Europol Report highlights increased global cybercriminality, threats with NFC and Blockchain payments

By Christine Duhaime | September 27th, 2016

Europol released its 2016 Internet Organized Crime Threat Assessment Report on cybercrime today and the results are more disturbing than last years’ report. The Report can be accessed here.

Generally, the Report findings were that the volume and scope of cybercrime has reached very high levels and now surpasses regular non-online crimes.

The Report made a number of key findings focussing especially on the threats from all digital currencies including Bitcoin, and the technology that runs them including Blockchain and distributed ledger technologies arising from its anonymous nature and use as a preferred payment method for cybercriminals.

Some of the key takeaways from the Report are as follows:

  •  Critical infrastructure (ports, railways, pipelines, financial services, bridges, electrical grid, air ports, dams, etc.) remains particularly vulnerable because those industries that build and maintain critical infrastructure have not done enough to design and implement against threats from cyber-criminality, leaving them open to attacks.
  • Threats to banks remain significant, particularly from Trojan attacks.
  • In terms of financial fraud, e-commerce is an ever-present threat with fraud and cyber-criminality occurring mostly from airline ticketing, car rentals and hotel accommodation. The threats are two-fold – stolen card numbers are used for payments from these services and identity theft from the databases online of these types of merchants that are unprotected.
  • NFC card systems, thought to be more secure, are now being used for cybercrime by transnational criminal organizations.
  • Cybercriminals are increasingly targeting what are called “high value targets” – CEOs of large corporations, high profile lawyers and judges and high-ranking members of government. According to the Report, tens of thousands of high value targets are defrauded annually, mostly CEOs for their banking information, or are extorted for payments over personal details that cybercriminals have obtained about them (e.g., the most common anecdotally appears to be CEOs who are engaged in extra-marital relationships).
  • Bitcoin and other digital currencies, and the Blockchain and distributed ledger technologies that power them, remain the number one concern for cybercriminality because they continue to be the payment of choice for cybercriminals who engage in all varieties of cybercrime from child pornography, extortion and attacks on critical infrastructure and businesses. Users of digital currencies continue to be able to conduct financial transactions anonymously because, among other things, wallets are anonymous, and that has spawned the payment phenomena of P2P C2C payments (peer-to-peer criminal-to-criminal payments) which are not part of the financial system and undetectable by law enforcement.
  • Ethereum’s smart contracts ability will act as a reinforcement of the crime-as-a-service model for the digital underground and will be used for payments to criminals for criminal acts committed.
  • The increased use of mobile phones around the world correspondingly increases the risks of cybercrime because criminals are moving attacks and hacks to the mobile environment, which is a concern because mobile phone devices are less secured by the end user than desktop systems.
  • The anonymitity of digital currencies on the Blockchain or distributed ledger technologies have resulted in the increase of the live-streaming of child sexual exploitation involving children from poor countries because digital currencies allows this industry to flourish with anonymous subscribers who cannot be easily traced through traditional payment methods, as is historically done.
  • A new target for cybercriminality is the hacking of stored medical records online or through mobile phone apps arising from the new practice of consumers uploading their medical records online without realizing the risks to them of doing so of, among other things, the waivier of privilege over their medical records, the disclosure of medical records and the risks of extortion by cybercriminals.
  • Canada ranks 7th place in the world in terms of destinations where law enforcement identify online criminality.

Among the many recommendations from Europol was that governments devote financial resources to ensure that its law enforcement personnel have expertise on, inter alia, Blockchain and distributed ledger technology and the relevant law applicable to this area in order to fight cybercriminality.

All cybercriminal activities general proceeds of crime to the extent there is a financial transaction connected therewith and therefore, there are money laundering risks with all cyber-criminal activities that must be reported as suspicious activities.

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US lists Vancouver company a “significant transnational criminal organization”

By Christine Duhaime | September 22nd, 2016

Vancouver company listed as a criminal organization 

Allegations of global money laundering from Vancouver through the financial system

Today, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC“), designated Vancouver based PacNet and its connected companies, as a significant transnational criminal organization (“TCO“) for its role acting as an alleged money laundering service. It is the first time a Vancouver company has been designated by OFAC as a TCO.

According to OFAC, PacNet has a “lengthy history of money laundering” and payment processing from Vancouver and is alleged to have used the financial system to move money between several countries.

The OFAC notice covers 24 PacNet companies and 12 persons affiliated with PacNet. The notice blocks all transactions of the PacNet entities worldwide pursuant to US sanctions law, and prohibits US persons and companies from dealing with them.

According to the US Treasury, PacNet has been allegedly laundering the proceeds of crime as a payment processor for over 20 years. In 2002, PacNet was previously implicated in similar activity involving criminal money laundering in the US said the US Treasury.

The company apparently had its own tiny airline, PacNetAir, that US Treasury said was used to move bulk proceeds of crime across the EU. It also had its own IT lab called Deepcove Labs in Vancouver and an entity called the Payments Factory, located in the UK, Ireland and Vancouver.

The US Attorney General, Loretta Lynch, held a news conference to announce that the bank accounts of PacNet had been seized and that it was aware that PacNet processed payments for more than 100 mass mail fraud schemes.

 A designation reserved for the likes of Las Zetas and Camorra criminal gangs

US Treasury has only issued seven TCO notices of sanctions and this is the first Vancouver entity to be listed.

The notice is issued pursuant to Executive Order 13581. EO 13581 was issued when the President of the US declared a national emergency to deal with the unusual and extraordinary threat to national security, foreign policy, and economy of the US by the growing threat of significant TCOs when they reach such scope and gravity that they weaken democratic institutions, degrade the rule of law and undermine economic markets.

Its authority is the International Emergency Economic Powers Act (50 U.S.C. §§ 1701 et seq.) and the National Emergencies Act (50 U.S.C. §§ 1601 et seq.)

It is used to sanction the most serious criminal activity involving the most serious  international criminal organizations. It was used to designate the Camorra, Italy’s latest criminal gang, and Las Zetas, Mexico’s Gulf cartel. Other designations include MS-13, Yamaguchi gang and the Brother’s Circle gang.

Canadian banks - freezing order effective immediately

As a result of the designation, all property (money, securities, and other property) of the designated persons and entities in the U.S. or in the possession or control of a U.S. person, or U.S. company must be immediately frozen and cannot be dealt with in any way.

The sanction applies to a U.S. person, a U.S. incorporated company or entity, a U.S. based partnership, joint venture, trust, group or any organization (even if Canadian parented) and any foreign branches of any of those entities.

Banks, funds, brokers, trust companies and in particular, charge and credit card companies in the U.S. or situated elsewhere but with a U.S. parent or U.S. connection need to take extra precautions to confirm they are not holding funds belonging to persons or entities on the list.

The list of entities and persons blocked is here.

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Canada’s anti-money laundering evaluation shows Canada is doing worse, not better, in combatting money laundering and terrorist financing

By Christine Duhaime | September 15th, 2016

Canada get 25% compliance grade from FATF

FATF notes the concern of proceeds of crime coming into real estate in Vancouver from China

The FATF Mutual Evaluation of Canada was released today and according to the Report, Canada achieved a grade of 25% compliance with international anti-money laundering and counter-terrorist financing standards. Out of 40 evaluation criteria, Canada was compliant in only 11 and was outright non-compliant in four categories. In the rest of the categories, Canada was partially or somewhat compliant with room to improve.

The 25% was derived from the number of areas of “compliance” in which there were 11 out of 40.

In a nutshell, here is a summary:

Where Canada failed

Areas where Canada failed include:

  •  Beneficial ownership (Although I agree with this assessment, in fairness to Canada, the FATF clearly did not understand beneficial ownership (e.g.,corporate law) in Canada and the deficiencies it identified are not the actual deficiencies that exist in this area in Canada. For example, it referred to “professional trustees”, a concept that does not exist in Canada and it did not appreciate the fact that trusts and corporate records are maintained in law firms.
  • Lack of AML / CTF requirements for lawyers
  • Lack of AML / CTF requirements for online gambling. This failure is not accurate and repeats a mistake the FATF made of Canada in its last mutual evaluation wherein it failed to distinguish between online gambling undertaken by the public sector and that which is undertaken by the private sector from other countries that target Canadian consumers – the FATF lumped them together as one, which skewed the result.
  • Customer due diligence for FinTech, third parties and lawyers is inadequate.
  • FinTech not included as part of a risk assessment as required
  • Politically exposed persons – not compliant

Note worthy comment from FATF:

There are cases of Chinese officials laundering the proceeds of crime through the real estate sector, particularly in Vancouver and the Chinese government has listed Canada as a country that it wishes to target for recovering the proceeds of Chinese corruption. Canada may be particularly vulnerable to such money laundering as there is no extradition treaty with China.”

What this means for banks is that they are now going to have to add to their risk assessments, more protocols for money flowing into Canadian banks from China and particularly for real estate transactions, to ensure that they verify whether a person being on-boarded is a PEP and if so, to verify the PEP’s source of funds. Many banks ask PEPs to self-declare their PEP status, which is inconsistent with the law and not permissible, subjecting the banks to fines.

Where Canada scored so-so

The areas where Canada scored so-so include:

  • Employing risk based approach (I don’t fully agree with this one as our legislation is not risk-based)
  • Forfeiture of proceeds of crime (this is criminal legislation and not related to anti-money laundering law)
  • Terrorist financing offence – some criminalization absent from the Criminal Code
  • Oversight of terrorist financing – Canada does not have a body that monitors compliance with terrorist financing requirements (that is true and the same is true for sanctions)
  • Customer due diligence lacking in areas such as factoring, leasing and numbered companies
  • Record keeping requirements are not adequate in the law
  • Correspondent banking supervision lacking
  • Tipping off offence is not strong enough
  • Provincial inadequacies of monitoring listed companies
  • Lack of power to law enforcement for money laundering investigations
  • Cash couriers are not adequately reported by CBSA as cross border
  • Administrative fines are too low to be a deterrant
  • Lack of ability to engage in interception of communications of persons suspected of money laundering

Where Canada passed

The areas where Canada passed include:

  • Canada has a national coordinated approach to money laundering
  • The money laundering offence is adequate in the Criminal Code
  • The secrecy laws for banking are adequate
  • The regulation of money services businesses is adequate
  • Canada has a list of high risk countries as required
  • Canada’s supervisory powers are adequate
  • Law enforcement and investigations are fully met

You can read the full 200-page report here.

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G20 adopts a “zero tolerance” against corruption and agree to close all loopholes and join forces for asset recovery of proceeds of crime on an urgent basis

By Christine Duhaime | September 12th, 2016

The G20 agrees to cooperate over asset recovery and tracking down wanted foreign nationals implicated in financial crimes

The G20 released its statement on September 5, 2016, and a large part of it indicates that the leaders of the world are becoming concerned with financial crime, including money laundering, terrorist financing and tax evasion.

The financial crime agenda was expanded to address concerns of flights of capital, the abuse of the financial system to export and move illicit funds from one country to another and shadow banking.

Shadow banking concerns

The G20 leaders said that they will be monitoring shadow banking, flights of capital and ways in which individuals and entities use the banking system to move money internationally and will address the risks to the financial system that arise from those activities. One of the ways they committed to address flights of capital and the movement of illicit funds is through better sharing of tax information with the lead coming from China who is opening up its tax database for asset recovery the Statement said, to achieve tax transparency.

Beneficial ownership disclosure is “vital” to protecting the integrity of the financial system”

The G20 leaders focused on beneficial ownership concerns – a term that means when people make legal structures to obfuscate who controls private companies (the shareholders or controllers behind the shareholders). As noted by the G20, understanding beneficial ownership is “vital to protecting the integrity of the international financial system” and to preventing its abuse.

Money laundering harms people

The G20 recognized that corruption, money laundering and the illicit flow of money to other countries is inconsistent with the rule of law and has a detrimental effect on the fair allocation of public resources on people. They stated that corruption, money laundering and the illicit flow of funds hinders economic growth and affects the integrity of the financial system.

G20 to assist in asset recovery

The G20 countries said that they will each assist in asset recovery and in the pursuit of persons wanted for corruption. At the G20, China announced that is was setting up a Research Center on International Cooperation Regarding Persons Sought for Corruption and Asset Recovery in the G20 countries.

Denial of safe haven

The G20 also said it would continue its policy of “denial of safe haven” of people immigrating to countries with proceeds of crime. The G20 stated it would share information with border agencies to enforce the denial of a safe haven, and will work with judicial authorities as well and start to aggressively use extradition measures to remove corrupt persons so that they are subject to justice in their own countries. According to the G20, this is an urgent matter.

Zero tolerance

The G20 also agree to information-share about foreign nationals who are suspected of financial crimes with law enforcement agencies. The statement said that they now have a “zero tolerance against corruption, zero loopholes in its institutions and zero barriers in taking action”.

Corruption in P3 infrastructure deals

In addition, the G20 addressed for the first time, the financial crime risks that arise from the practice of asset management, where the private sector is charged under long-term contracts with the responsibility for managing assets that belong to the public (such as highways, airports and such). According to NGOs, asset management arrangements that are contracted for under P3 procurement processes are at a higher risk for corruption and money laundering on the part of the funds that manage the assets – they is because they tend to be politically exposed persons and sometimes have anti-competitive arrangements.

Correspondent banking reduction

Not all the statements from the G20 were consistent or made sense from a financial crime perspective. The G20 said they support the reduction in correspondent banking but that move would increase financial crime activities and reduce the oversight of US regulators over the entire financial system, resulting in fewer prosecutions of financial crime.

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FBI – “No safe haven anywhere for money launderers” – The fascinating $1B 1MDB civil asset forfeiture case

By Christine Duhaime | August 21st, 2016

Largest civil asset recovery case in US of this kind

On July 20, 2016, the US Department of Justice filed a civil forfeiture case in California to recover assets of more than $1 billion in alleged proceeds of crime resulting from fraud allegedly committed by individuals associated with the Malaysian government’s 1Malaysia Development Berhad (“1MDB“).

According to the civil complaint, proceeds of crime were funneled through the US financial system and allegedly parked in expensive real estate in the US and London, and used to buy a Canadian Bombardier jet ($34,000,000) and expensive works of art ($200,000,000), and used to finance the film “The Wolf of Wall Street”, to pay for VIP high rollers to gamble in Las Vegas ($25,000,000), to buy expensive diamonds ($3,000,000), and alleged elsewhere, to finance the Omnia nightclub in Las Vegas (summary here and copies of email evidence and more detailed fascinating story here).

Bank assets and real estate frozen globally

Bank accounts in multiple countries in the names of individuals and private companies were frozen while the investigation continues and the trail of funds can be ascertained, which may take a year. In July 2016, the Singapore MAS seized $240 million in connection with 1MDB, half of which was allegedly held by Jho Taek Low (see below).

The essence of the civil complaint is that a few politically exposed persons (“PEP“) from Malaysia, the US and the United Arab Emirates raised funds through bond issuances for Malaysia intended to grow its economy and diverted the funds raised for their personal use or for the use of private companies they legally owned or beneficially controlled. While the allegations are based on criminal activities, no criminal complaint was filed although the alleged criminal conduct is being used for the basis of the civil asset recovery.

One of the key PEPs is Khadem Al Qubaisi, the former director of the International Petroleum Investment Company, Abu Dhabi’s sovereign-wealth fund. He was also the Chairman of a company called Hakkasan Ltd., which owns the Omnia nightclub in Las Vegas. He was arrested last week in Abu Dhabi and his assets are frozen.

Jho Taek Low

Jho Taek Low, a Malaysian PEP, originally based in Hong Kong, is one of the alleged actors involved in the 1MDB scandal named in the US civil forfeiture case. The South China Morning Post reported that Low has begun to sell expensive pieces of art. He allegedly runs several companies, Jynwel Capital, Batumba Investments Limited Hong Kong, Good Star Limited and Wynton Capital. According to some reports, he allegedly used part of the alleged proceeds of crime to arrange for expensive diamond purchases for Malaysian PEPs.

United Nations

The organizations that received the alleged proceeds of crime include the United Nations Foundation and the UN agency, IRIN, which said that it received over $2 million from Low’s organizations.

“Recycle cash well” 

In a PetroSaudi Powerpoint connected to the IMBD scandal that was allegedly used to raise the initial funds … the final step of the plan was to “recycle cash well.”

“Raining Cristal”

According to one website, when the first 1MDB funds were allegedly paid out to a company controlled by Low, his colleagues allegedly posted on Facebook that it was “raining Cristal haha!” (i.e., champagne) in Las Vegas.

The legal basis for the claim

The legal basis for the civil asset recovery action is a civil action in rem to forfeit assets in other countries, as well as the US, involved in and traceable to money laundered in the US pursuant to 18 U.S.C. §981(a)(1)(C), on the ground that it was derived from violations of US law, and pursuant to 18 U.S.C. §981(a)(1)(A). The US claims jurisdiction pursuant to 28 U.S.C. §§1345 and 1355.

The legal basis also is that the defendants’ asset are property that constitute or are derived from proceeds traceable to one or more violations of foreign criminal offenses involving fraud by or against a foreign bank, wire fraud, international transportation or receipt of stolen property or fraudulently obtained property, receipt of stolen money, and misappropriation of public funds by or for the benefit of a public official and is capable of forfeiture under 18 U.S.C. §981(a)(1)(C).

Harm was to US financial system

The action is interesting from a number of perspectives, including that it is a civil, as opposed to a criminal, action. No American natural or legal person was harmed by the alleged money laundering scheme. The basis of the action is that the US financial system was used to launder money and it – the financial system – was harmed by virtue of the fact that it was used (and abused) for money laundering purposes.

FBI – We will “deny money launderers safe haven wherever they may be” 

The action is also interesting because the US government said it would: ”be relentless in efforts to deny money launderers the proceeds of their crimes” wherever they may be and to ensure they have “no safe haven”.

The US government went on to say: “public corruption, no matter where it occurs, is a threat to a competitive global economy … we cannot allow billions of dollars to be laundered through US financial institutions without consequences,” explaining that the FBI is working with foreign countries to return stolen assets.

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US expands review of money laundering in real estate market

By Christine Duhaime | July 30th, 2016

More scrutiny in US for real estate

The Financial Crimes Enforcement Network (FinCEN) announced that it is expanding its program to identify persons who may be hiding assets in residential properties in the US. The expansion adds additional cities to what are called the area for Geographic Targeting Orders (GTO). Title insurance agents in GTO cities are required to identify the people behind private companies if they pay “all cash” for high-end residential real estate. All cash means mortgage-free.

The US said it is concerned that all-cash purchases may be used to launder proceeds of corruption by parking funds into real estate through the use of what are called beneficial ownership structures.

“Luxury real estate vulnerable to money laundering”

The initial GTO program stated in the US earlier this year yielded a “significant” number of cases to the US government of “possible criminal activity” associated with real estate transactions. The US government has said that it is concerned that” luxury purchases of residential property are highly vulnerable to abuse for money laundering” and that the expanded program will help the US learn more about money laundering risks in the national real estate markets, helping to form future regulation.

At least 25% of the GTOs filed since March 1, 2016, as part of the initial GTO test, revealed suspicious names associated with luxury real estate transactions in Manhattan and Miami – the two cities that were part of the GTO pilot.

The GTO program captures just all cash transactions because when mortgages are involved, it is banks who are required to perform the vetting process of identifying and reporting financial crimes associated with mortgages.

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Financial transparency in Iran – more advanced than you think

By Christine Duhaime | July 2nd, 2016

Blacklist in place

Last week, the FATF voted to keep Iran on a blacklist, which means that banks are being advised that they may want to treat financial transactions from Iran with heightened scrutiny.

It’s an interesting decision because Iran is, in many ways, more transparent that many other countries that appear to have no FATF issues. In other ways it may not be on par.

A former member of the US Treasury said in early May in public that John Kerry is asking global banks to re-engage with Iran but their board members are refusing because of the risks of fines from US regulators if they do, arising from the uncertainly created by the position of the FATF.

Central bank of Iran

Iran actually has a modern, online banking system that, if anything, is ultra transparent.

For example, the FATF put forward a soft recommendation a few months ago that central banks consider becoming involved in the on-boarding process of commercial banks and that they have ties to their banks for identification. It was advanced as the ideal way for countries to become FATF compliant.

Iran’s central bank does on-board clients at the same time as the commercial bank does. A person, whether they are foreign or Iranian, cannot open a bank account in Iran until the central bank clears the person first – the central bank runs a check on the person to ensure they are not a terrorist, a money launderer, a debtor or have an outstanding judgement against them in Iran.  Even a debtor is denied the privilege of a bank account in Iran until the debt is settled and the national records are corrected to reflect that.

Trade-based transparency & beneficial ownership data in trade transactions

Another example, Iran has transparency in respect of trade that no other country has – to wit, they have an online foreign trade database that delivers data on trade transactions in real time.

The database shows imported / exported goods, evaluations of the traded goods, tax receipts paid, licenses issued in respect of the traded goods, transit permits, trade-based invoices, and tax reports.

It also includes information in respect of the products imported, any legal issues with the importer and discloses the beneficial ownership of the importer or exporter (who controls the company involved in trade and is the authorized signatory).

The database can be used as an anti-financial crime tool to mitigate against money laundering, including trade-based money laundering, and for beneficial ownership disclosure. It allows Iran, and law enforcement to have real-time data on trades and the financing thereof, and act as a powerful tool to mitigate against financial crimes occurring as Iran opens up its trade system to the rest of world in conjunction with the lifting of sanctions.

 

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FBI wins appeal to hack into your personal computer for serious criminality

By Christine Duhaime | July 2nd, 2016

Right to hack any computer anywhere for serious criminality with underlying court order

In a case that seemed to be quite sweeping, the US government has won an appeal to use evidence in a criminal proceeding derived from hacking into personal computers, regardless of where situated (a home, a corporation, a café, an airport) for the purposes of identifying and prosecuting serious criminal activities.

It seems, pursuant to the case, that there is no need for the computer (e.g., you) being hacked to be owned or controlled by a US national (person or corporation) except that the underlying warrant authorizing the activity may be tied to US persons (natural and corporate, or which have a tie to the US).

The case, US v. Matish, did not involve terrorism, like the FBI- Apple case; rather it involved child pornography and child exploitation websites. According to the case, the FBI has been collecting evidence from a large number of national and international people for the purposes of future prosecutions for serious criminality. But they have not acted on those prosecutions yet and the targets in the US and other countries have no idea that the US government has evidence of them on file for prosecution purposes yet.

Facts

The facts of the case are as follows:

  • Edward Matish, a US citizen, was charged with accessing the Internet with an intent to view child pornography and receiving child pornography from a website called Playpen.
  • Playpen was on the TOR network which allows anonymous viewing of websites by hiding the IP address of a person using the Internet, which can locate the person geographically.
  • Playpen had 150,000 members.
  • The FBI took over Playpen from its creator and was authorized by a court order to deploy an investigative technique that allowed it to find out the identity of any user of the site, and where they lived (so, they were traceable like any porn regular non-TOR site). The information the FBI could obtain from the tech it created included the IP address of a person and the media access control address of their computer, so that if you moved locations, you could still be located.
  • In essence, the FBI gained access to a person’s computer through TOR and downloaded coding to obtain their computer address and then uploaded certain information back for the purposes of prosecution (e.g., who you are and where you are).

Matish sought to force the FBI to disclosure their investigation techniques and the tech (programming code) developed to access his home computer, and he sought to have the evidence inadmissible on numerous grounds including his 4th Amendment right against search and seizure, and his reasonable expectation of privacy when using his computer at home from FBI intrusion.

The government successfully resisted on the grounds, inter alia, of security because it would expose their techniques and make it useless to track Internet crime, and on the ground of law enforcement privilege because revealing their tech would diminish the future value of important techniques that protect the public.

No expectation of privacy with your computer

With respect to the expectation of privacy, the Court held that people cannot reasonably expect to be safe from hackers, including those using the TOR network.

The Court held that the FBI gaining access to one’s computer using TOR is identical to a police officer looking through broken blinds of a person’s home, and thus no 4th Amendment right was violated.

The Court noted that since no computer is hack proof, “people who traverse the Internet understand the risks associated with doing so.” The FBI’s action on TOR was akin to merely peeking through blinds when they downloaded code to a person’s computer and watched their activities in their home, and gathered information they needed to prosecute.

Government authorized to use most advanced tech for criminal investigation for terrorists and child porn

The Court further held that “the government should be able to use the most advanced tech to overcome criminal activity that is conducted in secret, and Defendant should not be rewarded for allegedly obtaining contraband through his virtual travel through interstate and foreign commerce on a TOR hidden service.”

“The government’s efforts to contain child pornographers, terrorists and the like cannot remain frozen in time; the government must be allowed to utilize its own advanced tech to keep pace with our world’s ever-advancing technology and novel criminal methods.”

The way it works is that the users of TOR sites that involve serious criminality that are hacked by the FBI (and there are thousands thus far), will be identified for criminal purposes and those that involve US citizens will be prosecuted and those that involve foreigners (Canadians) will be referred to the RCMP.

If I were to guess, based on that case, I would say that the FBI is creating a database of persons around the world with their IP address, media address, name, IP service provider, location and a site visit profile.

While that may seem freighting to some, it is much more palatable than companies in the private sector who attempt to do the same for commercial purposes in violation of privacy laws, who sell the personal data collected, or information related to personal data, to foreign countries.

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P3 infrastructure criminal charges in Canada against a politically exposed person

By Christine Duhaime | June 29th, 2016

The RCMP has charged a former head of a Crown corporation, Michel Fournier, and his wife, Judith Fournier, both resident in Victoria, with money laundering in connection with alleged corruption from kickbacks they allegedly received tied to a $127 million contract to renovate the Jacques Cartier Bridge. Fournier had a secret bank account in Switzerland with millions of dollars in it and is a politically exposed person (“PEP“).

At the time he was banking in Switzerland, Fournier was a foreign PEP to Swiss banks and was subject to higher due diligence scrutiny and vetting of funds under international anti-money laundering laws.

Corruption occurs frequently enough in large infrastructure projects, including in Canada. The largest corruption and money laundering case in Canada involved infrastructure with the McGill University Hospital Centre, a public-private partnership arrangement (P3) in which another PEP, Arthur Porter, was paid a bribe for a contract. In February 2014, the late Minister of Finance said that infrastructure in Canada has”fallen prey to corruption.”

According to the OECD and FATF, P3 project are more susceptible to corruption is they have the following characteristics:

  • Lack of due diligence by financiers on, inter alia, financial crime including involvement of politically exposed persons, domestic and foreign.
  • Large projects with greater complexities or novel features.
  • Lack of transparency in the process.
  • Too much discretionary decision-making authority exercisable by several officials.
  • Unclear rules and regulations in respect of financial control and audits.
  • Lack of awareness of financial crimes.

The FATF has determined, with respect to PEPs, that there is a greater risk with persons involved in the following:

  • Energy, construction, gaming, mining and defense sectors;
  • Large infrastructure projects; and
  • Financing of government projects.

The Competition Bureau of Canada recently expressed concern in Canada over the potential financial crime risks with infrastructure projects because financial crime negatively impacts competition and creates an unfair playing field.

Fournier was politically exposed because he ran the Federal Bridge Corporation, a federal agency.

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Iran renews calls for the deportation of Khavari

By Christine Duhaime | June 19th, 2016

The requested deportation of Mahmoud Reza Khavari, a former Iranian foreign national, and a Canadian citizen living in Toronto, seems to be at the centre of the arrest of a Canadian professor from Montreal, Homa Hoodfar, also an Iranian foreign national and equally a Canadian citizen, who was visiting Iran.

Professor Hoodfar was arrested by the Revolutionary Guard in Tehran just before Norwuz and is alleged to be incarcerated in Evin prison in Northern Tehran. The Canadian government has sought her release from Iran. The government of Iran has countered with its renewed requests for the deportation of Khavari.

Khavari 

Some background on Mahmoud Reza Khavari. He was prosecuted in Tehran for participating in the embezzlement of US$2.6 billion from the Melli Bank, a state-owned bank in Iran (Washington Post). It is the largest bank theft in Iran and its largest money laundering case, although it was not prosecuted on the basis of money laundering.

Khavari fled Tehran and came to Canada. Prior to that, however, he was granted citizenship of Canada in circumstances that seem unclear since he appears to have been living full-time in Tehran running a state bank and could not therefore have met the residency requirements under the Immigration and Refugee Protection Act to earn the right to citizenship.

Khavari purchased a mansion on the Bridal Path in Toronto, which is like having a mansion in Elahiel in Northern Tehran, only with a yard.


According to court filings, Khavari is alleged to have told a Toronto friend that he has “vast financial resources”. It turns out that Khavari was actively investing in Toronto – he invested $14.2 million in the construction of two Toronto luxury condominium buildings (Financial Post) and he has interests over them (they are at 131 Hazelton Avenue, 195 Davenport Road and part of 145 Davenport Road in Toronto) (2011 ONSC 101)

Also according to those court filings, Khavari assumed the name “Khalili” when he moved to Canada to conceal his true identity.

The US$2.6 billion taken from Iran was never recovered.

The government of Iran has sought the deportation of Khavari for many years from Canada without success; prosecutors in Tehran omitted to charge Khavari with money laundering in Iran, which would have accelerated his removal. While Iranian agents have visited Canada and physically searched for Khavari in Ontario, also without success, it now turns out that his address has been published in Court documents filed in Ontario in connection with a civil litigation in which he is embroiled (Financial Post). Iranians in Toronto say he lives openly in the community in a mansion in Toronto.

Iran has called the refusal of Canada to return Khavari to Iran as “one of the biggest hostilities of Canada towards Iran” (Fars News Agency), in part because allegedly Canadian officials misled Iran as to the whereabouts of Khavari, claiming that he was no longer living in Canada when he was in Toronto.

Anti-money laundering law & sanctions law 

Khavari was the Chairman of the Melli Bank, hence he and all his family members are foreign politically exposed persons, subject to anti-money laundering heightened due diligence that required that the source of all their wealth be ascertained when they opened bank accounts in Toronto.

Salaries in Iran are about 30% what they are in Canada so salaries on bank applications that don’t reflect that are of concern to banks. Iran was subject to sanctions after 2010 which prohibited any bank or brokerage firm, in fact any person, from doing anything but freezing funds of Khavari that originated from Iran after 2010 unless it was approved by the Canadian government. To avoid sanctions, Iranians typically move their money  through Dubai.  Obfuscating the original of money from Iran through banks in Dubai does not make the funds sanctions-free — it does the opposite, it makes them proceeds of crime, the predicate criminal offense being sanctions avoidance.

Dual citizens with dual passports

Back to Professor Hoodfar. The jurisdiction, as a matter of law, of the arrest of Professor Hoodfar is not as straight forward as it may seem to Canadians. All Canadian Iranians are Iranian citizens under the laws of Iran, and both countries allow them to have passports from both countries. However, Iran does not recognize dual residency and as long as an Iranian has not relinquished Iranian citizenship formally, in the eyes of Iran, they are Iranian.

Iranians often have two passports to facilitate their travel and often it is so that they can enter the United States as Canadians, without disclosing to US border agents the existence of their Iranian passports, and enter Iran as Iranians, without disclosing the existence of their Canadian passports to Iran’s border control agents. Professor Hoodfar likely entered Iran under her Iranian passport as an Iranian citizen, otherwise she would have needed to have applied for a visa to enter Iran, which seems unlikely. Khavari as well, although now a Canadian citizen, is still a citizen of Iran under the laws of Iran. Getting Professor Hoodfra back to Canada will not be as easy as it would be if she were a Canadian citizen visiting Iran. In the eyes of Iran, she is an Iranian in Iran, not a Canadian in Iran.

The political situation between Canada and Iran became more complicated and tense because of the $13 million judgement against Iran awarded by a Toronto Court last week (National Post) for American plaintiffs.

What will Iran do? 

If I were to take an educated guess, I think Iran will:

(1) Start discussing the case of Khavari internationally with other countries, the UN and such. At the end of the day, if the rule of law prevails, Canada has to return Khavari – he is a politically exposed person and was prosecuted in Iran pursuant to their rule of law and is being sought in connection with the most serious financial crime possible involving a US$2.6 billion alleged theft;

(2) Seek the deportation of Khavari to Tehran in exchange for the release of Professor Hoodfra; and

(3) Seek from Canada certain financial compensation to recover its US$2.6 billion.

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