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Let me start by saying that I understand that the money in my wallet may at one time have been used in an illicit transaction.

We have a question that we need help with.

How do we show regulators and other entities that Bob in the following scenario is not laundering funds?

Bob our mild mannered engineer who works from home has done a ton of work for a new website. He has agreed to accept payment in btc- The website pays him the equivalent of 20K USD in btc. The company bought those coins from a variety of other sources that are not involved in any criminal activity, those people also got their btc from other sources that are non-criminal. Let's say we dive an additional 5 levels deep and these btc are as pure as the driven snow. And maybe some of them were used long ago in sale of endangered birds or drugs or whatever. Just like the 20 dollar bill in my wallet.

7 months later Bob cashes in!! He now has 20K USD that he wants to deposit in to his bank account. In this scenario- mean men with badges show up at Bob's house and accuse him of selling dope and that 20K is via the proceeds of a crime and they want to send Bob to the nearest house of corrections. To make matters worse, Bob's work PC was lost in a boating accident and the web company he worked with is no longer in business. No proof of the work he did.

How can we help Bob quickly show the men with badges that the btc Bob received for payment was not bad money?

And as stated in the scenario maybe some of the btc were used in illicit activity but months later good honest people have these coins and we should consider these coins as pure as the $20 in my wallet that I got from may have been used to buy cocaine 5 months ago.

I can do analysis of our intake and show the regulators that the exchanges we work with are not buying from criminals and that we are certainly not allowing it. I am hoping to be able to show that people selling directly to exchanges are not not criminals either.

Thank you!

John Kay
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    At least in EU, you get a receipt for made transactions and you are eglible to preverse those according to the accounting laws. It really doesn't matter what transaction method, currency, etc. you have used. Only receipt proves whre the money is coming from and you need to trace it down only one step. – Mikko Ohtamaa Aug 02 '13 at 18:01
  • Exchanges are subject to Know Your Customer regulation and that guarantees that exchange guarantees they don't take criminal money https://en.wikipedia.org/wiki/Know_your_customer – Mikko Ohtamaa Aug 02 '13 at 18:02
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    In the similar news, your cash contains trace of cocaine http://www.greencupboards.com/blog/2011/02/09/how-much-cocaine-is-on-your-dollar/ - probably doesn't help you sleep any better if you are accepting cash – Mikko Ohtamaa Aug 02 '13 at 18:04
  • This shows the importance of proper business record-keeping. If Bob has kept no records, he's going to have a problem. – David Schwartz Aug 02 '13 at 23:09
  • Mikko I appreciate your comments but in case you are working in the AML space a quick word of warning. I have built AML and ecommerce risk platforms for the biggest names in ecommerce and KYC doesn't guarantee anything. - especially in the cyberworld. And that is the problem. BTC is undeniably a wonderful thing and it appeals to my core beliefs in many ways. But bad guys will wreck any system. And leave the rest of us scrambling to protect a good system. The problem I described either gets solved OR btc will be relegated to a relatively small use case. Thank you for your discussion. – John Kay Aug 05 '13 at 14:06
  • Mikko my apologies I meant to reply to your first comment regarding the EU. That is an incredible lead and I appreciate it. I'll research that. As you probably know companies are reluctant to add an extra step to ecommerce transactions like presenting receipts. However, that gives me a few other ideas that may be acceptable to the company and the customer. You win the internet for today. – John Kay Aug 05 '13 at 14:12
  • David- Totally agree- my example is a bit sloppy and I didn't do a good job as usual of getting my point across. My general idea is any customer, any amount. It will be important for companies receiving btc to be able to show that ANY sale(s) with a person over XXXX amount as a whole or aggregate is not from illicit activity. In my example Bob was on the hot seat but exchanges will be for a huge percentage of their payments. – John Kay Aug 05 '13 at 14:17
  • To everyone that pitched in- I am very grateful. It quickly became clear to me during our movement in to the btc world that there is a large part of the community that by action and intellect shows that Regulatory agencies should not be as worried as they are- because btc has smart people that are thoroughly engaged in the process of making this work. I am older than most here and sometimes folks my age wring their hands about younger generations. I tell them I have no fear. Because these generations are better than us in so many important ways. And your impact will be great... – John Kay Aug 05 '13 at 14:42

2 Answers2

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Administratively, there should be plenty of evidence that Bob was working a legitimate job.

  • If the web firm is a US company and Bob a US worker, then the company is required to file a form 1099-MISC. Yes ... even if they paid him in non-USD currency.

  • Some time in that seven-month period, Bob should have paid his quarterly taxes. That adds to the legitimacy of his income.

  • There must be some kind of timekeeping and invoicing process between Bob and the web company, along with specifications, emails, and other evidence of a working relationship.

  • Bob can point to the stuff he built. (I know from experience that this isn't always possible. I have worked on a lot of internal projects that people outside a company never have access to.)

  • If the web company bought their bitcoins on open exchanges, then there is an associated bank account and a bunch of regulatory machinery that has already kicked in at some point. The company is already being monitored under the usual rules for currency exchanges.

There is a technical side of this too. Because the entire bitcoin ledger is public knowledge, it should be very clear that Bob has been saving his bitcoins for the past several months. That is probably not typical behavior for a money launderer. If, on the other hand, it is clear Bob has been using a mixing service to receive his Bitcoins he may have a problem.

Ultimately all money is fungible. As you've already intuited, this problem isn't really much different from if Bob was taking his pay in USD instead of Bitcoin.

slashingweapon
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  • Mr Weapon I am grateful for the answer you provided and the effort. Thank you. Let's make Bob any customer who has accrued an amount of btc over $3000.00 from various legit sources and is cashing it in to an exchange After he sells to an exchange the exchang.e has a choice- declare it suspicious and file a SAR or they can notate the account with evidence that shows Bob is a good and legit customer. I would prefer a system where folks are innocent until proven guilty and companies take a few minutes to gather info to show Bob isn't cashing bad funds. I am learning a lot about btc thank you all. – John Kay Aug 05 '13 at 14:25
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There's no rational reason that Bob would need to prove that the funds his customers used to pay him with had no taint. His invoices to his customers should be adequate as far as records for the "men with badges" go.

But if for some reason a pedigree of the funds transfers was known to each party that received payment and Bob wished to have proof of each transfer, then each party could use the optional (and soon-to-be-released) Payments Protocol. If these parties then (voluntarily) shared this info with Bob, then the linkage back to each of the five previous transactions would yield the full pedigree of the funds.

There is no way to discover this linkage but when using the Payments Protocol then there is the ability for each party that sends a bitcoin transaction to prove who the recipient of the funds is.

Stephen Gornick
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  • Stephen thank you. Very interesting. The reason Bob would need to show is that guidance from FinCEN on suspicious activity is purposefully vague. They basically just say if you think it is suspicious you should file (and most of us interpret it differently). My goal is to avoid creating a SAR on Bob because I don't want Bob to have to deal with it. And I want our SARs to be taken seriously and not a case of the boy who cried wolf. Thank you again I will read up on payments protocol. – John Kay Aug 05 '13 at 14:36