Two Bitcoin guys, one who called himself the “Krypto King”, were charged in Arizona with money laundering and wire fraud after an investigation by the US Secret Service found that they used US$4.5 million of money that belonged to customers to live a lavish lifestyle that included living in a mansion together, riding around in exotic fast cars and taking a private jet trip together. Some of the victims were former players with the MLB.
The two – John Michael Caruso and Zachary Salter – are alleged to have started a company called Zima Digital Assets which sold digital currency securities and took in US$7.5 million from 90 investors but did not buy any digital currencies with the money.
Caruso has an extensive criminal record in the US for financial crime activities.
Salter allegedly told prospective investors, among other things, that Zima was the top in the world and had a genius behind it with the highest IQ in crypto (by which he meant Caruso possibly to imply to investors that funds were safe) and was delivering to all its customers with a return on investment ratio that was wild.
According to affidavit evidence from James Lamerson, a special agent with the US Secret Service, what was wild was their spending of customer funds. Caruso and Salter allegedly spent money lavishly for casino gambling (US$830,000) in Las Vegas; private jet trips (US$350,0000); exotic car rentals (US$350,000); a rented mansion (US$150,000) and numerous other things.
Yet Caruso only had income of US$22,800, which did not support his lavish spending.
Salter had reported income of $0.
Caruso bought a Lambo Urus and Salter bought a number of expensive cars including a Mercedes, a BMW and an Audi.
Special agent Lamerson located and trailed Caruso and Salter as part of his investigation and he deposed that he once followed them into a restaurant during which time he overheard them taking a call from a bank informing them that the company’s bank account was being de-risked. Over the course of trailing them, he noticed that they drove many luxury expensive exotic cars including McLarens, Farraris, an Aston Martin, and other Lambos, which had been rented.
The Secret Service subpoenaed casino records of the employees of the company and learned that Caruso with another associated person, or employee, went to Las Vegas multiple times and spent US$1.4 million gambling.
The affidavit notes that Caruso made statements (potentially implying that they appeared exaggerated), such as that he traded his own money privately and made so much money, others asked him to trade for them; he had a unique talent to spot trading trends that others didn’t have; and the company had US$379 million under management, which was an untrue statement.
In investment material sent to prospective investors via email, Caruso and Salter guaranteed crypto returns of up to 30% and never met that guarantee because the funds were allegedly mostly spent.
The affidavit evidence says that Salter paid for coverage in the press – he gave an interview as a “fabulous person”, where he said that Caruso was world famous, and he is alleged to have raised US$300,000 for refugees in Bangladesh.
Before getting into selling Bitcoin, Salter was a realtor. In this magazine article, Salter is alleged to be famous too, in fact a “music mogul.”
But not really; recollect that special agent Lamerson deposed in his affidavit that Salter had an income of $0.
In that same magazine article, Salter’s voice was said to “command the attention of millions.”
But not really; he produced a number of music videos, such as the below, which is quite good but only attracted 250k views.
Accountant Richard Gaffey, who was charged with money laundering offences, among others, in connection with the Panama Papers scandal must face charges of identity theft at his trial in connection with working with the law firm Mossack Fonseca, a judge ruled last week in New York.
Gaffey had applied to have the ID theft charges dismissed.
The case is interesting because the US government is pursuing, in part, the issue of beneficial ownership in the case. They allege that the accountant helped clients of the Mossack Fonseca law firm, and of his firm, use shell companies owned by sham foundations in offshore tax havens with lax anti-money laundering compliance to tax evade. In those corporate documents to set up the shells and foundations, Gaffey allegedly listed an elderly woman related to the client on the share registers, which the government alleges was fraud because she was not the shareholder.
Gaffey argued that he had not stolen identity, merely used it for corporate structuring purposes, and emailed it out and such.
Usually in tax structuring and tax planning files, it is accountants who set up shell and other companies, not lawyers. Conversely, in M&A, it is lawyers and not accountants who set up shell and other companies for financings. The difference is that using an accounting or advisory firm means that, for the client, no part of the accountant’s work is privileged or protected. It also means non-lawyers are often opining on complex tax law, and the advice is uninsured. People who want to be tax structured are always advised of this and opt to use accountants anyway.
A Canadian, Bahram Karimi, was charged in a superseding indictment in the Southern District of New York last Thursday, with bank fraud in a US$115 million Iranian sanctions avoidance case with close ties to the Pilatus Bank case. He faces a term of incarceration of up to 30 years, if convicted.
Karimi is also an Iranian national.
According to the indictment, Karimi funneled millions through US correspondent banks for other Iranian nationals and Iranian companies. In order to move the money through the financial system, he is accused of lying to banks about Iranian involvement in order not to be de-risked or have the bank accounts frozen under sanctions laws.
In 2004, Venezuela and Iran entered into a US$475 million agreement to build infrastructure in Venezuela led by Stratus Group, an Iranian corporation, which through a sub., Iranian International Housing Corporation, led the project. In Tehran, Stratus Group put Karimi in charge of managing the project.
The case is connected to the Malta Pilatus Bank scandal. In 2018, that bank was shut down by the European Central Bank, after the bank’s Iranian owner, Ali Sadr Hashemi Nejad, a politically exposed person (“PEP“) was arrested for money laundering in connection with the same infrastructure project as Karimi. He is now in the US on a US$32 million bond awaiting trial.
Manuel Delia, the former secretary of the former prime minister of Malta is reported to have recently said they suspect the Pilatus Bank “was a money laundering machine.” That from a person who had visibility at the top level.
The connection between Hashemi Nejad and Karimi?
Hashemi Nejad’s father, Seyed Mohammad Sadr Hashemi Nejad, owned the Eghtesad Novin Bank, the first private bank in Iran and is the founder and chairman of the Stratus Group, the entity hired by the Iranian government for the infrastructure project, which in turn hired Karimi in Canada. The father is one of the most wealthy and well-connected persons in Iran – in essence he is an ultra PEP. In this article, he discusses topics that include banks and currency exchanges he owns, the effect of sanctions, moving currency into Iran, and his company’s growth in Iraq including setting up a bank in Iraq and undertaking large P3 infrastructure projects.
The US government alleges that Karimi purposely structured payments, wires and bank relationship matters between Iran and Venezuela so that banks, presumably correspondent banks, could not detect there was a nexus to Iran. Between 2011 and 2013, Venezuela paid US$115 million to Iran for the project via wires, through front companies. In an email quoted in one of the indictments, Hashemi Nejad opened a bank account in Turkey for one of the alleged front companies for the Venezuela project, and allegedly wrote that he intended to add his father, Mohammad Hashemi Nejad, as a signatory to the account. In the meantime, it is alleged that he facilitated banking for the project.
If I were to guess, I would guess that Karimi was hired for the fact that he has both a Canadian and Iranian passport, which is essential for Iranian businesses to do business outside of Iran because they need bank accounts to be opened that don’t connect them to Iran.
If I were to further guess, I would guess that there are a whole host of companies and people in Vancouver who perform such shadow banking services for Iran, Iranian companies and ultra PEPs in Iran. Many may do it because they do not understand that as a matter of correspondent banking law, and regardless of conflicts of Canadian sanctions law, wiring money triggers US sanctions law and puts them in the jurisdiction of the US. Canada has adopted legislation to address the conflict of laws issue to protect Canadians in just one case in the history of Canadian sanctions laws, and Iran is not that case.
Some Iranians engage in a Vancouver practice called switching out, where they switch out passports for two reasons – to enter different countries and to set up bank accounts. It allows them to enter the US as Canadians but go back to Iran as Iranians (and to do that, they must maintain Iranian citizenship and renew Iranian passports) switching out their passports for each leg, without the two worlds intersecting because the passport data of Iran is isolated from the rest of the world in terms of intelligence sharing.
Some ultra PEP Iranians also buy citizenship from places like St. Kitts in order to have bank accounts. Hashemi Nejad allegedly has five passports and not one, but two from St. Kitts allegedly with different biometric data. Although from one of the richest families in Iran whose father consistently gets chosen for Iranian government contracts for large infrastructure projects and bank licenses, Hashemi Nejad claimed refugee status in the US, allegedly in fear for his life of the regime and then traveled back to Iran over 20 times, without letting the US government at least know that he was returning and no longer felt threatened.
The Pilatus Bank has been intertwined in the media in connection with the murder of Malta journalist Caruana Galizia, who was investigating alleged corruption payments allegedly processed by the Pilatus Bank to PEPs.
At 02:28, below, a journalist asked Hashemi Nejad to respond to allegations that the Pilatus Bank was “a quickly put together washing machine to clean dirty money.”
Don’t keep watching the clip until the end for the response … it never comes.
The US government appears to be taking on Canada as a safe haven for Iranian sanctions avoidance. Last week, another Iranian in the US was sentenced for sanctions avoidance who used a number of Canadian companies to ship equipment illegally to Iran.
One of the kingpins of Silk Road, the online darknet drug market that operated with Bitcoin, and its alleged CEO, Roger Clark, a Canadian, pled guilty on Thursday in New York to conspiracy to distribute narcotics. He faces a term of incarceration of 20 years.
Clark was extradited from Thailand in 2018, and was charged with narcotics trafficking conspiracy, distributing narcotics by means of the Internet, computer hacking conspiracy and money laundering. He was facing a term of imprisonment of life if convicted.
Clark advised Ross Ulbricht on all aspects of the operations of Silk Road, including how to avoid detection of US law enforcement. He was known as Variety Jones online and he figured prominently in the Silk Road chat evidence in the trial of Ulbricht, the founder of Silk Road. According to this reporter, Clark was its CEO. Silk Road was a $200 million online drug marketplace that facilitated the sales of illegal drugs and services around the world.
At his plea hearing, a few days ago, Clark admitted he played a central role in Silk Road and had advocated for the use of violence against anyone who cooperated with law enforcement. Clark went so far as to urge and facilitate, the attempted killing of a person suspected of stealing from Silk Road. That attempt is one of the more controversial stories surrounding the Silk Road case because the person they were trying to kill lived in Vancouver and the hit man was said to be a member of the Hells Angels, who asked to be paid in Bitcoin way back in 2014. The apparent Hells Angels hit man was paid and the transaction was recorded on the Blockchain on the time and date corresponding to when Ulbricht chatted that he sent Bitcoin to pay for the deed, but the RCMP discredited the story and said that no murder took place.
The two were aware that their activities triggered the super kingpin laws. Clark wrote to Ulbricht: “Not to be a downer [but] …understand that what we are doing falls under Drug Kingpin laws, which provides a maximum penalty of death upon conviction. . . . The mandatory minimum is life.”
Ulbricht wrote: “All in.”
Ulbricht was convicted of money laundering with an underlying narcotics offence, narcotics trafficking, running a criminal enterprise, trafficking in false ID products, among others in 2015, and was sentenced to life in prison with no possibility of parole.
Clark once told a reporter in 2016, in respect of the US government that: “They don’t have sh*t on me.”
For a few years, Canada was harboring two alleged fraudsters who were wanted in the US, and no one seemed to know much about it except US law enforcement – one was returned two weeks ago and the other was extradited from Canada in November.
The first, Ahmed Naqvi, who appears to be Canadian, fled to Toronto in 2015, after being charged by the SEC in Florida, and later charged criminally, with securities and wire fraud in New York. The second, Frederic Elmaleh, fled to Canada from Florida in 2017. He was charged with Naqvi. He also appears to be Canadian with US citizenship but it is unclear.
Both men allegedly solicited over US$17 million from over 50 investors in Canada, the US and Saudi Arabia for fictitious sales of well-known public companies. Through Elm Tree Investment Advisors, which they allegedly controlled and operated in Florida, they allegedly sold units in their own investment fund that investors were told held shares of big tech companies such as Twitter, Alibaba, Square, Uber, Snapchat and others. Investors were guaranteed returns of 338% in Twitter and 250% in Square.
None of the funds yielded anywhere close to those returns and in fact they lost millions. The government alleges that the firm acted like a Ponzi scheme – money from new investors was used to pay back earlier ones.
Investors lost millions, in part because, as the AG for the SDNY alleges, Elmaleh used investor funds for fancy fast cars, such as a Bentley Continental GT and Maserati Gran Turismo, a 4,644 sq. ft. 5-bedroom Florida mansion with its own elevator, expensive watches and diamond jewelry.
When investors turned on the heat to be repaid, Elmaleh and Naqvi allegedly started to create fake financial documents, and to doctor other documents, to buy more time. They also allegedly made oral and written representations to investors to keep buying more time, telling them that their investments were generating positive returns when in fact, some of those investors funds were allegedly parked in real estate.
Naqvi then high-tailed it up to Canada where he was traced living in the Toronto area and Elmaleh followed two years later.
After Elmaleh was first arrested in 2015, a stash of weapons was located in his mansion, including:
AR-15 Bushmaster assault rifle with ammo;
Glock gun case with an empty 15 round magazine and 1 box of Luger ammo;
Blazing Brass ammo; and
Smith & Wesson 500 magnum revolver with 1 box of ammo.
Why a Canadian fund manager needed an assault rifle and a hand gun at his mansion, is unknown.
Elmaleh has numerous connections to Ontario, beyond his family. According to Court filings in the SEC matter, while the fund was operating, Elmaleh sent millions of dollars to people he knew in Toronto, often in the tens of thousands each, for purposes of which are not known. During the financial investigation, more ties to Canada were discovered, including to two Ontario companies in Toronto, one operated by Elmaleh’s father, which was alleged to have acted partly as a cover for the fund’s operations, and to have been unjustly enriched thereby.
Elmaleh’s 70-year-old parents threw in the towel after a few years of defending claims involving their son and informed the presiding Judge in the civil action that they could no longer afford fees to defend themselves. Ultimately, they were ordered to pay US$2 million, plus interest.
Both Elmaleh and Naqvi are now in jail in Manhattan pending a trial.
After Elmaleh fled to Canada, he made numerous posts about Bitcoin and Tron, including that he was a Bitcoin investor, suggesting that maybe there is a treasure trove of Bitcoin and Tron parked in a digital currency exchange somewhere up in Canada.
He also posted a photo of Santorini on a social media platform with the caption that [one should] “die with memories, not dreams.”
An Iranian foreign national living in the US, Mahin Toussi Mojtahedzadeh, was sentenced to 443 days in jail in the US, for conspiring to unlawfully export gas turbine parts from the US to Iran, using a company in Richmond Hill, Ontario. She is being removed from the US and deported back to Iran.
Mojtahedzadeh was the president of ETCO-FZC, an export company which imported turbine parts to Iran from various places through Dubai. On July 19, 2019, she pled guilty to one count of conspiring to violate the International Emergency Economic Powers Act and the Iranian Transactions and Sanctions Regulations.
From 2013 through 2017, she worked with companies in Canada, including one that purportedly went by the name Industial Parts Solution, deliberately to violate sanctions against Iran, by having these companies acquire sanctioned equipment through Canada; the Canadian companies then forward shipped them to Iran, without having a license from the US Office of Foreign Assets Control.
Two of Mojtahedzadeh’s co-conspirators in Germany also pled guilty and were sentenced but so far, no word on prosecutions for sanctions avoidance on the Canadians in Richmond Hill, Ontario, who were part of the sanctions avoidance scheme.
The alleged mastermind behind the alleged pump and dump securities fraud case involving Biozoom, Francisco Abellan Villena, has been located in Ibiza, the playground for billionaires. Villena is currently incarcerated in Ibiza, perhaps on an extradition warrant from the US. He was located by an investigator in Spain hired at the direction of the SEC.
The SEC was searching for Villena to, among other things, effect service on him with a civil complaint filed in the SDNY in May 2018.
What was Biozoom?
Biozoom was a German technology company that made a hand held device that allegedly could read a person’s biometric data from their skin to monitor health metrics. Specifically, it was represented to investors as a replacement for blood tests, allegedly capable of detecting the presence of illegal drugs in one’s blood stream non-invasively from your skin surface or measuring blood sugar levels for diabetes, which may be a dubious claim because no such technology exists from a sweep of medical journals today to detect the presence of illegal drugs non-invasively merely from touching a human skin surface.
What’s an empty shell?
Biozoom was acquired as part of an asset sale by what is known as an empty public shell. An empty public shell is a reporting issuer that is non-operational, often with few assets or operations. An empty shell that is a reporting issuer is often re-invented, or pivoted, as something new. In Vancouver, for example, a number of mining companies that are reporting that are no longer viable are often re-invented as a Blockchain or cannabis company. In the US, empty shells that are reporting issuers are disclosed as shells, whether its a blank check shell or not.
RTOing of empty shells
People in Vancouver, sometimes lawyers in the securities law realm, sell or broker the sale of, empty shells that are reporting issuers to clients, sometimes for hundreds of thousands of dollars so that they can be used for a reverse take over (“RTO“). Not all RTOing of empty shells and not all sales of empty shells involve manipulative behaviour or fraud. The reason some people like to use empty shells that are reporting issuers is because its shares are listed for sale, or listable, and thus those who hold lots of such shares can sell them and, if the price magically pumps up, make a killing.
Biozoom’s RTO used complex shells and lax money laundering places
And that is what the SEC alleges four people behind Biozoom did, namely they backed Biozoom into an empty shell called Entertainment Art, Inc. that allegedly sold leather goods in Las Vegas, renamed the shell Biozoom Inc., and using a complex web of shell entities and lawyers in offshore tax evasion and known lax money laundering places like the BVI, Switzerland, Panama, Argentina, Belize and Vancouver, allegedly cooked up a scheme to issue, aggressively pump and then dump millions of shares of Biozoom to innocent investors to the tune of US$34 million.
One of the four persons charged by the SEC and alleged to have assisted with the scheme was a Vancouver lawyer named Faiyaz Dean, who the Vancouver Sun reported was, at some point, connected to another Vancouver securities lawyer named Penny Green of Bacchus Law. Seven years ago, the SEC started its investigation into Dean after the shares of Biozoom went from US$1 to US$4.
Empty shell companies are a problem for capital markets because, inter alia, as the SEC has noted, they are a breeding ground for pump and dumps and attract fraudulent behaviour. In other words, they are a high risk service and professional activity for lawyers and accountants, and also high risk for financial crime.
The accountant who flipped $6 million worth of shells
Speaking of accountants, an accountant named Jeffrey Lamson laid the groundwork for the alleged activities of Dean and Villena.
For six years, Lamson helped create a fiction of corporate viability for 22 empty shells that were reporting issuers. He was said to have recruited people to pretend to be officers and directors of the shells, and on occasion, to pretend to be the shareholders of the shells. This speaks to the ongoing concern expressed by US law enforcement and US Senators of the difficulty in attempting to ascertain from a minute book, who the true shareholders are behind the list of legal shareholders of an entity.
In order to obfuscate the true shareholders, Lamson likely controlled minute book records which he used to reflect other control persons by making inaccurate corporate records filings in the minute books. Doing this type of thing makes it impossible for investigators to know who ever was, or is, a shareholder or a director of an entity. The movie “The Laundromat” based on the Panama Papers with its ties to a Vancouver-lawyer-turned-incorporator, tells the story of a law firm that allegedly changed corporate records and back-dated them. Lamson ran what the SEC called an assembly line of shells with fraud at every juncture.
In order to keep the empty shells alive, the SEC says that Lamson filed false disclosure documents alleging that the shells were pursuing businesses when they were not. Not only that, the SEC says he forged signatures on documents for fake consultants who were paid fake consultants fees for doing no work. Lamson was keeping the shells alive to flip them to law firms and others or so that they could be brokered for hefty commissions. And flip them he did, for a whopping US$6 million. One of those he allegedly flipped to a lawyer for a hefty commission was Entertainment Art, Inc., the shell in which Dean became involved.
In 2015, Lamson was the subject of a complaint by the SEC in respect of his shell flipping activities, was permanently barred from securities activities in the US and ordered to disgorge profits from his conduct. He is serving time in jail.
The lawyer as alleged shell hunter and shell broker
Dean, the lawyer from Vancouver, was also the subject of a separate complaint by the SEC in respect of the Biozoom matter in which they allege that he, inter alia, orchestrated sham transactions and caused to be hired escrow agents to document the sham transactions as well as provided fabricated documents and false information to get the shell’s shares traded, including by false closing opinions. The SEC also alleges he was part of the acquisition of the shell that went on to sell listed shares and caused to be issued shares that violated the share restriction rules (e.g., in respect of legends). Violating the legend rules allows shares to trade when they are not free trading, at maximum pump. The whole reason there are legends to restrict trading is to protect against dumping.
Dean, as some securities lawyers do, allegedly acted as the shell broker – he sold the shell for US$430,000 and allegedly benefitted from a commission of US$105,000.
Dean has also been indicted in Arizona for wire fraud, making false statements for US securities law purposes (in particular, preparing a closing opinion with material false information) and money laundering.
The law says Dean wasn’t providing legal services
Dean’s case has an interesting aspect to it. When a lawyer becomes a business partner with a client, which happened here, the parties cease to be in the same position and a whole set of protective rights owed to the client arising from the lawyer-client relationship go out the window. And not only that, if the relationship with the lawyer was abused, knowingly or unwittingly, to commit unlawful conduct or to attempt to commit unlawful conduct or in furtherance thereof, including securities fraud, the lawyer-client relationship is gone ab initio, meaning that no duties or rights attach to the client that otherwise would. That’s because since 1833, if not earlier, Courts have held that lawyers cannot be used in furtherance of unlawful or attempted unlawful conduct and if they are, or there is such an attempt, no client gets to derive any benefit that otherwise they could derive from a lawyer-client relationship.
The law can best be summarized as follows: in order for the lawyer-client relationship to take root which gives rise to duties owed to the client by the lawyer, there must be two elements: (a) professional confidence; and (b) professional employment. If the client has or had an unlawful intent in obtaining advice or services from the lawyer, one of those elements is absent. The client either conspired with the lawyer to be unlawful or deceived the lawyer. In both cases, there is no lawyer-client relationship that was ever created.
In the first scenario, if the client hid the unlawful intent, the Courts have held that the lawyer’s advice or services were obtained by fraud, meaning the client defrauded the lawyer as to his or her unlawful purpose when he or she sought advice. The Courts have held, very specifically that, when a fraud is perpetrated on the lawyer by the client to obtain advice and the lawyer is deceived, there is no lawyer-client relationship because professional confidence was absent all along. Advice obtained by fraud perpetrated by the client is not protected and a lawyer deceived as to the true intentions of a client, is set free from the constraints of the lawyer-client relationship for all purposes. As Courts have held, if this were not the law, the result would be that a man intending to commit murder might obtain legal advice for the purpose of enabling himself to do so with impunity, and the lawyer whose advice was sought would not be at liberty to give information against his client to stop his criminal purpose which would have monstrous consequences on the rule of law. It makes sense – a client cannot lie to the lawyer about a file and use (more like abuse) the profession and then be able to benefit from his or her own deception. The lawyer and the rule of law, if that were allowed, would be doubly harmed.
In the second scenario, if the client’s unlawful intent was disclosed to the lawyer, the client is not consulting the lawyer qua lawyer as a member of the legal profession because it cannot be the lawyer’s business to further unlawful conduct. In this case, there is no professional employment of the lawyer by the client and therefore, there is no lawyer-client relationship. Courts have held that the protection of communications by lawyers in furtherance of an unlawful purpose by the client is injurious to the interests of justice and the administration of justice and does not come within the scope of professional employment.
In Dean’s case, he will have to take a position eventually that indicates whether his services were obtained under the first scenario or the second scenario.
Two other lawyers pitched in to help with the schemeandone flipped shells for $5.6 million
Dean isn’t the only lawyer who was pursued by the SEC in connection with Biozoom. Lawyer David Lubin was barred from practicing before the SEC over fraud he committed in connection with the Biozoom shell and James Schneider was convicted of 33 counts of fraud and money laundering in Florida for writing false closing opinions in furtherance of the pump and dump, which generated proceeds of crime, securities fraud being the predicate offence. Schneider created and flipped 20 shell companies for US$5.6 million and used his law firm trust account to receive payment for the shells. Schneider is alleged to be evading civil forfeiture.
What did Biozoom boy do?
So what did Francisco Abellan Villena do in respect of Biozoom? He is alleged to have masterminded and controlled the scheme. Among other things, he allegedly located Dean for these specific services, paid him to acquire not one but two shells, the second to hold shares of Biozoom in the names of people from Argentina, and is alleged to have instructed a range of professionals to undertake the scheme, to have dumped shares when the price was artificially high, and to have made a windfall from dumping those shares. He also allegedly placed another Canadian in charge of his Argentine company – he had a preference it seems, for using Canadians, wittingly or unwittingly, for his plan.
Now that Villena has been located in Ibiza, he will be removed to the US in due course for the SEC proceedings. Villena had a previous case involving securities manipulation here.
As for Dean, he moved into Blockchain and somehow is connected to a reporting issuer called Evolution Blockchain Group Inc., which was a revived dead mining company. The SEC stepped in immediately after the reporting issuer issued a news release that it was getting into the already high-fraud area of digital currencies and was ICO’ing and immediately halted it, saying it was questionable as to accuracy. This may be the news release that was of concern.
Hopefully, US law enforcement shuts down the practice of selling shells and shelf companies
On a go forward basis, US law enforcement has said that they intend to focus on professional money launderers which includes the circle of professional services that include the sale or brokering the sale of, shell and shelf companies that are used to back into an RTO with the issuance of closing opinions that contain representations that are false and concludes with the unlawful pumping and dumping of shares on the public markets. And indeed they are – in October, another lawyer that acted for a Canadian reporting issuer settled in the US over writing closing opinions with materially false information and selling shells for RTOs for US$200,000 each.
The BC Securities Commission has tried to clean up the ecosystem since 2008
You may be wondering why it appears that many paths lead to Canada when it comes to the whole circle of services that involve unlawful pump and dumps – it has to do with the culture of how little mining companies were created and historically financed in Vancouver. The British Columbia Securities Commission here commented on the disproportionate role of British Columbia “players” in the US OTC markets who engage in abusive securities law practices and noted that such activities “damage the reputation of the province’s capital markets and harm the interests of legitimate issuers.”
That was twelve years ago, in 2008 and it has not abated, but the BC Securities Commission can only regulate its own ecosystem – it has no control over and cannot stop the activities of others in the capital markets whose members keep that circle of fraud spinning.
Villena is listed in the Paradise Papers here. And a co-indicted person, Guillermo Federico Ciupiak, is in the Paradise Papers here.
On a positive note and this is pretty cool – victims of the Argentinian aspect of the securities fraud claim of Biozoom can consult this website to file a claim for a refund.
If this sounds like a good Netflix, it would be.
Update: 2020-02-03: The US Department of Justice filed a Notice of Intent to Introduce Evidence of Other Acts in federal court in the criminal matter, notifying the parties of its intention to introduce evidence that Villena and Dean, and other defendants, were involved in a similar alleged fraudulent pump and dump scheme of Ocean Electric Inc., orchestrated allegedly by Villena and Dean, involving some of the same nominee shareholders as Biozoom, to get listed on a more senior exchange.
Update: 2020-02-11: A co-defendant in the Arizona criminal case, James Panther, and the Department of Justice filed a joint motion to postpone pretrial deadlines because they are negotiating a disposition that would eliminate the need for a trial, likely meaning Panther is pleading guilty and will cooperate in the trial as against other defendants including Dean.
The Canadian securities commissions, through the Canadian Securities Administrators (the “CSA“), issued guidance on digital currencies and digital currency exchanges in Canada, the impact of which fundamentally changes the legal landscape for digital currency exchanges and puts the vast majority of them under the supervision of provincial securities commissions.
The securities commissions have jurisdiction in Canada that may arise in a number of ways, including but not limited to, over digital currencies and digital currency sellers, including exchanges, Bitcoin ATM operators and OTC operators, if the activity falls within the jurisdiction of securities legislation or the activity takes place in Canada, targets Canadian residents, or meets the “substantial connection” to Canada legal test (e.g., it is incorporated in an offshore island but substantially operates from Canada). Securities legislation in this context can apply to sellers (whether platforms or persons) if it involves securities and products (digital currencies) to the extent they are securities.
The CSA guidance mostly focuses on “Platforms” which is defined not as an online website but rather as any entity (legal person) that facilitates the buying or selling of any type of digital currencies (so that would include ICO issuers and such, even if they are called “tokens”).
Applicability of securities legislation
The material part of the CSA guidance is that securities legislation applies to Canadian activities in respect of digital currencies if custody of the digital currencies remains with a digital currency exchange or ICO issuer (the Platform) for any period of time, as opposed to with the consumer and the basis for that distinction 100% has to do with the level of risks of the former as opposed to the latter.
When securities legislation applies
According to the CSA guidance, securities legislation will apply in Canada when the Platform sells or buy digital currencies from consumers but the Platform retains custody and control of the digital currencies (deposit-takes), even if its services impliedly or expressly agree to transfer control back to the consumer at the request of the consumer at some later time. In this case, there is complete reliance on the Platform and therefore the consumer is at risk. Book entries whether manual or electronically made to reflect digital currency holdings of a consumer without transfer of control back to the consumer is not real control and ergo, the exchange has custody and securities law may apply. What is key here in exchange parlance is that the CSA seems to be referring to an internal wallet in this scenario, meaning the digital currencies are transferred to the customer’s internal wallet within the exchange, not outside of it. In this scenario, no digital currencies exit out of the Platform immediately into the legal custody of the consumer and hit the relevant Blockchain. These types of businesses are subject to securities legislation in Canada because, the CSA guidance is saying, they pose multiple risks to consumers. While the CSA guidance does not use this phrase, a service that poses multiple risks to consumers, is high risk.
When securities legislation does not apply
And the opposite applies – namely, securities legislation will not apply in Canada when the Platform sells digital currencies to, or buys digital currencies from, consumers and the Platform immediately transfers out the fiat or digital currency to an external wallet in the control and custody of the consumer, or in the case of a buy of Bitcoin by the exchange for liquidity via an OTC, to an external bank account of the consumer. In other words, if the consumers’ digital currencies exit out of the Platform or exchange immediately after a transaction (e.g., hits the Blockchain) and lands in the consumer’s external wallet, securities legislation would not apply. This type of business, the CSA guidance is saying, does not pose the multiple enumerated risks to consumers as those that retain custody and control of consumers’ Bitcoin, and is not subject to securities legislation. In other words, securities law is not needed to intervene to protect the public with these business models in the crypto space.
In sum, it would appear that a digital currency exchange or ICO or IEO issuer, physically in or substantially connected to, Canada or that has Canadian consumers and are custodians of any amount of digital currencies, perhaps even $1’s worth of which belongs to a consumer, are subject to securities legislation.
Bank de-risking of exchanges in Canada?
What may be the repercussion of the CSA guidance?
While its hard to say, the most immediate repercussion may be the closure of the majority of digital currency exchanges in Canada because they may be de-risked by banks or credit unions.
While not stated as such, the CSA guidance de facto made a determination that digital currency exchanges that hold customer digital currencies as a custodian have such risks that the intervention of the law is required. The CSA guidance does not use the words “high risk” but it sets out numerous risks that consumers face when dealing with digital currency exchanges that have custody of consumers’ Bitcoin and is seeking to mitigate those risks.
It will be hard for a bank or credit union to continue to provide banking services to a client that government agencies in Canada have determined has a business model that poses multiple risks, one of which specifically is identified as a criminal risk under the Criminal Code and others of which are tied to a lack of prudential oversight. Banks are more risk-adverse than government agencies.
In the context of anti-money laundering compliance, the CSA guidance is a key piece of a risk assessment for banks to consider in respect of evaluating the risks of banking Blockchain and digital currency exchange related businesses.
Not all digital currency exchanges are the same – there are two digital currency exchanges in Canada (which also only take customers from Canada) do not administratively control or have possession over customers’ digital currencies and pose low to no risk to consumers. This type of Bitcoin seller or digital currency exchange never has custody of the consumer’s financial instruments – whether its money or Bitcoin and they transfer assets immediately out to the consumer. The CSA guidance gives them a pass and exempts them from their regulatory oversight (all other things being equal).
Jurisdiction & enforcement action against foreign exchanges
The CSA in its guidance has said that it intends to launch enforcement action against digital currency exchanges with Canadian customers who violate securities legislation, and the CSA guidance.
Securities commissions face two types of foreign-related operations that may be considered for enforcement – one is that there are quite a few ICOs that raised money from investors and digital currency exchanges, as well as OTC service providers, that are in Canada but who have an offshore corporate presence to appear non-Canadian. A type of offshore corporate presence they go for is to obtain a piece of island paper, meaning they file a piece of paper in an offshore island corporate registry office and believe that the existence of that piece of paper from the island makes their operations tied to that offshore island and protected from US or Canadian enforcement scrutiny.
It can be challenging to deconstruct those types of entities to substantially tie them to Canada – as investigators, we normally would have to obtain evidence to prove that at least one key executive or decision maker is in Canada. In the gambling sector, US law enforcement investigators were able to do it for illegal gambling operators through tracing real estate transactions of their executives (penthouses at fancy hotels leased, rented or purchased for one or more executive or officer or highly paid employee) and exotic car rentals for such persons. The Neteller take-down by the FBI of the Canadian founders is a text book example of an excellent financial crime investigation, where they tracked the indicted founders, inter alia, by establishing a substantial connection to real estate and gambling at land based casinos. Most of the Bitcoin guys who cross over to the other side seem to have, inter alia, either a gambling addiction or a strong preference to gambling which allows investigators to find them.
The second is foreign digital currency exchanges and OTC service providers that provide services to Canadians online – this requires customers in Canada willing to state they opened an account at a foreign digital currency exchange, which is easier.
If securities legislation applies to an exchange or OTC provider or ICO issuer, it will have to determine which jurisdiction in Canada it wants to be its principle one – British Columbia, Ontario, Alberta or another one, and will have to commence to communicate with that securities commission to start the dialogue of oversight of its activities, or an exemption therefrom.
One can expect that the securities commissions may have in mind a plan to list those that one of them has green-lighted on a common website for consumer protection.
Hong Kong Customs seized about 70 kg of cannabis buds at the Hong Kong International Airport on January 17, 2020, from a Canadian who attempted to smuggle it into the country illegally inside 32 speakers. It is the largest cannabis trafficking seizure in Hong Kong in ten years.
A man from Montreal, Samy Bensaci, who allegedly stole US$50 million in Bitcoin from US residents, was arrested in Victoria, British Columbia, and removed to Ontario for prosecution, where he has since been released on bail, reportedLa Presse today.
The theft of $50 million happened during 2018 and 2019, according to the La Presse story, and involved several victims, all but one of whom are American. All the victims were attendees of the Bitcoin conference Consensus in 2018 in New York City. Allegedly, a Vancouver man was SIM swapped out of $2.3 million, possibly from Bensaci.
Bensaci was released pending a trial in Toronto on certain conditions, including that he refrain from using computer devices and owning or trading Bitcoin or other digital currencies. He faces charges of unauthorized computer use and identity fraud. He has not been charged with laundering the proceeds of crime.
What is a SIM Swap?
A SIM swap is a type of hacking fraud where a person communicates with a cellular service provider, impersonates a cellular account holder and convinces them to change the SIM card associated with a cellular device so that the hacker can gain control of the victim’s data.
When a SIM swap occurs, the cellular phone of the victim goes black and the fraudster then controls the data, and can text, call and interact as if they were the victim.
How Does SIM Swaps work with Bitcoin?
With respect to digital currency wallets, because some service providers use 2FA on cellular phones, it allows hackers access to steal digital currencies by changing the 2FA on the cellular phone when prompted. The hackers then can gain access to Bitcoin wallets and quickly transfer the digital currencies to Trezors under their control.
Technically, the theft of digital currencies from an exchange is always from the pooled wallet of the digital currency exchange although the victim’s account is debited from the exchange to reflect the loss, or it may be from a hard wallet with no third party intermediary involved.
One of the first SIM swaps to be litigated was the theft of US$81 million from Bitcoin investor Michael Terpin, who won a US$75.8 million civil judgment in California against 21-year-old Nicholas Truglia who SIM-swapped Terpin’s cellular phone and stole over US$23 million from Terpin’s digital currency wallets that held coins from three ICOs.
In all, Truglia is alleged to have stolen over US$81 million in crypto currencies via SIM swaps from various people and to have used the money to live a life of luxury, renting a penthouse in Manhattan, buying a US$100,000 Rolex diamond-embedded watch and to have booked private jet trips.
Laundered Funds Through Digital Currency Exchanges
Truglia was charged with impersonating numerous individuals to SIM swap them and was also sued civilly by Michael Terpin for the theft of his crypto currencies. It was alleged in that pleading that Truglia laundered millions of dollars in proceeds of crime from stolen digital currencies through Coinbase, Gemini and Binance.
A McLaren Sports Car, Private Jets, Stash of Cash
One of the deponents in the civil litigation that resulted in the Truglia judgment is a private jet broker who deposed that Truglia had no job during the time he knew him, and shortly after the SIM swap, had over US$72 million in crypto currencies on various wallets and a stash of US$100,000 in US cash chilling on his coffee table for spending money.
Shortly after the SIM swap, Truglia allegedly made plans to buy a US$250,000 McLaren sports car. Allegedly, Truglia’s Twitter account was Nick @erupts – that account holder took to Twitter to brag about stealing US$24 million, and posted images of the US$100,000 diamond watch and private jet trips.