In the late 20th century when New York State’s money laundering statute, Penal Law Article 470, was severely limited before it was amended in 2000, law enforcement sought a viable weapon to combat rampant money laundering of illicit narcotics sales through unlicensed money transmitter businesses. These illegal enterprises were everywhere, many being used as conduits by New York-based agents of the then all-powerful Cali and Medellin drug cartels. See, e.g., Stephen Labaton, Unassuming Storefronts Believed to Launder Drug Dealer’ Profits, N.Y. Times (Sept. 25, 1989) p.1; Laura L. Castro, Customers Put Funds at Risk At Unlicensed Money Houses, Newsday (June 27, 1988) p.5; Peter A. Crusco, New York’s Money Laundering Statute, NYLJ (March 13, 2000), p.1.
In the midst of all this chaos, law enforcement discovered a little used weapon, a criminal statute reposing in the Banking Law, concerning “Transmitters of Money,” §650, which became a key tool in enforcement efforts against the powerful cartels, and a staple for search warrant applications many of which resulted in significant arrests of international money laundering targets based in New York.
Today, money transmission statues nationwide have been taken out of mothballs to confront a new threat posed by the availability of a new laundering mechanism—the marketing of the little regulated virtual currencies—some commonly referred to generically as bitcoins. The interplay between the virtual currency tide and present day money transmission statutes will be addressed here.
Section 641(1) of the New York State Banking Law provides in pertinent part: “No person shall engage in … the business of receiving money for transmission or transmitting the same, without a license … .” Money transmitter licensing requirements and anti-money laundering compliance regulations are set forth in Article 13-B of the Banking Law and regulations thereunder. See §§640 to 652-b, et. seq.; 3 NYCRR §§406, 416-418 (2019).
The prerequisites to obtain a license include a background check, financial disclosure and the posting of a half million-dollar bond to protect the public. Licensees are subject to administrative examination of their records. See 3 NYCRR 406; United States v. Velastegui, 199 F. 3d 590 (2d Cir. 1999), cert. den. 531 U.S. 823 (2000). The pertinent regulations of the New York State Department of Financial Services (NYSDFS) concerning licensing of “virtual currency business activity” adopted in 2015 are found in 23 NYCRR Part 200. See, e.g., 23 NYCRR §§200.3 “virtual currency licenses”; §200. 2 definitions: (e) “fiat currency”; (o) “transmission; (p) “virtual currency”; and (q) “virtual currency transmission.”
Banking Law §650(2) provides in pertinent part, that “any person who either engages in the business of receiving money for transmitting the same … without a license … shall be guilty of a Class “A” misdemeanor.” The law was amended effective Nov. 1, 1990 and increases the crime to a class “E” felony when certain circumstances exist such as in the course of that violation the offender knowingly receives or agrees to receive for transmission from one or more individuals a total of $10,000 or more in a single transaction. See Banking Law §650(2)(b)(1). The legislature intended with the felony provision to shift the risk/reward ratio for money laundering activities more in society’s favor.
Historically, criminal enterprises used unlicensed money transmitters for converting, moving and laundering their enormous cash profits from lucrative rackets and the narcotics trade, as well as, using the “float” to fund other illicit ventures such as loan sharking. Terrorist organizations also used these same financial conduits to conceal, move and finance their terrorist plans. Similarly, criminal organizations may use the new virtual currencies that are little regulated to facilitate their criminal schemes. These digital currencies may be utilized to launder and thereby conceal their illicit profits, a necessary endeavor for their organizations to evade detection by law enforcement and succeed in capitalizing on their profits. See, e.g., United States v. Ulbricht, 31 F. Supp. 3d 540, 570 (S.D.N.Y. 2014) aff’d 858 F.3d 71 (2d Cir. 2017).
A violation of Banking Law §650—that is, that defendant engaged in the business of receiving money for transmission or transmitting the same—has been established in various ways. For instance, in United States v. Bah, 574 F.3d 106, 116 (2d Cir. 2008), the U.S. Court of Appeals for the Second Circuit held that bank records showing total transfers of $1.2 million, spreadsheets and charts including recipients’ and senders’ names, and other records and information was “probative evidence that [defendant] operated an unlicensed money transmitting business in New York.”
Additionally, as per Banking Law §650(2)(b)(1), a violation thereof may be proven where there is proof that a defendant knowingly received or agreed to receive “for transmission from one or more individuals a total of ten thousand dollars or more in a single transaction, a total of twenty-five thousand dollars or more during a period of thirty days or less, or a total of two hundred fifty thousand dollars or more during a period of one year or less.” Banking Law §650(2)(b)(1). In United States v. Mazza-Alaluf, 621 F.3d 205 (2d Cir. 2010), defendant was determined to be in the business of receiving money for transmission where the evidence demonstrated that the defendant received wire transfers from individuals, made over 1,000 wire transfers himself, and by his own admission, received and transmitted tens of millions of dollars.
Unlicensed money transmission is also a federal offense as per 18 U.S.C. §1960. Under §1960, in pertinent part, an “illegal money transmitting business” is defined to mean a money transmitting business which affects interstate or foreign commerce in any manner or degree and is intentionally operated without an appropriate money transmitting license in a state where such operation is punishable as a misdemeanor or a felony under state law; or fails to comply with the money transmitting business registration requirements under section 5330 of Title 31, United States Code, or regulations prescribed under such section.
Defendants charged with unlicensed money transmission in connection with virtual currency exchanges have asserted several defenses that focus on the wording of the money transmitter statutes they are charged with violating. For instance, if the statute requires a movement of “funds” or “money,” defendants have contended that the word funds or money should be limited to currency, that is, a sum of money or liquid assets easily converted to cash, or a medium of exchange authorized or adopted by a government as part of its currency. See, e.g., United States v. Murgio, 209 F. Supp. 3d 698, 708 (S.D.N.Y. 2016).
Nevertheless, courts have determined that virtual currencies are “funds” or “money” because they can be accepted as payment for goods and services. More specifically, these virtual currencies function as pecuniary resources, are used as a “medium of exchange,” a means of payment, can be easily purchased in exchange for ordinary currency, act as a “denominator of value, and are used to conduct financial transactions. See, e.g., United States v. Ulbricht, 31 F. Supp. 3d 540, 570 (S.D.N.Y. 2014) aff’d. 858 F.3d 71 (2d Cir. 2017); United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014); Cf. U.C.C. §1-201 (b)(24) (definition of money under the UCC, means a medium of exchange currently authorized or adopted by a domestic or foreign government); Wisconsin Cent. Ltd. v. United States, 138 S. Ct. 2067 (2018) (stock options are not mediums of exchange).
In State v. Espinoza, 2019 Fla. App. LEXIS 1133 (Fl. Ct. App. 3d Jan. 30, 2019), defendant was charged with unlicensed money transmission under the Florida statute, §560.125 (2013), for having sold an undercover police officer bitcoins to be transferred via the Internet for a sum of U.S. currency. The trial court dismissed the charges finding that bitcoins did not qualify as “monetary value” and the statute required a third-party transmission thus finding that the facts charged did not fall within the ambit of money transmission.
On appeal, the Florida Appellate court reinstated the charges. The appellate court found in an opinion by Hon. Norma S. Lindsey, Judge of the Florida Appeals Court for the Third District, that defendant’s conduct which included marketing a business where his offered service was the exchange of cash for bitcoins was within the ambit of the statute. Further, the court rejected the “third-party defense,” determining that the Florida statute (unlike the federal statute) does not include in the definition of “money transmitter” a third-party transmission requirement. Id. at *21-22.
The legislative history of New York’s money transmission statute, Banking Law §650, is consistent with that of the federal statute, 18 U.S.C. §1960, and arguably supports the conclusion that the virtual currencies fall within the statute’s purview. Cf., NYSDFS, 23 NYCRR §§200. 2 (e) “fiat currency”; (o) “transmission; (p) “virtual currency”; and (q) “virtual currency transmission,” and 200.3. Banking Law §650 was enacted to address the threat that money launderers had found new avenues of entry into New York’s financial system. It is an enforcement instrument designed to prevent innovative ways of transmitting money illicitly and meet the challenge of keeping pace with evolving threats. See Murgio, 209 F. Supp. 3d at 708.
The majority of courts reject the view that exchanges of money for virtual currency do not fall within the ambit of the money transmission statutes. Courts applying standard statutory interpretation rules have found that where the statutory words are undefined in the statute then the words are given their “ordinary meaning” instead of special meanings or “terms of art” as found, for instance, in Black’s Law Dictionary. See, e.g., Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560 (2012). Moreover, these courts have also opined that there is no plausible interpretation of statutory terms such as “monetary value” or “payment instruments” that would place virtual currencies outside of a money transmitter statute’s ambit.
Peter A. Crusco is executive assistant district attorney, investigations division, Office of the Queens County District Attorney. The views expressed herein are the author’s, and do not necessarily reflect the policies or views of the office.