US indicts two Chinese foreign nationals for operating criminal enterprise, international money laundering and selling fentanyl

By Christine Duhaime | August 26th, 2018

The US Attorney General, Jeff Sessions, announced the unsealing of a 43-count indictment against two foreign nationals from China for allegedly manufacturing, advertising, selling and shipping fentanyl, carfentanil and other deadly drugs to several countries including the US and Canada, which resulted in the deaths of American citizens. They are also charged with operating a criminal enterprise and money laundering.

The charges carry a term of life imprisonment because of the deaths of Americans attributable to their alleged importation of fentanyl.

Indicted were Fujing Zheng and his father Guanghua Zheng, from Shanghai, China.

The DHS, DEA, IRS, Postal Service and FBI worked on the case and reiterated at a news conference that the “DEA will relentlessly pursue anyone shipping deadly fentanyl to the US wherever they may be and bring them to justice.”

The indictment alleges that the Zhengs used numerous companies, including Global United Biotechnology, Golden Chemicals, Golden RC, Cambridge Chemicals and Wonda Science to manufacture and distribute hundreds of controlled substances, including fentanyl and carfentanil and maintained numerous websites to advertise and sell illegal drugs in more than 35 languages, shipping over 16 tons of chemicals every month from its own laboratory. They also allegedly made and shipped K2 and spice, drugs that are of growing concern for overdose deaths.

The Zhengs are also alleged to have agreed to make potent anti-cancer drugs illegally and ship them to the US.

The Zhengs laundered the proceeds of crime using Bitcoin and Litecoin and cashed out into bank accounts in China and Hong Kong, including the China Merchants Bank in Hong Kong. Drug traffickers were asked to say wire transfers to the China Merchants Bank in Hong were for “tuition.”

According to the indictment, the Zhengs used a number of digital currency exchanges outside of China and wallets to receive proceeds of crime from foreign drug purchasers. They also frequently used Skrill to launder money and receive drug payments for fentanyl.

According to the indictment, they set up companies in the BVI, the jurisdiction favored for money laundering and tax evasions by wealthy Chinese foreign nationals.

Neither Zheng is in the US and once located, will have to be extradited to the US.

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Another Bitcoin exchange owner murdered – Bitcoin exchange owner in Vancouver, Canada, identified by the police as a drug trafficker and member of organized crime, killed in Mexico

By Christine Duhaime | August 25th, 2018

Another Bitcoin exchange owner murdered

A Bitcoin exchange owner, Giuseppe Bugge, was murdered in Guadalajara, Mexico, last week, possibly by a Mexican drug cartel. Bugge was ambushed by eight to ten men and over-killed with 140 bullets from AK-47 and AR-15 assault guns.

Bugge operated a Bitcoin exchange called GS Crypto Currency Ltd. in Vancouver, Canada, that provided OTC services for the sale and purchase of Bitcoin.

Violent robberies and the murder of digital currency exchange owners is up 100% in 2018, as it becomes more dangerous to be associated with Bitcoin exchanges. Bugge is the second digital currency exchange owner to be murdered in 2018 – the first was a Russian named Pavel Nyashin. Another Canadian digital currency exchange owner was held at gun point and robbed earlier this year. Digital currency exchange owners, and high profile exchange executives seem to be at the highest risk for thefts, violent home invasions and extortion attempts.

The Vancouver Police Department said that Bugge was associated with the Hells Angels, a transnational criminal organization; was involved in drug trafficking; and had a long history of fraud in British Columbia. An associate of Bugge’s, Alfredo Mayorga Gudino, was also shot in Mexico but was not killed. A woman, who was with them, was taken by the state prosecutor’s office for questioning.

Several years ago, Bugge operated a number of moving companies that were allegedly used to smuggle drugs into the US. In 2005, one of the drivers of his moving company was arrested by US law enforcement and pled guilty to smuggling illegal drugs from Canada to the US, stuffed in a sofa.

Prosecutor Raúl Sánchez Jiménez, from the State of Jalisco, Mexico, where Bugge was killed, is seeking information about Bugge from US law enforcement.

During a press conference, the prosecutor said that no one from the Bugge family in West Vancouver has claimed Bugge’s body and that the Mexican authorities are treating it as an organized crime matter.

If Bugge was killed by a Mexican drug cartel, it may have been by the CJNG because Bugge was on their turf. Guadalajara, Jalisco, is the home of the most powerful drug cartel in Mexico, the Cartel Jalisco Nueva Generación (meaning the new generation cartel of Jalisco) whose acronym is CJNG.

The leader of the CJNG is Nemesio Oseguera Cervantes, also known as El Mencho. El Mencho was a former state police officer. He is now the most wanted drug kingpin in the world with a bounty of US$6.5 million for his capture.

The CJNG is alleged to have amassed a fortune of US$20 billion. 

The CJNG focusses on the production and export of synthetic drugs and have the lion’s share of the meth trade, with drug trafficking routes in several countries on six continents, controlling half of Mexico, including both coasts and both borders. The CJNG is known for being extra violent and, for example, stewing the bodies of murdered people in acid to eliminate identity evidence.

Jalisco has the highest number of disappearances in Mexico — topping 3,000 per year. There were 11,241 murders linked to transnational criminal organizations in Mexico in the first half of 2018.

In 2015, the CJNG was listed by the US Department of the Treasury’s OFAC as a Specially Designated Narcotics Trafficker pursuant to the Foreign Narcotics Kingpin Designation Act. The listing designation means that all the assets of the CJNG and its members (such as bank accounts, investments, homes, etc.) in the US or under the control of US persons or entities (such as accounts opened by Canadian banks that have a US presence, or Canadian entities operating in the US or that have US bank accounts) are frozen, and such persons and entities are prohibited from engaging in financial transactions with the CJNG or their members. Penalties for violations of sanctions include fines of up to US$5 million and imprisonment of up to 30 years.

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Another Canadian in Bitcoin, who was the 3rd largest fentanyl dealer, indicted by US in Operation Darkness Falls

By Christine Duhaime | August 23rd, 2018

Operation Darkness Falls nets Canadian fentanyl dealer

The US DoJ, Department of Homeland Security, the FBI, the US Postal Service and DEA announced several arrests in Operation Darkness Falls, an international operation that sought to ferret out the identities of people selling illegal drugs, especially fentanyl, on the darknet that accepted Bitcoin and other digital currencies for payment.

A Canadian in Vancouver named Robert Kiessling was arrested in Canada. He was vendor DF44 on AlphaBay, the Canadian-owned darknet trading platform that facilitated the sale and purchase of illegal drugs, guns, weapons, stolen identities and such, using Bitcoin and other digital currencies.

When AlphaBay was shut down by the US government, Kiessling moved to Dream Market. Under DF44, he openly promoted the sale of fentanyl (below). Kiessling committed suicide after his arrest before he could be extradited to the US. He was the 3rd largest fentanyl vendor in North America. Like the other Canadian who founded AlphaBay and was indicted in the US, Kiessling committed suicide after his arrest.

Largest fentanyl vendor also arrested in US

Also arrested were Matthew Roberts and Holly Roberts of San Antonio, Texas, who are alleged to have created and operated several darknet accounts, including MH4Life on Dream Market, Silk Road and on Canada’s AlphaBay to sell fentanyl, heroin, cocaine, marijuana, LSD, meth and other illegal drugs.

The Roberts are alleged to be the most prolific darknet fentanyl vendor in the US and the 4th largest in the world.

MH4Life seems to have known his identity was discovered on the darknet because he posted a “Code Red” post before being arrested (below).

Also arrested as part of Operation Darkness Falls were Americans Antoin Austin, known as Dark King 22, who pleaded guilty to operating a fentanyl business from an apartment with children and Ryan Kluth, known as Panachecak, who pleaded guilty to selling fentanyl and child pornography on the darknet. They both used Bitcoin for payment.

Warning from Jeff Sessions that he will “put you in jail” if you facilitate the fentanyl crisis killing Americans

US Attorney General, Jeff Sessions, held the press conference announcing Operation Darkness Falls and he specifically sent a “warning” to, inter alia, “foreign nationals” and foreign companies, including CEOs, that if they put profits over the lives of American citizens in the fentanyl crisis, he is coming after them and will “put you in jail” or “make you pay.”

The warning includes a warning to Canadians and Canadian companies, particularly Canadians in Vancouver.

That’s because the DEA has said on numerous occasions, including in the National Drug Threat Assessment, that fentanyl is coming into the US primarily from Canadians (Vancouver) who import it from China. Although fentanyl in the US also originates from Mexican cartels, according to the DEA, it is less desirable and less pure. Canadians buy fentanyl illegally from China using Bitcoin and other digital currencies.

Those in Canada who import fentanyl from China destined for the US cannot do it without financial services.

The DEA has said that fentanyl vendors in China prefer to get paid in Bitcoin using OTC Bitcoin traders. OTC Bitcoin traders are traders who buy and sell Bitcoin personally, usually without physical offices, who are not registered for anti-money laundering purposes. If the fentanyl trade is carried out from Vancouver, it would mean that there are OTC Bitcoin traders doing large cash transactions for Chinese foreign nationals in Vancouver.

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Bitcoin programmer and seller indicted in US for money laundering

By Christine Duhaime | August 19th, 2018

A Bitcoin seller was arrested in the US on Friday and charged with 31 offences including international money laundering, operating an illegal digital currency exchange, failing to have an anti-money laundering program in place and structuring transactions.

21-year-old Jacob Campos was a developer at Edge Wallet and a Bitcoin trader who sold Bitcoin in the US for 5% commission. He was a small player with a business that traded $900,000 in total, completed 971 transactions and had 900 customers. According to the indictment, he used US bank accounts to sell Bitcoin on behalf of clients without being registered with FinCEN as a money transmitting business.

According to the indictment, Campos had an account at the digital currency exchange Bitfinex during the time when Bitfinex had a bank account in Taiwan. Wells Fargo, the correspondent of Bitfinex’s former bank in Taiwan, indirectly derisked Bitfinex’s account as the correspondent. Bitfinex is believed to be a New York based digital currency exchange, with a corporate registered office in Hong Kong. Campos opened an account with Bitfinex, according to the indictment, after his account was derisked by Coinbase, another US based digital currency exchange.

Campos is a citizen of three countries and was held without bail after his arrest. His Facebook account is here and his Instagram account is here.

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International money laundering case allegedly involving the ICO Dragon Coin

By Christine Duhaime | August 18th, 2018

According to the federal Thai police, as reported here in the Bangkok Post, the Dragon Coin (which is an ICO), was used for or was involved in it seems unwittingly, an international fraud and money laundering scheme. The Dragon Coin is an ICO allegedly launched with the involvement of a former Triad boss and money launderer named Broken Tooth (reported here by the South China Morning Post). The real name of Broken Tooth is Wan Kuok-koi.

According to the Thai authorities, a man from Finland, Aarni  Saarimaa, sent over 5,500 Bitcoin to invest in certain projects and part of the investment involved an investment in Dragon Coin. Saarimaa appears not to have used a third party escrow agent and the Bitcoin was allegedly diverted to seven Bitcoin wallets belonging to fraudsters who used some of it to buy land in Thailand. The rest was cashed out of a digital currency exchange (it is not known which exchange) and then transferred to 51 bank accounts held in the names of the alleged fraudsters. The bank accounts were frozen in Thailand but no action has been taken to freeze the Bitcoin wallets at the digital currency exchange.

An ICO is an initial coin offering meaning the issuance of a new digital currency that trades on certain digital currency exchanges. The Dragon Coin raised US$320 million from investors. According to a media report, Broken Tooth has moved on to develop a second Blockchain project in Cambodia whose purpose will be to offer services to casinos and promote Chinese culture. Since his release from jail for financial crimes and organized crime activities, Broken Tooth has become the chairman of The World Hongmen History and Culture Association, which connects Chinese foreign nationals internationally for business purposes.

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China seizes $1.5 million in Bitcoin from wallets used for illegal online gambling

By Christine Duhaime | August 7th, 2018

The police from Guangdong province in China arrested more than 540 people in mid-July and seized more than $1.5 million in Bitcoin associated with illegal online gambling. Police also took offline more than 70 gambling apps and websites and shut down 250 chats for online gambling. In addition, $39 million in assets have been seized including computers, phones, cars, servers and such. According to Guangdong police, over 330,000 people participated in the illegal gambling operations and gambled over 10 billion Yuan.

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Do foreign digital currency exchanges taking US customers online have to be AML registered in the US?

By Christine Duhaime | July 21st, 2018

Do foreign digital currency exchanges that take US customers online have to be AML registered in the US?

Not unsurprisingly, the answer is yes.

Under US law, digital currency ​exchangers​ qualify as money transmitters and are subject to the obligations under the Bank Secrecy Act. Key concepts to know are that:

  • An exchanger is a person engaged in the business of exchanging digital currencies for real money or other digital currencies.
  • And if an exchanger, e.g., a business, accepts and transmits or buys or sells convertible digital currencies, it is a money transmitter under the regulations issued by FinCEN.
  • If the exchange accepts but does not transmit, it is not a money transmitter.
  • If you are a money transmitter, you must then comply with the Bank Secrecy Act and the registration obligations of FinCEN.

If you are a foreign digital currency exchange, you must register in the US if you onboard US customers whether F2F or Non F2F, who are located in the US even if none of your agents, agencies, branches or offices are physically located in the US.

Is “I don’t know where the online customer is from” a defense?

There are sometimes arguments made that a digital currency exchange that operates online may not know if it is onboarding US customers because the Non F2F online registration process involves providing an email address only.

That argument may be problematic for an exchange because it evidences that the exchange may lack anti-money laundering law, counter-terrorist financing or sanctions law compliance to identify its customers. If it does not know where its customers are from, how can it know they are not from a prohibited country? If they do not know who their customers are, how do they know they are not on a list of terrorists?

Moreover, all exchanges record and track IP addresses that provide the location of a customer when onboarding, and have the technology to know where each customer is visiting from.

Obligations for foreign exchanges taking US customers 

So what then, are the obligations required for foreign digital currency exchanges that take US customers online from another country?

They must:

  1. Register with FinCEN;
  2. In whatever state you accept customers online, you must then register, usually as a money services business, with that state;
  3. Comply with the Bank Secrecy Act obligations including having a competent anti-money laundering program that is risk-based, report transactions including suspicious transactions, verify the identity of customers, undertake record keeping, appoint an AML compliance officer, train and audit the exchange’s systems and the AML program.
  4. Appoint a US agent for legal service who is physically located in the US.

In practice, the obligations require the digital currency exchange to verify customer identity, conduct due diligence on its customers, file reports with the federal government, and create and maintain records pursuant to the Bank Secrecy Act.

I think they should do more and require officers of digital currency exchanges to file periodic certifications to the bank confirming  compliance, as well as filing third party AML certifications.

Banks should also ask for legal sign offs in respect of ICOs and digital currencies mined, both of which are significantly more risky from an AML perspective to require that ICOs and mining pools confirm that the ICO or mining operation was launched legally and is not inconsistent with the securities legislation and is consistent with AML law.

Penalties

Foreign digital currency exchanges taking US customers are as liable as US exchanges for violations of US law. Last year, the US issued a civil penalty against BTC-E for US$110 million for willful violations of US anti-money laundering law and assessed a penalty of US$12 million against one of its administrators. What BTC-E did for Non F2F online onboarding was to obtain a username, a password and an e-mail address and once it had those, it conducted financial transactions by accepting digital currencies and fiat.

A foreign person employed at or controlling a digital currency exchange that is convicted of money laundering can face up to 20 years in prison and fines of millions of dollars. Any property involved in a transaction or traceable to the proceeds of the criminal activity, including property and bank accounts (even if some of the money in the account is legitimate), may be subject to forfeiture.

Compliance also requires that digital currency exchanges investigate financial crimes and when warranted, file suspicious activity reports. Failures by companies to investigate financial crime alerts and to submit SARs, have resulted in penalties of up to US$97 million by the US government.

Liability can often be personal as well, as against compliance officers who fail to comply with anti-money laundering law at their companies. Liability has not attached, however, in cases where the CAMLO’s function is underfunded or not funded, or there is no buy-in or support from the directors for a compliance department, although CAMLO’s are expected to resign in those situations. Regulators recognize that there are instances where a CAMLO is appointed and the appointment is for show only, meaning that there is no desire or resources allocated by the company for a CAMLO to be an operational position. CAMLOs are also expected to file a report when they depart over a failure of the compliance function at their company.

The chart below, from Thomson Reuters, provides some interesting cases of personal liability of CAMLOs.

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US indicts 12 Russian nationals for money laundering and hacking

By Christine Duhaime | July 14th, 2018

The US has indicted 12 Russian foreign nationals for hacking, conspiracy and money laundering for allegedly interfering with the 2016 US presidential election. According to the indictment, Russia operated an intelligence agency called GRU which obtained confidential documents from the Clinton campaign systems by hacking and systematically released them to sway public opinion. According to the Indictment, the Russian hackers spoofed computers with fake Google emails to obtain access to computer emails and databases containing documents related to Hilliary Clinton and her presidential campaign.

The hackers, in what they believed was a move to avoid detection, used Bitcoin and the same Bitcoin wallet address to rent a server in Malaysia, register domain names and pay for other services. In total, they are alleged to have laundered $95,000 worth of Bitcoin in furtherance of their hacking activities. They also mined Bitcoin from their computers in order to pay for services. Unlike cash and other types of financial transactions, Bitcoin can be traced backwards online, even with tumblers and such, for financial crime purposes, and unlike traditional financial transactions, the identity of the owner of a Bitcoin wallet can also be determined.

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清华大学计划将区块链技术应用于文物保护

By Christine Duhaime | July 13th, 2018

By Tongtong Xu

作为中国最高学府之一的清华大学日前递交了一项关于将区块链技术应用于文物保护的专利申请。

根据在4月递交,今天得到披露的专利,三位教员一同研发了一个区块链技术的系统概念,目的是储存并分享有重要意义的文物的数字版本。作为发明者的谭嘉嘉(音译)和陆小步(音译)向大家解释了这个系统的两个重要组成部分。

第一部分包括一个可以对重要文物进行扫描的3D计算模型,目的是在扫描之后能为储存提供一个数字范围的表格。在第二步中,该系统将每一项物品的数据通过一个叫做“Hashing”的加密过程自动储存在私有区块链上。

尽管专利申请并没有直接解释关于他们会如何开发该私有区块链的各方细节,发明者表明说初阶段的探索已在去年四月腾讯发布的区块链平台上进行测试。

See the full patent application below:

https://www.scribd.com/document/383768782/Tsinghua-University-Patent#from_embed?campaign=SkimbitLtd&ad_group=100652X1574425X38331168130bda0dedb41cbaf98a34f5&keyword=660149026&source=hp_affiliate&medium=affiliate

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23 members of transnational criminal organization arrested for money laundering

By Christine Duhaime | July 12th, 2018

Europol announced today that the Spain and Columbia collectively arrested 23 members of an unidentified transnational criminal organization (the “Group”) involved in laundering the proceeds of crime on behalf of other unidentified transitional criminal organizations. The Group didn’t launder a lot of money – only €2 million.  The Group allegedly used Bitcoin to launder funds and part of the law enforcement action involved orders to freeze Bitcoin wallet addresses in Spain. The wallet addresses were set up in Spain for Columbian drug traffickers. According to Europol, drug traffickers used Bitcoin to hide the origin and movement of funds.  However, since they and the wallet addresses were located and the subject of what appears to be mareva orders, it’s fairly evident that Bitcoin financial transactions can reveal the identity of the transactors, as well as the transactions.

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