Cryptocurrency tracking improves -- but how?

The IRS and other tax enforcement agencies are touting big improvements in tracing the use of cryptocurrencies in tax evasion and other criminal schemes. They just don't want to talk about how.


The IRS and other tax enforcement agencies are touting big improvements in tracing the use of cryptocurrencies in tax evasion and other criminal schemes. They just don't want to talk about how.

On Friday, officials from the J5, a cooperative consortium of tax investigation and enforcement agencies around the world that includes Australia, Canada, the Netherlands, the United Kingdom and the U.S., wrapped up a week-long event in Los Angeles that brought together criminal investigators, cryptocurrency experts and data scientists.

The J5 was formed last year to help pool international tax enforcement resources and strategies. As the internet and the emergence of decentralized, pseudo-anonymous cryptocurrencies like Bitcoin have made it easier for tax evaders to move and hide their money, investigation and enforcement agencies around the globe have slowly realized they are dealing with a common set of challenges.

"The goal of the week was to remove some barriers and work together collaboratively to identify the most egregious tax offenders in the world," said Ryan Korner, executive special agent for the IRS field office in Los Angeles. "I want to emphasize that this week was not just a hypothetical training exercise; all of the participants ... worked together using real data to identify real criminals."

However, the agencies were more tight-lipped when it came to discussing what those leads are, how agencies are making new use of data and what tools they're leveraging. IRS officials said they developed new analysis platforms, generated "dozens" of new leads and were getting close to announcing operational results from the partnership, but offered few specifics on their work or what new capabilities they have developed to track cryptocurrency.

"I don't want to necessarily name any of them specifically, but we do have the tools in place today that we didn't have in place even six months to a year ago to take what was an anonymous form of payment and moving funds and really make it so it's not anonymous anymore," Korner told FCW.

IRS Special Agent Chris Hueston, the J5 project lead for the U.S., did cite enhanced data-sharing practices among partner countries as one of the reasons behind the improvement.

"We're able to use some of the data that we've seized through investigations, and we're able to rely on some of our J5 countries for data that they're able to share with us, so once we put those datasets together, as well as open sources and other information that we're able to … share legally, those datasets become richer as far as putting a finer point on our targeting efforts for those criminals," he said.

The emergence of decentralized, pseudo-anonymous cryptocurrencies have created new challenges for financial regulators and tax enforcement agencies, who initially struggled to track and trace payments. A 2017 survey of 564 Bitcoin investors conducted by The Motley Fool found that more than one-third reported they did not plan to report their earnings for capital gains taxation. Federal Reserve Chairman Jerome Powell told Congress that new currencies like Facebook's Libra raise "serious concerns regarding privacy, money laundering, consumer protection [and] financial stability."

While IRS officials were reluctant to discuss what tools they're using, there is evidence that law enforcement agencies are getting better at tracking cryptocurrencies. For example, the Department of Justice has cited the tracking of virtual currencies as a key component for takedowns of a massive child exploitation ring in October.

The use of new commercial software and algorithms may be fueling that improvement. At least two agencies, the FBI and Drug Enforcement Administration, have engaged in sole-source procurements in recent years with contractor Chainalysis for proprietary software and training on how to track the use of virtual currency. In both cases, the agencies argue the contractor is the only company capable of providing the services.

"The vast majority of FBI personnel investigating conduct involving virtual currency only have access to Chainalysis to perform bitcoin tracing," the FBI wrote in an August 2018 sole-source justification.