DOJ Calls On International Partners To Improve Investigative Efficiency In Response To President Bidens Executive Order On Risks Involving Digital Assets - Fin Tech

Key Takeaways

In June 2022, the DOJ issued a Report recommending increased cooperation amongst international law enforcement to combat crimes involving digital assets.
The Report identified characteristics unique to digital assets such as anonymity, the ability to be transacted instantaneously across borders, and ability to be stored offline that require coordinated efforts to address.
The Report proposes to strengthen relationships with foreign government agencies, increase information sharing, and implement uniform regulations to conduct more efficient investigations.

Overview

In June 2022, the Department of Justice (DOJ) issued a report (Report) recommending increased cooperation among international law enforcement agencies to combat threats and crime related to the use and proliferation of digital assets and to address obstacles unique to the asset class. Specific actions recommended by the Report include expanding U.S. relationships with international partners through strategic coordination and information sharing and addressing enforcement gaps related to jurisdictional limitations. The Report recognizes the critical need to share information quickly across borders to effectively investigate and deter criminal activity involving digital assets that are not bound by national financial systems. Closing regulatory gaps that presently exist among nations that inure to the benefit of wrongdoers is also noted as an important step.

The Report was issued in response to President Joe Biden's March 2022 Executive Order on Ensuring Responsible Development of Digital Assets, which called for federal agencies to study the risks and opportunities associated with digital assets, including cryptocurrencies, and a potential U.S. central bank digital currency (CBDC).¹ It comes on the heels of the recently proposed digital asset bill authored by U.S. Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., that would regulate digital assets and bring clarity to their status as either securities or commodities, and is led by the DOJ's National Cryptocurrency Enforcement Team, in consultation with numerous federal agencies.²

Criminal Activities Associated with Digital Assets Is a Key Focus of the Report

The Report focuses specifically on criminal activities associated with digital assets and recommends cross-border collaboration because "uneven and often inadequate regulation and supervision, coupled with a lack of compliance enforcement for digital asset trading platforms and other service providers, allow criminals to expose the U.S. and international financial system to risk from jurisdictions where regulatory standards and enforcement are less robust."³

According to the Report, crimes associated with digital assets include:

Extorting of victims through cryptocurrency ransomware payment demands.
Facilitating the purchase and sale of illicit items such as drugs, hacking tools, weapons and other contraband.
Hiding the source of criminal proceeds and criminals' identities.
Funding terrorism and circumventing sanctions regimes.

Criminals May Exploit Characteristics Unique to Digital Assets to Facilitate Crimes

Certain characteristics of digital assets are vulnerable to exploitation by criminals, who capitalize on certain of the assets' features to facilitate crimes. For example, criminals may leverage the pseudonymity available through use of cryptocurrencies for money laundering and other criminal activities. Moreover, obfuscation tools such as "mixers," "chain hopping" and "off-chain transactions" may be utilized to further anonymize transactions and obscure transaction histories. Additionally, the ability for digital assets to be transferred nearly instantaneously worldwide can enable criminal actors to quickly victimize targets, capitalize on cross-border jurisdictional limitations in order to avoid law enforcement, and hide funds in "unhosted" digital wallets (wallets not custodied on a centralized platform) — activities that limit law enforcement's ability to seize assets.

Global Cooperation Is Needed to Combat Crime Associated with Digital Assets

To effectively combat digital asset misuse, law enforcement officials worldwide must cooperate and share insight and information. The Report outlines several steps the DOJ has already taken to address these challenges, including (1) developing expertise that can be shared with foreign counterparts; (2) working through international standard-setting organizations to support uniform regulation of actors in the digital asset space; (3) facilitating information sharing among law enforcement and regulators; and (4) engaging with governments worldwide to respond to growing and evolving threats posed by malicious actors exploiting digital assets.

Building on the steps it has taken thus far, the DOJ's Report proposes various recommendations to achieve improved international law enforcement collaboration and thwart digital asset misuse. First, the DOJ seeks to strengthen and expand U.S. law enforcement relationships with foreign law enforcement partners, including increasing operational capacity abroad and enhancing the United States' ability to detect, investigate, prosecute and otherwise disrupt the illicit use of digital assets. According to the Report, resource allocation to international law enforcement partners is critical to combating international digital asset-related crime.

Second, the Report proposes improving global interagency information sharing, early coordination and deconfliction efforts in order to promote faster and more efficient criminal investigations involving digital assets, especially with respect to the preservation and collection of records and evidence and providing swift assistance with seizures, operations and proceedings concerning digital asset-related crimes. The Report also recognizes that partnerships with private sector entities operating in the digital asset space could help root out the illicit use of digital assets.

Finally, the Report recommends a focused approach that aims to close gaps in regulatory oversight across jurisdictions, including as related to money laundering and terrorism. According to the DOJ, these gaps jeopardize the safety and stability of the international financial system and create opportunities for criminals to engage in "jurisdictional arbitrage," which involves taking advantage of regulatory and supervisory inconsistencies across jurisdictions. To reduce those risks, the DOJ recommends promoting more uniform regulations among U.S. and foreign law enforcement in the digital assets space by implementing international standards and providing support to international counterparts in understanding and implementing Financial Action Task Force recommendations.

Footnotes

1. Exec. Order No. 14067 of March 9, 2022, 87 Fed. Reg. 14143 (March 14, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

2. Such agencies include the Department of State, Department of the Treasury, Department of Homeland Security, U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission.

3. Merrick Garland, The Report of the Attorney General: How to Strengthen International Law Enforcement Cooperation for Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets, at 1, U.S. Dept. of Justice (June 6, 2022, https://www.justice.gov/ag/page/file/1510931/download.

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