U.S. Court of Appeals Upholds Money Laundering Conviction Involving Bitcoin Transactions

On April 17, a panel of the U.S. Court of Appeals for the Ninth Circuit, in United States v. Costanzo, unanimously affirmed the federal money-laundering conviction of a Bitcoin seller for multiple cash-for-Bitcoin transactions.  Around 2014, Thomas Costanzo made a living as a Bitcoin seller through peer-to-peer transactions.  After Internal Revenue Service agents read Costanzo’s profile – which, in part, stated that he “was willing to exchange between $15,000 to $50,000 cash for bitcoin” – undercover agents conducted a series of cash-for-Bitcoin transactions over a two-year period.

In each case, the agents either intimated or stated specifically that they were engaged in illegal activity:

  • In April 2015, an undercover IRS agent “intimated that the bitcoin he purchased would facilitate illicit activity.” He explained to Costanzo

that “discretion” was important, the government could have issues with the product he imported, the bitcoin he purchased would be going “south of the border,” and his business involved picking up product in Arizona and shipping it to New York in a concealed manner.

Costanzo then accepted $2,000 in cash from the agent and transferred bitcoin to the agent’s cell phone.

  • In a subsequent transaction, the undercover IRS agent “explicitly told Costanzo that he was trafficking black tar heroin. Costanzo laughed and replied, ‘I know nothing’,” then accepted $3,000 in cash and transferred bitcoin to the agent’s cell phone.
  • In October and November 2015, undercover IRS agents “made clear to Costanzo that the purpose of the transaction was to conceal illegal activities.” In the October transaction, one undercover agent “again discussed the illicit nature of their business, and Costanzo stated that he ‘knew, but [didn’t] want to know’.”  That agent then gave Costanzo $13,000 in cash, and Costanzo transferred bitcoin to that agent’s cell phone.  In the November transaction, another agent met with Costanzo and exchanged $11,700 in cash for Bitcoin.
  • From 2016 to 2017, an undercover Scottsdale Police detective met on four occasions to exchange cash for Bitcoin, in substantially increasing amounts ($2,000, $12,000, $30,000, and $107,000). In the last transaction, the detective “expressly told Costanzo that the cash came from drug operations, but Costanzo replied that he did not need to know.”

Costanzo was then arrested, and convicted at trial on five counts of money laundering.

On appeal, Costanzo sought to challenge his conviction on the basis that the government had failed to prove one of the essential elements of the money laundering offense in question (18 U.S.C. §1956(a)(3)(B)). That offense requires proof that the defendant engaged in a “financial transaction,” which the statute defines in part as “a transaction which in any way or degree affects interstate or foreign commerce [] involving the movement of funds by wire or other means or [] involving one or more monetary instruments.”  Constanzo contended that the charged transfers “did not have the requisite effect on interstate commerce.”

The opinion, however, made short work of that argument.  It first stated that the connection between the transaction and interstate commerce “need not be extensive,” as the stature requires proof only that the transaction affected commerce “in any way or degree.”  It then reviewed the evidence presented at trial:

Here, the government presented evidence regarding Costanzo’s business; his use of global platforms; and the transfer of bitcoin through a digital wallet, which by its nature invokes a wide and international network. Costanzo advertised his business through localbitcoins.com—a website based outside of the United States. He encouraged the undercover agents to download applications from the Apple Store or other similar platforms to facilitate their communications and transactions. He then utilized those applications to engage in encrypted communications with the agents to arrange the transfers. Then, in each transaction, Costanzo and the agent used those applications on their smartphones to transfer bitcoin from one digital wallet to another. Each transaction was complete only after it was verified on the blockchain.

Viewing all of that evidence in the light most favorable to the government (the standard on appeal from a criminal conviction), the opinion found that evidence sufficient to prove “the ‘minimal’ interstate commerce nexus required under § 1956.”

Note: This decision affirms that Bitcoin transactions, like funds transactions in more traditional forms such as cash, checks, and wire transfers, can constitute “financial transactions” for purposes of the federal money laundering offenses.  Anti-money laundering (AML) compliance officers should inform their AML compliance team members about this decision, and incorporate it into ongoing AML training within their institutions.

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