2019 seems to have been a record year for mass protests by citizens marching against national corruption – at least 10 countries have had massive protests in the last few months, many of which are ongoing.
Corruption at the national level is perpetrated by politically exposed persons (“PEPs“) who have access to the country’s coffers, and are often paid bribes for contracts, for work or favours, and who then use their positions of power to exit proceeds of corruption to other countries.
A Europol Report on Trends published in 2015, noted the increasing threat associated with wealth disparity (e.g., the rich getting richer) which they predicted would cause citizens to be more willing to accept criminal activities that target the wealthy if those crimes deprive the rich of their wealth, or that even the playing field.
The protests have a few things in common: calls for an end to corruption; addressing hunger; and the rising costs of living – all tied to wealth disparity. On the financial institutional side, the protests will accelerate the need for PEPs to move their ill-gotten gains to safe countries. For Canada, the highest risk is proceeds of corruption from Iran entering Canada through MSBs registered in Vancouver and Ontario, which follow a well-known process of laundering money for wealthy Iranian PEPs through Dubai.
Iran
Protests in Iran tied to corruption (and worsening economic conditions) have been ongoing for two years, and ramped up in early 2019. Iran has a significant wealth disparity issue with a few select PEPs who are very wealthy that live in North Tehran, and the rest who are not. Inflation grew by 30% in one year and the lack of federal banking regulations is impacting the economy, as are sanctions. Many Iranians are unemployed and one third of Iranians have no access to drinking water.
According to this article in the Financial Times, 20% of lawyers in the UK are not complying with federal anti-money laundering laws. Unlike the US and Canada, in the UK, lawyers are reporting entities and must conduct bank-level AML to onboard and report suspicious and other threshold financial transactions externally. The findings come amid concerns that professional money launderers (accountants, lawyers, hawalas and bank officials) are facilitating international money laundering wittingly or unwittingly.
A criminal complaint filed in the Southern District of New York and deposed by a special agent of the FBI against Konstantin Ignatov, an executive who helped operate a digital currency company called OneCoin and a digital currency exchange, sheds some light on the murky world of OneCoin.
The money
From 2014 to 2016, OneCoin raised between US$2 billion to US$3 billion from investors in 175 countries, and was represented to investors as a digital currency on its own Blockchain that could be mined. It turns out that OneCoin was not a digital currency at all and it had no Blockchain technology.
According to the criminal complaint, the proceeds of the sales of the fictitious OneCoin were laundered through 21 countries, including the Cayman Islands, Jersey and Ireland.
The sister
OneCoin was founded by Dr. Ruja Ignatova, Konstantin Ignatov’s sister. She is an Oxford graduate and worked at McKinsey. Both are from Bulgaria. The complaint states that Ignatova acquired law enforcement intel and unauthorized access to law enforcement information in Bulgaria, presumably about an investigation into OneCoin, and then went dark and disappeared.
And apparently so has the billions of dollars paid by investors for OneCoin.
Sister likes diamonds; brother likes tattoos (Source: Instagram of Ignatov)
The complaint alleges that at sales events to pitch OneCoin, the siblings represented that the fictitious OneCoin Blockchain was “transparent” and had anti-money laundering compliance documentation built-in, none of which was true. Such sales pitches took place in the EU, Colombia, Singapore and Argentina. On Instagram, Ignatov posted photos of himself beside a OneCoin-branded airplane in Paraguay, driving a Porsche, on yachts and in exotic places in the world.
The founders of OneCoin also created a digital currency exchange called Xcoinx to ostensibly list the illusory coin, which later also went dark. It had a second trading platform, which was also not functional, called Dealshaker, which ostensibly allowed holders of OneCoin to buy merchandise, but which did not function.
The complaint refers to an additional unidentified co-founder, which is probably Karl Sebastian Greenwood.
The charges against Ignatov
Konstantin Ignatov has been charged with wire fraud pursuant to a criminal complaint and Ruja Ignatova has been indicted for money laundering. She is known as the “crypto queen” but referred to herself as “the bitch of Wall Street.”
Apparently, even though the business was relatively insolvent because the funds raised were not left in the business or used to create technology, they continued to solicit funds from the public and while OneCoin executives and salesmen were pumping out information to raise money for OneCoin, they were sending various company emails that the coins were “fake”; that they could manipulate data on Xcoinx; and that they knew that what they were telling the investing public was “shit.” Ignatova referred to OneCoin as “trashy coin.”
The majority of people scammed were in China and a large sum of funds were parked in Dubai.
“Blame someone else”
The complaint describes how two executives discussed an exit strategy and suggested that one exit option could be that they “take the money and run and blame someone else.”
Under this exit strategy, they would take the money at that time (18 months ago) and long after, would blame someone else for the crime.
As early as August 2015, Ignatova wrote in an email in reference to OneCoin being a fake coin: “we are fucked.”
Muslim investors targeted
One of the unique strategies of OneCoin was it promoted itself as a digital currency that was compliant with Islamic finance, apparently with a certificate from the Al-Huda Center of Islamic Banking and Economics. In the UK, Muslim investors believed it was legit and invested in it.
A branded little jet for Konstantin. He was #happy and having a #goodmorning
Ignatova’s disappearance
A year before Ignatova disappeared in October 2017, she informed her co-founder (believed to be Greenwood) that if anything happened to her, her brother “knows what to do.” When she disappeared, Ignatov took over operations of OneCoin.
We know that Ignatov had communication with Ignatova after she disappeared in October 2017, even if it was through a proxy. We know that because he was in possession of a power of attorney executed by Ignatova in favour of Ignatov dated four months after her disappearance. That power of attorney created for enforcement under EU laws means that Ignatova physically met with a notary after her disappearance and in his or her presence, executed it. The name of the notary on that power of attorney is the last person publicly known to have seen Ignatova.
The British Columbia Securities Commission has issued a warning about the purchase of virtual shares of a company tied to app games that are being marketed to investors who speak Mandarin in the Vancouver area. Virtual shares are not based on any corporate assets and the shares are only capable of being subscribed to on mobile apps. It also appears that no share certificates are issued, all of which is inconsistent with the Business Corporations Act.
Two promoters have been named – FullCarry and International Money Tree. The way the game works is that investors are told that with rising demand (hyping the stock on the app), the price will be driven up and will allegedly split at a certain point, allegedly generating income for subscribers.
The subscription works like a pyramid scheme where subscribers are given bonuses for new investors they find.
FullCarry is a BVI entity based in Dubai and IMT is in Singapore.
Skip this Part 1 if you know about Mossack Fonseca and shell and shelf companies.
The movie The Laundromat is about lawyers and big law firms and the system that fuels offshore money movements, often involving the proceeds of crime.
The movie is about a big law firm called Mossack Fonseca that was based in Panama. It didn’t appear to have provided much in the way of legal services; rather it sold the services of, inter alia, hiding wealth in little offshore tax havens through the use of what are called shell and shelf companies.
The way it worked and still works today at some big law firms, is that the law firm flips shelf or shell companies to a client, which are incorporated in a jurisdiction known for lax anti-money laundering compliance and tax evasion. These little jurisdictions are countries whose sole resource is providing a place to allow for incorporation where the identity of the directors, officers and shareholders are protected from disclosure, with a bank account. The two must go together (the offshore shell with a bank account) because the shell by itself is not the actual service the client of such services wants – it wants to move money and do it anonymously. The bank account is the critical piece for such persons – the thing of value – the shell merely sits over the bank account and is the figurative key to the often looted treasure.
The money such persons are moving is either illegally acquired or legally acquired, but either way the person wishes to hide it sometimes to defeat the rule of law. But it wasn’t just tax havens involved. British Columbia was a significant corporate host jurisdiction for Mossack Fonseca, where over 1,100 companies were set up, allegedly by a Canadian “company service provider” named Fred Sharp.
Mossack Fonseca also had a stable of nominee directors, officers and shareholders like a stable of horses. For a handsome fee they would come out of the stable and appear on the corporate records to fake to be the director, officer or shareholder of a shell. Mossack Fonseca pimped out those services, and if asked, secured bank accounts for the shell and shelf companies they sold.
On occasion, the shells used bearer shares. A bearer share is one where the owner of the share is its possessor, meaning that whomever is in possession of the share is the shareholder of that share. There is nothing illegal or wrong with bearer shares except that only the company knows who the shareholders are. They are like a promissory note in that rights arise upon presentment. British Columbia’s corporate legislation allows for the issuance of bearer shares. In practice, no one ever uses bearer shares. It’s because to use them, one still has to engage with the corporation and they do not give a person any rights to a bank account where the money is parked.
It wasn’t just Mossack Fonseca that drove the creation of shell and shelf companies – 90% of its clients were big law firms and accounting firms in Germany, Canada, Hong Kong, China, the UK and other places, who were asking them to provide such services, and were advising their clients in their offices about the bona fides (or not) of the practice.
In 2014, a reporter named Ken Silverstein wrote an explosive article about Mossack Fonseca which launched inquiries into the law firm for the first time.
Then in 2016, a John Doe acquired 11 million documents from Mossack Fonseca illegally and disclosed them to the media. The law firm did not bring an injunction application to stop the publication of the files on the basis of privilege and confidentiality. Today it would lose such an application because of the criminality now known to be associated with some files, but back then, it may not have. The leak and trove of documents became known as the Panama Papers.
The Panama Papers reverberated around the world because it disclosed more widely, the practice of law firms that flip shelf and shell companies, and how those entities are used to move around the wealth of politically exposed persons anonymously, in disregard of PEP laws and anti-money laundering law. Lawyers at big law firms who practice in the area of corporate finance, immigration for wealthy persons and taxation were familiar with shell and shelf companies (because they are the group that mostly flips them for hundreds of thousands of dollars each) but regular lawyers and the public were not aware of such practices.
Mossack Fonseca did provide somelegal services – among other things, they set up new corporate entities that were not shells for some clients, where the company had a real underlying business and the directors, officers and shareholders were legitimate.
Part 2
8 Questions you Maybe Had About the Movie The Laundromat
1. When Gary Oldman and Antonio Banderas, who play Mossack and Fonseca, respectively, say that there are many more law firms all over the world still in business exactly like them (that flip shells and shelfs to hide who is behind companies to allow them to move money anonymously), is that true?
Yes. Probably not so much in the US but many big law firms assist with the creation of shell companies, flip shelf companies and set up bank accounts for clients to give them anonymity. Many still use little offshore tax havens and help clients park money there.
2. John Doe, played by Meryl Streep, says that the problem is the massive pervasive corruption of the legal profession and that the fact that the Panama Papers was the event that shed light on what lawyers do is cause for concern. Has anything changed?
It’s hard to say. The US government has signalled that it is prepared to prosecute lawyers who flip shell and shelf companies, and those foreign lawyers who worked with Mossack Fonseca to create shells associated with criminality. It is also the big accounting firms with massive offices in little island tax havens that drive a lot of this work. In the US, the American Bar Association has faced criticism for not supporting changes that address the problem and that would help prevent people from breaking the law.
3. John Doe, played by Meryl Streep, says that as a result of the legal profession, global instability could be around the corner. What does she mean?
She means that the law firm (and the lawyers around the world that fed the machine that was Mossack Fonseca), serviced politically exposed persons who removed millions of dollars, sometimes hundreds of millions from their countries and moved those funds out through banks and shell companies to other countries, and that the corruption underlying that activity and the bankrupting of poorer countries, will lead to civil unrest. EURPOL, for example, has said that if wealth disparity grows, there will be disrespect for the law that leads to global instability.
4. Mossack and Forseca say, in the movie, that what they did was make assets safe from scrutiny by supplying shell companies located where the laws are favourable on islands in the middle of the ocean. Is that true?
Yes. Shell companies they set up are in little islands in the middle of the ocean which have favourable laws; usually favourable to defeat the law that is. But they did other things that are problematic such as doctoring corporate documents to change ownership, or remove ties to a person or corporation or back-dating them. They admitted to back-dating corporate documents and have said that it is a well-founded and accepted practice. If corporate documents are back-dated, the ability of law enforcement to successfully peel away the onion to ascertain who is behind a shell, becomes harder. Such practices are not consistent with corporate legislation, tax laws, or financial crime laws either. Mossack Forseca charged fees and a per-document price to back-date corporate resolutions, registers, shareholders and such, as a disbursement from a menu of services.
5. Was there a Boncamper in Nevis who worked with Mossack Forseca to front some shells and did they really doctor documents to remove him?
Yes, Malchus Boncamper was an accountant in St. Kitts and Nevis, who acted as a nominee (fake officer or director) for a number of shells for Mossack Forseca. He was arrested for money laundering and pleaded guilty in the US. For ten years, he laundered the proceeds of crime from a fraudulent scheme that sold fake insurance. He banked in Liechtenstein.
After his arrest, Mossack Forseca did a kind of a cleanse pursuant to which they cleansed the corporate records of many shells in which Boncamper was a nominee to remove his existence from those shells. Doing that invalidates all previous corporate actions, including consent resolutions which must be unanimous to be effective. When a lawyer goes back and cleanses resolutions to change the name of a nominee, who did not consent to a resolution or to any corporate actions, then there is not consent for the resolution.
St. Kitts and Nevis is a little island where Chinese foreign nationals are, according to legend, told by immigration lawyers that they could buy citizenship for a price commencing at $250,000 where no questions were asked and no expertise existed on the AML side, and where banks and law firms were friendly. Rich politically exposed Chinese foreign nationals were told by those immigration lawyers that they could come to Vancouver to park money because they became part of the Commonwealth if they were citizens of St. Kitts and Nevis, and that’s why St. Kitts and Nevis is popular – its an entry point to Vancouver.
6. In the movie, when Mossack says that with a shell company, the window is in the BVI and the room is in China, what does that mean?
What it means is that for Chinese foreign nationals, for example, they may have a trust set up under the laws of Guernsey which is controlled by a shell in another jurisdiction, such as the BVI, with bank accounts in Vancouver. When law enforcement, or someone doing an investigation for an asset recovery, attempts to determine where assets are and who controls them, they could be looking through many windows that are illusory because the room (the assets) is not what the view in the window is showing. So, for example, the room is China and one window is Guernsey, another window could be BVI and a third window is Vancouver for the exact same family of PEPs from China.
Basically, it means that unless you know the structuring of these schemes and how Chinese foreign nationals use trusts and private shell companies in, for example, Guernsey and BVI, with banking in Vancouver, what you see in the window for whatever purpose – let’s say asset recovery – is not what is in the window. In other words, you may spend years asset recovering in Vancouver only to later learn that you were looking through the wrong window – the window you want to look through is closed to you if you don’t understand how offshore jurisdictions function in the corporate law sense.
7. Is it true that Bo Xilai and Gu Kailai were clients of Mossack Forseca?
Yes. This article describes how they moved money from China illegally to France through shells.
8. Obama says in a news clip in the movie that what Mossack Forseca did was legal. Is that true?
Yes and no. It is legal to set up a company, even in little tax havens. It is legal to flip a shelf company for hundreds of thousands of dollars, although it is not the practice of law. It is legal to flip a shell company, but that is also not the practice of law. This is as opposed to incorporating a company fresh, which is legal and is the practice of law.
If a service is not the practice of law, the advice is neither privileged nor confidential and is similar to advice received from an accounting firm (not protected).
It is not legal to doctor corporate records. It is not legal to switch out officers, directors, shareholders of shell companies without the underlying corporate approvals or to back-date corporate records. It is not legal to knowingly flip shells and shelf entities, and secure bank accounts for clients to commit crimes or to facilitate the commission of crime, such to launder money, evade taxes or commit securities fraud. It is not legal to set up a whole corporate structure to obfuscate ownership and directors on purpose to provide anonymity to move money offshore to defeat or circumvent the laws.
In some countries, it is also not legal to accept or deal with the proceeds of crime or deposit such proceeds into a law firm bank account, so unless the services were provided for free, legal services can’t be provided, with the constitutional exception of providing legal services to defend an accused in a criminal proceeding.
A Vancouver man, Sinara Nou, was sentenced last week to 52 months in jail following a conviction in Hong Kong for attempting to smuggle in HK$13 million worth of cannabis through the Hong Kong International Airport in two suitcases.
In February 2019, Nou was arrested while attempting to smuggle cannabis buds into Hong Kong – he stashed 16 slabs of cannabis buds wrapped in towels in one suitcase and 14 slabs in the another, weighting 29 kgs combined, with a street value of close to HK$13 million (US$3.8 million).
Nou said he was on welfare in Vancouver and smuggled the drugs into Hong Kong for $25,000.
A Canadian man, originally from China, who is a convicted money launderer, lost a second appeal in the Hong Kong Court of Appeal two weeks ago, to prevent his deportation to India to face trial for drug trafficking.
Xie Jing Feng, whom we wrote about here, appealed decisions for his removal on the ground of non-refoulement and risk of death if deported to India, and this appeal was an appeal of those denials. He is seeking to return to Canada.
Xie was born in China and moved to Canada in 1998. He claimed refugee status, which was accepted and he became a Canadian citizen. It appears that he may have been a drug trafficker in Canada but that is unclear – whatever his business, Court decisions state that he later laundered HK$95 million in proceeds of crime through Vancouver banks and other banks in China, Macau and Singapore and used a shell company offshore. He also goes by the name David Chow. His spouse may live in Vancouver.
On a trip to India several years ago, he was arrested for drug trafficking. He was in remand for 3 years awaiting trial, during which time he escaped, made his way to Nepal then Hong Kong, where he was stopped and arrested for attempting to use a forged Malaysian passport to enter Hong Kong.
He was released pending trial for those immigration offences and was then arrested for money laundering (處ç†å·²çŸ¥é“或åˆç†ç›¸ä¿¡ç‚ºä»£è¡¨å¾žå¯å…¬è¨´ç½ªè¡Œçš„得益的財產). He had 3 Canadian passports (two that were alleged to be fake), that he used to open bank accounts at HSBC and Standard Chartered in Hong Kong, where he had laundered millions of dollars, at times using his wife’s name. He was convicted of money laundering and sentenced for a term of incarceration of 4 years and 4 months on April 23, 2013.
In this latest appeal, the Court of Appeal in Hong Kong denied his application, calling his appeals “hopeless.”
US law enforcement agencies recently signalled that they were stepping up enforcement, inter alia, in two ways: (a) as against professional money launderers; and (b) as against shell and shelf companies that law firms flip to clients.
Professional money launderers under scrutiny, the FBI explained recently, are accountants, hawalas, lawyers and individuals, as well as banks, that wittingly or unwittingly launder the proceeds of crime. Shell and shelf companies are companies that law firms create and flip (sell) to clients. Both are often used by transnational criminal organizations and for securities fraud and are high risk for money laundering.
Law firms flip shelf and shell companies to clients for upwards of $200,000 each. They flip them sometimes as part of a financing, and sometimes because in the case of shelf companies, they give the appearance of having longevity, and ergo legitimacy. Such companies appear to be a going concern when in reality they have just sat on a shelf for years, engaged in no real business. Shell companies are not aged like shelf companies and the advantage of paying extravagant sums for shell companies to law firms appears to be because they come ready-made with legal and beneficial owners.
When law firms flip shelf and shell companies to clients, often the payment is taken from a retainer held in a law firm’s trust account from the client or from proceeds of a financing, and may be billed as a disbursement.
It is debatable whether the business of flipping of shelf and shell companies to a client constitutes the practice of law, because its the resale of a law firm asset to a client (no different than the flipping of a condo owned by the firm to the client) except at a significant profit of close to $200,000 a pop, often more.
To flip a shelf or shell company to a client, a law firm would need to ensure that it explains to the client what it is, how much profit the firm is making off the flip, that it can obtain the same thing (a new company) without some of its perks for $500, and because there is a conflict (the firm is the vendor of an asset flipped to its own client).
There appears to be no guidance for lawyers and law firms in respect of having a side business flipping shell and shelf companies – thus far, law regulators have not expressed any concern in respect of the practice, issued guidance in respect of it, or prohibited the practice.
But in other regulated sectors, there is significant concern being expressed. The SEC recently filed charges against a lawyer for selling 8 shell companies to 3 related clients and referred to it as a “shell manufacturing” operation.
Lawyers as car salesmen
A New York Times story entitled Panama Papers Show How Lawyers Can Turn a Blind Eye showed how Ramon Fonseca, one of the founders of the Panama law firm Mossack Fonseca, which set up companies where its lawyers acted as beneficial owners, directors and officers for a fee, and which also was in the shell flipping business to clients, bankers and accounting firms, told a reporter that its lawyers did nothing wrong in flipping shells to clients: “we are like a car factory” the lawyer said. Precisely the point.
That firm also set up thousands of bank accounts with global banks for thousands of clients as part of the shell service.
In 2014, this article first called lawyers who flip shell and shelf companies, car salesmen.
Shell companies and crime
The FBI explains some troubling cases here where drug cartels, human traffickers, sanctions avoiders and Ponzi schemers used shells for financial crime. You can read here about a company that sold over 2,000 shell and shelf companies as a business, some of which later were traced to financial crime. You can also read here on how Canada is a facilitator of the creation of anonymous shells. And here on how what are called “service companies” act as fronts for trusts, shells and foundations. The shell games involve using an offshore country known for lax anti-money laundering law and known for tax evasion to act as the place of incorporation of shells owed by wealthy PEPs, such as Guernsey.
You can read here about an employee of the law firm Mossack Fonseca (the firm which said it was like a car factory), arrested for money laundering and extradited to Germany to face charges of facilitating clients to break the law, and here, where the US charged three other employees of that same law firm in connection with criminality, including money laundering and creating sham shells, and here where the two founding lawyers of that law firm were charged. The partners have also been indicted in Brazil for flipping shells that were used to move the proceeds of crime from government corruption, and they have admitted to back-dating corporate records, a practice that they said was an “industry practice”, meaning all lawyers do it as a standard practice.
That shells are used for serious criminality and money laundering is no longer an unknown. Thus far, $1.2 billion in fines and payments from tax evasion have been collected arising from shells associated with the law firm Mossack Fonseca.
This video here highlights the harm the law firm did playing shell games, ranging from human trafficking, medical fraud and the Syrian refugee crisis, which displaced 30 million people.
The Securities and Exchange Commission (“SEC“) announced today that it filed an emergency application ex parte in US Federal District Court in Manhattan, and after a hearing, obtained a temporary order over the initial coin offering (“ICO“) launched by Telegram Group, Inc. (“Telegram“), the messaging application, which raised $1.7 billion from investors around the world thus far.
According to the SEC, Telegram and its subsidiary, TON Issuer Inc., started to solicit money from investors for its ICO commencing in January 2018 to finance its operations, and its fund-raising activities were global and included the solicitation of funds from US investors. In January 2018, Telegram represented it was creating its own Blockchain called the Telegram Open Network. It is alleged to have sold 2.9 billion units to 171 investors, which in the ICO world translates into 2.9 billion digital currency tokens which were called Grams. Over 39 of those investors were resident in the US.
Part of the representation to investors, alleges the SEC, was the delivery of the Gram tokens to investors in a digital currency wallet by October 2019, ergo, the promise of liquidity and control of the investment, similar to a representation that an investor’s funds would be used to purchase shares that were liquid and tradable.
No registration of securities
Telegram allegedly did not register the offering or the sale of its ICO with the SEC. Part of the requirement of selling investments to the public, subject to an exemption, includes disclosing to investors the information they need to make informed decisions such as risk factors, the legality of the offering, the financial condition of the issuer, the expertise and experience of its management and information in respect of insiders, as well as any material information.
The SEC is seeking a permanent injunction, disgorgement of the proceeds of the ICO sales and civil penalties against the two corporate defendants.
Joint statement by SEC, CFTC and FinCEN
At the same time, the SEC, CFTC and FinCEN issued a joint statement in respect of the anti-money laundering and counter terrorist financing obligations of entities that engage in the business of money transmission (whether registered or not), including activities of accepting currency, funds or value, or selling securities, or providing exchange services, including ICOs that transmit and accept digital currencies on behalf of others as their business.
A Judge of the Supreme Court of Mexico has resigned amid questions in connection with a money laundering inquiry involving his finances stemming from the US. Justice Eduardo Medina Mora was appointed in 2015 by the President of Mexico. Previous to that, he was the Ambassador to the US, and Attorney General of Mexico. The Supreme Court is Mexico’s highest court.
As a Judge, Mora is a politically exposed person in anti-money laundering law, which means he is at higher risk for corruption and to launder money compared to the general population according to the FATF. Politically exposed persons including judges, politicians, heads of NGOs, members of the military and business associates of any of the foregoing.
