Canada makes its first prosecution for economic sanctions violations

By Christine Duhaime | April 24th, 2014

Although Canadian economic sanctions have been in place for years, until now Canada has never prosecuted for sanctions violations. That changed this month when Lee Specialities Ltd., a Calgary based company, was charged with violating sanctions by exporting goods to Iran that could be used for nuclear devices.

The RCMP investigated the company after customs officers at Calgary International Airport intercepted a shipment of Viton O rings in May 2011 destined for Iran that allegedly originated from the company.

Under the Special Economic Measures Act, companies and persons are prohibited from certain activities in relation to Iran and Iranians, including providing goods, financial services or insurance, facilitating a transaction or dealing in any property. They are also prohibited from exporting, selling, supplying or shipping goods to Iran or to persons in Iran, or to provide technical data related to petrochemicals, ships, gas, and arms. It is of course, also prohibited to invest in Iran or to provide financing or banking/correspondent relationship services for Iran or Iranian entities.

Banks, credit unions, trust companies, insurance companies, MSBs and securities dealers, fund managers and any type of seller of securities must determine on a continuing basis whether they have prohibited property of a designated Iranian person or entity in their possession or control (e.g., bank account, securities, funds, Bitcoin, insurance policy, derivatives, mortgages, lines of credit, credit cards, etc.) and if so, disclose it to the RCMP forthwith and take steps to freeze prohibited property.

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UAE to implement tougher anti-money laundering laws and jail terms for reporting failures

By Christine Duhaime | April 21st, 2014

UAE debates tougher AML laws

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

The United Arab Emirates is proposing amendments to its anti-money laundering legislation that, if approved, may be one of the most stringent anywhere. That’ s because it will allow the incarceration of officers for failures to report transactions suspected of involving money laundering or terrorist financing without a due diligence defence. Canadian anti-money laundering laws, for example, also permit the incarceration of employees and directors and officers for similar reporting failures for a term of up to 5 years, however, a due diligence defence is available for officers and directors and with respect to employees, a defence of upstream reporting is available. The UAE is proposing a strict liability regime which will obviously increase the legal risk of correspondent and other banking relationships in the UAE for US, EU, Canadian and other banks and funds.

The proposed amendments will also expand the law to make it an offence to fail to report if a person has controlled substances in the UAE (such as drugs and alcohol) or to fail to complete currency importations, exportations and holdings in amounts to be prescribed.

The UAE is one of the few jurisdictions in the world where crimes against the environment, or a violation of environmental laws, is a predicate offence to money laundering. The same is true for damage to public property and violations of international treaties.

One of the more innovative approaches taken in the UAE was the formation in 2002 of a national anti-money laundering committee which advises the government in respect of policy and legal issues comprised of several federal ministers in charge of customs, taxation, finance, trade, justice and the Central Bank. This committee was responsible for directing these proposed legislative amendments currently under consideration.

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Vancouver Bitcoin Session

By Christine Duhaime | April 14th, 2014

Bitcoin Vancouver Session

The Vancouver Chapter of the Association of Certified Anti-Money Laundering Specialists (ACAMS) is hosting a session on “Bitcoin – What it Really Is and Whether it’s Risky” on April 17, 2014 at the River Rock Casino. Click here for details.

Speakers

The speakers are as follows:

Pervees Faisal Islam, CAMS / Chief Compliance Officer at Buttercoin

Pervees Faisal Islam is the Chief Compliance Officer at Buttercoin, a California based cryptocurrency platform backed by Google Ventures and Reddit. He oversees the global compliance and anti-money laundering program throughout Buttercoin’s various business lines across three continents. He is a Certified Anti-Money Laundering Specialist and a board member of the Montreal ACAMS Chapter, and has held several executive positions at payment companies, money transfer companies and online and virtual payments firms. Faisal is a frequent speaker at emerging payments and anti-money laundering conferences and a contributor to compliance and payments publications. He speaks frequently on matters of compliance and anti-money laundering on digital currencies, and recently on cryptocurrencies. He spearheads the open access global anti-money laundering repository called KnowYourCountry.com and is a lecturer at Comptegrity, an online anti-money laundering compliance training center.

Christine Duhaime, Attorney, BA, JD, CAMS / Partner at Duhaime Law

Christine Duhaime is a partner at the law firm Duhaime Law in Toronto and Vancouver and is a Certified Anti-Money Laundering Specialist and the Co-Chair of the Vancouver Chapter of ACAMS. She advises companies on all aspects of financial crime and anti-money laundering law, including in emerging areas such as digital currencies, offshore trusts, and carbon emissions trading, as well as traditionally for reporting entities. She is one of the only attorneys practicing in the combined areas of gambling and anti-money laundering law. Christine is a former M&A and securities attorney and conducts financial crime transactional due diligence and certifies sources of funds for immigration purposes for reporting entities and governments.  Christine is authoring a legal textbook on financial crime compliance for Thomson Reuters. She is widely quoted in the media on financial crime and frequently writes legal articles for various publications. She is a frequent speaker on anti-money laundering issues worldwide, most recently on the financial crime risks of bitcoin and is considered to be one of Canada’s Bitcoin legal experts.

About ACAMS

ACAMS is an international membership organization dedicated to enhancing the knowledge and expertise of AML/TF and financial crime detection and prevention professionals, from a wide range of industries, in both the public and private sectors.  The organization serves more than 13,500 members in 160 countries, with extensive resources designed to develop and sharpen the skills required for superior job performance, and career advancement including certification, moneylaundering.com (industry leading online news and information resource), international conferences, full day seminars, web seminars, customized training and peer networking opportunities.

ACAMS members represents a diverse group of professionals from the following lines of business:  Banking, Government, Securities Broker/Dealers, Money Services Businesses, Insurance Companies, Accounting and Law Firms, Gaming Organizations, Credit/Debit and Pre-paid Card Companies, Real Estate Agencies and Jewellery/Precious Metals Dealers.

To find out more about ACAMS please visit www.ACAMS.org

 

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Primer on correspondent banking relationships and offshore tax havens

By Christine Duhaime | April 14th, 2014

How correspondent banking relationships are used to launder funds

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

There are a few staples books, reports and articles in every anti-money laundering attorney’s library.  My favorite for correspondent banking is the US Senate Report on Correspondent Banking published several years ago. Despite its age, it remains timely because it deals specifically with how the US financial system is used by correspondent banks in, mainly offshore tax havens to, inter alia, launder funds. Interestingly, the Senate Report notes that only one bank operating in the US refused to respond to questions posed of it by the Senate as part of its investigation – a Canadian bank.

Correspondent banking defined

Correspondent banking is the provision of banking services by one bank to another. It allows foreign banks to conduct business and provide services where they have no physical presence. For example, a bank licensed in Switzerland with no US office may want to provide services in the US for its customers. Instead of the Swiss bank bearing the cost of setting up a US branch office, it can open a correspondent account with an existing US bank. The Swiss bank, called the respondent bank, can thereby offer services and products through the US bank, called the correspondent. Large international banks in financial centres of the world serve as correspondents for thousands of smaller foreign banks.

Services provided by correspondent banks

Correspondent banks provide cash management and investment services to respondent banks. The cash management services include deposit accounts, international wire transfers, cheques clearing, payable through accounts and foreign exchange services. Investment services include money market accounts, investment accounts, certificates of deposit and securities trading accounts. By far, the most important service is providing access to international funds transfer systems.  International wire transfers are complex in that they involve multiple electronic communications that trigger a series of debits and credits recorded on the ledgers of financial institutions that identify the sender and receiver of the wires. Multiple banks are involved in payment transfers and correspondent banking acts as the gateway, or the electronic pathway, to allow funds to move from one jurisdiction to another.

For many foreign banks, especially in offshore tax havens, if access to correspondent banks were severed, they would be unable to operate. Another went so far as to say that without correspondent accounts, offshore banks would “die.”

Correspondent banks are susceptible to money laundering

US correspondent banks are susceptible to money laundering due to: (a) culture of lax due diligence at US correspondent banks; (b) nested correspondents; (c) bank secrecy laws; (d) difficulty seizing funds in US correspondent accounts; (and e) weak compliance at foreign banks. In the Report, offshore bankers informed Senate investigators that offshore bank accounts are held mostly by Americans and Canadians and named several major banks in both countries that provide correspondent relationships to it that, whether they were aware of it or not, provided money laundering services to that bank’s clients.

What bankers say about correspondent banking

One US correspondent banker told the Senate that there is no reason for offshore banking to exist if not for tax evasion or other financial crimes. Another US correspondent banker informed the Senate that 100% of its clients were engaged in tax evasion and sought bank secrecy for that precise reason and were willing to pay higher offshore fees.

According to a third US correspondent banker, the way the offshore correspondent banking scheme works is as follows:

  • Lawyers from anywhere arrange for a corporation to be established in an offshore tax haven or buy, in that jurisdiction, a shelf corporation (which most law firms already have);
  • The bank in the tax haven sets up a bank account for the client in the name of the new corporation;
  • Shares are held in the name of another shelf corporation;
  • Lawyers act as the sole director of the corporate entity or another corporation fulfills that function as a nominee director;
  •  In order to secure the client’s interest as the actual shareholder (the beneficial as opposed to the legal owner), assignment agreements are entered into evidencing the arrangement whereby the real shareholder assigns its shares to the nominee shareholder. Such assignments are not part of corporate records; and
  • In order to spend the funds (indirectly repatriating them), clients are issued credit cards in the name of the corporate entity and advised to use those cards as a way of removing funds indirectly from offshore accounts to the US. Alternatively, the offshore bank will pay for goods and services on behalf of the clients, for example, paying for home deposits or luxury vehicles.

By entering into the above type of arrangement, the client has complete anonymity for corporate, banking and anti-money laundering purposes.

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The Bitcoin inventor, Satoshi Nakamoto ~ an American math whiz who gambles online?

By Christine Duhaime | March 30th, 2014

Pieces of the Satoshi Nakamoto puzzle

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

As everyone knows, the alleged inventor of Bitcoin is a person or persons, named Satoshi Nakamoto, which is perhaps a pseudonym but perhaps not.

Newsweek believes they located Mr. Nakamoto several weeks ago, and identified him as an American named Dorian Nakamoto, who allegedly admitted being the Bitcoin creator to Newsweek then subsequently denied it.

According to popular mythology, Mr. Nakamoto is the author of a white paper published in 2009 entitled A Peer-to-Peer Electronic Cash System (the “Whitepaper“), that serves as the moment Bitcoin was born.

The Whitepaper was apparently published on bitcoin.org by Mr. Nakamoto. That domain was registered on August 18, 2008, allegedly in Panama. The domain is protected by Whoisguard, Inc. Whoisguard protects a domain owner’s identity but not completely. It cannot hide where the domain was registered and, if law enforcement wanted to dig further, credit card records would reveal the identity of the registrant of that domain name and the Whoisguard payment used to hide the identity of the registered owner. According to the public registration records, the telephone number of the person who registered bitcoin.org is (507) 836-5503. That phone number is disconnected. The fax number is (51) 17057182. That fax number is used by other domain names registered to the same box number address in Panama City.

The server for bitcoin.org is Hetzner Online AG in Nurembeg, Germany.

Four months after the bitcoin.org domain was registered, Mr. Nakamoto joined Source Forge, from where Bitcoin development was hosted. The relevant webpage at Source Forge states that Bitcoin was created by, inter alia, Mr. Nakamoto. Mr. Nakamoto registered his email address with Source Forge so that Bitcoin users could communicate with him.

In 2010, the archived bitcoin.org stated that Bitcoin was created solely by Mr. Nakamoto. One of the noticeable things about the 2010 webpages at that domain is that the creator of Bitcoin has an above average command of the English language.  The same is true for the Whitepaper.

The 2010 webpages for bitcoin.org disclose other interesting information about Mr. Nakamoto, such as his distrust of “middlemen”, third parties who control transactions and a distain for the policies of central banks which Mr. Nakamoto described as “bad”, monopolistic and “fractional.”

I think whoever invented Bitcoin was familiar with online gambling programming from a merchant’s perspective. The Whitepaper makes an unusual reference to Bitcoin solving the problem of transaction reversals. The reference is unusual because the concern is for merchants, not gamblers and in 2008 only the online gambling sector was working towards programming methods to eliminate the reversibility of transactions from unhappy gamblers who suffered losses.

Whoever invented Bitcoin also studied advanced math, likely at an American university. The Whitepaper discusses the security of attacks to the blockchain by analogy to the “Gambler’s Ruin” problem. The Gambler’s Ruin problem is something that only gambling and math nerds tend to be aware of and it is not for the mathematically faint of heart. Columbia University has an example of how to calculate the Gambler’s Ruin at this website. The Whitepaper has a Bitcoin version of the Gambler’s Ruin problem with the answer to the problem – something that only a math whiz could calculate. Reference to the Gambler’s Ruin suggests that the inventor of Bitcoin is not from Asia.

And finally, as is probably obvious from the above, Bitcoin was invented sometime in early 2008, and not in 2009 as many people believe. By the Fall of 2008, its protocol was already apparently being downloaded from secure anonymous websites.

So – who is Mr. Nakamoto? Few people really know but my guess is that he’s an American computer programmer with a graduate degree in math who gambles online and has some connection to Panama City and a greater connection to online gambling merchants in Europe.

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Canadian asset manager who wanted to be “superhero” and Canadian tax lawyer whose firm gave anti-money laundering advice indicted in US for money laundering

By Christine Duhaime | March 21st, 2014

International tax lawyer and former CIBC fund manager from Québec indicted in US after IRS sting

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

The arrest of two Canadians from Québec, Eric St-Cyr, an investment fund manager, and Patrick Poulin, a lawyer, in the US over money laundering charges hit the news today when their cases were transferred to Florida for prosecution.

Mr. St-Cyr and Mr. Poulin were indicted on March 6, 2014 in Virginia and the indictment was sealed pending their arrests on March 13, 2014. They are not being released on bail.

Bishops Legal

According to LinkedIn, Mr. Poulin, is a Québec international tax attorney at a law firm named Bishops Legal, based in the Turks and Caicos. According to the Bishops Legal website, it services prominent international banks and other financial institutions and global investment funds and undertook financial regulatory work for those clients. The firm website mentions the prevention of “international money laundering” in the Turks and Caicos.

Clover Asset Management

According to the Toronto Sun, Mr. St-Cyr operated an asset investment firm, Clover Asset Management, for Canadian and American clients that was incorporated in the Cayman Islands. According to the firm’s website, Mr. St-Cyr set up the firm because no firm could meet the “needs” of institutional and private wealth clients in the Caribbean except him. Mr. St-Cyr’s bio says he is a former CIBC asset manager in Canada.

Alleged use of beneficial ownership and law firm trust account to wash funds

According to the Indictment, Mr. St-Cyr and Mr. Poulin, together with a third defendant used beneficial ownership to create layers of transactions in multiple jurisdictions to facilitate the laundering of proceeds of crime. They are alleged to have solicited clients to specifically use their services to evade US taxes by, inter alia, creating bogus legal entities, including foundations, in offshore tax havens. They were bogus because they served an illegitimate purpose.

Allegedly, part of their services included serving as board members of the legal entities to obfuscate true ownership and control. Part of the alleged money laundering scheme involved having clients fund bogus foundations, subsequent to which the directors of the foundations would wire funds to Mr. St-Cyr’s investment firm for investment to dodge reporting taxes. According to the Indictment, Mr. Poulin would subsequently wash the funds through his law firm’s trust account back to the client in his or her home country, repatriating the funds in a non-disclosable way.

Other non-US lawyers allegedly helped in the money laundering scheme

The indictment alleges that a series of non-US attorneys were used to create the bogus legal entities (e.g., corporations, trusts and foundations) for tax evaders and allowed their law firms trust accounts to be used to receive funds from tax evaders. This suggests that other non-US attorneys, likely from Canada given the Canadian connection, are being looked at for their role in the alleged international money laundering scheme.

In order to catch Mr. St-Cyr and Mr. Poulin, three US undercover agents met with Mr. St-Cyr and Mr. Poulin in Canada and Miami and hired them to launder $2 million of dirty money the agents said they obtained from defrauding a US bank. According to the Indictment, Mr. Poulin and Mr. St-Cyr had money laundering ethical standards – they were willing to launder proceeds of crime provided none of the proceeds were derived from terrorism or drug trafficking.

Not quite “zero exposure” for allegedly funneling dirty money through law firm trust account

According to the Indictment, Mr. Poulin, through his law firm, established a foundation for the undercover agents with the not-so fortuitous name of  ”Zero Exposure Inc.”, a name likely selected by clever IRS agents with a sense of humor who knew Mr. Poulin was, at that point in the sting, 100% exposed if the allegations are accurate. The Indictment alleges that subsequently, Mr. Poulin knowingly accepted proceeds of crime into the law firm trust account, which was sent to Mr. St-Cyr in the Cayman Islands and invested. He also allegedly used Canadian financial institutions to launder funds from Québec to the US.

Mr. St-Cyr is alleged to have told the IRS agents that foundations are better for laundering funds and trusts are better for tax evasion, and that he charged higher fees for money laundering than for tax evasion.

The charges

Mr. St-Cyr and Mr. Poulin are charged with Conspiracy to Launder Money Instruments pursuant to 18 USC §1956(h) and Laundering Monetary Instruments pursuant to 18 USC §1956(a)(3)(B). The latter relates to undercover operations where the financial transaction involves property represented to be proceeds of specified unlawful activity. The proceeds in §1956(a)(3) cases are not derived from a real crime; they are undercover funds supplied by the government. The specific intent provisions in §1956(a)(3) require that the transaction be conducted with the intent to conceal or disguise the nature, location, source, ownership or control of the property or to avoid a transaction reporting requirement.

The defendants were not charged with Conspiracy to Defraud the US pursuant to 18 USC §371, which it may have been possible to establish against the defendants if the allegations are true and could also be used against other prospective foreign nationals who facilitate US tax evasion in multiple cases. 18 USC §371 makes it an offence if two or more persons conspire to commit any offence against the US or any agency thereof in any manner or for any purpose, such as conspiracy to defraud the IRS.

Endorsements on LinkedIn

According to LinkedIn, Mr. Poulin’s services are endorsed by Canadian attorneys and accounting firms, including by a partner of a well-known international accounting firm. According to the Indictment, the services rendered by Mr. Poulin included overt money laundering services.

A financial crime lawyer will tell you that investigators routinely download an indicted person’s LinkedIn profile months before an Indictment and save, inter alia, endorsements in their investigation files. Endorsements disclose that a firm has done business with the indicted person and is vouching for them. If the allegations in this case prove accurate, endorsements by professionals pose a reputational risk and invite an inquiry into the person who made the endorsement and their clients if it involves a law firm, some of whom may not be implicated in any financial crime.

Specific target of Canadians by IRS agents

The point should not be missed that this is a case where the IRS specifically devoted significant resources to target Canadian professionals who allegedly facilitated tax evasion by US citizens. Agents worked the file for over a year, earning the trust of Mr. Poulin, then travelled to the Turks and Caicos, Canada, Miami, and the Cayman Islands for multiple meetings with the defendants.

One of the IRS’ three articulated strategies is to identify and prosecute the most significant tax, currency and money laundering offenders and to pursue their assets domestically and internationally. It would be a mistake by non-American lawyers, bankers and other financial and tax advisors not to take notice of this Indictment. It has the markings of step one in a multi-step investigation and prosecution of the facilitation of Canadian professionals in US tax evasion.

The US prosecution of Wegelin & Co., Switzerland’s oldest bank, summarized at the end of this article, is relevant. Wegelin & Co. was charged in the US with facilitating tax evasion by US persons. It had obtained a legal opinion on its exposure to prosecution in the US and was advised that it faced zero exposure. Unfortunately for it, and its directors, that legal opinion was wrong. Inter alia, it failed to consider money laundering law. Wagelin relied upon the deficient legal opinion to its detriment and as a result, the 272-year old bank with hitherto billions of dollars in assets did not survive the money laundering sting and ceased operations.

US Attorney Preet Bharara’s statement in connection with the Wegelin & Co. prosecution is also relevant, namely that the US Attorney General will find US tax evaders and, more importantly here - those who facilitate their activities - wherever they may be in the world, including obviously Canada.

Third party firms implicated should conduct reviews now

Law firms,  accounting firms and financial institutions in Canada and other countries who may have unwittingly assisted Mr. St-Cyr and Mr. Poulin in the alleged money laundering scheme should consider conducting an internal review of the transactions in which they were engaged to determine their exposure and whether any of the transactions involve money laundering and are reportable. It’s better to mitigate issues now than to receive a call from the IRS or a US prosecuting office because your firm name appears in a number of transactions associated with the indicted persons. Setting up corporations, trusts or foundations in the circumstances described in the Indictment where there is no legitimate purpose, is the facilitation of money laundering. No privilege attaches to advice rendered or legal services provided for the pursuit or fulfillment of criminal activities or fraud irrespective of whether the lawyer was an “unwitting dupe or knowing participant” (Canada v. Solosky, [1980] 1 S.C.R. 921, relying upon former Justice Benjamin Cardozo in Clark v. United States, 289 U.S. 1; 53 S. Ct. 465).

Mr. St-Cyr wanted be Spiderman

Mr. St-Cyr wrote in a client newsletter that he dreamed of putting on a Spiderman suit and becoming an American superhero. If the allegations against Mr. St-Cyr are accurate, he seems to have missed the point about Spiderman, namely that Spiderman worked to stop financial crimes from being committed, not the opposite. If convicted, Mr. St-Cyr will get to wear a different type of well-known American suit – the orange jumpsuit and may spend the rest of his life in an American jail – not quite what he wished for but perhaps close enough.

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Equatorial Guinea Vice President charged with money laundering

By Christine Duhaime | March 20th, 2014

Equatorial Guinea Vice-President facing Investigation in France

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

The Vice-President of Equatorial Guinea, Teodorin Obiang, has been charged with money laundering in a multinational corruption case in which it is alleged that he illegally moved state assets to other countries, including France. His lawyer in France, Olivier Metzner, was found dead last year floating in the sea near Boëdic island in Gulf of Morbihan.

Politically exposed person 

Mr. Obiang is the son of of the President of Equatorial Guinea. He was the subject of a US Senate Committee on Homeland Security & Governmental Affairs Money Laundering Report on the use of lawyers for laundering proceeds of crime by politically exposed persons, summarized here. Pursuant to that Report, Mr. Obiang hired US attorneys to set up shell companies for the purposes of laundering $100 million into the US through law firm trust accounts. Funds were used for lavish expenses, such as a house in Malibu and a private jet, and to attend parties at the Playboy Mansion. Mr. Obiang was a politically exposed person.

Mr. Obiang’s assets in France were frozen after financial magistrates in France began investigating the conditions under which he acquired property in France. Before his untimely death, Mr. Obiang’s former lawyer said that his client was not subject to French law, which is true.

Canadian family of Gabon Former President Allegedly Implicated

The French investigation also involves another politically exposed person who was the subject of the US Senate Committee on Homeland Security Report, El Hadj Omar Bongo Ondimba, the President of Gabon, who is deceased. The Report describes how one of his wives, Marie-Yva Astier and his daughter, Yamilee Bongo-Astier, both granted Canadian citizenship, allegedly laundered state assets in North America. Ms. Bongo-Astier laundered funds for her father in the US and had over $1 million cash in her safety deposit box at a New York bank, according to the Report. The New York bank thought her activities were suspicious but because Ms. Bongo-Astier produced a Canadian passport and said she was from Canada, the compliance officer did not investigate the origin of funds. Ms. Bongo-Astier and her mother are politically exposed persons in Canada, the US and many other jurisdictions that have anti-money laundering laws in force.

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US Treasury Undersecretary for Terrorism Discusses Banks, Bitcoin, AML & Sanctions

By Christine Duhaime | March 18th, 2014

US Treasury Undersecretary for Terrorism on Bitcoin, Banks, AML and Regulation

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

The US Treasury Undersecretary for Terrorism and Financial Intelligence, David S. Cohen, discussed the risks of virtual currencies and Bitcoin in a Bloomberg talk in New York City today.

Mr. Cohen said the regulation of Bitcoin coming down the pipe may require financial “transparency” which he said will involve the identification of Bitcoin customers (in an anti-money laundering sense).

“Financial Scarlet Letter”

He also said that if push comes to shove and it is not possible to balance transparency in the financial system and virtual currencies, the US government will choose financial transparency over virtual currency to protect the global financial system.

And, he said, financial institutions that do not comply with their legal obligations [in respect of Bitcoin transactions and AML compliance], will be saddled with a “financial scarlet letter.”

Executive Summary

Our Executive Summary of Mr. Cohen’s presentation is as follows:

  • FATF is coming out with a paper on virtual currencies and Bitcoin with common definitions for international use, led by the US Treasury.
  • Virtual currency differs from cash mainly because of the consumer protection risks associated with it, whether as a securities, commodity, or financial service.
  • The long-term viability of virtual currencies depends upon whether the financial crime risks associated with it can be controlled.
  • The chief concerns in respect of virtual currencies and illicit finance include terrorist financing, drug trafficking, sanctions avoidance, money laundering and these concerns are not theoretical, as evidenced by the Liberty Reserve and Silk Road prosecutions.
  • The anonymity of virtual currency transactions makes it somewhat difficult for financial institutions to comply with anti-money laundering laws.
  • Not enough attention has been given to terrorist financing and proliferation of WMD potential risks with virtual currencies. Virtual currencies are appealing to terrorists except that its instability is currently a deterrent for them.
  • With respect to sanctions, they only work if law enforcement can detect efforts to avoid them and sanctions will have a weaker bite if virtual currencies are permitted to continue in anonymous form.
  • Currently, there is no widespread use of virtual currencies for terrorist financing.
  • Besides the US Treasury, the SEC, CFTF, IRS, and CFPB are assessing virtual currencies.
  • US Treasury wants to foster the viability of virtual currencies as a core goal to allow financial innovation to flourish in order to serve the unbanked and underserviced populations, however transparency is paramount.
  • Transparency of virtual transactions will mean basic controls – client identification, client transaction monitoring, record-keeping, reporting to FIUs, risk assessments – in other words, AML law.
  • Any financial institution can be exploited for money laundering from virtual currencies and therefore, all of them must have in place controls to mitigate threats. Those that are disregarding their [AML] obligations, “will be saddled with a financial scarlet letter.”
  • US Treasury is aware of the opposition to the regulation of Bitcoin and regardless, there will be scalable regulation to bring in transparency.
  • The regulations currently in place in the U.S. apply at the two crucial points in virtual currency transactions – entry and exit of users in respect of virtual currencies (e.g., when you buy and when you sell). The federal view is that this is currently sufficient to detect and deter financial crimes. However, if virtual currencies achieve greater adoption or if normal financial life can be conducted for long stretches fully within the virtual currency regime, the US government will increase regulation.
  • US government intends to go after virtual currencies not registered as money transmitters, financial institution not in AML compliance, entities violating sanctions law in respect of virtual currencies, and the use of virtual currencies for illicit purposes.
  • With respect to Bitcoin, Blockchain records are immaterial – for financial crime, it is not the transactions of Bitcoin that are material – it is the transactors (e.g., the identity of the persons).

The full presentation is here.

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Japanese government first to articulate requirement for Bitcoin SAR/STR filings

By Christine Duhaime | March 18th, 2014

Bitcoin & suspicious activity / transaction reports

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

The government of Japan has informed its financial institutions during Parliamentary debates, that is has an obligation to treat Bitcoin companies and transactions like any other, and report suspicious transactions pursuant to national anti-money laundering (“AML“) laws.

Although that has always been the case everywhere worldwide, Japan appears to be the first jurisdiction to articulate this to its financial institutions. The reason this is important is because up until now, financial institutions have taken a hands-off approach to Bitcoin, in part because there has been a lack of understanding in respect of what Bitcoin is and how it connects to the financial system.

The hands-off approach is likely to come at a huge regulatory cost to financial institutions in a year from now when regulators begin compliance reviews in respect of, inter alia, AML, counter-terrorist financial and sanctions law compliance.

Financial institutions everywhere need to have considered the risks of Bitcoin and other digital currencies in their risk assessments, obviously before commencing the processing of those transactions, and to have addressed how those risks will be met by the compliance function, and provided the requisition training to their employees in respect thereof.

Pursuant to Japanese anti-money laundering law, banks in Japan are required to check the identity of people who want to send more than 100,000 yen of cash, along with the the purpose of transfers, and keep records of the transactions.

Numerous regulators around the world have focussed on the regulation of Bitcoin, rather than on ensuring that Bitcoin transactions are properly brought into the AML reporting process pursuant to AML national laws.

In response to the questions I receive on “What should we do?”, it depends who you are. If you are a bank or other financial institution, you should obtain legal advice on three things – (a) Bitcoin; (b) Bitcoin AML; and (c) managing the Bitcoin compliance audit  now. You will want legal advice as opposed to non-legal AML advice for reasons of privilege and so that the advice is insured as legal advice and can be relied upon as such.

You can read a more fulsome synopsis of the issues from us here (Re: “Did the big banks forget about anti-money laundering law with Bitcoin?”).

 

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Did the big banks forget about anti-money laundering law with Bitcoin?

By Christine Duhaime | March 17th, 2014

Bitcoin and banks

by Christine Duhaime, BA, JD, Certified Financial Crime and Anti-Money Laundering Law Specialist

The news on Friday that the Japanese Bank, Mizuho Bank Ltd., and two of its executives were named as defendants in the U.S. class action against the Japanese-based Bitcoin exchange, Mt. Gox, should be causing concern at U.S. and Canadian banks but surprisingly it hasn’t yet. It should be cause for concern because most banks seem to have glossed over the extent to which they may be exposed by Bitcoin for any number of reasons, chiefly here, for anti-money laundering compliance.

Compliance with anti-money laundering (AML) law in the U.S., Canada and just about everywhere else except Asia and Africa which have more relaxed AML standards, is not easily reconcilable with some types of Bitcoin transactions.

Despite popular mythology, there is no such thing as a Bitcoin transaction that does not flow through the financial system except in two remote circumstances: (a) a person is gifted or steals Bitcoin and never uses them except to buy goods and services from Bitcoin merchants; or (b) a Bitcoin merchant sells merchandise and never subsequently exchanges the Bitcoin he receives into real currency. Absent those two scenarios, Bitcoin is like any other transaction for AML purposes.

Bitcoin does not exist in a legal vacuum

Despite another popular myth, Bitcoin does not function in a vacuum, ungoverned by laws. Banks that have not obtained advice on Bitcoin and how transactions derived from it move through the financial system, may be potentially exposed.

Compliance officers, and the persons to whom they report, bank executives or compliance committees, should, before it’s too late, ensure that they know: (a) what Bitcoin is; (b) how Bitcoin financial transactions work; (c) what services the banks provide to Bitcoin exchanges and other Bitcoin companies generally (in other words, how do Bitcoin transactions use the financial system); (d) who the bank’s Bitcoin business customers are; (e) the risks in respect of Bitcoin business clients and transactions (anti-money laundering risks, other financial crime risks, litigation risks, insurance risks, regulatory risks, etc.; and (f) the extent to which banks can service Bitcoin businesses and complete transactions without violating financial crime (including anti-money laundering) laws.

Inevitably, Bitcoin melt-downs will lead to lawsuits. The difficulty for plaintiffs is that the primary targeted parties (Bitcoin exchanges for some lawsuits such as in the Mt Gox litigation) may be out of the relevant jurisdiction and as a result, plaintiffs will seek out numerous other defendants for recovery, normally entities that financed, invested in, or provided financial services to the Bitcoin exchanges.

Bitcoin lawsuits & foreseeable risks

When such a lawsuit is commenced, a primary theory of potential liability may, among others, be negligence. A defendant may be subject to liability under this theory if he owed a duty to the plaintiff and acted negligently in such a way as to cause the plaintiff an objectively foreseeable injury. The standard is an objective one and the courts apply the test of what a reasonable person would have done in the defendant’s (i.e., compliance officer’s) position. What is reasonable under the circumstances depends. However, with respect to Bitcoin, the fragility of the security of Bitcoin exchanges and AML compliance risks were not just foreseeable, they were well-known and had been expressed by some AML lawyers and government agencies over a year ago. If it was foreseeable to them, it was more foreseeable to risk and compliance officers at banks who are certified experts whose material job function is to identify and mitigate risks from, inter alia, emerging products, services and client transactions. If the risks are foreseeable, it places an enhanced obligation on defendants.

It goes without saying that a competent compliance officer at a bank, as the reasonable person, would have undertaken a risk assessment in respect of Bitcoin over a year ago and accordingly, would have adjusted compliance measures to protect the bank from those risks.

Acting now on Bitcoin compliance

Banks who may not have done so, should without delay: (a) have their compliance officer consider the issues raised above; (b) consider engaging outside counsel to manage and engage an external party for a Bitcoin review and assessment. Doing so imbues the engagement with confidentiality arising from the lawyer-client relationship protecting the end product from disclosure in the event of litigation (routinely done on AML, potential tax evasion, environmental and other sensitive matters); and (c) realize that Bitcoin will inevitably result in years of legal claims and lawsuits – some that banks will have to start but most they must defend.  The best advice any AML lawyer can possibly give is for banks to get their legal house in order now.

Don’t wait until FinCEN (or FINTRAC in Canada) or OFAC has evidence from another source that your bank dealt with property of a SDN or Listed Entity, or facilitated terrorist financing, or failed to submit a SARs (STRs in Canada) in connection with a Bitcoin transaction. According to the Office of the Currency Comptroller, the public is looking for the incarceration of bank executives for AML and sanctions violations and Bitcoin may very well be the way to satisfy the public. I’m not suggesting that Bitcoin exchanges are doing anything wrong but what I am suggesting is that banks are not looking at the business of Bitcoin with a view to its compliance risks and that is going to be a regulatory problem for them down the road.

And finally, consistent with popular mythology, Bitcoin does have elements of rocket science and thankfully, some of the world’s cleverest people are heavily involved in Bitcoin. If you want to avoid a Bitcoin lawsuit, get your cleverest compliance or legal people involved in understanding what it is, how it may expose you and what you can do about it.

If you want to talk Bitcoin further, we are in Toronto discussing the law on Bitcoin on April 4, 2014 at Osgoode Hall Law School and in New York City on April 7-8, 2014, in Miami on May 4-6, 2014 and in Amsterdam on May 14-17.

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