On 1 February this year, the Court of Appeal of The Hague ruled in one of the first large-scale criminal investigations into bitcoin laundering from 2013 to early 2016. The case involved, among others, a bitcoin trader who allegedly traded bitcoins with more than 1,000 people. A total of nearly 63,000 bitcoins were allegedly involved. The question before the court was whether the defendants during this time could have suspected that the bitcoins they were buying and selling had a criminal origin. Indeed, in that case, money laundering could be involved. Unless the accused a concrete, verifiable and not a priori highly improbable explanation could give, that the bitcoins were not from crime. In that case, there can only be money laundering if further investigation by the prosecution has shown that the statement cannot be true.
Suspicion of potentially illegal origin
The question of whether the defendants owed any explanation at all was not so easy to answer, as the 2013-2016 period saw relative unfamiliarity with the cryptocurrency phenomenon. And therefore also with the investigative possibilities regarding its origin. Nowadays, this is easier to determine via labelling of addresses and search engines like walletexplorer, but in that period there was no reasonable possibility. Nevertheless, the court convicted a number of defendants of debt laundering.
Clustering
The first question the Court had to answer was whether the bitcoin addresses belonged to the defendants. The Court did so by accepting analytical techniques clustering. Clustering is a technique that results in several bitcoin addresses being attributed to the same entity. Using this technique, several bitcoin addresses could be attributed to suspects. If these bitcoin addresses could be attributed to a suspect through clustering, but were not related to the darknet, or transactions with that address fell outside the period charged, (partial) acquittal followed. This was also the case if bitcoins were merely moved from one bitcoin address to another. Then there was no concealment of origin.
Facts and circumstances
The next question was whether there were facts and circumstances that justified a presumption that it could not be otherwise that the bitcoins came from any crime. Indeed, in that case, the defendants would have to provide explanations. Here too, the period plays a crucial role. Only in 2017 would the Financial Intelligence Unit (FIU)come up with the money laundering typologies for digital currencies that could justify a money laundering suspicion. Examples include, failure to establish the identity of the buyer, payment in cash or using mixers. As the bitcoins were traded before 2017, the defendants could not be accused of failing to adhere to standards that apply today in cryptocurrency trading.
WWFT
Therefore, the court drew on the then-current Prevention of Money Laundering and Financing of Terrorism Act, into which the Disclosure of Unusual Transactions Act had been absorbed. The court assumed a suspicion of money laundering based on the indicator, also valid at the time, that a cash payment of at least €25,000 was suspicious. The court considered:
"Specifically, this means, in the court's opinion, that if the accused buys from one person or entity a number of bitcoins with a value of €25,000 or more for cash, either in one go or spread out over the period of up to one month, there is a situation that it cannot be otherwise than that these bitcoins were from crime."
In doing so, the court considered, among other things, that the accused met his customers frequently in public places, frequently converted those bitcoins into cash and had his family members withdraw the proceeds at ATMs. Orderly records were also lacking. The only thing the accused countered this with as an explanation was a list of about 1,200 customers. As no link had been established between the names and the bitcoin transactions, the accused had not provided sufficient leads for further investigation. There was no a concrete, verifiable and not a priori highly improbable explanation. So the prosecution did not need to conduct further investigation. And the accused was convicted of debt laundering.
Cassation
The Supreme Court is likely to address this question. Among other things, on whether clustering may be accepted as an analytical technique. But also whether the accused could be required to keep orderly records at the early stages of crypto trading. Even if large cash flows were involved. A Supreme Court ruling will take some time. Nevertheless, this Court's ruling is at least guiding.
Mr. D.M. Penn