Updated: Aug 17, 2020
More than once I have been asked by a prospective client if I can help facilitate the sale of their personally held cryptocurrency to another for cash. While individuals can often accomplish this without the use of an intermediary, they often prefer to utilize a trusted third party to hold the cash for payment until the cryptocurrency is fully transferred in order to avoid any problems with fraud. In transactions involving more common assets like real estate, a bank or a licensed escrow fund typically provide this service for a fee. However, lawyers in the United States may also use their trust accounts to provide this service when funds are held for a short time.
US lawyers are not held to the same regulatory standards as bankers for complying with anti-money laundering and counter-terrorist financing (AML/CTF) regulations. Nonetheless, strict rules of professional conduct issued by State bar associations that govern lawyers do require that lawyers take all reasonable measures to verify the identity of the parties to the transaction, and that the funds involved have not been derived from illegal activity. Further, although lawyers are not always subject to the Bank Secrecy Act, they cannot faciliate any transactions involving individuals or entities prohibited by the US Office of Foreign Assets Control (OFAC). If it is later found that a lawyer did facilitate a transaction involving funds derived from illegal activity or involving parties on the OFAC list, then they could be suspended from the practice of law, or even prosecuted criminally.
In a recent case, I was consulted by a prospective client who wanted to sell several personally held Bitcoin to another individual for a substantial cash sum. I engaged the client over a series of emails, requesting the identity of the parties to which they responded by sending me a copy of their respective passports. One was located in the United States, and another was from an English-speaking country outside the US. While waiting on a second form of identity I requested to confirm their residency, I attempted to set up a video meeting with each so as to confirm their visual identities with that shown on their passport. However, one of the parties refused. Not surprisingly, the deal promptly died. Consequently, I believe they were attempting to use me to facilitate a transaction involving funds likely derived from criminal activity.
In 2016, a CBS 60 Minutes episode entitled Lowering the Bar demonstrated how New York lawyers involved themselves, knowing and unknowingly, in money laundering through the misuse of client trust accounts. In 2019, the Financial Action Task Force (FATF), the international governing body that develops policies to combat money laundering and terrorist financing, issued risk management guidance for lawyers facilitating financial transactions.(1) While US lawyers are not obligated to follow this guidance, given the criminal penalties involved with faciliating money laundering and terrorist activities, they should implement these recommendations within their practices for best compliance and for better risk management. This is especially applicable to transactions involving cryptocurrencies because they trigger enhanced scrutiny from financial regulators.
So, whether you are a lawyer asked to faciliate a financial transaction for a client, or you are a client seeking help with your own financial transactions, regardless of whether the transaction involves cryptocurrency, here are a few steps you can take to manage the risk involved.
(1) Know Your Customer (KYC). Know Your Customer standards used by banks and financial institutions require government issued identification to prove a person's identity. While banks often require a customer to appear in-person, meeting with someone over active an active video conferencing session and matching their face to that provided on the government-issued identification may be sufficient in some circumstances to be considered reasonable.
(2) Require Multiple Forms of Identification. Although not everyone will have more than one form of government ID that includes a picture, requiring a second form of government issued identification should be required, such as their social security number, date of birth and address. Utility bills can be used to confirm a person's residential address where uncertainty persists.
(3) Confirm the Source of Funds. Ask the client about the source of the funds and have them commit to explanation in a written document. Call the bank where the funds are located in order to confirm that the funds are already in the account. If the funds are not in the account, then that may indicate additional caution is warranted.
(4) Check OFAC List. A financial intelligence and enforcement agency of the US Treasury Department, "OFAC publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under pgorams that are not country specific."(2) OFAC provides a free, online search tool for users to simultaneously search all of its sanctions lists.(3)
(1) FATF (2019), Guidance for a Risk-Based Approach for Legal Professionals, FATF, Paris, www.fatf-gafi.org/publications/documents/Guidance-RBA-legal-professionals.html
(3) OFAC Sanctions List Search (2020), https://sanctionssearch.ofac.treas.gov/