Virtual Currencies: Additional Information Could Improve Federal Agency Efforts to Counter Human and Drug Trafficking [Reissued with Revisions Feb. 7, 2022]

GAO-22-105462 Published: Dec 08, 2021. Publicly Released: Jan 10, 2022.
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Fast Facts

Virtual currency is increasingly used in human and drug trafficking, according to our review of agency records and interviews with officials.

Agencies we examined face challenges countering illicit use of virtual currency. For example, the Treasury Department's Financial Crimes Enforcement Network requires virtual currency kiosk operators to register with it but doesn't require routine reporting of specific kiosk locations. Kiosks allow exchange of virtual currencies for cash and are found in convenience stores and other locations. Information about specific kiosk locations would help investigations. Our recommendations address this issue.

A person holding a smartphone in front of a bitcoin kiosk.

Reissued with Revisions Feb 07, 2022
On February 7, 2022, two sentences of this report were omitted from the background section to remove inaccurate information. The first sentence identified specific retailers who accept virtual currency (page 9). The second sentence quantified the volume of payment transactions processed on average per day in 2020 by the Federal Reserve Banks’ Automated Clearing House (page 13).
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Highlights

What GAO Found

This is a public version of a sensitive report that GAO issued in September 2021. Therefore, this report omits sensitive information and data on selected federal agencies' activities to counter human and drug trafficking, associated use of virtual currency, and related challenges.

Virtual currency is increasingly used illicitly to facilitate human and drug trafficking, according to GAO's review of agency documentation and data and interviews with officials. For example, the number of suspicious activity reports filed with the Financial Crimes Enforcement Network (FinCEN) that involve virtual currency and drug trafficking increased fivefold (from 252 to almost 1,432) from calendar year 2017 to 2020. However, in a sensitive version of this report, GAO found that data from selected federal agencies on virtual currency use for human and drug trafficking may not be consistently captured. Consequently, agencies may lack complete data when assessing or reporting on the illicit use of virtual currency in human and drug trafficking. In that report GAO made nine recommendations to selected agencies to enhance their data collection practices.

Example of Virtual Currency Kiosk, Which May Be Used in Human and Drug Trafficking

Example of Virtual Currency Kiosk, Which May Be Used in Human and Drug Trafficking

Selected federal agencies have taken actions to counter the illicit use of virtual currency in human and drug trafficking but face challenges. For example, FinCEN and the Internal Revenue Service (IRS) oversee virtual currency entities. FinCEN imposes requirements for operators of virtual currency kiosks that are used to exchange virtual currencies for cash and are found in various locations such as convenience stores (see fig.). While kiosk operators are required to register with FinCEN, they are not required to routinely report the specific locations of their kiosks. This limits federal agencies' ability to identify kiosks in areas that have been designated as high risk for financial crimes and could involve human and drug trafficking. Reviewing registration reporting requirements and taking appropriate action, as needed, to better identify individual kiosk locations by operator could help FinCEN and IRS identify high-risk kiosk operators to monitor for compliance, while also improving information law enforcement has available to identify potentially illicit transactions.

Why GAO Did This Study

Virtual currencies are an emerging payment method for transactions, such as retail purchases. Virtual currency's anonymizing features can attract criminals' use to avoid detection when paying for illicit activities, such as human and drug trafficking. Thus, policy makers, regulators, and law enforcement have identified virtual currency, human trafficking, and drug trafficking as priority areas of concern.

GAO was asked to review the use of virtual currency to facilitate sex and drug trafficking. This report examines (1) the use of virtual currency for human and drug trafficking and the extent to which U.S. agencies collect data on these topics; and (2) the extent to which U.S. agencies have taken steps to counter human and drug trafficking facilitated by virtual currency and challenges these agencies face. GAO analyzed data, reviewed documentation, and interviewed relevant officials at selected federal agencies.

Reissued with Revisions Feb. 7, 2022

On February 7, 2022, two sentences of this report were omitted from the background section to remove inaccurate information. The first sentence identified specific retailers who accept virtual currency (page 9). The second sentence quantified the volume of payment transactions processed on average per day in 2020 by the Federal Reserve Banks’ Automated Clearing House (page 13).
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Recommendations

GAO made 2 recommendations in this public report, including that FinCEN and IRS review virtual currency kiosk registration requirements. FinCEN and IRS concurred.

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service The Commissioner of IRS should review the MSB registration requirements for virtual currency exchanges and administrators that operate virtual currency kiosks and make recommendations to the Director of FinCEN, based on that review, such as recommendations on requiring kiosk operators to submit the locations, including physical addresses of kiosks they own or operate, upon MSB registration, and update this information upon reregistration or other appropriate interval. (Recommendation 1)
Closed – Implemented
IRS concurred with this recommendation and officials stated that they subsequently created a workgroup including Small Business/Self- Employed Bank Secrecy Act Policy and Examination groups and IRS Criminal Investigation. The workgroup discussed potential enhancements to the MSB Registration Form, Registration of Money Services Business (RMSB) Form to improve visibility to an MSB's activities, Title 31 code and regulations governing MSB registration, and studied the RMSB itself. The working group developed seven proposals for changes to the MSB registration requirements for virtual currency exchangers and administrators. IRS presented and discussed the seven proposals with FinCEN on March 22, 2022. As a result, this recommendation is closed as implemented.
Financial Crimes Enforcement Network The Director of FinCEN, in consultation with the Commissioner of IRS, should review MSB registration requirements for virtual currency exchanges and administrators that operate virtual currency kiosks and take appropriate actions, as needed, based on that review, such as requiring kiosk operators to submit the locations, including physical addresses of kiosks they own or operate, upon MSB registration, and update this information upon reregistration or other appropriate interval. (Recommendation 2)
Open – Partially Addressed
FinCEN concurred with this recommendation and on July 26, 2022, FinCEN officials stated that, in consultation with the Internal Revenue Service (IRS), FinCEN is reviewing existing MSB registration requirements in the context of virtual currency kiosks as part of a larger effort to implement the requirements of the Anti-Money Laundering Act of 2020 (AML Act). FinCEN officials provided an action plan that included reviewing IRS proposals for potential revision to the registration requirements; reviewing the request for information related to the AML Act; identifying findings and implementing changes, if any, to the registration requirements; and assessing any new requirements implemented. As of October 2022, FinCEN officials stated that FinCEN coordinated with IRS in March 2022 and that it continues to review the request for information related to the AML Act to assess whether there are additional proposals relevant to virtual currency kiosk MSB registration requirements. FinCEN officials did not provide a specific timeframe for implementing the action plan. To fully implement this recommendation FinCEN would need to follow and complete the aforementioned action plan steps.

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