Ex-FTX head Bankman-Fried faces more charges, including “strict liability” crime of conspiracy to operate as an unlicensed money transmitter

The implosion of international crypto exchange FTX and the fall of its founder and CEO Samuel Bankman-Fried (SBF) was fast and furious, and in the aftermath, seemingly never-ending criminal charges mount against leadership of the exchange. Eight initial charges were filed against SBF on December 9, 2022, but prosecution continued, with four additional criminal charges announced in a February 23, 2023 superseding indictment.

Notably, the new charges include a violation of 18 U.S.C. Section 1960, operating a money transmission business without a license, a charge which we discussed in great detail in last month's insight on Bitzlato, and a bank fraud conspiracy charge. There are a number of interesting threads in the superseding (and original) indictment that could provide insight on the prosecution’s case strategy and the likely areas of attack for the defense.

Background

In the summer and fall of 2022, a general downturn in crypto values lead to overall market volatility, as well as a solvency issue for FTX. Against that backdrop, in November 2022, a report surfaced that Alameda Research, a market making crypto trading firm that Bankman-Fried also founded and largely owned and controlled, relied entirely on FTX for its solvency. Both companies filed for Chapter 11 bankruptcy protections, and additional reports emerged that FTX had misappropriated its customers’ funds to finance Alameda’s risky investments. As more and more revelations about the interplay between FTX and Alameda became public, those involved began to shed light on the culpability of the leadership of FTX and Alameda.

Unlicensed money transmission

The 18 USC 1960 charge, though powerful, could be tested, as several unique circumstances exist:

Strict liability

The superseding indictment charges SBF with conspiracy to operate an unlicensed money transmission business in violation of 18 U.S.C. 1960(b)(1)(B). 18 U.S.C. 1960(b)(1)(B) is a strict liability, general intent offense that, unlike its cousin, 18 U.S.C. 1960(b)(1)(C), does not require proof that the defendant knew that the transmitted funds “were derived from a criminal offense or are intended to be used to promote or support unlawful activity.”

As alleged, SBF “knowingly conduct[ed], control[led], manage[d] … an unlicensed money transmitting business affecting interstate and foreign commerce which failed to comply with [the BSA]." The indictment further alleges merely that SBF and others “caused FTX customers to send wire transfers and sent wire transfers to FTX customers” in the Southern District of New York. To meet these elements, SBF merely needs to have knowingly operated (or conspired to operate) a crypto exchange in the US without a license. He need not have known about any registration requirement.

FTX-US registration and timing

Interestingly, the conspiracy period for this count is October 2019 through November 2022. However, FTX’s US entity, FTX-US, was in fact registered with FinCEN between 2020 and October 4, 2022, Superseding Ind. ¶ 16, and in 31 states, including according to a purported Regulation and Licensure Information document available online. Notably, FTX Bahamas was never registered in the US.

The take-home lesson, perhaps, is that the government will not take at face value that a US-registered and purportedly compliant exchange processes all transactions involving US customers. Instead, the government will look under the hood at any unregistered affiliates to see if those entities are processing transactions with US customers.

Possible challenges

If SBF continues to contest the charges, we might have a rare opportunity to see the limits of 18 U.S.C. 1960 liability: SBF could challenge the statute pre-trial as being void for vagueness and/or not providing sufficient notice of what it criminalizes, or challenge FinCEN’s authority to pass relevant regulations. Interestingly, however, similar arguments proved unavailing in 2015 in the Budovsky case, involving Arthur Budovsky, the principal founder of the “OG” unregistered cryptocurrency exchange Liberty Reserve (and Budovsky later pled guilty after losing at the motion to dismiss stage). See United States v. Budovsky, No. 13-cr-368 (DLC) 2015 WL 5602853 (S.D.N.Y. Sept. 23, 2015).

At trial, SBF also could make what amounts to a jury nullification argument, claiming that it is unfair to convict him for failing to register and, if accurate, that he relied on others, including legal counsel, that registering FTX-US in the US would be sufficient.

The conspiracy to commit money laundering charge under 18 U.S.C. Section 1956(h) is meaningful in several ways.

Absence of a requirement that participants knew the specific underlying unlawful activity

In most jurisdictions, including the Southern District of New York where this case would be tried, a money laundering conspiracy does not require its participants to know what the underlying crime or “specified unlawful activity” was (here, the alleged wire fraud on customers of FTX). Superseding Indictment ¶ 89 (describing the proceeds of specified unlawful activity, “to wit, the wire fraud alleged in Count Two of this Indictment”). (see United States v. Tusaneza, 270 F. Supp. 2d 422 (S.D.N.Y. 2003), aff'd, 116 F. App'x 305 (2d Cir. 2004)).

Instead, the prosecution must simply show that the defendant knew that the transaction of funds involved the “proceeds” of “some unlawful activity” (and, here, with knowledge that the transaction was designed to conceal or disguise the nature or source of the proceeds). Furthermore, the knowledge of “some unlawful activity” may be proved using circumstantial evidence, including odd or atypical behaviors such as using false names or identification to deposit or withdraw funds or (as potentially relevant here) opening a bank account with false information about its purpose.

Here, prosecutors have alleged that the bank account was opened “to obscure the relationship between FTX and Alameda, and in order to overcome [the bank’s] refusal to open a bank account for FTX without extensive due diligence and licensing” and/or “direct[ing] [co-conspirator, Caroline] Ellison to change the name of Alameda entities that were funding venture capital investments by FTC so that it would not be apparent that the money was coming from Alameda.” Superseding Ind., ¶¶ 17, 25.

Use of proceeds/expenditures gets before the jury

To prove a money laundering charge, prosecutors must show how the proceeds were used in a financial transaction, making information about the proceeds an essential element of the offense. This typically makes it less likely for a judge to exclude evidence of even lavish expenditures (such as using customer funds to purchase a penthouse apartment in the Bahamas) from the jury’s consideration.

Forfeiture as a tool

Charging money laundering and 18 U.S.C. 1960 provided a very powerful statutory tool for forfeiture under 18 U.S.C. 982(a)(1), which allows prosecutors to forfeit any funds that was “involved in” the money laundering conspiracy. Ordinarily, where money laundering is not charged, prosecutors can only forfeit proceeds under 18 U.S.C. 982(a)(1)(C) of an underlying crime and must undertake time consuming “tracing” efforts in connection with any legitimate funds that get commingled with criminal proceeds. Compare Superseding Indictment ¶¶ 97 and 98 with ¶ 99. Forfeiture is designed to take the profit out of crime and, importantly, to punish the defendant. It is a penalty that is separate from (and in addition to) any court-ordered restitution to be paid to victims.

A peek under the BSA/AML curtain

Finally, the newly added bank fraud conspiracy carries a higher (30-year) statutory maximum. Additionally, if the case is tried, the charge could shed light on internal bank secrecy act/anti-money laundering controls for onboarding and monitoring cryptocurrency companies.

Banks rely on their customers at intake and thereafter to be truthful – but prosecutors allege that SBF wasn’t truthful, and that he submitted a fake due diligence form to open an account at the bank in the name of another company controlled by SBF. Superseding Ind. ¶ 17.

Further, FTX executives allegedly told the bank a “false story” that the account was opened in the name of a company called North Dimension controlled by SBF was for trading when in fact “North Dimension was created for the purpose of transmitting customer deposits on and off the FTX exchange.” Id. ¶ 18.

A potential defense at trial could include that the misstatements could not have been material to Silvergate, Silvergate knew (or should have known based on the account activity) that SBF was using the account for different purposes and its inaction in stopping this suggests that the alleged lies were not meaningful. We note that Silvergate Bank recently announced that they are voluntarily liquidating “in light of recent industry and regulatory developments,” and it is unclear how this may affect the prosecution.