A Southern California man has been sentenced to two years in federal prison for illegally operating Bitcoin ATM machines and kiosks where customers could buy the crypto with cash, or sell it in exchange for cash. Kais Mohammad, 37, was sentenced at U.S. District Court in Santa Ana.
Mohammad ran an unlicensed virtual currency business and laundered up to $25 million in Bitcoin and cash for five years through Herocoin, a cryptocurrency token that operates on the Ethereum platform and contains a smart contract allowing decentralized peer-to-peer online betting.
Mohammad owned and operated Herocoin for five years and offered Bitcoin ATM cash-exchange services, Ciaran McEvoy, spokesman for the U.S. Attorney’s Office said. He charged commissions of up to 25 percent, well above the market rate, the Orange County Register reported.
The company operated a network of Bitcoin ATM kiosks at malls, gas stations and convenience stores throughout Southern California, where customers could buy Bitcoin with cash or sell Bitcoin in exchange for cash dispensed through the machines.
A former bank employee, Mohammad knew he had to register his company with FinCEN — the U.S. Treasury Department Financial Crimes Enforcement Network. He knew he had to maintain an effective anti-money laundering program and report various virtual currency exchanges, but he failed to do so. He also knew that some of his clients’ funds came from illegal activity, McEvoy said.
Mohammad eventually registered the company but failed to do due diligence and report suspicious customers.
Undercover agents posed as employees for a karaoke bar that employed women from Korea and gave Mohammad $16,000 in cash in exchange for Bitcoin, even after the agents said the funds came from illegal activity, McEvoy said.
Every cryptocurrency transaction is recorded on an immutable blockchain, and cybercriminals leave a trail when they cash out digital currency for cash, Financial Times reported. Forensics firms are using technology that analyzes blockchain transactions to help U.S. intelligence agencies map out a picture of the intertwined crypto criminal ecosystem.
Crypto forensics companies that help law enforcement track criminal groups by analyzing currency flow include New York’s Chainalysis, which raised $100 million at more than a $2 billion valuation earlier this year, London-based Elliptic, which counts Wells Fargo among its investors, and U.S. government-backed CipherTrace.
In 2020, about $5 billion in funds representing less than 1 percent of the overall crypto flows were received by illicit entities, and those illicit entities sent $5 billion on to other entities, according to Chainalysis, Financial Times reported.
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Stricter rules and concerns about regulations have pushed some cybercriminals to use unlicensed exchanges, which usually require no know-your-customer information. Many operate outside extradition treaties.
The largest illegal transactions are facilitated by over-the-counter brokers with some operations set up for that purpose alone. There are 11,600-plus crypto ATMs globally with little or no regulation that smaller transactions flow through, along with online gambling sites that accept crypto.
Forensics firms figure out which crypto wallets belong to which criminal groups. Their research shows that hackers are renting out their ransomware software to networks of affiliates while taking a cut of proceeds. Hacker gang DarkSide shut down the Colonial Pipeline earlier this month, according to Chainalysis.