Light Sentence Puts Damper on U.S.’s Offshore AML Efforts

U.S. prosecutors planned to send a message to the largely offshore crypto industry this week about the cost of ignoring the anti-money laundering (AML) laws at the core of an important chunk of financial regulation.

And they did, but it wasn’t the one they wanted to send.

On Friday (May 20), a federal judge sentenced Arthur Hayes, the former CEO of the BitMEX cryptocurrency derivatives exchange, to two years’ probation and six months of house arrest for years of all but ignoring requirements to collect and document customers’ personal identity information, which is required to comply with AML and combating the financing of terrorism (CFT) laws.

The Department of Justice (DOJ) had asked for six to 12 years in prison.

At his sentencing, Hayes said, “I deeply regret that I had a part in this criminal activity. My best years are ahead of me. … I am ready to turn the page and start again. I ask that you allow me to return home, deeply remorseful and able to start the next chapter of my life,” according to CoinDesk.

That was exactly what he got, and what the Justice Department didn’t want.

Tough Talk

Long an influential figure in the cryptocurrency industry, Hayes was indicted along with two BitMEX founders and an executive of the Seychelles-based exchange on Oct. 1, 2020. At the time, Audrey Strauss, then-acting U.S. Attorney for the Southern District of New York, alleged that Hayes and the others “flouted” the law by operating “a purportedly ‘off-shore’ crypto exchange while willfully failing to implement and maintain even basic anti-money laundering policies.”

“In so doing,” she said, “they allegedly allowed BitMEX to operate as a platform in the shadows of the financial markets.”

Founded in 2014, BitMEX was one of the largest derivatives platforms in the crypto industry at the time of the indictment. While it has fallen to No. 22, according to CoinMarketCap, BitMEX still had a 24-hour volume of $841 million on Tuesday (May 17), when it launched its first spot crypto exchange. The new platform allows traders to buy and sell cryptocurrencies in addition to futures, options and other derivatives contracts.

In 2020, FBI Assistant Director William Sweeney Jr. pointed to a comment attributed to Hayes, in which he said the firm had been incorporated in the Seychelles because the cost of bribing officials was “just a coconut” compared to the U.S. and elsewhere.

“They will soon learn the price of their alleged crimes will not be paid with tropical fruit, but rather could result in fines, restitution, and federal prison time,” he added.

The DOJ was successful with the fines and restitution part, with Hayes and cofounders Benjamin Delo and Samuel Reed each agreeing to $10 million fines, and BitMEX’s new leadership coughing up $100 million to the DOJ and to the Commodity Futures Trading Commission (CFTC). It also hired the CEO of Germany’s Börse Stuttgart stock exchange and began instituting an aggressive AML policy.

But the real scare-them-straight part of the indictment, serious jail time? Not so much.

‘Vigorously Enforce’

In Friday’s release, U.S. Attorney Damian Williams said his office would “continue to vigorously enforce United States law intended to prevent money laundering through financial institutions, including cryptocurrency platforms.”

Outside of the case against former Ethereum developer Virgil Griffith — who got five years last month for violating sanctions while attending a North Korean cryptocurrency conference — Hayes’ AML charges were the highest-profile criminal prosecution within the crypto industry.

See more: Crypto Developer Gets 5-Year Sentence for Helping N. Korea Skirt Sanctions

And in February, the FBI announced the creation of a National Cryptocurrency Enforcement Team, with language making clear that crypto’s use in money laundering is a priority.

“With the rapid innovation of digital assets, we have seen a rise in their illicit use by criminals who exploit them to fuel cyberattacks and ransomware and extortion schemes; traffic in narcotics, hacking tools and illicit contraband online; commit thefts and scams; and launder the proceeds of their crimes,” said Assistant Attorney General Kenneth A. Polite Jr. in an announcement.

Also read: Will FBI’s New Crypto Crime Unit Bust Industry’s Mainstream Image?

Sending Messages

The jail-free sentence comes as U.S. regulators are doubling down on enforcement. Most notably, Securities and Exchange Commissioner (SEC) Gary Gensler nearly doubled the size of the SEC’s Crypto Assets and Cyber Unit enforcement team earlier this month.

Read more: These Bills Could Change SEC’s Crypto Enforcement Trend

That came on the heels of a record $100 million fine agreed to by crypto exchange BlockFi in February over the sale of yield-baring crypto lending products. In the announcement, Gensler made clear that the settlement’s size was intended to be a message to the crypto industry.

“This is the first case of its kind with respect to crypto lending platforms,” Gensler said. “Today’s settlement makes clear that crypto markets must comply with time-tested securities laws.”

Related news: BlockFi’s $100 Million Settlement With SEC Raises Internal Discussion

It was likely a factor in the recent decision by competing exchange Coinbase — which spiked a similar lending product last year after the SEC threatened to sue if it launched — to register as an SEC-regulated brokerage.

More here: Coinbase Registers With the SEC To Prevent Regulatory Setbacks