Issues in Financial Crime, Technology, Artificial Intelligence and Machine Learning

By Christine Duhaime | March 23rd, 2017

3rd Annual Vancouver FinTech Conference

The 3rd Annual Financial Technology Conference in Vancouver takes place on May 3, 2017, which we co-sponsor. This year’s Conference focuses on “FinTech and Financial Crime” and will cover the nexus between technology solutions to address regulation (RegTech), law, money laundering, terrorist financing, compliance, fraud, identity management, transnational criminal organizations, corruption, real estate tech, on-boarding / de-risking, predictive AI and cyber-security.

The idea is to advance the dialogue to deep-dive into the issues at the level where it matters – law, policy and financial transactional monitoring and explore solutions that work, including importantly, artificial intelligence and financial crime.

In the lead up to the conference, we’ll be populating this page with those topics to identify some of the issues worth exploring that the experts at the Conference can address.

Confirmed speakers are at FinTech 2017 are:

  • Fintrac
  • RCMP
  • BCLC
  • ACAMS
  • Vancouver Sun
  • Globe & Mail
  • Evolocity
  • ChatBo
  • Elk
  • Baker Marquart
  • Duhaime Law
  • BLG

1. Issues in cyber-security

Cybercrime costs the global economy $500 billion annually and ransomware attacks rose to 4,000 per day in 2016, forcing companies to pay $400 million in ransom in Bitcoin in 2016. As the world becomes connected (20 billion devices by 2020) with robots, cars, medical equipment, phones and refrigerators all inter-connected, the threats will grow.

Americans have said plainly that we are “in the fight for our digital lives and are not winning the cyber-security war” from China to Russia, hackers are stealing intellectual property from tech firms on a daily basis, as well as financial data and health care records. In addition, Americans have said that terrorists are crowd sourcing the murder of innocent people.

Cyber criminals are winning for many reasons including that there are more criminals than law enforcement can deal with; the law has not kept up with cyber attacks and nor is there the budget to address it properly; there are serious information challenges between the public and private sectors because the private sector does not report cyber crime; there is no deterrence in the cyber realm to prevent further cyber attacks; and terrorists are using social media and end-to-end encryption on their phones to cover their tracks.

The US is also noting that critical infrastructure is a critical vulnerability with criminals now leaving their digital fingerprints on purpose as a warning.

The battlespace is –> your cellular phone.

2. Predictive AI & data vacuuming in crime

One day soon, a machine will identify money laundering activity all on its own and will alert law enforcement on how to locate the person with the evidence all nicely packaged for prosecution. Already, in the US, machine learning analyses massive amounts of data for the SEC to find insider trading and machine learning takes recordings of faces, plugs them through facial recognition and informs police when the same people interact on street corners (druggies), visit a night club frequently (druggies), a high end hotel (prostitution) or a parking garage (car thieves).

Using data vacuuming, governments and law enforcement are able use machine learning to predict criminality. ASA – automated suspicion algorithms convert inputs into outputs. For example, an Instagram account as an input uses a person’s own data and their behavior and coverts it into predictions on the likelihood of criminality and do so in a way that is automated to cut down on the time a human would take to identity the data and come to the same conclusion. The advantage of machine learning data that was vacuumed from an Instagram account is that it can pick up correlations and connections to other people and repeat patters of behavior that a human cannot detect without years of analysis.

Accessing big data and data vacuuming and using machine learning with that data may be viewed as a form of constructive knowledge, legally speaking, allowing for law enforcement to have constructive awareness of predictions of criminality, ignoring the individual reasonable suspicion requirements. One scholar suggests that the constructive knowledge doctrine would turn our police agencies into “something like Star Trek’s Borg Collective” in that police could rely on databases of what all law enforcement agencies know everywhere in respect of a person suspected of a crime.

In anti-money laundering law, since it is criminal law, the money laundering component requires having reasonable grounds to suspect that certain conduct is tied to a criminal offence and that is a  legal determination that our courts have ruled cannot be “technical”. So then, how do we design machine learning technology for anti-money laundering detection that is, by its design, technical, that reasonably matches what a lawyer, judge or law enforcement officer would determine is reasonable to ensure it is constitutional? No one yet knows. For example, in the example above, the person who interacts at the street corner frequently could be a girl selling Girl Guide cookies and not a drug trafficker.

For an ASA to be sufficient to justify reasonable grounds to suspect and justify a search or seizure or reporting, it must be accurate and be based on an understanding of the law. ASA is only as good as its coding and if that coding is not done by lawyers, it will fail on the constitutional threshold.

3. Money laundering tech

Some recurring issues affecting money laundering is the lack of manpower to investigate cases. Prosecutors have found that when tips come in from the public (informants or whistle blowers) about money laundering or transnational criminal organizations, the information tends to be accurate and point law enforcement immediately to the key players and where the crimes can be detected. Those cases tend to be the ones that are pursued by law enforcement.

What type of money laundering tech is being developed, and does it include mechanisms to allow the public to report money laundering cases?

4. China and money laundering / corruption

China was slow to implement anti-money laundering controls and its regulatory effectiveness is “relatively low because [for ten years], a lot of money laundering activities were not detected and there was much capital flight from China” (Shan Xi Normal University).

From 2008 – 2013, Chinese financial institutions filed 45,000,000 suspicious activity reports annually to their FIU. Yet although it files 187 times more suspicious activity reports than the US, it averages about 7 arrests a year for money laundering.

The relevant law in China for money laundering that addresses the predicate offenses have some limitations compared to other countries. For example, the predicate offenses are drugs, gangsterism, smuggling, corruption, bribery, destruction of financial records and financial fraud, gambling and tax crimes.

The percentage of predicate offenses for money laundering in China:

  • Corruption 42.08%
  • Financial fraud 11.76%
  • Destruction of records 8.6%
  • Drugs 8%
  • Smuggling 8%
  • Tax crimes 5.88%
  • Gambling 4.98%
  • Gangsterim 2.71%

Types of customers involved in money laundering in China:

  • Politically exposed persons 57.58%
  • Private companies and their shareholders 27.7%
  • Cash management companies such as insurance, real estate and securities firms 15.15%

A report from a university on money laundering refers to Canada as a jurisdiction where politically exposed persons launder money and “abscond overseas.” Given that China has lax money laundering compliance itself, what does that mean for Canada, as a key destination?

5. De-risking

The past 15 years has been unprecedented enforcement action in connection with anti-money laundering law such that in 2014, over $15 billion in fines were levied by US regulators, causing de-risking as banks attempted to limit their risks. However, there is concern over the chilling effect this has on cross-border trade because banks are eliminating correspondent banking relationships. The fear of liability and of AML / CTF compliance is killing banks in high risk areas. According to two studies, between 31% to 60% of banks say AML / CTF costs are the reason for de-risking of correspondent banks. Other surveys 40% of banks and corporations said that AML / CTF was a significant impediment to trade finance and over 70% said they declined transactions because of AML / CTF.

Topics coming: 

6. Transnational criminal organizations

7. Real estate in Vancouver, Toronto, Miami, New York

8. Identity management

9. Terrorist financing

10. Law (RegTech)

11. Politically exposed persons

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US rates Canada once again as a “major money laundering country” in annual drug report

By Christine Duhaime | March 12th, 2017

1. Canada once again a “Major Money Laundering” country

The 2017 “International Narcotics Control Strategy Report” (INCSR) published in March 2017 by the U.S. Department of State identifies Canada once again as a “major money laundering country” along with a host of mostly risky countries for financial crime such as Afghanistan, Argentina, Brazil, BVI, Cayman Islands, Cambodia, China, Columbia, Cyprus, Dominican Republic, Guernsey, Jersey, Iran, Iraq, Libya, Mexico, Macau,  Saudi Arabia, Somalia and the UK.

A “major money laundering country” is one whose banks and financial institutions allow financial transactions involving significant amounts of proceeds of crime. For several years in a row, Canada has been identified as such (see our other annual reviews here (2016), here (2014), here (2013) and here (2012)).

There is lots that is new in the 2017 INCSR for Canada, as described below, showing that the drug trade and consequently, the money laundering landscape, has changed in one year but one theme is that there are more concerns raised between Canada and China – in particular, fentanyl, proceeds of corruption landing in Canada and bulk cash smuggling.

Lots has been removed about Canada that isn’t completely justified in the sense that the needle has not moved over our record for battling, deterring and prosecuting financial crimes, and the risks identified in the earlier Reports are still relevant. However, one can get a complete view of the risks to banks and other reporting entities in a compliance sense from reading the summaries of 2012, 2013, 2014, 2016, linked above, and this 2017 summary, collectively, in preparation of a risk-assessement and on boarding purposes.

The good news though is that compared to previous INCSRs, Canada has improved and the weaknesses are more siloed.

2. What’s new in 2017 INCSR for Canada compared to 2016 report

Money laundering from tax evasion & corruption; lax conviction rate

According to the Report this year, money laundering in Canada is originating from tax evasion, corruption, as well as the usual drug trafficking, fraud, and such. And the main methods of money laundering have shifted to include Bitcoin, offshore corporations, bulk cash smuggling, money services businesses and real estate.

The Report mentions the exemption of lawyers as a deficiency in the anti-money laundering regime.

The Report says Canada should enhance enforcement and convictions for money laundering.

China

A lot was changed about China in relation to Canada this year in the Report, curiously. However, this year’s report says that the main source of proceeds of crime from China is from corruption involving state-owned enterprise and that criminals are laundering money mostly by bulk cash smuggling, fake large international trade invoices (trade-based money laundering), gambling and real estate.

Fentanyl entering Canada from China by mail

The Report states that fentanyl is originating in China and entering the US via Canada or Mexico, making Canada a source country. The fentanyl that enters Canada from China is by mail. Heroin is being altered with low-cost synthetic opioids, especially fentanyl, by drug dealers which can be 25 to 50 times more potent than heroin. Fentanyl is also pressed into pill form and sold as counterfeit prescription opioid pills. Drug takers are not aware of the large quantities of fentanyl, causing thousands of overdoes fatalities in Canada and the US.

Opium coming to Canada from Afghanistan

Afghanistan is the major supplier of opium derivatives to Canada and Europe. Insurgent groups in Afghanistan generate revenues by taxing drugs passing through regions they control [before the drugs reach Canada].

Meth produced in large quantities in Canada

Alpha-phenylacetoacetonitrile, the pre-cursor for methamphetamine, has been found in large quantitates in Canada.

Stay away from the Dominican Republic

Perhaps as a sobering thought for Canadians not to visit the Dominican Republic, the Report says that there is corruption in the Dominican Republic among the military and law enforcement agencies and it remains a significant impediment to law enforcement efforts, noting that the prosecution of corrupt officials rarely happens. Moreover, the judiciary is politicized and accused of corruption. According to the Report, the legal system offers little recourse to those who lack money or influence (e.g., can’t buy their way out). The FIU is not effective but if there is some good news, it is that the Report notes that the US has been effective in extracting criminals from the Dominican Republic to the US for prosecution.

Canada used for Laundering Funds for a Listed Terrorist Group and for Organized Criminal Gangs from China, Mexico & Columbia

Also noted was that a transnational organized crime group affiliated with Altaf Khanani from Pakistan uses Canada and other countries such as UAE and Australia, to launder billions of dollars in proceeds of crime every year for crime gangs from China, Columbia, Mexico and for the listed terrorist organization, Hezbollah. According to the Report, Altaf Khanani has also moved terrorist funds for the Taliban.

3. Key Findings

Volume 1 - The key findings of Volume 1 on the drug trade vis a vis Canada are:

  • Large amounts of fentanyl from China enter Canada by mail.
  • Canada is a major producer of precursor chemicals used in the production of illicit narcotics, along with Afghanistan, Bangladesh, Brazil, China, Columbia, Dominican Republic, Egypt, Iraq, Mexico and several other countries.
  • Cannabis destined for the US is produced mostly in British Columbia, Quebec and Ontario.
  • Canada is a primary source country of high potency marijuana and estasy to the US.
  • Canadian synthetic drugs and amphetamine stimulants are exported to the US, Asia and Australia.
  • Cocaine continues to enter Canada from South America and Mexico, some of which is transited through the US.

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

  • Money laundering activities in Canada are primarily from tax evasion, corruption, illegal drug trafficking, fraud, piracy and tobacco smuggling.
  • Laundering methods in Canada have changed slightly and now involve smuggling, money services businesses, casinos, real estate, wire transfers, offshore companies, credit cards and digital currencies like Bitcoin.
  • Also noted was that bulk cash smuggling into Canada is “widespread”.
  • Gangs from Vietnam are a significant source of illicit funds.
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SEC denies approval for Bitcoin Trust over multiple market integrity issues

By Christine Duhaime | March 11th, 2017

The Securities Exchange Commission has denied an application for the creation of a Bitcoin Trust based primarily on issues related to preservation of the integrity of the capital markets.

The decision is what was expected from a financial crime and integrity perspective.

The decision can be read here. The gist of the negative findings of fact that formed the basis of the decision are that:

  • There is no regulation or oversight for the worldwide market of exchanges used to trade Bitcoin; 
  • There are few (if any) Bitcoin exchanges anywhere that are regulated for fiduciary and custodial activities);
  • The price of Bitcoin is dominated by activities in China; and
  • The bulk of trading of Bitcoin occurs outside of the US where there is no regulation in place.

It remains true that Bitcoin can be bought, sold and transacted upon with complete anonymity and thus, its activity is inconsistent and irreconcilable with the obligations for transparency and integrity of the capital markets.

Unless we are dealing with a closed micro exchange (which no one has yet established), it is impossible in an environment of anonymous wallet holders, to comply with anti-money laundering and counter-terrorist financial law, or sanctions law.

Bitcoin exchanges have also said on many occasions that they are unable to freeze any account of Bitcoin that is suspected, or know to be, terrorist property because they allege that only a holder of a Bitcoin wallet can access and control its activities. For example, they go further and allege that if a private key is lost by a wallet holder, there is no way to recover the funds invested to buy Bitcoin, and thus, for capital markets, this also an impediment to market regulation as it results in unjust enrichment of the Bitcoin exchanges and it makes the exchanges incapable of complying with terrorism and sanctions laws prohibiting the dealing of terrorist property.

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Casino executives alleged to have been collecting debts when arrested in China

By Christine Duhaime | March 10th, 2017

According to this article, the 18 executives of Crown casinos that were arrested in China in October 2016, were in China to collect the debts of what are called “VIP customers” who go on gambling trips through junket schemes. One of the people arrested was Jason O’Connor, who was the VIP executive for Crown Casinos, allegedly responsible for luring rich people from China to gamble in Australia.

It is illegal to solicit gambling services to people in China. O’Connor is believed to have been arrested in October 2016 and has been incarcerated ever since with 17 other Crown employees. When he was arrested, the Crown casino’s VIP operations plummeted 45%. Most large casinos in close proximity to China make money mostly relying upon VIP gambling operations. In Macau, it is Mainland Chinese sub-contractors who arrange the junkets. In the case of Crown, according to this article, it set up offices in China to directly solicit VIP gamblers, rather than using established junket operators.

The arrest was in the midst of something called “Operation Chain Break”, a Chinese operation to stop money laundering through Macau by junket operators but the operation appears to have widened.

The arrest in China is going to require a review by the gambling regulator of the registration of the Australian gambling operations. That is because the arrest and incarceration of Crown employees in China affects the integrity of gambling in Australia.

You can learn more about junkets from our two-part series: “Macau casino junket operators use trade show to polish image” here and “Macau casinos face regulatory balancing act amid international money laundering concerns” here.

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Politically exposed Chinese foreign national pleads guilty to immigration fraud

By Christine Duhaime | March 9th, 2017

Shilan Zhao (趙世蘭), the ex-wife of a Chinese official and a politically exposed person, has pleaded guilty to immigration fraud related to the EB5 investor visa program in the US and will serve a term of incarceration of five years.

Zhao conspired with her husband, Jianjun Qiao (喬建軍), aka Feng Li, to immigrate to the US fraudulently and settle in Washington State. He is wanted in China for embezzling over $50 million in state funds acquired while serving as the director of a state-owned grain company, Sinograin,  in the Henan province. He is on China’s Most Wanted list.

By 2012, Zhao had moved about US$2.2 million in what the US government called “laundered funds” from China to banks in Vancouver and parked the funds there in anticipation of immigration to the US. Those banks were RBC and HSBC. Zhao also bought homes in the Vancouver area.

According to the investigation by the IRS and DHS, Qiao and Zhao transferred about US$700,000 to HSBC in Vancouver in 6 transactions in 2011; then transferred another $1.6 million to another HSBC account in Vancouver; and in 2012, they cashed out over $2 million from a Royal Bank account; and transferred a further $700,000 from RBC to buy property in the US.

Zhao applied to the US under the EB5 program using falsified documents, including fake documents ostensibly proving the source of her investment to qualify under the EB5 program to obtain a US visa. In reliance upon those fake documents, Zhao was approved to immigrate to the US.

In this article, the Chinese Foreign Minister confirms what we know about China which is that the people of China “care greatly about bringing back fugitives and recovering their assets.” So far, 2,500 fugitives from more than 90 countries were returned to China on charges of corruption and economic crimes.  38 are on the list of 100 most wanted fugitives.

 

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Mafia dad and his 3 children sentenced to long jail terms for illegal gambling

By Christine Duhaime | February 26th, 2017

According to several news reports in Italy (here, here and here), a whole family of the ‘Ndrangheta, an international criminal organization that originated in Italy, was convicted Wednesday of illegally operating online gambling websites after a three year trial called “Black Monkey”.

Nicola Femia, his daughter and two sons were sentenced to 56 years incarceration collectively in Bologna, Italy. They ran several online gambling websites hosted in Romania and the UK that provided services to Italians online at 888Suite.com, Vivacasinoelite.com, Vanillascasino.com and Davidcasino.com and also operated a series of slot machines and VLTs across Italy, collecting debts in violent ways from gamblers.

Femia is alleged to have paid €100,000 to a member of the local police to try to influence the outcome of his trial by attempting to bribe the judge. The policeman and the financial intermediary were arrested in October 2013.

In 2008, the U.S. Department of the Treasury added the ‘Ndrangheta to the Office of Foreign Assets Control Specially Designated Nationals list. The ‘Ndrangheta are present in Toronto and in the northern parts of Toronto and once a person is affiliated with them, there is no such thing as ending the relationship.

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Co-founder of infrastructure fund allegedly under investigation for money laundering

By Christine Duhaime | February 25th, 2017

Kola Aluko, a Nigerian energy mogul, is allegedly under investigation for money laundering in Nigeria. Among other things, Aluko is one of the founders of Made in Africa (MiAF), a foundation for infrastructure projects across Africa which, in 2013, joined the African Development to launch the Africa50 Fund on NASDAQ, Africa’s largest infrastructure investment vehicle. It seems to have no projects to date.

Mr. Aluko was the subject of a mareava injunction freezing his assets worldwide. Those assets are listed as including 3 mansions in Los Angeles, 2 high-end apartments in New York City, properties in Santa Barbara, California; numerous properties in Lagos, including 43 apartments in Banana Island, 58 vehicles, the Galactica Star yacht, and three airplanes.

The New York Times reported last year how Aluko made extensive use of shell companies and beneficial ownership structures to move money around the world through tax havens.

Aluko is a politically exposed person and was subject to enhanced due diligence by banks, law firms, wealth management firms as to the source and legitimacy of any funds he transacted in respect of. Persons connected to him at the Africa50 Fund are also each politically exposed persons.

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RCMP charge man in Alberta for money laundering for acting as a finder

By Christine Duhaime | February 25th, 2017

The RCMP has arrested Neil Andrew McDonald in Alberta for money laundering and fraud in connection with finding $240,000 from 7 investors in 2015 in Alberta, in violation of securities law.

It is unusual for Canadian prosecutors outside of Quebec to attach a money laundering offence to a serious predicate offence, especially for securities fraud and this signals a change among Canadian prosecutors.

In this case, it appears that Mr. McDonald may have been acting as a “finder” – a term that describes an unlicensed person who “finds” investors to invest in deals. In some cases, a finder is able to act in finding investors provided they comply with securities legislation by, among other things, filing disclosure statements that they acted as a finder. The arrest of Mr. McDonald is the first one resulting from a joint investigation in Alberta of the Alberta Securities Commission, the RCMP and prosecution office.

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US extends GTOs for tracking money laundering in real estate

By Christine Duhaime | February 23rd, 2017

The US Treasury has announced that it is extending its Geographical Targeting Orders to identify purchasers of luxury real estate properties in six areas in the US. The GTOs require title insurance companies to identify the natural persons behind shell companies used to pay all cash for high-end residential real estate.

A Special Agent with the US Department of Homeland Security said: “We don’t come across [money laundering in real estate] once every 10 or 12 cases – we come across real estate being purchased with illicit funds once every other case.”

FinCEN reported that 30% of the transactions covered by the GTOs involve a person (natural or legal) that is the subject of a previous suspicious activity report for money laundering, and is consistent with the concerns of FinCEN that shell companies and beneficial structures are used to buy luxury real estate. The GTOs are important to understand financial crime being used for real estate. As a Miami area lawyer noted: “It’s not good for real estate or for business if illicit dollars are artificially inflating the market. And law enforcement doesn’t want real estate to be a safe haven for money laundering.”
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The waitress, the casino, the money laundering scam

By Christine Duhaime | February 16th, 2017

The CEO of Mohegan Tribal Gaming Authority has resigned following a review by the Pennsylvania Gaming Control Board that indicates the possibility of financial irregularities at the Mohegan Sun Pocono Casino. The irregularities stem from charges laid against three people, Robert Pellegrini, Mark Hetitzel and Rochelle Poszeluznyj, who conspired to scam the Casino out of $400,000 and launder the proceeds of crime.

Poszeluznyj, a champagne cocktail waitress, pleaded guilty to defrauding the Casino of $419,000 for over a year and could serve up to 20 years in jail. The plan was concocted from a love triangle involving Poszeluznyj with two different men. When her relationship with one of the men soured, he informed the police about her scam.

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