The United States District Court for the Southern District of New York on October 1, 2020, unsealed a criminal indictment against four BitMEX executives for violations of the U.S. Bank Secrecy Act (BSA).1 It is a move that is noteworthy in that the “Department of Justice has rarely, if ever, filed a standalone criminal indictment against individual executives for failing to maintain an adequate Anti-Money Laundering (AML) program.”2 In just the first seven days after the indictment was issued over $818 million had been retrieved from BitMEX.3
The Bitcoin Mercantile Exchange (BitMEX) is an online trading platform which operates through the website www.bitmex.com. BitMEX, which deals in bitcoin, is one of the world’s biggest cryptocurrency trading exchanges, handling more than $1.5 billion of trades daily prior to the indictment.4 It was founded in Hong Kong in 2014, but is currently registered in the Seychelles, which is a purported tax haven. According to a New York Times article, “BitMEX allowed traders to buy and sell contracts tied to the value of Bitcoin — known as derivatives or futures — with few restrictions and rules that were in place in other exchanges, thus allowing investors to take out enormous loans and make risky trades and to easily move money in and out of BitMEX without the basic identity checks that can prevent money laundering.5 According to the indictment, BitMEX at one point around March 2017 offered its customers up to 100 times leverage on certain of its products. This means that “a deposit of $1,000 resulted in a trader having the ability to trade $100,000 worth of bitcoin and futures trading, allowing investors to bet on the future prices of bitcoin.”6
Since several thousand of its customers are in the United States the DOJ maintains that the Bank Secrecy Act, which was designed to prevent, detect and prosecute international money laundering and the financing of terrorism, requires that futures commission merchants register as such with the U.S. Commodity and Futures Trading Commission (CFTC) under the Commodity Exchange Act, which BitMEX failed to do. The Bank Secrecy Act also requires that futures commission merchants establish anti-money laundering programs, including Know Your Customer (KYC) programs that prevent them from being used for money laundering or the financing of terrorism. The indictment alleges that BitMEX leadership, while aware that AML and KYC regulations did apply to BitMEX, actually took steps to attempt to exempt BitMEX from U.S. laws. One of these steps was to formally incorporate in the Seychelles, although they never had a physical presence in the country and, in fact, had offices in Hong Kong and New York City.
BitMEX, which issued a statement on their website saying they “strongly disagree with the U.S. government’s heavy-handed decision to bring these charges” is reported to have recently taken steps to improve AML procedures.7 Each of the four BitMEX executives named in the indictment face up to 10 years in jail and the fines to the company could top $1.3B USD.8
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1 Sealed Indictment, U.S. Justice Department, Southern District of New York
2 BitMEX Indictment Warns of New Department of Justice Approach on AML Failures by David L. Kirman, Laurel Loomis Rimon, Nora Kahn and Braddock Stevenson, 11/03/2020
3,6 Crypto Conversation: Facing U.S. Probe, BitMEX Sees $818M Evaporate, 10/7/2020
4,5 Owners of BitMEX, a Leading Bitcoin Exchange, Face Criminal Charges by Nathaniel Popper, 10/1/2020
7,8 CFTC, DOJ Charge BitMEX Owners with Illegal Operations and Anti-Money Laundering Violations, 10/13/2020