Risk of suspicion of money laundering

While cryptocurrency gains popularity, it is still unregulated in the Netherlands and the rest of Europe. The legislators are working on implementing detailed regulations, but this will be a long process. However, the Dutch national courts have already passed several judgments in cases concerning cryptocurrency. Though a few decisions concerned the legal status of cryptocurrency, most cases were within the criminal spectrum. Money laundering played a big part in these judgments.

Money laundering is an aspect that should be taken into account to ensure your organization does not fall under the scope of the Dutch Criminal Code. Money laundering is a punishable act under Dutch criminal law. This is established in articles 420bis, 420ter and 420 of the Dutch Criminal Code. Money laundering is proven when a person conceals the actual nature, origin, alienation or displacement of a certain good, or hides who is the beneficiary or holder of the good while being aware that the good derived from criminal activities. Even when a person was not explicitly aware of the fact that the good derived from criminal activities but could have reasonably assumed that this was the case, he can be found guilty of money laundering. These acts are punishable with imprisonment up to four years (for being aware of the criminal origin), imprisonment up to one year (for having a reasonable assumption) or a fine up to 67.000 euro. This is established in article 23 of the Dutch Criminal Code. A person who makes a habit of money laundering can even be imprisoned up to six years.

Below are a few examples in which the Dutch courts passed on the use of cryptocurrency:

• There was a case in which a person was accused of money laundering. He received money that was obtained by converting bitcoins to fiat money. These bitcoins were obtained through the dark web, on which IP-addresses of users are concealed. Investigations showed the dark web is used almost exclusively for trading illegal goods, that to be paid with bitcoins. Therefore, the court assumed bitcoins obtained through the dark web are of a criminal origin. The court stated the suspect received money that was obtained by converting bitcoins of a criminal origin into fiat money. The suspect was aware that bitcoins are often of a criminal origin. Still, he did not investigate the origin of the fiat money he obtained. Therefore, he has knowingly accepted the significant chance that the money he received was obtained through illegal activities. He was convicted for money laundering.[1]
• In this case, the Fiscal Information and Investigation Service (in Dutch: FIOD) started an investigation on bitcoin traders. The suspect, in this case, provided bitcoins to the traders and converted them to fiat money. The suspect used an online wallet on which numerous amounts of bitcoins were deposited, which derived from the dark web. As mentioned in the case above, these bitcoins are assumed to be of illegal origin. The suspect refused to provide clarification concerning the origin of the bitcoins. The court stated the suspect was well aware of the illegal origin of the bitcoins since he went to traders who guarantee the anonymity of their clients and ask a high commission for this service. Therefore, the court stated the intent of the suspect can be assumed. He was convicted for money laundering.[2]
• The next case concerns a Dutch bank, ING. ING entered a banking contract with a bitcoin trader. As a bank, ING has certain monitoring and investigation obligations. They discovered their client used cash money to buy bitcoins for third parties. ING ended their relationship since the origin of the payments in cash cannot be checked and the money could possibly be obtained through illegal activities. ING felt like they were no longer able to fulfill their KYC obligations since they could not guarantee that their accounts were not used for money laundering and to avoid risks concerning integrity. The court stated the client of ING was insufficient in proving the cash money was of a lawful origin. Therefore, ING was allowed to terminate the banking relationship.[3]

These judgments show that working with cryptocurrency may pose a risk when it comes to compliance. When the origin of the cryptocurrency is unknown, and the currency may derive from the dark web, suspicion of money laundering can easily arise.

Compliance

Since cryptocurrency is not yet regulated and anonymity in transactions is ensured, it is an attractive means of payment to be used for criminal activities. Therefore, cryptocurrency has some sort of negative connotation in the Netherlands. This is also shown in the fact that the Dutch Financial Services and Markets Authority advises against trading in cryptocurrencies. They state that using cryptocurrencies poses risks with regard to economic crimes, since money laundering, deception, fraud, and manipulation can easily arise.[4] This means you have to be very accurate with compliance when dealing with cryptocurrency. You have to be able to show that the cryptocurrency you receive is not obtained through illegal activities. You have to be able to prove you really investigated the origin of the cryptocurrency you received. This could prove to be difficult for the people who use cryptocurrency are often unidentifiable. Very often, when the Dutch court has a ruling concerning cryptocurrency, it is within the criminal spectrum. At the moment, authorities do not actively monitor the trade in cryptocurrencies. However, cryptocurrency does have their attention. Therefore, when a company has a relationship with cryptocurrency, authorities will be extra alert. Authorities will probably want to know how the cryptocurrency is obtained and what the origin of the currency is. If you cannot answer these questions properly, suspicion of money laundering or other criminal offenses may arise and an investigation concerning your organization might be started.

Regulation of cryptocurrency

As stated above, cryptocurrency is not yet regulated. However, the trade and use of cryptocurrencies will probably be strictly regulated, due to the criminal and financial risks cryptocurrency entails. The regulation of cryptocurrency is a topic of conversation all around the world. The International Monetary Fund (a United Nations organization that works on global monetary cooperation, securing financial stability and facilitating international trade) is calling for global coordination on cryptocurrencies as it warned for both financial and criminal risks.[5] The European Union is debating whether to regulate or monitor cryptocurrencies, though they have not yet created specific legislation. Furthermore, regulation of cryptocurrency is a subject of debate in several individual countries, such as China, South-Korea, and Russia. These countries are taking or want to take steps in order to establish rules concerning cryptocurrencies. In the Netherlands, the Financial Services and Markets Authority has pointed out that investment firms have a general duty of care when they offer Bitcoin-futures to retail investors in the Netherlands. This entails that these investment firms must take care of the interest of their clients in a professional, fair and honest way.[6] The global discussion on the regulation of cryptocurrency shows that numerous of organizations think it is necessary to establish at least some kind of legislation.

Conclusion

It is safe to say that cryptocurrency is booming. However, people seem to forget that trading and using these currencies can also entail certain risks. Before you know it, you may fall within the scope of the Dutch Criminal Code when dealing with cryptocurrency. These currencies are often associated with criminal activities, especially money laundering. Compliance is therefore very important for companies which do not want to be prosecuted for criminal offenses. Knowledge of the origin of cryptocurrencies plays a great part in this. Since cryptocurrency has a somewhat negative connotation, countries and organizations are debating on whether or not to establish regulations concerning cryptocurrency. Though some countries have already taken steps towards regulation, it may still take some time before worldwide regulation is achieved. Therefore, it is of great importance for companies to be careful when dealing with cryptocurrency and to make sure to pay attention to compliance.

[1] ECLI:NL:RBMNE:2017:5716, https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBMNE:2017:5716.

[2] ECLI:NL:RBROT:2017:8992, https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBROT:2017:8992.

[3] ECLI:NL:RBAMS:2017:8376, https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBAMS:2017:8376.

[4] Autoriteit Financiële Markten, ‘Reële cryptocurrencies, https://www.afm.nl/nl-nl/nieuws/2017/nov/risico-cryptocurrencies.

[5] Report Fintech and Financial Services: Initial Considerations, International Monetary Fund 2017.

[6] Autoriteit Financiële Markten, ‘Bitcoin Futures: AFM op ’, https://www.afm.nl/nl-nl/nieuws/2017/dec/bitcoin-futures-zorgplicht.