panelists described the dramatic increase in whistleblower tips – and in the rewards paid out by the agencies after successful use of those tips.


Tagged in: CFTC Whistleblower Reward Program, Cryptocurrency, Financial and Investment Fraud, Importance of Whistleblowers, IRS Whistleblower Reward Program, Market Manipulation and Trading Violations, Money Laundering, Ponzi Schemes, SEC Whistleblower Reward Program, Securities Fraud, Tax Fraud,