What a FinCEN dragnet means for 700 Miami businesses

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By Nina Lincoff
April 24, 2015

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.”

To view original article, click here.

Pot, Bitcoin Companies Pay Steep Fees for Bank Access

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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.

To view original article, click here.

Hectic Trial Schedule May Have Forced $100M Engle Deal

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360

By Carolina Bolado
February 25, 2015 

The $100 million settlement announced Wednesday resolving hundreds of Engle tobacco cases pending in Florida may have been the result of an aggressive trial schedule set by the federal judge overseeing the litigation, a stark contrast to the lack of coordination in cases at the state level.

Philip Morris USA Inc., R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. inked a settlement that clears out the more than 400 so-called Engle-progeny cases currently pending in Florida federal court that have not gone to verdict and are not on appeal, a number that represents about 10 percent of total pending cases.

What got the parties to the negotiating table may have been the aggressive trial schedule set by U.S. District Judge William G. Young of the District of Massachusetts, according to Robert Nelson of Lieff Cabraser Heimann & Bernstein LLP, who helped negotiate the settlement for the plaintiffs.

Judge Young was appointed by the Eleventh Circuit to oversee and coordinate the hundreds of Engle progeny cases in the Florida federal courts, and he set an aggressive schedule and brought in judges from across the country to oversee the trials, according to Nelson.

“This was part of a comprehensive strategy really conceived by the court to push the cases aggressively and in so doing force as many trials as possible,” Nelson said.

The cases stem from the landmark Engle v. Liggett Group Inc. class action against tobacco companies that was decertified in 2006 by the Florida Supreme Court.

Though the court decertified the class and overturned a $145 billion verdict, the court allowed up to 700,000 people who could have won judgments to rely on the jury’s findings to file suits of their own. These findings include conclusions that smoking causes certain diseases and that tobacco companies hid smoking’s dangers. The individual suits have since yielded hundreds of millions of dollars in damages.

Nelson said that on Feb. 2, his team had four Engle trials going at the same time, and three more were set to start on Feb. 23. Under Judge Young’s schedule, the federal docket would have been cleared of tobacco trials by the end of 2016.

“We just had trial after trial,” Nelson said. “It was quite an extraordinary schedule that he set, and he was able to keep the commitment by getting other judges to help.”

Sergio Campos, a professor at the University of Miami School of Law, said Judge Young has a reputation for being innovative and for working quickly.

“This is a particularly clever way to push the cases forward,” Campos said. “By having an aggressive schedule, it takes away one power of the defendants, which is just to delay.”

But even before the aggressive trial schedule was set, Judge Young implemented a number of procedures intended to winnow the number of cases. In addition, all of the cases were in a single federal district court, making it easier to coordinate a settlement.

Murray Garnick, a senior vice president and associate general counsel at Philip Morris’ parent company Altria Group, said that the settlement is in the best interest of the company.

“We are pleased that we were able to work with Motley Rice LLC and Lieff Cabraser to put the federal Engle progeny trials behind us,” Garnick said.

R.J. Reynolds’ vice president and assistant general counsel Jeff Raborn said the agreement “presented a unique opportunity to essentially close out the federal docket.”

An R.J. Reynolds spokesman told Law360 that the aggressive trial schedule set by Judge Young did not factor in to the company’s desire to settle the federal cases.

All three tobacco companies say they will continue to vigorously defend the rest of the pending cases, which are meandering through the state court system. About 3,600 Engle progeny cases in state court are still awaiting resolution.

Micah Berman, a professor at Ohio State University Moritz College of Law, said Monday’s settlement is significant and is a change from the tobacco companies’ past practice of refusing to settle anything. But he cautioned against expecting a wave of settlements clearing out state court dockets.

“State court is a different ballgame, because you’re talking about thousands of cases instead of hundreds of cases,” Berman said. “It’s much more difficult to pull off.”

So far, there has not been much interest from the tobacco companies’ side to resolve those cases out of court, according to Joseph Rice of Motley Rice, which was co-counsel for the plaintiffs with Lieff Cabraser on the settlement.

Rice, who represents a number of plaintiffs in state court Engle cases, said he has tried to start settlement talks for those cases without success.

“We offered to discuss coming up with some model and trying to contact the state court attorneys but the tobacco companies said they didn’t have any interest,” Rice said.

If the parties do decide to settle all or part of these cases, this deal could provide a sort of template for future settlements and how to calculate which plaintiffs should get money and how much, according to Dick Daynard, a professor at the Northeastern University School of Law.

The federal cases were an obvious group to settle, because they were brought by a single group of attorneys and were overseen by one judge, Daynard said. The state court cases would be a more complicated process, but they could look to both this settlement and the $110 million deal Liggett Group LLC inked in 2013 to exit all Engle cases.

“It’s going to be a little messier because there are more plaintiffs and more plaintiffs’ attorneys involved, they’ve been filed in many more courts, and there hasn’t been the weeding process that I think the federal cases may have pushed through,” Daynard said.

 

 

Asymmetrical Reporting: A Trap for the Unwary

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Corporate

By Joseph DiRuzzo III
February 19, 2015

As the regulatory state continues to grow with every passing year, businesses’ obligations to provide information to, and file reports/forms with, local, state, and federal governmental agencies increases. Whether it be periodic reporting, e.g., IRS Form 1120, SEC Form 10-Ks, or upon the consummation of a specific transaction or event, e.g., IRS Form 8300, SEC Form 8-K, each filing represents an opportunity to incur a potential liability for incorrect or improper reporting. To that end, each filing also represents justification to the IRS to audit a business (to the extent that justification is needed).

It should come as no surprise that compliance costs make the list of corporate counsel’s top concerns. However, reducing compliance costs often comes with an unseen price — the cost of the audit and any attendant fines and penalties that result. Accordingly, corporate counsel is placed in the unenviable position of attempting to balance the unknown risk of future audits and contingent (and often speculative) governmental liabilities with known (and quantifiable) costs of short and medium-term governmental compliance. Indeed, before a governmental audit commences corporate counsel can be viewed as a “chicken little,” always attempting to minimize exposure that may never come to pass, while after a governmental audit starts, and there is an internal assessment that there was corporate shortcomings, corporate counsel is blamed with not doing enough. Given these mutually exclusive competing interests, what is a savvy corporate counsel to do?

Avoid Asymmetrical Record-Keeping

The answer is to do more with the limited resources available. While this may seem like a statement of the obvious, understanding where governmental auditors look for evidence of non-compliance, and how to provide evidence of compliance and minimize and/or eliminate evidence of non-compliance is key to minimizing audits and, just as importantly, minimizing the length and intrusiveness of the audit.

One common business practice that often will draw special scrutiny from government auditors is asymmetrical record-keeping (and the related practice of asymmetrical reporting). While such procedures may be justified for business and accounting reasons, asymmetrical record-keeping also may lead auditors to extend an audit or, worse yet, reach audit conclusions that, but for the asymmetrical record-keeping, would not have resulted in fines or penalties being assessed.

Where does asymmetrical record-keeping typically occur? Do the individuals tasked with interacting with the government auditors have sufficient understanding to provide the correct data? And perhaps more importantly, do these individuals sufficiently understand why the record keeping is asymmetrical and do they have the ability to effectively communicate this information?

If corporate counsel is not absolutely confident that he/she is comfortable with the answers to these questions (or if corporate counsel is asking himself/herself these questions for the first time) an internal assessment of the business’ capabilities and consideration of how to address any internal weaknesses should be performed.

The Questions to Ask

Starting with the data itself, corporate counsel must have a sufficient understanding of the business information technology (IT) infrastructure and accounting information systems (AIS) within the business to be able to respond to a governmental request. The days are long gone when corporate counsel could rely on IT personnel or lower level accounting staff to be able to assess nature, extent, and scope of the governmental information requests. The reason is that data is often processed into information that suits the information end-user’s specific needs. In other words, it might not be entirely clear to the person tasked with responding to the audit what information is

actually being provided, and how such information may differ based on certain query parameters. Moreover, the data in its unprocessed form may not impart any useful information; the data itself may be incomprehensible without further refinement, thus necessitating legal and accounting acumen.

For example, accounting records may be kept in accordance with U.S. Generally Accepted Accounting Principles (GAAP), in accordance with International Financial Reporting Standards (IFRS), for cost-accounting purposes, on a cash basis, for federal income tax purposes, or a combination of some, or all, of the above. While U.S. GAAP and IFRS do have some substantial similarities, and have been converging over the years, substantial differences remain.

Cost-accounting differs in key respects from financial accounting, i.e. , GAAP. Cost-accounting is designed for the managers of a business. Since managers of a business make decisions based on the business they are running, there is no need for the information to be comparable to information in other businesses. In contrast, GAAP is designed to provide consistency and comparability among and between businesses. Importantly, cost-accounting need not comply with GAAP. Generally speaking, cost-accounting focuses on operating profit, which is the excess of operating revenues over the operating costs incurred to generate the revenues. Operating profit almost always varies from GAAP net income, which is operating profit adjusted for certain items such as interest, depreciation, amortization, taxes, extraordinary losses or gains, and other adjustments needed to comply with GAAP (or in the case with income taxes with the Internal Revenue Code).

While the data that resulted in the specific accounting information may, or may not, have been the same, the ultimate accounting information will be very different. This asymmetry may be compounded by the fact that business may need to keep two or more “sets of books” for their different reporting obligations. There is nothing uncommon about this practice, but providing information to an IRS auditor what was based on cost accounting, instead of tax accounting (see the “Uniform Capitalization” provision of the Internal Revenue Code – 26 U.S.C. § 263A), could extend an audit as the IRS auditor now has been provided source documentation/information that may directly contradict what was reported on an income tax return. It may take weeks, if not months, to fix the damage and put the audit back on track. At worst, if the mistake is not corrected, the IRS auditor may use the business’ own records against it to justify the imposition of additional tax, interest, and penalties.

This problem is exacerbated by governmental auditors who do not have a robust accounting background, or lack the ability to understand the differences or nuances between different accounting methodologies. At times this problems is unavoidable because low level governmental auditors use “check-the-box” audit lists that require auditors to ask for accounting information that is often inappropriate for the audit’s purpose. Indeed, the use of audit checklists has taken the discretion away from auditors, resulting in a one-size-fits-all approach leading to incorrect audit findings.

For example, transfer pricing (26 U.S.C. § 482 and 26 C.F.R. § 1.482-1, et seq.) between related business entities has recently been the focus of the IRS, which has bolstered its transfer pricing operations. Transfer pricing is an attempt to approximate what an “arm’s-length” transaction would be between unrelated parties. A common method of transfer pricing is the “cost-plus” method, 26 C.F.R. § 1.482-3(d), in which the purchasing entity pays for the goods and from the selling entity at the cost of producing the goods, plus a reasonably commercial mark-up for the production. If the selling entity is audited by the IRS and the wrong information is provided (e.g., the GAAP information is provided instead of the cost-accounting information on which the inter-company agreement was based) the IRS auditor could come to the conclusion that the “correct” arm’s-length transaction should have resulted in substantially more income to the U.S.-based entity and, by extension, increased the taxable income underreported and subject to penalties and interests.

More Than Just the IRS

However, problems with asymmetrical record-keeping can cause issues with state and local taxing authorities as well. Using the example above, but shifting the paradigm to high-tax jurisdictions such as California, one can see how a state tax auditor could conclude that a consolidated group of entities has improperly attempted to shift income from his or her state to a low-tax jurisdiction such as Washington, which has no state income tax, or has improperly attempted to shift expenses or deductions from low-tax jurisdictions to high-tax jurisdictions.

 

 

Additionally, in the non-income tax environment, U.S. Customs and Border Protection (CBP), under 19 U.S.C. § 1500 and 1401a, is responsible for appraising imported merchandise by ascertaining its proper value and other information. Using a CBP Form 28, ”Request for Information,” as authorized under 19 C.F.R. § 151.11, CBP can request additional information about imported merchandise from an importer. While CBP does this routinely when the invoice or other documentation does not provide sufficient information for appraisement, CBP also uses supplementation information on value to monitor whether there is no illegal “dumping” of goods into the American market, or to prevent trade-based money laundering.

The automated systems used by CBP to monitor imported merchandise is quite sophisticated and when the reported value of an imported item is outside of an acceptable range it may result in the issuance of a CBP Form 28 (or even a CBP audit or full-scale investigation). CBP will issue Form 28, which among other things, asks for the “[b]reakdown of components, materials, or ingredients by weight and the actual cost of the components at the time of assembly into the finished article.”

If the information provided to CBP in response to an audit is inconsistent, e.g. , IFRS information is provided instead of the cost-accounting, with the customs declaration the CBP might conclude that there has been an attempt to avoid duties or break other laws. Further, if the information provided in response to Form 28 is inconsistent with information provided on prior occasions CBP might conclude that there is a significant change or anomaly with the importation of the goods. Indeed, as part of a standard CBP audit, CBP auditors are instructed to request readily available information such as flowcharts, working trial balances, and other financial information. Moreover, CBP auditors are to consider whether there are procedures in place to ensure that additions to declared value, i.e. , price, includes packing, proceeds, royalties, selling commissions, transportation costs, and currency exchange adjustments, to name a few. Thus, providing the correct data is often key to demonstrating compliance and minimizing audit costs.

Further, because governmental agencies share information, it is not uncommon for CBP to provide information to the IRS that may result in an IRS audit (of transfer pricing practices or otherwise), or if an IRS audit is ongoing, the IRS may request the information from CBP.

Conclusion

Understanding the differences and the similarities in the information is key to both providing the correct information in the appropriate context and, just as importantly, being able to articulate the rational and legitimate basis for the inconsistencies in data when a governmental auditor obtains information and applies it in the wrong context.

Joseph A. DiRuzzo III is a senior attorney with Miami law firm Fuerst Ittleman David & Joseph. He may be reached at jdiruzzo@fidjlaw.com.

 

Industry: BitLicense Revision Leaves Room for Continued Debate

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By: Pete Rizzo
February 6, 2015

Screen-Shot-2015-02-06-at-3.10.45-PM

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.

To view original article, click here.

Podcast: Criminal defense attorney Andrew Ittleman on digital currency law

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By: Trace Mayer, J.D.
February 5, 2015

To listen to the podcast, click here.

#BTCMiami: Regulation Panel Predicts New State Law Imminent — and “Look Out for the Lawsuits”

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By: Hal M. Bundrick
January 17, 2015

TNABCRegulatoryPanel

Panels discussing regulatory issues can be a bit tedious at bitcoin conferences. But this afternoon in Miami at The North American Bitcoin Conference, predictions were made, warnings were issued and attendees may have heard a bit more than they bargained for.

Moderated by Jacob Farber of Perkins Coie, panelists included: Christopher Hopkins of Akerman, Marco Santori of Pillsbury Winthrop Shaw Pittman, Perianne Boring, founder and CEO of the Chamber of Digital Commerce, Kathryn Haun, assistant U.S. Attorney for the organized crime strike force and Andrew Ittleman of Fuerst, Ittleman, David & Joseph. Australian senator Sam Dastyari joined the panel in the second half hour to provide an international view.

TNABCLobby

The panel was asked to offer predictions of major events imminent in the regulatory realm. Ittleman provided the first fireworks by saying the beleagured bitcoin mining industry has witnessed “a shot across the bow” from the Internal Revenue Service. Ittleman says that unlike traditional mineral mining, Bitcoin miners experience a taxable event “the moment you mine it,” and that taxable event is “a serious one,” even before the asset is sold.

“If their position is going to be tested through audits and ultimately in tax court litigation, it could theoretically make mining, especially in the United States, completely unprofitable — worse than it is now,” Ittleman said. That could damage the bitcoin ecosystem, “worse than anything else.” He expects the already dicey business — suffering thin, if any, profits due to a sagging price and increasing mining difficulty — can expect heightened interest from regulators, likely resulting in the first tax audit of a miner soon.

Haun forecast the industry would  see additional “government guidance” soon in matters of cryptocurrency regulations. Unspoken, but perhaps veiled in her prognostication was that the guidance could be issued in the form of enforcement action.

Marco Santori predicted that “a U.S. state” – and not New York, though its BitLicense has been top of the mind in the industry – would be putting the first digital currency-specific law on the books before the end of the second or third quarter of this year.

The panel continued to offer one dire prediction after another for the coming year. Hopkins said that consumer action would be spurred by a wave of lawsuits against cryptocurrency companies whose promises may have exceeded their performance. And Haun added that enforcement of money laundering laws don’t require a business to be officially categorized as a Money Services Business (MSB). Boring said that having a well-implemented and documented compliance program was the first step in staying out of trouble and that the Digital Chamber had resources available to guide such efforts.

Finally, Sam Dastyari, senator for New South Wales, Australia, gave a politician’s view of government regulation, by disputing the notion that for companies to simply “do the right thing” and expect a result of “the best policy outcome” was a mistake. The industry has to lead the initiative in helping structure a framework for regulation he said, rather than unrealistically expecting the government to create new laws that are better than what are already on the books.

To view original article, click here.

 

BigLaw Stands To Gain From New US Policy In Cuba

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360

By Carolina Bolado
December 18, 2014    

President Barack Obama’s announcement Wednesday that the U.S. would ease travel and trade restrictions with Cuba for the first time since 1961 positions Miami as a departure point for future investments and means major opportunities for lawyers in the hospitality, travel, telecommunications and construction sectors, experts say.

After 18 months of secret talks with Cuban President Raul Castro, Obama announced that the U.S. would begin normalizing diplomatic relations with Cuba and will lift restrictions on interstate money exchange, travel, trade, telecommunications and third-country financial transactions. While the announcement was met with mixed reactions in the political sphere, the legal and business communities looked to the opportunities that may open up with greater interaction with the island nation 90 miles away.

The easing of regulations and restoration of diplomatic relations is a “watershed moment,” according to Pedro Freyre, chairman of Akerman LLP’s international practice, who said he almost fell out of his chair when he heard the announcement.

“It’s not hyperbole to say that this is historic,” Freyre said. “The U.S. and Cuba have not had diplomatic relations since 1961.”

The hospitality and travel business will likely be immediately impacted thanks to loosened restrictions on travel to Cuba, according to Francis Rodriguez, a partner at Shutts & Bowen LLP in Miami. In addition to easing regulations on who can visit Cuba, the announcement that the U.S. would allow Americans to use credit and debit cards on the island will make travel in Cuba easier.

“In the immediate future, we see the primary opportunities for business interests and our clients in the tourist industry, including travel and hospitality,” Rodriguez said. “There has already been a lot of interest in Cuba in those sectors and we expect the president’s comments to increase those interests.”

He expects new opportunities for joint venture agreements with existing travel and hospitality operators to expand facilities and to market Cuba more broadly to the American public.

“Given the reality of the political situation in Cuba, our clients have been measured in their approach to investment in Cuba,” Rodriguez said. “However, the president’s comments may help facilitate Miami as a potential departure point for the investments which our clients wish to cautiously investigate and pursue.”

In many ways, South Florida, the hub of all things Cuban outside of Cuba, could be the epicenter of mid- to small-sized businesses that might want to participate in new opportunities opened up by the easing of regulations, according to Holland & Knight LLP partner Jose Sirven.

Sirven said that in addition to the travel sector, financial institutions, which previously were not permitted to have correspondent accounts with Cuban banks, will feel the immediate effect of the changes and that he expects his financial institution clients to call for advice on how these changes might affect them.

“It’s an immediate change that they need to figure out how to handle,” Sirven said. “They can’t currently have Cuban accounts, but that’s a particular change that the president has requested. It sounds like financial institutions will now be permitted to deal with Cuban banks.”

This will allow for more large-scale commerce to occur between the U.S. and Cuba, as opposed to just the family remittances that are regularly sent back to the island, according to Andrew Ittleman of Fuerst Ittleman David & Joseph PL. His partner at the firm, Mitchell Fuerst, added that he expects change to come quickly after the president’s announcement.

“There is a huge amount of business between the U.S. and Cuba, and it pings off of Colombia, Venezuela, Belize and Guatemala,” Fuerst said. “What you’re going to see is business instead of being directed in some ignoble way is going to go directly from the U.S. The embargo is not down, but I don’t believe that will influence people’s behavior. We’ve seen it already in remittances. With money transfers from the U.S. to Cuba, there is no barrier.”

Other attorneys think the increase in trade and business will be more incremental. Freyre at Akerman does not expect the trade floodgates to open immediately, but he said Obama’s move should facilitate trade in certain areas, beginning with foodstuffs, which are already allowed under the embargo and which U.S. companies have sold to the Cuban government for years. From there, trade could expand in telecommunications, which Obama specifically mentioned in his announcement Wednesday, and possibly construction materials, which are sorely needed on the island, where buildings are crumbling from decades of neglect.

“Step No. 1 is more trade, and that builds confidence and relationships,” Freyre said. “If things go well and there’s a lowering of tensions, you’ll see greater financial compacts and greater flow of goods. If that goes well and Cuba modernizes its corporate law, trade law and judiciary, investors will begin to feel confident that it’s a safe place to invest. It will not happen overnight.”

Among the many announcements made by the president Wednesday, one that exporters to Cuba were relieved to hear is that they will no longer have to wait for payment from Cuba before shipping their products. Cuba will still have to pay in cash for its purchases, but the payment can now be made just before handing over the goods at the port of entry, according to Freyre, who said the small tweak should make trade between the two countries run more smoothly.

 

But many of the impediments to increased trade come not from the U.S., but from Cuba, where the average citizen makes very little money. Trade is done with the government, which is cash-strapped, has no credit and whose economy is in shambles. The country is particularly suffering now that oil prices have plummeted, as it has in years past sold heavily subsidized Venezuelan oil on the open market to generate cash.

“They can’t rely on Venezuela anymore, which has its own problems,” Doug Jacobson of Jacobson Burton PLLC said. “They have to now fend for themselves, and that’s not easy to do in a truly state-run economy. The economy there is still very much a work in progress.”

Trade in agricultural products will likely increase incrementally, according to Jacobson, who added that suppliers of telecommunications products could also find buyers in not just the Cuban government but also with telecom companies from other countries that operate on the island.

Jacobson, who has worked on Cuba licensing issues for more than two decades, added that though the president’s goal of getting more Cubans connected with smartphones and computers is a good one, the Cuban government’s agenda is a different one.

“Average Cubans have very little access to the Internet, and infrastructure in Cuba is still very very poor,” Jacobson said. “In terms of what we want to accomplish, it sounds great, but if the Cuban government doesn’t want that, it won’t happen.”

Even if the embargo were lifted completely, large-scale changes will need to be made on the island before investors are willing to dip their toes in the market. But re-establishing diplomatic relations is an important first step, according to Freyre.

“We are now taking steps on our side to make things easier,” Freyre said. “We’re opening our valve a little bit. Cuba needs to do the same.”

Western Union BitLicense Response is Pro-Bitcoin, Legal Experts Say

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By: Pete Rizzo
December 13, 2014

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For many in the bitcoin industry, Western Union is the epitome of everything that’s wrong with traditional finance – one might say it’s the Blockbuster Video of a financial world that is on the verge of a Netflix solution.

As a result of this complicated history, bitcoin commentators took aim at Western Union’s latest act in the digital currency space: its public comment on New York’s controversial BitLicense proposal.

Published last week as part of a release of more than 3,700 comments that included big-name brands like Amazon and Walmart, it was Western Union’s submission that perhaps drew the mostattention and scrutiny, with some critics calling attention to language that was allegedly anti-competitive, and by extension, anti-bitcoin.

Though some passages would seem to support this notion at first glance, legal experts working in the bitcoin space largely disagreed with the interpretation of the community at large.

Speaking to CoinDesk, Pillsbury Winthrop Shaw Pittman attorney Marco Santori summed up this assessment, stating:

“Despite popular opinion to the contrary, Western Union’s recommendations telegraphed support for its involvement in the digital currency industry. Nearly every suggestion, save oversight for placement of kiosks, seemed geared toward creating a workable regulatory environment for all of us.”

While the surveyed legal experts agreed Western Union is certainly viewing developments in the bitcoin ecosystem through the lens of its own business interests, they suggested the filing shows it is seeking to prepare for the technology, should it prove more beneficial to its business model.

Fair playing field

Fuerst Ittleman David & Joseph, PL attorney Andrew Ittleman echoed Santori’s remarks, stating that while larger companies will commonly use regulatory processes to burden smaller competitors, Western Union’s filing shows little evidence that it is looking to engage in such behavior.

Ittleman suggested that big corporations will typically argue for tighter regulation, making the case that in the absence of such rulemaking, they might not have the same incentive to provide their products and services to consumers.

“Western Union’s is different,” Ittleman said. “I think that the tone that Western Union takes is for the most part reasonable, and I don’t think it shows on the part of Western Union some sort of intention to destroy the burgeoning virtual currency industry.”

Gusrae Kaplan Nusbaum PLLC attorney Aaron Kaplan posited that part of the filing can be read to suggest that Western Union may be interested in partnering with the industry.

In particular, he points to the following section, which reads:

“We request clarification that if we provide a money transfer to a consumer who has separately agreed to a transaction directly with a VC Licensee as described in the following examples, we would not be engaged in a Virtual Currency Business Activity.”

Kaplan said that this section further suggests Western Union may also be considering how it could “offer a compliance type service to virtual currency licensees”, while additional portions imply it could use bitcoin to fund money transfers.

More opportunity than threat

Perhaps the most visible lightning rod in the filing for the community has been the perception that Western Union wants the government to approve every bitcoin ATM location, as the machines are popularly viewed as a way to encourage new customers to the ecosystem.

However, to Kaplan, this part of the response actually suggests Western Union wants to clarify whether its existing agent network can become “NYDFS-approved locations for virtual currency kiosks”.

Kaplan suggested that Western Union may be hinting at how it could leverage the size of its operations to deploy the technology, should it become more widely used, while pointing out the positives and negatives of this interpretation.

“Where do you think those approved locations will be?” he asked. “Companies like Western Union with its more than 500,000 agent locations and existing infrastructure ‘approved’ as locations for bitcoin ATMs are definitely anti-competitive.”

One source, who declined to be named in the report, remarked that other parts of the response suggest Western Union sees bitcoin as “more of an opportunity than a threat”.

“You see a number of things that suggest if the world does move in this direction of blockchain-based frameworks, what would make this unworkable for us? If we found ourselves going down that path, what things would we want to nip in the bud now if we found ourselves doing that in the medium to long term?” he said.

In regards to Western Union’s call for clarity on the use of kiosks, the source added, “I saw that as a defensive service.”

Dissenting views

Still, not everyone believes that the filing finds Western Union playing nice with the bitcoin industry.

Kaplan, in particular, is at odds with his colleagues in viewing the filing as a positive sign for bitcoin as a whole, saying it did “nothing to promote innovation in the bitcoin industry”.

“It essentially tries to have the bitcoin industry conform to the business that Western Union is in, the traditional MSB business,” he said, adding that such businesses should be allowed to have a flexible regulatory environment in which to mature.

Kaplan also pointed to what he called Western Union’s bid to remain except from BitLicense registration, as a sign that it is looking for a competitive edge over new competition.

Ultimately, Kaplan called on regulators to help ensure that companies like Western Union aren’t able to block the new industry from blooming, voicing his belief that federal regulation is needed to preempt many varied state laws.

“Such a federal regulatory regime will allow and foster the growth of the bitcoin industry both domestically and internationally,” Kaplan continued. “Comparatively, Western Union’s approach is the same old wine in the same old bottle.”

To view original article, click here.