By: Samuel Rubenfeld and Joel Schectman July 14, 2015
U.S. authorities are enlisting check-cashing businesses in a crackdown on tax–refund fraud.
The U.S. Treasury Department’s Financial Crimes Enforcement Network ordered check-cashing businesses in south Florida to collect customer records that could later be used to prosecute perpetrators of fraud. The FinCEN order requires check cashers in Florida’s Broward and Miami-Dade counties to take a digital photo and the thumbprint of a customer who seeks to cash a tax-refund check of more than $1,000, FinCEN said.
The step is the latest effort by federal authorities to rein in cash transactions in south Florida, a region officials consider to be a hotbed of fraud and money laundering.
FinCEN pointed to “a rising wave” of stolen identity tax-refund schemes. The schemes typically involve the filing of a fraudulent tax return after stealing a victim’s identity, and then cashing the refund check at a local check-cashing firm using fake identification, FinCEN said.
The order takes effect Aug. 3 and ends Jan. 30, 2016, a period outside the normal tax season when FinCEN said criminals would hope “their illegal activity will catch financial institutions off-guard and be more likely to slip through their anti-money laundering controls.”
The order covers about 760 check-cashing businesses in the two counties, said a FinCEN spokesman.
Rich Weber, chief of the Internal Revenue Service’s criminal investigation division, said such schemes have been taking place for the past several years. “We felt that more needed to be done on the front end” to stop them from happening, he said.
“One common thread in many investigations was the ability of criminals to cash tax refund checks with little fear of repercussion…the Treasury Department has put a roadblock in the path of those who would steal another person’s identity,” Mr. Weber said.
The filing requirements would likely dissuade some check-cashing businesses from processing off-season returns, said Andrew Ittleman, a Miami-based white collar defense specialist at Fuerst Ittleman David & Joseph PL. “If it sounds hard to comply with, that’s because it is,” Mr. Ittleman said.
Jared Dwyer of Greenberg Traurig LLP said the orders show that federal authorities are looking closely at south Florida cash transactions. “Financial institutions need to take notice,” he said.
The region has been a hotbed for money laundering problems for more than 30 years, said John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists, a Miami-based anti-money-laundering membership organization.
“South Florida hasn’t ever left the lexicon of high money-laundering areas within the U.S. There’s never been a point where it [wasn’t] a problem,” said Mr. Byrne.
https://fidjlaw.com/wp-content/uploads/2015/10/WSJ.png195195admin_fidjhttps://fidjlaw.com/wp-content/uploads/2007/02/FIDJ-Logo-Hero.svgadmin_fidj2015-07-14 16:09:142026-03-12 09:34:34FinCEN Targets Check-Cashers in South Florida
Faced with a surge in tax refund check fraud in South Florida, the Financial Crimes Enforcement Network on Monday issued a geographic targeting order for the region’s check cashers, temporarily enhancing identification requirements for customers to deter and help prosecute these crimes.
The GTO, which takes effect Aug. 3 and will run through Jan. 30, with the possibility of renewal, will affect check cashers in Miami-Dade and Broward counties when cashing federal tax refund checks in excess of $1,000.
The power to issue a geographic targeting order, or GTO, has been in the arsenal of the U.S. Department of the Treasury bureau since 1988 under the Bank Secrecy Act, but it has been used rarely until recently. Only a few have been issued in the last few years, but this is the second for South Florida, with FinCEN also targeting electronics exporters in an April order aimed at curtailing money laundering by prominent drug cartels such as Mexico’s Sinaloa and Los Zetas.
“For South Florida, it’s significant,” said Andrew S. Ittleman, a partner at Fuerst Ittleman David & Joseph PL, whose practice focuses, in part, on anti-money laundering compliance. “Two within several months in the same region, when there have only been a handful in history — it’s a big deal.”
Under the current order, check cashers handling the covered transactions — either U.S. Treasury tax refund checks or third-party checks issued in connection with anticipated tax refunds of more than $1,000 — will have to obtain a copy of the customer’s valid government-issued identification, which must match the name of the check’s original payee; a clear digital photograph taken at the time of the transaction (surveillance video images will not suffice); the customer’s phone number; and the customer’s original thumbprint.
These records must be retained for five years past the last day the order is in effect and made available in a reasonable amount of time to FinCEN or other law enforcement or regulatory agencies.
“Our unique authorities, such as the ability to issue GTOs, enable us to partner with law enforcement in attacking stolen identity tax refund fraud from every angle,” FinCEN Director Jennifer Shasky Calvery said in a statement. “This GTO will help ensure that the perpetrators of these schemes can no longer hide their face while our national treasury is looted and innocent victims spend countless hours and personal expense working with government to reclaim their true identities.”
A typical one of these schemes involves a criminal using stolen identification information to file a fraudulent tax return. The criminal or an accomplice then cashes the refund check, usually using fake identification to evade capture when the fraud is discovered, according to FinCEN.
“It is a very big issue in South Florida and has been for the last 4 to 5 years,” said Jed Dwyer, a Miami-based partner at Greenberg Traurig LLP and a former federal prosecutor.
“I think that it is a comparatively easy and not very dangerous criminal endeavor,” he added, noting that authorities have been seeing people who were involved in other criminal activities, such as the drug trade, getting involved in these schemes since they require little more than a stolen social security number.
FinCEN’s announcement stressed that the order does not mean that it has made any finding about any check casher’s knowledge of these schemes, but it also made clear that failure to comply could carry consequences, including civil or criminal penalties without limitation.
The bureau, with help from the Internal Revenue Service and the U.S. Attorney’s Office for the Southern District of Florida, set the order to coincide with a time of year outside of tax-filing season, when authorities are concerned criminals are trying to catch financial institutions off guard.
Describing it as a period “in which the proportion of fraudulent tax refund transactions is high, but the total volume of transactions is relatively low,” FinCEN said this should help minimize the burden on affected cash checkers while snaring higher-risk transactions.
The burden will still be significant, Ittleman said, opining that the GTO is designed ultimately to eliminate these transactions.
“It is burdensome, it is difficult, it is confusing, and it’s all of those things by design,” he said, adding, “This order is designed to disincentivize check cashers from cashing those type of checks at all.”
Dwyer agreed that the easiest way to comply is to stop cashing tax refund checks over $1,000, but he said he thinks the requirements to maintain these additional records — while likely the biggest burden — will also help authorities address a big challenge in gathering evidence for trials.
“I think this order is really intended to aid them in their prosecutions,” he said.
Having seen two GTOs issued for South Florida just a few months apart, Dwyer and Ittleman both said more could be in store for the future.
“The only question that remains for me is, is this two of two or two of many many more?” Ittleman said, noting that FinCEN has clearly put Miami under the microscope right now.
Dwyer said the recent orders are the product of a perfect storm of federal law enforcement focusing on this type of fraud, an upswing in their occurrences, and FinCEN on the regulatory side becoming more aggressive and working more closely with the law enforcement side of government.
“They’re realizing that each brings something to the table that they can use,” he said.
https://fidjlaw.com/wp-content/uploads/2015/03/Law360.jpg132327admin_fidjhttps://fidjlaw.com/wp-content/uploads/2007/02/FIDJ-Logo-Hero.svgadmin_fidj2015-07-13 16:33:292023-08-23 17:37:41FinCEN Order Targets Tax Refund Check Fraud In South Fla.
Cashing a tax refund check greater than $1,000 in Miami-Dade or Broward counties? Starting Aug. 3, additional ID will be required.
Federal regulators issued a geographic targeting order to South Florida check cashers in those two counties to combat tax refund fraud in the area. The order was made public Monday.
Geographic targeting orders are rare, and are not always made public.
“We’ve only done two this year, and only a few last year,” Financial Crimes Enforcement Network spokesman Stephen Hudak told the Business Journal.
Those two public GTOs were issued in South Florida. To read more about the previous dragnet affecting 700 Miami-Dade County electronics distributors, click here.
South Florida is a hotbed for tax refund fraud schemes, where a criminal steals a victim’s identity and then files a fraudulent tax refund. The criminal then cashes the refund check, often with a fake ID.
But the order intends to make it more difficult for criminals to cash fraudulent checks by requiring all check cashers to record additional information between Aug. 3, 2015 and Jan. 30, 2015 on tax refund checks over $1,000. Check cashing businesses are not currently required to keep records unless the refund check is over $10,000, according to the IRS.
“Tax-related identity theft occurs when someone uses your stolen Social Security number to file a tax return and claims a fraudulent refund,” said Kelly R. Jackson, the Internal Revenue Service’s Criminal Investigation Miami Field Office’s special agent in charge.
The GTOs requires businesses to:
record a copy of the person’s government-issued identification, which must match the name on the check.
keep a clear digital photo taken of the customer at the check casher.
get the customer’s phone number.
take an original thumbprint of the customer on the check.
hold on to the records for five years.
“We greatly appreciate the continued efforts of FinCEN and the IRS in this area,” said Wifredo A. Ferrer, U.S. Attorney for the Southern District of Florida. “[We] look forward to working with financial institutions in the private sector through this GTO in order to further combat these fraudulent schemes that impact our South Florida communities.”
This order is particularly interesting because it shows how FinCEN is focusing on financial crime in South Florida, said Andrew Ittleman, a founding attorney with Miami-based Fuerst Ittleman David & Joseph.
Check cashers in the area are certainly well-equipped for this type of record keeping, but it will impose a heightened burden on the Miami-Dade and Broward county businesses, Ittleman said.
“There was a report on 60 Minutes on this exact variety of fraud and a report that described South Florida as the ‘Silicon Valley of Fraud,’” he said. “When you have that and you have this, don’t be surprised that the fed will crack down on it.”
https://fidjlaw.com/wp-content/uploads/2015/07/SFBJ-Logo-2-e1435785490105.jpg121300admin_fidjhttps://fidjlaw.com/wp-content/uploads/2007/02/FIDJ-Logo-Hero.svgadmin_fidj2015-07-13 15:57:542025-12-11 08:17:30Regulators issue dragnet in Miami-Dade, Broward to root out tax refund fraud
Federal officials are cracking down on a form of tax fraud that is hugely popular in South Florida.
Crooks can use stolen identities to claim bogus tax refunds thanks to a lack of oversight by the Internal Revenue Service.
But the Financial Crimes Enforcement Network on Monday announced a new temporary measure to combat the fraud. The order applies specifically to Miami-Dade and Broward counties, which have the highest rates of identity theft and tax-refund fraud in the country.
Under the new rules, check cashing stores in Miami-Dade and Broward will have to record more information about customers cashing a tax refund over $1,000, including a copy of their ID, a digital photograph, a phone number and a thumbprint. The order goes into effect on August 30 and will remain in force until January 30, 2016.
“This [order] will help ensure that the perpetrators of these schemes can no longer hide their face while our national treasury is looted and innocent victims spend countless hours and personal expense working with government to reclaim their true identities,” Jennifer Shasky Calvery, director of FinCEN, said in a statement.
The new measures will likely make it too risky for criminals to cash ill-begotten refund checks, said Andrew Ittleman, a Miami-based attorney whose practice focuses on white collar criminal defense and anti-money laundering compliance.
But the fraud is often accomplished with pre-paid debit cards from financial services companies that the criminals load with tax refunds, making checks unnecessary.
“There are lots of different ways of getting criminal proceeds into legitimate forms of commerce,” Ittleman said.
“Ultimately, FinCEN might be playing a game of whack-a-mole, just moving the racket from paper checks to the pre-paid cards,” he continued. “So is it going to completely eliminate the tax refund fraud? No. But they may well eliminate this variety of it.”
The regulation is known as a “geographic targeting order” because it singles out a specific region of the country for heightened enforcement. It is the second such order issued against South Florida in recent months.
In April, FinCEN cracked down on 700 electronic export businesses in Miami-Dade that may have been used to launder proceeds from the drug trade and other criminal enterprises.
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If you’re looking for the seeds of a powerful moneymaker, this could be it. But telling the forest from the weeds is another story.
By Lou Carlozo June 17, 2015
You might want to cash in on this modern-day “Gold Rush,” but the pot industry is so new that your aspirations may go up in smoke.
Take a toke, if you will, on this: There’s a possibly great investment out there on a commodity that’s legal. Sort of. And it holds potent promise for making a killing – though at this early stage of the sector, you could also get scammed.
Once a scourge for law enforcement officials across America, cannabis is now fully legal in four western states. That seems fitting, since the new marijuana “Green Rush” reminds some observers of the mid-1800s “Gold Rush” – or another boom of recent note.
“I liken it to where the dot-com industry was circa 1998,” says Steve Gormley, chief business development officer at OSL Holdings in Yardley, Pennsylvania. “There’s a ton of opportunity, early adopters and genuine entrepreneurial innovation happening in the industry right now.” And yet: “There are also predatory scam artists and black marketeers who will fleece uninformed investors dazzled by the prospect of huge returns,” he says.
As with any new investment opportunity, the questions and conundrums are enough to make your head spin – and that’s without inhaling.
Take it from a professor based at ground zero of the legal pot free-for-all. “Frankly, we don’t know yet whether the people opening the shops have the business knowledge and experience necessary to be successful in this challenged industry,” says Maclyn Clouse, a professor of finance at the University of Denver’s Daniels College of Business.
OK, so some operations don’t quite know how to sell pot. But if you’re a backer, would you necessarily know? Not really, Clouse says, because the core industry is so new that no one really has a track record in it just yet (unless, say, they come from the medical marijuana end of things).
“It’s also not easy to invest in one of these businesses; they are not publicly traded, they may not have credible financial statements and out-of-state ownership may not be allowed,” he says. “The information a prudent investor would want may not be available. There have also been some issues in Colorado with shop owners linked to organized crime.”
As if grappling with a potential “Potfather” weren’t bad enough, fraudsters are definitely out there. “There are people getting into the cannabis industry who were essentially run out of their last business and trying to reinvent themselves as cannabis entrepreneurs,” says Kris Krane, co-founder and managing partner of 4Front Advisors, a Phoenix-based company that provides support capabilities to companies in the marijuana industry.
“When looking into dispensary or cultivation operations, be wary of anyone claiming a guaranteed, large short-term return on investment,” advises Krane, who served from 2000 to 2005 as associate director of the National Organization for the Reform of Marijuana Laws. “These businesses tend to take time to get up and running and to scale, so someone promising big numbers right out of the gate is either not educated enough or not being honest.”
“Know the people you are investing with,” adds Jeremy Carr, CEO of BlazeNow, an ad platform and data collection hub that will focus on the high-tech side of the cannabis industry. “Be hands-on if possible and learn everything about the product and industry.”
To that end, it helps to know a hedge fund manager in the cannabis world – someone like Leslie Bocskor, founder and managing partner of Electrum Partners. He says to carefully read the investment prospectus and look for “a great team that can demonstrate previous success and has been able to take in investor money and return it with profits.” (Trust us, the plan shouldn’t be scrawled on the back of a rolling paper.)
The rest of the prospectus, Bocskor adds, should take you through some rigorous paces that include “valuations of comparable businesses in their industry and analogous industries, and clarity about the path to return of investor capital and profits. Businesses that can meet these criteria solidly always have the very best chance of winning.”
And as any smart investor knows, the rise of a commodity leads to bright prospects for the industries attached to it. “The buzz phrase in the industry right now is that all the money in pot is in the ‘pick and shovel’ ancillary businesses,” says Adam Bierman, co-founder and managing partner of MedMen, a medical marijuana licensing and management company in Culver City, California. These products include growing lights and vape pens, which vaporize the active ingredients in cannabis oil.
Compare that to what it’s like to wholesale cannabis in Colorado, where there are more than 2,000 dispensary licenses in Denver alone, Bierman says. “The market price for wholesale flower fluctuates drastically, which is why you hear about ‘intrepid’ entrepreneurs losing their shirts in Colorado because of massive crop failure, or a drop in market rate due to oversaturation.”
Meanwhile, guess who else is making the real green? Lawyers, accountants and professionals, says Andrew Ittleman, co-founder and partner at Fuerst, Ittleman, David & Joseph, a Miami-based law firm. But they could also help you vet the real investment opportunities: “Review the company’s filings with the [Securities and Exchange Commission],” he advises. “Chances are the public filings tell a far more modest story than the company itself would tell.”
Making sense of marijuana’s legality in the U.S. is akin to getting lost in a head shop. It’s still illegal under federal law to use, sell or cultivate it, but states can decriminalize it so long as they have regulation systems in place. To date, only four states have legalized cannabis for recreational use: Colorado and Washington in 2012, followed by Oregon and Alaska in 2014. They also rank among the 18 states that have decriminalized pot, according to NORML. But it’s still fully illegal Texas and Utah, where selling cannabis is a felony.
Will all this change? Some predict full, fast-track legalization in many of the remaining 46 states. But Ittleman calls such forecasts from those in the industry a “red flag” for the little green plant. He urges caution: “Stick with what you know and forget about the hype. The opportunity is not going away anytime soon.”
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Regulators announced Wednesday that a geographic targeting order was going to be put in place April 28, impacting almost 700 Miami businesses in the electronics exporting industry.
The Financial Crimes Enforcement Network order will require the targeted businesses in ZIP codes in Doral, Miami Gardens, Sweetwater, Medley, West Miami and Virginia Springs to submit a Form 8300 for all cash transactions over $3,000. Typically, that form is required for cash transactions over $10,000. The order will be in effect for 180 days.
Regulators and law enforcement are using the order to root out money laundering schemes connected to drug cartels like Los Zetas and the Sinaloa, according to FinCEN. Los Zetas and the Sinaloa are the largest drug cartels in Mexico.
The record-keeping requirement in the order is more expansive than what currently exists. Businesses need much more extensive identification for buyers, and information on whether or not the buyer is representing a third party.
“With the explosion of the cellphone industry, it has become quite normal for drug dealers and money launderers to use these types of businesses as a front. It’s a natural fit in their eyes,” said attorney Brian Bieber, a shareholder in the Miami office of law firm GrayRobinson, P.A.
There haven’t been a lot of these orders, so there is not a lot to measure against, said attorney Jared Dwyer, a shareholder in Greenberg Traurig’s Miami office and a former assistant U.S. attorney for the Southern District of Florida.
“By lowering the threshold to $3,000, by requiring the additional record keeping and by requiring the additional records at the time the transaction occurs,” Dwyer said, “they’re necessarily going to have an impact on money launderers that want to continue doing business in those ZIP codes.”
There was a similar GTO issued last year, targeting Los Angeles’ garment district. That order was preceded by some government enforcement actions, specifically search warrants and cash seizures from various businesses.
“With regard to the Doral [GTO], I don’t believe there has been the similar type of enforcement activities in that area,” Dwyer said.
The order is going to slow down transactions, he said. “It may not be an investigative tool, but more of a protective tool for the systems. In other words, to shut it off.”
Following the order, it’s possible that there will be the opportunity for the creation of a criminal case, Dwyer said.
Because the order affects hundreds businesses, it’s likely that some are legitimate businesses simply operating in targeted zip codes.
“I think there are businesses on this list that just happen to be on the exporting businesses but they are in that zip code. They’re legitimate,” Dwyer said.
“Most of these companies are unwittingly and unknowingly participating in these money laundering violations,” said Andrew Ittleman, a founding attorney with Miami-based Fuerst Ittleman David & Joseph. “Sometimes a random person comes and the Miami company doesn’t do its due diligence … because it’s a computer parts distributor, not a bank.”
The electronics exporting industry is a big one in Miami, and originated largely because electronics manufacturers didn’t want to distribute to countries they deemed were a credit risk. To fill the hole, smaller distributors set up shop in Doral, Sweetwater, etc., Ittleman said.
“Instead of taking that credit risk themselves, the Samsungs and Nintendos will sell to a distributor in Miami, which will then sell to Latin America,” Ittleman said.
These distributors will sometimes go to Latin America and check out the warehouses and businesses that are buying product from them, and determine whether or not a business is a good risk.
“The distributors are really good at it,” Ittleman said.
Although the Miami GTO was not precipitated by the same type of criminal investigation as the Los Angeles one, there has been a wave of simple forfeiture cases that have been launched by the South Florida Money Laundering Strike Force, Ittleman said.
“What has happened is that the Miami companies have found themselves in the middle of the money laundering event,” Ittleman said. After all, it’s easier to send a box of cellphones to a different country than it is a box of cash.
The impact of this order is threefold, Dwyer said. First, people fly into Miami from all over the world with up to $10,000 in cash, and they are allowed to buy cellphones and computers and videogame consoles to bring back to other countries. This order now requires anyone coming in with $3,000 or more in cash for electronics purchases from the targeted businesses to have proper documentation.
Second, the banks will be affected: “Banks who bank all these exporters are going to be impacted by the order, because now everybody is on notice that FinCEN believes the Mexican drug cartels are laundering money down here in Miami,” Dwyer said.
Third, the exporters themselves are going to be impacted. During the order, businesses will have to implement compliance programs and make sure their employees are familiar with every aspect of the order. Business have to make sure that they have the proper identification, keep the records for five years, and store them in an accessible place to produce for law enforcement, Dwyer said.
“The order has so many permutations through it that the exporters are going to have a lot of work to do to become compliant with the order itself,” Dwyer said.
To some extent, FinCEN is tipping its hand to any actual money launderers using the Miami electronic exporting industry.
“It is quite unusual for the government to come out and essentially stand on top of the tallest building in downtown Miami and scream to 700 businesses, ‘Watch out, we’re investigating you and this entire industry,’” Bieber said. “It’s quite rare and tells the story of a real problem occurring.”
https://fidjlaw.com/wp-content/uploads/2015/04/SFBJ-Logo-2-e1435785490105.png88286admin_fidjhttps://fidjlaw.com/wp-content/uploads/2007/02/FIDJ-Logo-Hero.svgadmin_fidj2015-04-24 21:20:082023-08-23 17:41:44What a FinCEN dragnet means for 700 Miami businesses
By Chris Cumming and Marc Hochstein April 10, 2015
As financial institutions worldwide move to cut off relationships with industries that regulators consider risky, the few banks that serve these businesses are charging hefty fees for basic services.
For companies in the cryptocurrency and legal marijuana businesses — two sectors that regulators now scrutinize most closely — getting access to a bank account can cost thousands in monthly fees, if it can be done at all.
Marijuana businesses routinely pay as much as $3,000 a month for basic checking accounts, people who work in the pot industry say. Additional fees — for picking up deposits in armored cars or for audits required by a bank’s regulators — make the all-in costs even higher, they say. (For perspective: Most banks offer small-business checking with monthly fees below $50, if any.)
For crypto-currency companies, banking options are even more limited, and more expensive. Monthly fees for a basic checking account can range into the tens of thousands of dollars, say lawyers and consultants who work with these companies.
There’s no question that banking these companies is expensive and risky for banks, given the due diligence required and the potential fines for lapses in anti-money laundering compliance. But many people who work in these industries think that banks are using risk as a cover to take advantage of the fact that companies in these industries have few other options.
“The reality is that it’s extremely difficult to get a bank account in this industry, so if you do find a bank you are highly incentivized to play by whatever rules they set for you,” said Taylor West, deputy director of the National Cannabis Association.
Offsetting Risk
From banks’ perspective, higher fees are inevitable. Banking high-risk businesses requires extensive documentation and reporting, which would be unprofitable without charging more.
Charging risky companies high monthly fees for bank accounts is “absolutely reasonable,” said Andre Herrera, executive vice president of banking and compliance for Hypur, a firm that helps banks serve challenging industries.
“There are a number of legal, legitimate businesses that pay a higher price for their financial services,” he said. “Banks are looking at all the risk factors and saying, ‘I have more on the line to bank this industry and we’re going to bill them more to offset this risk.'”
The risks of the pot and cryptocurrency industries are due in part to their cloudy regulatory status. No bank has been publicly censured or fined by bank regulators for working with either industry, and regulators have issued guidelines on how banks can legally serve these industries.
But for most banks the business isn’t worth the risk. The result is that even as these industries begin to join the mainstream — with legal cannabis now a multi-billion-dollar business and traditional financial institutions investing millions in Bitcoin companies — basic banking services remain either off-limits or onerously expensive.
There are “a lot of parallels between the marijuana-banking space and the crypto-banking space,” said Andrew Ittleman, an attorney at Fuerst, Ittleman, David & Joseph who has published articles on both subjects.
New York’s bid to become the first state with a dedicated regulatory regime for the digital currency industry took a step forward this week when the New York State Department of Financial Services (NYDFS) published an updated draft of its BitLicense proposal.
While only released on 4th February, the digital currency industry is already beginning to develop a loose consensus on the revisions and their potential impact.
Overall, the community lauded the NYDFS for its willingness to incorporate feedback from those who provided comment, even if there was an equally strong belief that some parts of the regulation remain unclear and onerous.
Non-profit research firm Coin Center has to date released the lengthiest public response to the latest proposal, and was perhaps most indicative of this centrist view. Coin Center praised the agency even as it critiqued its approach to conditional licenses and mandated that those who want to issue digital currency will fall under its scope.
Authors Jerry Brito and Peter Van Valkenburgh wrote:
”NYDFS has shown a willingness to embrace criticism that should be celebrated by the bitcoin community. This new draft clearly indicates that the many comments submitted in the previous comment period were reviewed and considered.”
Despite challenges ahead, there was a sense from the business community that the BitLicense debate is nearing completion and that this will spur interest and growth for the industry, even if there are likely to be disagreements that arise in the coming 30-day comment period.
The more critical view was perhaps best characterized by Circle CEO Jeremy Allaire, whose bitcoin services startup has raised $26m in two public rounds.
“Throughout the document, there remain an enormous number of clauses that leave issues open ended and to be decided at the discretion of the superintendent,” he argued. “This lack of specificity and open-ended review will create an environment which discourages innovation and instead focuses on risk mitigation.”
Allaire’s criticisms came even despite his belief that the revision includes a number of “significant and important changes”, and that upon its passage, bitcoin will take an important step on the road toward being integrated with the wider financial system.
This more optimistic outlook was echoed by Cameron and Tyler Winklevoss, the venture capitalists and entrepreneurs behind New York-based digital currency exchange Gemini.
“The revisions demonstrate New York’s commitment to being the center of the financial world – both for fiat and digital currency,” the brothers told CoinDesk.
Boon for non-financial bitcoin technologies
Perhaps most notable was the inclusion of a previously announced exemption for startups that are using bitcoin’s decentralized ledger, the blockchain, as well as the ledgers of other protocols, for non-financial means.
The addition of this provision was cited by a number industry members, including Allaire and the Winklevosses, but was of particular focus for crypto 2.0 companies, the sector most concerned with these applications.
Taariq Lewis, CEO of bitcoin and gold trading platform DigitalTangible, told CoinDesk he was “comforted” by the fact that software distribution is exempt from the current proposal.
“We’re still digesting, but believe this clause allows companies like DigitalTangible to avoid licensing requirements by building more software tools,” he said.
Tim Swanson, business development head at digital asset exchange Melotic, however, suggested his opinion that the definition of “software” still remains vague.
Such an interpretation would put New York in line with the growing global consensus that non-financial blockchain applications require less oversight, a development that could potentially push more investors to consider the sector as its growth continues in 2015.
Business burdens remain
While noting that “important improvements” were made, Allaire critiqued the most recent revision for its failure to remove potentially onerous mandates that he argued will restrict the competitiveness of startups.
In particular, Allaire took aim at the requirement that licensees receive permission to introduce all new products and features.
“This cuts deeply against the grain of agile, Internet-based software innovation, and is nearly inconceivable,” Allaire said. “Internet technology companies deploy new features into products on a daily or weekly basis, responding to immediate customer and market demands.”
The latest revision did allow for digital currency startups to ask the NYDFS if certain changes need to be reviewed, but Allaire suggests that such oversight be limited to certain “highly specific” changes.
Such a take was seconded by Bitcoin Foundation board member candidate and Bitcoin Embassy director Francis Pouliot, a resident of Canada who spoke to the proposal’s broad reach. Pouliot said that US bitcoin companies should push for bitcoin to be regulated under existing law.
“Compliance with existing laws is crucial for the bitcoin industry to obtain legitimacy, but such new rules and requirements will certainly reduce New York’s potential to be a leader in cryptocurrency innovation,” he said.
In current form, Pouliot suggested, the proposal would do much to convince startups to head to “more friendly jurisdictions” outside the US.
At least one respondent provided evidence of this response, with Coinkite’s Rodolfo Novak telling CoinDesk:
“It seems that it was toned down, but it is still absurd to ask a startup [for] $265,000 to register in all states. Happy to be in Canada.”
Verdict still out
Still, while the community applauded the willingness of the NYDFS to make changes, others were unimpressed by what they characterized as slight revisions given the scope of the critical feedback the department received.
“None of these changes address the structural flaws that many industry members, such as Coinbase, addressed in the comments they submitted,” Andrew Ittleman, founder and partner of Fuerst Ittleman David & Joseph, PL, told CoinDesk. “If anything, subject to a few exceptions, NYDFS has doubled down.”
Other respondents were positive in their remarks, while suggesting that more in-depth reading needs to be done before decisions can be reached.
This take was put forth by Perianne Boring, president of US bitcoin advocacy group the Chamber of Digital Commerce, who indicated her opinion is perhaps still being formulated.
“The NYDFS clearly listened to many of the community’s concerns and was very responsive in addressing some of the identified issues. We are continuing to analyze the proposal and look forward to providing comments to the NYDFS,” Boring said.
In yet another sign opinion is still being formulated, many individual companies contacted for comment did not return responses at press time.
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Attorneys Andrew Ittleman and Jessika Tuazon of Fuerst Ittleman David & Joseph published their article, “Federal Marijuana Regulation: Why is Flexibility Critical in the Dawn of Legalization?” in the December 2014 issue of the Food and Drug Law Institute’s Food and Drug Policy Forum. A copy of the article is available here.
In the article, Mr. Ittleman and Ms. Tuazon confront “the complex question of how the federal government should go about the process of ending its decades-old prohibition of cannabis and bring about a regulatory regime designed to address the wide array of risks and opportunities presented by legalization.” After describing the history of the federal government’s prohibition of marijuana, as well as the efforts of various states to legalize it in various forms, the article recommends that “rather than attempting to devise a statutory scheme for cannabis in an echo chamber, Congress should be carefully studying the successes and failures of the individual states’ efforts to regulate marijuana, as they are the perfect ‘social and economic experiments’ encouraged by traditional notions of federalism.” The article further suggests that instead of “starting from scratch in developing regulations for marijuana, the government could – and should – borrow elements from regulatory regimes already in place for analogous products.” The article also describes how existing federal agencies – including the FDA, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), and
the Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) – could all be delegated jurisdiction by Congress to regulate marijuana, as all three agencies
are well suited to handle the added task of regulating and enforcing laws overseeing the manufacture, distribution, and sale of marijuana.
Most importantly, Mr. Ittleman and Ms. Tuazon recommend that in undertaking the regulation of marijuana, the federal government should proceed flexibly, giving due regard to the marijuana industries already developing in numerous jurisdictions in the United States, as well as regulatory regimes already in place for analogous articles, including alcohol and tobacco. The article concludes with the following recommendations:
First, we respectfully submit that Congress should carefully study the marijuana industries already developing in numerous jurisdictions in the United States, and should likewise invite the individual states to participate in Congress’s legislative process. Additionally, because of the value of the data currently being developed
in states which have legalized marijuana in one way or another, the federal government should support the states in their efforts to regulate marijuana by providing regulatory guidance and law enforcement resources as requested by the states. The federal government should also continue to loosen restrictions on banks and other federally regulated financial institutions wishing to do business with licensed marijuana related companies, as the all-cash business model of the typical dispensary will only lead to security risks and the tainting of the information needed by Congress when considering how to govern the interstate market for cannabis.
Second, we respectfully submit that in evaluating its own regulation of medicinal and recreational cannabis, the federal government should look to regulatory regimes already in place for analogous articles, including alcohol and tobacco. By doing so, the process of writing regulations for the marijuana industry can be far more economical, and will give the regulated industry better notice and more opportunity to comply.
Third, we should all appreciate the scope of the task at hand, and understand that there is much more at issue than simply rescheduling or “legalizing” cannabis. Once prohibition has ended, marijuana may be available nationwide in the form of buds, edibles, drinks, tinctures and concentrates, potentially for medicinal and recreational purposes, and every possible variation on the manufacturing, distribution and use will be subject to regulation. It is therefore critical that Congress proceed deliberately so as to avoid a gap between the end of prohibition and the beginning of regulation, and flexibly so as to take all of the various forms and uses of cannabis into consideration.
Finally, everyone participating in the process of ending the federal government’s prohibition of cannabis should appreciate the magnitude of the black market and understand that it will not disappear overnight following a rescheduling. It is the black market, perhaps above all else, that mandates that Congress proceed deliberately when legalizing cannabis, to ensure that all possible voices are heard and seriously considered. Indeed, if federal regulation of cannabis is overly restrictive, leading to higher costs or elimination of choice for consumers, consumers will revert to the same black markets they have used for the past 40 years. A black market for cannabis – even following a federal rescheduling – will trigger all of the “Cole Memo Priorities” currently sought to be quelled by the Obama administration, including the diversion of profits to criminal enterprises, access to cannabis by children, and other adverse health consequences. Congress should thus take care to end prohibition deliberately, comprehensively, and with due regard for every interested party.
Fuerst Ittleman David & Joseph provides comprehensive representation to highly regulated businesses, including clients operating in the financial services, biotechnology, and international trade industries, and frequently lectures on these subjects for industry trade groups. The firm has more recently been called upon to combine its Food and Drug and Anti-Money Laundering practice areas in assisting marijuana-related businesses achieve financial compliance.
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