FinCEN releases red flags for fentanyl and Bitcoin

By Christine Duhaime | August 24th, 2019

FinCEN has released a very good plain language advisory for banks to become aware of, and assess the purchase and trafficking of fentanyl online for financial crime compliance. Fentanyl is imported in bulk from Mexican cartels and follows the same typology as typical TCOs and money laundering activities. It is also imported from China via online sales on the darknet using Bitcoin, Ether or Monero and the red flags in respect thereof are different.

With respect to fentanyl ordered online, the way it works is as follows:

  • A person accesses through TOR a darknet marketplace that allows vendors to sell fentanyl, or the person locates an online vendor in the normal way;
  • The person opens an account, makes the purchase and pays in Bitcoin;
  • The darknet marketplace uses its pooled Bitcoin wallet to broker the deal so that you or I, or law enforcement, cannot know what Bitcoin wallet address is involved in illegal activities and so the person paying is paying to the marketplace, not the vendor;
  • The darknet marketplace extracts their commission in Bitcoin for brokering sales of illegal drugs and they send the remaining Bitcoin to the drug dealer; and
  • The drug dealer uses the postal service or a courier to ship the fentanyl to the buyer.

Knowing that that’s the process, things for banks to be aware of to gate-keep the financial system are as follows:

  • With respect to digital currency exchanges, undertake due diligence to ensure that you are aware of any in your ecosystem (including your clients who bank exchanges) that have darknet capabilities. For example, there is an ICO exchange in Vancouver that has darknet capabilities for no obvious reason.
  • With respect to digital currency exchanges, undertake due diligence to be comfortable that the terms of use are adequate and make sense – this is important because it speaks to competence and knowledge of the law. We came across an exchange in Canada, for example, that in describing corporate accounts for financial crime purposes to onboard, asked companies to confirm whether they have shareholders or no shareholders; the latter evidences the exchange lacks corporate law knowledge, which means they likely will not be adequately versed in more complex financial crime law, which poses a risk to banks. Another exchange in Canada has some nonsensical terms of use in which it states that cheque cashing services and collection agencies and securities brokers are not regulated in Canada and therefore are prohibited and yet it has no provisions prohibiting sanctioned countries or terrorist activities or listed terrorist persons from trading in Bitcoin and using the exchange’s bank account in Alberta for those transactions.
  • With respect to digital currency exchanges, undertake due diligence to ensure that the terms of use identify the jurisdiction of law because if no jurisdiction is identified, it means the corporate entity is obfuscating its own identity, which is inconsistent with financial crime compliance.
  • With respect to digital currency exchanges, undertake due diligence to ensure the officers are identified on the business’s website – if not, that is a red flag indicating the business lacks transparency.

The FinCEN advisory mentions AlphaBay, the Canadian darknet marketplace that was the largest in the world which operated with bank accounts processing billions of dollars in Bitcoin and money solely for criminal activities, including the sale of fentanyl which resulted in the untimely death of young adults around the world. You can read about AlphaBay here.

Learning from the AlphaBay case, an obvious red flag is corporate officers who are young, flush with cash and sudden wealth and no gainful employment, or corporate sales to account for the increase in wealth.

Red flags also include transactions involving countries such as the Seychelles, Malta, Guernsey, the Isle of Man, Jersey, Cyprus and other jurisdictions that are known for lax financial crime compliance and where identity of corporate controllers is difficult to verify.

Banks will rarely know if a customer uses a mixer or anonymizer but FinCEN notes that using mixers and anonymizes is a financial crime red flag. That’s because the purpose of mixers is to obfuscate the transactor behind a Bitcoin transaction.

FinCEN also lists as a red flag, bank customers with previous criminal records for drug trafficking – they are more likely to get back into the drug trafficking business online using Bitcoin.

In all the Bitcoin tracing work we have done for the preparation of SARs for clients, almost every single case was traced to the pooled wallet of just one digital currency exchange. That being said, another red flag is to be cognizant of what digital currency exchanges are preferred for criminal activities and to make decisions to minimize bank exposure in respect of those organizations and customers associated with those exchanges.

You can read more from FinCEN here.

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American Bitcoin exchange owner on trial for murdering his girlfriend in the Philippines

By Christine Duhaime | August 3rd, 2019

While an inordinate number of Bitcoin exchange executives are facing increased violence, and even death (see here and here), one exchange CEO is on trial in the Philippines for the opposite – namely, allegedly killing his girlfriend.

Troy Woody Jr., apparently the CEO of  an exchange in the US called Luxr LLC,  was arrested in Manila with another person named Mir Islam, and charged with the murder of 23-year-old Tomi Masters. Mir Islam has a criminal record from hacking.

On December 23, 2018, Ms. Masters was found in a large wooden box in a Philippines river, naked, bound with duct tape and with a plastic bag over her head. Originally from Indiana, she was in the Philippines with Woody.

Woody and Islam allegedly put Ms. Masters’ body in a large box in a taxi and dumped it into a river from a bridge. The taxi driver went to the police after the incident because he was suspicious.

Woody has admitted dumping a box in a river in the Philippines but said the box is not his but he has changed his story, allegedly, as to his role in her death. Both suspects claim to know nothing about her death and both say they just randomly agreed to hire a taxi, loaded a heavy box in the taxi that was chilling in Woody’s apartment, and agreed to pay the taxi driver to take them to a bridge over a river and during the ride, threw a heavy box from a bridge into a river for no reason, not knowing what was in it.

According to this article, two days before her death, Ms. Masters removed all references to Woody on social media and allegedly booked a flight to return to the US without him.

A month before his girlfriend was found dead, Woody started what appears to be a twitter fight against his friend, well-known hacker CosmoTheGod formerly of UG Nazi (see here and here) and the CEO of a company called Path Network, whom Woody accused of spending customers’ money to fund a lavish lifestyle. Both Islam and Woody were also part of UG Nazi. There is a Vancouver connection – Path Network announced work it did for the TOR accessible, Vancouver-based ICO digital currency exchange called CoinPayments.

Woody had his own lavish lifestyle, making purchases of diamonds, watches and other luxury items bought with proceeds of Bitcoin transactions. He follows Kracken, Binance and Bitstamp and may have accounts at those Bitcoin exchanges. His Instagram account is here.

A good background story is here. Woody is incarcerated at Bicutan in the Philippines, a remand prison for foreigners that is well-known for its inhumane prison conditions.

Woody claims that he had significant sums in Bitcoin and that the FBI seized it.

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Blockchain companies in Vancouver, Canada caught up in securities fraud investigation

By Christine Duhaime | July 29th, 2019

Two Canadian Blockchain companies based in Vancouver, BLOK Technologies Inc. (“Blok“) and Cryptobloc Technologies Corp. (“Cryptobloc“) have been caught up as part of the so-called Bridgemark scandal affecting Vancouver’s capital markets.

The Bridgemark situation started in November 2018, when the Executive Director of the BC Securities Commission announced that he had issued an order against numerous companies and persons associated with Bridgemark Financial Corp. (“Bridgemark“) over allegations that one or more of the named companies and persons were allegedly involved in fake consulting agreement schemes whereby persons or companies were allegedly hired as consultants and paid lump sum fees in advance but provided no services.

According to the BCSC, Blok and Cryptobloc each sold shares via private placement to Bridgemark for proceeds of $4.5 million each. Two other little cannabis companies did the same for a total proceeds raised from Bridgemark of $17,929,500. But then, allegedly Blok, Cryptobloc and the two other companies paid back Bridgemark $15,331,000 for what appears to be alleged consulting fees, thus between the 4 issuers, they appear to have been left with a little over $2 million from alleged private placements of $17 million. Such an arrangement, if it existed, is material and contracts for such arrangements, if they existed, are material contracts. According to the public disclosure documents, no shareholders of the issuers were informed in filings of the pay-back of funds raised back to the one placee, if such did indeed occur.

The BCSC alleges that the so-called Bridgemark scheme facilitated the illegal distribution of securities and was abusive to the capital markets.

According to the disclosure record of the public filings of the two Blockchain companies, there is no disclosure of material contracts between them and Bridgemark and no disclosure of the fact that over 80% of funds raised by private placement were directed back to the coffers of one placee, according to the BCSC.

In the Spring of 2019, the BCSC issued orders freezing certain property and assets of some of the parties involved in the Bridgemark case. As well, several civil claims have been filed against some of the parties for claims tied to the BCSC investigation and allegations.

Who is Blok?

Blok was a Vancouver mining company, a reporting issuer, that up until 2017, was mining in northern Canada and then announced an intention to get into clean energy and then a few months later, into Blockchain to develop a Blockchain for cannabis by acquiring a company called Greenstream, whose owners, Blok said, were the first in the world to identify that Blockchain could be used for cannabis. According to the public disclosure filed by Blok, Greenstream had already developed smart contracts. With respect to Bridgemark being a consultant pursuant to a consulting agreement, if there was one, the listing application of Blok does not mention a material contract, or any contract for consulting services with Bridgemark. Continuing up to today, there is no material contract filed in respect of Bridgemark for consulting services. Blok recently announced it was shutting down the Greenstream smart contract cannabis tech.

Who is Cryptobloc? 

Cryptobloc started as tech company in the area of sensors. Its early disclosure documents have footers that identify it as associated with, or having a listing completed by, Bacchus Law. Like Blok, there is no material contract filed, or disclosure in respect of consulting services with Bridgemark. In November 2017, it switched its business to Blockchain. It is not clear from its disclosure record, what precisely it does, or has done, in the Blockchain space. The Cryptobloc website home page, a screenshot of which is posted below, evidences that its Blockchain customer facing website is still not done since 2017 and is a work in progress.

It has a fairly impressive client, however. On April 9, 2018, it issued a press release that, among other things, disclosed that the US based digital currency exchange Coinbase was its client and that it provides AML services to it and, while unclear, possibly through a subsidiary entity. Cryptobloc is under a management cease trade order and as a result, it is surprising that it could still be providing AML solutions to Coinbase. Coinbase has a New York State trust charter to operate as a financial institution, a BitLicence and 50 state MSB licences, as well as a FinCEN registration. Normally, the New York state bank regulator would require Coinbase to cease dealing with a service provider facing regulatory allegations until such allegations are resolved.

You can read more here, and follow Glacier Media to stay up to date with the story.

Other parties named in the Bridgemark case are Aly Babu Mawji, Robert Lawrence, Tavistock Capital Corp., Jackson & Company Professional Corp, Anthony Jackson, Jarman Capital Inc. and Scott Jason Jarman.

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Another Bitcoin exchange founder murdered after $23 million allegedly evaporates from exchange

By Christine Duhaime | July 28th, 2019

Exchange owner killed

The co-founder of a Bitcoin exchange called BitMarket, was found murdered in Poland, after the exchange closed, citing a lack of liquidity. Allegedly, over $23 million in customer funds is unaccounted for.

Tobiasz Niemiro was found with a bullet in his head in the woods a few hours from Warsaw. Although Polish, the exchange was registered in the Seychelles.

Growing number of Bitcoin murders

Niemiro is among a growing number of digital currency exchange founders who were murdered in the past two years.

For example:

  • Almost a year ago, a Canadian Bitcoin exchange owner named Giuseppe Bugge, who police say was tied to organized crime, was gunned down in a hail of 140 bullets from machine guns in Mexico in territory controlled by the powerful drug cartel, the CJNG.
  • 9 months ago, Heikki Bjørklund Paltto, a Bitcoin trader, was murdered in his home in Norway. He was 24 years old.
  • Over a year ago, Pavel Nyashin, was murdered in Russia. He was 23 years old.

The first Bitcoin exchange murder was in 2014 – then, the CEO of an early exchange, Autumn Radtke, was murdered in Singapore, although some believe her death was a suicide.

Bitcoin traders kidnapped & tortured 

Others who work at exchanges or who trade on a self-employment basis, have been exposed to extreme violence as well. For example:

  • Three weeks ago in India, three Bitcoin traders were kidnapped, taken to a high rise in India and tortured for two weeks. The kidnappers sought 80 Bitcoin for their release.
  • Over a year ago, an ICO developer was kidnapped, beaten, mutilated and forced to transfer over $1M in Bitcoin to robbers in Moscow.

Bitcoin kidnap ransoms & murders

There is also a growing trend of using Bitcoin for ransom payments in kidnappings. For example:

  • The 12th richest man in Norway, Tom Hagen, alleged that on October 31, 2018, his wife was kidnapped by people demanding he pay $10M in Bitcoin for her release. He never paid because he said the police instructed him not to. The police believe she was killed.
  • The wife of a Brazilian exchange owner was also kidnapped in exchange for a Bitcoin ransom, which also wasn’t paid by her husband.
  • William Sean Creighton was kidnapped in Costa Rica last year. His family paid a $950,000 Bitcoin ransom for his release but despite paying, Creighton was never released and is believed to have been killed. His kidnappers wanted $5 million.
  • Earlier this year, a businessman in India was kidnapped and forced to pay $49 million in cash and Bitcoin to secure his release.
  • In Mexico, a lawyer was kidnapped for a Bitcoin ransom and while the family paid the ransom, the police located the kidnappers and got the Bitcoin ransom back.

The Bitcoin world is much more dangerous than banking – bank executives are rarely kidnapped, tortured or killed but despite this, unlike banks, exchanges still tend to lack security procedures for human assets and adequate insurance.

You can read more about the incidents of Bitcoin crimes afflicted on the people involved in the Bitcoin space here.

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Ontario Securities Commission settles with Canadian ICO consultant, promoter and listing agent

By Christine Duhaime | July 28th, 2019

The Ontario Securities Commission (“OSC“) has entered into a settlement agreement with a Canadian company called CoinLaunch to settle claims that it engaged in the business of trading securities contrary to the Securities Act (Ontario) in respect of two ICOs. Articles about CoinLaunch stated that over $1,050,000,000 was generated on its ICO platforms (see below).

The two ICOs that were part of the settlement were BCZero and ECoreal. BCZero was an ICO issued for a truck racing team in the Czech Republic. ECoreal was an ICO issued to develop a resort in Portugal.

CoinLaunch offered ICO consulting services that included writing white papers, soliciting investments, going on fund raising roadshows, getting listed on digital currency exchanges and fulfilling anti-money laundering law requirements. CoinLaunch was not registered to be in the business of trading of securities and was not exempt from registration.

The parties agreed that the Howey Test applied to the two ICOs under Ontario law, which may be the most important take-away from the settlement agreement for future actions by the OSC.

Pursuant to the settlement agreement, CoinLaunch agreed to pay a fine of $30,000 plus costs, to disgorge $12,000 and to destroy access to ICO coins in its possession. It is prohibited from trading in securities for 5 years and its CEO, Reuven Cohen, agreed not to act for any company engaged in the business of trading in securities where such company is not authorized to do so.

The OSC took into account an argument by CoinLaunch that it was unfamiliar with the law as a mitigating factor. Every legal and natural person in Canada is deemed to know the law of Canada and it is not a defence to argue lack of knowledge of the law in the criminal, civil or regulatory context. Recognizing that, the OSC noted that such arguments by ICO players in the future may be given little weight.

The settlement agreement also puts ICO players on notice generally and the OSC warned that firms that ignore the Securities Act can expect to face worse consequences.

CoinLaunch did not shy away from describing itself as in the business of promoting, offering, selling and listing securities – on this site, it described itself as a platform to create and sell ICOs “safely and securely” with know-how to walk any company through the sale of ICOs from pre-sale, sale to the public and on the secondary markets.

And here, its CEO describes how one could use the platform and services to avoid, among others, lawyers, which were, he stated, “expensive.” CoinLaunch was described as a company that “specializes in …legal.” That seems suggestive of the practice of law and to the extent it is, no one associated with CoinLaunch appears to have been licensed under the Law Society Act to provide legal services, or hold themselves out as authorized to offer legal services.

According to a representation made in an interview with Tech Crunch, over $1 billion was generated using CoinLaunch. CoinLaunch launched another service called Fraction/al, which separate and apart from its CoinLaunch service and funds raised on that platform, ”helped raise over $50 million for clients” in a two month period in the summer of 2018.

The settlement agreement does not address what happened to the $1,050,000,000 or how members of the public that used their platforms and who made payments of $1,050,000,000, as alleged, can claim the right of rescission in respect of the sale of securities sold contrary to the Securities Act. CoinLaunch claimed it had users from over 60 countries on its platform. It is also possible that the figures were greatly exaggerated or untrue, and were made to drive sales as mere legal puffery, and that no members of the public actually paid those sums.

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EU Commission report finds bank negligence over anti-money laundering compliance

By Christine Duhaime | July 26th, 2019

A new report released by the EU Commission that looked at cases of alleged money laundering made several findings about some banks operating in the EU, including that they were negligent when it came to anti-money laundering (“AML“) law compliance in respect of the cases it looked at.

The EU Report found that shortcomings identified in the cases it looked at of alleged money laundering by banks were driven by negligence. It also found that some banks made decisions to favour lucrative business lines at the expense of AML compliance. It also found that banks take too long to address AML deficiencies, and some banks have risky practices where they do not increase AML compliance to accommodate more risky lines of business. It also found that there were governance flaws at banks that impacted AML compliance.

The Report suggested that bank supervisory agencies be held accountable for their actions to ensure banks comply with the law.

The Report is called “Report from the Commission to the European Parliament and the Council on the Assessment of Recent Alleged Money Laundering Cases.”

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US Treasury files civil claim against foreign Bitcoin exchange and its owner / officer to enforce penalties of $100M for AML failures

By Christine Duhaime | July 25th, 2019

The US Attorney for the Northern District of California, on behalf of the US Treasury, has filed a civil complaint against the Bitcoin exchange known as BTC-e and one of its alleged owners / officers, Alexander Vinnik, to enforce over $100 million in monetary penalties for a series of anti-money laundering law violations.

BTC-e was incorporated in Cyprus and/or the Seychelles and operated in several countries offering Bitcoin exchange services, including to US residents online. Vinnik is currently incarcerated in Greece, fighting extradition. Both defendants were indicted in January 2017 in the US in connection with AML violations.

In early 2017, FinCEN determined that BTC-e was a MSB because it provided money transmission services in the US though its exchange. It sought no AML-related information from those completing financial transactions at any time. It processed transactions in the US of over $296,000,000.

As an MSB, it was required, inter alia, to register with FinCEN, to register in the state in which it provided services, to have an AML program in place, to train its employees, to have a designated AML officer, to file SARs and to create and maintain records related to financial transactions. FinCEN assessed monetary penalties against both defendants in 2017 and this litigation seeks to enforce those penalties.

According to the complaint, Bitcoin buyers, sellers or traders sent funds to front companies of BTC-e and such funds were converted to digital currencies. The exchange was not allegedly, a normal exchange because a “significant portion of BTC-e’s business was derived from suspected criminal activity.”

With respect to Vinnik, the complaint alleges that he had control over some of the exchange’s wallets used to process transactions (the trust account wallets). Vinnik allegedly sent emails confirming that he owned BTC-e. On behalf of the Bitcoin exchange, Vinnik is alleged to have had control over trust account wallets that took in funds stolen from Mt. Gox and to have transferred the cash-out funds to the exchange’s bank accounts and then to bank accounts associated with him.

The importance of this allegation is that Vinnik had visibility over digital currencies moving into the exchange (by virtue of control over the pooled trust account wallets) and out of the exchange as they hit the financial system (by virtue of control over the bank accounts of the Bitcoin exchange).

For a unique view, you can read how Vinnik’s wife believes that the US wants him extradited for his alleged Bitcoin intellect. She also reasons that if he can be prosecuted over BTC-e, so too can manufacturers of frying pans because in Russia she says, women hit their husbands with frying pans. Vinnik believes he is being sought by the US because he believes he is a singular threat to US banks.

The press release from the DoJ is here.

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A “Criminal Blockchain” – York Regional & Italian Police take down alleged major ‘Ndrangheta players and seize over $35 million in alleged proceeds of crime

By Christine Duhaime | July 21st, 2019

A criminal Blockchain linking Calabria and Toronto

York Regional Police, north of Toronto, Canada, made a major money laundering bust last week against the ‘Ndrangheta, arresting several of its alleged members including its alleged powerful leader, Angelo Figliomeni. Figliomeni is charged with money laundering, directing a criminal organization and fraud. Another eight alleged associates of Figliomeni were arrested on various charges including loan sharking and illegal gambling.

York Regional Police executed 48 warrants and seized $35 million in alleged proceeds of crime including 23 luxury cars, including 5 Ferraris, a $7,000 bottle of scotch, 27 houses and $2 million in cash and jewellery. They also seized gaming machines and ATMs. Police also executed warrants against 11 illegal gambling venues allegedly controlled by the ‘Ndrangheta.

Prior to his arrest, the police allege that Figliomeni and his associates were laundering proceeds of crime at Ontario Lottery & Gaming Corporation casinos around Toronto and through real estate companies, accountants and financial services companies. Police believe they laundered $70 million in the last few years in Toronto.

Police in Italy made simultaneous arrests of ‘Ndrangheta from Siderno, Calabria, while York Regional Police made their arrests.

The Italian police describe the links and connections between the ‘Ndrangheta families in Calabria and those in Toronto as a “criminal Blockchain.” It’s a fitting description on some level but the ‘Ndrangheta are anything but transparent or easily traceable.

At a news conference, investigators made a point of confirming that before the investigation was launched and charges considered, they had forensic accounting evidence tracing financial flows to and/or from those arrested in respect of the money laundering charges. It would not be appropriate to have proceeded without evidence from financial investigators that a money laundering offence had occurred.

About the ‘Ndrangheta

The ‘Ndrangheta are a different breed of transnational criminal organization (“TCO“). They are supply chain management experts which allows them to control much of the world’s cocaine transportation and its supply chain into various countries, but they do not manufacture hard drugs or deal drugs at the local street corner level. They control large ports in the EU, which allows them to import cocaine in bulk, and they control the supply routes. The ‘Ndrangheta ships drugs for Colombian and Mexican drug cartels.

In the EU and in third world countries, they are known to infiltrate, bribe and extort law enforcement and other legal gate-keepers for access and to avoid prosecution. Similar to Mexican TCOs, they are infiltrated in the financial services sectors. A recent report from an Italian Court of Appeal found that the ‘Ndrangheta has infiltrated all parts of their economy and the government.

They are extremely secretive and usually only allow entry to those of ‘Ndrangheta blood, which means those whose family originate from Calabria.

Italian police say that much of Calabria is ‘Ndrangheta and anyone from that region immigrating to other countries is in furtherance of the expansion of the family criminal enterprise (the family being the ‘Ndrangheta).

The ‘Ndrangheta are wealthy – their revenues are estimated to be €53 billion per year. They make more money than Deutsche Bank and McDonald’s combined.

Although they have been around for 150 years in Italy, it was the US, and not Italy that took the first step towards stopping the ‘Ndrangheta from a money laundering legal perspective. In 2008, the U.S. Department of the Treasure added the ‘Ndrangheta to the Office of Foreign Assets Control Specially Designated Nationals list, which prohibits banks, including Canadian ones who all have US operations, and US persons from dealing with their cash or property.

Two years later, in March 2010, Italy designated the ‘Ndrangheta as a mafia organization for the purposes of Italian law.

The ‘Ndrangheta take pains to appear to be law abiding members of society and while they are secretive, so too are their operations. To do this, police say they have secret members (who are said to be wealthy professionals who launder their proceeds of crime) and they operate through corporate entities so that the proceeds of crime flow through company bank accounts and not personal ones. They do this probably because anti-money laundering law compliance in respect of private companies is relatively weak all over the world at banks and they would rely on that weakness.

The ‘Ndrangheta are known to launder the proceeds of crime through businesses they set up – from hotels, restaurants, wind farms and other businesses.

Researchers have written that the ‘Ndrangheta deflected the world to focus on the less powerful Cosa Nostra in Sicily, Montreal and New York, so they could expand their empire under the radar.

Toronto has been a ‘Ndrangheta hub apparently since the 1950s, and continues to grow its family and business base in Toronto. One restaurant in a fancy midtown neighbourhood in Toronto believed to be owned by an ‘Ndrangheta family makes no secret about its roots – it has a large photo of the owner’s family taken in the 1950s in Calabria framed on the wall.

The ‘Ndrangheta give their members 7 rules when they join:

  1. humility to be humble
  2. loyalty to protect each other
  3. scripts and procedures to converse with fellow society members
  4. false scripts and procedures to speak with law enforcement and unworthy people
  5. a knife to protect the society
  6. a mirror to look behind your back at all times
  7. a razor blade to cut away unworthy people.

If Figliomeni is an ‘Ndrangheta, he may have forgotten rule #6 because he wasn’t watching behind him to notice that he was under investigation for the past 18 months prior to his arrest.

An ‘Ndrangheta daughter

Another member of the high-ranking Figliomeni clan, this time a woman, Jole Figliomeni, left Calabria, Italy for Abidjan, Ivory Coast, which is coincidentally now a major cocaine import hub. While she is alleged to have cut ties to the family, Italian wire taps established that she remains connected to the family. She allegedly left Italy because she had an affair with the husband of the sister of one of the alleged heads of the ‘Ndrangheta called “U’Mastru”, Giuseppe Commisso.

The Figliomeni and Commisso families are two of the leading ‘Ndrangheta families, according to the Italian anti-mafia police.

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SEC files complaint against Canadian securities lawyer for allegedly breaching gate-keeping duty to the public and over pump & dump scheme

By Christine Duhaime | July 15th, 2019

1. Complaint by SEC over a law firm’s opinion

The SEC filed a civil complaint against a Canadian lawyer, William Lawler, and another person named Natalie Bannister, for alleged violations of the Securities Act of 1933 involving the offer and sale of securities of three little public companies that was done allegedly in violation of the Securities Act. The three companies are Broke Out, Inc., Immage Therapeutics Corp., and Nami Corp. and it is alleged that the shares were sold to the public that were not registered, and that trades were manipulated for one of the companies by William Lawler.

Lawler, although Canadian, is called to the bar in Arizona and California and he acted for the three companies as counsel. Bannister is from Missouri and she allegedly acted as an agent selling shell companies and participating in the sale of the shares to the public of the three companies.

According to the SEC, Broke Out and Immage Therapeutics Corp. were shell companies with little activity, whose purpose was to be used to transfer control through share sales to be re-sold to the public. In order to do that, Lawler is alleged to have deposited shares in brokerage accounts for resale to the public. In order to get brokers to accept the shares for re-sale to the public, Lawler is alleged to have provided legal opinions that contained untrue statements, opining that the shares were free-trading when they were restricted from trade and to have omitted material information in the legal opinions.

Bannister is alleged to have conducted fake purchases of the shares of those two companies to help establish their eligibility for public trading and to have made untrue statements in furtherance of getting the shares sold. Certain participants, unnamed in the claim, then allegedly sold those shares in tandem with a hyper promotional campaign to pump the price up, selling millions of shares to the public in a pumped-up phase and without telling the public that there were control persons dumping the shares. The participants allegedly made US$3.2 million in profit from the pump & dump scheme.

With respect to Nami Corp., Lawler is alleged to have engaged in wash trading, described in the complaint as a practice whereby a person pumps up the price of shares fakely by manipulative trading. To do this, he allegedly used two brokerage accounts to buy and sell shares to himself so that it had the appearance of a series of active trades when in reality, the same person was trading.

2. Why the complaint in respect of the law firm’s opinion is important

A legal opinion versus a closing opinion

The SEC alleges that Lawler, the lawyer, prepared and submitted a fraudulent legal opinion to the broker. The complaint is interesting for this point because it is rare to see a securities commission go after a gate-keeper’s opinion. The SEC alleges that Lawler’s opinion was false because, among other things, it contained a statement that was untrue as to the date of the sale of securities and it stated that there was no material information omitted. The SEC alleges that the opinion was either recklessly fraudulent and misleading or intentionally so. The brokers relied upon Lawler’s opinion.

For clarity, there are two types of opinions that lawyers write.

(a) Legal opinions – opinions on the law by a lawyer

The first type is a opinion written for a client and it involves the lawyer opining on a matter of law in writing. These opinions may be privileged. They are usually 25 – 100 pages in length and therein, the lawyer sets out facts, assumptions, the law and then his or her opinion on the law based on the facts. This type of opinion is written by an individual lawyer, and not a firm. This is not the type of opinion implicated in the SEC complaint and this type of opinion does not serve a gate-keeping function.

Some lawyers get their opinions wrong. For example, according to the indictment of Switzerland’s oldest private bank, Wegelin Bank, the bank obtained a legal opinion from lawyers as to its exposure in the US which was wrong – its lawyers told it that it was protected from indictment in the US because it had no physical office there. Wegelin Bank ceased operations after 272 years after handing over $74 million to the US over what amounted to reliance on an incorrect opinion.

An arm of Wedelin Bank helped wealthy foreign politically exposed persons set up trusts, bank accounts and private companies in well-known tax avoidance islands which resulted in the evasion of taxes and facilitated the hiding of $1.2 billion for its clients.

(b) Closing opinions - opinions as to matters of fact by a law firm

The second type, relevant to the SEC complaint, is a non-privileged opinion prepared for M&A deals or financings. These opinions are not privileged because they are for third parties. Financings or M&A deals, to close, involve the issuance by counsel of closing opinions. Because M&A deals cannot close without legal opinions, the role of lawyers in securities law who do financings is critical. Such lawyers gate-keep the integrity of the securities law regime and that gate-keeping function involves the use of closing opinions because participants rely on the veracity of closing opinions to close.

A closing opinion is executed by a firm, and not a lawyer at that firm. It is usually about 8 – 20 pages long. It sets out with precise language for whom the firm acted (e.g., “We acted as specialized gaming counsel to Marx Brothers Casinos and certain of its subsidiaries listed in Schedule “A” in connection with the issuance and the purchase by Goldman, Sachs & Co. of $700 million aggregate principal amount of 5.25% senior subordinated notes due in 2024… This opinion is delivered to you pursuant to §27(c) of the Agreement.”). It then sets out the work the firm did in order to put a circle around potential scope liability  (“As counsel, we participated in the preparation of the indenture, the preliminary offering circular and the global certificates representing the notes”). Then it sets out what documents the firm consulted  (“We have consulted … and examined a certificate of officers and guarantors”). Then it sets out for each opinion of factual matters, who else the firm relied upon (“In expressing the opinions in paragraph 65, we have relied on the opinions of X law firm in X city”).  And it concludes with stating the opinion as to certain facts. For typical financings, opinions say : “the issue and sale of the securities and the compliance by the Company and each of the guarantors, including the consummation of the transactions, will not result in any violation of federal or provincial statute, or any order, rule or regulation of any federal or provincial court or governmental agency …”).

The drafting of closing opinions requires lawyers to undertake transactional due diligence and to be satisfied in respect thereof, a precursor necessary to drafting a competent closing opinion. That’s because closing opinions also opine as to other general and corporate matters. For example, opinions opine as to the accuracy, completeness and fairness of the risk factors disclosed by the offerer of securities in the offering documentation provided to prospective investors, as well as opine that shares issued are duly authorized, fully paid and non-assessable. To make such representations knowing that they serve a gate-keeping function and will be relied upon by the investing public, as well as regulators, requires that the lawyers involved in drafting the closing opinion for the law firm, undertake examinations, inter alia, of records and conduct minute book reviews of directors resolutions and such to make such representations.

Drafting this type of legal opinion when you are working with a book-runner like Goldman Sachs, lets say, can take weeks to draft for complex financings – not because the opinion is complex but because every word the lawyer drafts in such an opinion matters because of the reliance placed on an opinion by the third party to whom it is addressed, and because of the gate-keeping function it serves for securities regulators and the investing public.

Only law firms prepare these types of opinions – never an individual lawyer for obvious client, liability and third party reliance reasons. These opinions usually go through several trusted and competent lawyers at a firm before they are signed by the firm and can be released (because of liability reasons). These opinions can be general or can be for specific areas – for example, if gaming counsel is retained, an opinion is sought by specialized counsel as to gaming regulatory matters.

As noted above, closing opinions close with the material representation: “the issue and sale of the securities and the compliance by the Company and each of the guarantors, including the consummation of the transactions, will not result in any violation of federal or provincial statute, or any order, rule or regulation of any federal or provincial court or governmental agency.” To make such a representation, the law firm must first be satisfied that it is true, and must have undertaken due diligence on the law and the transactions to be comforted as to the representation.

Brokers solely rely upon the law firm’s opinion – it does no due diligence of its own on those matters opined upon in the closing opinion and therefore, the representations of a law firm (called the opinions) in a closing opinion are critically important. If a law firm issues a closing opinion that is untrue, as alleged in this case, the integrity of the security law regime is impacted because it raises the question of whether the public can or cannot rely on law firm closing opinions 100% of the time. The SEC and the public it protects, obviously need to be able to rely on the closing opinions of law firms 100% of the time.

Interestingly, lawyer regulatory bodies teach new lawyers over the course of weeks, about the first type of opinion – the legal opinion – but not about how to undertake due diligence, how to draft, and the liability exposure in respect of, the second more important type of opinion – the closing opinion – that only lawyers can prepare for their law firms. These opinions are more important because they are relied upon by the investing public; they protect the public; and they protect the integrity of the securities law regime. New lawyers are also not taught about the gate-keeping function these opinions serve, and nor how fundamentally important the role of the lawyer is in respect of these types of opinions to both the integrity of the legal profession and the public markets.

3. Why the lawyer and not the law firm? 

You may be wondering about jurisdiction, namely how the SEC has jurisdiction to file a complaint against a lawyer over a closing opinion when such opinions are executed by a law firm and not a lawyer, and when the representations therein that form the opinions are those of a law firm and not any individual lawyer, and bearing in mind that clients are always only clients of a law firm and never of a lawyer, unless a lawyer does not work under the umbrella of a law firm but in securities law, that is rare. It’s because, although the law firm holds the liability in respect of closing opinions, and not a lawyer, if there is a lawyer who can be identified as the sole author of a closing opinion and who signed off on it, that would give jurisdiction over that lawyer for SEC purposes. It is also possible in this case, that the lawyer personally executed the opinion  qua lawyer rather than qua law firm. Unlikely though, because a brokerage firm will usually reject a closing opinion that is issued by a lawyer and not a law firm. So while a law society or bar association has jurisdiction over an opinion attributable to a lawyer, or if none, to the managing partner of the issuing firm if issues arise as to competence or misrepresentations in the matters opined upon, the SEC also has jurisdiction over the lawyer for breaching his or her gate-keeping duty as the agency responsible in the US for preserving the integrity of the securities law regime.

4. Another Canadian securities lawyer allegedly facing charges over closing opinions allegedly used in furtherance of pump & dumps to defraud the public

This is not the first time the SEC comes after a Canadian securities lawyer over alleged incompetence in connection with closing opinions.

Another Canadian securities lawyer, Faiyaz Dean, from Vancouver, is alleged to have provided closing opinions from his law firm for securities law purposes as to factual matters for third party reliance that the SEC says were questionable. To wit, a Russian company with one employee, a 79-year-old message therapist and less than $100 in revenues was allegedly able to obtain opinions from Faiyaz Dean’s law firm sufficient to become a listed entity. Dean’s firm allegedly opined on a handful of other Eastern European companies under similar circumstances for US securities law purposes.

According to an article written by David Bains in 2009, who was a well-known reporter in Vancouver, Faiyaz Dean was trained to practice law by a securities law firm called Bacchus Law in Vancouver. In 2009, Mr. Bains wrote that he was concerned with these deals being shams and he identified that the handful of so-called Eastern European companies actually were Vancouver connected, and were each inner-connected to each other, and some were connected to Bacchus Law, as well as to Faiyaz Dean.

Faiyaz Dean is alleged to have moved on to bigger fish, and to have allegedly helped perpetrate a $34 million pump and dump involving a company called Biozoom with another lawyer, James Schneider, who was recently convicted of money laundering in Florida in connection with the Biozoom matter. That other lawyer wrote false closing opinions in furtherance of a dump and dump, which were relied upon by third parties which generated proceeds of crime, securities fraud being the predicate offence, hence the money laundering charge resulting in his conviction as a money launderer.

This 2018 article, published nine years after David Bains expressed concerns, explains a civil complaint filed by the SEC against Faiyaz Dean wherein the SEC alleged wrongful conduct by the lawyer that caused harm to the public and to the capital markets. Seems like Mr. Bains believed that harm to the public by Faiyaz Dean was a clearly foreseeable event.

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The un-talked about sector in money laundering cases – the accountant

By Christine Duhaime | June 23rd, 2019

Mobster Lansky exiting a Las Vegas casino with a duffle bag of cash. Photo from Francis Miller/The LIFE Picture Collection/Getty Images

Practical and real accountants

Not much is written about the role of practical or real accountants in money laundering, or the compliance of accountants, as reporting entities to FIUs under anti-money laundering law. But it’s an increasingly interesting issue.

At least in Canada, accountants, accounting firms and their employees must report the following to the FIU, which is FINTRAC:

  • Suspicious transactions if there are reasonable grounds to suspect that a transaction or an attempted transaction in which the accountant or accounting firm is advising on is related to the commission or attempted commission of a money laundering offence or a terrorist activity financing offence;
  • Terrorist property if the accountant or accounting firm has property in his, her or its possession or control that he, she or it knows is owned or controlled by or on behalf of a terrorist or a terrorist group, as well as any information they have about a transaction or proposed transaction in respect of such property; and
  • Large cash transactions for cash transactions of $10,000 or more received in connection with a transaction in which they provided advice.

Most unreviewed sector by FIU

I believe it was according to a Freedom of Information Act request made in Canada that showed that accountants were the reporting sector with the lowest per capita number of filings with the FIU and which had the lowest number of compliance reviews conducted by the FIU. In other words, they seem to report the least when adjusted by number of firms and accountants and are reviewed by the FIU the least.

Pursuant to the design of the Recommendations of the FATF, certain sectors that touch the financial system are designated gate-keepers and accountants are one such gate-keeper. No studies have been done on the extent to which that sector complies with its gate-keeping function but anecdotally, there are countless cases in which accountants have been involved in money laundering – wittingly or unwittingly.

Cases with accountants

Lansky

According to the book “The Laundrymen”, money laundering was a business started by a practical accountant (and gangster) named Meyer Lansky, who managed the books and money for many of New York’s most well known national organized crime figures such as Bugsy Siegel and mob boss Lucky Luciano. Lansky became known as the “mob’s accountant” and “the patron saint of money launderers.” He is credited with being the person who convinced organized crime figures to move their proceeds of crime to offshore havens in Switzerland and the Bahamas to avoid detection and forfeiture. All three – Lansky, Siegel and Luciano – were intimately involved in land-based casinos, including building one of the first casinos in Las Vegas. Lansky would wash money through Las Vegas casinos for the mob.

According to an ACAMS article on Lansky, he helped the mob avoid being detected as money launderers by (a) filling their taxes on time all the time because all money launderers file on time to avoid attention being drawn to them; (b) using offshore tax havens, preferably Switzerland; (c) avoiding lavish spending; and (d) using shell companies.

Tax havens

Probably the most famous accountant in the world, a man named Walter Diamond, now deceased, who was a bank examiner and advisor to the US government, wrote a text book of questionable content called “Tax Havens of the World”, updated annually for 25 years, in which he promoted the use of offshore tax havens to defeat law enforcement and government oversight. In his book, he extolled the virtues of offshore tax havens and wrote that they are useful to cloak bank accounts in secrecy (because of the anonymity of shareholders of private companies incorporated in offshore tax havens); to shift investments offshore without being taxed; to make sure financial dealings and financial assets remain private (to avoid taxes); and to avoid government control. His book provided an analysis of each offshore country and an assessment of the strength of each country’s anti-money laundering law enforcement – the more lax the country and the more secretive its private company structure, the more favourable a location it was, suggested Mr. Diamond. He was one of the harshest critics of the FATF because he felt that the FATF interfered with what he seemed to believe was a right to park money secretly in other countries and to own companies secretly in other jurisdictions to use to open bank accounts.

Columbia 

Insight Crime reports that in Colombia, a man known only under the alias “contador” (the “accountant”), is believed to be a practical accountant, the chief financier and money launderer for the cartels. He is alleged to have links to the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia – FARC) and one of the main financial backers of the Oliver Sinisterra Front of the ex-FARC Mafia and the United Guerrillas of the Pacific (Guerrillas Unidas del Pacífico).

Cartels

Other international gangsters seem to like accountants to move money as well. The DEA lists another practical accountant, aka “el contador” from Mexico, who is believed to be the accountant for the Gulf Cartel and part of that cartel’s leadership, whose real name is Jose Alfredo Cardenas-Martinez. Martinez was arrested a few months ago in Mexico and is the nephew of Gulf Cartel Leader, Osiel Cardenas. As the el contador, he is believed to have been the material money mover and washer for the Gulf Cartel.

Bitcoin

Not to be left out, Bitcoin people have accountants too that have used their financial talent for inappropriate purposes. An accountant, Renwick Haddow, was indicted in the US for operating a fake Bitcoin trading platform and taking US$38 million from consumers in several countries. He subsequently pleaded guilty. Among other things, Haddow opened bank accounts for the Bitcoin exchange and acted as its authorized representative with the banks, and managed what amounted to a Ponzi scheme.

Cautionary case of wrongful investigation and arrest of accountant

But here is an interesting case from Canada that is a cautionary one for investigations and arrests of professionals for alleged money laundering.

In Canada, Jocelyn Therrien, an accountant, was investigated, arrested and charged by the police for allegedly being tied to criminality (specifically the Hells Angels) and laundering money for them. At the criminal trial, the Judge dismissed all the claims against her, before it even went to the jury, saying that there was no evidence to substantiate the charges. The accountant is now suing the police, the attorney general and the prosecutors in respect of the investigation and the charges laid against her for abuse of process and negligence. In her lawsuit, she says that the police investigation cost her all of her clients.

The case is concerning for professionals, especially accountants. Most government agencies and banks have teams of accountants and auditors who, based on this case, are at risk of criminal prosecution in the same way, or more, as Ms. Therrien was, if their organizations are unwittingly used for financial crimes. That’s because, as the Court held, Ms. Therrien had no connection to the proceeds of crime moved by the Hells Angels through the financial system and yet she was charged and prosecuted, whereas accountants do have such connections, however indirect, because financial institutions and government agencies are often unwittingly used and abused by organized crime to move proceeds of crime.

The discovery of the trial will be interesting as it will require disclosure of what forensic financial transactional evidence existed to tie the accountant’s financial transactions to the Hells Angels. If there was no tracing of financial transactions from them to her, or no evidence of financial transactions from bank records, which appears to be the case, there were then no grounds to commence the investigation, lay charges, arrest the accountant or continue the criminal trial against her. In money laundering charges, you need evidence and that evidence must be financial evidence from a qualified forensic expert, which ironically is usually a forensic accountant.

The money laundering offences are purely about moving property knowingly to obfuscate its criminal origin and therefore, the police, AG and prosecutors would have to have had evidence not only of the movement of property derived from crime through bank accounts between the Hells Angels and the accountant, but also evidence that even if the accountant moved property derived from crime, she did it knowingly. The DPP in Canada has testified to Parliament on the high standard of evidence and proof required to bring a money laundering charge in Canada. That’s why, they have testified in Parliament, there are so few charges and prosecutions in Canada. Since the time of the prosecution of Al Capone in 1931, the standard to lay a charge has been evidence of financial transactions establishing the requisite crime from qualified forensic accountants.

Vancouver has a famous case, never prosecuted, where over $500,000 in Bitcoin was paid to the Hells Angels to murder people, which is traceable on the Blockchain (read here), and the province of Quebec housed the world’s largest money laundering operation tied closely to Russian organized crime (read here), also never prosecuted in Canada, which is also traceable on the Blockchain – so why the case against the accountant was pursued vigorously or at all, is unknown when more solid cases are on the shelf.

One more important aspect to keep in mind is that Courts have ruled that money laundering reports produced by bank or other AML consultants are not a protected communication and are compellable. This applies irrespective of if the bank or other entity made a filing with a FIU. So in a litigation involving wrongful filing of police reports or of other information that leads to a wrongful investigation and an arrest of a professional, the litigant can compel AML-related documents from banks and other parties to litigate or to defend wrongful charges, and the banks and other entities are not entitled to redact such reports.

If you want to learn more about accountants, the FATF has guidance in respect of the role and obligations of accountants here, which is an interesting read of the expectations of accountants in anti-money laundering law.

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