Where is financial crime heading? Where will enforcement be focused?
With financial crime costs rising for law enforcement, investigations, compliance and reporting, and the number of predicate criminal offenses and sanctions lists increasing, the ability of financial crime sector organizations and governments to respond is shrinking.
2022 changed the financial crime space
2022 ushered in new geo-political realities which will shift the entire financial crime space. For example:
The Russian invasion of Ukraine is causing significant increases in sanctions compliance and investigations into Oligarch source of funds.
The US focus on China as a geo-political risk with Russia, shifted the focus of Western nations and their resources from addressing external terrorism threats, and correspondingly, away from counter-terrorist financing. Terrorism is increasing in several African countries so the threat remains but geo-political shifts have caused shifts away from terrorism.
The pervasive fraud in the crypto sector finally trickled down after several years, overburdening law enforcement and investigations teams worldwide, as well as financial crime experts, pulling them away from other financial crime work. Banks went back to blanket de-risking crypto companies as too high-risk and expensive from a compliance view. The explosion of international payments fraud, generally, has overwhelmed financial crime sector participants.
The US-driven initiative to “shore-up” rare earth elements and critical metal supplies, and the supply-chain for the US market in anticipation of the energy transition (what the US calls “friend-shoring”), means that the corruption-infused mining industry will become a big focus.
This will cause a focus on securities fraud outside the US (and on to Canada and Africa), because the mining sector will become too important to tolerate systemic fraud. Investor trust will have to be assured for the US policy of friend-shoring in Canada and other countries to succeed.
Climate change is going to result in global food insecurity in conjunction with climate-driven mass migration, which will impact the sourcing of food resources, especially fishing.
This in turn will cause Western enforcement agencies and policy agencies to tackle the shipping industry and insurance from a financial crime and beneficial ownership perspective to stop IUU fishing and fish laundering (see here about laundering fish).
National crypto systems
In the back drop of the above, the plans of Islamic countries (Shia and Sunni alike) to complete their previously-announced shared crypto systems to enable them to operate outside of the US dollar financial system, may take shape in 2023, but even if it does not, countries subject to US sanctions, or at risk of US sanctions, will likely continue to cooperate together to develop their own crypto solutions at national levels to eradicate those risks.
We knew this was coming since 2014, but it has never been determined to be a national security risk of the US or its allies.
A worse-case scenario would be if the Islamic countries’ crypto plans, and the crypto plans of heavily sanctioned countries converge into a shared new financial system bubble, with most of the world’s growing populations opting-into their own system. There’s always a danger of over-using sanctions and its a delicate balance that the US Treasury considers when it makes its designations. Not all nations align on sanctions and its not realistic to expect that they will, given national sovereignty.
Singapore, which has the FATF presidency for the next two years, has declared that its focus will be on asset recovery but its day has come and gone. Five years ago, movement on asset recovery for financial crimes was really needed – now there are greater priorities. Unfortunately, the FATF and some FIUs that issue risk assessments have wholesale not addressed IUU fishing or shipping vessel flagging and regulation gaps that allow blue crimes to grow, threatening global food security.
Decrease focus on other areas
With resources that are limited, governments and law enforcement agencies cannot possibly tackle all the financial crime that arises and choices will be made to prioritize areas that correspond with new geo-political risks and climate change, above all else, and to de-prioritize others.
Areas that will gradually decrease in terms of small to mid-sized money laundering investigations, enforcement and cases in 2023 and beyond will include organized crime, real estate laundering, human trafficking, drug trafficking, money laundering in the gambling sector, corruption (except in the mining sector tied to Africa) and terrorist financing.
2023 will be a year of greater visibility on the new hot button items, leading into 2024 where we will being to see the reporting of predicate offenses and large financial crime investigations of IUU fishing (deforestation as well), mining corruption, securities fraud, fraudulent flagging of vessels, and climate-related crimes. A few of these areas are tied to state actor conduct, which is inconsistent with how anti-money laundering compliance works so changes will likely be made to enable the refocusing of risks on such actors and the reporting thereof.
The global nature of these areas of investigation mean that FIUs will improve the quality and quantity of information sharing. The move to revealing the identity of shareholders of private companies (the so-called beneficial ownership initiative) will undergo a significant shift to the shipping sector for investigations into IUU fishing. The reality is that with food security causing global hardship, governments will care less about who controls the bank account of a shell entity of a drug trafficker and more about who controls ships engaged in IUU fishing.
None of these changes to the financial crime sector will happen overnight, but they are happening.
Shoring up for a different financial crime future
In the interim, shoring up for a different financial crime future by understanding the following will prepare one for financial crime policy shifts: IUU fishing and its risk areas; the difference between rare earth minerals and critical minerals and where they are mined, and processed, as well as their financial crime risks; corruption tied to the mining sector and its risks; securities fraud in the mining sector and its risks; and how the flagging and registration of ships occurs and the gaps that exist.
They have been called many things – mercenaries, irregular forces, private military contractors (PMC), and private security companies (PSC) – whatever the phrase, PMCs have been around for a very long time.
The war in Ukraine recently brought the use of private soldiers into focus – Russia has hired at least three such groups, the Wagner Group, Redut, and Patriot Private Military Company, to fight in Ukraine.
PMCs are a growing international business.
There are private military contractors from all over the world, including the US, Russia, Iran, Canada, and South African. Many are former elite military combatants, more skilled than local forces. The biggest contractor of PMCs is the US government but that may have changed with the Ukraine war.
PMCs in history
The most well-known example of PMCs in the world was the military group who worked for a woman pirate named 石陽, Queen Shí Yáng, also known as 鄭嫂. Queen Shí Yáng had 70,000 men who worked for her aboard more than 1,600 vessels. In the early 1880s, they controlled the South China Sea and Pearl River Delta, routinely defeating the Qing Dynasty navy in coastal battles.
Shí Yáng’s group earned revenues in a variety of ways, including as mercenaries for warring Vietnamese rulers, by controlling the importation of salt into China, by collecting navigation taxes, and looting foreign vessels entering China’s waters. Mercenaries were paid 20% of all the loot collected by Shí Yáng.
The Roman Empire had PMCs called the Praetorian Guard. They were private soldiers who, for over 300 years, protected powerful generals and politicians. Wealthy families often had thousands of praetorians safeguarding their family, land and business affairs. Praetorians became a powerful group in Rome, and the more powerful among them, at one time came to control who would succeed as emperor of Rome.
YouTube channel of Invicta
Medieval Europe had a booming conflicts market, and PMC were used to engage in wars, steal land or to protect businesses for the wealthy.
Byzantine emperors hired Norse PMCs known as the Varangian Guard. In the 11th Century, nearly half of William the Conqueror’s army was made up of PMCs, and King Henry II hired PMCs to deal with the rebellions of 1171–1174. The Pope’s Swiss guards, now part of the Swiss Army, used to be PMCs.
An obvious example of the use of PMCs, but the least discussed, was the use of PMCs in the enslavement trade. Henry Bath, in his book series “Travels and Discoveries of North and Central Africa”, which describes his mission to several countries in Central Africa in 1856, details the use of local armed private forces hired by foreigners to capture humans in Central Africa for enslavement.
Illustration of Enslavement (Source: John William Frost’s book Broken Shackles)
PMCs, in one form or another, have always been part of the culture in manufactured and real conflict zones, hired to protect legal and illegal commerce for private enterprise, organized crime and in some cases, for governments.
The Wagner Group is owned by Russian oligarch Yevgeny Prigozhin. Prigozhin became acquainted with Putin when Putin was a municipal politician in St. Petersburg. Murdered Russian organized crime leader Shabtai Kalmanovich, was part of the same circle in St. Petersburg. Before Kalmanovich was horse-traded back to Russia from an Israeli jail, he used PMCs to engage in diamond and minerals trafficking in Sierra Leone, and to protect Joseph Momoh.
Defending extraction rights
PMCs continue to be frequently used to protect mineral resources for private enterprise, including in large part, by Canadian owned extraction industries.
Some PMCs act as intermediaries for black bag deliveries. Black bag deliveries (called black suitcases in Europe and Asia) are corruption / bribery payments made to politically exposed persons (often politicians), a common occurrence in the mining and extraction industries in Africa.
The Wagner Group is one of the PMCs operating in the Central African Republic on behalf of the government, and to protect private mining companies.
Canadians were one of the first in the CAR. According to allegations made by Wikileaks (see here), the Canadian little public company Uramin Inc., made a black suitcase “bonus” payment in the CAR on June 28, 2006, in connection with mining rights for the Bokouma plot of land, where there were allegedly viable uranium deposits. Uramin was sold to the French state-owned company Areva S.A.
https://www.youtube.com/watch?v=1tECHzB-uCM
YouTube channel of Al Jazeera
PMCs remain the protectors of mining assets and mining rights in most conflict areas of the world because they are effective at what they do for private commerce. Many public and private enterprises could not operate in conflict zones without PMCs because the risks to assets, investments, manpower, infrastructure and executives are extremely high. PMCs mitigate risks.
The mining company Freeport-McMoRan hired the PMC company Triple Canopy to protect its mining rights and mining operations in Papua, Indonesia, against local insurgents. In South Sudan, DeWe Security provides PMC services to protect the contractual rights and operations of the China National Petroleum Corporation.
PMCs also operate in Syria, to protect oil and gas assets, and in Mali, under contract with the government.
YouTube channel of VOA Africa
PMCs can be effective
PMCs can be effective.
PMCs from South Africa and Eastern Europe were hired by Nigeria for a search and destroy mission to eliminate the terrorist group Boko Harem from Nigeria. They drove out Boko Haram in weeks – something the Nigerian military had not been able to do in six years.
Another PMC group, Executive Outcomes, was paid US$1.2 million a month to successfully contain and quell a rebellion in Sierra Leone. In comparison, the United Nations went through US$47 million for one month in Sierra Leone with zero impact.
In Somalia, PMCs hired by the UAE and the Somalian government effectively eliminated the piracy problem in the waters off the coast of Somalia. According to Lloyd’s of London, there have been no attacks on merchant vessels off Somalia for the last four years, saving US$6 billion in costs.
In the 2011 clip below, PMCs from the Trident Group, open fire on Somali pirates and prevent a pirate attack.
YouTube channel of Inbound Logistics
PMCs to obstruct justice
PMCs also provide intelligence and pre-litigation services.
In Canada, the Israeli groups Tamara Global and Black Cube, run by former Mossad agents, were used in a litigation connected to Ontario lawyers, to come to Canada to obstruct justice and defeat the rule of law in a civil proceeding.
The mission?
To locate an Ontario Supreme Court judge named Frank Newbould, who presided over a key litigation, and once located, to lie to Newbould so that he agreed to a meeting. And at the meeting to engage him in a conversation under false pretenses, to egg him on to make anti-semitic statements, which would then be used as grounds for appealing a court decision.
The mission was successful except for the last part because Newbould did not make anti-semitic statements at the meeting.
The use of foreign PMCs in the obstruction of justice in Canada is probably less shocking than the fact that nothing happened to the lawyers involved in the plot.
Dangers of PMCs
The use of PMCs is growing throughout the world and there are dangers associated with their growth, beyond manipulating courts and interfering with the administration of justice.
The attractiveness of PMCs to those who hire them is that they provide deniability, which means they act in a foreign country in a vacuum outside the rule of law.
Among the dangers is that the super rich, the fortune 500 executives, will be able to buy power, leading to a situation where, with private armies, they become more powerful than some countries. The super-rich will become superpowers, and above the law.
Another danger is that while PMCs are stateless (meaning the men and women who sign on to be PMCs can come from any country), locals see them as a representative of a country. Blackwater, for example, was seen by the Iraqis and Iranians are being the US military, as opposed to simply PMCs. The Wagner Group has more than just Russian nationals engaged to perform PMC work, but locals in African countries, and in Syria tend to see them as tantamount to the Russian military. For example, a PMC group comprised of contractors from France in Serbia will be viewed by Serbians as if they are an arm of the French government, even though they are a private group whose paymaster may be a private sector company. Any unlawful, menacing or inappropriate conduct will be attributed to the French government, which harms its international reputation.
There is also the danger that wars could be started without states. In the CAR, for example, and specifically, it is not beyond the realm of possibilities that another PMC group is hired to battle the Wagner Group and, among other things, to attempt to gain control of the mining infrastructure they protect for their clients, or to destabilize existing mining activities for another actor whom that PMC is fronting for.
This is a risk for many African countries that, hiring PMCs to support economic growth and protect foreign investment, may cause other non-transparent actors to use PMCs to engage in commerce-related warfare to gain competitive advantages illegally, especially those with viable deposits of rare earth elements and critical minerals.
Most countries use PMCs, and allow them to operate – tacitly or overtly. With armed non-state private military actors assuming more control in more areas around the world, state power will decline, which has the potential to upend international relations as we know it.
Another crypto company bit the dust early this week, and with it, up to US$10 billion in customer money evaporated. BlockFi was a digital currency exchange, deposit-taking institution, and lender. BlockFi also issued and sold securities. It was not government-registered to provide any of those financial services in Canada. In early 2022, it settled a case with the SEC for misrepresentations made to investors.
SBF
Like many others in crypto before it, it promised to “protect your assets” if consumers used its services. On Monday, it filed for bankruptcy protection. According to the bankruptcy filings, consumer assets were put at risk and not protected.
In the past few months, a slew of crypto companies – Terra-Luna, Three Arrows Capital, Celsius, Voyager Digital, FTX and now BlockFi – have gone kaput, and with them, billions upon billions of dollars of customer money are gone.
Voyager Digital is in a different category than the others because it is a Canadian public company, and one of its directors was a lawyer in British Columbia. It is being sued in the US for being an alleged Ponzi scheme.
The combined losses of those six crypto companies are of unprecedented proportions. This isn’t a Bernie Madoff sized evaporation of customer money held in trust – it’s many Madoffs. Before it blew up, CME Group CEO Terry Duffy said FTX was a pump and dump scheme, eg., like a capital markets fraud scheme.
Some of the founders of the six defunct crypto companies fled to extradition-friendly countries, where they are now professing their innocence in the court of Twitter.
It seems obvious that many crypto guys are not good at running companies but they seem exceptionally good at the art of deception.
Crypto dudes fool everyone
These crypto dudes fooled executives at the Ontario and Quebec pension funds, they fooled lawyers, they fooled banks, they fooled experienced venture capitalists, they fooled journalists, they fooled members of parliament in several countries, and they fooled regulators.
Canadian Kevin O’Leary talks about how he was fooled too, and talks about being targeted with hate on social media (and by the media) for his ties to FTX (here).(Footnote 1)
We got a taste of early deception in 2017, when a Canadian crypto dude settled with the SEC (see here) for lying in a pitch deck, on phone calls and in emails to banks, lawyers and investors about advisors, claiming untruthfully that several prominent people were advisors of his crypto company. Not only were they not advisors, but they had no knowledge that their likeness, bio and name were being used without consent to raise money, until reporters called them.
In crypto culture, some of these guys don’t just fib about advisors, high investment returns or the protection of customer assets – the US government warns that some are impersonating people (see here) as part of their business model.
Where were regulators?
The effects of the six crypto debacles, including British Columbia based Voyager Digital, are rippling across the globe, leaving many wondering how such vast schemes went on for so long without regulators stopping them, despite numerous red flags and warnings.
It’s not like there are no laws to protect the public from this. In Canada and the US, numerous laws, including securities, consumer protection, competition, banking, fraud, financial crime, and lending laws all have a role to play.
Round-tripping
One of the things emerging from these six crypto debacles is the extent to which crypto is a clubby, secretive world of guys who all know each other, and do transactions between each other. Not only that, if one looks at all of them together, it appears that some of them may have allegedly fronted for each other’s balance sheets or engaged in round-tripping.
Round-tripping is a type of activity where money (or crypto) is moved in a circuit. It’s a type of financial magic trick that creates the illusion of having funds (or of solvency, assets, or revenues). Round-tripping is unknown to most professionals except in the world of public auditing. We wrote about round-tripping in the capital markets here and here.
With multi-party round-tripping for credit, a number of companies send money to each other, one by one. When credit is obtained by party one, the money is sent to party two. When credit is obtained by party two, the money is sent to party three. Around and around, it goes. The result is that the amount of credit extended by victim banks or other parties balloons, filled with hot air.
Financial magic
Like all magic tricks, the illusion only lasts so long. The balloon must burst.
A user on Twitter questioned the money movements of BlockFi and FTX, which we’ve paraphrased:
“BlockFi gave hundreds of millions of dollars to FTX; FTX gave it to its Alameda branch; Alameda gave it to Emergent, a shell company owed by SBF, FTX’s founder; Emergent used the money to buy shares of Robinhood; the Robinhood shares were used as collateral for a loan from BlockFi to FTX; FTX then used that money to bail out BlockFi.”
Changpeng Zhao, the CEO of the world’s largest crypto exchange, Binance, also tweeted about the money movements. We’ve paraphrased what he wrote like this:
“Voyager Digital gave hundreds of millions to Three Arrows Capital; FTX-Alameda gave $100 million to Three Arrows Capital; FTX-Alameda gave $110 million to Voyager; FTX-Alameda then borrowed $377 million from Voyager; Three Arrows Capital went bust; Voyager went bust.”
And then FTX went bust. And then BlockFi went bust.
A circus
But its circuitous, right?
It was a kind of a merry-go-round of the same money spinning between many of these kaput crypto companies. Unfortunately, there were no adults in sight to turn off the circus lights at midnight and send the kids home.
1: In that interview, O’Leary pitches using Canadian digital currency exchanges, which he alleges are “safe” if they are public companies – we know that isn’t the case because of the Voyager Digital case – it was a Canadian public company that was a digital currency exchange. FTX operated in several provinces in Canada, as well, as a digital currency exchange and it was not “safe”.
New charges levied against Dhillon and against his lawyer
Three times a charm or a curse?
A Vancouver doctor who allegedly partnered with the now-infamous Vancouver lawyer Frederick Sharp in an international microcap alleged fraud scheme (summarized here) – Avtar Singh Dhillon – was charged criminally by the US Government, the FBI announced yesterday. It’s the third set of securities-related charges against Avtar Singh Dhillon in thirteen months.
Less than a week ago, Avtar Singh Dhillon (“Dhillon“) was charged by the Securities and Exchange Commission (“SEC“) for alleged fraud in connection with undisclosed promotional activities to sell the stock of Emerald Health Pharma Inc. (those charges are summarized here).
Yesterday, the FBI announced that Dhillon was charged with conspiracy in connection with payments to the same stock promotor of Emerald Health Pharma Inc. (“EmeraldPharma“).
In connection with another microcap company, Arch Therapeutics Inc., the FBI announced that Dhillon was charged with failing to disclose stock sales and with aiding and abetting the sale of unregistered securities.
Dhillon’s lawyer charged
Dhillon’s lawyer, Daniel V. Martinez, was charged with the sale of unregistered securities.
The FBI alleged that Martinez created a company for Dhillon and shares of Arch Therapeutics Inc. were parked there (meaning the lawyer created the central securities register and entered Arch Therapeutics Inc. as the shareholder of that private entity the lawyer incorporated in California). The private entity then sold the shares of the public company. Because it was a private company selling and fronted by the law firm, it looked to the outside world like it was not Dhillon beneficially controlling the shares. Dhillon earned US$1.3 million in proceeds of that crime. The securities disclosure of that issuer did not disclose these events to investors or to the capital markets.
Avtar Singh Dhillon, the former chair of the board of directors of the Massachusetts-based company Arch Therapeutics, and attorney Daniel V. Martinez have agreed to plead guilty to selling unregistered securities following an #FBI Boston investigation. https://t.co/lQEmuuBRI1
Both agreed to plead guilty. Dhillon is facing a term of incarceration of up to 30 years. No date has been set for Dhillon’s sentencing. He will be sentenced pursuant to US federal sentencing guidelines in effect as at the date of the events.
Because he was heavily lawyered-up in Vancouver throughout the whole of his capital markets career, including partnering during that career with a Vancouver securities lawyer, there isn’t much he can advance downwards for the sentencing guidelines. The 30 years is a baseline – it can be increased, for example, if a person directed the intimidation of a whistleblower, attempted to obstruct justice or refused to accept responsibility. There is usually a “role enhancement”, that increases sentencing where the person was in charge. Sentencing can also be reduced (called downward departures) if, for example, a person was young and made a mistake. A defendant who enters a guilty plea is not automatically entitled to an adjustment for acceptance of responsibility because it can be outweighed by conduct that is inconsistent with acceptance of responsibility such as a defendant telling family members or business partners that he’s going to get off. The SEC, in the Frederick Sharp case, alleges that several instances of the obstruction of justice emanated from Dhillon, including in connection with a purported land transfer.
Emerald Pharma and Sciences
According to the Vancouver office of Deloitte LLP, and the last available consolidated financial statements they created of Emerald Health Sciences Inc., Emerald Pharma is owned 53% by Vancouver-based Emerald Health Sciences Inc., and it used to be a British Columbia entity that moved jurisdiction to Delaware.
In the charges announced last week, the SEC alleged that Dhillon caused officers of Emerald Pharma, whom he directed as a director, to draft fake consulting agreements to obfuscate payments to undisclosed stock promoters, and Emerald Pharma then paid fake invoices rendered by the promoters. Dhillon settled that case with the SEC and didn’t have to pay a fine for the alleged wrongful conduct. It is possible that he avoided civil penalties because of the then-undisclosed criminal charges announced today against him related to Emerald Pharma.
Dhillon voluntarily disclosed the list of shareholders of Emerald Health Sciences Inc. in a Court proceeding, and in that list Martinez appears as a shareholder.
Excel of stockholders of Sciences (Source: From Avtar Dhillon)
Dhillon was dealing with the death of his father-in-law the last few weeks, and it is likely that the FBI, US Department of Justice and SEC delayed making an announcement in respect of Emerald Pharma to allow him to deal with family matters.
Addinginternal controls
Emerald Pharma issued a news release two days ago (here) in which they stated that they intend to “add internal accounting controls.”
Wait – they’re going to “add” internal controls? Why were there no internal controls before?
Since Deloitte LLP completes (perhaps “completed” if they have resigned from Pharma and Sciences), the financials of both entities consolidated together, it begs two questions – how it was able to issue audited financials without internal accounting controls in place for a public company, and whether Deloitte LLP informed Emerald Health Sciences Inc. (as control person and pursuant to consolidated financials that included Emerald Pharma), that there was a significant deficiency in internal controls. An auditor is required to report on internal controls to the client and more importantly, to the capital markets.
If they didn’t, that’s an issue for Deloitte LLP; if they did, that’s an issue for Emerald Pharma.
Controversial entity
As noted here, Emerald Health Sciences Inc. is a controversial entity because Dhillon swore in an affidavit years after soliciting investments from investors, that one of its co-founders is Yadvinder Singh Dhillon. Singh-Dhillon is a US felon who was convicted of smuggling one of the largest amounts of heroin into the US with Ranjit Cheema, the deceased leader of an Indo-Canadian organized crime group. The Emerald Health Sciences Inc. entity controlled a number of public companies. One of those companies entered the legalized cannabis space in Canada and obtained a federal cannabis producer licence with the US felon in the mix.
How any of that was possible remains a mystery. Singh-Dhillon’s criminal history was well-known because the heroin smuggling case was heavily covered in the media for over a decade in Canada.
Dhillon incorporated a company in California through Martinez that they decided to name “Walk on Water” – an expression that means a person believes he or she is untouchable, superhuman, godlike. One suspects the FBI may have some views on that.
A Vancouver doctor who allegedly partnered with Vancouver lawyer Frederick Sharp in an International microcap fraud scheme (summarized here) – Avtar Singh Dhillon – was charged by the Securities and Exchange Commission (“SEC“) again today. This time it involves a different public company and hits closer to home for Vancouver residents because the company is Emerald Health Pharmaceuticals Inc. (“EmeraldPharma“).
Emerald Pharma is owned 53% by Vancouver-based Emerald Health Sciences Inc., according to Deloitte LLP’s Vancouver office, which completed consolidated financial statements of Emerald Health Sciences Inc. which included the financials of Emerald Pharma.
Emerald Pharma was incorporated in Delaware in 2017, but according to Deloitte LLP, before that it was a British Columbia company located and operating in Vancouver since May 2015, and was wholly-owned by Vancouver’s Emerald Health Sciences Inc.
Emerald Health Sciences Inc. is a controversial entity because it is the control person (in the US securities common law sense) of a number of public companies but was co-founded by a US felon who was involved in one of the largest heroin smuggling cases in US history. This was not disclosed to investors at the time, but was revealed years later in an affidavit Dhillon voluntarily filed in a Court proceeding, together with a list of all of the shareholders with their addresses of the Sciences entity (which included nominees that the SEC says are, or were, controlled by Frederick Sharp). The Ontario Securities Commission held, in the Russian gangster case involving the FBI’s most wanted, Simeon Mogilevich, that criminality must be disclosed to investors, as a matter of risk. How they found a solicitor willing to do securities work with a felon co-founder is a mystery.
Subsidiaries of Emerald Health Sciences Inc. Source: Deloitte LLP, 2016
The SEC also charged Emerald Pharma and its CEO James DeMesa (“DeMesa“).
Undisclosed stock promotions
The SEC alleges that Avtar Singh Dhillon (“Dhillon“) and DeMesa hired a newsletter writer to write purported independent articles to promote the stock of Emerald Pharma without disclosing that the articles were paid promotional content and without disclosing who received the payment (a §17(b) issue).
According to the SEC, several executives from Emerald Pharma (whom they do not name), attended a meeting in November 2019, to work on the promotional plan, subsequent to which the SEC alleges that Dhillon arranged to secretly pay the promoter to promote a Reg A offering to US investors.
The SEC alleges that Emerald Pharma entered into fake consulting agreements as a method to move money to pay the promoter secretly.
Fake consulting agreements
Vancouver capital markets has the dubious distinction of having invented the idea of fake consulting agreements to move money, which on its face is a form of trade-based money laundering (“TBML“). TBML revolves around invoice fraud for goods or services whereby goods or services are over or under-priced, or there are invoices for no goods or services. TBML can be domestic or across state or national lines. The SEC says that in this case, fake invoices were submitted to Emerald Pharma for payment with work described on the invoices as “developing agave syrup.”
The SEC alleges that it was Dhillon who urged DeMesa to enter into the fake consulting agreements on behalf of Emerald Pharma.
The SEC also alleges, without using these words, that the promoter was being paid as a finder, earning 6% of funds raised. Emerald Pharma paid the promoter US$1.7 million to promote, plus issued shares to the promoter with a value of US$600,000. Emerald Pharma raised USS$30 million from the alleged illegal promotions.
The SEC charged Emerald Pharma, Dhillon and DeMesa with numerous securities violations for their deception, allegedly employing various schemes to defraud investors, and making materially false statements in the disclosure material of Emerald Pharma.
The SEC sought injunctive relief against Emerald Pharma, Dhillon and DeMesa, and their attorneys among others, to prevent them from continuing to break the law. Why attorneys? Because attorneys are capital markets gate-keepers – they draft the continuous disclosure, and then publish the disclosure they write on Edgar or Sedar, which investors rely upon.
Parties settled
All of the parties charged settled.
Emerald Pharma agreed to pay a penalty – more like a parking ticket really, since they raised US$30 million – of US$517,955; DeMesa agreed to pay a penalty of US$103,591.
And Dhillon?
Although there are other securities fraud charges against him, including criminal charges in connection with other public companies, he got off Scot-Free. Not even $1 did he have to pay.
It’s hard to understand the logic, or the deterrent and denunciation message of a settlement with Dhillon on such terms. He was the director, e.g., the directing mind of the entity; the person living in the luxury mansion with the greatest capacity to pay (investors on the East coast told us that Dhillon flew around on a private jet with a body guard), who may prove to be a recidivist if the Frederick Sharp related charges are concluded with a conviction.
In a shareholder newsletter of the control person, Emerald Health Sciences Inc., DeMesa once said that his philosophy is to get outstanding business results by working closely as a team and by following the philosophy of Dhillon, which he said was to ” be a family and not just a typical business.”
But alas, they were no family – they booted DeMesa out of Emerald Pharma.
Hey, Be Happy!
DeMesa runs a YouTube channel on “being happy” with 5 subscribers.
“Asking Questions About Canadian Capital Markets” is a series of articles about the capital markets in which we explore some Canadian public companies and ask questions. These questions may shed light on the now-defunct Canadian digital currency exchange called Voyager Digital.
One of the founders of Voyager Digital is a Canadian attorney named Stephen Dattels. To understand Voyager Digital, it may help to understand the journey of some of its founders.
Voyager Digital, the digital currency exchange, is a subsidiary of a British Columbia public company(1).
According to several media reports, some investors have filed a class action lawsuit in the US against Voyager Digital, alleging that it was a Ponzi scheme with US$5 billion allegedly missing(2).
When people talk about loses to investors, sometimes it’s not clear what they mean. In the case of digital currency exchanges, if they are public companies, there are two separate pools of investments – funds from investors who bought shares of the public company (e.g., shareholders), and funds from consumers taken in as a deposit-taking function and held in trust for consumers.
The billions of dollars allegedly missing according to the US class action lawsuit refers to the money that ordinary consumers deposited in trust to buy digital currencies, some of which are so-called “tokens” or so-called “stable coins” and most are a securities. This series of articles is not about that activity or consumers; it’s about the capital markets side.
In this Part 1, we explore historic attempts to federally legislate Canada’s capital markets and l’Affaire Uramin, also known as l’Affaire Areva.
Systemic securities fraud
There is a perception in Canada that legislators haven’t done much to address securities fraud in Canada. According to research we conducted in early 2021 (see Business in Vancouverhere), while Canada represents only 12.5% of the US population, it often represents 40% of securities fraudulent activities in the US capital markets involving micro-capitalized public companies. In 2020, we researched US Court records and calculated that there was over US$4.5 billion in open securities fraud cases involving Canadians in the US.
When Covid-19 fraud started occurring in the capital markets with false representations by microcap public companies stating that they had magic Covid-19 drugs or cures, the US Securities and Exchange Commission (“SEC”) issued emergency orders to stop misrepresentative statements by suspending the trading of securities on more Canadian public companies than companies from anywhere else in the world. The SEC v.Frederick Sharp et. al. alleged securities fraud prong of cases with British Columbia actors adds another US$1 billion to the tally of open securities fraud cases involving Canadians.
Canadian public companies cause more per capita harm to US investors and to the US capital markets than any other country.
The problem has been known to US lawmakers since at least the 1940s. In a New York Times article dated June 2, 1940, a reporter noted that the best suckers grow in the US, suckered by Canadian fraudsters who target the US investors because they want access to a wealthy, large investment pool they can’t get in Canada. The Washington Post, in 1952, wrote that the US Senate’s concern for American investors being defrauded by Canadians with phoney stock claims, including phoney uranium mining claims, was so heightened there was talk of a treaty just to ship fraudsters from Canada to the US where they could be prosecuted.
Fraud on the capital markets (called by its 1920s name, “public markets,” in the Criminal Code of Canada) is a predicate offence under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, so if there is a capital markets fraud problem, we also have a money laundering problem in the capital markets.
From time to time, Canadian federal legislators have tried to address Canadian securities fraud and to force a cultural change using the law. Unfortunately, to no avail.
Bond Dealers Association of Canada
Canada was once ahead of its time in securities legislation discourse.
What happened is this – in 1916, the Bond Dealers Association of Canada was formed by a handful of nationally known bond house executives in Toronto – John Worth Mitchell of Dominion Securities Corporation Limited (now RBC Dominion Securities), J. H. Gundy of Wood, Gundy & Company Limited and A.E. Ames of A. E. Ames & Company Limited. They were famous financiers in Canada, the US and the UK who later ran (with E. B. Wood), Canada’s Victory Bond programs for the federal government for both World Wars.
In its first year, the Bond Dealers Association set up a committee at the request of the federal Minister of Finance to consult on securities matters.
In 1919, Bond Dealers Association leaders J.W. Mitchell, (who was previously an Ontario lawyer), J.H. Gundy and C.H. Burgess drafted a securities legislative framework which proposed that a federal securities commission be established in Ottawa, with branches in every province, to examine projects before securities could be sold to the public. Securities dealers would be required to be registered to sell securities and every issuer of securities for public sale would be required to provide full disclosure and any other information desired by the federal securities commission. The federal securities commission could reject a project that involved the issuance of securities to the public, and no offering of securities by advertising, circular or letter could be conducted without advance approval of the securities commission. The securities commission would be empowered to investigate issuers and their statements. Speculative securities would be “so marked on all literature.” The markings on securities literature would also include yield representations and any securities which promised to yield more than 7% return or that made representations to investors that the investment would be twice its value in two years, would have to be marked as speculative for investors. Those who violated the new proposed securities laws, could be fined or subject to imprisonment by the federal securities commission.
This was 14 years before the US Government enacted its federal securities laws and created the SEC. Canada did not enact federal securities legislation as proposed by a committee of the Bond Dealers Association but almost identical concepts were enacted in the United States in 1933 and 1934.
In 1921, the Bond Dealers engaged in discussions for Ontario’s proposed securities legislation. With the Toronto Stock Exchange, they were looking at investor protection legislation. A mining exchange called the Standard Exchange in Toronto pushed back, arguing that investor protection would harm the mining sector. The Globe and Mail noted at the time that the members of the Toronto Stock Exchange believed that mining companies on the Standard Exchange were of “questionable quality” and wanted protection for small investors, who they said had little opportunity to determine the merits of an offering.
For context, J.W. Mitchell, A.E. Ames and J.H. Gundy owned numerous utilities and financial businesses together in the United States and Canada, and sold bonds in New York. They were tight socially – for example, A.E. Ames hired the brother of J.W. Mitchell, who operated the London securities branch office of A.E. Ames & Company Limited. Dominion Securities Corporation Limited, was founded in 1901 and J.W. Mitchell, E.R. Wood, Sir Wiliam Mackenzie, and George A. Cox were among its founders and were officers or directors. Mitchell, Ames and Gundy were extremely well-connected to American industrialists and American bankers and often consulted American legislators on securities law matters with a view to ensuring that Canadian, US and UK securities laws were aligned to facilitate international finance during critical war and post-war periods.
Because they were in International finance and securities specifically, they were more acutely aware than most that harm to investors from securities fraud caused market distrust and would erode Canada’s ability to attract investment. While they had a personal interest in ensuring the market was operated with integrity, they also had a deeper obligation to Canada as the sellers of the federal bonds in international and national markets.
The way of the business world back then was through private clubs and for example, J.W. Mitchell for whom records survive, was one of a handful of Canadians invited to join the prestigious Bankers Club of New York and the Detroit Club frequented by presidents Truman, Hoover and Roosevelt. For all of their connections to federal lawmakers, access and power as the captains of bond finance in Canada, they were unable to bring about investor protection for securities on a national level in Canada.
But their legacy lives on – the Bond Association of Canada became the Investment Industry Regulatory Organization of Canada.
Bond Association of Canada founders J. W. Mitchell of Dominion Securities Corporation Limited (first from the left), J. H. Gundy of Wood, Gundy & Company Limited, A.E. Ames of A. E. Ames & Company Limited with E. B. Wood (third from the left), 1917 (Source: Collection of Sir Robert Borden).
Proposed federal securities legislation
In Canada in 2009, former Finance Minister Jim Flaherty set up a federal working group which drafted a federal securities act to replace provincial securities legislation. The legislation was designed to, among other things, address systemic fraud afflicting Canada’s capital markets, protect the Canadian financial system and investors, and enable the detection and prosecution of financial crimes arising from capital markets activities. Flaherty’s efforts were defeated by the Supreme Court of Canada which took a very provincial view and ruled in Reference re Securities Act, that capital markets had to remain provincial jurisdiction under The British North America Act, 1867.
The decision was rooted in a reality that existed in the last century when in Canada, capital markets were limited to Toronto and Montréal, and securities were evidenced on physical paper records and delivered to investors by horse and buggy.
The fact that the Canadian judiciary, in this day and age, thinks that the capital markets are like the 1890s is quite concerning.
Where Canada’s capital markets were born – King and Bay Street, Toronto, Canada, circa 1890 (Source: Toronto Public Archives)
Senate attempts to amend Criminal Code
In 2016, the second federal attempt was undertaken by former Canadian Senator Céline Hervieux-Payette, who was the deputy chair of the Standing Senate Committee on Banking, Trade and Commerce. She introduced criminal legislation called the “Combating International Fraud Act”, to respond to fraud in the capital markets after a number of scandals involving public companies in Canada left investors (many of whom were elderly) destitute and which harmed Canada’s financial reputation internationally.
Senator Céline Hervieux-Payette, 2017 (Source: Eric Carrière, Flickr here)
Senator Hervieux-Payette said she was motivated to introduce the legislation because of Stephen Dattels. Stephen Dattels appears to be the only Canadian attorney, perhaps the only attorney anywhere in the world, in respect of which deterrent legislation has been drafted.
Uramin Inc.
In Parliament, the Senator stated that Dattels founded a company in Canada called Uramin Inc., which became a public company in Canada listed on the TSXV. A short time after listing, Uramin’s stock price rose 467% and it was sold for US$2.5 billion to Areva S.A., a state-owned nuclear energy corporation in France.
According to its filed securities disclosure and a book that Dattels participated in about the deal, some of the people involved in Uramin Inc. with Dattels included John Ian Stalker, Edwin L. Phelps, Samuel Jonah, Neil Herbert, James Pitman, Ian Watson, Graham Mascall, Michael Beck, Francis Daniels and the Brexiter James Mellon. According to a book they paid to be created about themselves and Uramin, the idea to start a uranium issuer stemmed from watching Frank Guistra and Ian Telfer start a uranium issuer with a Russian brought in from Canaccord.
Why did a foreign government pay US$2.5 billion for a little public mining company in Canada that had only been around for 674 days, that had mined nothing? No one knows the answer. Literally. It may be because of representations Uramin made about the extent or value of its uranium resources. Its disclosure says its uranium resources totalled 262.6 million pounds in three African countries.
The Senator told Parliament “there was no uranium” and she stated that various audits, including one by the French Parliament found that “Dattels and his associates lied outright about their uranium reserves and deposits.” We have not been able to find an audit which says that.
No uranium? Some uranium?
In France it took a while for Areva S.A. management to comprehend its own uranium acquisition and it wasn’t until 2010, that it hired external investigators to find out about its own deal. What they and investigative journalists (see “Areva: les secrets dune faillite”here) say they learned was that: (a)Uramin Inc. had uranium deposits in Namibia that were not exploitable because they were below 100 ppm U (below 100 ppm is graded “very low” and means there is 0.01% U or less); (b) deposits at the Bakouma site in the Central African Republic were not exploitable because of mining land access issues; and (c) there were no uranium mining rights in South Africa (see “Affaire Areva Uramin: 3 milliards en fumée” here).
“Affaire Areva Uramin: 3 milliards en fumée” (Source: YouTube Channel of Imineo Documentaires)
Uramin’s mining report, called a 43-101, states that the Uramin deposits in Namibia were, for the most part, above 100 ppm U and were “low” and not “very low”. Low grade is 1,000 ppm U or 0.1% U.
With respect to the assets sold by Uramin in the Central African Republic, after the deal closed, Areva was unable to access the mining site it bought from Uramin, even though Uramin said it had paid US$27 million to the Central African Republic for a 90% interest in Bakouma and for licenses to commence mining activities.
Bakouma empty site
According to the Central African Republic, they were the shareholders of 10% of a Uramin subsidiary registered in the CAR which held the Bakouma mining rights, and its shareholder and mining agreement required the advance written consent of the CAR for the sale to Areva S.A., which they allege was never given.
Areva negotiated with François Bozizé and eventually agreed to pay an extortion of US$50 million to access the mine site. The deal was negotiated by the Belgian George Forrest, a controversial figure who, according to the US government, was talking to the Iranian regime about buying uranium. Sam Jonah, who presumably speaks French, was the person at Uramin who had previously dealt with François Bozizé Yangouvonda‘s government to secure the mining rights. All toll, US$77 million was allegedly paid to the Central African Republic for the mining rights.
Bozizé “opening up” the Bokouma empty mining site for Uramin in 2006
According to documents on Wikileaks, a bonus payment was allegedly also made by Uramin to officials in the CAR in June 2006.
Some in France have called the Uramin deal a scam (une escroquerie) or a fiasco (see “Affaire Areva Uramin: révélations due un scandal d’état?”here).
“Affaire Areva Uramin: révélations sur un scandale d’Etat?” (Source: YouTube Channel of CNEWS)
There were other aspects of “l’affaire Areva” that involved Canada beyond accusations about exploitable reserves, and those were concerns involving money laundering. And although they involved allegations tied to Uramin Inc., they don’t originate from Uramin.
Money laundered here and there?
The first is that, according to TracFin, the French federal financial intelligence unit, the spouse of the CEO of Areva, Olivier Fric, had access to material undisclosed information about Uramin Inc. and was able to buy securities of Uramin for several weeks during its blackout period. He conducted those securities transactions using a BVI shell company called Amlon Limited and netted €300,000.
TracFin told the French prosecutor that the transactions buying and selling the securities of the Canadian public company were suspicious transactions for money laundering purposes for fraud.
There was another controversial figure with his own private jet, Saifee Durbar. He self-describes as a “bandit” and his role in the Uramin Affair has been described in The Times as one of a key player in a spy thriller.
He told investigative journalists and the French prosecutor that allegedly, millions of dollars in proceeds of corruption were paid to a South African named Tokyo Sexwale at the closing of the Uramin deal, which originated from ScotiaBank in Toronto. The funds, he alleged, were laundered to Bermuda and then to South Africa for the benefit of Sexwale. In 2017, he gave more specific statements in respect of Sexwale and Uramin (see “Candidat à la Fifa, Tokyo Sexwale, éclaboussé par une affaire de corruption” here).
L’OBS headline, February 16, 2016
The French national financial prosecutor established two judicial inquiries to investigate Areva S.A., including aspects of the Uramin deal.
At the end of the day, the prevailing theory among some people in Europe and Africa who were involved, and who spoke to investigative journalists, appears to be that the deal included a portion of the acquisition price going towards a black suitcase (see “Enquête Areva – Uramin, filouterie radioactive?” here). A black suitcase is an expression used in France and China, perhaps other places, that means a bag for black money. Black money is money for crime, most often to make corruption payments.
It was Areva’s black suitcase, though, not Uramin’s but the suitcase was in Canada, if it existed. And if it existed, when the suitcase needed to be opened, it was opened in Canada and the money it held was sent to intended recipients.
In France, “l’affaire Areva” was a massive story for years. Several books have been written about it.
Senator Hervieux-Payette said that no securities regulator in any province conducted an investigation into “l’affaire Areva.” The Senator told Parliament that she tried to get the RCMP to investigate but that went nowhere, she said. The Senator then conducted her own investigation, which led to her proposed legislation to strengthen criminal enforcement of Canadian capital markets.
Her draft legislation included provisions for extraterritorial application of the Criminal Code insider trading and tipping offences. The latter provision, the Senator told Parliament, could have been used to investigate what she called the “Dattels gang.” She submitted her investigation report to Parliament.
Hervieux-Payette stated that as “federal legislators, it’s our duty to protect Canadians against capital markets fraudsters.”
But Parliament didn’t enact the Senator’s legislation. We asked a former investigator in France who investigated “l’affaire Areva” for France, why there was no investigation in Canada if there was a case to be made, as alleged. He told us it was because Canada’s mining lobby group lobbied the Canadian government to take no action.
But how do we explain the fact that the Canadian media never picked up on or followed l’affaire Areva even though it was so significant a story in France and Africa? The answer is language – most of the Areva and Uramin coverage, including about Dattels, is in French and from France and Africa. Unless one is French or follows mining, or financial crime news in Africa, one wouldn’t necessarily learn about Uramin, Areva or its collateral players.
And Areva? It apparently never survived doing a deal with Uramin Inc. It melted down and filed for insolvency protection. 6,000 people lost their jobs in France, across the EU and across Africa.
And Canadian attorney Stephen Dattels? He moved to the United States, built a mansion in Palm Beach, Florida, and kept a footprint in Ontario’s thoroughbred horse breeding country. But he also stayed involved in little Canadian public companies.
We found him connected to a little Vancouver microcap company named BetterLife Pharma Inc., where he is mentioned in a fascinating lawsuit filed by a man named Aly Ismail, battling over a finder’s fee.
Next up
In Part 2, we continue our journey to understand Voyager Digital and we explore BetterLife Pharma Inc. and the battle for a finder’s fee.
Footnotes:
(1) There is sometimes confusion about jurisdiction in cases where a Canadian company decides to operate in other countries. A British Columbia company means its jurisdiction is British Columbia, and Canada. If it is a reporting issuer, the company makes a decision on which province it wishes to attorn to as a matter of jurisdiction for securities regulation and enforcement and in respect of investors. It also selects a principal regulator, and informs investors and securities regulators who that principal is. That provincial principal regulator has primary jurisdiction in Canada. A third prong in respect of jurisdiction is the jurisdiction of its directors. In the case of Voyager, it made the decision to report to all provinces and asked Ontario to be its principal regulator for investors. It has, perhaps had now, directors in Canada. That does not mean, however, that US securities and other regulators have no jurisdiction; they have jurisdiction in respect of US investors, financings and listing matters if a US exchange was used to list stock, and if securities were offered or sold to persons in the US.The US also has jurisdiction by virtue of correspondent banking rules, which means that all of the financial transactions of Voyager Digital fall under US jurisdiction, and that brings in the US Wire Act and financial crime laws.
(2) A Ponzi scheme simply means to take new investor money and use it to return money to old investors. Before Charles Ponzi, it was called “robbing Peter to pay Paul.” It’s one of the easiest alleged frauds to investigate and confirm because directors of a Ponzi scheme direct the making of statements about how much money is invested and held in trust and one call by a regulator to the DTC, or in the case of crypto, a review of its cold wallet holdings instantly affirms (or not) the truth of representations made to investors. That’s one of the things that happened with the Bernie Madoff Ponzi scheme – no regulator picked up the phone and called the DTC.
A mysterious man from Asia and the most famous round-tripping case
In Part 1 of “Understanding round-tripping in the capital markets” (here), we discussed round-tripping and looked at a rare SEC enforcement action involving round-tripping by executives of a microcap public company. In this Part 2, we look at the most famous round-tripping case involving a mysterious man from Asia named Hady Hartanto.
Hady Hartanto is a foreign national of Indonesia and China, and seems to have appeared in Vancouver, Canada, from time to time.
Early Vancouver-managed issuer
He has a long history of involvement in public companies in Asia but he also appears in an SEC revoked OTC-listed microcap company called Worldstar Energy Corp. managed from Vancouver. In 2007, Hartanto sold Worldstar 18% of 50 mining licences he said he owned in Mongolia, and thus became involved in Worldstar.
Worldstar Energy Corp. has one of the weirdest things in a US public reporting company – an anonymous person who was a director named “Supriadi”. No first name, no middle name, no last name – just “Supriadi”. That’s like appointing “Michael” as a director of a public company and hoping no one notices on the exchange, securities regulatory, corporate or AML banking side. Actually, no one did notice.
It is supposed to be against securities law disclosure rules to fail to identify a director of a pubic company.
When Hartanto became involved in Worldstar, Supriadi appeared too.
“Supraidi” in the Form 10-K of Worldstar Energy Corp.
One of the other directors at Worldstar with Supriadi was Richard Tay, a/k/a Tay Thai Seng, a Chinese national.
In Vancouver, Supriadi appears to have replaced a director named Taj Mohamed who controlled a British Columbia entity named Cheer Beauty Investment Ltd. Taj Mohamed was a “finder” and the control person of Worldstar, holding over 32% of its securities according to its filings.
Singapore Exchange action
The round-tripping case that is so famous started out as an enforcement action against Hady Hartanto and others by the Singapore Exchange in 2011 (see here).
The story goes like this – sometime in March 2011, Hartanto’s BVI company, Telemedia Pacific Group Ltd. (“Telemedia Pacific”), bought over 25% of the shares of a public company in Singapore named Scorpio East Holdings Ltd. (“Scorpio East“). Hartanto was appointed a director and officer of Scorpio East.
At that time, Scorpio East’s only potential business was film production revenues with several film producers who had signed on to create content worth S$12 million (the “Scorpio Contracts”). Scorpio East had paid a deposit of S$5 million for the Scorpio Contracts, representing 70% of its net asset value.
After Hartanto joined Scorpio East, he cancelled the Scorpio Contracts on his own, without consulting the other directors, without getting consent from the other directors with an executed consent resolution, and without issuing a news release to announce a material change to the company.
Hartanto worked deals with a man named Low Shiong Jin, and he brought Low Shiong Jin into Scorpio East’s affairs, inviting him to attend director’s meetings. But Low Shiong Jin had been blacklisted by the Singapore Exchange.
Then on March 17, 2011, Hartanto, all on his own, signed a S$6 million contract between Scorpio East and Alpha Entertainment Group Pte. Ltd (“Alpha Entertainment”), without consulting the other directors and without getting consent from the other directors with an executed consent resolution.
Who was one of the directors and shareholders of Alpha Entertainment? Jung Jin, the wife of Low Shoing Jin, the person blacklisted by the Singapore Exchange.
Hartanto then wired S$3.2 million from Scorpio East to Alpha Entertainment, without consulting the other directors and without getting consent from the other directors with an executed consent resolution. The S$3.2 million was ostensibly a deposit for film production.
The round-tripping
Alpha Entertainment then round-tripped S$2.86 million back to Scorpio East. When the round-tripped funds landed back into the coffers of Scorpio East, Hartanto then told the other directors that the Scorpio Contracts were terminated. He also stated that he had obtained a refund of S$2.86 million from the S$5 million deposit paid. It was not true.
No refund was received and the intent was to have the round-tripped amount fraudulently recorded on financial statements as a refund and not an impairment.
Hartanto then tried to get Scorpio East to wire S$3,300,000 out – S$3,000,000 of that amount to his personal lawyer at JLC Advisors LLP; the rest to Alpha Entertainment. Hartanto did so without consulting the other directors and without getting consent from the other directors with an executed consent resolution.
A director stepped in and stopped the payments.
The directors then halted the stock, launched an investigation, and self-reported the events to the regulator.
After its investigation, the Singapore Exchange held that Hartanto did not demonstrate the qualities expected of a director or officer of a Singapore-listed company, and had failed to act in the interests of the shareholders as a whole. He was blacklisted.
Hartanto then sued the other directors of Scorpio East in Singapore over statements made in the required continuous disclosure over the Hady Hartanto affair.
The Court found that Hartanto’s failure to inform the other directors of what was going on, and to obtain the approval of the other directors for the transactions he approved on his own, was a breach of his fiduciary duties. The Court also held that the Alpha Entertainment deal was not in the interest of Scorpio East. Hartanto’s lawsuit was dismissed.
Other lawsuits involving Hartanto
Hartanto was involved in a number of lawsuits after that, which centered around the movement of large sums of money or securities of public companies.
For example, in 2014, his company, Telemedia Pacific, sued a Swiss bank operating in Hong Kong for following the instructions of its bank account signatory to transfer securities, which allegedly caused a financial loss. The securities were of a Singapore public company called Next-Generation Satellite Group (“NextGen“).
Basically, the claim was that the bank signatory’s authority had been revoked by Hartanto and because the bank completed a transfer on the basis of the authority of that bank signatory, the bank was liable for the transfers and resulting loss of securities. If there was a change in authorized signatories, no one informed the bank.
Remember “Supriadi”? In that lawsuit, Hartanto gave evidence that Supriadi is his nominee for banking purposes. A nominee for banking purposes means a person who opens a bank account on behalf of another.
In another case, an investor in Hong Kong named Huang Li sued Hartanto and Telemedia Pacific in 2014, over a stock sale. She alleged that in January 2011, at a dinner in Shenzhen, Hartanto offered the sale of securities of NextGen to her for HK$10 million. She paid him via cheque and made the cheque out to a different entity name (not NextGen). After she had paid, she never received the NextGen shares. She chased him for 3 years and finally in 2014, he informed her that he had sold her warrants, not shares, and that he had given the money to another shareholder who was supposed to transfer the securities to her. She obtained a worldwide mareva injunction against Hartanto and Telemedia Group. No progress seems to have been made on the case since 2018.
EY reports on public company affairs
In the interim, NextGen launched an investigation into its affairs after its directors discovered that certain funds of the public company had been transferred to a Hong Kong MSB named Niaga Finance, and its records did not reconcile. It hired EY to investigate the matter.
At that time, two of the directors of NextGen were Hady Hartanto and Tay Thai Seng, a/k/a Richard Tay, the director on the Form 10-Ks of the Vancouver-managed Worldstar Energy Corp.
The non-conflicted directors of NextGen believed Niaga Finance was a bank. Hartanto co-owned and was a director of the MSB Niaga Finance. Hartanto told EY that the public company’s money was wired to his MSB because he was more comfortable with it being there, as director of both entities.
If you’re like “what??”, you wouldn’t be alone.
Hartanto and Tay Thai Seng a/k/a Richard Tay were two signatories of the MSB’s bank account at HSBC, where the public company’s money landed.
EarlyHady Hartanto connections (zoom out on a trackpad to read)
According to EY, S$22.5 million was transferred from the public company’s bank account at Barclay’s Bank to the MSB’s bank account at HSBC. From the MSB, the money then went to the credit of a company named Omega Creation Worldwide, which had no ties to the public company.
The funds were then wired to BNP Paribas under Omega’s name and no one could tell EY who controlled that bank account, although Hartanto told EY that it may be Tay Thai Seng. Another S$24 million was transferred to Niaga Finance according to EY for which EY stated there was no paperwork to explain such transfers. Additionally, S$20.7 million and S$17.3 million were transferred to Niaga Finance from the public company for unknown purposes, according to EY.
The first EY report was released in 2014 (available here). EY then was engaged to continue the investigation in 2014, and released a second report in 2017 (available here).
The 2017 EY report discusses the role of — a “Supriadi” — and stated that Supriadi appeared to be a “purported” director and shareholder of an entity named Bright Beach, together with another director named Wye Man, who told EY that she acts as Hartanto’s “dummy director.”
A “dummy” director? A “nominee” banker? A “purported” officer? Millions of dollars owned by a public company sent to an MSB and unrecoverable? The weirdness described in the two EY reports is quite astounding and it makes the round-tripping seem like child’s play.
世纪星⾠新材料（保定 ) 有限公司
We did some due diligence on Hartanto in China and according to federal government records in China, one of his companies, 世纪星⾠新材料（保定 ) 有限公司, is blacklisted.
Back to Vancouver
Hartanto has another private company in Hong Kong, called a “Foundation”, incorporated in 1997, from which he recently made a move to enter into a distribution deal with a British Columbia company. The deal fell through but it would likely have been blocked by RBC Royal Bank of Canada’s AML officers, which is the bank of the British Columbia company whose directors are connected to Hartanto, but it’s funny how it all started in Vancouver in 2007, and round-tripped back to Vancouver 15 years later.
SEC files rare round-tripping enforcement action against Canadian issuer
We tend to think of round-tripping as tax evasion round-tripping tied to FDI, where investments are routed through a no tax jurisdiction before being reimported into the economy of origin as FDI. Mauritius comes to mind, because billions of dollars are round-tripped there every year, from India and emerging nations of Africa. The FATF has cautioned Mauritius about this type of activity.
But before there was sophisticated tax-evasion round-tripping, local capital markets had their own version of round-tripping, with new public companies inflating sales or revenues, to increase valuations to sell stock and dump it on unsuspecting investors. Round-tripping is as old as the capital markets themselves but for some reason, in the last 50 years, it has rarely been prosecuted.
That is until recently when the Securities and Exchange Commission (“SEC“) filed a handful of enforcement actions specifically addressing round-tripping, some involving Canadians.
Round-tripping is frequent and yet so infrequently addressed in the law, that we’ve decided to cover it in a two part series.
In Part 1, here, we discuss what round-tripping is and a recent SEC enforcement action. In Part 2, we explore the world’s most famous round-tripping case involving a mysterious man from Asia named Hady Hartanto.
What is round-tripping?
Round-tripping is a scheme involving financial transactions of public companies. It literally means money that went around and ended up at the same place (it went around in a circle), but deceptively, so that it appears to those not-in-the know that new money came in, when the same money re-enters an issuer. A round-trip involves several financial transactions, and combined, we use the term round-tripping.
Round-tripping happens frequently enough with little issuers – they do it to inflate their sales and revenues artificially to deceive banks, investors and analysts. Issuers may also round-trip to obtain a loan from a financial institution, and insiders sometimes take money from an issuer and circle it around to acquire securities using the issuer’s own money (instead of their own).
In terms of money laundering, round-tripping usually goes hand-in-hand with trade-based money laundering. To round-trip to deceive, the issuer has to fabricate invoices and sales to move the money, and that part of round-tripping is trade-based money laundering. The underlying crime is fraud (fraudulent financial statements, false documentation to obtain credit, etc.), and the proceeds are proceeds of crime, and thus the financial transactions are laundered funds.
SEC case involving round-tripping
In June, the SEC filed a claim against Mark Korb (“Korb“), the CFO of a Canadian issuer called Petroteq Energy Inc. (“Petroteq”), listed on the TSXV, OTC and Frankfurt exchanges. The CEO of Petroteq was Aleksandr Blyumkin (“Blyumkin”).
Korb was charged by the SEC with multiple failures to disclose material information to investors, including executive compensation, related party transactions and mining rights.
Failures to Disclose Related Party Transactions
In 2013, business associates of Blyumkin began buying shares of Petroteq, accumulating 8.96% of Petroteq’s shares and as a result of owning that amount of securities, became its control person (the “Control Group”).
That Control Group acquired mining rights from third parties on certain federal land leases in Utah for $275,000 and then flipped the mining rights to Petroteq for $23.8 million, meaning that the issuer’s own control person entered into a non-arms length deal and made over $23 million. Petroteq filed a Form 10-K, that was certified, which failed to disclose that the transaction was a related party transaction with its control person, and that the Control Group had an interest in the transaction.
Money From Acquisition of Mining Rights Round-Tripped
Petroteq acquired the mining rights in two transactions from the Control Group. In the first transaction, Petroteq acquired a 50% interest from Vendor A for $10.8 million, satisfied with a $1.8 million cash payment and the remainder in Petroteq shares. It then acquired the remaining 50% interest from Vendor B for $13 million, satisfied with payments in cash and Petroteq shares.
Most of the $1.8 million cash that Petroteq paid to Vendor A for mining rights was returned (round-tripped) to Petroteq and to Blyumkin. Blyumkin directed that $1.4 million paid by Petroteq be wired to two companies in the Control Group. These two companies then wired $1.39 million back to Petroteq to buy its shares. The result was that the same money came in, went out and came back in. Issuers cannot round-trip in this manner.
There is a lot more to the civil case against Korb than round-tripping, including in respect of related party disclosure, which can be read here, and it is highly recommended for Vancouver CFOs and auditors.
Criminal round-tripping
Round-tripping can be dealt with criminally as well.
In USA v. Vitaly Fargesen and Igor Palatnik (involving the cannabis issuer Canadian CanaFarma), two CanaFarma control persons were charged for raising money from investors on false statements, lying about having cannabis facilities and creating bogus deals to round-trip money around to create fake revenue for the issuer. They were hoping that by round-tripping using fake deals for technology, the stock price would increase and because they were the control persons, their stock holdings would be more valuable and they could cash out.
The auditor signed off on round trip transactions but likely was not aware of round-tripping risks or how to detect them.
YouTube Channel of SAExploration
In another case, USA v. Whiteley, the CFO of SAExploration, a well-known public oil and gas company was charged for round-tripping $12 million through several companies to create the illusion of having sales on the books in order to qualify for a corporate loan. In doing so, he certified to false financial statements which were filed with the SEC. The CFO pled guilty to securities and wire fraud and at his plea hearing, stated that he understood that he faced a 90 year jail sentence.
Stay tuned for Part 2, where we review the most famous round-tripping case involving a mysterious man from Asia.
The Premier of the British Virgin Islands, Andrew Alturo Fahie, and BVI port authority head Oleanvine Maynard (“Maynard“), were arrested on drug trafficking and money laundering charges in Miami yesterday, shortly after looking at $700,000 in cash in a private jet that was earmarked for them.
The cash, they were told, was a payment from the Sinaloa cartel in Mexico for facilitating the movement of cocaine and money through the BIV.
Alas, that wasn’t true – they were looking at bags of cash that were never going to come to them because they were the target of a US investigation to root out corruption in foreign government tied to drug trafficking and money laundering.
The case was a DEA undercover operation involving the BVI.
In an affidavit, a DEA agent says that persons who said they are members of the Lebanese terrorist organization Hezbollah, met a DEA undercover agent in Tortola and gave him Maynard’s name as a BVI government official who could help with drug importations and money laundering.
The DEA undercover agent was posing as a “fixer” for the Sinaloa, seeking a transshipment point for cocaine from Colombia. The Hezbollah told the DEA undercover agent that he “owned” Maynard and that BVI government officials would need to be paid to help with drug transshipments.
The son of Maynard, Kadeem Maynard, was also arrested. He acted as the contact person between the Hezbollah and the DEA undercover agent, and later for access to his mother. At the first meeting, Kadeem Maynard informed the undercover agent that he had been trafficking drugs for 20 years.
With respect to money laundering, at that first meeting Maynard told the DEA undercover agent that “we set up shell companies” for banking to get the proceeds of crime into the BVI. Her son owns a real estate company in Florida and Maynard offered his company bank accounts to launder money in the US.
Maynard told the agent that BVI Premier Fahie was “a little crook sometimes” and “not always straight.”
The undercover agent eventually met BVI’s Premier Fahie through Maynard, and they reached an agreement for drug trafficking protection in exchange for a cut of the drug proceeds. Part of the arrangement involved providing Fahie with seizures of bad drugs and money in the BVI so that Fahie would avoid suspicion and it would appear to the world as if he was combatting drug trafficking and money laundering in the BVI, when of course he was not.
Fahie said he wanted $500,000 upfront and he would handle the ports and airports. He also asked for an advance of $83,000 to pay a man from Senegal who had “fixed” some political issues for him in the past.
Andrew Fahie, Premier of BVI (Source: Government of BVI)
When he was being arrested, Fahie asked: “Why am I getting arrested? I don’t have any money or drugs.”
People say the most prophetic things to undercover law enforcement officers – take Fahie, for example. Almost like he was foreshadowing, at the beginning of the relationship, he told the undercover agent that he hoped the agent was not law enforcement because it took him 20 years to become Premier and he didn’t want to lose it all in 20 minutes being caught in a drug trafficking operation. He knew, in his gut, that the agent was law enforcement and in the end, many weeks later, he did lose it all – in 20 minutes. Maybe even in two.
Next steps
The defendants are charged with conspiring to import more than five kilos of cocaine into the US and conspiring to commit money laundering, and will be prosecuted in Miami.
The DEA issued a statement about the arrest, noting the agency’s “resolve to hold corrupt members of government responsible for using their positions of power to provide a safe haven for drug traffickers and money launderers in exchange for their own financial and political gain.”
AML Risks
The BVI has a population of only 29,000 and yet it has 400,000 shell companies and other private companies (with bank accounts attached to them). It is a known money laundering safe haven for politically exposed persons, criminal organizations and oligarchs. In the chart, below, we describe the money laundering and narco-trafficking risks for each Caribbean nation, including the BVI (on page 2).
If you look at Cayman Islands (page 3 of the document below), while it has similar shell, banking and money laundering risks as the BVI, the ratio of the population to shell companies is significantly less, as is the number of shells. That’s because while the Cayman Islands is a money laundering haven, it does not have the narco-trafficking transshipment footprint that the BVI has.
Checklist of AML Risks for each Caribbean Nation
If you’re wondering about the Hezbollah and whether they really are chilling in Tortola, setting up shells and moving dirty money and drugs, we don’t know from the DEA whether in this case, it really was Hezbollah operatives or Lebanese nationals just claiming to be the Hezbollah, who made the connection for the DEA to alleged corrupt BVI government officials.
The Securities and Exchange Commission (“SEC“) filed more cases in New York over Easter, targeting actors in the Canadian capital markets. The cases are for alleged pump and dump schemes. One of the two latest cases by the SEC charges Courtney Vasseur, a full-patch member of the Hells Angels in Vancouver, with securities fraud and alleges that he was part of a group that controlled eight public companies.
In total, five cases were filed or unsealed charging a group of mostly Canadians with securities fraud brought by the SEC and/or the US government. The defendants in the first set of actions are David Sidoo, Ronald Bauer, Craig Auringer, Adam Kambeitz, Alon Friedlander, Massimiliano Pozzoni, Daniel Mark Ferris, Petar Dmitrov Mihaylov, Chris Lehner (“Lehner“), Julius Csurgo (“Csurgo“), Anthony Korculanic, Dominic Calabrigo (“Calabrigo“), Hasan Sario (“Sario“) and Courtney Vasseur (“Vasseur“).
All five cases are tied to the US$1 billion securities fraud case in Vancouver, SEC v. Frederick Sharp, Avtar Dhillon et. al., which is a series of actions brought by the SEC and the US government. That case alleges that for at least a decade, Vancouver’s Frederick Sharp (“Sharp”) and his associates (the “Sharp Group”) ran a factory of fraud in Vancouver offering securities fraud services, with a tight circle of gate-keepers, facilitators and “corrupt intermediaries”, who together, allegedly defrauded the capital markets and investors of US$1 billion. The money and the securities of many little public companies was laundered and integrated through the Vancouver financial system.
The first newest case by the SEC charged defendants Dean Shah (“Shah“), Csurgo, Henry Clarke and a corporate entity owned by Csurgo in Toronto, Canada, called Antevorta Capital Partners Ltd. (“Antevorta“). Henry Clarke is tied to Shah in the corporate sense in Malta.
Antevorta Capital Partners website
In this case, the SEC alleges that Shah and Clarke were clients of the Sharp Group, and used his services to acquire and conceal control of several public companies to run pump and dumps to defraud investors. Part of the manner in which this was accomplished was using multiple private companies to act as nominee shareholders.
According to the SEC, Sharp sold shelf companies to clients as part of the alleged obfuscation services. In order to communicate secretly, Sharp established an encrypted communication service with devices called X phones, that he used with clients to run the operation and, according to the FBI, assist clients commit fraud without law enforcement visibility. The SEC alleges that Shah and Clarke used the X phone service.
Because the beneficial owners of the stocks involved were concealed behind private companies, the SEC alleges that the defendants were able to pump stocks and dump them on innocent investors at inflated prices. Investors were unaware that stocks they were buying were allegedly derived from fraud and from a secret control group.
The SEC says that one of the pump and dump schemes conducted by the defendants was of Zenosense Inc. (“Zenosense”), and the fraud was carried out in several phases.
The SEC says that Shah and Clarke acquired Zerosense from Sharp, and came to control most of its issued and outstanding shares. When they became the controller of the issuer, and therefore its affiliate, they hid that fact from the market, and failed to make the requisite disclosure filings.
The SEC says that when new shares were being issued, Clarke asked Sharp if the certificates should be mailed to shareholders.
Sharp is alleged to have replied: “Nooo. Never.”
The SEC says that Sharp told Clarke that the share certificates should be sent to a lawyer who would forward them to Sharp. Clarke replied that he was working with a “straight” lawyer, which he stated was concerning. Sharp told Clarke to find a lawyer who would be willing to take the certificates from the transfer agent and send them to Sharp.
According to the SEC, Sharp informed Clarke that the purpose of layering securities[1] was to insulate Sharp in the event of an investigation by the SEC because, according to Sharp, the SEC would not bother the lawyer.
The SEC alleges that a lawyer in Canada working for one or more of the defendants deposited money wired from a bogus financial entity into their law firm trust account. That lawyer then wired the money to another law firm. The SEC says that in some instances, no legal services were rendered in connection with the movement of such money in and out of law firm trust accounts.
Once Shah and Clark had secret control of Zerosense, they allegedly incorporated a shell in Belize through Sharp to act as the hidden payor for promotions of the stock, then pumped the stock and sold it when the price became artificially high, unjustly becoming enriched in an amount equal to US$2.3 million.
A few years later, they allegedly undertook a second pump and dump of Zerosense. This time, Shah and Clarke allegedly partnered with Csurgo in Toronto and his company, Antevorta, to gain control of 90% of Zenosense’s issued and outstanding shares.
The SEC alleges that some of the defendants prepared fake stock purchase agreements purporting to evidence the purchase by Antevorta of the stock of one or more of the issuers for alleged consideration. One such agreement was with a company named Total Investment Holdings Ltd. The two pages of that agreement, below, show, for example, that there is not even a seller of the shares identified, as well as inconsistencies in respect of the parties to the contract and the use of a corporate seal.
For comparison purposes, except for the fictitious party names, the two pages, below, are from a real stock purchase agreement.
Total Investment Holdings Ltd. is a shareholder of a public company in Vancouver named Green 2 Blue Energy Corp., now G2 Technologies Corp.
The SEC alleges that Csurgo also acquired Zenosense shares from Sharp, and also executed a fake stock purchase agreement purporting to evidence an alleged payment for such shares when no consideration was paid for those shares. The Csurgo alleged fake stock purchase agreement was allegedly sent to broker-dealers to defeat their compliance processes.
The SEC alleges that the Zerosense stock was pumped with Shah, Clarke and Csurgo selling over 6.3 million shares and earning proceeds of US$7.9 million. According to the SEC, they conducted a third pump and dump of Zenosense, earning US$3.2 million.
The SEC alleges that the same pattern of activity took place in respect of Drone Guarder Inc., Envoy Group Corp. and EnviroTechnologies International Inc., whereby one or more defendant amassed secret control of the stock of issuers for no consideration, orchestrated promotional activity, and engaged in manipulative trading to condition the market ahead of a pump and dump, subsequent to which shares were then dumped on innocent investors and everyone in the chain was unjustly enriched thereby.
Csurgo posted a video on YouTube on how stock manipulation works.
Second Case
In the second case, the defendants are Calabrigo, Lehner, Sario and Vasseur and they face similar allegations of securities fraud.
Vasseur is a full-patch member of the Hells Angels in Vancouver. Although a member of transnational organized crime, Vasseur was allegedly able to infiltrate the capital markets and with one or more of the defendants, allegedly controlled eight public companies.
The SEC says that for a three year period, some or all of the defendants manipulated the stock of at least nine public companies, including Zenosense, Blake Therapeutics Inc., Bingo Nation Inc., Drone Guarder Inc., Horizon Minerals Corp., I-Wellness Marketing Group Inc., Oroplata Resources Inc., Preston Corp. and Vilacto Bioscience Inc. and earned US$39 million in unlawful proceeds.
The SEC alleges that they obtained the majority of the shares of these companies from Sharp associates or from the conversions of purported debt for shares, and held such shares in various nominee and shell companies which enabled them to conceal their control of the public companies. The SEC says that they were Sharp clients and part of the Sharp circle.
The SEC alleges that Vasseur helped draft promotional emails sent to investors for at least two of the companies. In one such promotional email, investors were promised returns of 15,000%.
With another company called Bingo Nation, the defendants alleged that the company supplied gambling kiosks to gaming venues in the US which would generate US$30 million per week in revenues which promised to turn a US$2,000 investment into US$26,880 for investors.
The SEC suspended trading of the shares of Bingo Nation, and the SEC says that the company’s officers lied and denied knowledge about the pumping of its stock.
The SEC says that the defendants used a boiler room to help promote the stock of issuers they controlled. Vasseur, Lehner and Sario allegedly worked with Luis Carrillo. In August 2021, he was charged criminally and civilly in connection with alleged securities fraud as part of the Sharp cases and was allegedly part of the Sharp circle.
When the stock prices were elevated, the SEC says that one of more of the defendants liquidated stock of the issuers.
In order to move the proceeds around without running into questions by anti-money laundering professionals, the SEC says that the defendants used fake invoices and fake consulting agreements to wire funds.[2]
In these cases collectively, the SEC alleges that the defendants are responsible for pulling off a US$194 million securities fraud scheme.
There may be more cases coming down the pipe against Vancouver capital markets actors tied to the Sharp circle. But this set of cases, in particular, is important because of the threat posed to the capital markets arising from the fact that transnational organized crime allegedly infiltrated the capital markets through Vancouver and were able to allegedly control, with others, eight public companies.
In terms of liability for gate-keepers such as attorneys, providing services for criminality to enter the capital markets, the YBM Magnex case in Canada reminds us that the costs can be high – in that case, the insurers of auditors, brokers, book-runners, underwriters and lawyers had to pay $185 million to investors for facilitating Russian organized crime figures to raise money and launder it using the capital markets of Canada. Almost everyone has ignored the YBM Magnex case for over two decades but have recently come to pay it more heed as a result of new interest in the provenance of dirty money held by Russian oligarchs.
[1]Layering is a money laundering term and it involves obscuring criminal origin and as far as possible, to distance money or securities and the beneficial owners from their sources and to make it difficult for an investigator to trace the securities or funds back to that source. Layering may be done in part through repeated transfers in different locations and may involve the use of a variety of transactions and the use of corporate structures as cover.
[2] This is called trade-based money laundering, whereby fake documentation including invoices, or documentation that changes the amount or value of goods, services or securities, is created to launder money and often to defraud customs agencies. Although infrequently explored, TBML can be a material component of cross-border securities fraud and is prevalent in Vancouver, Canada.
