FATF to finalize interpretation of virtual assets, digital currency exchanges and ICOs to require they be FIU-registered and supervised for AML compliance

By Christine Duhaime | May 21st, 2019

In furtherance of the US approach to responsible innovation, the Financial Action Task Force (“FATF“)’s private sector consultation in Vienna two weeks ago, will help drive changes to FATF Recommendation 15 to bring digital currencies, ICOs, and digital currency exchanges more fully into the AML requirements in June 2019.

The Vienna change will take effect by adoption of an Interpretive Note and new Guidance to the Recommendations and will require, inter alia, that digital currency companies be FIU-registered, that their owners and senior management pass an investigation to be registered, that digital currency companies be supervised and monitored to ensure AML compliance, and that investigators have the power to compel documents from them. The constitutional right against unreasonable search and seizure for electronic and other records, would not apply to digital currency companies. As a result of the fact that it has emerged that some ICOs, digital currency exchanges and darknet marketplace operations accepting digital currency payments have connections to organized crime, have been launched by owners with criminal records or who have affiliations with illegal drug trafficking, FIU registration is expected to be similar to the New York BitLicence where registration will be denied where there is an integrity concern. This could result in what happened in the online gambling sector where organizations shed owners, executives and employees with criminal records or who were ever subject to court orders that speak to integrity.

Vienna Interpretative Note

The Vienna Interpretative Note and new Guidance will cause a trickle down effect in most countries which will have to amend federal legislation to adopt digital currency assets and transactions as part of their AML requirements to protect the financial system.

The Vienna Interpretive Note and new Guidance adds to previous amendments to Recommendation 15 and such changes will require crypto companies, except wallet holding companies, ICOs, digital currency exchanges and such that provide financial transactions to:

  1. obtain and verify the identity of their customers when they open an account (and not when they move money);
  2. understand what predicate offences are;
  3. undertake risk assessments to mitigate risks;
  4. monitor suspicious transactions;
  5. report suspicious transactions;
  6. report transactions above prescribed thresholds;
  7. have procedures in place for PEPs;
  8. register with a federal FIU;
  9. have no criminality attached to the organization (because they will not be able to be FIU registered);
  10. draft and implement compliance programs and policies based the results of a risk assessment;
  11. hire independent auditors to audit internal controls;
  12. be subject to compliance reviews;
  13. retain appropriate records of customers and financial transactions; and
  14. conduct training to train staff on AML.

Criminal sanctions against exchanges and their officers

An interesting addition in the Interpretive Note is the requirement that countries impose a range of civil, criminal or administration offences that are effective and act as a deterrent against digital currency companies and other crypto service providers that fail to register with a FIU or to comply with the requirements under AML legislation, as well as against their directors and senior management.

Supervision of exchanges for AML purposes

The FATF recommends that digital currency exchanges and other virtual asset issuers, be subject to supervision and be monitored to ensure they comply with AML law and the FATF recommends that that the supervision be by a competent authority (and not by a self-governing body of crypto people), and that the supervisory body be able to compel evidence and information, as well as to impose criminal and other sanctions.

No jurisdiction-hopping to avoid the law

Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence at the US Department of the Treasury, mentioned the FATF changes affecting digital currency exchanges and virtual assets at a talk she gave in New York on May 13, 2019 at Consensus. She remarked that AML compliance should not be viewed as a chore but rather should be viewed a a duty serving national security. The US and British Columbia are on the same page on that issue as this is precisely what the RCMP financial crime lead in Vancouver, Canada, said to bankers, credit unions, payments companies, FinTechs and digital currency executives and innovators during a FinTech conference we convened three years ago on responsible innovation. The Under Secretary also said, importantly, that the FATF changes coming in June 2019 will create a level playing field and ensure that crypto companies do not, as some currently do, jurisdiction-hop to avoid being tied to any one country to avoid financial regulation.

A draft of the Interpretive Note is here.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

Q & A on White House sanctions over technology from foreign adversaries

By Christine Duhaime | May 21st, 2019

Last Wednesday, the White House issued an executive order (the “Order“) under the International Emergency Economic Powers Act, 50 U.S.C. 1701, the National Emergencies Act, 50 U.S.C. 1601, and §301 of Title 3 of the United States Code, prohibiting transactions of hardware, software or other products or services that enable information processing, data processing, data storage, data retrieval or electronic communications to foreign adversaries.

Who does it apply to? 

The Order applies to all US citizens and residents, as well as US companies and companies resident in the US, or companies with US shareholders above the threshold.

The Order prohibits transactions and under correspondent banking law, the Order applies to any entity, any bank, and any person who avails itself of a US correspondent bank for a prohibited transaction involving Prohibited Tech with a foreign adversary.

What and who does it target? 

The Order targets financial and contractual transactions and specifically those involving communications and data technology associated with foreign adversaries, which means a foreign government engaged in serious conduct (or long-term patterned conduct) adverse to the national security of the US or to the security or safety of a US person (a natural and legal person).

It also targets a foreign person (legal or natural person) who is not part of a foreign government who engages in serious conduct adverse to the national security of the US or to the security or safety of a US person.

A foreign adversary can be any person or any company from any country that is not the US – what is targeted is the conduct by any non-US person or company from any country, as well as known foreign adversaries to the US (e.g., Iran, Korea) whose contractual dealings or transactions pose an undue risk to US security or tech resiliency.

Continue reading

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

Canadian Member of Parliament Introduces Bill to Allow for Crypto Capital Gains Donations to Charities

By Christine Duhaime | May 17th, 2019

Canadian Parliamentarian Dan Albas, has introduced Bill C-452 in Parliament today which would allow holders of cryptocurrency to make charitable donations in crypto to Canadian charities and get a tax credit for their donations.

The short but powerful amendment to the Income Tax Act, amends §38(a.1) to include crypto as an approved category for the purposes of calculating capital gains and allowable capital losses. This means that crypto will be recognized for capital gains purposes for donations to charities for income tax purposes in the same way as shares are.

Currently the Income Tax Act in Canada allows shares, mutual fund units and such to qualify for the purposes of a disposition of gifts to qualified donees but it does not treat digital currencies in the same way as other assets like shares. If Bill C-452 passes, digital currencies like Bitcoin can be gifted to charities in the same way as shares for capital gains purposes.

In essence, the amendment, if passed, means that those Canadians who hold approved digital currencies can support Canadian charities with donations of crypto and take advantage of the Income Tax Act for their generosity.

Bill C-452 went through first reading today when it was released.

Not all digital currencies will be eligible — the government, if the Bill is passed, will list those digital currencies that qualify for gifts to charities for capital gains purposes and it will likely not approve ICOs or digital currencies where there are issues attached to the digital currency, or to the persons behind it to mitigate financial crime concerns.

Dan Albas is the Member of Parliament from British Columbia (Central Okanagan – Similkameen – Nicola) and is the shadow minister for Innovation, Science and Economic Development.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

21-year-old SIM swapper who allegedly stole $81 million in crypto, ordered to pay it back

By Christine Duhaime | May 12th, 2019

Bitcoin investor, Michael Terpin, won a US$75.8 million civil judgment on Friday in California against 21-year-old Nicholas Truglia who SIM-swapped Terpin’s cellular phone and stole over US$23 million from Terpin’s digital currency wallets that held coins from three ICOs.

In all, Truglia is alleged to have stolen over US$81 million in crypto currencies via SIM swaps from various people and to have used the money to live a life of luxury, renting a penthouse in Manhattan, buying a US$100,000 Rolex diamond-embedded watch and to have booked private jet trips.

Truglia is currently incarcerated in California and is charged with impersonating numerous individuals to SIM swap them. He was also sued civilly by Michael Terpin for the theft of his crypto currencies and it was alleged in that pleading that Truglia laundered millions of dollars in proceeds of crime from stolen digital currencies through Coinbase, Gemini and Binance.

A SIM swap is a type of hacking fraud where a person communicates with a cellular service provider, impersonates a cellular account holder and convinces them to change the SIM card associated with a cellular device so that the hacker can gain control of the victim’s data.

When a SIM swap occurs, the cellular phone of the victim goes black and the fraudster now controls the data, and can text, call and interact as if they were the victim.

With respect to digital currency wallets, because some service providers use 2FA on cellular phones, it allows hackers access to steal digital currencies by changing the 2FA on the cellular phone when prompted. The hackers gain access to wallets and quickly transfer the digital currencies to Trezors under their control.

Technically, the theft of digital currencies may be from the pooled wallet of a digital currency exchange although the victim’s account is debited to reflect the loss, or it may be from a hard wallet with no third party intermediary involved.

One of the deponents in the civil litigation that resulted in the judgment this week, who is a private jet broker, deposed that Truglia had no job during the time he knew him, and shortly after the SIM swap, had over US$72 million in crypto currencies on various wallets and a stash of US$100,000 chilling on his coffee table for spending money. Truglia alleged he earned his wealth from mining. Shortly after the heist, Truglia allegedly made plans to buy a US$250,000 McLaren sports car. Allegedly, Truglia’s Twitter account was Nick @erupts – that account holder took to Twitter to brag about stealing US$24 million, and posted images of the US$100,000 diamond watch and private jet trips.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

France & Spain go after Syrian PEP, the Butcher of Hama’s $1 billion in unexplained wealth

By Christine Duhaime | May 12th, 2019

Rifaat al-Assad, the uncle of Syria’s President Bashar al-Assad, is facing permanent asset forfeiture in France in connection with unexplained wealth and asset accumulation in France. He was charged in France last month with corruption, money laundering and embezzlement of state assets from Syria. He was ordered to remain in France. He is a politically exposed person.

al-Assad was Syria’s vice president in the 1980s. He lives in mansions in Spain, Paris and London. The Assad family is claiming their unexplained wealth is from gifts from King Abdullah of Saudi Arabia. Those gifts would be equal to close to US$1 billion.

But in this article in France, the son contradicts his father and says all their wealth was gifted by friends and many governments, including most Arab countries, to the family, including France which allegedly invited al-Assad to come to France and bought properties for the family and funded them to live in France. The son alleges that al-Assad left Syria without a penny with 400 members of his family and entourage, and landed in Switzerland, penniless and homeless.

al-Assad owns a  £10 million Georgian mansion off Park Lane in London, next door to his son Ribal, who lives in a similar mansion. He owns €90 million in real estate in Paris and owns 500 properties in Spain worth €690 million. His real estate was bought through private companies registered in Panama, Curacao, Liechtenstein and Luxembourg. Spain has seized 503 properties and over 200 bank accounts of al-Assad and under his children’s and private company names.

His 3 children bought immigration status from England on the condition that their mother invest in the UK, and presumably move some wealth from unexplained sources to London. That decision is highly controversial and appears to be subject to a review over concerns of potential blood money because Rifaat al-Assad is better known as the “butcher of Hama”, a name he acquired for allegedly ordering the murder of 40,000 civilians in Syria in 1982. Author Thomas Friedman claimed that Rifaat was “proud” of how many people died in Hama, saying: “We killed 38,000.”

Chris Doyle, director of the Council for Arab-British Understanding said that Rifaat al-Assad was one of the kingpins and founding godfathers of the regime that has decimated Syria for decades and notes:

“having fleeced Syria for so much wealth, it is galling to Syrians to see them flaunt their ill-gotten millions across Europe while millions of Syrians languish in refugee camps.”

Bank AML processes are supposed to stop PEPs being able to move stolen state assets.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

US seeks money laundering forfeiture of a large cargo ship citing sanctions and correspondent banking violations

By Christine Duhaime | May 11th, 2019

The US government unsealed a federal forfeiture complaint this week, seeking in rem forfeiture of a cargo ship that was used for sanctions avoidance to benefit North Korea which used US correspondent banks to engage in sanctions avoidance. The case has no tie to the US except for the use of correspondent banks and is an excellent and important example of jurisdiction (competence or kompetenz) of the US that arises purely by virtue of correspondent banking of US denominated currency. This is the first forfeiture of a large cargo ship for sanctions violations.

The cargo ship, M/V Wise Honest, was seized by Indonesia in April 2018 and then by the US pursuant to a Court order. It was transporting coal from North Korea to foreign buyers, which violates UN Security Council Resolutions as well as US sanctions law. Authorities found evidence that the cargo ship was used to import into North Korea, heavy machinery, and then coal out of North Korea. The cargo manifest indicated that the coal was from Russia but satellite pictures tracked the course of the vessel from docks in North Korea to Indonesia. The complaint alleges that the M/V Wise Honest turned off its AIS system while in transit to avoid detection of its location and course when it left North Korea.

The ship is registered in North Korea but in order to obtain supplies and services, the ship owner allegedly sent details in respect of the vessel from letterhead showing an address in Hong Kong, and at other times represented the vessel’s nationality was Tanzanian.

Correspondent Banks

In order to pay for its operations, the ship’s owner would buy goods and services and pay for those goods and services by wiring funds, which used the SWIFT network and which had to pass through correspondent US banks where such payments were denominated in US dollars. US correspondent banks are subject to US sanctions.

The way it works under correspondent banking law is that a person from China, as an example, sends a wire in USD to a person in Germany, for example. The bank in China debits the customer’s account then transmits the payment instructions to the US correspondent bank which debits the customer’s bank account while transmitting those US dollars from the US bank to the recipient’s bank in Germany, which credits its customer’s bank account. The use of USD triggers the use of a US correspondent bank and ergo, invokes US law for all those transactions, including sanctions law.

The payment of goods and services for the M/V Wise Honest that used the correspondent banks in the US was prohibited by sanctions law and thus the persons associated with the M/V Wise Honest violated US sanctions law by making those wire payments, the proceeds of crime of which are subject to forfeiture. According to the complaint, more than 30 such payments were sent in violation of US sanctions law, totalling US$750,000.

The M/V Wise Honest is worth $2.9 million.

UN Security Council Report on M/V Wise Honest

The United Nations Security Council commissioned a report in respect of the M/V Wise Honest, available here. It found that:

  • A Blockchain / Bitcoin company called Marine Chain was set up in Hong Kong and launched an ICO with a DPRK individual behind the company to engage in the cargo shipping business and the UNSC says there is concern that it could be used to raise funds for North Korea, for sanctions avoidance and to obfuscate cargo vessel movements. It raised $500,000 in its ICO.
  • Global banks and insurance companies are facilitating payments and providing coverage for vessels involved in illegal shipments of petroleum and coal in violation of sanctions.
  • Luxury car manufacturers such as Rolls-Royce, Mercedes-Benz and Lexus are indirectly selling luxury and racing cars to North Korea in violation of sanctions law, in some instances in the past, such vehicles were bought in bulk and were shipped to California, then to China, then to North Korea.
  • Cargo captains are being paid in bulk cash for piloting cargo ships that violate sanctions, and mention was made of the case of Kim Kwang Il,  who is on the UN sanctions list, who received US$179,000 in a black garbage bag seized by Russian authorities.
  • Banks in western countries are not de-risking the accounts of foreign nationals from North Korea or seizing assets, as required.

Relevant Legislation

Relevant legislation in this post:

United States Code, 18 U.S.C. § 981(a)(1)(C), 18 U.S.C. § 981 (a)(1)(A), 18 U.S.C. §1956

United States Code, 28 U.S.C. §§ 1345, 1355

International Emergency Economic Powers Act, 50 U.S.C. § 1701

North Korea Sanctions and Policy Enhancement Act of 2016, 11 U.S.C. § 9201 et seq.

United Nations Security Council Resolution 1718 (2006), S/RES/1718

United Nations Security Council Resolution 2094 (2013), S/RES/2094

United Nations Security Council Resolution 2270 (2016), S/RES/2270

United Nations Security Council Resolution 2397 (2017), S/RES/2397

Executive Orders 13382, 13466, 13570, 13687, 13722, 13810

Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. § 544.101 et seq.

North Korea Sanctions Regulations, 31 C.F.R. Part 510

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

Former Head of Financial Crime Regulator and Director of Danske Bank Charged with Money Laundering Failures

By Christine Duhaime | May 10th, 2019

According to the Danish press, Henrik Ramlau-Hansen, the former head of the Danish Financial Supervisory Authority, Denmark’s bank regulator, who was a director of Danske Bank, has been criminally charged and his house raided in connection with a €200 billion money laundering scandal involving Danske Bank. The charges are pursuant to Denmark’s anti-money laundering legislation and are related to his alleged failure to have performed or supervised, anti-money laundering law properly over the bank’s activities, allowing hundreds of billions of dollars of proceeds of crime to flow through the Danske Bank from 2011 to 2015 that was tied to politically exposed persons from, among others jurisdictions, Russia.

Thomas Borgen, the CEO of Danske Bank was criminally charged earlier this week, and additional executives have been charged but their names have not been released.

The €200 billion money laundering and PEP scandal cost the Danske Bank more than half of its capitalization and sparked a criminal investigation in the US, Estonia, France and Denmark.

Mr. Ramlau-Hansen was head of the Danish Financial Supervisory Authority from 2016 until 2018.

At an ACAMS national conference a few years ago, a US government official did say in reference to the global ecosystem, that regulators want banker heads on a stick. This may be that occasion.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

Lax AML compliance can downgrade a bank’s credit rating

By Christine Duhaime | May 10th, 2019

According to this article in the Wall Street Journal, the level to which a bank is AML compliant, or not, is now a key factor used to determine its credit rating, and is more material than any other non-financial factor. The new report cites the fact that bank supervisors and federal regulators around the globe are now beginning to crack down on AML failures in banks and adopting a zero-tolerance approve to compliance. The report cites the downgrading of Swedbank AB and Danske Bank A/S resulting directly from their reported lax AML controls pursuant to which they accepted hundreds of millions of dollars from politically exposed persons without complying with PEP law. Both Swedbank and Danske Bank have replaced their CEOs over AML compliance issues.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

Darknet news and promo website seized and founders indicted for money laundering

By Christine Duhaime | May 8th, 2019

The US Department of Justice for the Western District of Pennsylvania announced the unsealing of a federal indictment in Pennsylvania of two Israeli men who are alleged to be the co-owners and administrators of the website Deep Dot, which charges them with conspiracy to commit money laundering in association with that website. The site acted as a news source for information in respect of the Darknet but it also provided addresses of Darknet marketplace sites accessible on TOR and links to the sites on TOR. The accused were arrested simultaneously in Israel and France.

The website was seized by the FBI and taken offline.

Darknet marketplaces are websites that sell illegal goods and services for Bitcoin. Fentanyl sales from China are often transacted on Darknet websites on TOR and paid for with Bitcoin, then cashed out at a digital currency exchange for fiat through a bank.

Some Darknet marketplaces also sell illegal weapons, offer murder for hire services and traffic in stolen identity products and sell child pornography. Some of these sites broker sales of stolen customer and account data from banks and credit card issuers in order to allow fraudsters to steal millions of dollars online from banks. All of this activity is paid for with Bitcoin and cashed out at digital currency exchanges for fiat, with criminals looking for exchanges with the most rapid and least friction in cash outs where AML processes are less stringent than at banks.

The site allegedly generated millions of dollars in commissions by providing kick-backs to the site owners when purchases were made with Bitcoin from a Darknet site of illegal goods and services.

Over 23% of all of the AlphaBay transactions (the Canadian Darknet website on TOR that processed over $1 billion in illegal goods and services using Bitcoin), came from a referral from Deep Dot. Hansa, another Darknet website that was taken down, received half of its customers from Deep Dot. In total, the two indicted are alleged to have received 8,155 Bitcoin in commissions for website linkages that generated commissions, equal to more than US$15 million.

The indictment mentions a Darknet marketplace site called Tochka Market. Tochka Market advertised the launch of an initial coin offering to raise money, and issued a white paper for its ICO to support its TOR activities. According to the indictment, Tochka Market has been in operation since 2015 and sells illegal narcotics, counterfeit goods and other contraband.

The first take down of an online marketplace on TOR was Silk Road. Its creator and administrator, Ross Ulbricht, is serving two life sentences in a federal jail in the US after having been convicted by a jury of narcotics trafficking over the Internet, operating a criminal enterprise, computer hacking, trafficking in stolen identity products in order to defraud banks and open accounts to defeat AML purposes, and money laundering. He forfeited $183 million in Bitcoin proceeds of crime. His darknet marketplace allowed anyone, including teenagers, to use Bitcoin to buy heroin and fentanyl online and have it shipped to them using the US postal service. Several teenagers died of drug overdoses from Silk Road. Silk Road trafficked as well in child pornography, human trafficking and weapons. At his sentencing, the learned Judge noted that after thinking about it for just six minutes, Ulbricht approved listing cyanide for sale on Silk Road, knowing that people would buy it to murder others but he didn’t care so long as he would earn commission in Bitcoin from the sales.

The Deep Dot website was also used for non-criminal purposes by researchers and financial crime investigators and wallet tracers.

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email

Spanish police seize €9 million in Bitcoin as part of money laundering Bitcoin ATM ring

By Christine Duhaime | May 8th, 2019

The Spanish Guardia Civil has arrested eight people and seized over €9 million, luxury cars, cannabis plants and jewellery in connection with an alleged money laundering operation in Spain that involved the use of Bitcoin ATMs and digital currency exchanges to launder proceeds of crime and avoid the filing of suspicious transaction reports.

According to Europol, the alleged money launderers were members of organized crime who used private corporations to open bank accounts and transfer funds from digital currency exchanges in other countries which were proceeds of drug trafficking.

The police say that organized crime used digital currency exchanges overseas (which from Spain usually means North or South America), where there is a strong tie to organized crime and drug trafficking and where it is easy to cash out from Bitcoin through a digital currency exchange to a bank account (which on speculation, may mean the US or Canada but considering there is no US involvement in this arrest, it may mean Canada).

Share this Post:
  • Facebook
  • Twitter
  • LinkedIn
  • Print
  • email