When the Reagan Administration declared its “War on Drugs” during the 1980’s, one of their first methods of attack was to go after the huge sums of money generated by the criminal cartels, a tactic that proved extremely effective against the Columbian cartels.
The law, known as “civil asset forfeiture” was structured to not only track deposits made by suspected criminals but to seize them as well. But anyone who knows how bureaucracies operate knows that laws such as this often result in a slippery slope, sweeping up the innocent along with the guilty more often than not. This might not be much of a concern for members of the Bitcoin community except for two things: the IRS ruling that Bitcoin is property instead of currency and Structuring (31 U.S. Code § 5324), also known as “smurfing.”
Under FinCEN guidelines, deposits of more than US$10,000 must be reported by banks and financial services to the Internal Revenue Service, which has been tasked to track a great deal of this type of criminal activity. Criminals have found that the best way to avoid triggering these requirements is to make “structured” deposits smaller than the upper limit.
The problem, however, is that banks have been trained to look for deposits like this and report them if they sense any suspicious activity. Also the IRS does a great deal of its own analysis trying to detect patterns that might indicate structuring.
This law has been a complete nightmare for many regular citizens. One case, recently reported in the New York Times, is about a restaurant owner, Carole Hinders, in Arnolds Park, Iowa. Hinders had made it a practice over many years to make regular deposits from her restaurant to a local bank just a short walk from her restaurant.
After nearly four decades of these deposits she had saved almost US$33,000 after paying the expenses incurred by her business. Then, just last year, she was informed by the IRS that her account had been seized. Hinders was not a criminal of any kind and certainly not a drug dealer or money launderer for the Cartels. Her problem was that those deposits had signaled “suspicious activity” to the IRS. Moreover, Hinders was never even charged with any crime, but that did not get her money back and, according to an IRS spokesman, it’s likely that she will never see that money again.
While the IRS announced last week that it would begin focusing on cases that are clearly more criminal in nature, he also said that the tax agency’s new policy would not be retroactive. In other words, Carole Hinders, and many more like her, had been robbed by their government and simply had little recourse to get their legally obtained money returned to them. According to IRS’ Chief of Criminal Investigation:
“This policy update will ensure that C.I. continues to focus our limited investigative resources on identifying and investigating violations within our jurisdiction that closely align with C.I.'s mission and key priorities.”
The fact that the agency promises to actually follow the law in the future does little for the people already victimized by past abuses and is already generating concern in the Bitcoin community. The fact is that the media generally ignores any news related to Bitcoin unless it has something to do with criminal activity, creating the general perception that cryptocurrencies are only used for nefarious purposes. The IRS seized assets in 639 cases in 2012, a 550% increase over seizures in 2005 and the banks filed more than 750,000 “suspicious activity” reports.
One of the main reasons that this may be troubling for anyone dealing in BTC, especially traders, is that they may often convert Bitcoin to cash and back again several times a week and this is activity, while perfectly legal, could certainly set off alarm bells with the more than 100 task forces that comb through records looking for this type of activity.
The fact that these agencies knew immediately that citizens like Hinders were not criminals but still declined to return their money also brings into question their true motives for the seizures. Simply put, mistakes can be made. But when they are recognized and not corrected there has to be a question of where or not it was really a mistake.
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The law, known as “civil asset forfeiture” was structured to not only track deposits made by suspected criminals but to seize them […]