NCIS discovers jail pay FinTech app used by prisoners to launder money

By Christine Duhaime | April 24th, 2019

Agents from NCIS have charged several prisoners, who used social media and online dating sites, with extortion and money laundering for blackmailing members of the military for money. The scheme cost 442 service members from the Army, Navy, Air Force and Marine Corps from across the United States more than $560,000 in financial losses.

The prisoners used fake names, posed as women and exchanged naked pictures through Vancouver-based Plenty of Fish, and later demanded payments not to reveal the photos. Some inmates made fake claims that they were children and threatened to report to law enforcement unless targeted members of the military paid them online. The extortion was made possible because prisoners were given cell phones, wireless Internet access and were allowed to have access to external financial services from a FinTech called JPay, which provides banking access to criminals in jail through MoneyGram. NCIS alleges that the criminals, although incarcerated, laundered the proceeds of crime through the JPay app.

It’s unclear who does the AML compliance for prisoners using the JPay service.  And theoretically, its unclear whether every transaction qualifies for a suspicious transaction and must be reported.

A petition of several states to the Federal Communications Commission for permission to control wireless access in prisons, stated that prisoners use cell phones acquired illegally and wireless access to coordinate gang activity, extort money, engage in credit card fraud online and sell drugs – all from prison.

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$15 million in heroin seized from Iranian truckers entering Bulgaria

By Christine Duhaime | April 20th, 2019

The Bulgarian police have seized a transport truck from Iran attempting to cross the Bulgarian – Turkey border with 288 kilos of pure heroin, with a street value of $15 million at the low end.

The heroin was dry-walled, meaning each brick of heroin was covered individually with drywalling material. According to the US 2019 Narcotics Report, Iran is a significant narcotics trafficking country, where narcotics are exited to Turkey or Iraq and then to Eastern Europe. The US State Department determined that its global illegal narcotics activities are assisted by the fact that Iran has a large underground economy, spurred by uneven taxation, widespread smuggling, sanctions evasion, and its expatriate community. That expat community is in Canada, US, UK and Germany. Over 40% of opiates from Afghanistan enter or transit through Iran.

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Iran confirms supporting an ICO and several Blockchain projects

By Christine Duhaime | April 20th, 2019

On Tuesday, Iranian officials spoke to the Iranian media and confirmed that a government organization – Iran Telecommunication Research Center – has 4 Blockchain projects in progress that have looked at using Blockchain for policy making, threat management and business use cases for Iran. Further, they announced that a project at Sharif University, funded by Iran, developed a taxi app for consumers using Blockchain which launched an ICO already.

The Iran Telecommunication Research Center is interesting for another reason – it facilitated the introduction of Ericsson’s 5G to Iran in 2017, and tested 5G for government officials (see the aggressive photo attached from the Ericsson event in Tehran of a military aircraft with 5G on the wings). Iran’s Irancell and Ericsson signed an agreement for 5G in Iran in 2017 to make it available in Iran by 2020. Irancell is a government owned and controlled organization, and it is said by Iranians, to be owned and controlled by the Islamic Revolutionary Guard Corps and foundations controlled by the Supreme Leader, Ayatollah Khamenei. China and several other countries in Asia are ahead in 5G research, innovation and deployment whereas Canada is quite behind, and even at deployment, will be required to buy and use technology from foreign countries, as well as to risk the compromise and abuse of its user data to foreign parties, whether they be commercial or non-commercial parties.

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China’s Supreme People’s Procuratorate comments on Blockchain-based evidence for Court purposes

By Christine Duhaime | April 18th, 2019

China’s Supreme People’s Procuratorate, the highest national legal supervisory body in China (which reports to the National People’s Congress), published a commentary by a learned legal scholar on its official website on the use of Blockchain for Court evidentiary purposes yesterday, noting that for it to grow as a source of reliable evidence in Chinese Courts, data from the Blockchain will have to pass third party independent certification. Otherwise, the scholar noted, it will not be accepted by judges and Courts.

The legal scholar goes on to mention that the Hanghou Internet Court has accepted the use of Blockchain for electronic data storage. That is not the same as it being relied upon for the proof of the evidence by Courts and judges. The Hanghou Internet Court’s decision in respect of Blockchain information was confirmed by the Supreme People’s Court in September 2018. That case involved a litigation over copyright protection and in that case, the Blockchain was used as part of the process to establish proof of the date in which an interest in a copyright was asserted. That is important in copyright law where proof of use and/or assertion is material but does not speak to proof of evidence of the content on information stored on a Blockchain.

In the article on the Procuratorate’s website, the legal scholar reviewed developments in this area emanating from Vermont, in contrast with China.

A Canadian company, Crypto-Copyright, in 2015, was the first in the world to create a smart contract system to enable a person or a company to record copyrighted interests on a Blockchain using micro-transactions of a digital currency.

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Iranian charged in €6.6 billion case with disrupting Iran’s economy by moving money for sanctions avoidance, immigrated to Canada

By Christine Duhaime | April 13th, 2019

Updated 2019-04-14

Marjan Sheikholeslami, an Iranian foreign national, now living in Toronto, Canada, is alleged to have played a major part of a financial crime case with an Iranian petroleum executive, Reza Hamzehlou, and is on trial in absentia in Iran for disrupting Iran’s financial system to the tune of €6,600,000,000. Mr. Hamzehlou was the CEO of the Iran Petrochemical Commercial Company (“PCC”), an arm of the National Iranian Petrochemical Industries Company. Ms. Sheikholeslami and 13 others, including Mr. Hamzehlou, are also alleged to have violated sanctions by transferring funds out of Iran by using so-called front companies in Turkey.

The indictment is over 700 pages and involves 3 defendants who have left Iran. According to the prosecutor, among other things, Mr. Hamzahlou in collusion with Ms. Sheikholeslami,  transferred €659 million to a company she owned in Turkey and transferred another €347 million to other sources in Iran, all of which were funds owed to the petroleum company. The prosecutor alleges that Ms. Sheikholeslami was the main partner of Mr. Hamzehlou.

Mr. Hamzehlou has admitted, through his lawyer, the sanctions avoidance aspect of the indictment using foreign front companies to move money, but says that he did it to assist the Iranian regime to sell oil. Ms. Sheikholeslami admits working with Mr. Hamzehlou for the purposes of assisting the PCC. In this article, the company is mentioned as engaged in sanctions work-arounds (aka sanctions avoidance), to export petroleum products from Iran.

But Reza Hamzehlou had more corporate activity outside of Iran besides the companies with Ms. Sheikholeslami in Turkey — he is listed in the Paradise Papers Database as owning two companies in Malta for unidentified purposes. Malta is known for its lax counter-terrorist financing and anti-money laundering compliance standards.

Mr. Hamzehlou travelled to Malta in 2008 with other business partners in a different capacity, namely the CEO of a large conglomerate called the Iranian Investment Company (“IIC”). He met with a lawyer for advice on arranging the investment of US$500 million to buy PetroPars, an Iranian petrochemical company. PetroPars has projects in Venezuela and Angola, as well as Iran. Money seemed to have been no object and Mr. Hamzehlou informed the law firm that IIC controlled numerous Iranian companies. The Malta lawyer disclosed the existence of the client, the purpose of the meeting and client emails to, among others, the US Department of the Treasury here, informing them that he had a long-standing relationship with Mr. Hamzehlou. Tags of the communication to the US Department of the Treasury included “terrorism finance traffic”, “government” and “terrorists and terrorism” – tags which indicate that Mr. Hamzehlou’s activities raised red flags on the magnitude of international security. How Mr. Hamzehlou and his associates were able to be banked, particularly through the correspondent banking system, remains a mystery.

Mr. Hamzehlou went to Brazil and set up a company there as well, and was active in the media explaining how Iranian oil and gas products could tap into South American and Asia markets.

Mr. Hamzehlou appears to have had a higher level of connection to the Supreme Leader, Ayatollah Khomeini. Inter alia, he is noted by Iranians (and by a reporter with Radio Free Europe) as having been selected to chair, and did chair, a conference associated with Sheikh Naeem Qassem. Sheikh Naeem Qassem is not an inconsequential person – he is the 2nd in command of Hezbollah. The #2 guy. The reports say that the conference was organized for an association under the patronage of the Ayatollah. It is a significant honour in Iran to have bestowed upon you, the duty to chair such a conference and if this is true, it should not be doubted that Mr. Hamzehlou was and may still be, part of a small inner circle of persons with access to the Supreme Leader. Iranians on social media have remarked that they spotted Mr. Hamzehlou in Qom and were surprised since they thought he was incarcerated. Qom is where you go to consult with the senior clerics, including the Supreme Leader and the expression “going to Qom” means, in commercial circles, that you did a consultation or went for a blessing for a business venture. Qom does not come to you – you go to Qom.

Back to the connection between Ms. Sheikholeslami and Mr. Hamzehlou – they both have said in different venues as part of the trial reporting, that they were business partners. His close connection to the Iranian regime and in particular, allegations if true, of chairing a high profile conference involving the Hezballah leadership, should have been a red flag for Immigration Canada to consider during the vetting process of her.

Marjan Sheikholeslami is also known as Marjan Sheikh al-Islamami and Marjan Sheikholeslami Al Agha. Like Mr. Hamzehlou, she is a politically exposed person.

Ms. Sheikholeslami is said to have worked as a reporter for the official newspaper of the Iranian government, the Islamic Republic News Agency, a coveted post for insiders.  خبرگزاری جمهوری اسلامی‎  is funded, and its content controlled by, the Ministry of Culture and what is called Islamic guidance. It publishes the voice of the Supreme Leader, Ayatollah Khomeini.

She is also alleged to have worked for Sepanir Oil & Gas Energy Engineering in Tehran, a sanctioned company, said to be owned by the Iranian Revolutionary Guard Corp. (“IRGC”) but her connection to Sepanir, if true, is not part of the current criminal proceedings in Iran.

The IRGC too was sanctioned by the US on December 19, 2014, under the Iran, North Korea, and Syria Nonproliferation Act and on October 25, 2007, was added to the Specially Designated National list maintained by the US Department of the Treasury’s Office of Foreign Assets Control, freezing its assets under US jurisdiction and prohibiting transactions with US persons pursuant to Executive Order 13382, which targets proliferators of weapons of mass destruction.

Ms. Sheikholeslami made a statement recently about the case from Canada, in which she says that she did not flee Iran and returns often [which means she has an Iranian passport that she renews and switches out to use in Dubai to board a flight to Tehran]. She stated that in 2014, she managed the two companies named in the indictment and that they were not involved in money laundering. She says that she has not been served in Canada with notice of the indictment and has therefore not hired a lawyer.

Another co-accused, Mohsen Ahmadian, a retired director of the petrochemical company, is accused of participating in the scheme and of moving €78 million in cash. He was an employee of the Iranian Ministry of Petroleum and his family are all politically exposed persons for several reasons, including by association with Mr. Hamzehlou. He has a daughter and son in Canada.

The Iranian prosecutor has changed the numbers that allegedly disappeared but it appears that of the €6 billion that was moved, half came back to the company, leaving €3 billion unaccounted for. Three weeks ago, the prosecutor said that Iran has sought the extradition of Ms. Sheikholeslami. They are likely only going to succeed in obtaining an extradition order if the charges include money laundering. In the past, however, Iran asked Interpol for extradition, which suggests that they do not appear to be familiar with how extradition works.

Allegedly, Ms. Sheikholeslami claimed refugee status in Canada, although that has not been confirmed, but that is unlikely because first, she says she did not flee Iran and second, it would put her citizenship at risk of being revoked for misrepresentation because one cannot both flee a country, claim refugee status for fear of prosecution in that country and then return for commercial purposes to the country in which you fear persecution shortly thereafter.

Two other indicted persons are living in foreign countries, likely Canada, but that has not been released by the prosecutor yet. Organizations in the EU tend to have a more relaxed approach to sanctions – here, for example, a Swedish company said it was helping Iranian companies to use Bitcoin through Sweden.

This blog is covering the financial crime prosecution in Iran of Mr. Hamzehlou and Ms. Sheikholeslami, et. al.

Canada has several Iranian foreign nationals wanted in Iran for financial crime, including another politically exposed person, Mahmoud Reza Khavari (you can read about him here), who was convicted of embezzling US$2.6 billion from an Iranian state-owned bank. He moved to Toronto, Canada where he parked hundreds of millions in luxury real estate. Canada has declined to assist with his removal from the country.  Another, Mehregan Amirkhosravi, an Iranian foreign national lives in Montreal and was also convicted in the US$2.6 billion embezzlement case.

Update 

According to media coverage in Iran, in testimony given in the trial in Tehran on April 13, 2019, Mr. Hamzehlou testified that the IIC also involved Ms. Sheikholeslami, and that is how he came to know her and to seek her assistance with sanctions avoidance. The IIC is the company referred to the US Treasury, described above, for terrorism concerns in Malta. He testified that she is a prominent person in the Iranian government, and was considered an expert at Iran’s parliament in cultural Islamic issues.

Ms. Sheikholeslami’s court appointed lawyer stated, according to media coverage of the case in Iran, that she participated in sanctions avoidance through private companies as a money broker and that she had provided a public service to the country. A lawyer for one of the parties then asked why, if Ms. Sheikholeslami provided a public service to Iran, she fled Iran and carried out the financial transactions in secret through front companies. In response as to why she has not appeared to testify, her appointed lawyer said that she is in Canada.

According to media coverage in Iran, the other defendant connected to Canada, Mr. Ahmadian, testified that he moved money out of Iran through Swiss bank accounts and that he set up a Swiss private company for that purpose. He apparently testified that if he was a sinner, he would have stayed in foreign countries (e.g., Canada and the EU) and not returned to Iran (his two children acquired Canadian citizenship despite being connected to Mr. Hamzehlou).

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A guy stole $2M in Bitcoin mining equipment, escaped from prison, jumped on a plane with the Prime Minister of Iceland and no one stopped him

By Christine Duhaime | April 7th, 2019

Sindri Por Stefansson was recently sentenced to 4 1/2 years in prison in Iceland for masterminding the theft of $2M worth of Bitcoin mining machines.

This is another one of those stories that only happens in the Bitcoin world.

Mr. Stefansson was arrested in February 2018 in Iceland with several others, and ordered held in connection with computer theft, for over $2M worth of mining equipment.

He was held in a low-security prison, named Sogn Open Prison. The prison was so low-security that it has windows that open wide and the windows do not have prison bars. The Sogn Open Prison was, it seems, very open where security is not a thing.

One day, Mr. Stefansson went online at the prison, and booked a flight to Stockholm. He then opened the window of the open prison, climbed through and walked away. No one stopped him; in fact, no one noticed at first.

He made it to the Keflavik International Airport, 100 km away, managed to acquire a passport and boarded his flight to Sweden. No one noticed; no one stopped him. Chilling on the plane with him to Sweden, was Iceland’s Prime Minister. Security of the Prime Minister seems not to be a thing either.

Long after the flight had left Iceland airspace, the prison guards noticed he was missing.

No one thought to notify officials in Sweden to arrest him when the plane landed and so, Mr. Stefansson got off the plane in Stockholm with Iceland’s Prime Minister. He traveled to Germany then to Amsterdam, where he was arrested, and returned to Iceland.

He is now back at the prison, serving his 4 1/2 year term.

The police have not recovered the stolen mining equipment yet, after a year.

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Vancouver Convicted Money Launderer Listed In Offshore Leaks, Originally from China, Ordered Extradited to India for Drug Trafficking by Hong Kong Court of Appeal

By Christine Duhaime | April 6th, 2019

A Canadian, originally from China, named Xie Jing Feng, was ordered deported a few weeks ago to India by the Hong Kong Court of Appeal, to face trial for drug trafficking. Xie Jing Feng came to Canada from China in 1998, where he applied for refugee status, which was granted on the grounds that he alleged that he had a fear of persecution for being part of a Christian group in China and needed protection in Canada. He was subsequently granted Canadian citizenship, with his wife Zhu Li-chang.

He is included in the Offshore Leaks databased as a Canadian and is a convicted money launderer, who moved the proceeds of crime equal to HK$95 million through banks in Vancouver, China, Macau and Singapore. The couple lived in Vancouver, British Columbia, and had a house in Richmond. They appear to have used the Cook Islands as an offshore vehicle.

In 2008, Xie Jing Feng travelled to India where he was arrested for possession of meth. He was held in the Baroda Central Prison for three years on remand, waiting for a trial and during that time, he alleges he was routinely tortured.

In April 2011, he managed to escape prison in India and made his way to Nepal. He was arrested when entering Nepal for illegal entry and detained. Two months later, he was arrested by the Nepal Narcotics Control Bureau for drug trafficking. While being detained, he paid a government official $3,000 for a fake passport under an alias and was allowed to escape to the Airport, where he took a flight to Bangkok. He then traveled to Hong Kong and was arrested for illegal immigration for entering with fake ID. He was charged and convicted in Hong Kong of offences related to fake ID for immigration purposes and served a term of incarceration of 8 months.

Upon his release for fake ID and immigration offences, he was arrested for money laundering (處理已知道或合理相信為代表從可公訴罪行的得益的財產). It was found that he had 3 Canadian passports (two that were alleged to be fake), which he used to open bank accounts at HSBC and Standard Chartered in Hong Kong, where he laundered HK$95 million through shell companies and through his wife. The money was moved between Vancouver, China, Macau and Singapore. He was convicted and sentenced for money laundering in Hong Kong for a term of incarceration of 4 years and 4 months on April 23, 2013.

Two years into his sentence, the government of India applied for the extradition of Xie Jing Feng to India and upon his release from prison on March 21, 2015, he was arrested and detained for extradition to India. He then applied to be deported back to Canada and resisted extradition to India on the ground that he would face an unfair judicial process and would be harmed or killed.

He was ordered extradited to India and appealed that order for over 4 years, arguing that the delay to prosecute him in India (11 years) would amount to a denial of justice and he would “rot” in prison in India in remand if extradited to India.

The High Court of Appeal for Hong Kong denied the last appeal for Xie Jing Feng, and he was ordered extradited to India.

He is listed on a CBC list of Canadians with offshore dealings that were identified as part of the investigation called Offshore Leaks by the International Consortium of Investigative Journalists, which includes the CBC. His multiple Canadian passports, his alias, David Chow, and other names with fake IDs that he used to travel, made him an elusive person to follow.

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US identifies Canada as major money laundering country, and notes concern over its low prosecution rate

By Christine Duhaime | April 2nd, 2019

Canada once again a “Major Money Laundering” country

The 2019 “International Narcotics Control Strategy Report” (INCSR) published on Friday by the U.S. Department of State identifies Canada once again as a “major money laundering country” along with a host of risky countries for financial crime.

A “major money laundering country” is one whose banks and financial institutions engage in financial transactions involving significant amounts of proceeds from international narcotics trafficking. For several years in a row, Canada has been identified as such.

Canada has also been identified as a “major precursor country” which means it is a leading country that produces precursors or essential chemicals used in the production of illicit narcotics.

Low Prosecution Rates

Key findings for Canada this year include the fact of its low prosecution ability for money laundering and gaps in the law, such as for Bitcoin, and the continued substantial size of Canada’s illegal drug trafficking ecosystem and transnational organized crime.

Bitcoin Concern for organized crime

The Report notes the growing concern of digital currencies like Bitcoin, and the use of Blockchain for money laundering and drug trafficking and its gaps for AML compliance purposes. It also notes the growing concern of beneficial ownership with AML, which is important in the context of corruption because organized crime and corrupt officials use shell companies to launder money and evade sanctions.

Bitcoin Concern for Fentanyl

The Report specifically mentions the use of Bitcoin for fentanyl purchases overseas, as a global concern for all countries. It notes that fentanyl is responsible for the surging number of deaths in the US, claiming the lives of over 30,000 Americans. Carfentanil, which is 100 times more potent is not approved for human use but is being cut into drugs and sold on the street. The presence of carfentanil poses a serious threat to public health.

The Report notes that money launderers use offshore gambling companies (online illegal companies) and offshore centres (Guernsey, Jersey, Cayman Islands, Cook Islands) to anonymously launder funds.

Key Findings

Volume 1 - The key findings of Volume 1 on drug trafficking vis a vis Canada are that:

  • Canada is a source of fentanyl to the United States.
  • Canada is a primary source country of high-potency marijuana and MDMA to the United States.
  • Canada exports illegally, synthetic opioids to the United States.
  • Canada exports, illegally, synthetic drugs and amphetamine-type stimulants to Asia and Australia.
  • Cannabis destined for the US is produced mostly in British Columbia.
  • Methamphetamine continues to be produced in large quantities in Canada.
  • Canadians buy cocaine mostly from South America, and some of that transits through the US.
  • Afghanistan is the primary source of heroin for Canadians.
  • Canada says imports of fentanyl from China via mail decreased.

Volume 2 - The key findings in respect of money laundering  in Volume 2 for Canada are:

  • Canada needs to enhance its money laundering prosecution capabilities, given its low conviction rate.
  • The illicit drug market is the largest criminal market in Canada.
  • Transnational organized crime represents the most threatening and sophisticated actors in Canada.
  • Transnational organized crime has access to professional money launderers in Canada.
  • Laundering methods in Canada primarily involve cash smuggling, money services businesses, casinos, real estate, wire transfers, offshore companies, credit cards and digital currencies, like Bitcoin.
  • Money laundering activities in Canada involve drug trafficking, fraud and corruption.
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Vancouver ICO firm co-founders alleged to have defrauded investors of $30 million over EtherParty ICO

By Christine Duhaime | March 30th, 2019

RCMP Investigation

According to court filings in Canada, Kevin Hobbs and Lisa Chang, the two co-founders of ICO called EtherParty FUEL and an associated company, Vanbex, based in Vancouver, are allegedly under investigation by the Federal and Serious Organized Crime Division of the RCMP for, inter alia, fraud and are also under investigation by the Canada Revenue Agency for tax offences.

Documents filed in court allege that Kevin Hobbs has a criminal record in the US and Canada. Specifically, according to court documents, Mr. Hobbs’ criminal history includes:

  • 2005 – convicted in the US for possession of 100 pounds of marijuana in an incident in which he also had US$178,000 in cash in a suitcase.
  • 2008 – convicted of possession of proceeds of crime for having $32,000 in cash in heat sealed plastic bags in a suitcase at an Airport and of laundering the proceeds of crime.
  • 2009- convicted in connection with a grow-op operated from a home he was renting and of unlawful possession of marijuana.

This month, the Director of Civil Forfeiture of the Ministry of the Attorney General of British Columbia, filed a civil forfeiture action in rem against Kevin Hobbs and Lisa Chang and as against property they own arguing that the property is proceeds of crime. The Notice of Civil Claim appears to suggest that there may be a securities action because the alleged proceeds of crime is alleged to arise from, inter alia, public market activities.

Mr. Hobbs and Ms. Chang have since filed a Response to Civil Claim, denying the allegations, which is summarized below.

$30 Million Allegedly Not Used on Tech

The court documents in British Columbia allege that Mr. Hobbs and Ms. Chang interchangeably under Vanbex, EtherParty and FUEL, represented to investors that the FUEL ICO could be used for smart contracts and would dramatically increase in value, and then they, by “deceit, falsehood and other fraudulent means”, defrauded investors of over $30,000,000 raised.

The application alleges that Kevin Hobbs and Lisa Chang used investor funds for their own use. Among other things, they allegedly bought a luxury condo in Vancouver for $4 million and Hobbs allegedly bought one in Toronto for $3.7 million.

A Lambo & No Occupation

According to court documents, they also allegedly bought and rented luxury vehicles, including a Lambo. The Toronto condo for $3.7 million was paid for entirely in cash, according to court documents.

The court documents state that Kevin Hobbs and Lisa Chang have no known occupation to the government plaintiff. Clearly, though, they have an occupation running Vanbex.

The pleadings allege that in two years, Vanbex developed no usable product or service. EtherParty’s tech concept was to create technology to enable anyone to easily create smart contracts. Its white paper is here.

According to court documents, Mr. Hobbs is alleged to have gambled over $1.8 million using the ICO investment funds at a Vancouver casino, and was placed on a “watch list” by the BCLC for buying in with unsourced funds (this usually means, for example, that the person can’t point to a source of funds that satisfies the casino, such as a tax assessment evidencing after-tax employment income of $1.8 million ).

According to court documents, when Mr. Hobbs and Ms. Chang realized they were under investigation, they allegedly attempted to liquidate the assets deliberately.

A real-life hero

An online profile today described Ms. Chang as a real-life hero in the age of crypto. She is credited with working on Tether and also working on Mastercoin, the latter which the article indicates was the first ICO in the world. In the article, Ms. Chang says (in reference to there being no best practices back then and although it is not clear, presumably this means in 2014 and in relation to Mastercoin) that “half of the world thought it was a scam, telling us bluntly that we were going to jail; and then the other half saw this was a brand new way for companies creating open source technology to fundraise.” Not to detract in any way from Ms. Chang  -   she may have indeed played a material role in the development of ICOs on the global landscape but, PR wise, not an ideal statement.

Only 2 clients?

Some of the ICOs Vanbex indicates they worked on include Dash, Factom, Tron and Storj. The court filings, however, allege that Mr. Hobbs and Ms. Chang lied (the government’s word) and that Vanbex and its subsidiary companies were shell companies which only ever had two clients.

Some of Vanbex’s partners listed on its website are:

  • The University of British Columbia
  • Polymath, a Toronto-based company
  • Enterprise Ethereum Network
  • CoinPayments, a Vancouver digital currency exchange which allows trading on TOR

Neither Lisa Chang nor Kevin Hobbs have been charged in connection with this investigation. All that has occurred is that the government has filed a Notice of Civil Claim and two applications to seize their assets and has successfully obtained a seizure order over those assets. All of the statements in the Notice of Civil Claim and Notice of Application(s) are allegations that have not been proven in any court, although there are Affidavits in support thereof. The order is not a mareva injunction, or an order as against the whole world in respect of other of their assets. Mr. Hobbs and Ms. Chang are sharing a lawyer. There does not appear to be counsel yet for Vanbex or for EtherParty or separate counsel for each of Mr. Hobbs and Ms. Chang. That will have to change – they will need separate representation and the corporate entities each need their own lawyers as well.

Extra – the Condo

The Vancouver condo, featured below, that was ordered forfeited was bought by Ms. Chang and Mr. Hobbs for $4.1 million in November 2017, was renovated and listed for sale for $7.8 million.

Criminal History Details

According to older court records unrelated to this civil forfeiture action, Mr. Hobbs’ criminal history seems tied to a series of events that occurred during the course of one summer. On balance, he does not appear to have a criminal history, per se, that extended beyond events in 2005, except as alleged now by the government.

The history seems to be this:

In March 2005, Mr, Hobbs was placed under police surveillance in Canada. On April 8, 2005, Mr. Hobbs arrived to check in for a last-minute flight and was detained at the Halifax Airport.

A police dog at the Airport had made a positive indication of Mr. Hobbs’ suitcase for the presence of drugs. Mr. Hobbs was detained. He denied the police permission to search his suitcase without a warrant, and the police held onto the suitcase to obtain a warrant. Mr. Hobbs was permitted to leave the Airport.

The police subsequently obtained a warrant and opened the suitcase in the presence of Mr. Hobbs. Therein, they located $32,000 in cash in heat sealed plastic bags and mostly in denominations of $20 with elastic bands around the bundles of cash.

The $32,000 suitcase incident

Mr. Hobbs later indicated that the $32,000 was being taken to Vancouver to gamble. There were no drugs in Mr. Hobbs suitcase. However, the heat sealed plastic bags containing the money tested positive for the presence of cocaine, as did the handle of his suitcase and his clothing.

The US$178,000 suitcase incident

Three months after the Airport incident, he went to New York, and on July 28, 2005, he was arrested in a hotel room and found to be in possession, with two other persons – one from Vancouver –  of 100 pounds of marijuana and US$178,000 in cash in a suitcase. The drugs and money were forfeited. In New York, Mr. Hobbs pled guilty to criminal possession of marijuana in connection therewith and intimidating a victim or a witness, and received a sentence of one year incarceration. He was credited for time served during remand.

The grow-op incident

A week after the New York hotel incident, police executed a search warrant on a large house rented by Mr. Hobbs and located a grow-op in the basement. The grow-op was described in court documents as semi-sophisticated.

Mr. Hobbs was arrested on August 18, 2005, and charged with unlawful possession of property or proceeds of property knowing that part or all of it was derived from an indictable offence (e.g., proceeds of crime) and with dealing in those proceeds with intent to convert the proceeds knowing or believing that all or part of it was derived from the commission of an indictable offence (e.g., money laundering). He was also charged with the grow-op operation and possession of a controlled substance. Mr. Hobbs may not have been present during any of this incident since if appears that he was incarcerated in New York.

At his trial, Mr. Hobbs maintained that the $32,000 cash was from casino winnings. The RCMP testified that the money could not be derived from gambling because of the way it was packaged (e.g., wrapped in elastic bands in plastic bags). Mr. Hobbs testified that he was a professional poker player and he was going to gamble with the $32,000 at River Rock Casino, which was having a big poker tournament at that time. A River Rock Casino executive testified that there was no poker tournament scheduled at the time that Mr. Hobbs had deposed. The RCMP testified that, at that time, the money he had in his suitcase was equal to the price of a brick of cocaine and given that his clothing and other items tested positive for cocaine, they suspected he was going to Vancouver to purchase coke and resell it in Halifax.

The Judge held that Mr. Hobbs was wholly unreliable in his testimony, making up stuff on the witness stand, and he was convicted by a Judge on the two counts in the indictment (e.g., possession of proceeds of crime and money laundering) and sentenced to 9 months imprisonment. He was convicted by a jury of the unlawful possession of marijuana and operating a grow-up.

Mr. Hobbs appealed his convictions many times over several years, one quite successfully and some as a self-represented litigant. In one appeal, the Judge said that he was concerned about Mr. Hobbs re-offending and remarked to Mr. Hobbs that he needed to realize that a quick way of making money has significant risks.

There is at least one other litigation in the United States in which Vanbex, and its two co-founders are defendants –  for an alleged failure to provide services to a company wanting to do an ICO that pre-paid US$80,000 for a white paper, global marketing and introductions to ICO buyers, none of which allegedly materialized.

Response from Mr. Hobbs and Ms. Chang

The defendants have posted an unfiled Response to Civil Claim on its website in which they deny all of the allegations made by the government.  Among other things, the defendants say that Vanbex, the corporate entity, did not solicit funds for the FUEL ICO and that, and while its a little vague, that the purchasers thereof were informed of the risks (presumably of investing) into the FUEL ICO, and that such risks were prepared by a lawyer. The Response says that Vanbex currently has 50 employees and many clients, as well as more clients seeking their services currently, which means they have not been harmed by the allegations made by the government.

The Response also clarified that Vanbex is a consulting company while EtherParty is an entity that develops technology. The Response states that the Lambo was actually bought, and not leased, as the government alleged and after it was bought, it was sold.

With respect to gambling, the Response states that Mr. Hobbs did not use company money to gamble at a casino. The Response dives into how the FUEL ICO was sold online and somewhat into the secondary market sales by its purchasers. The relief sought is to over-turn the forfeiture action.

Although the Response does not expressly say so, it is possible that the defendants are objecting to the characterization of FUEL as a securities if such a characterization has been advanced by other parties, on the basis that the Howey Test is not applicable in Canada. There may be some merit to that, if that is what is happening because some lawyers are of the view that one of the four aspects of the test arguably does not apply in Canada.

Updated on 04-04-2019. 

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SNC Lavalin – its about “playing true”

By Christine Duhaime | March 14th, 2019

Sometimes non-lawyers ask me about the SNC Lavalin situation – some don’t get what all the fuss is about.

And I get why they don’t get it  – while most lawyers across Canada were troubled by the prospect of the interference in a prosecution by politicians for political gain occurring in Canada, I think it resonated a little less with non-lawyers.

Lawyers sit through long classes in law school and have to read sometimes upwards of 2,000 pages of caselaw per night, the material parts of which deal with ancient concepts of law and equity, constitutional law and the rule of law. The rule of law becomes part of our DNA and we bristle at the prospect of political interference in prosecutions because it isn’t just that there is interference in stopping a prosecution that is contrary to the rule of law, it also means that the opposite is possible, namely that there could be interference to commence a prosecution. If as a society, we cross the line and stop a justified prosecution for political gain, will we cross a worse line and commence a wrongful prosecution against an innocent person for political gain? They are just difference sides of the same coin.

The SNC Lavalin case is like a doping case in the Summer Olympics.

Imagine Canada has a superstar athlete who wins a gold medal in the 50 free at the Summer Olympics – arguably the hardest, most prestigious Olympic event there is.

At the medal ceremony, our superstar swimmer stands on the podium, receives his gold medal, the world sings “O Canada” and the whole country feels proud.

A few days later, we find out our star swimmer cheated and won the 50 free with the use of illegal drugs. Then we find out that he has been charged with doping in the past and cheated before.

He didn’t play true.

The World Anti-Doping Agency has to take some action. They decide to ban him from competing in swimming for two years. Two years is harsh – it means he will lose his endorsements, his coach and his entourage will be out of a job, and he will never recover because swimmers have a short competitive shelf life.

After the head of the World Anti-Doping Agency makes her decision, the head of the International Olympic Committee, who is a Canadian, asks her to change her mind. The head of the World Anti-Doping Agency is consistently lobbied to let this one untrue play slip by. She is asked to consider the harm to the swimmer of a two year ban and the harm to his family, his coach, his team. Jobs are at stake.

She says no, the agency has a duty to enforce the principle that athletes must play true and uphold the integrity of athletics, otherwise what do we stand for, if not integrity? The world is looking at us, she says, to make this right, to deliver justice.

The head of the Olympic Committee fires the head of the World Anti-Doping Agency and replaces her.

How do you think it ends?  #playtrue

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