FinCEN issues money laundering advisory for Iran’s use of Bitcoin and digital currencies

By Christine Duhaime | October 14th, 2018

FinCEN has issued an advisory for Iran that specifically is targeted for digital currency exchanges, banks and foreign banks so that the latter can understand their obligations under the correspondent banking system. The advisory is interesting because it is one of first instances of an attempt to provide guidance to foreign banks in respect of the reach of US financial crime law arising from the correspondent banking system. Often foreign banks, and in particular, digital currency exchanges, are not aware of the correspondent banking system and how US AML / CTF / sanctions law is applicable to them.

The practice in Iran is to move money out to Dubai and from there, banks and money services businesses sanctions-strip the money and move it to the US, Germany, UK or Canada. Sanctions-stripping is a method of providing originating information for banks that strips the origin of the money from being associated with Iran.

The Advisory directs US correspondents to go back to foreign banks they provide services to (most Canadian banks) and seek additional information to ascertain that they are not being used for sanctions avoidance from Iran. In other words, to determine if sanctions-stripping of data occurred.

Here is a common example in Canada –  an Iranian foreign national, almost always an undisclosed politically exposed person (“PEP“) immigrating to Canada opens a bank account in Dubai and wires money to that bank. The bank then wires it to a Quebec bank as part of a paid investor immigration program and strips out the originating information that the funds originated from Iran. The Dubai bank and the Quebec bank know the funds involve an Iranian foreign national (the latter because they administer investor immigration funds) but that information is not disclosed. The money moves through a US correspondent bank in New York as originating from Dubai. The US correspondent bank is unaware that it handled Iranian funds from a PEP that may be subject to US sanctions. The US correspondent bank is then exposed to potential criminal liability in the US for unknowingly dealing in funds from Iran.

According to the Advisory, officials tied to the Central Bank of Iran, in particular, are being deployed to move money internationally to finance terrorism through Dubai and other cities in the United Arab Emirates. The Advisory provides examples including of an Iranian airline that moved money to Canada through Germany to finance terrorism. All Iranian foreign nationals use third parties and third party countries to move money – they have to because it is near impossible to export money in any form from Iran directly to another foreign financial institution.

Except it is possible with Bitcoin and other digital currencies because they are decentralized and are outside of the formal financial system. The Advisory estimates that at least $3.8 million is exiting Iran through Bitcoin annually from Iranian and foreign digital currency exchanges and OTC trades (referred to sometimes as peer-to-peer).

And that brings us to so-called sovereign initial coin offerings (“SOV“) that are ICOs issued by a government. A SOV is a new digital currency issued off an existing or a new Blockchain by a government agency. Venezuela is an example of a country that issued a SOV called the Petro coin for sanctions avoidance on the NEM Blockchain, that can be bought with NEM coins. Here, you can read about how millions of dollars of stolen NEM coin were apparently OTC traded at a Vancouver digital currency exchange which means that the Petro coin from Venezuela issued for US sanctions avoidance, can be bought with NEM at a Vancouver digital currency exchange without visibility since that exchange trades NEM. If you can buy the Petro coin in Vancouver with NEM for sanctions avoidance, you will be able to buy an Iranian SOV.

Last month, Iran issued a notice that it was working on a SOV and the concern is that it will be used, like Venezuela, for sanctions avoidance.

The Advisory suggests that banks and foreign digital currency exchanges monitor IP addresses and engage in Blockchain tracing to ascertain the original of digital currency trades from Iran, although the latter is harder to do than the Advisory suggests. No Blockchain identifies the origination of a transaction – only IP tracing can do that and with Iran’s heavy use of VPNs country-wide, such tracing is difficult. You can, however, trace to Iranian wallets and that is where the focus should be on, in addition to utilizing solid AML, CTF and sanctions compliance methods. And in addition, banks and digital currency exchanges should know the typologies in respect of Iran — for example, the trades of digital currencies involving Iran in Canada typically take place involving former Iranians in Canada with a Canadian passport. That is because the movement of money to and from Iran is closely transacted among persons of Iranian origin and specifically those with a Canadian passport.

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ICOs & tokens increasingly attracting FBI criminal attention

By Christine Duhaime | October 8th, 2018

According to this interview with FBI’s Financial Crimes Section Chief on CNBC, the FBI is seeing an increase in the number of complaints and cases opened involving digital currencies and crime. In particular, the FBI said that it is mostly ICOs and associated investment fraud schemes involving Bitcoin that are on the raise for investigations where retail investors (e.g., the public) is the target.

According to the FBI, criminals are increasingly using Bitcoin for crimes and as a result, the FBI is liaising with the Five Eyes to learn about digital currencies and crime. However, cash is still king for crimes because of the fact that there is always an intersection point when dealing with digital currencies.

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7 Russian foreign nationals indicted in US for alleged money laundering and hacking of Canadian / US agencies

By Christine Duhaime | October 7th, 2018

The Department of Justice announced the indictment of 7 Russian foreign nationals in Pennsylvania for their roles in an alleged hacking of anti-doping sports agencies, including one in Canada called the Canadian Centre for Ethics and Sports. According to the indictment, the indicted persons hacked into computers for several years to allegedly influence sports doping and used Bitcoin to facilitate the payment of domain names and to use servers. According to the indictment, the defendants hacked into computers remotely from Moscow and also hacked into agency computers and mobile devices by gaining access to hotel and airport wifi networks. The defendants allegedly traveled to Brazil and Switzerland to hack hotel wifi networks to obtain log in credentials, and once they had access, they conducted large-scale exports of data. The indictment also alleges that the defendants acquired Bitcoin from mining, which offers a way to acquire Bitcoin relatively anonymously because the only connection point (and therefore identifying point), is the IP address.

You can read more here.

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Hezbollah financier arrested for laundering $10 million at casino

By Christine Duhaime | September 22nd, 2018

An alleged financier for Hezbollah, Assad Ahmad Barakat, was arrested in Brazil, accused of laundering $10 million at a casino in Argentina. In 2004, the US Treasury said Barakat was one of the most influential members of  Hezbollah, a listed terrorist organization. It accused him of using his businesses in the border areas of Brazil, Paraguay and Argentina as a front for fundraising for Hezbollah as well as coercing local shopkeepers into giving money to the organization. Barakat is on the US sanctions list.

Paraguay has stated that it believes Barakat financed the 1994 attack in Buenos Aires that killed 85 people.

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Iran using ghost supertankers to avoid sanctions law

By Christine Duhaime | September 22nd, 2018

According to this article in the Financial Times, Iran has sent a supertanker, called Happiness I, en route to Asia, carrying 2 million barrels of oil that is off-the-radar literally, in order to obfuscate that it is transporting Iranian oil to another country. When ships are off-radar, they turn off their transponders and are no longer broadcasting their positions.

Off-radar shipping by Iran is in response to the new US sanctions imposed against Iran that come into effect on November 5, 2018.

Although many EU nations appear to oppose the renewal of US sanctions against Iran, their opposition has little effect because oil sales involve the private sector (banks, law firms, insurance firms, refineries, accounting firms), and it is the private sector that needs access to US correspondent banks to survive. Engaging in commerce with Iran, including dealing with Iranian oil, is too much of a risk for the private sector. Even Turkey, which buys 7% of Iranian oil, decreased its purchases by 45%.

Officials are suggesting that the US government intends to ramp up sanctions enforcement against the private sector, mostly as against foreign banks with US correspondents or operations in the US which gives them jurisdiction, that facilitate sanctions avoidance involving Iran or Iranian foreign nationals.

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New York AG releases integrity report on digital currency exchanges

By Christine Duhaime | September 20th, 2018

The New York Office of the Attorney General (the “OAG“) released a report yesterday on the integrity of digital currency exchanges. It sought the voluntary participation of exchanges including Bitstamp, Coinbase, Binance, Huobi, Bitfinex, Kraken, Bittrex, Gemini and Poloniex, among others. The OAG noted that Binance and Kraken declined to participate, citing the fact that they said that they do not allow trading from New York. The OAG suggested otherwise and referred them to the Department of Financial Services for potential violations of the law.

The key findings of the OAG are not positive. It found that:

  1. Protection of customer funds are often non-existent or limited at digital currency exchanges. The AG noted that digital currency exchanges lack audit standards and transparency and there is no independent auditing available to confirm statements made by digital currencies exchanges that they possess customer funds. The AG noted that customers are at risk of the unauthorized withdrawal of their funds and misappropriation.
  2. No safeguards exist at exchanges for integrity and surveillance of trading patterns.
  3. Owners and insiders of exchanges often trade on their own insider information and exchanges have no conflict of interests policy to protect customers.
  4. Some exchanges, which include Bitfinex according to the OAG, are not authorized to operate in the US and when it comes to anti-money laundering law, they do not comply with AML law when onboarding and seek, for example, only an email address to open an account and complete a financial transaction.
  5. With respect to sanctions and terrorist financing, exchanges usually use IP addresses to block certain countries but the OAG found that only Bitstamp and Poloniex used technology to combat VPNs to be able to confirm that they are not accepting financial transactions from sanctioned countries.
  6. Most exchanges do not have so-called formal bank accounts to allow fiat to digital currency trading. (A formal bank account is a corporate bank account in the name of the exchange. Some exchanges open bank accounts using names of other entities, or accounts in the name of a natural person to hide that they are an exchange.  That practice constitutes bank fraud in some countries).
  7. Some exchanges do not address manipulative or abusive trading activity.
  8. No exchanges have objective criteria with respect to listing ICOs for transparency and do not disclose fees charged to list an ICO.
  9. Data security is not tested at a few exchanges, including Bitfinex and Tidex.
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CEO of the exchange OKCoin allegedly stalked by several customers demanding back investments in digital currencies

By Christine Duhaime | September 15th, 2018

According to Caixin, China’s most influential media company, the founder and CEO of  the Chinese digital currency exchange OKCoin, Mingxing Xu, 徐明星, was stalked and chased to a hotel in Shanghai by angry customers of his exchange.

Later that day, he was taken to the Shanghai police station and detained overnight and part of the next day for questioning.

It is not clear whether he was held as a victim, a witness or as a possible defendant but another media organization in China reported that a criminal complaint was approved in connection with OkCoin but no one has confirmed this yet.

Apparently, several of the customers of OKCoin also went to the police station. According to some of the customers interviewed by Caixin, they were prevented from selling Bitcoin and other digital currencies online at OKCoin.

According to news reports, the police in China are investigating whether it is true that customers were prevented from selling. Exchanges, like brokerages, must follow customer instructions and complete a trade or they are liable for losses incurred by the delay and also like brokers, they are liable if an exchange refuses to return funds to the customer.

OKCoin operates in China and the US and is one of the largest exchanges in the world.

Two months ago, the founder of the ICO Skycoin, Brandon Smietana, was allegedly  threatened, beat up, robbed and forcibly confined at his home in China for several hours by his own employees who forced him to transfer 18 Bitcoin to them.

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Did Canada just seize enough carfentanil from an alleged drug dealer that could have been used to kill hundreds of millions of people?

By Christine Duhaime | September 2nd, 2018

Last fall, the police in Ontario arrested a person named Maisum Ansari who lives in the suburbs of Toronto, who had in his home approximately 42 kilograms of carfentanil, or a substance containing carfentanil.

42 kilograms of carfentanil is a massive amount and likely the largest seizure by law enforcement in the history of seizures of carfentanil. According to Europol, before the seizure in Canada, the largest single seizure of carfentanil was 440 grams seized in the UK in 2017.

Carfentanil is 100 times more potent than fentanyl.  According to the AG of New Jersey, 45 kilograms of fentanyl is enough to kill 18 million people. A similar amount of carfentanil, at 100 times the potency of fentanyl, is enough to kill 100 times that number – which is somewhat less than 1.8 billion people, assuming it is of the same purity. And even if it is of a lesser purity, it is still enough to kill tens of millions of people. The purity in drug seizures typically ranges from 0.00034% to 0.13% carfentanil.

What a person in suburban Toronto was doing with that much carfentanil is unknown. And we also do not know where he got it from. There are no minimum doses of carfentanil that are known to be safe for humans. For the less potent fentanyl, the lethal dose is between 1-2 milligrams (which is similar to a few grains of salt).

Carfentani is a opioid sedative used for large animals, mostly elephants. It affects the central nervous system and depresses respiration. An overdose can cause respiratory arrest and death.

The amount of carfentanil seized in the home of Ansari suggests it may have been contemplated for terrorism-related purposes rather than drug trafficking because it’s simply too much volume. Carfentanil could be used by terrorists as a WMD and hence is a money laundering and terrorist financing concern under the FATF Recommendations for banks and the AML community who are tasked with safeguarding the financial system. Carfentanil is believed to have been used in Russia in 2002 in aerosol form to end a stand-off with hostages which resulted in the death of 117 people.

It’s not the first time Canadians have been identified as major players in the fentanyl and carfentanil trade – in late 2016, 50 million lethal doses of carfentanil were shipped to Canada from China, labelled as printer ink. Last month, the DHS, DoJ and FBI, among others, identified a Canadian man as the third largest fentanyl trafficker in North America. And Interpol issued an international wanted notice for a Polish gangster who was given immigration status in Canada named Wojciech Joseph Grzesiowski, wanted for trafficking fentanyl and carfentanil for the leading mafia organization, the Ndrangheta.

Europol and the European Monitoring Centre for Drugs and Drug Addiction reported that in 2017, 62 grams of carfentanil was seized in Vancouver, Canada, which originated in Hong Kong and transited through Germany.

As well, it was a Canadian owned and operated darknet site, AlphaBay, that facilitated most of the illegal drug sales, including fentanyl and carfentanil, online for quite a number of years until the US took them down.

Carfentanil and fentanyl have been linked to a significant number of overdose deaths in the US and Canada. Carfentanil is added to mixtures of heroin and cocaine and sold on the street.

Carfentanil and other fentanyl-related compounds are a serious danger to public safety, first responders, postal service employees and forensic laboratory personnel. It is also a significant health risk to bank employees who handle cash.

Ansari was charged with 337 offenses related to possession of illegal guns and possession of carfentanil for the purposes of trafficking. Later arrested was Babar Ali, who is alleged to be connected to Ansari.

Ansari is connected to Faisal Hussain, the man who killed two people and wounded thirteen others on July 22, 2018, in Toronto, using a semiautomatic gun.

Carfentanil is imported to Canada (usually Vancouver) from China illegally, paid for with Bitcoin, and then distributed to the US. More recently, it is believed that the CJNG in Mexico are pivoting into the fentanyl business because of the higher profit margins.

The World Health Organization just recently recommended that carfentanil be listed in the Single Convention on Narcotic Drugs.

Chemically, carfentanil is methyl 1-(2-phenylethyl)-4-[phenyl(propanoyl) amino]piperidine-4-carboxylate.

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US and China continue joint investigation into fentanyl trafficking

By Christine Duhaime | September 2nd, 2018

This week, US and Chinese law enforcement announced the continuation of a joint investigation into fentanyl production and trafficking with a view to tackle the problem through money laundering investigations to identify TCOs involved.

As part of the announcement, China said that on September 1, 2018, it banned two fentanyl variants. In February 2017, China banned carfentanyl.

The DHS said that 35 persons have been identified and are in custody (but not named) that are associated with fentanyl trafficking in this specific case. Officials from the city of Xingtai, China, were in New Orleans as part of the investigation and announcement.

Two years ago, a 14-member delegation from the DEA spent a week in China meeting with Narcotics Control Bureau and Public Security Bureau officials in China to train them on investigating money laundering activities that would reveal fentanyl sellers.

Fentanyl is 50 to 100 times stronger than morphine, has been linked to hundreds of overdoses and deaths in the US annually, and over a thousand deaths a year in Vancouver, Canada. Fentanyl is often mixed into heroin and drug purchasers often have no idea that they’re taking fentanyl.

Illicit fentanyl trafficked in the US comes from Canada, China and Mexico. Xingtai is a key city in China where fentanyl is manufactured. Vancouver is a key city in Canada where fentanyl is shipped to before heading to the US. Vancouver is important because Canada is known for its relaxed approach to financial crime investigations and prosecutions.

Fentanyl from China is often paid for with Bitcoin (see online ad below from Xingtai for the illegal sale and export of carfentanyl for payment in Bitcoin although the ad may be a plant because the price for a gram of carfentanyl is not $30 and no one is named “Judy” in China, for real or for cover).

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Iran sues US over sanctions

By Christine Duhaime | September 1st, 2018

The Islamic Republic of Iran is suing the US at the International Court of Justice (ICJ) over the US sanctions annouced on May 8, 2018. ICJ is the forum for the resolution of disputes among members of the Untied Nations.

Iran is claiming that the sanctions of May 8, 2018, violate the Treaty of Amity entered into by the two countries in 1955. The court application of Iran is unclearly drafted but it seems that Iran is seeking an injunction to prevent the further application of sanctions, as well as a declaration that the sanctions are illegal, and damages for the harm allegedly caused by the sanctions to Iranian foreign nationals. What Iran appears to want more immediately, is the ability to continue to acquire aircraft parts from the US and EU.

It may be an uphill battle for Iran to argue its case on the basis of the Treaty of Amity because it is inconsistent with its conduct.  The Treaty covers, among other things, the protection of diplomatic relations and diplomats, as well as financial and commercial activities. The Iranian hostage crisis demonstrated that Iran had no intention of adhering to the Treaty. During the Iranian hostage crisis, 50 American diplomats, who were protected by the Treaty of Amity, were kidnapped from the US Embassy in Tehran, held hostage and some were severely mis-treated for 444 days.  The US Embassy is Tehran is also protected by the Treaty of Amity. Despite that, it is occupied by the Iranian Revolutionary Guard. The Iranian judiciary does not appear to acknowledge or abide by the Treaty of Amity either – for example, in this case, they ruled that foreign nationals do not have the same rights as Iranians in commercial matters in Iran – a ruling which is inconsistent with the terms of the Treaty of Amity.

Even if the Treaty of Amity is held to be in force, its terms specifically allow the US to take all steps to maintain or restore peace and security and to protect international security. The imposition of sanctions against Iran was pursuant to executive power to preserve the international financial system for international security purposes.

And moreover, sanctions required to protect against the movement of proceeds of terrorist financing that may originate from Iran and are routinely moved through Dubai, are authorized by legalization from the United Nations and supersede the Treaty of Amity, even if it is in force.

And finally, if Iran has a dispute with the US in respect of sanctions pursuant to the JCPOA, it must use the dispute resolution mechanism in that agreement to resolve them.

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