Cryptocurrency Offshore Tax Evasion
Cryptocurrency Offshore Tax Evasion: The U.S. Government has filed a criminal and civil action (DOJ) against Amir Bruno Elmaani for both criminal tax evasion and SEC violations. Specifically, the government alleges that after Defendant issued the ICO (Initial Coin Offering) for Oyster Pearl, he went back and re-issued more coins for the purpose of his own personal use — without paying for the coins, or reporting the income on his tax return. Unlike tax fraud, tax evasion is criminal and may result in monetary penalties and confinement. The crux of the indictment is that after the ICO, Defendant took the money and did not properly report the income on his U.S. tax returns.
In recent years, the U.S. government has significantly increased enforcement of cryptocurrency related enforcement, including joining onto J5 – which was developed to deter tax crime, including cryptocurrency.
In addition, the SEC (Securities Exchange Commission) has filed a civil action against defendant as well regarding the alleged illegal profiting off the ICO.
Let’s review the facts of the alleged offshore cryptocurrency tax evasion.
USA v ELMAANI: Criminal Action (DOJ)
Here are Some of the highlights of the Criminal Indictment:
- Defendant created a new cryptocurrency called “Pearl” Tokens
- Although the number of tokens were fixed, Defendant minted millions of new tokens for his own “personal use.”
- Much of the income was missed on his 2017 tax return and did not file a tax return for 2018 – although it was required to be filed.
- Defendant created holding companies to conceal ownership of the crypto
- Defendant manipulated a smart contract to issue more coins, below market price, for his own use.
SEC v. Amir Bruno Elmaani: Separate Action SEC
In a separate action, the SEC has also filed suit against Elmaani for illegal securires offerings involving offshore cryptocurrency tax evasion related activities (civil). Specifically, defendant is alleged to have minted millions of unauthorized tokens, which he did no pay for – for his own personal use.
As provided by the SEC:
The Securities and Exchange Commission today charged Amir Bruno Elmaani, who goes by the online alias Bruno Block, for conducting an illegal securities offering of digital tokens and for his scheme to profit by minting millions of unauthorized tokens for himself at no cost and selling them into the secondary market, thereby causing the value of others’ tokens to plummet.
As alleged in the SEC’s complaint, in the fall of 2017, Elmaani offered and sold tens of millions of digital tokens called Pearl tokens in connection with his venture, Oyster Protocol. According to the complaint, the Pearl tokens were securities, but Elmaani’s offer and sale of Pearl tokens was not registered with the Commission. The complaint alleged that Elmaani unlawfully raised approximately $1.3 million through his unregistered sale of Pearl tokens. The complaint also alleged that, on or around October 29, 2018, Elmaani used a web of digital wallets to covertly mint approximately four million unauthorized Pearl tokens for himself for free and immediately began selling the tokens in the secondary market. As alleged in the complaint, Elmaani made approximately $570,000 in illicit gains through the minting and sale of Pearl tokens and, as a result of his sales, the price of Pearl tokens fell by nearly 65%, resulting in significant losses for investors.
The SEC’s complaint, filed in federal district court in New York, charges Elmaani with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The SEC’s investigation was conducted by David Snyder and Assunta Vivolo, who are members of the Cyber Unit, and Polly Hayes in the Philadelphia Regional Office. The litigation is being led by Julia C. Green and supervised by Jennifer Chun Barry. Kelly L. Gibson, Regional Director, and Kristina Littman, Cyber Unit Chief, are supervising the action. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
Full DOJ Release (U.S. v Elmaani)
“Audrey Strauss, the Acting United States Attorney for the Southern District of New York, William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), and Kelly R. Jackson, Special Agent in Charge of the Washington, D.C., Field Office of the Internal Revenue Service, Criminal Investigation Division (“IRS-CI”), announced today the unsealing of an Indictment in Manhattan federal court charging AMIR BRUNO ELMAANI, a/k/a “Bruno Block,” the founder of the cryptocurrency “Oyster Pearl,” with tax evasion.
As alleged, ELMAANI made millions of dollars from the sale of a new cryptocurrency but evaded reporting that income to the IRS, including by filing a false tax return, operating his business and owning assets through pseudonyms and shell companies, obtaining income through nominees, and dealing in gold and cash. ELMAANI was arrested this morning in Martinsburg, West Virginia, and will be presented later today before United States Magistrate Judge Robert W. Trumble in the Northern District of West Virginia. The case is assigned to Chief United States District Judge Colleen McMahon in the Southern District of New York.
In a separate civil action, the Securities and Exchange Commission is filing civil charges against ELMAANI today.
Acting Manhattan U.S. Attorney Audrey Strauss said: “As alleged, Amir Bruno Elmaani purported to establish a high-tech method of financing a high-tech business, but the underlying scheme was old-fashioned fraud and tax evasion. Elmaani allegedly generated millions by soliciting investor money through his own cryptocurrency, adding to the purportedly fixed number of tokens and converting them to other cryptocurrencies, and failing to report or pay tax on any of the proceeds. Thanks to the FBI and IRS-CI, Elmaani is now in custody and facing federal prosecution.”
FBI Assistant Director William F. Sweeney Jr. said: “Taking advantage of the ever-so-popular cryptocurrency market, Elmaani allegedly capitalized on the investments of those who purchased virtual currency through Oyster Pearl, which he founded. As it turns out, Elmaani was funneling the proceeds of his alleged cryptocurrency scheme through a shell company that hid the true nature of his financial interests, ultimately never paying taxes on his earnings. With minimal reported income in 2018, he still managed to spend over $10 million for the purchase of yachts, but after today’s arrest, he won’t be sailing anywhere anytime soon.”
IRS Special Agent-in-Charge Kelly R. Jackson said: “Ensuring the integrity of our tax system is a priority of IRS-CI. Evading taxes only aims to deteriorate the confidence in this system and those who fail to pay their fair share will be investigated. Using cryptocurrency as a means to defraud and evade taxes will not stop our agents from doing what we do best – following the money.”
As alleged in the Indictment unsealed today in Manhattan federal court:
In September and October 2017, ELMAANI began promoting online his new cryptocurrency known as Pearl tokens. Using a variation of his online pseudonym “Bruno Block,” ELMAANI stated that he planned to develop an online data-storage platform, known as Oyster Protocol, which would allow users to purchase online data storage with Pearl tokens. Instead of using his real name, ELMAANI operated almost exclusively online under the pseudonym “Bruno Block.” ELMAANI concealed his true identity from his prospective employees and business associates and never met them in person.
In the fall of 2017 and thereafter, ELMAANI sold Pearl tokens to the investing public through an “initial coin offering” and on cryptocurrency market platforms. ELMAANI announced that he intended to take a “founder’s share” of Pearl tokens for his own personal use. ELMAANI owned and controlled the subsequently established company Oyster Protocol Inc. through a shell company not associated with his true name.
In a statement issued under ELMAANI’s online pseudonym on June 7, 2018, ELMAANI stated that he was retaining millions of Pearl tokens as his “ownership stake” in Oyster Protocol, but that he had to move the tokens to a different cryptocurrency wallet “in order to avoid being double-taxed.” In truth, ELMAANI did not report or pay tax on any of his cryptocurrency proceeds. At various points, ELMAANI used friends and family as nominees to receive cryptocurrency proceeds and transfer them or U.S. currency to his own accounts.
ELMAANI dealt substantially in precious metals, kept gold bars in a safe on a yacht he owned, and used large amounts of cash to pay personal expenses.
In late October 2018, although the number of Pearl tokens was purportedly fixed, ELMAANI used his access to the blockchain technology used to create Pearl tokens to mint new tokens, which he took for his own personal use (the “Exit Scheme”). ELMAANI thereby increased the total volume of Pearl tokens. Shortly after creating the new tokens, ELMAANI converted the Pearl tokens he had obtained to other types of cryptocurrency on an online marketplace or exchange. As a result of ELMAANI’s conduct, trading in Pearl tokens halted on that exchange and the price of Pearl tokens held by investors dropped substantially. Pearl tokens were subsequently de-listed from the primary exchange where they were traded. Subsequent to the Exit Scheme, ELMAANI used his friends and family to receive cryptocurrency and to transfer funds to a bank account in his name.
While ELMAANI initially attempted to hide even “Bruno Block’s” involvement in the Exit Scheme, he later effectively admitted to the conduct online under his “Bruno Block” pseudonym. In a recorded call with the then-chief executive officer (“CEO”) of Oyster Protocol Inc., after the Exit Scheme, the CEO asked ELMAANI why he had to take the additional new Pearl tokens if he had already cashed out millions of dollars’ worth of Pearl tokens in the past. ELMAANI responded, in part, that “taxes are pretty nasty.” ELMAANI carried out the Exit Scheme only days before the exchange he had used to cash out his Pearl tokens was set to require “know your customer” personal identifying information from its users.
ELMAANI filed a false 2017 tax return stating that he had only approximately $15,000 of income from a “patent design” business, and he filed no return and reported no income to the IRS in 2018. Nevertheless, ELMAANI spent, in 2018, over $10 million for the purchase of multiple yachts, $1.6 million at a carbon fiber composite company, hundreds of thousands of dollars at a home improvement store, and over $700,000 for the purchase of two homes, one of which was titled in the name of a shell company and the other in the name of two of his associates.
ELMAANI, 28, is charged with two counts of tax evasion, each of which carries a maximum sentence of five years in prison. The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.
Ms. Strauss praised the investigative work of the FBI and IRS-CI and also thanked the Securities and Exchange Commission and the Commodity Futures Trading Commission for their assistance.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Margaret Graham and Drew Skinner are in charge of the prosecution.
The charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.”
In conclusion, offshore cryptocurrency tax evasion enforcement is on the rise. Investors should take take the government’s actions as a warning that even using foreign nominees/corporate structures may not protect you from the U.S. government.
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