The non-techie guide to the Blockchain, distributed ledger tech and Bitcoin

By Christine Duhaime | September 3rd, 2017

This guide to Bitcoin, Blockchain, distributed ledger tech, and digital currencies is taken from a collection of presentations, comments, speeches we’ve made at global conferences and articles written by us from 2012 to 2015.

By Christine Duhaime

The dangers of being in the Bitcoin space early on

I’ve been in the Bitcoin space since 2012 and writing about it since that time, mostly in respect of its financial crime risks and benefits since that is my area of legal expertise. When I first started talking and writing about Bitcoin and the Blockchain in 2012, there were few lawyers in the space. I confess I loved Bitcoin from the get-go because while I could see its financial crime risks, I could also see its benefits for financial crime mitigation. However, in 2012 and into 2013, it was not a popular thing to publicly say that Bitcoin presented dangers to the financial system among certain of its supporters.

To wit, in 2013, shortly after I was quoted in Forbes Magazine commenting on the money laundering and terrorist financing risks of Bticoin, I received this Tweet (anonymized below) that Christine Duhaime needs killing.

I was a little freaked out but later learned from Elite Daily in New York City while they were filming a documentary about people who were early entrants in the space, that other people in Bitcoin had been threatened for suggesting that Bitcoin be regulated. It comes with the territory, it seems.

My view has always been that it’s better to be transparent about digital currencies if we want regulators to embrace the technology, including to be honest about the ways it which the wallet holders can be rendered anonymous by mixers and tumbler services that, for a fee, tumble each Bitcoin financial transaction thousands of times to make it impossible to identify the  transactors and how there are some digital currency exchanges that won’t spent $1 to implement systems required by law to stop terrorist financing or sanctioned transactions that imperil us all.

More than anything over the years, people have asked me what Bitcoin and Blockchain are and why they are worth it from a law perspective.  So, below is a collection of things I’ve written about Bitcoin since 2012 that answers the question from a law and law enforcement view of: “Why Bitcoin?”

What is it exactly, this Blockchain or distributed ledger? 

Consumer payments and ways of transferring value in Canada and globally have shifted over the last several decades from paper-based media, such as cash and cheques, to card-based media such as credit and debit cards, electronic methods such as pre-authorized payments through ACH, and more recently, digital methods such as digital currencies.

A digital currency is a digital form of a monetary instrument with a bidirectional flow, meaning it allows users to both buy and sell, or use, the digital currency. Bitcoin is the most popular digital currency. Bitcoin operates peer-to-peer and machine-to-machine (M2M). Unlike traditional fiat currencies that are issued by national governments and controlled by central banks, Bitcoin has no central monetary authority and is not backed by any central bank, authority or government. The supply of Bitcoin is not controlled by any central governmental authority, and it is not yet legal tender.

Users can buy digital currencies in person, at an ATM or online with real monetary instruments and can subsequently use digital currencies to buy goods and services globally or to transfer value. The purchase and selling price of digital currencies is determined by supply and demand in the digital currency market.

Trust me — “Because its trustless, its trustworthy”

The transactions for goods and services bought or sold using digital currencies are not processed through a centralized authority, or clearing house. A Bitcoin transaction is processed through the Blockchain, which acts similar to a third party clearing house except that the clearing (or reconciliation and verification of transactions) component is entirely M2M on the Blockchain (i.e., direct).

Cryptographic software validates each transaction through a process referred to as mining where participants compete to make records by solving computationally complex cryptographic problems. In the transactional validation process, transactions are time-stamped via a hash algorithm which creates an ongoing chain, and a decentralized digital and permanent record (the ledger) that theoretically cannot be altered or eliminated. A proof-of-work concept records the transactions chronologically and publicly. The shared public distributed ledger is the Blockchain. The Blockchain, by design, prevents anyone from double-spending, and therefore using digital currencies they do not own. 

Although it may appear an oxymoron to say so, financial transactions on any distributed ledger tech, including the Blockchain, are  designed to be trustless and therefore they are trustworthy. What I mean by that is that it is designed with a lack of trust in respect of all its users (me, you and the system), which makes the system trustworthy.

Not everyone in the space agrees on this point, however, if you read the White Paper from Satoshi Nakamoto on the technology of Bitcoin, it appears evident that part of what he was attempting to accomplish was to facilitate online gambling, and Bitcoin makes sense to those of us in the online gambling space, more than any other space.

By contrast, other online currencies or payment systems, such as bank credit cards are indirectly settled – they involve a central administrator or financial institution middleman that sits between the transacting parties. These intermediaries validate and reconcile transactions to avoid double spending by a person. In other words, there is a human involved. Digital currency transactions on the Blockchain rely on computer software to perform that function, cutting out the institutional go-between in financial transactions, and no human is involved.

As a result of the Blockchain, it is possible to buy currency, shop for goods or services and remit value internationally almost instantaneously, purely M2M without the need for institutional middlemen.

Ethereum & Smart Contracts

Canadians created distributed ledger technology early on. It’s true – Canadian talent, including law firms, were involved in the space early on when few in the mainstream world knew what a Bitcoin was and many more were disparaging the technology.

For example, Ethereum is a distributed ledger company that was created in Toronto. It moved to Switzerland when Canada announced the world’s first regulation of digital currencies. Its digital currency is called Ether. It is a distributed ledger that is programmable by users. Etherium promotes something called “smart contracts” which are not actually contracts or smart contracts. They are escrow payments that are, in essence, arrangements established purely by computer coding. The theory behind it is that a contracting party will buy Ether through Etherium and pre-pay certain Ether into a wallet and have it programmed to be held in escrow. Upon the fulfillment of the relevant legal condition precedent under the contract between the parties, the payment held in escrow on the distributed ledger is automatically released to a contracting party as a matter of computer coding.

The Ethereum distributed ledger is also often mischaracterized as able to “enforce legal contracts” or the so-called smart contracts. However, it does the opposite – these smart contract complete the payment terms of a contract voluntarily by pre-agreement of the parties and performs no enforcement function whatsoever.

Ethereum is very novel and cool tech but it cannot create legal contracts or contracts that are enforceable on the distributed ledger – what it can do is much more simple – its tech can be used for escrow payments in Ether that are auto-released to an Ethereum wallet, irrespective of the existence of a contract between parties.

I think the potential more cool applications of smart contracts include the possibility of creating invoices that automatically execute a payment when a shipment arrives or the issuance of dividends which are automatically paid to shareholders if corporate profits reach a certain level. Imagine the articles of incorporation with dividend rights whereby declarations of dividends are auto paid by smart contracts – how cool is that?

Cool Law Enforcement Uses 

Independent of traditional uses of digital currencies, there are a much broader set of potential applications for Blockchain beyond the payments industry which are significant. As noted earlier, a distributed ledger operates as an online ledger where all the validated transactions that are processed through it are recorded, linked, and can be traced.

In some respects, the distributed ledger is like a public searchable database of all of a bank’s transaction records for every financial transaction ever completed by a customer. If a person’s wallet address is known, anyone can view the history of their financial transactions. In my view, as a financial crime legal expert, if wallet addresses were eventually not anonymous, the Blockchain and distributed ledger technology would be the world’s most perfect counter-terrorist financing and anti-money laundering tool for law enforcement because its unique features mean that it is a permanent depository of evidence, in the legal sense. If you are a lawyer and work in the space of foreign asset recovery and tracing proceeds of crime through the financial system, like I do, you will get what I mean by the benefits of having a permanent bank of evidence for financial crime.

Read here for the financial crime risks of digital currencies.

Cool Law Purposes

There are other legal applications of distributed ledgers and the Blockchain. It allows for the permanent recording of certain records in circumstances where it may be commercially expedient to do so, such as to record the date of issuance of stock options and other securities-related transactions. It has applications as well in cases where it is legally expedient to record certain legal information or triggering dates, such as notice periods, limitation periods, warranty periods, or the commencement of options to exercise certain legal rights. Such application are not yet legal in the sense that no court of law or judicial or legal body has vetted or approved such use as legally relevant, let alone legally binding upon any third party or government agency.

Distributed ledgers and the Blockchain can revolutionize not only the banking sector, but equally the role of law enforcement, financial transactional reporting, and the practice of law and the administration of justice by virtue of what I call the “permanent bank of evidence.”

Vision for the Future

This is what I believe are the promises of the tech for humanity and relevant to the practice of law:

  • A reduction in terrorist financing if transactions were operated through a distributed ledger system by virtue of the permanent evidence of transactions on the distributed ledger and Blockchain that can be used simultaneously and cooperatively by law enforcement agencies globally;
  • Elimination of some forms of fraud because of the impossibility of double spending using distributed ledger and the Blockchain for financial transactions that could save billions in many areas from environmental fraud arising from the carbon credit trading systems, securities-law related fraud and bribery payments to politically exposed persons;
  • Elimination of bank corruption in developing countries, for example in places like Vietnam, where we have seen citizens that are required to pay bank employees bribes, in addition to bank fees, for the privilege of using the banking system to remove or deposit money into their bank accounts or cash pay cheques;
  • An inexpensive remittance system that can service millions of poor and unbanked populations, mostly in Africa and Asia, that allows them to receive value from relatives abroad to keep their families alive, and allows more fortunate Canadians to send value directly to them;
  • Empowerment, and sometimes the survival, of marginalized or undocumented sectors of the population who are denied financial services because they live in refugee camps in destitution or live on the street with no government issued ID to set up bank accounts. We have seen this first hand in Jordan and Turkey;
  • Financial freedom for women, especially those who are denied banking services because of social, political, economic or geographical circumstances, for example, because they live in repressive societies where women cannot receive banking services or are victims of human trafficking whose ID is confiscated by traffickers;
  • Ability to quickly and easily transfer value to hundreds of thousands of volunteers who work with international aid organizations around the world in times of crisis when traditional financial institutions are shut down (or destroyed) such as during a terrorist attack, a tsunami, or an earthquake. This is a serious concern that is ever present in the counter-terrorism field; and
  • To provide financial inclusion to First Nations across Canada who are unbanked because they lack permanent residences (are homeless or live in halfway houses) to set up bank accounts or there are no bank branches within proximity to them. I have pro bono clients who face this daily.

Obviously, the case studies above to advance humanity or law and justice are unique to my experiences as a financial crime lawyer but nonetheless they present real problems that one day could be solved with distributed ledger tech and digital currencies.

@2012 -2017, Christine Duhaime.

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US to adopt national money laundering & terrorist financing strategy that includes risks from digital currencies

By Christine Duhaime | August 7th, 2017

US President Trump signed new sanctions legislation into law on August 3, 2017, against Iran, Russia and North Korea, and at the same time, adopted a new national strategy to combat terrorist financing and money laundering. The legislation, “HR3364 – Countering America’s Adversaries Though Sanctions Act” is more than about sanctions. In large part, it’s about financial crime – and indeed, the more enduring parts are those related to financial crime.

Pursuant to HR3364, the President is required to develop a national strategy for financial crime to deal with “illicit finance.” The strategy must be developed with bank regulators, the AG, the Secretary of DHS, the NSA and budget officials. “Illicit finance” means the financing of terrorism, money laundering, funds from narcotics trafficking, funds from proliferation of WMD, or other forms of illicit financing that occur domestically or internationally.

US National Strategy on Financial Crime

The national financial crime strategy must include:

  • an evaluation of how the US is addressing its own risk assessment and if it supports counter-terrorism efforts;
  • goals and priorities to disrupt and prevent illicit finance running through the US financial system (i.e., this means the correspondent banking system wherein US global banks act as correspondents for most of the banks in the world to establish US jurisdiction). The goals will include the dollar value of money laundering that goes through the US system.
  • details of the most significant threats of money laundering that go through the US financial system;
  • comments on the extent to which law enforcement is going after money laundering, terrorist financing and funds used to finance illegal drug trafficking;
  • commentary on striving towards a P3 with financial institutions for financial crime mitigation;
  • plans to develop more cooperative efforts with other countries to address illicit finance;
  • Analysis on trends in illicit finance using digital currencies (called cryptocurrencies) in respect of cyber crime; and
  • an analysis on how to leverage technology to get better at financial crime.

Financial Inclusion Tech

There is also a plan to create technology to establish a money services business to facilitate the transfer of money to Somalia. The Somalia pilot project will be used to try to find a way in which the US government can lead the way in addressing financial inclusion and provide banking in high risk areas with compliance with financial crime law.

Focus on Digital Currencies / Ransomware

Digital currencies are a concern to the US and are likely the most significant risk to its financial system at the moment. That is because all of the ransomware attacks around the world involve extortion payments of digital currencies. Since 2012, some Bitcoin exchanges have been quite public about rejected implementing AML / CTF / sanctions compliance measures and others have implemented such measures but they are are less than comprehensive, competent or adequate. Others operate without any compliance with the law whatsoever. Where Bitcoin exchanges fail most is in respect of beneficial ownership, sanctions, terrorist lists and politically exposed persons. Bitcoin exchanges mistakenly believe that “KYC” equates to anti-money laundering compliance. For the US to deal effectively with ransomware attacks, it has to take a look at Bitcoin exchanges that do not have competent AML / CTF / sanctions compliance systems in place and qualified legal personnel on the team who understand the financial system and the risks posed by financial crime.

ICO take downs will be over money laundering, not securities law

In the ICO realm, people in the anti-money laundering law and law enforcement world believe that the US government will be conducting more take-downs of digital currency companies and their directors/ officers / investors but it will be in respect of ICOs who launched ignoring anti-money laundering, counter-terrorist financing and sanctions law, not for securities law violations. That is because ICOs that are not conducted in a way that involves responsible innovation, can represent an unmonitored, unregulated and unsupervised method to move money through the financial system without oversight, transparency or knowledge of the transactors behind the transactions because not only is there the issue of the involvement of some Bitcoin exchanges that historically reject financial crime compliance but also because there is the added layer of ICO players entering the heabily-regulated financial services sector with tokens built on top of digital currencies that allow existing anonymous transactors to conduct further financial transactions with the acquisition and disposition of those tokens for fiat currency.

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Pope lays out his plan to take down the Mafia and deal with corruption globally

By Christine Duhaime | August 6th, 2017


The Vatican’s justice branch has released its statement emanating from its recent anti-Mafia meeting with global law enforcement agencies to take-down the Mafia around the world through excommunication, if necessary.

The Pope believes that he can make a difference in eradicating the Mafia and transactional criminal organizations through the reach of the Catholic Church. The Catholic Church has committed to use its reach to address, in particular, countries that are rife with corrupt persons that cause suffering as a result (where for example the rule of law does not prevail). Interestingly, the Pope advocates that, as part of the anti-Mafia and anti-corruption movement, that countries be called upon to respect human rights treaties and to fight indifference of the law.

A new group was established to take on the Mafia and corruption and its goals include:

  • Define the Mafia so that people understand it, and explain the relevance of the rule of law, and in particular the Palermo Convention;
  • Help foster a culture globally of respect for the law;
  • Teach about the consequences of corruption;
  • Envourage International agencies to follow international treaties on corruption and organized crime;
  • Tell the stories of victims of the Mafia and of corruption so that people understand the harm that comes to regular people;
  • Locate and foster relationships with institutions and thought leaders in the space; and
  • publish magazine, stories, newsletters and hold conferences to address the issues.

On June 15, the International Consultation Group for justice, corruption, organized crime and mafia, part of the Vatican dicastery for Promoting Integral Human Development, organized an International Debate on Corruption. The event, hosted in collaboration with the Pontifical Academy for Social Sciences, drew some 50 participants from all over the world, including anti-mafia and anti-corruption magistrates, bishops, Vatican officials, representatives from the U.N. and various States, heads of movements, victims and ambassadors.

The Mafia take-down is, the Vatican stated, our collective moral duty.

On July 15, 2017, (summarized here), the Pope said that taking down the Mafia and those who support them, is necessary to save humanity.

The reference to the Palermo Convention and the Mafia is no accident – that is the international treaty dealing with global anti-money laundering law that is the basis for the criminalization of moving, dealing with, accepting etc. proceeds of crime from one country to another, which prohibits banks from wiring proceeds of crime internationally. The undercurrent of the meeting is that countries are not adhering to anti-money laundering law to shut down organized criminal activities.

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BTC-e was the Bitcoin exchange for 95% of global ransomware extortions

By Christine Duhaime | July 30th, 2017

According to tracing that was revealed this week at the Black Hat USA Conference, BTC-e was the Bitcoin exchange that serviced over 95% of all the ransomware extortion payments globally since 2014. Researchers wrote scripts that extracted payments to Bitcoin wallet addresses to determine what exchanges was used for extortion payments. The research also showed that ransomware extortion payments exceeded US$2 million per month in 2016, its most lucrative year.

The corporate entity behind the BTC-e Bitcoin exchange was indicted this week by the US as was its director, officer and founder, Alex Vinnik, who was arrested in Greece. He will be extradited to the US to face charges that include money laundering and running a MSB without the requisite AML registration and policies and procedures.

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US continues its take down of Bitcoin entities with indictment of foreign Bitcoin exchange that “banked” many global cyberattackers and processed $9B in payments

By Christine Duhaime | July 28th, 2017

The US continued its take down of Bitcoin companies this week with the unsealing of an indictment against BTC-e and Alex Vinnik, and his arrest in Greece. The Indictment against Vinnik and BTC-e was obtained in January 2017, and was sealed until now so that he could be located internationally and arrangements made to effect his arrest. The Defendants are charged with operating an unlicensed MSB and 16 counts of money laundering.

According to the indictment, BTC-e operated an unlicensed MSB since 2011 that processed several billions of dollars worth of payments in digital currencies and acted as a money laundering service for cyber-criminals around the world. Vinnik is alleged to be the founder and controller of BTC-e. More particularly, BTC-e is alleged to have moved money and provided wallets (effectively to have “banked”), via Bitcoin, international bad actors who were engaged in ransomeware cybercrimes that demanded extortion payments in Biticoin.

It also allegedly banked criminals who were engaged in international drug trafficking, weapons dealing and it allegedly provided Bitcoin services to a number of corrupt public officials, although the indictment does not identify which public officials used the Bitcoin exchange. Allegedly BTC-e had no anti-money laundering controls, policies or procedures in place. Many Bitcoin exchanges provide deposit taking services for customers by virtue of the fact that they take in deposits into their bank accounts without having a bank licence and in that sense, are said to provide “banking” services, in addition to currency conversion services.

BTC-e is alleged to have accepted a significant number of transactions from the US although it advertised that it did not. It is not known where BTC-E operated as it advertised that it was in Bulgaria but was incorporated in the Seychelles and had companies in Russia, France, Singapore, BVI and New Zealand. BTC-e had 700,000 customers globally. It was Russia’s most popular digital currency exchange and over the course of its history, it received over 9 million Bitcoin worth over $18 billion. According to the indictment, BTC-e was the exchange for Liberty Reserve, which was taken down in 2013 by the US government, and many of the same people allegedly used both services.

In order to deflect law enforcement, BTC-e is alleged to have posted comfort statements on its website that were untrue, such as that it verified the identity of its customers when they were onboarded and that it did not accept funds from US persons. In essence, it is alleged that the exchange made statements about anti-money laundering compliance that were completely untrue in order to lure customers to do business with it, suggesting that it was law-abiding when the US government alleges that it was not.

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Foreign digital currency exchange fined $110M in US for anti-money laundering law failures

By Christine Duhaime | July 26th, 2017

For the first time ever, the US Financial Crimes Enforcement Network (“FINCEN“), has asserted jurisdiction over a foreign digital currency exchange, BTC-E, for the purposes of fines, and assessed civil penalties for anti-money laundering law failures under the Bank Secrecy Act in the amount of $110,003,314.

In July of this year, BTC-E and its founder, Alexander Vinnik, were indicted in California for money laundering, conspiracy to commit money laundering, engaging in illegal financial transactions and for operating an unlicensed MSB. Neither Vinnik nor BTC-E were based in the US or operated in the US.

However, BTC-E conducted digital currency transactions with some persons located in the United States and moreover it used US computer servers, which according to FINCEN, was sufficient to establish jurisdiction in law for US anti-mony laundering legislation. It is unknown how many accounts BTC-E had opened in the US, if any, but its US based customers transacted in connection with over 21,000 Bitcoin and moved digital currencies within the US, and across state lines, triggering the Wire Act.

By virtue of the fact that FINCEN took the position that it had  jurisdiction under US law over BTC-E,  it fined BTC-E for violating the MSB registration requirements and the requirements to implement a competent anti-money laundering compliance program and to obtain and retain certain required records. The Bank Secrecy Act requires that a MSB register in the US within 180 days of beginning operations, and a foreign MSB accepting US transactions, must appoint an agent pursuant to corporate law to accept service.

One of the issues with respect to BTC-E was that it provided services to Coin.MX which was implicated in  processing Bitcoin ransomware transactions for extortion payments, whose CEO was charged in the US. BTC-E was also alleged to have provided services to other cybercriminals and to have stored and laundered the funds of extortionists connected to ransomware and to have assisted Liberty Reserve. The CEO of BTC-E, Alexander Vinnik, was personally fined $12,000,000 by FINCEN.

Mr. Vinnik was arrested in Greece and is being extradited to the US in connection with the criminal charges against him for operating BTC-E. If convicted, he is facing over 50 years in jail for running a digital currency exchange incompetently and without anti-money laundering policies in place tailored to the uniqueness of digital currencies. He had a bunch of lawyers retained for BTC-E but not one that had a clue about or understood, the complexities of financial crime law.

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Biggest illegal online dark net Bitcoin marketplace shut down; run by a Canadian who committed suicide rather than face US justice

By Christine Duhaime | July 21st, 2017

The US DoJ has taken down what it calls the world’s largest criminal marketplace on the Internet called AlphaBay yesterday, which operated for over two years on the dark net. AlphaBay was over ten times larger than Silk Road when Silk Road was taken down in 2013.

Like Silk Road, AlphaBay was used for trading of illegal drugs including fentanyl, to traffic in fake ID and to sell and buy guns and buy services such as hacking services. Over 6 countries helped with the take down including the US, Canada Lithuania, France, the UK and Thailand. The online marketplace accepted only digital currencies for payment – mostly Bitcoin.

AlphaBay was started by a Canadian from Quebec named Alexandre Cazes, who amassed a fortune of over US$23 million in Canada and Thailand. He was arrested in Thailand on July 5, 2017, by Thai authorities on behalf of the FBI and charged with inter alia, money laundering, drug trafficking, trafficking in illegal fire arms.

He committed suicide in prison a few days later rather than face justice in the US. The assets of him and his wife, and his family in Canada are already frozen in Greece, Canada, Thailand and Antigua. The FBI has also already seized the digital currencies he held at various exchanges around the world. Cazes had US$3.6 million worth of Bitcoin, US$1.6 million worth of Ether and US$708,000 worth of ZCash. AlphaBay had over 240,000 different Bitcoin wallets.

Cazes applied for immigration in Antigua and Cyprus and set up bank accounts using private companies to obfuscate ownership. Unfortunately for Cazes, he seemed to be unaware that buying citizenship in certain countries, such as Antigua, is a red flag for suspected money laundering to law enforcement.

AlphaBay operated on TOR and had over 200,000 users and 40,000 vendors.  At the time of its takedown, there were over 250,000 listings for illegal drugs and controlled chemicals on AlphaBay for sale, and over 100,000 listings for stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms and fraudulent services.

The US Attorney General said in a news conference that the US government will hunt down such people no matter where they are hiding (including obviously in Canada as this case shows), particularly because of the sale of fentanyl that is “sending Americans to an early grave” and will be going after transnational criminal organizations that move drugs – whether they are on the dark net or in broad daylight. The US government said that several American teenagers died using fentanyl that had been sold by Cazes on AlphaBay.

The reference to transnational criminal organizations is interesting – usually law enforcement means the Mafia but in this case, there is no obvious connection to the Mafia that has been disclosed yet. However, the last such take down – Silk Road – which was also an online Bitcoin marketplace, was used by the Mafia in the EU and the Hells Angels in Vancouver, where the latter were known to have offered hitman services online for payments in Bitcoin. How the Hells Angels in Canada or members of the Mafia in the EU obtained Bitcoin wallets and were able to buy and sell digital currency using traditional banks to wire funds on exchanges remains a mystery.

Silk Road led to the subsequent arrests of hundreds of people around the world who were vendors on that site and of people who purchased illegal items. It is expected that the same will happen with AlphaBay and banks can expect to be under pressure to the extent they banked digital currency millionaires who are engaged in criminal activities. Already, the US DOJ has disclosed the conviction of two people who sold drugs on AlphaBay who have already agreed to sentences of over six years each in prison. They were located from details of their Instagram and Facebook accounts. Interestingly, in our experience it tends to be iTunes information that reveals a person and his / her location to law enforcement, not Instagram. The two convicted dealers were both foreign nationals living in New York who sold heroin and cocaine online and shipped it across the US.

With respect to AlphaBay’s owner, the following banks banked Cazes and were the subject of seizure orders: Loyal Bank in St. Vincent and Grenadines; the Bangkok Bank, the Siam Commercial Bank and the Kasikorn Bank (all in Thailand), Bank Alpinum and Bank of Ayudhya. He also had a PayPal account and several Canadian bank accounts that were still open at the time of the take down. Bitcoin Suisse AG acted as his Bitcoin exchange, as did the Bitcoin Company Ltd.

Cazes led a lavish lifestyle, buying numerous luxurious items from cars to condos to watches despite having no gainful employment or legitimate business that he could show AML officers to justify the vast amount of funds flowing through his bank accounts.

The indictment is here.

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US authorizes seizure of more assets for money laundering

By Christine Duhaime | July 20th, 2017

The US Attorney General has issued an order authorizing the forfeiture of property whenever there is conduct that is in violation of federal law more frequently than is currently being done in order to deter criminal activity. From 2007 to 2016, the DEA collected $3.2 billion from civil asset forfeiture.

Civil asset forfeiture is a practice in the US and Canada that allows law enforcement to seize cash and property suspected of being connected to criminal activity. The property owner does not have to be convicted or even charged with a crime to have his or her property seized and forfeited by the government. In the US, local law enforcement agencies can keep 80% of the assets forfeited. Law enforcement has long advocated for increased forfeiture as the only effective tool to combat transnational criminal organizations.

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China hires an army of 400,000 anti-money laundering specialists

By Christine Duhaime | July 10th, 2017

In its ever growing angst against flight of capital to places like Canada that are occurring partly due to lack of anti-money laundering know-how at Chinese banks, China announced that it had hired an army of over 400,000 anti-money laundering compliance personnel at the Bank of China.

More is available here.

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Predictive money laundering and damming orders – what are they?

By Christine Duhaime | July 10th, 2017


Last week, the US Treasury Department imposed sanctions against a bank in China for allegedly providing financial services to North Korean companies and said it was rolling out more sanctions in the weeks to come.

The bank, the Bank of Dandong, is alleged to have facilitated money laundering by allowing its bank to be used to move money connected indirectly with WMD. Selling, trading, financing or providing services in support of WMD is a predicate offense for money laundering and the proceeds of the offence is proceeds of crime, hence the money laundering allegation against the China Bank of Dandong which, if the allegations have merit, profited off the financial transactions and its revenues therefrom are proceeds of crime.

The bank is alleged to have provided banking services for the sale of coal, not directly for the sale of WMD. But North Korea is believed to use its proceeds from coal exports to fund its WMD program.

In May, the US DOJ had obtained what is called a “damming seizure” warrant.

A damming seizure is an unusual court order because it is granted on the basis of the predictability of criminal activity in the future and it covers the full scope of financial transactions going through a bank of the targets.

In essence, it forces banks to disclose all incoming financial transactions of the target and to block outgoing transactions, including correspondent banking transactions. The damming order was not for funds held in the US — it was for funds held offshore.

In that sense it is similar to a mareava injunction only with a wider scope and full disclosure. The constitutionality of an order based on the propensity of criminality is interesting and was litigated in the US.  A damming order is anticipatory – it is not based on existing probable cause – rather it is based on cause existing at execution, namely that funds are going to be laundered at the eight banks subject to the damming order and therefore the order should be installed in advance.

The US courts held, among other things, that damming orders based on future criminality were constitutional in the US based on 2006 precedent from the US Supreme Court.

Eight banks

The damming order was served on eight US banks for funds held in the US and elsewhere but that are tied to the US by virtue of the correspondent banking relationship. The US alleges that the eight banks processed over US$700 million in financial transactions that were illegal because they were sanctions under US sanctions law.

The eight banks are:

  1. Bank of America
  2. Bank of New York Mellon
  3. Citigroup
  4. Deutsche Bank
  5. HSBC
  6. JP Morgan Chase
  7. Standard Chartered
  8. Wells Fargo

Damming orders are not new – they are usually used for transnational criminal organizations, such as the Mafia, to monitor their financial transactions between countries to learn with whom they associate and where the movement of illicit goods and money is going to and from.

Predictive AI used to guess future criminals

Interestingly, there is a debate in financial crime and artificial intelligence circles about the use of predictive AI that predicts the propensity of criminality of a person based on, inter alia, their family, business and social media connections.

In financial crime, usually a person associated with organized crime will “infect” those people around him or her, and eventually a non-criminal will engage in criminal conduct, statistically speaking. What predictive AI does is identity those persons and in some pilot cases, analysts then enter such persons in a database for monitoring by law enforcement to protect society. Theoretically, this may violate the presumption of innocence and other rights but based on case law associated with this case’s damming orders, it would appear that in the US, courts have determined that the greater interest in protecting society against the dangers of financial crime outweigh certain personal potential rights violations of persons or companies. In a round-about-way, this case could be seen as a win for the use of predictive AI by law enforcement.

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