Investigators reported using cryptocurrencies in nine closed cases. Auditors found another 1,064 that might not have been properly recorded.
The U.S. Postal Service’s law enforcement arm has been using—and confiscating—cryptocurrencies since 2017. But a lack of oversight, training and proper procedures have led to significant policy violations and could lead to serious fraud or waste if left unchecked.
Postal inspectors need access to cryptocurrency in order to delve into the criminal underground, according to a recent review by the agency inspector general. However, these transactions must be tracked closely to prevent waste, fraud or abuse.
“The anonymity of cryptocurrency transactions and the significant fluctuations in the value of cryptocurrency create opportunities for abuse or theft when used during law enforcement activities,” the IG wrote.
To limit the risk of abuse, the agency developed an application to manage inspectors’ cryptocurrency wallets.
“Within the application, postal inspectors submit requests for cryptocurrency intended for investigative use, which includes information about the inspector’s cryptocurrency exchange account and wallet that will be used for the case,” the report explains. “The application tracks all cryptocurrency activity associated with an inspector’s exchange account by cross-referencing the public blockchain daily. Tracked activity includes disbursements of funds to postal inspectors from the program’s national wallet and purchases made in online marketplaces.”
In fiscal 2019 and 2020, postal inspectors closed nine cases in which agents used cryptocurrencies to purchase illicit goods and services, such as illegal drugs. Inspectors working these cases are meant to obtain and track the use of cryptocurrencies through the agency’s Cryptocurrency Fund Program, which includes an app for requesting digital currencies.
However, the program currently only supports a limited number of cryptocurrencies—redacted in the IG report—and inspectors need to use whatever currency is appropriate for the sting they are operating.
“When an inspector does not use one of the … cryptocurrency[ies] managed under the program, the funds are requested through the traditional investigative funds process,” the report states. “In these instances, it is the discretion of the team leader to inform the Cryptocurrency Fund Program manager that some other type of cryptocurrency is being used for investigative purposes.”
But this is not a hard requirement and so is not always done, leaving the CFP managers with an incomplete view of how digital currencies are being used.
A basic keyword search of the Postal Inspector’s Case Management System returned 1,064 individual cases that might have used cryptocurrencies but were not reported to the CFP manager, “each of which would have to be reviewed manually,” the report added.
The IG audit also found the app’s main reporting function—the Transaction Review Report—was unreliable.
“Because of the way the report obtains information from the application, the report contains duplicate transactions and transactions unrelated to the case being queried,” the IG report states. “As a result of these data integrity issues, the Transaction Review Report cannot be used to accurately track and manage cryptocurrency transactions or to assist in validating the final balance of funds for each case.”
Some 44% of transactions reviewed were found to be duplicates despite each having its own unique payment identification number.
One issue exacerbating all the others is a lack of training for postal inspectors.
“Internal guidance states that postal inspectors must be approved to conduct undercover operations and training must be completed prior to requesting cryptocurrency funds,” according to the IG. “However, the guidance does not specify what training courses should be taken or how frequently refresher training is required.”
This has led to significant policy breaches, such as inspectors transferring currencies to other inspectors in direct violation of the agency’s policy.
Inspectors also confiscated digital currencies as part of investigations, including four evidence seizures in 2019 and 2020 involving cryptocurrencies.
The Postal Service’s handling of these seized assets has been largely above board, the IG said, with the office “sufficiently managing seized cryptocurrency by recording seized assets and collecting proceeds of sale.”
The IG made four recommendations to improve the program:
- Ensure that the Cryptocurrency Fund Program has the information needed to provide oversight of the investigative use of cryptocurrency.
- Modify the [application] to ensure duplicates and unrelated transactions are not included in the Transaction Review Report and that the report provides sufficient information to differentiate between transactions.
- Develop a comprehensive cryptocurrency training program.
- Develop written procedures for the management and oversight of the national wallet and its associated exchange account.
Postal Inspector management agreed with all four recommendations, though they did not agree that the CFP was not a useful tool for managing cryptocurrencies or mitigating risk. That said, they agreed the CFP manager should have full visibility into all investigations using cryptocurrencies.