SEC locates pump & dump alleged mastermind in Ibiza who used a Vancouver lawyer for the alleged scheme

By Christine Duhaime | January 26th, 2020

Biozoom boy found in Ibiza

The alleged mastermind behind the alleged pump and dump securities fraud case involving Biozoom, Francisco Abellan Villena, has been located in Ibiza, the playground for billionaires. Villena is currently incarcerated in Ibiza, perhaps on an extradition warrant from the US. He was located by an investigator in Spain hired at the direction of the SEC.

The SEC was searching for Villena to, among other things, effect service on him with a civil complaint filed in the SDNY in May 2018.

Villena in Las Vegas in a photo with Paris Hilton. This photo is over 10 years old and appears to be merely a night club photo opp (Source: promotionstocksecrets.com)

What was Biozoom?

Biozoom was a German technology company that made a hand held device that allegedly could read a person’s biometric data from their skin to monitor health metrics. Specifically, it was represented to investors as a replacement for blood tests, allegedly capable of detecting the presence of illegal drugs in one’s blood stream non-invasively from your skin surface or measuring blood sugar levels for diabetes, which may be a dubious claim because no such technology exists from a sweep of medical journals today to detect the presence of illegal drugs non-invasively merely from touching a human skin surface.

What’s an empty shell?

Biozoom was acquired as part of an asset sale by what is known as an empty public shell. An empty public shell is a reporting issuer that is non-operational, often with few assets or operations. An empty shell that is a reporting issuer is often re-invented, or pivoted, as something new. In Vancouver, for example, a number of mining companies that are reporting that are no longer viable are often re-invented as a Blockchain or cannabis company. In the US, empty shells that are reporting issuers are disclosed as shells, whether its a blank check shell or not.

RTOing of empty shells

People in Vancouver, sometimes lawyers in the securities law realm, sell or broker the sale of, empty shells that are reporting issuers to clients, sometimes for hundreds of thousands of dollars so that they can be used for a reverse take over (“RTO“). Not all RTOing of empty shells and not all sales of empty shells involve manipulative behaviour or fraud. The reason some people like to use empty shells that are reporting issuers is because its shares are listed for sale, or listable, and thus those who hold lots of such shares can sell them and, if the price magically pumps up, make a killing.

Biozoom’s RTO used complex shells and lax money laundering places

And that is what the SEC alleges four people behind Biozoom did, namely they backed Biozoom into an empty shell called Entertainment Art, Inc. that allegedly sold leather goods in Las Vegas, renamed the shell Biozoom Inc., and using a complex web of shell entities and lawyers in offshore tax evasion and known lax money laundering places like the BVI, Switzerland, Panama, Argentina, Belize and Vancouver, allegedly cooked up a scheme to issue, aggressively pump and then dump millions of shares of Biozoom to innocent investors to the tune of US$34 million.

One of the four persons charged by the SEC and alleged to have assisted with the scheme was a Vancouver lawyer named Faiyaz Dean, who the Vancouver Sun reported was, at some point, connected to another Vancouver securities lawyer named Penny Green of Bacchus Law. Seven years ago, the SEC started its investigation into Dean after the shares of Biozoom went from US$1 to US$4.

Empty shell companies are a problem for capital markets because, inter alia, as the SEC has noted, they are a breeding ground for pump and dumps and attract fraudulent behaviour. In other words, they are a high risk service and professional activity for lawyers and accountants, and also high risk for financial crime.

The accountant who flipped $6 million worth of shells

Speaking of accountants, an accountant named Jeffrey Lamson laid the groundwork for the alleged activities of Dean and Villena.

For six years, Lamson helped create a fiction of corporate viability for 22 empty shells that were reporting issuers. He was said to have recruited people to pretend to be officers and directors of the shells, and on occasion, to pretend to be the shareholders of the shells. This speaks to the ongoing concern expressed by US law enforcement and US Senators of the difficulty in attempting to ascertain from a minute book, who the true shareholders are behind the list of legal shareholders of an entity.

In order to obfuscate the true shareholders, Lamson likely controlled minute book records which he used to reflect other control persons by making inaccurate corporate records filings in the minute books. Doing this type of thing makes it impossible for investigators to know who ever was, or is, a shareholder or a director of an entity. The movie “The Laundromat” based on the Panama Papers with its ties to a Vancouver-lawyer-turned-incorporator, tells the story of a law firm that allegedly changed corporate records and back-dated them. Lamson ran what the SEC called an assembly line of shells with fraud at every juncture.

In order to keep the empty shells alive, the SEC says that Lamson filed false disclosure documents alleging that the shells were pursuing businesses when they were not. Not only that, the SEC says he forged signatures on documents for fake consultants who were paid fake consultants fees for doing no work. Lamson was keeping the shells alive to flip them to law firms and others or so that they could be brokered for hefty commissions. And flip them he did, for a whopping US$6 million. One of those he allegedly flipped to a lawyer for a hefty commission was Entertainment Art, Inc., the shell in which Dean became involved.

In 2015, Lamson was the subject of a complaint by the SEC in respect of his shell flipping activities, was permanently barred from securities activities in the US and ordered to disgorge profits from his conduct. He is serving time in jail.

The lawyer as alleged shell hunter and shell broker

Dean, the lawyer from Vancouver, was also the subject of a separate complaint by the SEC in respect of the Biozoom matter in which they allege that he, inter alia, orchestrated sham transactions and caused to be hired escrow agents to document the sham transactions as well as provided fabricated documents and false information to get the shell’s shares traded, including by false closing opinions. The SEC also alleges he was part of the acquisition of the shell that went on to sell listed shares and caused to be issued shares that violated the share restriction rules (e.g., in respect of legends). Violating the legend rules allows shares to trade when they are not free trading, at maximum pump. The whole reason there are legends to restrict trading is to protect against dumping.

Dean, as some securities lawyers do, allegedly acted as the shell broker – he sold the shell for US$430,000 and allegedly benefitted from a commission of US$105,000.

Dean has also been indicted in Arizona for wire fraud, making false statements for US securities law purposes (in particular, preparing a closing opinion with material false information) and money laundering.

The law says Dean wasn’t providing legal services

Dean’s case has an interesting aspect to it. When a lawyer becomes a business partner with a client, which happened here, the parties cease to be in the same position and a whole set of protective rights owed to the client arising from the lawyer-client relationship go out the window. And not only that, if the relationship with the lawyer was abused, knowingly or unwittingly, to commit unlawful conduct or to attempt to commit unlawful conduct or in furtherance thereof, including securities fraud, the lawyer-client relationship is gone ab initio, meaning that no duties or rights attach to the client that otherwise would. That’s because since 1833, if not earlier, Courts have held that lawyers cannot be used in furtherance of unlawful or attempted unlawful conduct and if they are, or there is such an attempt, no client gets to derive any benefit that otherwise they could derive from a lawyer-client relationship.

The law can best be summarized as follows: in order for the lawyer-client relationship to take root which gives rise to duties owed to the client by the lawyer, there must be two elements: (a) professional confidence; and (b) professional employment. If the client has or had an unlawful intent in obtaining advice or services from the lawyer, one of those elements is absent. The client either conspired with the lawyer to be unlawful or deceived the lawyer. In both cases, there is no lawyer-client relationship that was ever created.

In the first scenario, if the client hid the unlawful intent, the Courts have held that the lawyer’s advice or services were obtained by fraud, meaning the client defrauded the lawyer as to his or her unlawful purpose when he or she sought advice. The Courts have held, very specifically that, when a fraud is perpetrated on the lawyer by the client to obtain advice and the lawyer is deceived, there is no lawyer-client relationship because professional confidence was absent all along. Advice obtained by fraud perpetrated by the client is not protected and a lawyer deceived as to the true intentions of a client, is set free from the constraints of the lawyer-client relationship for all purposes. As Courts have held, if this were not the law, the result would be that a man intending to commit murder might obtain legal advice for the purpose of enabling himself to do so with impunity, and the lawyer whose advice was sought would not be at liberty to give information against his client to stop his criminal purpose which would have monstrous consequences on the rule of law. It makes sense – a client cannot lie to the lawyer about a file and use (more like abuse) the profession and then be able to benefit from his or her own deception. The lawyer and the rule of law, if that were allowed, would be doubly harmed.

In the second scenario, if the client’s unlawful intent was disclosed to the lawyer, the client is not consulting the lawyer qua lawyer as a member of the legal profession because it cannot be the lawyer’s business to further unlawful conduct. In this case, there is no professional employment of the lawyer by the client and therefore, there is no lawyer-client relationship. Courts have held that the protection of communications by lawyers in furtherance of an unlawful purpose by the client is injurious to the interests of justice and the administration of justice and does not come within the scope of professional employment. 

In Dean’s case, he will have to take a position eventually that indicates whether his services were obtained under the first scenario or the second scenario.

Two other lawyers pitched in to help with the scheme and one flipped shells for $5.6 million

Dean isn’t the only lawyer who was pursued by the SEC in connection with Biozoom. Lawyer David Lubin was barred from practicing before the SEC over fraud he committed in connection with the Biozoom shell and James Schneider was convicted of 33 counts of fraud and money laundering in Florida for writing false closing opinions in furtherance of the pump and dump, which generated proceeds of crime, securities fraud being the predicate offence. Schneider created and flipped 20 shell companies for US$5.6 million and used his law firm trust account to receive payment for the shells. Schneider is alleged to be evading civil forfeiture.

What did Biozoom boy do?

So what did Francisco Abellan Villena do in respect of Biozoom? He is alleged to have masterminded and controlled the scheme. Among other things, he allegedly located Dean for these specific services, paid him to acquire not one but two shells, the second to hold shares of Biozoom in the names of people from Argentina, and is alleged to have instructed a range of professionals to undertake the scheme, to have dumped shares when the price was artificially high, and to have made a windfall from dumping those shares. He also allegedly placed another Canadian in charge of his Argentine company – he had a preference it seems, for using Canadians, wittingly or unwittingly, for his plan.

Villena unknown location (Source: promotionstocksecrets.com)

Now that Villena has been located in Ibiza, he will be removed to the US in due course for the SEC proceedings. Villena had a previous case involving securities manipulation here.

As for Dean, he moved into Blockchain and somehow is connected to a reporting issuer called Evolution Blockchain Group Inc., which was a revived dead mining company. The SEC stepped in immediately after the reporting issuer issued a news release that it was getting into the already high-fraud area of digital currencies and was ICO’ing and immediately halted it, saying it was questionable as to accuracy. This may be the news release that was of concern.

Hopefully, US law enforcement shuts down the practice of selling shells and shelf companies

On a go forward basis, US law enforcement has said that they intend to focus on professional money launderers which includes the circle of professional services that include the sale or brokering the sale of, shell and shelf companies that are used to back into an RTO with the issuance of closing opinions that contain representations that are false and concludes with the unlawful pumping and dumping of shares on the public markets. And indeed they are – in October, another lawyer that acted for a Canadian reporting issuer settled in the US over writing closing opinions with materially false information and selling shells for RTOs for US$200,000 each.

The BC Securities Commission has tried to clean up the ecosystem since 2008

You may be wondering why it appears that many paths lead to Canada when it comes to the whole circle of services that involve unlawful pump and dumps – it has to do with the culture of how little mining companies were created and historically financed in Vancouver. The British Columbia Securities Commission here commented on the disproportionate role of British Columbia “players” in the US OTC markets who engage in abusive securities law practices and noted that such activities “damage the reputation of the province’s capital markets and harm the interests of legitimate issuers.”

That was twelve years ago, in 2008 and it has not abated, but the BC Securities Commission can only regulate its own ecosystem – it has no control over and cannot stop the activities of others in the capital markets whose members keep that circle of fraud spinning.

Villena is listed in the Paradise Papers here. And a co-indicted person, Guillermo Federico Ciupiak, is in the Paradise Papers here.

On a positive note and this is pretty cool – victims of the Argentinian aspect of the securities fraud claim of Biozoom can consult this website to file a claim for a refund.

If this sounds like a good Netflix, it would be.

Update: 2020-02-03: The US Department of Justice filed a Notice of Intent to Introduce Evidence of Other Acts in federal court in the criminal matter, notifying the parties of its intention to introduce evidence that Villena and Dean, and other defendants, were involved in a similar alleged fraudulent pump and dump scheme of Ocean Electric Inc., orchestrated allegedly by Villena and Dean, involving some of the same nominee shareholders as Biozoom, to get listed on a more senior exchange.

Update: 2020-02-11: A co-defendant in the Arizona criminal case, James Panther, and the Department of Justice filed a joint motion to postpone pretrial deadlines because they are negotiating a disposition that would eliminate the need for a trial, likely meaning Panther is pleading guilty and will cooperate in the trial as against other defendants including Dean.

Update 2020-02-24: The SEC issued an order prohibiting Dean from appearing before them as a lawyer, citing his activities as a shell hunter and re-seller for Biozoom and his actions to unlegend shares, for which he billed fees of $120,000.

Canada’s securities commissions issue guidance to regulate Bitcoin exchanges and other digital currency or crypto assets

By Christine Duhaime | January 23rd, 2020

The CSA guidance

The Canadian securities commissions, through the Canadian Securities Administrators (the “CSA“), issued guidance on digital currencies and digital currency exchanges in Canada, the impact of which fundamentally changes the legal landscape for digital currency exchanges and puts the vast majority of them under the supervision of provincial securities commissions.

The securities commissions have jurisdiction in Canada that may arise in a number of ways, including but not limited to, over digital currencies and digital currency sellers, including exchanges, Bitcoin ATM operators and OTC operators, if the activity falls within the jurisdiction of securities legislation or the activity takes place in Canada, targets Canadian residents, or meets the “substantial connection” to Canada legal test (e.g., it is incorporated in an offshore island but substantially operates from Canada). Securities legislation in this context can apply to sellers (whether platforms or persons) if it involves securities and products (digital currencies) to the extent they are securities.

Platforms defined

The CSA guidance mostly focuses on “Platforms” which is defined not as an online website but rather as any entity (legal person) that facilitates the buying or selling of any type of digital currencies (so that would include ICO issuers and such, even if they are called “tokens”).

Applicability of securities legislation

The material part of the CSA guidance is that securities legislation applies to Canadian activities in respect of digital currencies if custody of the digital currencies remains with a digital currency exchange or ICO issuer (the Platform) for any period of time, as opposed to with the consumer and the basis for that distinction 100% has to do with the level of risks of the former as opposed to the latter.

When securities legislation applies

According to the CSA guidance, securities legislation will apply in Canada when the Platform sells or buy digital currencies from consumers but the Platform retains custody and control of the digital currencies (deposit-takes), even if its services impliedly or expressly agree to transfer control back to the consumer at the request of the consumer at some later time. In this case, there is complete reliance on the Platform and therefore the consumer is at risk. Book entries whether manual or electronically made to reflect digital currency holdings of a consumer without transfer of control back to the consumer is not real control and ergo, the exchange has custody and securities law may apply. What is key here in exchange parlance is that the CSA seems to be referring to an internal wallet in this scenario, meaning the digital currencies are transferred to the customer’s internal wallet within the exchange, not outside of it. In this scenario, no digital currencies exit out of the Platform immediately into the legal custody of the consumer and hit the relevant Blockchain. These types of businesses are subject to securities legislation in Canada because, the CSA guidance is saying, they pose multiple risks to consumers. While the CSA guidance does not use this phrase, a service that poses multiple risks to consumers, is high risk.

When securities legislation does not apply

And the opposite applies – namely, securities legislation will not apply in Canada when the Platform sells digital currencies to, or buys digital currencies from, consumers and the Platform immediately transfers out the fiat or digital currency to an external wallet in the control and custody of the consumer, or in the case of a buy of Bitcoin by the exchange for liquidity via an OTC, to an external bank account of the consumer. In other words, if the consumers’ digital currencies exit out of the Platform or exchange immediately after a transaction (e.g., hits the Blockchain) and lands in the consumer’s external wallet, securities legislation would not apply. This type of business, the CSA guidance is saying, does not pose the multiple enumerated risks to consumers as those that retain custody and control of consumers’ Bitcoin, and is not subject to securities legislation. In other words, securities law is not needed to intervene to protect the public with these business models in the crypto space.

In sum, it would appear that a digital currency exchange or ICO or IEO issuer, physically in or substantially connected to, Canada or that has Canadian consumers and are custodians of any amount of digital currencies, perhaps even $1’s worth of which belongs to a consumer, are subject to securities legislation.

Bank de-risking of exchanges in Canada?

What may be the repercussion of the CSA guidance?

While its hard to say, the most immediate repercussion may be the closure of the majority of digital currency exchanges in Canada because they may be de-risked by banks or credit unions.

While not stated as such, the CSA guidance de facto made a determination that digital currency exchanges that hold customer digital currencies as a custodian have such risks that the intervention of the law is required. The CSA guidance does not use the words “high risk” but it sets out numerous risks that consumers face when dealing with digital currency exchanges that have custody of consumers’ Bitcoin and is seeking to mitigate those risks.

It will be hard for a bank or credit union to continue to provide banking services to a client that government agencies in Canada have determined has a business model that poses multiple risks, one of which specifically is identified as a criminal risk under the Criminal Code and others of which are tied to a lack of prudential oversight. Banks are more risk-adverse than government agencies.

In the context of anti-money laundering compliance, the CSA guidance is a key piece of a risk assessment for banks to consider in respect of evaluating the risks of banking Blockchain and digital currency exchange related businesses.

Not all digital currency exchanges are the same – there are two digital currency exchanges in Canada that do not administratively control or have possession over customers’ digital currencies. This type of Bitcoin seller or digital currency exchange never has custody of the consumer’s financial instruments – whether its money or Bitcoin and they transfer assets immediately out to the consumer. The CSA guidance gives them a pass and exempts them from their regulatory oversight (all other things being equal).

Jurisdiction & enforcement action against foreign exchanges

The CSA in its guidance has said that provincial securities commissions intend to launch enforcement action against digital currency exchanges with Canadian customers who violate securities legislation, or do not follow the CSA guidance.

Securities commissions face two types of foreign-related operations that may be considered for enforcement – one is that there are quite a few ICOs that raised money from investors and digital currency exchanges, as well as OTC service providers, that are in Canada but who have an offshore corporate presence to appear non-Canadian. A type of offshore corporate presence they go for is to obtain a piece of island paper, meaning they file a piece of paper in an offshore island corporate registry office and believe that the existence of that piece of paper from the island makes their operations tied to that offshore island and protected from US or Canadian enforcement scrutiny.

The second is foreign digital currency exchanges and OTC service providers that provide services to Canadians online.

Next Steps

If securities legislation applies to an exchange or OTC provider or ICO issuer, it will have to determine which jurisdiction in Canada it wants to be its principle one – British Columbia, Ontario, Alberta or another one, and will have to commence to communicate with that securities commission to start the dialogue of oversight of its activities, or an exemption therefrom.

One can expect that the securities commissions may have in mind a plan to list those that one of them has green-lighted on a common website for consumer protection.

Bitcoin SIM swapper charged with stealing $50 million, arrested in British Columbia

By Christine Duhaime | January 14th, 2020

$50 Million SIM-swapped

A man from Montreal, Samy Bensaci, who allegedly stole US$50 million in Bitcoin from US residents, was arrested in Victoria, British Columbia, and removed to Ontario for prosecution, where he has since been released on bail, reported La Presse today.

The theft of $50 million happened during 2018 and 2019, according to the La Presse story, and involved several victims, all but one of whom are American. All the victims were attendees of the Bitcoin conference Consensus in 2018 in New York City. Allegedly, a Vancouver man was SIM swapped out of $2.3 million, possibly from Bensaci.

Bensaci was released pending a trial in Toronto on certain conditions, including that he refrain from using computer devices and owning or trading Bitcoin or other digital currencies. He faces charges of unauthorized computer use and identity fraud. He has not been charged with laundering the proceeds of crime.

What is a SIM Swap?

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

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

How Does SIM Swaps work with Bitcoin?

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

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

One of the first SIM swaps to be litigated was the theft of US$81 million from Bitcoin investor Michael Terpin, who won a US$75.8 million civil judgment in California against 21-year-old Nicholas Truglia who SIM-swapped Terpin’s cellular phone and stole over US$23 million from Terpin’s digital currency wallets that held coins from three ICOs.

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

Laundered Funds Through Digital Currency Exchanges

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

A McLaren Sports Car, Private Jets, Stash of Cash

One of the deponents in the civil litigation that resulted in the Truglia judgment is a private jet broker who deposed that Truglia had no job during the time he knew him, and shortly after the SIM swap, had over US$72 million in crypto currencies on various wallets and a stash of US$100,000 in US cash chilling on his coffee table for spending money.

Shortly after the SIM swap, Truglia allegedly made plans to buy a US$250,000 McLaren sports car. Allegedly, Truglia’s Twitter account was Nick @erupts – that account holder took to Twitter to brag about stealing US$24 million, and posted images of the US$100,000 diamond watch and private jet trips.

A Hezbollah terrorist sleeper agent with family in Canada, says his family name is akin to being the “Bin Ladens of Lebanon”

By Christine Duhaime | January 5th, 2020

It seems that some of the “Bin Ladens of Lebanon” are living in Canada.

Let’s go back a month ago to December 3, 2019. On that day, a man named Ali Kourani was sentenced to 40 years in prison in New York for terrorism-related activities. Kourani is deeply connected to the highest ranks of the Hezbollah, and hence to the Iranian regime. Not only is his family the Bin Ladens of Lebanon, as he himself said, but his brother is “the face of the Hezbollah” in southern Lebanon.

Ali Kourani was a sleeper agent for the Hezbollah’s foreign nation unit, called the Islamic Jihad Organization (“IJO“) or “Unit 910”, tasked with procuring weapons and gathering intel in foreign countries on potential targets for Hezbollah terrorist attacks. The IJO is operated by Hassan Nasrallah, the Secretary-General of Hezbollah, who reports directly to Ayatollah Ali Khamenei, the Supreme Leader of Iran.

When he joined the IJO, Kourani knew that Nasrallah had a direct pipeline to the leader of Iran. He told the FBI that, and more, including that he knew the IJO did “black ops” for Iran.

Kourani was born in Lebanon. When he was 16, he attended a Hezbollah-sponsored military training camp in Lebanon. He was allowed to attend a Hezbollah military camp, he told the FBI, because being related to Haider Kourani, the Hezbollah’s Chief of Military Security for southern Lebanon, opened doors for him.

At the camp, he was trained to use and fire weapons that included rocket propelled grenade launchers, AK-47 assault rifles, an MP5 submachine gun and a PKS machine gun (a Russian-made belt-fed weapon).

In 2003, he visited the US to attend university and graduated with a degree in Biomedical Engineering and later, an MBA.

In 2008, he returned to Lebanon and during that trip, was personally recruited into the IJO unit by Sheikh Hussein Kourani. Sheikh Kourani was a significant person in Lebanon and Iran, considered to be one of the key figures in the founding of Hezbollah and although Lebanese, was buried in the holy city of Qom, Iran, after his death in September 2019.

When he joined the IJO, Kourani was set up with a handler in charge of assigning missions to him and to debrief him. Kourani communicated with his Hezbollah handler using coded emails. In Lebanon, his relatives acted as his contact point to connect with the Hezbollah for meetings.  

One of the IJO’s first instructions to Kourani was to apply for US citizenship and become a dual national. Dual nationality allows operatives to avoid travel scrutiny. Kourani was also instructed to obtain a US passport card so that if his passport was seized, he could switch to his other nationality passport to enter Canada to then enter the US by land using his passport card.

In 2008, Kourani did as instructed by the Hezbollah and applied for US naturalization. In his immigration application, he made material false statements that neither he nor his family were associated with a terrorist organization, and further than he had not participated in military training with a terrorist group. In 2009, he was issued a US passport.

From 2008 until 2015, Kourani was with the IJO as an operative in the US. During that time, he assisted the Hezbollah with surveillance and gathering intel to prepare for potential future attacks against the US. Some of the targets Kourani surveilled included JFK Airport and law enforcement facilities in New York City, including the Federal Plaza in Manhattan.

He also: (a) searched for suppliers in the US who could provide weapons to the Hezbollah; (b) identified individuals affiliated with the Israeli Defence Force that the Hezbollah could recruit or target for violence; (c) gathered information on security at airports in the US; and (d) sought to develop relationships in China to buy ammonium nitrate to be used as an explosive precursor chemical.

Kourani’s handler was responsible for Hezbollah undercover operatives in Canada and the US.

Kourani was charged and convicted of several offences including providing material support to a terrorist organization, receiving military training from a terrorist organization, conspiracy to possess, carry, and use firearms and destructive devices in relation to crimes of violence, and making and receiving funds to and from Hezbollah.

Now back to December 3, 2019.

That was the day Kourani was being sentenced in New York.

At his sentencing hearing, Justice Hellerstein asked Kourani several questions including why he had taken photos of the Fort Washington Armory beside a major hospital in Manhattan. His lawyer replied that he took the photos because the Hezbollah wanted to be ready with a response if the US attacked Iran.

Why Iran wishes to target a major hospital in Manhattan (the Columbia University Irving Medical Center), and how, was never asked of Kourani or answered but what seems clear from the reply, was the key role Hezbollah dual national operatives play in western countries to supply information to Iranian intelligence in preparation of the furtherance of harming other countries.

Kourani’s lawyer had one final request for Justice Hellerstein – to place him in a federal prison in upstate New York to serve his time. Why? Because he has a wife and two children who are Canadian citizens and live in Canada.

As to Kourani’s request to serve his sentence in northern New York, close to his children in Canada – Justice Hellerstein said no.

How the family known to be the Bin Ladens of Lebanon, or part thereof, with deep connections to the Hezbollah and to the Supreme Leader in Iran, came to acquire Canadian citizenship from Lebanon, or to be able to retain it, is unknown.

As for Haider Kourani, the man whose name opened doors for Ali Kourani to attend a Hezbollah military training camp when he was 16? He has a brother named Mahmoud Youssef Kourani who was also convicted of terrorism related offences in the US and was sentenced to 4.5 years in jail for transferring funds to Haider Kourani for the Hezbollah.

You can read more here from Matthew Levitt, a terrorism expert, on the activities of the Hezbollah agents in the US and Canada, including on another Kourani brother convicted of terrorism who is part of Hezbollah, and of Nemr Ali Rahal, a Hezbollah operative, who entered the US from Canada with military-grade explosives residue on his passport.

US considering two anti-money laundering bills to force disclosure of shareholders of private companies

By Christine Duhaime | January 1st, 2020

In what will be the most significant change to anti-money laundering law in the US since the Bank Secrecy Act, the US is considering two separate bills that, if passed, would require disclosure of the shareholders of private companies – the ILLICIT CASH Act and the Corporate Transparency Act, H.R. 2513.

ILLICIT Cash Act

The first, the Improving Laundering Laws and Increasing Comprehensive Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act, was introduced by Senator Mark Warner in September 2019.

If passed, the bill would require the disclosure of shareholders of private entities to the US Department of the Treasury when an entity is formed. It would also require disclosure of changes of shareholders within 90 days of such changes taking effect to the Treasury Department. Failures to report would be an offence, punishable by a term of imprisonment of up to four years. Information filed on shareholders of private companies would be made available to law enforcement agencies and in that way, has privacy protection for shareholders because the bill does not contemplate a public registry of shareholder information.

The bill also has interesting provisions with respect to foreign financial institutions, specifically it requires foreign banks to provide authentic bank records to US agencies and to comply with US subpoenas for money laundering investigations. Foreign banks, including those known for lax AML compliance that are unresponsive to US law enforcement agencies seeking financial information, would be subject to fines in the US, which would impact their correspondent capabilities.

In Canada, for example, anecdotally, bank records from China of wealthy politically exposed persons provided for immigration purposes, are often not authentic or complete and immigration laws do not require the submission of financial records be by affidavit evidence from China.

Accommodates Future AI for AML

The bill, importantly, recognizes the need for financial crime investigations expertise and would fund a federal team of financial crime investigators for money laundering investigations in respect of private corporations in particular, who are trained and have the expertise in respect of disclosure of shareholders of private companies. It has other modern technology provisions that allow for AML sharing of anonymized suspicious activity reports for machine learning datasets.

Includes Bitcoin & China

It also is forward-thinking in that it contemplates creating expertise in respect of comprehending how money moves from China to the US, and would include Bitcoin and all other digital currencies in the law.

SEC Limitation Periods Extended

It also would allow the SEC to pursue disgorgement of proceeds of crime derived from securities fraud for up to five years, and authorize the SEC to pursue restitution for investors for up to twelve years, a move that would impact the many ICO issuers who issued tokens and digital currencies in violation of securities legislation.

Position of Lawyers

US lawyers, specifically members of the American Bar Association, are not in favour of the bill on the grounds that it may erode privilege and confidentiality, and place an unfair burden on lawyers that do transactional work (real estate or M&A transactions).

Corporate Transparency Act

The second bill, passed by the US House, called the Corporate Transparency Act, also requires the disclosure of shareholders of private companies when formed but the obligation to disclose changes to shareholders would be on an annual basis. The person or company that incorporates private companies, and acts as agents of record for them (e.g., most law firms), would be required to make filings to disclose the identity of shareholders. This will either force law firms out of the business of forming corporations or force law firms to be reporting agents of corporate information. Often shareholder information of private companies is available (and is neither confidential or privileged in many cases), depending in large part on what are called the constating documents and local corporate law. In other words, it is not accurate to state that privilege and confidentiality are at risk by virtue of the proposed legislation. Law firms can elect to exit providing formation of company services to avoid being part of the reporting regime.

Failures to report, including by lawyers, would be an offence, punishable by a term of imprisonment of up to three years. Information filed on shareholders of private companies would be made available to law enforcement agencies and in that way, also has privacy protection for shareholders because the bill also does not contemplate a public registry of shareholder information. Lawyers in the US are also not supportive of this bill either for the same reasons as set out above.

Legal versus Beneficial Shares

The disclosure of shareholders of private companies is often referred to as “beneficial ownership,” a term that is not legally accurate because private (and public) companies have both legal and beneficial shareholders, and the movement for visibility on the identity of shareholders of private companies is driven by the need for disclosure of primarily legal shareholders, not beneficial shareholders.

The difference is this –> a legal shareholder is the person (natural or legal) on a share certificate who holds or owns shares. A beneficial shareholder (also a natural or legal person) is the person who is the beneficiary of the shares. Sometimes the two are not the same. For example, brokerage firms in a private placement are often on a securities registry beneficially for often 20 or 30 shareholders of a private company. When companies undertake financings and pledge shares in connection therewith, those shares are beneficially held by a bank or an investor but the corporate records don’t show that – they show the legal shareholder only.

End of Sale of Shell Companies

One thing both or either of the bills would likely do is immediately end the practice by law firms of the sale of shell and shelf companies for upwards of $200,000 each, and it would end the problem of minute and corporate records books doctoring that was highlighted in the movie “The Laundromat.”

Taiwan busts US$462M underground bank, money laundering and gambling operation that allegedly influenced elections

By Christine Duhaime | December 27th, 2019

The police in Chiayi, Taiwan, shut down an underground banking operation and international gambling syndicate allegedly used to influence municipal and federal election results.

The underground bank moved US$462 million from China to Taiwan in ways that are designed to circumvent the laws in China that control currency conversions and exports.

Arrested were Hsiao and Lai, who were described as real estate developers in Taiwan. Lai fled to the Philippines. A co-accused, Wu, who had been arrested months earlier, was the alleged operator of the underground bank. They are charged with violations of the federal Bank Act, money laundering and illegal gambling.

Police seized diamonds, including one diamond worth US$200,000, over 200 cell phones, 200 USB drives, luxury cars and over US$200,000 in cash.

Promissory notes and cash seized (Source: Chiayi Police)

According to prosecutors, a witness came forward and said that the same gambling pools and syndicate were in place to bet the outcome of the current president of Taiwan and appear to be a method to influence the outcome of elections.

Allegedly, according to the witness, the way it works to influence election outcomes is that the house, as that term is used in gambling and casinos environments, pays unreasonably high returns to betters which encourages them to persuade family and friends to vote for a certain candidate that the house is backing so that the candidate beats the spread, wins the election and each better is in the money. The witness alleged that it was gambling pools backed by money from China that helped direct the outcome of the election.

Over $3.2 billion missing in digital currency fraud in China; several Bitcoin exchanges shut down and many CEOs disappear with funds

By Christine Duhaime | December 11th, 2019

A few weeks ago in China, several digital currency exchanges announced that they were suspending trading or shutting down operations altogether, leaving the recovery of potentially hundreds of millions of dollars of funds with those exchanges up in the air, and this after approximately US$3 billion went missing from two initial coin offerings (“ICOs“) in China this summer. 

The shut downs came after several government agencies in China issued notices and warnings about the risks of digital currency exchanges and of ICOs over the past few weeks. 

The agencies also announced several investigations into exchanges. So far, there are reports that over 500 people in crypto have been arrested in China in this latest crack down. 

Multiple government agencies issue warnings

Mongolia

The first government warning was from the Autonomous Region of Inner Mongolia in Northern China, on November 11th by the Ministry of Industry and Information Technology, which issued notice that it was investigating, inspecting and “cleaning up” mining operations in the region. More here, and earlier first reported here. 

In 2018, a number of foreign mining operators set up shop in Inner Mongolia and it now accounts for about 2% of the global mining. That’s not a lot for China, which accounts for 60% of the global mining. The government of Hong Kong told me in 2015, that China’s dominance over mining was once over 80%, and thus it is steadily declining. China is a preferred location, not because of electricity, but because of the infrastructure and ease with which mining can be launched in China.  

Beijing

Then, the  Beijing Municipal Bureau of Local Financial Supervision issued two warnings, one on November 13th and the other on November 14th. 

The first was to warn the public about fraudulent misrepresentations being made by some exchanges who were selling coins on the allegation that they were backed by, or associated with, China’s central bank, the People’s Bank of China. 

The People’s Bank of China has not issued, endorsed or backed any digital currencies with the private sector.

The second warning the next day was more of a reminder that online trading platforms, such as exchanges, must be registered and approved by provincial governments in China, and it informed the public that Beijing had not approved any exchanges and in essence if there were any in Beijing, they were not legal.

On November 18th, the China Banking and Insurance Regulatory Commission, a federal agency which regulates financial services, issued a notice about illegal fund-raising for Blockchain projects, which it described as fund-raising that is not registered and cautioned against fake Blockchain projects. 

That came at the same time as Guo Shuqing éƒ­æ ‘清, the Community Party Sec­re­tary for the People’s Bank of China and Chairman of the Com­mis­sion, gave a speech in Jiangxi (郭樹清：拆解影子銀行 éåˆ¶æˆ¿åœ°ç”¢æ³¡æ²«åŒ–) in which he said that the Commission was cracking down on shadow banking and illegal online financial activities within China. 

A crack down on shadow banking in China is important in crypto because shadow banking includes financial transactions done outside the system, such as through exchanges. 

Shanghai

On November 22nd, the Shanghai headquarters of the People’s Bank of China issued a notice that it was cleaning up payments and settlement companies that provide services for international transactions to residents of China that are unauthorized. 

The notice essentially reiterated that in China, buying digital currencies could involve illegal sales or the illegal issuance of securities, and could involve financial fraud or pyramid schemes. It informed the public that in Shanghai alone, the People’s Bank of China had shut down 13 ICOs and 10 exchanges. 

It cautioned against hype related to Blockchain companies and said that its investigations were ongoing. 

Shenzhen

And finally, on November 22nd, the Shenzhen Financial Supervision Bureau issued a warning about the risks of online finance that included digital currency financial transactions, as illegal activities that would be “dealt with seriously.”

In China, the criminal law allows for terms of incarceration for life for violations of federal law involving financial transactions, and so the repercussions can be severe in China. 

RMB22 billion missing

China has issued warnings and undertook a crack down in 2017 and people are left wondering what’s different this time.

What’s different this time is that, in addition to multiple agency action across China, more than 500 people were arrested for digital currency fraud in connection with exchanges and ICOs, with losses for 2019 alone, estimated to exceed RMB22.6 billion in China. 

According to the news website Shanghai Securities News, the Office of the National Internet Financial Risk Special Rectification Group confirmed that law enforcement agencies have been active across China, closing down exchanges, mining operations and ICOs. 

This was further confirmed by the 2019 Financial Stability Report for China published by the People’s Bank of China at the end of November which stated that 173 digital currency exchanges in China has been shut down by the government since 2018. 

Why now? 

You might be wondering why now – why there was such activity in the last few weeks in China over digital currencies and digital currency exchanges?

There are many reasons for that. 

The first is that China has quite advanced research, including academic research, and advanced government investments into Blockchain technology and before the government begins to release its projects to the public, it needed to clean up the ecosystem and get rid of businesses operating outside of the law. 

Partly, that is just for the adherence to the rule of law but also, when unlicensed or unlawful businesses are allowed to operate with lawful ones, it creates an anti-competitive business environment, which is unfair and which the law is designed to prevent and it also creates uncertainty among the public.

So the move is designed to reestablish the rule of law in the crypto space, clean the slate and allow for a fresh start in China for businesses in the Blockchain space. 

The other part, though, was that China was rocked by several digital currency schemes that, as China put it, caused significant damage to the financial order. 

Plus token

The first scheme which caused damage to the financial order was an ICO called Plus Token, which, it appears, was a Ponzi scheme (and may well be China’s largest Ponzi scheme involving digital currencies). 

The Plus Token was sold online and at events in China, Korea and Hong Kong. It was headquartered in Yancheng in the province of Jiangsu, and it is believed that upwards of US$3 billion was allegedly taken by six employees – Chen Bo, Yuan Yuan, Ding Zanqing, Peng Yixuan, Wang Renmi and Dong Jianhua. 

The six employees fled to the Republic of Vanuatu in June 2019. The Vanuatu government confirmed that four of them had acquired citizenship in advance, which would suggest that there was an exit strategy that was planned.

The six were subsequently arrested in Vanuatu by Chinese officials and removed to Mainland China in July. Plus Token then filed for bankruptcy. 

And this is kind of interesting – allegedly, before fleeing, one of the employees inserted Hex code into a Bitcoin transaction that said: “Sorry, we have run” but there is no confirmation that that is accurate, especially since it was not written in Mandarin.  

Wave Field Super Community

The second scheme, Wave Field Super Community, was a wallet and exchange service for digital currencies which went dark on June 30th in China, after an alleged hack. 

But some people have done some casual tracing and remarked that all the digital currencies in its wallets had been transferred out before the alleged hack, suggesting that there was nothing to hack. It had hundreds of thousands of customers and they are allegedly out over US$150 million.

CEOs disappear from China

Following these events in the summer, the government of China decided to act. 

As described above, it led a coordinated strategy of published warnings to the public and arrests to signal a change in approach. After the publication of the warnings, several digital currency exchanges shut down or were faced with situations where their CEOs disappeared. 

Idax CEO allegedly missing with cold wallet of customer assets 

One of those exchanges that was facing a disappearing CEO was Idax, one of the largest in China.

 It announced online on November 29th, that its CEO had disappeared on November 26th, a week or so after the warnings started to be published. 

The CEO is Lei Guorong. He owns over 17 companies in China. Idax is a Mongolian company that has been in operation since 2014. It had an office in Shanghai, and operated as an exchange without authorization in China.

The CEO kept the digital currencies of all of the customers in a cold wallet which he controlled and sometime around the time of his disappearance, employees said they were unable to access any of it, implying that all of the consumer funds disappeared when the CEO disappeared. 

However, several weeks before the disappearance of the CEO of Idax, its employees were responding to consumers in writing that, because of congestion from an overload of withdrawal requests, they were unable to process withdrawals, knowing that those statements were untrue.

Idax had statements on its website that were also untrue, including that it was supported by the government of Mongolia to conduct its digital currency business. 

Idax was the 24th largest exchange and it said that it processed over US$700 million in volume. It had its own ICO, that is now worth nothing. 

BISS exchange employees arrested

Another exchange called BISS was reported to have been raided by the police in Beijing and several employees, as well as its CEO, were allegedly arrested and are in remand pending an investigation for participating in an illegal exchange. 

The exchange is up but not operating. Its website alleges that it was based in the Cayman Islands but it was in China. It also had an ICO that is now worthless. 

Three other exchange CEOs allegedly disappeared

The media in China have reported that the CEOs of three additional digital currency exchanges recently disappeared with the USB sticks that hold the digital currencies of their customers. 

Another digital currency exchange in China notified its consumers that, without their consent, it was converting their digital currencies into its own exchange ICO; in other words, it was cashing out the Bitcoin and more valuable digital currencies owned by its customers and replacing them with its own exchange coin, so that the exchange keeps the valuable liquid digital currencies and consumers get illiquid less valuable exchange coins, the legality of which seems highly questionable and seems to be an illegal conversion.

Social Media Crackdown

And finally, you may have heard that Binance and Huobi’s Weibo accounts were closed or that their offices were allegedly raided in Shanghai around the time of the warnings that were issued by several government agencies in China. In fact, there was a bit of a Twitter storm involving Binance because it was reported that Binance’s Shanghai office had been raided, which Binance denied. 

So, what did happen? 

Well Binance’s co-founder said on Weibo that China came to them in advance of the November crackdown, and that they were no longer in China by the time the warnings were issued and the crackdown started. For Binance, it seem like they were given a heads up, which is entirely possible if a company has a good relationship and a transparent dialogue with Chinese government officials. 

I’ve heard the same thing from a China digital currency exchange actually located in Canada.

Many tech and AI companies from China continue to have a presence in China for survivability, revenues and access to Chinese tech university talent while operating in secondary offices under the radar in Canada. All they do is bring in the tech and AI talent from China and the crypto space is no different.

Suumary

In summary, what is the outlook for China? 

It looks like the landscape in China has changed for digital currencies and exchanges, as well as for mining. China has put the community on notice that it’s has zero tolerance for crypto activities that are pursued outside of regulation. 

For Canada, which is a recipient of vast sums of digital currencies imported into the country from China in violation of currency control laws, we will likely see an uptick in transactions that move money out of China to Canada, and then it may subside and move underground. 

I don’t think we’ll see a large impact on mining, because Inner Mongolia was not a large center of mining operations to begin with. 

With respect to prosecutions, China does not publicize all of its criminal trials and so we are unlikely to have much information on the prosecutions of those arrested in this wave of crackdowns. 

Interestingly, though, under Chinese criminal practice, if those who are being prosecuted return the digital currencies back to the government, they face much less severe sentencing, so we may see some of the US$3 billion that is missing make its way back into China through crypto transactions on the Blockchain for sentence reduction. 

But I think there’s more to come from China on the law enforcement side mostly involving exchanges, and if so, it will happen before the Chinese New Year. 

Drug kingpin Caesar Emilio Peralta (Caesar el Abusador) arrested in Colombia on anniversary of Escobar’s death

By Christine Duhaime | December 8th, 2019

Caesar Emilio Peralta, also known as Caesar the abuser, an OFAC designated drug kingpin from the Dominican Republic, was arrested in a rented condo in a hotel in the upscale Bocagrande District of Cartagena de Indias, Colombia. Police say he was getting ready to flee to Panama.

Peralta is wanted on charges of international narcotics trafficking and he is alleged as well to have engaged in the trafficking of women and girls from Venezuela to the Dominican Republic. He was allegedly tipped in respect of his pending arrest by Dominican Republic officials, according to locals.

Peralta fled the Dominican Republic in August 2019, days before his OFAC designation was released and several members of his drug organization were arrested.

In Cartagena, Peralta was captured in a one bedroom suite, number 1104 of the 3-star Murano Elite Hotel. Peralta’s last sleep outside of prison was in the apartment’s green-infused bed with the word “love” above it. The suite is available for rent here. Colombian national police said that Peralta had booked prostitution services and several “business” meetings for the day when he was arrested.

  • A love bed
  • Green infused kitchen
  • Rooftop pool

Another drug kingpin, Pablo Escobar, used to hang out in Cartagena de Indias. He owned a vacation mansion on La Isla Grande, off the coast of Cartagena de Indias, which is now vacant.

There are other Pablo Escobar connections – Peralta was arrested on purpose in Colombia on December 2, 2019, because that is the day the Colombian national police tracked down and killed Pablo Escobar, 26 years ago.

Peralta arrived in Cartagena on November 29, 2019, on board a private yacht. The national police said that: El periplo de este hombre en Cartagena se centre en encuentros con prostitutas y tuvo muchas reuniones”, meaning he spent his time booking prostitutes in Cartagena.

Peralta told police after his capture that in October 2019, he was in the northern city of Barranquilla, where someone tried to murder him.

Barranquilla is where the nephew of Pablo Escobar, Severo Cuarto Escobar Garzon, was arrested in 2010. He was eventually extradited to the State of Georgia, where he was convicted in 2014, of being part of an organization that laundered drug proceeds as a business from Mexico, the UK, Puerto Rico, the Dominican Republic, Colombia and Australia.

Bitcoin advisor arrested for allegedly providing technical education on Blockchain to North Korea

By Christine Duhaime | November 30th, 2019

Unsealed criminal complaint

The US Attorney for the SDNY, together with the FBI yesterday announced the arrest of Virgil Griffith, a cryptocurrency advisor, in connection with technical services he allegedly provided to educate the Democratic People’s Republic of Korea (“North Korea”) on sanctions avoidance and money laundering. Griffith was the subject of a criminal complaint filed on November 21, 2019, that was unsealed upon his arrest.

The US Attorney General alleges that Griffith provided highly technical information knowing that it could be used to help North Korea launder money and evade sanctions, and in so doing, put the US financial system at risk. Part of that technical education allegedly took place at something called the Pyongyang Blockchain and Cryptocurrency Conference that was held in North Korea.

He was denied permission to travel to Korea but went anyway

The sanctions in respect of North Korea are in respect of concerns over the proliferation of weapons of mass destruction and terrorism. The unsealed criminal complaint says that it is unlawful for US citizens to travel to North Korea, and despite that, Griffith went there after being denied permission by the US government to do so, and outright disobeyed instructions from the US State Department.

It is alleged that Griffith informed attendees at the Conference that Blockchain and digital currencies could be used to achieve independence from the financial system and circumvent it, including discussions in respect of mining digital currencies.

Allegedly he acknowledged sanctions avoidance

The FBI extracted his cell phone information and therein, he is alleged to have said that the interest of North Korea in his expertise was probably sanctions avoidance and later, sent digital currencies to North Korea despite sanctions in place.

Griffith was a math and science whiz, who, according to this article, considers himself a super hero in the computer sphere, who has invented a number of technical firsts.

Blockchain used to defeat the rule of law

The concern of digital currencies and mining being used for sanctions avoidance is not new but has been growing recently. For example, there are concerns that Iran (through mining) and a self-proclaimed state in the Ukraine (the PRIZM coin owned by Aleksei Muratov), may be engaged in sanctions avoidance, as well as Venezuela (the Petro coin). The Petro coin uses NEM, which is supported in Canada in terms of transactions by a Vancouver digital currency exchange, which would allow sanctioned transactions to be cashed out in Canada. Venezuela said it sold $5 billion of the Petro coin around the world and then its ICO website went dark and remains offline.

The US government has, on several occasions, issued guidance and advisories, and expressed concerns to the digital currency ecosystem about the use of digital currencies to circumvent the rule of law, including sanctions law and has also put the community on notice that the sandbox days of ignoring the rule of law are over.