Offshore advisory firm that once advised Crocodile Dundee star pleads guilty to helping wealthy clients hide money in tax havens

By Christine Duhaime | November 23rd, 2020

Strachans SA

Last month, Strachans SA, pleaded guilty in the US to hiding income and assets in offshore bank accounts, and in various corporate entities from tax authorities for its clients. Strachans SA was an accounting and financial services firm based in Jersey and Switzerland. In 2013, it became news-worthy when it and/or one of its shareholders were accused of the disappearance of US$34 million owned by Crocodile Dundee star Paul Hogan, that it had helped Hogan park in offshore bank accounts.

Strachans SA created trusts, foundations and companies in offshore jurisdictions for clients and acquired banking for them using those corporate documents at financial institutions around the world. Interestingly, it earned US$4.7 million in fees in five years from 60 US residents, and other fees from non-US residents. One of its founders was an accountant named Philip Egglishaw.

2020 Interpol notice of Egglishaw (Source: Interpol)

Offshore advisory services

Offshore entities created by professional facilitators to hide money and defeat the rule of law on behalf of clients, must acquire assets from the evading clients and must be able to facilitate those evading clients to subsequently have access to those funds (sometimes referred to as repatriation of funds), both in ways that obfuscate the trail of money so that no law enforcement agency has visibility on the assets and the person behind the assets. That’s essentially the service they offer.

One can think of it as a two-way street for investigations purposes in terms of the movement of money – the professional services firm sits in the middle as the conduit for the intake of wealth being exited from country “A” and then is the conduit for the shipping back of that wealth in tranches to country “A” over the course of several years. The shipping back of wealth is the part that is high risk for these type of bad actors and that part of their services is where more resources are expended in creating layers to obfuscate money movements.

Fake loans, fake consulting contracts and dummy invoices

In order to manage that part of the services that involved repatriation of client funds, Strachans SA admitted that it created fake loans, fake consultancy agreements and dummy invoices for clients.

For example, under the fake consultancy arrangements, a Strachans SA entity would fake hire the client for services that were never rendered, creating a false reason to send the client’s money back to them in a tranche as fake consulting fees when the client needed some portion of funds to spend.

Entertainment guru Glenn Wheatley, who was one of Strachans SA’s clients in Australia said he used the fake loan scheme to repatriate money he had hidden offshore. The way he described repatriating his hidden money from Switzerland to Australia was as follows: “all I had to do was approve the transaction. The lawyer sent the money off, deducted his secret fee and arranged for the money to come back as a loan.”

In a Strachans SA proceeding in Australia, a Supreme Court judge referenced one document written by a law firm describing a repatriation scheme, which gave instructions that 25% of client funds moved to an entity to be repatriated were to be retained. While it’s not clear, 25% appears to be the secret fee that Wheatley says was payable, and if that is the case, it suggests that a law firm extracted a 25% cut to launder money and created the documentation to paper the money laundering transaction.

Credit cards in fake names

Certain clients of Strachans SA said that Strachans SA arranged for them to be given branded credit cards issued by MasterCard or Visa in fake names to use as a method to repatriate their funds from Switzerland.

The issuing and mailing of credit cards to other countries, and more particularly charge cards, are a significant money laundering vehicle often used for sanctions avoidance and to evade currency controls.

Strachans SA also placed some client funds in the personal bank accounts of the shareholders of Strachans SA, and in essence its shareholders then became the personal bankers of the clients, holding their funds to make sure that tax authorities would not suspect its provenance.

Australia’s investigations

The Strachans SA offshore services scheme first came to light in Australia.

In 2004, the Australian government seized a laptop owned by Egglishaw. The laptop contained the files of the clients of Strachans SA and communications among clients and the firm. Egglishaw brought a motion for the suppression of the information on the laptop and lost. Based on the information obtained by Egglishaw, the government commenced a criminal investigation into suspected money laundering and fraud by Australian residents using Strachans SA and a bank it owned called Corner Banca SA in Lugarno, Switzerland.

On June 9, 2005, Australian federal police executed 48 search warrants over two days at law firms and accountant’s offices who were involved directly, or indirectly through clients of Strachans SA, and at the homes and offices of clients of Strachans SA.

Authorities had at first attempted to obtain information from law firms and were met with barriers of claims of privilege. They then obtained search warrants for client files on the basis of the exceptions to privilege and confidentiality over client files (arises when advice is sought or obtained in furtherance of unlawful conduct, wittingly or unwittingly involving a law firm).

Philip de Figuereido

A director of Strachans SA, Philip de Figuereido, was extradited to Australia from Jersey for money laundering and fraud, and spent a few years in jail. He then returned to Europe.

Philip Egglishaw

Egglishaw was charged with various offences in Australia connected to Strachans SA. He was alleged to have masterminded a US$2 billion offshore fraud scheme. He disappeared from Australia.

In 2013, an Interpol red notice was issued for his arrest.

On May 3, 2017, Egglishaw was located in Italy and arrested. He was released by an Italian court which held that the charges against him for fraud and money laundering had taken too long to be prosecuted.

Philip Egglishaw under arrest (Source: YouTube)

In 2017, a reporter located Egglishaw apparently living a lavish lifestyle at a mansion he had purchased in 1999, on the French Riviera in the town of Saint Paul-de- Vence near Nice. The mansion features a swimming pool, tennis court and manicured grounds and Egglishaw owns a Bentley, a Lamborghini, a black Mercedes and an Audi sports car. His brother, another shareholder of Strachans SA, allegedly owns a villa in Nice a few miles away.

Litigation involving Strachans SA over MLATs and trust documents

In 2012, Strachans SA was successfully sued in Jersey by the beneficiary of a family trust that it had set up for a client who was seeking information, as a beneficiary, on funds held in trust. The beneficiary was concerned by the investigation of Strachans SA by the Australian Crime Commission and the arrest of its director, Philip de Figuereido, and feared that the assets of her family trust had been misappropriated. Egglishaw refused to provide trust account information to her. Strachans SA and a trust company called Roker Trustees, who worked with Egglishaw, took the position that unless the beneficiary indemnified them in respect of their conduct of the file, and the funds they managed, she was not entitled to trust information. Strachans SA and Roker Trustees were not successful in the litigation to hide trust statements from a beneficiary.

In 2008, Strachans SA sued the Australian government over its use of MLATs with Switzerland for information on its affairs in that country. MLATs are agreements between countries for the provision of information where the conduct of a legal or natural person in the requesting country involves criminal offences but MLATs have been misused for information in connection with investigations into regulatory offences to obtain information.

In this case, Switzerland pushed back in respect of the MLAT request and sought evidence that the alleged conduct was criminal (in criminal legislation) and was conduct that could be proven to be attached to the person(s) who were the target of the MLAT. Records and information obtained by MLATs that are not compliant with the terms of MLATs or national laws, can be challenged and derail a prosecution or later overturn a conviction because the evidence is tainted (poisonous tree doctrine(1)). Switzerland ultimately refused to proceed against Egglishaw because of the inability to tie the conduct to criminal offences under national criminal legislation provably attributed to Egglishaw.

Interestingly, one of the key points of argument in the MLAT litigation commenced by Strachans SA was correspondence by law firms giving instructions to Strachans SA for the movement of money for repatriation via fake documents and the 25% retainer that was to be deducted from funds back to the clients. The Australian government provided, among other things, these types of law firm communications to establish that the conduct constituted criminal offences under criminal statutes and ergo met the terms of the MLAT. Strachans SA argued that the communications were documents from law firms, not them and to the extent it evidenced criminality, it was in respect of the authors of the documents, not them. The Court agreed with Strachans SA on that point.

You can read more about the leading case on MLATs here. That case,  Elgizouli v. Secretary of State for the Home Department, which involved the ISIS Beatles, was brought about when the mother of one of the ISIS Beatles learned years after the fact that an MLAT request had been used to provide information about her son to the US government. Despite the passage of years, she was able to bring a judicial review application to prevent the use of written records and information in respect of her son being shared with the US government.

MLATs can be challenged on two fronts – by a natural or legal person in the requesting country arguing that the originating MLAT suffers some legal impediment to be effective (like Strachans SA did) under the laws of the requesting country, or in the receiving country arguing that the receiving MLAT, if complied with, violates the rights of the natural or legal person targeted under the receiving country’s laws (like Ms. Elgizouli did). They can also be challenged by a legal or natural person if an MLAT was used inappropriately to share or obtain information irrespective of the outcome of an investigation, or if too much information was sought or obtained that falls outside the four corners of the intended purpose of an MLAT.

(1) The fruit of the poisonous tree doctrine is 100 years ago and arose in Silverthorne Lumber Company v. US, after LE seized corporate records without legal authority and photographed them. In 1910, US Courts held that evidence obtained without legal authority cannot be used in trials (Weeks). Silverthorne Lumber later established that evidence obtained without legal authority could not be used at all (not just not for trials). The doctrine is still alive today as part of American jurisprudence and is subject to some exceptions.

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Jimmy the Henchman, money-order money laundering and lawyer conflicts

By Christine Duhaime | November 13th, 2020

In case you missed it, in the middle of the first wave of Covid-19, James Rosemond, who is aka Jimmy The Henchman, lost his last appeal of his third conviction for charges of murder-for-hire and is now serving seven life sentences in US federal prison.

The Game talks about Jimmy the Henchman (Source: VladTV Channel on YouTube)

Rosemond founded Czar Entertainment in 2003, and managed the careers of several big names in the entertainment industry, including Akon, Mike Tyson, Sean Kingston and The Game.

Drug trafficking and money orders

Several years after starting his music company, he was charged pursuant to a thirteen-count superseding indictment, along with several co-defendants, charging that he had led and operated a criminal enterprise since 2007 which generated more than US$11 million a year in proceeds from cocaine distribution and that he had laundered the proceeds of crime.

Rosemond’s narcotics trafficking operations moved cocaine and proceeds of crime between LA and New York. The method in which he laundered money was through the US Postal Service in which cash proceeds were converted into money orders. Rosemond used those money orders to pay rent and tuition.

Murder-for-hire trials

He was later charged with arranging a murder-for-hire.

In 2007, members of a rap music group known as “G-Unit” assaulted Rosemond’s son outside his New York apartment. G-Unit was run by rapper 50 Cent.

James Rosemond Jr. speaks about his father (Source: GlobalGrindTV Channel on YouTube)

In 2009, Rosemond recruited a crew to kill Lowell Fletcher, one of the G-Unit members who had assaulted Rosemond’s son, in retaliation. Fletcher was killed on September 27, 2009, with a handgun owned by Rosemond.

Rosemond was tried three times for the murder-for-hire of Fletcher. However, the first trial was declared a mistrial. He was convicted in the second but the conviction was vacated by the US Court of Appeals for the Second Circuit. He was convicted in the third trial and in May 2020, lost an appeal of that conviction.

Lawyer conflicts from representing a criminal unit and one of its members

In 2011, the Rosemond case became note-worthy as well over complex issues that arose over potential lawyer conflicts.

What happened, in part, was that the government made arguments pursuant to Wheat v US and its progeny to have Rosemond’s lawyer disqualified for reasons of institutional integrity.

It argued, among other things, that Rosemond’s lawyer would be in the position of an unsworn witness, partly because of the fact that his law firm received a large payment for legal services in trust from funds that could not be attributed to revenues from Czar Entertainment or Rosemond. That placed the law firm in the position of being a witness against its own client in respect of the payment it had received. Since it was possible that it would be a witness, it could not also act for the client.

House counsel doctrine for organized crime members

Another lawyer conflict arose by virtue of the fact that the government argued that Rosemond’s lawyer was what are called “house counsel” in Mafia and criminal enterprise cases – meaning in essence that the law firm was akin to an in-house counsel, corporate lawyer, except to unincorporated entities (called criminal units) that form crime organizations.

In this case, the law firm – the “house counsel” – acted for the Rosemond enterprise (the criminal unit) and then crossed-over and acted individually for Rosemond (the person). It was the “house counsel” because it had acted, in the past, for more than one of the defendants in the ad hoc criminal enterprise, which in this case was the drug trafficking activities of Rosemond and his partners. Moreover, in the specific prosecution, one of the lawyers of the firm had met with a witness to discuss the government’s investigation, which meant that it could not then act for Rosemond. The multiple representations and the crossing-over placed the law firm in a conflict.

In a Canadian version, the same would apply for law firms that act for the Hell’s Angels, for example. Issues arise if they then act for any one of the individual members of that organization under the conflicts rules associated with the “house counsel” doctrine. To be clear, the “house counsel” doctrine necessarily starts with the law firm acting individually for one person of a criminal group – not the organization per se – and kicks in once the law firm acts for a second member. Lawyers may cross-over into conflicts without knowing that there is a house counsel doctrine that governs conflicts in respect of criminal enterprises, even if they are ad hoc, as in the case of Rosemond’s group.

The underlying conflicts rule when it comes to legal and natural persons is that a firm is not supposed to defend both a legal person (a company) and its directing minds (directors and officers) or members (shareholders or gang members) whether the defence is in a criminal, civil or regulatory matter.

Another conflicts problem arose in that the lawyer’s firm had previously acted for one of the parties besides Rosemond in the proceeding and that necessarily meant that the law firm’s interests diverged – the law firm could not honor its obligation to the former client not to act adverse in interest to it while it was subsequently representing Rosemond (the current client) in a litigation – the positions were not reconcilable.

Convictions have been overturned when law firm conflicts are present and lawyers have not disclosed them; ceased to act; or obtained, if possible, waivers in respect thereof, which is why governments move early to remove lawyers from acting when they may be in, or appear to be in, a conflict of interest that may jeopardize a proceeding and the rights of any one defendant.

Not surprisingly, one of the grounds of appeal later argued by Rosemond during one of his many appeals was that he was denied the right to a lawyer (and law firm) who was conflicts-free.

There have been at least three “house counsel” doctrine cases that are known – perhaps more that were never reported, and the doctrine mostly is used in the US where government and defence lawyers, and Courts very strictly apply conflicts rules because of a greater awareness that a breach of conflicts rules can completely de-rail a criminal prosecution and overturn a conviction.

One of the very first “house counsel” lawyers went on to become, decades later, the defence lawyer for the leader of the largest criminal enterprise at one time – El Chapo.

When clients lie to government

The defence of Rosemond in respect of his drug trafficking trial was extraordinarily complex, partly because Rosemond had lied to the government and thus his lawyer was faced with the reality that lawyers are prohibited from assisting clients to be untruthful in their testimony. The lies made by Rosemond, which impacted and limited his options as a defendant, were described by the Court as the hand his lawyer was dealt from the client’s gamble to go down a path of being untruthful to government agencies.

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Vancouver-based Blok Technologies Inc. cease traded by BC Securities Commission

By Christine Duhaime | November 9th, 2020

Cease trade order

This week, the British Columbia Securities Commission (the “BCSC“) issued a cease trade order (“CTO“) in respect of the securities of Blok Technologies Inc., (“Blok“) a British Columbia issuer. The CTO was issued for a failure of the issuer to make certain required periodic financial filings on Sedar.

Bridgemark case

Blok is part of the so-called Bridgemark Group scandal, which is a securities law enforcement action by the BCSC against 11 issuers, placees, shareholders and alleged consultants of certain issuers which alleges in essence that funds raised by private placements went to alleged consultants who were paid lump sums of money in advance for consulting services yet allegedly performed no work.

Two issuers admitted consultants did not perform services

Two of the eleven issuers have thus far admitted they paid the so-called consultants from funds raised via private placements for the performance of no work. Many of the same persons, whether as legal or natural persons, cross-over into several of the issuers.

Late filed material contracts

In July 2019, we summarized some of the allegations against Blok (here). As at that date, no material contracts had been filed on Sedar in respect of the consultants or the pre-payment of some consulting fees, and its listing application did not disclose such information. Since then, Blok late filed consulting arrangements on Sedar.

According to those late filings, Blok entered into 23 consulting contracts for services, some of which involve pre-payment before services were rendered and many of which were for the duplication, triplication or more, of the same services. For example, many consultants were paid for the same described services such as web services, corporate services or M&A services. The chart below summarizes some aspects of the contracts in respect of Blok.

Who had consulting agreements?

Table Notes:
(3) The payment to 1113300 BC Ltd. of stock options was at $0.10 per option and may have been what are called in-the-money stock options by up to an amount of $0.18 each option. Based on the closing price of the stock of Blok as at August 7, 2018, an exercise of the options awarded to this consultant was equal to $135,000 if exercised after deducting the payment of the exercise price. An in-the-money stock option occurs when the exercise price is lower than the closing price of the stock so that the person is said to be in the money and no longer has to be incentivized. To grant a significantly below FMV stock option, a director’s consent resolution is required, as is the consent of the listing agency and often the regulator and a lawyer must then provide a securities law opinion in respect thereof for options grants.
(5) The payment to Link Media LLC was in USD. As at the contract date of August 8, 2018, it was equal to $227,902.50.

Almost $5 million paid to consultants

The total amount paid, or payable, to these consultants by Blok seems to have been $4,795,402.50.

On an annualized basis, the four highest paid were Tavistock Capital Corp., Kendl Capital Limited, Hunton Advisory Ltd. and 1113300 BC Ltd.

Fourteen of the consultants executed a precedent consulting agreement (pre-drafted) with terms that are, in substance, verbatim. Each of those fourteen agreed to indemnify Blok and third parties in connection with the consulting agreements for any lawsuits, claims, demands and proceedings, including legal fees for, inter alia, a breach of the consulting agreements or negligence arising in respect thereof, and in addition, to indemnify for omissions in providing contractual services. The BCSC position in the Bridgemark case allegations are that there was altogether a complete omission to provide services by many consultants.

The indemnity provisions surprisingly, do not cap liability at the amount paid under the consulting agreements and therefore, the indemnity amounts that can be sought are limitless and are at least equal to amounts suffered by claimant shareholders, the issuer and the regulator.

Normally, in a consulting agreement involving an issuer, the consultant indemnifies and saves harmless the issuer from and against all claims, actions, losses, expenses, costs or damages of every nature and kind which the issuer may suffer as a result of a breach of a consulting agreement by a consultant or the negligence of the consultant but the contract normally limits that by providing that the liability for any amount or claim, regardless of the form of action, whether in contract or in tort, cannot exceed the greater of the amount of insurance recoverable by the consultant for a claim and the contract amount.

With respect to Blok, each consultant confirmed in writing that it received, or was aware that it could avail itself of receiving, independent legal advice before signing the contracts under which they agreed to indemnify the issuers and third parties.

Schedule Bs created together?

The same fourteen consulting agreements late-filed on Sedar a year ago have an oddity about them. The last page of each agreement, its Schedule B setting out the compensation, presents as a different document – more specifically – presents as if all the Schedule Bs of all the fourteen agreements are one document at the end of each of the fourteen agreements.

They present that way because of what are called law firm footers. Law firms use numerical and sometimes alpha-numerical footers which are different as between firms. In the industry, one can know which law firm created or saved, certain documents by footers.

Footers are document filing and location tools, used so that lawyers can find their own documents in a system. They are auto-generated by document management software that works with word processing software.

The Schedule Bs in the 14 consulting agreements all have the exact same footer and version, namely 32678251.2 (.2 means it was the auto-generated second version of document 32678251).

But only Schedule Bs have a footer – the first 13 pages of every consulting agreement each have no footers at all. And in contrast, page 14 of each consulting agreement has the same footer, suggesting that the compensation schedules were subsequently created as one document separate and apart from the consulting agreements.

Why only one page of the 14 page consulting agreements, the Schedule Bs, of the 14 consulting agreements all have the exact same footer, down to the version, is a mystery. An example of the Schedule Bs of three of the 14 consulting agreements with the same footer is provided below.

No material consulting contracts filed by Cryptobloc yet

Not all the issuers in the so-called Bridgemark scandal have filed their material contracts on Sedar in respect of consultants, as required, which prevents shareholders from having visibility on those arrangements. Cryptobloc, for example, which has undergone two subsequent name changes and is now in the battery business, has not filed its material contracts for its consultants on Sedar. It continues to be listed, though, announcing the raising of more funds from investors and the entering into of new contracts, which are also not filed on Sedar.

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Narco jets – how next to no security and oversight at private jet terminals, fuels use of private jets to move US$1 billion worth of drugs and money for drug cartels

By Christine Duhaime | November 5th, 2020

Jetting money around for cartels

According to a seasoned former agent with HSI, who gave an interview to the Courier Journal, private jets are being used to move drugs and bulk proceeds of crime in cash for the Sinaloa cartel in Mexico, without much in the way of processes to give law enforcement visibility.

“The next time you look up and see a private jet, wonder to yourself: ‘Where’s it going? Where’d it come from, and what’s on board?’ “There’s a good chance it could be illicit narcotics”, the former HSI agent is quoted as saying in the Courier Journal article.

Security measures do not exist at secondary little airports that manage private jet passengers, luggage and cargo globally. According to the article, another HSI agent testified in a Court proceeding that private airports have “no security, no drug-sniffing dogs, no police and no TSA.”

The lack of security and oversight at private jet terminals creates gaps that criminal actors can and do exploit.

For example, Robert Carlson Jr., a California computer network specialist, used private jets and private little airports for a second job – to move over US$1 billion of drugs and cash across the US for the Sinaloa cartel. He was arrested in 2017, after police received a tip. He eventually pled guilty and is incarcerated in the US.

The company in Oregon that had rented its jet to Carlson Jr., lost it when it was seized and forfeited to the government.

It’s surprising that Carlson Jr. was not discovered earlier. His lifestyle was inconsistent with his employment. For example, Carlson Jr. had a US$8 million mansion and a Ferrari, ostensibly bought on his computer networking salary. A co-defendant of Carlson dealt with laundering the proceeds of crime in bulk cash for the Sinaloa that was moved by private jets throughout the US.

Narco jets crash and burn in Belize and Mexico

Narco jet abandoned in Belize in 2020.

In February, 2020, in Belize, a narco jet landed in Belize. It was flying “dark”, meaning its identification and tracking data were off. Its pilot and crew disappeared but it had 69 bales of cocaine onboard, which was seized by the government.

In 2019, another “dark” private jet made a rush landing in Belize along a private road. The jet broke in two shortly after the rough landing and the operators vanished with whatever was onboard. In terms of typology, it is believed to have been a narco jet, used to move narcotics and proceeds of crime.

Narco jet crashed and abandoned in Belize in 2019.

This summer, in Yucatan Peninsula, Mexico, a cartel performed an emergency jet landing and then set fire to the jet on a country road to avoid its seizure. It was detected by the Mexican military after it entered Mexican air space. Not far from the burning narco jet, officials found 13 sacks of cocaine weighing 850 pounds, with an estimated value of US$4.9million.

Burning and abandoned narco jet in Mexico in 2020.

Canada

Despite its small economy and having no corporate head offices, Vancouver, Canada, has a vibrant private jet sector that sustains many private and luxury jets business operators. Private jet trips from Vancouver are often destined for Vegas, Colombia and Mexico.

Using private jets to move proceeds of crime isn’t new. In 2014, a Canadian was indicted in Michigan, arrested and subsequently convicted for money laundering, with and through his American lawyer, using, among other mechanisms, private jets to move bulk cash to the offshore tax havens of Panama and the Bahamas.

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FinCEN assesses US$60 million penalty against owner of Bitcoin mixer / tumbler service

By Christine Duhaime | November 3rd, 2020

US$60 million penalty

On October 19, 2020, the Financial Crimes Enforcement Network (“FinCEN“) assessed a US$60 million penalty (here) against Larry Dean Harmon, the owner of two Bitcoin mixing and anonymizing services called Helix and Coin Ninja LLC. FinCEN found that the two entities were operating as unregistered money services businesses (“MSB“) which exchanged currencies, including Bitcoin, conducted financial transactions and provided services to mix, tumble and anonymize financial transactions.

Office of CoinNinja (Source: Instagram)

Anonymous payments for narco traffickers

For a three year period from 2014 to 2017, through Helix, Harmon’s entities pulled in over US$311 million and conducted at least 356,000 Bitcoin transactions. In total, Harmon oversaw over 1.2 million financial transactions without complying with the Bank Secrecy Act financial crime obligations as an MSB. FinCEN found that Helix processed US$121,511,877 darknet Bitcoin transactions. FinCEN’s investigation into the activities of Helix revealed that it processed payments for narco traffickers, fraudsters, those engaged in counterfeiting and other criminals.

Indictment against Harmon

Earlier in the year, an indictment against Harmon was unsealed in respect of his Bitcoin mixing services and in connection with a darknet search engine called Grams, that was part of Helix, that allegedly worked with the now-defunct illegal Canadian darknet site, AlphaBay, to launder money.  The indictment alleges that Harmon operated a money laundering service and promoted and obfuscated the proceeds of crime derived from drug trafficking and other darknet illegal activities. 

The Grams darknet site provided an index that allowed bad actors to sell stolen ID products, weapons and narcotics.

FinCEN found that Harmon’s entities provided services to just about all of the darknet vendor sites including Silk Road 2, Oasis Market, Russian Anonymous Marketplace, Middle Earth Marketplace, Hydra Market, Hansa Market, DutchDrugz Market, Dream Market, Black Bank Market, Agora Market, Valhalla Market and Wall Street Market and to darknet vendors that sold child pornography and child exploitation material using Bitcoin. It also did business with BTC-e, also shut down by law enforcement (although one of its co-founders resurfaced as part of PRIZM coin which surprisingly, one can buy in Canada at a registered MSB (here)).

Obfuscating transactions

Bitcoin tumbling and mixing services make tracing the flow of funds next to impossible and deprive people of the ability to take any action against parties that use those services when they have been defrauded, or suffer other legal losses.

With respect to Canada’s AlphaBay, it was shut down by US law enforcement (here). AlphaBay operated the world’s largest darknet illegal site accessible on TOR that resulted in the death of several teenagers from fentanyl overdoses. Its Canadian owner, Alexandre Cazes, was arrested by US law enforcement and committed suicide in custody before being extradited. 

Stated belief that illegal drugs are victimless; a legal right

In an interview on this website, a person identified as the founder of Grams and Helix, described Helix as the definitive Bitcoin cleaner and represented to the public that for a 3% fee, he will “clean your Bitcoin” and made this statement: “victimless crimes, such as using drugs, is everyone’s right and is the purpose of the darknet” and that he “likes being on the frontier of the Internet’s dark side.”

The super narcotics kingpin and major money launderer, Ross Ulbricht, made similar comments about access to illegal drugs being a legal right. He was sentenced to two life terms of imprisonment plus forty years with no possibility of parole, a sentence that was intended to send a message to others (presumably those providing similar darknet services) so that they “understand without equivocation” that if they break the law like Ulbricht, “there will be very, very severe consequences.” (see Q&A on Ulbricht’s trial here).

In terms of threat actors in the Bitcoin mixing and tumbling space, the marketplace is beginning to see some actors who ran Bitcoin mixing and tumbling services reinvent themselves as ostensible legitimate operations under new brands with attempts to align with international law enforcement agencies and financial crime standard-setting bodies.

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Narco subs, drug cartels and Canada – new threats on the horizon to international security

By Christine Duhaime | October 26th, 2020

Narco subs

In the last few months, an increasing number of so-called narco subs, also called drug subs, have been intercepted in international waters by law enforcement (“LE“). A narco sub is usually a self-propelled semi-submersible (“SPSS“) used by drug traffickers to transport large quantities of illegal drugs for cartels to an international market.

SPSS are stealthy and often go unnoticed and have grown in popularity so much that US officials now estimate that more than 30% of cocaine trafficked into the US enters from SPSSs. Many SPSSs are self-driving.

Security concerns

Of concern for international security is the risk that such vessels may be used by terrorists or agents engaged in state-sponsored terrorism to transport weapons of mass destruction undetected, or to attack the US or Canadian coast along the Pacific Ocean. Terrorist organizations and drug cartels already have existing trade and money laundering relationships.

More sophisticated narco subs

In August 2020, a 100 foot narco sub was found by LE in Colombia in a river in the jungle, which if operational, could carry about US$200 million in cocaine. A few days after that discovery, Colombian LE seized a SPSS carrying US$18.2 million of cocaine being transported for Mexico’s leading cartel, the Jalisco New Generation Cartel (“CJNG“). Colombian LE believe the SPSS is owned by the CJNG.

On a small scale, a personal submersible was used by a Canadian in a kind of a James Bond move to smuggle cash and 265 pounds of illegal drugs along the bottom of the Detroit River from Canada to the US in June, 2020. The vessel was equipped with two cameras, wifi and operated at more than 13 miles per hour. It is the first known case of a personal fully submersible vessel being used underwater to smuggle drugs between Canada and the US.

Both pale in comparison, however, to the November 2019, detection and seizure of a 66 foot fully submersible submarine captured off Spain transporting US$100 million in cocaine from Colombia that has transited through a third country, likely Brazil and crossed the Atlantic Ocean.

Narco sub seized off Spain (Source: Guardia Civil)

Connections to Canada

The idea of Colombian and Mexican drug cartels using real submarines to transport illegal drugs originated around the early 1990s and has some connections to Canada.

Here’s how.

3 mobsters try to buy a Russian narco sub

Three people – a Russian mobster named Ludwig Fainberg, aka Tarzan, who immigrated to Miami, together with a Cuban drug trafficker who was then a fugitive named Nelson Tony Yester, and a supplier of luxury vehicles, “go fast” drug boats and equipment to drug cartels in Miami named Juan Almeida, traveled to Russia to buy a submarine for US$35 million from the Russian navy on behalf of the Cali Cartel. The Cali Cartel wanted a real submarine to be able to transport 40 tons of cocaine without being detected from Colombia to the United States and Canada.

The sale did not go through and the story of how a submarine from Russia was almost bought for the Cali Cartel was the subject of a documentary on Netflix called “Operation Odessa.”

Ludwig Fainberg in Russia looking for a submarine (Source: Miami New Times)

The three – Fainberg, Yester and Almeida were each indicted and subject to various prosecutions in connection with drug trafficking in the US. As they themselves say in the documentary Operation Odessa, their faces were plastered all over newspapers around the world and they were infamous.

Trailer for documentary Operation Odessa (Source: YouTube)

Fainberg flipped on Almeida for a reduced jail sentence of 33 months, subsequent to which he was deported to Israel, his last port of entrance before he had immigrated to the US.

Before moving to Miami, Fainberg set fire to businesses for the Mafia in New York when business owners refused to pay Mafia extortion payments, a job which he says he “enjoyed” and later moved to Miami where he opened a strip club and engaged in trafficking women from Eastern Europe.

“To be honest with you, I actually enjoyed it”, says Fainberg about his arson activities, torching businesses in New York City for the Mafia (Source: YouTube TsarTV channel)

Fainberg shows up in Canada

After his indictment and subsequent conviction in connection with activities of the Cali Cartel, Canada approved Fainberg’s entrance into Canada in 2000. Fainberg apparently married a woman in Ottawa and had some cash from somewhere which he planned to use to open a strip club in Canada with women from Eastern Europe that he said he could buy for $10,000 each from a broker in Russia (Benjamin Skinner, A Crime so Montrous: Face-to-Face Wirth Modern Day Slavery).

As noted by DEA special agent Alex Yasevich in this story on the Russian Mafia, they spread themselves across many criminal activities. Another Netflix documentary, The World’s Most Wanted, describes the story of Russian kingpin Semion Mogilevich, who used a Canadian issuer called YBM Magnex International to perpetrate a US$1 billion securities fraud. A 2010 Human Trafficking report published by Cambridge University noted that Mogilevich’s operations in Moscow and Budapest are also implicated in the trafficking of women, with relationships to crime groups in North and South America, further noting the fact that Fainberg used Slavic women to lure Colombia drug traffickers to his Miami strip club as an optimization of those relationships. Fainberg is apparently now back in Russia.

Don Aronow

Fainberg and Almeida were business associates with a person named Donald Aronow, who invented the “go-fast” boats that were used by cartels to run drugs up the coast to the US. Aronow was murdered in a gangland style hit on February 3, 1987, in Miami. Together with several others, he operated a marina called Fort Apache in Miami, frequented by drug traffickers. In a court proceeding, the marina was referred to as the Ester Palace where Almeida would treat customers as follows: “snow blind’em, eye wash’em and take their cake.”

Go-fast boats with turbo jet engines are used by drug smugglers

The esteemed Chief Judge A. Jay Cristol, a former Navy captain, wrote an entertaining judgment here in respect of some of these parties where he mused that transportation equipment sent to Colombia, such as Aronow’s go-fast boats, equipped with turbo jet engines that travel 600 miles at 60 miles per hour without refuelling were no doubt for sport fishing.

For the drug cartels to transition from go-fast boats to a submarine and reach out to the same group of drug trafficking transportation facilitators in Miami, makes sense. In addition to manufacturing and selling the cartels go-fast boats, they also procured military helicopters for drug cartels.

The identification, detection and interception of narco subs is usually performed by the US Coast Guard and other Coast Guards, together with national navies and drug enforcement agencies. Interceptions of narco subs can be very dangerous, as depicted in this video below.

US Coast Guard intercepts a narco sub (Source: YouTube Vice News channel)
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Laundering fish – new report points to China and US$23 billion IUU proceeds of crime problem

By Christine Duhaime | October 14th, 2020

China overfishing in distant waters

A new report from Future Directions International (the “Report“), based in Australia, is highlighting concerns about illicit proceeds and the fishing industry, particularly with China.

The Report, available here, says that China has the largest distant water fishing fleet in the world, estimated to be over 3,000 vessels, accounting for 40% of the distant fishing vessels worldwide. By comparison, the US has 300 distant water fishing vessels. The Report says that the Chinese fishing fleet is militarized and there is anecdotal evidence that the armed Chinese Coast Guard often accompanies Chinese fishing vessels to distant waters. The Chinese maritime militia is a subset of China’s national militia. China is the only fisheries superpower.

Fishing vessels from China off Zhoushan Islands (Source: Xinhua)

The Report notes that China has overfished its own waters, and moved to distant waters where it is exploiting the waters of other countries, particularly in Latin America and West Africa where enforcement tends to be weakest.

Illegal fishing off Canada

Illegal fishing also occurs off the coasts of Canada. This article here on homeland security, describes a two-month patrol by the US Coast Guard through the North Pacific Ocean in an international law enforcement operation to detect and deter illegal fishing. During the operation, the US Coast Guard conducted at-sea inspections on 11 foreign fishing vessels and reported 14 suspected violations involving three Chinese fishing vessels fishing for squid. As a result of the inspections, the fleet of 31 foreign vessels departed to avoid further inspection.

Chinese fishing vessel in North Pacific Ocean intercepted by US Coast Guard (Source: GTSC Homeland Security Today)

Global rankings of IUU

According to the IUU Fishing Index, available here, China ranked the worst in terms of illegal, unreported and unregulated fishing, referred to as IUU.

IUU fishing continuing

At the beginning of this year, China said it was taking steps to stop illegal distant water fishing originating from its vessels.

However, throughout June and July, 2020, Ecuador reported that there were 340 fishing vessels near the Galapagos Islands, most of which were Chinese flagged. The US Government took notice and commented on Twitter.

Ecuador claimed that at least 149 of those vessels turned off their tracking systems to prevent monitoring of their activities. When vessels go dark, their locations cannot be ascertained.

Argentina navy detaining Chinese fishing vessel, May 2020 (Source: Ministerio de Defensa)

A month earlier, Argentina arrested a Chinese vessel illegally fishing off its coast. It had gone dark as well, and when eventually detained, had 1,000 tons of dead fish on board. In June, in Ghana, a Chinese fishing vessel was arrested for IUU fishing a second time. And two weeks ago, Ecuador detected a whole fleet of 300 fishing vessels from China off its coast.

In 2016, Argentina sank a Chinese fishing vessel when it refused to heed calls to stop.

Argentina sinks a Chinese fishing vessel (Source: On Demand News)

In June 2018, the US Coast Guard and Chinese Coast Guard intercepted a Chinese vessel off Japan with 80 tons of chum salmon that had been fished illegally. The vessel, the Run Da, was apprehended using a 5.6 mile long drift-net on the high seas off the coast of Japan to catch chum salmon. There is a worldwide drift-net moratorium.

Canadian snow crab fishing in Québec’s St. Lawrence River (Source: Perishable News)

Over 3 billion people rely on fish as a primary source of protein, and sustainable fishing is a significant global food security issue. When it comes to poor nations, fish provides the necessary protein for over 158 million people. China alone accounts for one third of all fish consumption in the world.

The IUU fishing of squid is of growing concern. China accounts for up to 70% of squid captured in distant waters, controlling the supply, using unsound practices such as trawling nets between fishing vessels. Its unsound because it captures other fish (referred to as by-catch or collateral damage) and results in waste and greater environmental damage.

Blue crimes

China is not the only country engaged in IUU fishing by any means. The point of the Report, however, is that the scope and breadth of the activities from China in IUU fishing, presents a greater set of risks that impact global food security.

Crimes at sea, and in particular those that involve moving and laundering the proceeds of crime are so-called blue crimes. IUU is a type of blue crime that does not occur as an isolated predicate offence. Often it is associated with human trafficking, human smuggling, modern slavery and murder, as well as trade based money laundering.

Transnational criminal organizations

The Report also notes that illegal, unreported and unregulated fishing has become a new business for transnational criminal organizations (“TCO“), citing legal research from Professor Dr. Anastasia Telesetsky, a marine expert.

In earlier research, Professor Telesetsky found that the combination of flags of convenience, offshore shell companies in tax havens and little oversight of the shipping sector enables TCOs to engage in illegal distant water fishing. Responses by governments to view illegal distant water fishing as an issue of fishery management, as opposed to one of international organized crime, means that they approach the problem with the wrong lens to address the issue.

IUU fishing is US$23 billion in proceeds of crime

Experts estimate that between 1/8 to 1/3 of the global fishing industry is illegal, amounting to US$10 billion to US$23.5 billion in proceeds of crime that is laundered per year. In the US, officials estimate that between 20% to 32% of wild-caught seafood is illegal.

Governmental lack of capacity, coupled with lack of an approach of illegal fishing in terms of networking of criminality, means that criminals are outcompeting government counterparts in fisheries.

Maritime intel and security

A very cool intel tool that looks at the South China Sea (and beyond) that allows maritime researchers a bathymetric snapshot of the political landscape, the fisheries landscape, the military landscape, the legal claims landscape and the energy landscape, is the Maritime Awareness Interactive Map.

The US 7th Fleet maintains a continuous forward presence in the Indo Pacific maritime region, over 124 million square kilometres, and its operations encompass 36 maritime countries with over 50% of the world’s population. Its former commander, Navy Vice Admiral Robert L. Thomas Jr., said in 2016 that he was more concerned with the escalation of future skirmishes between national coast guards and fishing vessels in and around places like the South Luconia Shoals (off Malaysia), Second Thomas Shoal (off the Philippines) and Sharborough Reef (off the Philippines). An International maritime arbitration panel ruled that China has no claim to those areas, or waters surrounding them as an exclusive economic zone.

Command 7th Fleet (Source: Flickr, COMSEVENTHFLT)

Financial crime and food security

The 24 Hr Conference on Global Organized Crime on November 10, 2020, will discuss illegal distant fishing, money laundering and TCOs (see YouTube below), if you want to learn more about this important area of financial crime risk intersecting with environmental issues and food security.

The US government established a fraud portal here, designed to provide information in respect of the goal of stopping fish and seafood from IUU fishing from entering the US market place.

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York Regional Police bust illegal casino in Ontario operating from luxury mansion by Chinese PEPs and seize $11 million in assets and cash, illegal guns and arrest 29

By Christine Duhaime | October 8th, 2020

Project Endgame

York Regional Police in Ontario announced the arrest of 29 people following the raid of an illegal underground casino at a 20,000 square-foot mansion in Markham, Ontario, during the summer. The operation dubbed “Project Endgame”, resulted in several raids of illegal underground casinos operating in York region.

The first bust was on July 3, 2020. Police raided a commercial unit at 3276 Midland Avenue in Scarborough, that was being used as an illegal casino and seized gambling tables, slot machines and $20,000 in cash. Five people were arrested.

Luxury mansion casino

Then on July 23, 2020, York Regional Police, together with the OPP and Durham Regional Police raided a $9 million mansion at 5 Decourcy Court in Markham that was being used as a large high end casino called “Mackenzie No. 5 Club”, replete with slot machines, mahjong tables, a full service bar, a restaurant that served shark fin, a cash exchange area and hotel-style rooms above.

The mansion is owned by Wei Wei, a Chinese foreign national. He, his wife, Xiang Yue Chen, and their two children were charged with various offences related to operating a gaming house, possession of firearms, illegal sales of alcohol and dealing with proceeds of crime.

Mansion raid during Project Endgame (Source: OfficialYRP YouTube Channel)

Loaded guns and semi-automatic rifle seized

Police seized 11 guns, including a semi-automatic AR-15 rifle, $1 million in cash, shot machines, thousands of chips, gambling tables and $1.5 million in alcohol. The $9 million mansion was restrained.

Gun seized from Wei Wei’s mansion (Source: York Regional Police)
Gambling equipment from Wei Wei’s mansion (Source: York Regional Police)

York Regional Police believe that the mansion owned by Wei Wei and his wife, Xiang Yue Chen, may have been used for human trafficking of women for sex, and continue to investigate.

Large box of cash in Wei Wei’s mansion (Source: York Regional Police)

Investigation continuing

A third raid took place in Vanghan. Three people were arrested and more than $70,000 in cash was seized.

Wei Wei was reported as having met with Canada’s Prime Minister and advocates for the Government of China in Canada.

29 charged with criminal offences

Several Chinese foreign nationals were found gambling at the underground casinos and were charged. They are Chiu-Wing Luk, Wei Xia Lu, Qian Zhang, Guo Jiang, Yuan Jin, Dan Li, Mei Ying Pang, Rui Qian Huang and Chi Shing Yeung.

Several additional Chinese foreign nationals and three Bulgarian foreign nationals were charged with keeping a common gaming house –  they are Yuan Hung Li, Nan Chen, Haibin Chen, Tseng Hsiu Lee, Yan Yu Yang, Ivo Milnaov, Jianyang He, Xinran Wang, Qihan Tang, Emily Ho, Sinuo Du, Jun Liu, Siwen Zhang, Edmond Bilbili, and Nikolay Kolev.

The foreign nationals charged may also be naturalized Canadians but typically underground gambling operations in Canada for mahjong are set-up, funded by, operated by, loan sharked by and frequented by foreign nationals from China who continue to use their Chinese ID and have dual lives in two countries.

Wei Wei a high risk PEP

Wei Wei, his wife and two children are foreign and domestic (both) politically exposed persons under anti-money laundering law, which made them, and continues to make them, high risk when it comes to banks, for money laundering. It is surprising that they were able to obtain a large mortgage and financing to buy the mansion in the first place when it was foreseeable, given their PEP status, that they may be implicated in proceeds of crime allegations that would put the asset at risk for banks.

Link to organized crime

York Regional Police said that the illegal underground casinos was organized crime exploiting and demonstrating their money and position in a belief that they were above the law.

“Money moving through underground casinos leads to huge profits for criminals that fund other ventures such as prostitution and drug trafficking,” York Regional Police Chief, Jim MacSween, said in statement.

“This illegal high-stakes gambling also leads to gun violence, armed robberies, kidnappings, extortion and other serious violent offences within our community.”

Because Bulgarian foreign nationals were arrested and organized crime is involved, it is possible that it is the Bulgarian mafia – they offer crime as a service to the Italian mafia.

Even The Bridal Path once had an underground casino

Toronto and its surrounding area have a history of underground luxury casino operations in mansions that have been shut down by police.

People who grew up on The Bridal Path, a ritzy street in Toronto with 40 or so of the most expensive mansions in Canada, say that an owner of one of the mansions on The Bridal Path ran an unground luxury casino for several years. Cars would line up all the way down the street on casino nights and the parties would last until 6am. It was often raided and would re-open a week later.

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Bitcoin exchange owners charged by CFTC and US DoJ with various federal violations

By Christine Duhaime | October 2nd, 2020

CFTC civil enforcement action

The Commodities Futures Trading Commission (“CFTC“) today filed a civil enforcement action in the SDNY against the owners – operators of a digital currency exchange called BitMEX, for alleged violations of the Commodity Exchange Act. BitMEX processed trillions of dollars in transactions, received over US$11 billion in Bitcoin and made more than US$1 billion in fees. The CRTC says that BitMEX has customers that are US residents and that it transacted using the US financial system.

Parallel criminal indictment

In a parallel proceeding, the US Attorney for the Southern District of New York unsealed an indictment against the three owners of BitMEX, namely Arthur Hayes, Ben Delo and Samuel Reed, for alleged violations of the Bank Secrecy Act.

With respect to the CFTC, it says BitMEX solicited and sold swaps, futures options and futures contracts and derivatives in digital currencies through their online platform, without being registered to sell such financial products, and further, that it did not have anti-money laundering procedures in place to protect the financial system.

The CFTC alleges, for example, that BitMEX altered on-boarding records of a US resident to “Canada” in order to have records that did not reflect the on-boarding of US residents, and that it was searching for a “favourable jurisdiction” to operate from (Isle of Man, Jersey and Gibraltar (typically used by illegal online gambling websites)).

BitMEX corporate entities HDR Global Trading Limited, 100x Holdings Limited, ABS Global Trading Limited, Shine Effort Inc, Limited, and HDR Global Services (Bermuda) Limited, were named as defendants in the CFTC filing. The CFTC says that as opposed to having the entities operate distinctly with different functions, all the corporate entities operated as one digital currency platform, sharing the same resources, personnel and one email address. The CFTC pleadings set out in length, the ways in which BitMEX attorned to the jurisdiction of the US, perhaps anticipating a defence argument of a lack of jurisdiction.

Lack of AML compliance

With respect to the indictment in the SDNY, Hayes, Delo and Reed, as well as Gregory Dwyer, were indicted for a failure to implement and maintain an adequate anti-money laundering program, and conspiracy to evade anti-money laundering legislation.

Seychelles shell company

The indictment states that BitMEX set up a paper company in the Seychelles in part because they said that it costs “just a coconut” to bribe regulators in that country.

The indictment states that one of the executives lied to US federal investigators, and in order to attract attention to the exchange in the US for client growth, rented three Lamborghinis for the 2018 Consensus Conference in New York and left them parked on the street for media attention – a move that BitMEX referred to as a “stunt”.

TOR access to the darknet

From its inception in 2014 to the date of the indictment, BitMEX did not file one SAR with an FIU anywhere in the world, and accepted financial transactions from Iran irrespective of sanctions. Further, BitMEX implemented TOR access to allow users to trade on BitMEX anonymously using the darknet.

Hayes discusses selling Bitcoin derivatives on CNBC (Source: YouTube).

Vietnam?

BitMEX’s CEO’s last point of reference was Vietnam – it is possible that he is in that country.

It is expected that the US government will file to forfeit assets at BitMEX, currently at US$2 billion, otherwise there is a risk of liquidation.

In announcing the indictment today, the FBI Assistant Director William F. Sweeney Jr. said that the defendants will soon learn that the price of their alleged crimes will not be paid with tropical fruit but rather could result in prison time.

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SEC charges 3 Canadians with various securities violations, including pump and dump schemes, involving over 20 microcap issuers

By Christine Duhaime | September 22nd, 2020

SEC complaint

The US Securities and Exchange Commission (the “SEC“) filed charges against three Canadians, four Americans and nine private companies in the US District Court for the Southern District of California, for numerous violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, for alleged manipulative market behaviour, including pump and dump schemes involving at least 20 microcap issuers.

One of the issuers, Abby, Inc., lists its principal securities regulator as Alberta and another, VMS Rehab Systems, is based in Ottawa. A third, Argus Worldwide Inc., had an office in Ottawa and its contact telephone number is in Ottawa: (613) 731-5935, a number shared with VMS Rehab Systems and several past issuers such as NPS International Corporation, AuraGenix and Seakinetics Corp.

The SEC alleges that the defendants made over US$6.6 million from illegal trades.

The nine companies named as defendants are Adtron Inc., dba Stockpalooza.com, ATG Inc., DOIT, Ltd., DOJI Capital, Inc., King Mutual Solutions Inc., Optimus Prime Financial Inc., Orca Bridge, Redline International and UAIM Corporation.

Canadians allegedly participated in scheme

The three Canadians are Andrew McAlpine, who resides in the Cayman Islands and operated a brokerage firm in Belize; Ontario-based Ashmit Patel, a securities lawyer who practices in Illinois; and Ottawa-based Michael S. Wexler, the CEO of two of the microcap issuers.

The four Americans are Ongkaruck Sripetch, who goes by other aliases; Amanda Flores; Brehen Knight; and Dominic Williams. Williams allegedly controls Optimus Prime. (Optimus Prime is the name of the leader of the autobots from the film Transformers).

Entities associated with McAlpine have been charged by the SEC in the past.

McAlpine (Source: Cayman Compass)

Activities undertaken in concert

The SEC complaint alleges that all of the defendants worked in concert to: acquire shares of various microcap issuers; pay for the promotion of those issuers using third parties, such as Stockpalooza.com, in order to cause the price of the shares to increase; and sell those shares when the market prices had been artificially increased from paid promotional activities.

One of the microcap issuers that the network allegedly paid for the pumping of, using Stockpalooza.com, was Argus Worldwide Inc.

A Stockpalooza promotion of ARGW

The SEC also alleges that some of the defendants engaged in scalping and wash trading to cause share prices and trade volumes to increase artificially. Some defendants are also accused of selling restricted shares before the expiry of the hold periods. The alleged pumping and dumping of the shares of two Canadian entities – Abby Inc. and VMS Rehab Systems, are described in the SEC complaint in detail here.

Stockpalooza.com issued a promotion campaign of other issuers not named in the SEC complaint, including for an issuer named Largo Resources Ltd.

A Stockpalooza.com promotion of Largo Resources Ltd.

Securities lawyer alleged participation

Based on the allegations in respect of Patel, he appears to have acted somewhat like a broker and a banker for some of the defendant entity clients, selling their shares, receiving proceeds from the sales and disbursing the proceeds back to the clients, minus commissions – if accurate, the activity appears to be a type of law firm washing of funds whereby the firm acts as banker, clearing house and perhaps even as obfuscator.

Patel was accused in the past by the Alberta Securities Commission of participating in a pump and dump fraud scheme with another lawyer in Calgary, Canada. The two lawyers allegedly made false claims in respect of mining interests in Africa and Alberta to boost the share price of an Alberta-based mining microcap issuer, and then allegedly sold shares of that mining issuer when the prices were artificially high and subsequently, violated the terms of a regulator’s order by trading during a cease trade order.

Network illustrated

Although the SEC complaint is a set of allegations, it illustrates the classic method of how securities fraud works, and in particular pump and dump schemes. They operate like a network in which the same actors are used repetitively over multiple years moving from one microcap issuer to the next, to complete aspects of the work required to achieve the goals in a manner that attempts to anonymize the actors in the network and their activities, to shield them from detection.

It also illustrates the role of professional facilitators in this type of securities activities with the use of professional firms. In this case, the SEC alleges that a professional firm was a witting participant (as opposed to unwitting, which also happens).

It demonstrates the sophistication, planning and advanced preparation in a sustained manner of the actors who form the nodes of a network to undertake the fraudulent activities, as alleged in the SEC complaint.

Parellel criminal indictment unsealed

A parallel criminal case was filed by the US Attorney’s Office for the Southern District of California following an indictment obtained in January, 2020, against Sripetch, Wexler, Patel and McAlpine for pump and dump activities associated with the same scheme.

Sripetch was arrested in the US. He was transferred to California from Washington State.

McAlpine arrested en route to Toronto

McAlpine was arrested by the FBI when a private jet he appears to have arranged from the Cayman Islands to Toronto, made a stop in Florida.

The C-FCGF McAlpine booked (Source: FlightAware)

Chances are that Sripetch and McAlpine were arrested on the same date because it was the first date following the filing of the indictment in January 2020, that McAlpine booked a flight out of the Cayman Islands and traveled over US air space. Indictments are often sealed until arrests can be coordinated, especially if it involves foreign nationals.

The Canadians, Wexler and Patel, are in Canada. An arrest warrant was issued for each of them in the US. Wexler is a long time member of the Rideau Club in Ottawa and no doubt easily locatable from that close membership network as a result.

List of microcap issuers

The microcap issuers whose shares were manipulated by one or more of the defendants, according to the SEC complaint, are:

  1. Abby Inc.,(ABBY) (it shares a CEO telephone number with Smart Ventures Inc.);
  2. Acadia Diversified Holdings Inc., (ACCA);
  3. American Transportation Holdings Inc., (ATHI);
  4. Andiamo Corporation;
  5. Angus Worldwide Inc., (ARGW)
  6. Capital Ventures Europe PLC, (CPVNF);
  7. Freedom Energy Holdings Inc., (FDMF);
  8. Formosa Liberty Corporation, (FLIB);
  9. Global Green Inc., (GOGC);
  10. Glow Holdings Inc., (GLOH);
  11. Kabe Exploration Inc., (KABX);
  12. Mirge Energy Corp., (MRGE);
  13. NI Technologies Inc., (NTCHF);
  14. One Step Vending Corporation, (KOSK);
  15. REAC Group Inc., (REAC);
  16. Smart Ventures Inc., (SMVR);
  17. Super Directories Inc., (SDIR);
  18. Textmunication Holdings Inc., (TXHD);
  19. Transnational Group Inc., (TAMG);
  20. Van Gold Resources Inc., (VGRI); and
  21. VMS Rehab Systems, Inc., (VRSYF).
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