Court upholds real-world conviction in case that used virtual currency

A federal appeals court ruled that using a virtual currency, like bitcoin, does not protect an Arizona man from charges of money-laundering after he issued the currency in exchange for cash he was led to believe came from drug activity. (Photo by Zach Copley /Creative Commons)

TEMPE – Laundering money with virtual currency is still a real-world crime, a federal appeals court ruled as it upheld a five-count conviction against an Arizona man.

Thomas Costanzo was convicted on five counts of money laundering for taking cash from undercover investigators, who led him to believe it was the proceeds of drug dealing, and paying them in bitcoin.

Costanzo raised several arguments on appeal, including that virtual currency – unregulated by any government – cannot affect interstate commerce as the law requires for a conviction.

But a three-judge panel of the 9th U.S. Circuit Court of Appeals rejected that argument, ruling Friday that a jury “could have found beyond a reasonable doubt that the transactions affected interstate commerce in some way or to some degree.”

An attorney for Costanzo said he was disappointed in the ruling.

“I’m concerned that this opinion seems to set an exceedingly low bar for what that evidence has to be, but each case will have to go based on its own evidence,” said Daniel Kaplan, a public defender on the case.

But the U.S. Attorney’s Office for Arizona said in a statement Monday welcomed the ruling, saying it “provides us guidance going forward on how to charge and prove new instances of money laundering involving virtual currency.”

The case began in 2014, when two IRS special agents noticed Costanzo’s ads offering to exchange up to $50,000 in cash for bitcoin. The agents got approval for an undercover investigation and began meeting with Costanzo to arrange cash-to-bitcoin trades.

Costanzo and several different agents ultimately completed a number of transactions, beginning with a $2,000 deal in 2015 when the agent said “discretion” was needed as the money would go “south of the border” for product to be shipped through Arizona to New York “in a concealed manner.”

Agents were more explicit in subsequent transactions.

“Agent Kushner explicitly told Costanzo that he was trafficking black tar heroin. Costanzo laughed and replied, ‘I know nothing,'” the opinion said. “Costanzo then went forward with the arranged transaction.”

By early 2016, Scottsdale Police Department investigators were also part of the probe.

Costanzo was indicted on five counts of money laundering for five different transactions that totaled $164,700. He was convicted by a federal district court jury in 2018 on all charges and sentenced to 41 months in prison and another three years of supervised release.

Besides challenging the interstate commerce element of his conviction, Costanzo also claimed he was entrapped by investigators. But the appeals court rejected that claim, saying in a separate opinion that evidence “showed Costanzo had a predisposition for using bitcoin to facilitate illicit transactions.”

It also rejected his argument that the district judge misinterpreted sentencing guidelines. But it agreed with Costanzo that the lower court erred when it said that not only could he not drink alcohol during his supervised release, but he could not possess it. It ordered the case back to district court on that sole issue.

Kaplan could not say Monday what the next steps might be in the case.

“We’re disappointed with the outcome in that case,” Kaplan said. “Right now we’re looking into the options for further review of the court’s decision.”

Next Gen Reporter, Washington, D.C.