Financial Services

Last Friday afternoon, the creator of the Silk Road website, Ross Ulbricht, was sentenced to life imprisonment for actions that he took in connection with his management of the Silk Road online marketplace. He also was ordered to forfeit over $183 million. This harsh sentence has provoked a strong reaction from members of the FinTech industry.

Operators of websites that use virtual currencies have expressed shock and consternation at the severity of this sentence. Many FinTech entrepreneurs have conveyed concerns that innocent operators of platforms that are used for criminal activity of which the operators are unaware could face similar penalties. However, when viewed in the context of the facts presented to the sentencing judge, it is clear that these concerns are misplaced and often reflect basic misconceptions about Ulbricht’s sentencing.

First Misconception: Ignoring Variety of Charges While general facts concerning Silk Road are well known, to evaluate the sentence imposed on Ross Ulbricht, it is important to keep in mind that Ulbricht was convicted of seven different violations of federal law: distributing narcotics, distributing narcotics by means of the Internet, conspiring to distribute narcotics, engaging in a continuing criminal enterprise, conspiring to commit computer hacking, conspiring to traffic in false identity documents, and conspiring to commit money laundering. Many commentators have erroneously focused on specific violations in isolation, such as the distribution of narcotics by means of the Internet, while ignoring other violations that contributed to Ulbricht’s sentence.

Second Misconception: Ignoring Applicable Penalties The crimes for which Ulbricht was sentenced have very different statutory penalties. Most notably, the mandatory minimum penalty for engaging in a continuing criminal enterprise is 20 years imprisonment. To obtain a conviction for this crime (also known as the “kingpin statute”), the government must prove beyond a reasonable doubt that a defendant acted as an organizer, supervisor or manager of five or more persons with whom s/he acted in concert to commit 3 or more narcotics offenses and obtained substantial income or resources from the offenses. By contrast, conspiracy to commit computer hacking carries a maximum penalty of 5 years imprisonment.

Third Misconception: Limiting Analysis to Online Drug Marketplace While a primary focus of the sentencing was the amount of narcotics sold over Silk Road, the severity of the sentence imposed was based in part on judicial findings that Ross Ulbricht attempted to solicit murders for hire to eliminate threats to Silk Road. The government also introduced evidence that, in addition to selling narcotics used by recreational drug users, Ulbricht permitted sales of firearms on Silk Road (for a time) and permitted sales of poisons such as cyanide. The government used these allegations concerning attempted violence and trafficking in firearms and poison to undermine Ulbricht’s argument that he was merely attempting to create a safer platform for the exchange of recreational drugs.

Fourth Misconception: Misinterpreting Government’s Sentencing Recommendation Many commentators have erroneously stated that the U.S. Attorney’s Office requested a sentence of life imprisonment. That not only is false, it ignores the fact that the U.S. Attorney’s Office intentionally did not adopt the recommendation of the U.S. Probation Department, which was a term of life imprisonment. It is typical for the U.S. Attorney’s Office to advocate a term of imprisonment consistent with a calculation under the U.S. Sentencing Guidelines. Here, that would have been a life sentence. Rather than advocate a life sentence, the U.S. Attorney’s Office requested a penalty that was “substantially more” than the mandatory minimum of 20 years, but stopped short of advocating a sentence of life imprisonment. While there are strong arguments that the prosecution advocated a sentence that was far too harsh, ignoring the nuance of the government’s position is a mistake.

Fifth Misconception: Ignoring Evidence Connecting Silk Road to User Deaths Some commentators, based in part on misinterpreting arguments offered by Mr. Ulbricht’s counsel, have stated that the government failed to offer any evidence that anyone died from using drugs purchased on Silk Road. In fact, the evidence offered by the government of user deaths was circumstantial, yet stark. For example, in the government’s sentencing memorandum, prosecutors described the death of a 27-year old Microsoft employee who was found dead in a chair next to his computer. A black belt with a looped end was lying near his feet on the floor along with a hypodermic needle and an express mail package that was torn open. The employee’s computer had two browser windows open. One browser window displayed the Silk Road website with a message about a package containing heroin with the subject line “Your day just got better.” The other window was opened to USPS.com, displaying tracking information for a package with the same tracking number provided by the sender of the message about the heroin package, which also matched the tracking number on the express mail package sitting on the floor. While circumstantial, this evidence is both powerful and chilling.

Legitimate Concerns While many commentators have misinterpreted the Ulbricht sentencing, there are very important grounds for FinTech entrepreneurs to be concerned:

• First, there is no denying that Ulbricht received an extremely harsh sentence. Despite the fact that Ulbricht never intentionally killed anyone, he received a term of life imprisonment. Many drug dealers, including gang leaders who murdered with their own hands, have received lesser sentences. Anyone who is tempted to engage in criminal conduct online with the expectation that the potential penalty will be minimal because the crime takes place online should think again.
• Second, while this case involves a very overt form of criminal behavior, there is a recent trend toward the government using criminal charges to enforce violations that traditionally were handled through civil enforcement. In particular, anyone operating a FinTech platform that potentially could be used for money laundering should be very aware of the potential for criminal prosecution for for failing to maintain an effective AML program, which is a crime under 31 U.S.C. §5318(h). This threat is particularly grave because it is not necessary for the government to prove that a financial institution actually laundered money to obtain a conviction. It is sufficient to establish that the financial institution willfully failed to maintain an effective AML program.