China and US agree to cooperate to help China track down & repatriate “economic fugitives”

By Christine Duhaime | April 13th, 2015

Late last week, at a meeting in Beijing, the US and China agreed to continue cooperating in the removal of Chinese foreign nationals from the US who are suspected of having immigrated with proceeds of corruption. The meeting took place between Meng Jianzhu, Secretary of the Central Politics and Law Commission, and national police chief Guo Shengkun, and US Secretary of Homeland Security Jeh Johnson.

Both countries affirmed a commitment to work closely with law enforcement agencies to improve information sharing on repatriation and economic fugitives and provide status updates on active fugitive cases.  China said it was working expeditiously to verify names of its foreign nationals who immigrated to other countries “illegally” to  facilitate their return.

Interestingly, press reports said that both countries are looking at databases to identify Chinese foreign nationals that book travel and request travel documents from other countries to catch them, obviously, wherever they may be in the world. The actual return of such persons is being done by China.  China’s anti-corruption agency said that more than 500 fugatives were brought back to China last year, along with more than 3 billion yuan. Just how they are “brought back” without a formal extradition process remains a mystery. Some Chinese foreign nationals living in Vancouver allege that the Chinese secret police are in Vancouver ferreting out economic fugitives and are seeking their return unlawfully.

Chinese authorities said many countries are supporting its efforts to track down and extradite Chinese foreign nationals who have left China with proceeds of crime. Two such operations, “Sky Net” and “Operation Fox Hunt”, have identified economic fugitives that China is seeking to have returned, together with their assets. During the Beijing talks, the US affirmed it would not provide a safe haven to Chinese foreign nationals suspected of entering the US with proceeds of crime.

The talks also touched on counter-terrorism, intellectual property rights, maritime law enforcement and cyber-security.

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A financial crime failure & why Chinese media are fascinated with hot money flowing into real estate in Canada, the US and EU by Chinese immigrants

By Christine Duhaime | April 9th, 2015

Fascination with hot money leaving China

The Chinese media continue to be fascinated with the story of Chinese immigrants to Vancouver, Toronto, New York, LA and Paris who are buying up luxurious mansions, countless condos, and wineries worth tens of millions of dollars, often with cash, and the greater emerging story – that China is coming after them for a variety of financial crimes.

I get the fascination.

Every non-wealthy person I’ve met in China greatly resents that countries like Canada and the US accept wealthy Chinese immigrants with dirty money. They don’t understand how it is possible that countries that they admire for being corrupt-free, accept their citizens with proceeds of crime, and reward them with permanent residence. Its at odds with what they believe our values are. Imagine the difficulty in being an anti-money laundering lawyer from Canada in China at the receiving end of that conversation.

The story is a fascinating one from a financial crime perspective because it evidences a problem we don’t want to acknowledge –  that anti-money laundering laws that are supposed to prevent the illicit removal of billions of dollars in state assets or proceeds of corruption from China to places like Canada, the US and France, are being ignored.

Ukraine as an example

We saw the same problem with the Ukraine where $70 billion in state assets was removed in 3 years to offshore tax havens and to Switzerland by government officials.

In that case, Ukraine’s former President, Viktor Yanukovych, went from earning $2,000 per month before entering politics in 2009 to amassing a personal fortune of $12 billion by 2013 which he parked overseas. Yanukovych was a politically exposed person (“PEP“). Despite the impossibility of earning that amount legitimately on his President’s salary, not one global financial institution appears to have done what anti-money laundering law requires in that case, which is to de-risk the account, close it, and report his financial transactions to the relevant FIUs. A year after Yanukovych fled from the Ukraine, not one of those financial institutions appears to have been prosecuted or sued for the recovery of state assets. Meanwhile, the Ukraine’s economy is on the brink of disaster and it could use its $70 billion back from the banks that wired it out to tax havens to feed people and rebuilt its infrastructure.

China clearly does not want to follow in the Ukraine’s footsteps and it is going after state assets.

My guess is that China at first will be friendly, to secure the return of its foreign nationals, then I suspect it will be less friendly, by suing financial institutions in conduit countries (Hong Kong and offshore tax havens) and in destination countries (US, Canada, France) to recover state assets that have been spent. The extent to which banks are liable for breaches of anti-money laundering law that causes economic losses to a foreign country will be an interesting legal issue. It would be a tort claim where importantly, the focus will be on the standard of care exercised by senior bank executives.

If China is successful in such a litigation, it may open the floodgates to hundreds of similar lawsuits. Would China win? It’s hard to say but banks systematically do a poor job on PEP legal compliance and, despite the Ukrainian example of a global PEP failure, don’t appear to be improving in this area. Banks have two achilles heels at the moment – PEP legal compliance and counter-terrorist financing legal compliance.

Chinese foreign nationals are PEPs

With respect to wealthy Chinese immigrants, they enter the immigration stream without 3rd party independent verification of the source of their wealth and most, if not all, are politically exposed persons.

PEPs are at a higher risk for financial crimes, such as laundering proceeds of crime, yet few financial institutions treat wealthy Chinese foreign nationals immigrating as PEP clients and verify source of funds.

When wealthy Chinese foreign nationals buy real estate in Canada or France, many real estate agents and developers who sometimes accept cash for the purchase of million dollar homes by foreign nationals from China do not report the transactions to FINTRAC or TracFIN, as required.

Pursuant to the G20 denial of safe haven arrangement, China has put pressure on Canada, the US and the EU to cooperate in tracking down funds moved to Toronto, New York, LA, Toronto, Paris and Dubai by Chinese foreign nationals for repatriation.

Money laundering concerns

There are three money laundering concerns that arise with wealthy Chinese foreign nationals immigrating, as follows:

  1. The Chinese PEP usually removes funds from China in violation of the foreign currency export restrictions and to the extent that is a criminal offence in China, the proceeds of that transaction are proceeds of crime, and every bank accepting those funds has accepted proceeds of crime. The key legal issue is whether the circumstances in which the removal of funds is criminal – in China, it depends.  Assuming the criminal offence is triggered with that particular currency export, when such a PEP enters a foreign country with funds or wires it to another country, they have laundered money through the bank.
  2. The Chinese PEP often has a high level government job with a salary that does not match their wealth, and their wealth may be derived from bribery payments. PEPs also often have businesses with revenues that do not match sales, indicating that payments in bribery are likely the source of wealth. When such a PEP  wires funds derived from bribery to a foreign country, the PEP has laundered proceeds of crime through the bank.
  3. The Chinese PEP often brings large sums of cash into Canada, the US or the EU in suitcases and fails to file a currency report with immigration officials when they enter the foreign country. This is an offence under the proceeds of crime legislation.

I think the days are coming to an end when wealthy immigrants from China can immigrate without:

  1. Proving that the source of funds is legitimate and is not proceeds of corruption. I have probably seen most of the schemes many prospective immigrants create to attempt to prove source of funds – they are easy to detect on Chinese banking and corporate records;
  2. Immigration agencies demanding that there be independent verification and certification of source of funds by financial crime experts to protect the integrity of the financial system from being used for the importation of proceeds of corruption;
  3. Banks and wealth managers proactively undertaking PEP due diligence and treating the accounts of PEPs with heightened scrutiny, as required; and
  4. Financial Intelligence Units, such as FINTRAC, cracking down on real estate agents and developers who process large cash transactions and do not file the requisite reports.

Sing Tao Daily

Here (and below) is the latest story on the money laundering concerns of Chinese immigrants buying luxurious homes, in Sing Tao Daily.

We are quoted in the story discussing the issue in Canada.


專家指稱 現金交易 當局不知情

防洗黑錢專家、溫市律師杜希米(Christine Duhaime)周二接受《星島日報》訪問時表示:「大溫房市確實成為部分中國貪官或不法所得的洗錢天堂,她經常聽聞地產經紀描述有買家,帶著裝滿現金的行李箱來購買房產。此行為雖不犯法,但構成可疑洗錢行為,必須依法通知加拿大金融交易及報告分析中心(Financial Transactions and Reports Analysis Centre of Canada,簡稱FINTRAC)。

Continue reading

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Business in Vancouver Covers Vancouver Real Estate Sector Money Laundering Concerns

By Christine Duhaime | April 8th, 2015

Business in Vancouver has an interesting story here on the increase in real estate investment in Vancouver by wealthy Chinese foreign nationals here.

There are concerns that the funds invested in the real estate sector in Canada may be proceeds of crime from numerous sources, including potential bribery or corruption. Over $1.08 trillion has been removed from China in the past ten years and Canada remains a key destination for those funds.

We are quoted in the article in respect of the financial crime risks.

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Lead DEA & Secret Service Agents in Silk Road investigation arrested for stealing $1 million in Bitcoin

By Christine Duhaime | March 30th, 2015

Two lead US government agents in Silk Road investigation arrested for allegedly stealing over $1 million of Bitcoin from Silk Road during the investigation

Two former government agents involved in the Silk Road murder and extortion investigations in Baltimore, Carl Force and Shaun Bridges, were arrested and charged with corruption, money laundering, wire fraud and theft yesterday in California for allegedly stealing over $1 million worth of Bitcoin during the Silk Road investigation, one of whom allegedly transferred the proceeds to a tax haven.

Silk Road was a website accessible only on the TOR network that sold illicit goods and services including weapons, drugs, prostitution services, fake IDs and on occasion, services for hit men. The TOR network is a network on the Internet in which IP addresses are concealed though a router. In order to use TOR, one must download the TOR software.

Many of the users of Silk Road were transnational criminal organizations. According to affidavit evidence from the US government, the Hells Angels based in Vancouver used Silk Road. It was only possible to buy or sell on Silk Road using Bitcoin.

Silk Road was founded and operated by Ross Ulbricht, who was convicted of drug conspiracy and money laundering in New York on February 4, 2015. Ulbricht was also charged by the District of Maryland with conspiring to murder several people some of whom lived allegedly in Vancouver who were paid with Bitcoin.  The hit man in the Vancouver murder-for-hire scheme was allegedly a Hells Angel.

Carl Force had been a DEA agent for 15 years, and the lead undercover agent in communication with Ulbricht. Bridges had been a US Secret Service agent for six years and was the computer forensics expert on the Baltimore Silk Road investigation. Both were apparently Bitcoin experts, but obviously not sufficient expert on the Blockchain.

Force Allegations

According to the affidavit filed in support of the Criminal Complaint, Force allegedly:

  • Ran illegal criminal history checks for private enterprise, including a Bitcoin exchange company called CoinMTR, for a secret payment of $110,000 paid in Bitcoin.
  • Acted as Advisor to CoinMTR to enable the company to solicit funds from venture capital firms.
  • Directed CoinMTR to illegally seize and transfer $297,000 worth of Bitcoin belonging to another person to his Bitcoin wallet.
  • Fabricated a US Department of Justice subpoena and sent it to a payments firm, PayPal’s Venmo subsidiary, ordering that they release funds Venmo had frozen that were held in his name.
  • Attempted to get Ulbricht to pay him $250,000 if he did not fully complete his investigation and withheld evidence from the US government in respect of its investigation.
  • Sold information to Ulbricht about the Silk Road investigation for $100,000 worth of Bitcoin.
  • Took a large number of Bitcoin from Silk Road during the investigation and transferred it to his own Bitcoin wallet, including a transfer of $235,000 in cashed-out Bitcoin wallet to Panama.
  • Although his annual salary was $150,000, during the Silk Road investigation, he had unexplained income of $757,000.
  • Instructed Ulbricht to encrypt his communications so that his own investigation team could not access them and they could not be used as evidence in a court proceeding.
  • Informed Ulbricht that the US Secret Service had spoken to Mark Karpeles, the owner of Mt. Gox, to identify the owner of Silk Road.
  • Was hired by Ulbricht as a hit man to kill the administrator of Silk Road who was cooperating with law enforcement in the Silk Road investigation.

Bridges Allegations

Bridges allegedly stole $820,000 worth of Bitcoin from Silk Road, cashed it out through Mt. Gox, and transferred the funds to an account held at Fidelity that had been opened under a beneficial ownership structure.

Bridges was apparently both a TOR and Bitcoin expert on the Silk Road investigation in Baltimore, although according to the Criminal Complaint, he did not know how Bitcoin transactions could be traced from currency exchanges such as Mt. Gox, and in early 2015, he asked Coinbase to educate him on that issue.

According to the Criminal Complaint, in April of 2014, the General Counsel of Bitstamp allegedly called Bridges by telephone to alert him in advance that they were filing a SAR on him, subsequent to which Bridges resigned. Under 31 U.S.C. 5318(g)(2)), it is illegal to alert or inform a person that a SAR has been filed but it is not clear whether it is equally prohibited to alert a person that a SAR will be filed against them. An analyst with whom Bridges worked, later illegally searched for BSA filings under Bridges’ name.

The affidavit deposed in support of the Criminal Complaint by IRS digital currency special agent Tigran Gambaryan, is incredibly well-documented in respect of evidencing the movement of Bitcoin and funds through the international financial system for establishing the allegations of money laundering.

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ISIS and the Age of the Digital Terrorist and Digital Terrorist Financing

By Christine Duhaime | March 29th, 2015

ISIS and How We Effectively Engage & Win A War with Digital Terrorists.

By Christine Duhaime, BA, JD, CAMS

“One of the great liabilities of history is that too many people fail to remain awake through great periods of social change …our very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change.” Martin Luther King, Jr.

A. Digital Terrorism is the new Battlefield

If there is one thing the international crisis with the Islamic State (“ISIS“) has made clear, it is that we are in the midst of something we haven’t faced before, namely, a war against digital terrorists where the most important battles are fought not on the battlefield, but online.

ISIS’ key weaponry against the West in digital warfare is not guns, swords and bombs – it is computers, cell phones, the Internet and social media.

ISIS is winning the digital terrorism war by a long shot and will continue to win for years to come unless the West mounts a competent digital counter-terrorism offensive.

B. Why ISIS Has Succeeded in Digital Terrorism

Organizations like ISIS have succeeded in digital terrorism for four reasons:

1. Surveillance Lag

Counter-terrorism intelligence agencies took too long to monitor ISIS on social media and grasp the impact of their digital terrorism effects. There are still relatively few in law enforcement who have Twitter accounts and are actively engaged on that battlefield.

2. Digital Divide

A deep digital presence is a modern thing occupied by young people who are being utilized by ISIS for terrorism efforts, but not by the West for counter-terrorism. They get digital terrorism – their parents who make counter-terrorism decisions do not, and will not.

3. Failure of Public-Private Partnerships

The private sector owners of social media platforms took too long to react, and often still fail to react, to the use of their services to publish terrorist material. They are not entirely to blame – it is incumbent upon the public sector to educate and inform businesses and individuals alike on terrorism and counter-terrorism. There are no counter-terrorism efforts targeted at the private sector in the West, with the exception of perhaps the financial services sector in a limited fashion.

4. Failure to Oppose ISIS in Digital Terrorism

The West has failed to mount a digital opposition force against ISIS on a national or global level.

C. ISIS’ Digital Terrorism Strategy

ISIS’ digital terrorism strategy has four parts.

1. Recruitment of People & Terrorist Acts

The first, which has been immensely successful thus far, is to recruit sympathizers to defect and join them in Syria, through the porous borders of Turkey. They recruit young men and women from all corners of the world primarily in English, French, Arabic, and Russian to join the cause and become fighters, jihadists, computer programmers, hackers, doctors, engineers, teachers, propagandists and brides. ISIS is rebuilding the ancient Islamic State and all are welcome who believe in the cause and are prepared to formally renounce allegiance to their country of origin in favor of the Islamic State.

ISIS Targets Minnesota for Defectors

Here is a good example of the recruitment of people issue in Minnesota, below:

50,000 Defectors to Syria

Western nations believe 5,000 to 10,000 foreign nationals have defected to join ISIS from around the world. However, people on the ground in the area, such as the Kurds, report that it is closer to 50,000. One is inclined to believe that the people on the ground are more knowledgeable about what happens in their own backyard.

Lone Wolf Recruitment

ISIS also uses social media to recruit and direct sympathizers to commit domestic acts of terrorism in their own country. That this has succeeded is not disputed – there have been numerous ISIS inspired attacks, including two in Canada that evidence the effectiveness of digital terrorism efforts by ISIS. ISIS has published countless Hollywood-quality movies and written directives, translated in numerous languages that are targeted at young men that implore them to commit terrorist acts at their places of employment or on their streets against “kuffars(1).”

ISIS recruits online using multiple social media platforms such as Twitter, Facebook, YouTube, Tumblr, Vine, Kik, WhatsApp, and JustPasteIt. The primary source by far is Twitter which is used to link recruits and sympathizers to other platforms where videos and such are published. Platforms and services such as Kik, WhatsApp and are used for individual communications among ISIS and potential defectors.

2. Engagement & Impact with the World

The digital terrorism strategy of ISIS also includes an engagement component with the world. It is premised on ISIS’ theory that through engaging with everyone on social media and widely publishing their propaganda, they will have some impact. Whether the impact is positive or negative is irrelevant – the goal is to enter Western consciousness. Here are two recent examples of what I mean:

Tweeting to World Leaders to Engage

Below is a retweet from what appears to be an apparent ISIS sympathizer on Twitter to Canada’s Prime Minister regarding a person named Omar Khadr, who is incarcerated in Canada for US terrorist-related convictions. An ISIS sympathizer knows full well that the Prime Minister will not reply to such a retweet. That’s not the point. The point is that ISIS can, and will, communicate on Twitter with world leaders without much risk of having their Twitter accounts suspended.


Tweeting to Influence the Next Generation

With respect to impact, the best example of the impact of ISIS’ digital terrorism engagement strategy is the effect it is having on children who are the largest consumers of digital media, ergo digital terrorism. Very young children are watching ISIS’ reign of terror on YouTube, unsupervised by parents, and are now emulating ISIS’ behavior in mock beheadings and such. In late February, a group of teens in Yemen filmed a mock reenactment of the beheading of 21 Egyptian Christian that ISIS beheaded earlier that month. And this week, five children in Italy were suspended from school for reenacting ISIS beheadings and posting the pictures on Instagram and WhatsApp. An Italian newspaper posted the Intragram photos online, below. The most horrific ISIS video to date of the death of Moaz al-Kasabeh, the Jordanian pilot, is still published on social media platforms owned by Western countries.

Caliphate Cubs Syndrome

ISIS’ battle for the control of young minds and hearts isn’t just digital. The ‘caliphate cubs’ syndrome is resulting in the indoctrination of a generation of young Syrians and Iraqis into the world of digital and physical terrorism on an incredible scale. Even if ISIS is defeated, the million of so incredibly young children in ISIS controlled territory will present challenges for years to come. There are hundreds of pictures on JustPasteIt and Twitter like this one, below, of an ISIS Chechen baby in Syria packing a gun.

3. Shock The West

The third part of the digital terrorism strategy is to “shock the West” and that involves committing and posting on social media, violent and gruesome crimes against humanity in order to compel the West to enter into a physical on-the-ground war in Syria. Over two years ago, ISIS correctly determined that the more gruesome, the more inhumane, the more shocking their behavior, as a terrorism strategy, the more the West will be compelled into action to stop them.

Part of this strategy feeds into a larger ISIS digital media strategy to dominate the media around the world. They know that shocking or gruesome behavior is news-worthy. That they have been successful in this initiative is also evident – every news cast around the world now leads with an ISIS-related story, whether it be Syria, Iraq, Nigeria, Yemen, France, Jordan, the UK or Canada.

The “shock the West” strategy has a side benefit for ISIS that they learned from al Qaeda and al Nusra, which is that when horrific videos are posted online, sympathizers in the the Gulf States and in the West respond with financing. Part of the terrorist financing culture is “proof of benefit”, meaning that terrorists have to provide proof on social media platforms to their funders in order to obtain additional funding. They provide proof of benefit by committing and videotaping attacks that destroy critical infrastructure or cause the deaths of many “kuffars” and uploading the videos onto social media platforms.


ISIS is an immensely predictable terrorist group. Part of their predictability stems from the fact that they are reversing the clock 1,400 years to recreate the first Islamic State. Separate and apart from predictability based on historic patterns of behavior, they are predictable because they are transparent on digital media with respect to their goals, desires, objectives, strategies and activities. They have thousands upon thousands of Twitter accounts and are quite transparent on them. I have monitored about 700 of them in the past two years and interestingly, as soon as one is suspended by Twitter, they immediately open another account and Tweet the new handle to followers.

With respect to the “shock the West” strategy, however, we know that ISIS’ behavior will likely become more repugnant to us as time goes on and we should either brace for that eventuality or start to engage on the digital battlefield in a more concerted manner to prevent the escalation from occurring.

4. Fund Raising

As noted above, ISIS is not the first Islamic State and Abu Bakr al-Baghdadi is not the first person to declare a caliphate and assume jurisdiction territorially, culturally and religiously. Watching ISIS and al-Baghdadi is like re-reading the history of the ancient world, only fast forward 1,400 years. But what is different is that part of their financing for terrorist activities is digital. ISIS solicits funds from sympathizers on Twitter,, WhatsApp and JustPasteIt, to name a few. Although these amounts are quite low in order to fly under the radar of terrorist-financing reporting requirements under anti-money laundering laws, collectively, they are significant. Interestingly, and unfortunately, in order to engage in terrorist financing digitally, the payments to ISIS are solicited digitally through payment processors or for collection at money services businesses in Turkey.

Tracking terrorist financing digitally is not possible when we are not engaged with ISIS in digital warfare. We have to be in the digital game with them to detect and prevent digital terrorist financing.

D. The Costs of Failing the Digital Terrorism War

That the West has failed to remain “awake” throughout this change is clear, to our great peril. Almost ten million people have been rendered refugees living below the poverty level; hundreds of thousands of people have been killed; tens of thousands of young Christian, Kurdish and Yazidi girls have been sold into slavery and are missing; thousands of priceless antiquities have been destroyed; and Syria has all but been destroyed. While terrorists may inevitably physically attack our critical infrastructure in an attempt to create chaos and cause an economic depression in the West in an attempt to forcibly install their ideology in the same way they have done in Syria, those attacks can only occur if they succeed in their digital terrorism efforts.
E. Finding Solutions
What is the solution to counter digital terrorism?

The solution is simple. As Martin Luther King, Jr. said, we need to “stay awake, adjust to new ideas, remain vigilant and face the challenges.” That requires that we cure the problems, articulated above, that allow terrorist groups to thrive on social media, as follows:

1. Intelligence agencies and law enforcement should become versatile in the new weaponry of terrorism, namely Twitter, WhatsApp, Kik,, Tumblr and the like. They can’t possibly effectively battle ISIS digitally if they do not know how Twitter works and don’t follow ISIS accounts.

2. Close the digital divide to engage in digital counter-terrorism efforts by hiring young men and women who understand the medium.

3. Formulate a public-private partnership on counter-terrorism that includes a digital component. Social media companies have a vested interest in not allowing their platforms to be used for terrorism but they lack the knowledge in respect of terrorist threats that the public sector should be providing. Social media companies presume they will not ever be liable for publishing terrorist material but I’m not convinced that is a safe position in law in places like Canada, France, Germany or the UK where their services are provided. I do not necessarily advocate the automatic and wholesale suspension of every ISIS sympathizer’s Twitter account, however, because there is important intelligence to be gleaned from them, especially in respect of terrorist financing.

4. Oppose ISIS on social media with a meaningful counter-offensive that includes a different message. I have seen some counter-messaging Twitter accounts created by government agencies that do not work because they are condescending with messages that suggest the West is better, or more ethical or superior and written by people who are not social media savvy. Those who are susceptible, the target audience, are young people, and counter-terrorism messages targeting young people should materially come from them. Again, hire young people for counter digital terrorism.

5. Spend the money and invest in counter digital terrorism. What is so terribly disappointing is that ISIS invests significantly in digital terrorism efforts, in the tens of millions of dollars annually, and yet in some countries in the West we balk at the idea of investing to counter those efforts. There will not be a Bay Street or a Wall Street, or a growing and vibrant economy if we do not firstly address international security issues and eradicate terrorism where it is actually happening – on the iPads and iPhones in the hands of every ten year old watching ISIS’ reign of terror.

What will it take?

It will require national and organizational leadership and significant long-term investment in digital counter-terrorism to successfully oppose ISIS’ digital terrorism efforts. Clearly, one country needs to assume that leadership role to start the proverbial ball rolling. I may sound like a broken record, having said this for two years now, but why not Canada?


(1) A kuffar is a derogatory term meaning an infidel or non-believer but tends to exclude ‘People of the Book’, the latter of which are people who are Christian or Jewish.

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Two Canadian banks allegedly banked Chinese politically exposed persons with alleged proceeds of crime

By Christine Duhaime | March 28th, 2015

PEPs from China

According to this article in the Vancouver Sun, two Canadian banks, HSBC and the Royal Bank, opened and maintained a bank account for politically exposed persons from China who are now alleged to have laundered $900,000 in proceeds of crime from China to Canada and the US.

The two politically exposed persons are Shilan Zhao (趙世蘭) and her ex-spouse, Jianjun Qiao (喬建軍). They are politically exposed in anti-money laundering law because Qiao was the director of a government corporation in China, Sinograin, and Zhao was his spouse. They have a son who goes to school in Toronto, and another who lives in the United States. Both are also politically exposed persons.

Under international anti-money laundering laws, banks are required to determine if their clients are politically exposed persons (“PEP“) by affirmatively undertaking investigations to make that determination. If they are PEPs, banks must confirm the source of wealth to ensure it is not proceeds of crime, seek bank officer approval to open a bank account, and continually monitor PEP banking activities for suspicious typologies that may suggest criminal activity. A PEP who cannot confirm source of wealth, or lies or is evasive about source of wealth, is a suspicious typology that should be reported to financial intelligence units.

Most foreign nationals immigrating to Canada and the US are PEPs. Most banks ask prospective clients to complete a questionnaire to self-declare if they are a PEP, a compliance measure that is not compliant with the law. Banks often use services that attempt to check for PEPs but there are none that are effective or comprehensive enough to screen for PEPs.

US Charges

Zhao and Qiao were indicted in the US a week ago with conspiracy to commit immigration fraud and international transport of stolen funds, as well as conspiracy to commit money laundering. Zhao is additionally charged with one count of immigration fraud in respect of the EB5 immigration program. They also did business in Vancouver, including the flipping of real estate properties.

Zhao was arrested in the US but Qiao is a fugitive. The tracking of Chinese PEPs in the US and Canada for prosecution for money laundering and asset removal is part of a global “denial of safe haven” described here.

If convicted, Zhao faces statutory maximum sentences of five years in federal prison for the charges of conspiracy to commit international transport of stolen funds and immigration fraud, 10 years for the immigration fraud charge, and 20 years for the money laundering conspiracy charge.

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China hunting down assets and money launderers in Canada and the US in “Operation Skynet”

By Christine Duhaime | March 27th, 2015

Operation Skynet

Business Insider has an interesting story here on “Operation Skynet”, the operation by the Chinese government to track down money laundering foreign nationals from China who exported funds and other assets illegally from China as part of the immigration process. Most of those people moved assets and money to Vancouver and New York and parked the funds in real estate.

Denial of Safe Haven

Operation Skynet is part of the larger global initiative of “denial of safe haven” in which the G20 countries agreed in 2013, not to allow the immigration system to be used to provide a safe haven for people who remove assets illegally from a country. The denial of safe haven permits the easier removal of a person to their home country to face money laundering charges in cases where there is evidence of such activities.

Tax Havens & Financial Firms Targeted 

The Government of China said they are going after people who have facilitated or assisted Chinese foreign nationals to remove funds from the country illegally, such as immigration consultants and financial firms.  Operation Skynet is also going to target tax havens.

Foreign Currency Restrictions

In China, a person or company can only export $50,000 per year from China unless they obtain permission in advance to remove more than that amount. Often Chinese foreign nationals immigrating to places like Canada or the US do not want to seek permission in advance to remove more than $50,000 because they do not want to alert the Chinese government with respect to (a) the amount of funds they have accumulated; and (b) how those funds were obtained. With respect to the latter, that is because often the funds were obtained from bribery or other forms of corruption and are proceeds of crime. If a person uses proceeds of crime, they are a money launderer. Every tax evader from China is, by definition, a money launderer. If a person from China removed funds illegally to Canada and China determines that the removal of funds is criminal, that person is likewise a money launderer.

Ways Chinese Nationals Illegally Move Funds

Foreign nationals from China remove money illegally in several ways when they immigrate to places like Canada and the US, as follows:

  1. They have  several friends and family, or they force employees, to wire funds for them each at the maximum $50,000 amount to circumvent currency export restriction rules in China. I have seen files with up to 200 different employees of a Chinese company who were forced to wire $50,000 each so that the business owner could buy a $7 million mansion in Vancouver and have some spending money left over.
  2. They use junket operators who are sometimes connected to the Triads to move money for them to Macau where they gamble for relative minimal play and then have the funds wired from Macau to Canada or the US, sometimes using passé tax havens such as the BVI, Cayman Islands, Cook Islands or the like, or back through Hong Kong.
  3. They engage in trade-based money laundering where they create false invoicing to justify the wiring of vast sums of money on the basis of fictional trades to companies in places like Canada or the US.
  4. They pay money mules a 20% commission to physically transport funds from China to Canada or the US, who fail to report the importation of funds when they enter the country.
  5. Anecdotally, they buy Bitcoin in the amount they want removed, and cash it out in Canada or the US. If the price fluctuates in the interim period, it still cost them less than using a money mule and is more secure (and just as anonymous).

Last year, China apparently went after over 500 former foreign nationals who they allege illegally removed assets from China for prosecution. The adoption of FATCA by China and Canada signalled the death knell for funds removed from China illegally that were not declared.

Will China Seek to Recover from Banks for PEP Failures?

Private banks and  asset managers who facilitated, or turned a blind eye to the removal of assets and funds from clients in China may have compliance issues of their own on this issue. That’s because many of the wealthy Chinese foreign nationals who removed, and continue to remove, funds from China are politically exposed persons in the US and Canada under anti-money laundering and counter-terrorist financing laws and very few bankers comply with politically exposed persons (“PEP“) laws in the way they were meant to be complied with.

Often, banks provide a questionnaire to the client from China and ask the client to self-declare whether they are a PEP.  It is not incumbent upon a person to self-declare whether they are a PEP or not and moreover, that determination is a legal one that most PEP are unable to determine. Asking a PEP to self-declare and purporting to rely on that self-disclosure does not constitute compliance with the law.

Sometimes it’s not the bank’s fault – I have heard advisory firms advise banks that self-declaration questionnaires meet the standard of care in counter-terrorist financing and anti-money laundering laws. An advisory firm is to qualified to advise on what meets the standard of care and nor can it advise on counter-terrorist financing and anti-money laundering law, since both are legal issues that only lawyers are permitted (under legal professional legislation) and qualified, to determine.

The Government of China may be tempted, as a next step in Operation Skynet, to seek recovery from financial institutions who failed to meet the standard of care pursuant to PEP laws if that failure caused losses to the Government of China by allowing state assets to be moved from China. It’s an easier asset recovery than seeking recovery from a person. If I was a major bank in Canada, I would get my PEP house in order now in terms of competent compliance measures so that bank employees involved in client on-boading are trained in PEP law and follow it.

Typologies of Money Laundering from China

Money launderers from all countries follow identical typologies (spending patters) the world over that help to identify them. The typologies below do not mean that anyone who displays these behavior patterns is a money launderer. Those typologies are:

1. They buy luxury homes.

2. They buy high end racing cars.

3. They buy high end jewellery (mostly watches).

4. They immediately register children in the most expensive private schools or most elite universities in Canada or the US.

5. They carry large amounts of cash.

6. They like to flaunt wealth in public.

7. They use private banking because anti-money laundering and counter-terrorist financing practices are the most lax.

8. They use certain tax havens such as BVI or the Cayman Islands, that are no longer used by the financial elite who now use other havens that are less conspicuous.

9. Their bank accounts may be funded with hundreds of wire transfers from different sources in Asia.

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PayPal to pay $7.7 million for sanctions non-compliance issues

By Christine Duhaime | March 26th, 2015

PayPal has settled with the US Treasury Department to pay $7.7 million over alleged sanctions failures in which they are alleged to have processed more than 500 financial transactions to places like Iran, Cuba and the Sudan and to persons who are on the sanctions list. They processed 136 transactions for a person on the sanctions list who trafficked WMD. PayPal allegedly said that before 2013, it did not  have a compliance plan in place to detect sanctioned transactions as they were occurring. The US Treasury Department is increasingly focusing its compliance and enforcement efforts on non-banking financial services providers.

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France to limit cash and ‘anonymous’ transactions; introduces new law; et mobilise contre le terrorisme avec l’investissement de €736 million

By Christine Duhaime | March 21st, 2015

€736 Million Investment in Counter-Terrorism Infrastructure

Le gouvernement français a décrété une “mobilisation générale” contre le terrorisme, annonçant la création de 2,680 emplois et le déblocage de €736 millions sur trois ans.

Le Premier ministre a présenté des mesures visant à mieux lutter contre les filières suspectes, notamment via internet et dans les prisons, évaluant à “près de 3,000″ le nombre de personnes à surveiller.

“Au total, au cours des trois prochaines années, ce sont donc 2,680 emplois supplémentaires qui seront consacrés à la lutte contre le terrorisme dans les services régaliens de l’Etat et dans les juridictions”, a déclaré Manuel Valls.

Sur les 1,400 emplois créés au ministère de l’Intérieur, 1,100 renforceront les services de renseignement. Sont aussi annoncés 950 postes à la Justice, 250 à la Défense et 80 au ministère des Finances, dont 70 aux douanes.

Côté financement, €425 millions d’euros de crédits d’investissement, d’équipement et de fonctionnement ont été débloqués sur trois ans, dont €233 pour le ministère de l’Intérieur et €181 millions pour la Justice.

Le Premier ministre a confirmé la création d’un fichier de personnes déjà condamnées pour terrorisme sur le modèle de ce qui existe pour le suivi des pédophiles et la création de cinq quartiers réservés aux détenus radicalisés.

Il a évoqué un montant de €60 millions pour lutter contre la radicalisation dans les trois prochaines années.

Des “mesures exceptionnelles, et non pas d’exception”, dont une partie sera incluse dans la loi sur le renseignement appelée à être présentée en mars au Parlement, en vue d’une adoption définitive début juin.

Reprenant une proposition de la droite, le chef du gouvernement a proposé d’engager une réflexion parlementaire sur une peine d’indignité nationale, dont la privation des droits civiques, pour les Français condamnés pour terrorisme.

“La République est debout et nous prenons des mesures exceptionnelles, à la hauteur de ces menaces” a dit M. Valls.

Manuel Valls a lancé en outre un appel aux usagers d’internet, principal vecteur du djihadisme, les invitant “à coopérer étroitement avec les autorités pour appliquer les règles relatives aux contenus illicites et au déréférencement des sites illégaux”.

New Law on Surveillance and Data Collection

France also unveiled a new law to allow intelligence forces to monitor and collect the email and telephone communications of anyone suspected of being a terrorist. It would also force ISPs and telcos to allow intelligence agencies to record metadata that would be stored for five years and analyzed for serious criminality related to, among other things,  terrorism, organized crime and economic stability. The law also sets up a national commission that would oversee surveillance requests and information collection.

New Regulations on Anonymous & Cash Transactions

France also announced measures to limit the ability of terrorists to use cash and anonymous payment methods that the Minister of Finance Michel Sapin, said facilitated terrorist acts.

As of September 1, 2015,  the amount of cash that a person can spent at once in France is €1,000 (it’s now €3,000). Banks would also have to report monthly transactions of €10,000 or more to TracFin. ID would  be needed to buy a prepaid card worth more than €250 or to complete a currency exchange of more than €1,000. And virtual currencies will be a “lot better regulated” said Sapin.

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American Banker – Why banks should be concerned about hackers taking on counter terrorist financing

By Christine Duhaime | March 11th, 2015

In case you missed it, our article in American Banker‘s Bank Think entitled “We Shouldn’t Be Relying on Hackers to Stop Terrorism Financing” can be read here.

The article discusses the recent phenomena of hackers in #OpISIS taking down the websites of the Islamic State and their stated promise to go after banks engaged in terrorist financing. It also discusses ways in which ISIS is funded and why counter-terrorist financing efforts are failing thus far and why it is of concern that hackers may be targeting global banks and their executives over terrorist financing, raising cyber-security issues.

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