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Selva Ozelli: U.S. cracks down on Canadian cross-border cryptocrime

Canada has emerged as one of the cryptocurrency and blockchain centers of the world. Canada’s dominance in blockchain innovation stems in part from Toronto being home to Vitalik Buterin, the inventor of Ethereum Blockchain, which is the globally most adopted platform that supports ether (ETH), the second highest cryptocurrency valued at $63 billion. 

The Enterprise Ethereum Alliance counts 135 banks out of its 450 members that are trialing the new Ethereum Blockchain technology which launched in 2015.

Blockchain technology and digital taxation received considerable coordinated attention from global intergovernmental organizations, regulators, legislators and central banks who discussed their impact on financial stability and potential uses in tax evasion and money laundering during the G20 meeting in Buenos Aires, Argentina on March 20.

The world’s economic leaders agreed that Ccryptocurrencies and blockchain technology, given its borderless and intangible nature, are fundamentally reshaping the global cross-border financial connectedness and its increasing ability to automate cognitive tasks. They committed to implementing Financial Action Task Force’s anti-money laundering and terrorist financing standards as they apply to crypto-assets to mitigate concerns over security, consumer protection, and financial crime.  

Accordingly, the Canadian government is once again looking at updating its laws around cryptocurrencies, money laundering, and terrorist financing.

The Canadian anti-money laundering legislation and counter-terrorist financing regime  was amended in 2014 for persons “dealing in cryptocurrencies” as “money services businesses” subjecting those businesses to Canada’s AML, without an effective date. When made effective, the amended legislation will require businesses “dealing in cryptocurrencies” to register with the Financial Transactions and Analysis Centre of Canada (FINTRAC) and implement an AML compliance regime. Banks will be prohibited from providing services to businesses not registered with FINTRAC.

On February 7, 2018, the Standing Committee on Finance released a consultation paper for comments that has far-reaching implications for compliance with Canadian AML requirements. The comment period on this paper ends on April 30, 2018. This consultation paper was intended to support the parliamentary review held on April 18, where one cryptocurrency expert expressed concern that excessive or inappropriate AML regulation requirements will stifle innovation in Canada. The Chief Scientist of Quebec, Rémi Quirion, explained “Public concern that cryptocurrencies are being used for illicit activities like tax evasion and money laundering are largely overblown.” 

However, the recent revelations about the so-called “Vancouver Model” of money laundering linking fentanyl, luxury Vancouver real estate, and casinos that allow players to make deposits and withdraw their winnings in cryptocurrencies, have alarmed Canadians.    

On March 27 the province’s Attorney General David Eby appeared before the House of Commons’ Standing Committee on Finance where he explained that for the past ten years casinos in the province were linked with drug trafficking and money laundering because there were no adequate measures and policies in place to track, investigate, and prosecute groups and individuals taking part in such activities. AG Eby explained that drug traffickers utilized casinos and laundered the proceeds through wire transfers via banks which have been increasingly implementing blockchain technology and cryptocurrencies transferred by online exchanges and money service businesses.

On the same day of the G20 meeting and a week ahead of Eby’s testimony about the “Vancouver Model” of money laundering, the U.S. government cracked down on cross-border cryptocrime by charging online cryptocurrency payment processor Payza.com and their Canadian founders from Montreal with running an unlicensed money services business.

One of the founders of the firm, Ferhan Patel, was arrested, while his brother and co-founder Firoz Patel remains at large.

The U.S. DOJ unveiled the charges alleging the Patels and Pazya.com operated an internet-based unlicensed money service business that processed more than $250 million in cryptocurrency transactions — in XRP, ETH and Dash — by opening bank accounts throughout the United States and elsewhere and laundered their illegal proceeds through those accounts.  ‎

In addition to Payza.com, the Patels were founders and operators of AlertPay.com and Egopay.com online, two other cryptocurrency exchanges.

“The defendants are accused of operating a money transmitting business ‎that operated ‎without the necessary state licenses and knowingly ‎transmitting funds that were derived ‎from illegal activity from in or about ‎March 2012 until the present. The arrest and indictments in this case demonstrate that we will vigorously enforce laws meant to protect the American consumer,” DOJ ‎officials said.‏

‎ If convicted, each of the Patel brothers face a maximum sentence of more than 25 years.

It should be noted that cross-border cryptocurrency transactions are also subject to taxation both in the United States and in Canada, with multiple tax filing requirements.

The Canadian tax filing deadline for individuals is at the end of April and corporate tax returns are due six months after the fiscal year-end of a corporation. 

Non-compliance with Canadian tax laws could subject U.S. taxpayers to U.S. federal wire fraud charges based on the U.S. Supreme Court case of Pasquantino v. U.S. (2005).

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Selva Ozelli, Esq., CPA, pictured above, is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.

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