So exactly what is in that court order that the US Department of Homeland Security used this week to clamp down on Dwolla-Mt. Gox transactions? It appears the feds have decided there's reason to believe Mt. Gox and a subsidiary are operating as unlicensed money transmitting businesses in violation of US law.
The seven-page warrant cites an affidavit made by a special agent with Homeland Security Investigations (HSI) stating there is probable cause to believe the contents of a specific Dwolla account are subject to seizure and forfeiture under US law. The warrant also reveals some of the background details leading up to Tuesday's halt to Dwolla-Mt. Gox transactions, including the use of a confidential informant who engaged in bitcoin trading over a period of six months.
"Out of respect for the sensitivity of the issue and the two parties' legal responsibilities, we've been encouraging all interested parties to clarify or gather additional information from Mt. Gox and Homeland Security, this includes affected users," a Dwolla spokesperson reached for comment responded in an email Wednesday.
In the affidavit included in the federal warrant, the HSI agent refers to two applicable statutes of the law:
- 18 USC section 1960, which states, "Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both."
- 18 USC section 981, which says the following properties are subject to forfeiture: "Any property, real or personal, involved in a transaction or attempted transaction in violation of section 1956, 1957, or 1960 of this title, or any property traceable to such property."
The warrant signed by Judge Gauvey describes Mt. Gox -- the world's largest bitcoin exchange -- and a subsidiary company called Mutum Sigillum LLC. Mutum Sigillum, the warrant states, holds an account at Wells Fargo Bank that was established on May 20, 2011, and signed by one person: Mt. Gox CEO Mark Karpeles, also identified as the owner of both Mt. Gox and Mutum Sigillum.
In the paperwork to open that bank account, Karpeles allegedly stipulated that Mutum Sigillum was a business "not engaged in money services."
The warrant then notes that "neither Mt. Gox nor the subsidiary, Mutum Sigillum LLC, is registered as a Money Service Business." Such registration with FinCEN -- the US Financial Crimes Enforcement Network -- is required for money transmitting businesses under US law.
A Maryland-based confidential informant -- referred to in the warrant as CI-1 -- told government agents he established new accounts with both Mt. Gox and Dwolla. The informant stated he deposited US funds in his Mt. Gox account, then used Dwolla to exchange those funds for bitcoins. He later used Mt. Gox to exchange the bitcoins back into US dollars, which were credited to his Dwolla account.
"According to bank records, this transfer was completed through the subsidiary, Mutum Sigillum LLC," the warrant states. "This demonstrates that Mutum Sigillum LLC is engaged in a money transmitting business but is not registered as required with FinCEN."
Bank records showed that "a number of deposits" to Mutum Sigillum's Wells Fargo account were made via international wire transfers from Japan's Sumitomo Mitsui Bank in the name of Mt. Gox. Afterward, those funds were "frequently disbursed to Dwolla." Because Mutum Sigillum transferred those funds without FinCEN registration as a money transmitting business, the contents of its Wells Fargo account "were subject to seizure and forfeiture," the warrant states.
A seizure warrant for the Wells Fargo account was issued on May 9, 2013.
The seizure warrant issued on Tuesday, May 14, was for a Dwolla account registered in the name of Mutum Sigillum and held in the custody of Veridian Credit Union. That Dwolla account was "the destination for the funds wired from the Wells Fargo account," the latest warrant states. Records indicate the Wells Fargo account was the only one funding the Dwolla account.
"Therefore, it is evident that the Dwolla account was used exclusively to move funds between Mt. Gox and Mutum Sigillum and their customers," the warrant states. "Consequently, there is probable cause to believe that Mt. Gox and Mutum Sigillum are using (the Dwolla account) to conduct transactions as part of an unlicensed money service business ... "
No monetary amounts were stipulated in the warrant.
An "unlicensed money transmitting business" is defined as a business that affects interstate or foreign commerce and operating without an appropriate license to transfer funds "on behalf of the public".
According to the Dwolla spokesperson, Dwolla users have been sent the following message:
"In summary: The Department of Homeland Security and US District Court for the District of Maryland issued a 'Seizure Warrant' for the funds associated with Mutum Sigillium's Dwolla account (aka Mt. Gox). In light of the court order, procured by the Department of Homeland Security, 1.) Dwolla has ceased all account activities associated with Dwolla services for Mutum Sigillum while 2.) Dwolla's holding partner transferred Mutum Sigillium’s balance to the proper authorities.
"Dwolla requires a court order before honoring requests such as seizing funds or revoking access to an account."