On October 19, 2020, the Financial Crimes Enforcement Network (“FinCEN“) assessed a US$60 million penalty (here) against Larry Dean Harmon, the owner of two Bitcoin mixing and anonymizing services called Helix and Coin Ninja LLC. FinCEN found that the two entities were operating as unregistered money services businesses (“MSB“) which exchanged currencies, including Bitcoin, conducted financial transactions and provided services to mix, tumble and anonymize financial transactions.
Anonymous payments for narco traffickers
For a three year period from 2014 to 2017, through Helix, Harmon’s entities pulled in over US$311 million and conducted at least 356,000 Bitcoin transactions. In total, Harmon oversaw over 1.2 million financial transactions without complying with the Bank Secrecy Act financial crime obligations as an MSB. FinCEN found that Helix processed US$121,511,877 darknet Bitcoin transactions. FinCEN’s investigation into the activities of Helix revealed that it processed payments for narco traffickers, fraudsters, those engaged in counterfeiting and other criminals.
Indictment against Harmon
Earlier in the year, an indictment against Harmon was unsealed in respect of his Bitcoin mixing services and in connection with a darknet search engine called Grams, that was part of Helix, that allegedly worked with the now-defunct illegal Canadian darknet site, AlphaBay, to launder money. The indictment alleges that Harmon operated a money laundering service and promoted and obfuscated the proceeds of crime derived from drug trafficking and other darknet illegal activities.
The Grams darknet site provided an index that allowed bad actors to sell stolen ID products, weapons and narcotics.
FinCEN found that Harmon’s entities provided services to just about all of the darknet vendor sites including Silk Road 2, Oasis Market, Russian Anonymous Marketplace, Middle Earth Marketplace, Hydra Market, Hansa Market, DutchDrugz Market, Dream Market, Black Bank Market, Agora Market, Valhalla Market and Wall Street Market and to darknet vendors that sold child pornography and child exploitation material using Bitcoin. It also did business with BTC-e, also shut down by law enforcement (although one of its co-founders resurfaced as part of PRIZM coin which surprisingly, one can buy in Canada at a registered MSB (here)).
Bitcoin tumbling and mixing services make tracing the flow of funds next to impossible and deprive people of the ability to take any action against parties that use those services when they have been defrauded, or suffer other legal losses.
With respect to Canada’s AlphaBay, it was shut down by US law enforcement (here). AlphaBay operated the world’s largest darknet illegal site accessible on TOR that resulted in the death of several teenagers from fentanyl overdoses. Its Canadian owner, Alexandre Cazes, was arrested by US law enforcement and committed suicide in custody before being extradited.
Stated belief that illegal drugs are victimless; a legal right
In an interview on this website, a person identified as the founder of Grams and Helix, described Helix as the definitive Bitcoin cleaner and represented to the public that for a 3% fee, he will “clean your Bitcoin” and made this statement: “victimless crimes, such as using drugs, is everyone’s right and is the purpose of the darknet” and that he “likes being on the frontier of the Internet’s dark side.”
The super narcotics kingpin and major money launderer, Ross Ulbricht, made similar comments about access to illegal drugs being a legal right. He was sentenced to two life terms of imprisonment plus forty years with no possibility of parole, a sentence that was intended to send a message to others (presumably those providing similar darknet services) so that they “understand without equivocation” that if they break the law like Ulbricht, “there will be very, very severe consequences.” (see Q&A on Ulbricht’s trial here).
In terms of threat actors in the Bitcoin mixing and tumbling space, the marketplace is beginning to see some actors who ran Bitcoin mixing and tumbling services reinvent themselves as ostensible legitimate operations under new brands with attempts to align with international law enforcement agencies and financial crime standard-setting bodies.
Since the FBI released parts of its file on the Russian Ten investigation in 2011, and CBS “The FBI Declassified” covered the story in depth this October, the public has gained a better window of visibility on one of the longest, deepest covert operations ever carried out by a foreign government in the US, and one of the longest FBI investigations – an investigation which shed light on the way deep covert activities are taking place that involve Canada.
The Russian Ten were ten secret agents and four other operatives from Russia who worked for the foreign intelligence organ of the Russian Federation, the SVR, in various cities in the US for several years. Their secret mission? To assume fake identities and live in the US long term, immersing themselves into US society and culture and to use that penetration to develop close ties with US policymakers and report intel back to the SVR that would give Russia a competitive advantage.
After a multi-year surveillance and investigation program undertaken by the FBI, they were arrested in the US in June 2010, after they had spent several years there at various universities and in US businesses.
Many of them came to Canada first because that is a common way for Russians to infiltrate the US, possibly because either immigration visa standards are more relaxed to enter Canada than the US, or because false identity products are easier to acquire from Canadian government agencies and pass off in Canada, or perhaps a bit of both.
Four of the Russian Ten were fake Canadians – Donald Howard Heathfield, Tracey Lee Ann Foley (who was married to Heathfield), Christopher Metsos and Patricia Mills (Наталья Переверзева).
The FBI files reveal how at least one of them acquired a fake Canadian identity after landing in Canada from Russia from a death notice in the newspapers.
According to the FBI files, Andrey Bezrukov (Андрей Безруков) assumed the identity of Donald Heathfield (who was deceased) and obtained a real Canadian birth certificate from the Quebec government using information from the death notice of the father, Howard William Heathfield, who died on or around June 25, 2005.
His spy wife, Tracey Lee Ann Foley, did the same – assuming the name of a dead Canadian child in Quebec. Her real name was Elena Vavilova. They lived in Toronto and had two children, even starting their own diaper business as part of their cover. Their cover was so good, the Toronto Star ran a story about their entrepreneurial spirit launching a Toronto diaper business. Often intelligence agents are paired up at headquarters long before they head out to a transit country like Canada before being deployed to the US.
Many of the Russian Ten pursued advanced degrees in the target country and joined professional organizations to deepen their cover and hide their activities as Russian intelligence agents.
Ultimately, they sought contacts with American businessmen. Two of the Russian Ten, for example, Cindy and Bradley Murphy, sought to develop contacts in the financial services sector and among venture capitalists.
Heathfield attended Harvard’s Kennedy School of Government and remained active in its alumni association to gain access to government and academic influencers and authority figures. He launched another start-up subsequent to the diaper business, providing business forecasting services which were marketed to the military and government. It didn’t actually have operational tech or sales – the business was a merely a cover for clandestine activities, materially as a way to gain entry to critical connections who might have intel of value to Russia.
Another Russian operative who was able to obtain a Canadian passport using a stolen identity, Christopher Metsos, was a handler who provided operational support such as money and tradecraft for the Russian agents operating in the US. In order to fund operations without traceability, Metsos delivered bags of cash to agents in the US to fund their lifestyle and activities.
Two others, Anna Chapman (aka Anna Vasilyevna Kushchenko, А́нна Васи́льевна Ча́пман) and Mikael Semenko entered the US later using their real names and with different tradecraft which the FBI assessed posed greater risks to US national security at that time. Chapman was named “Agent 90-60-90” by the SVG, a sexist reference to her bust, waist and hip size. Chapman and one other spy acted as realtors, and used the real estate sector and business connections in that sector for influence.
After their arrests, the existing US administration negotiated a spy swap with Russia so that the resolution of the cases was handled through intelligence channels which minimized collateral damage.
In the last few months, an increasing number of so-called narco subs, also called drug subs, have been intercepted in international waters by law enforcement (“LE“). A narco sub is usually a self-propelled semi-submersible (“SPSS“) used by drug traffickers to transport large quantities of illegal drugs for cartels to an international market.
SPSS are stealthy and often go unnoticed and have grown in popularity so much that US officials now estimate that more than 30% of cocaine trafficked into the US enters from SPSSs. Many SPSSs are self-driving.
Of concern for international security is the risk that such vessels may be used by terrorists or agents engaged in state-sponsored terrorism to transport weapons of mass destruction undetected, or to attack the US or Canadian coast along the Pacific Ocean. Terrorist organizations and drug cartels already have existing trade and money laundering relationships.
More sophisticated narco subs
In August 2020, a 100 foot narco sub was found by LE in Colombia in a river in the jungle, which if operational, could carry about US$200 million in cocaine.
A few days after that discovery, Colombian LE seized a SPSS carrying US$18.2 million of cocaine being transported for Mexico’s leading cartel, the Jalisco New Generation Cartel (“CJNG“). Colombian LE believe the SPSS is owned by the CJNG.
On a small scale, a small personal submersible was used by a Canadian in a kind of a James Bond move to smuggle cash and 265 pounds of illegal drugs under the Detroit River from Canada to the US in June, 2020. The personal submersible was equipped with two cameras, wifi and could operate at more than 13 miles per hour. It is the first known case of a personal submersible being used underwater to smuggle drugs between Canada and the US.
They pale in comparison, however, to the November 2019, detection and seizure of a 66 foot submarine captured off Spain transporting US$100 million in cocaine from Colombia that has transited through a third country, likely Brazil and crossed the Atlantic Ocean.
Connections to Canada
The formation of the idea of Colombian and Mexican drug cartels using submarines to transport illegal drugs across borders is not new. The idea originated in the early 1990s and has some connections to Canada.
A Russian submarine for Cali Cartel
Three people in Miami – a Russian mobster named Ludwig “Tarzan” Fainberg who had immigrated to the US, a fugitive Cuban drug trafficker named Nelson “Tony” Yester, and drug trafficker and supplier of luxury vehicles, “go fast” drug boats and equipment to drug cartels named Juan Almeida – offered to obtain a Russian submarine for the Cali Cartel. The idea was that the Cali Cartel would use submarines to more efficiently and economically transport narcotics to Canada and the US. They figured that in one trip, they could move 40 tons of narcotics up the Pacific Coast to Canada or the US without detection.
The three wise guys traveled to Russia to inspect submarines. They were able to gain permission to access a restricted Russian naval base and even to take pictures with their own phones of the naval base. They entered into negotiations to buy one submarine from the Russian government for US$35 million.
The Cali Cartel paid millions for the submarine but apparently someone played both the Russian government and the Cali Cartel because the money disappeared with an intermediary before the Russians were paid. No submarine was delivered.
The story of how a Russian submarine was bought and paid for by the Cali Cartel and never delivered, was the subject of a fascinating documentary on Netflix called “Operation Odessa.”
The wise guys were each indicted and subject to various prosecutions in connection with drug trafficking in the US. As they themselves say in the documentary “Operation Odessa”, their faces were plastered all over newspapers around the world and they were infamous in connection with the narco sub purchase deal.
During the various prosecutions, Tarzan flipped on Almeida in exchange for a reduced sentence of 33 months if he provided truthful testimony. He was subsequently deported to Israel, his last place of residence before he immigrated to the US. Almeida’s trials took a more circuitous route but eventually he was sentenced to six years in jail for other drug charges and is now at a Miami halfway house. Yester pled guilty this year to conspiracy to distribute a large amount of drugs and is awaiting sentencing.
Tarzan is a different story. He landed in Canada.
In “Operation Odessa” he explains a less than comforting employment background. Before he moved to Miami, he says he worked in New York for organized crime. His job, he says, involved setting fire to stores and other businesses if their owners refused to make extortion payments to the Mafia. He says he “enjoyed” that job. When he moved to Miami, he opened a strip club and allegedly engaged in trafficking women from Eastern Europe.
Tarzan settles in Canada
Surprisingly, despite his indictment and subsequent conviction, his employment with organized crime in New York as an arsonist and his connection with the activities of the Cali Cartel for the procurement of a narco sub from the Russian military to facilitate massive amounts of narcotics trafficking into Canada, Canada approved Tarzan’s visa to the country in 2000.
As noted by DEA special agent Alex Yasevich in this story on the Russian Mafia, they spread themselves across many criminal activities. Another Netflix documentary, “The World’s Most Wanted“, describes the story of Russian mobster Semion Mogilevich, who used Canada and a Canadian issuer called YBM Magnex International to perpetrate a US$1 billion securities fraud.
A 2010 Human Trafficking report published by Cambridge University discusses both Mogilevich and Tarzan and reports that Mogilevich’s operations in Moscow and Budapest are implicated in the trafficking of women, with relationships to organized crime in North and South America and that Tarzan used Slavic women to lure Colombia drug traffickers to his Miami strip club as an optimization of those relationships.
Tarzan is apparently back in Russia.
How Tarzan came to be connected to drug cartels in the first place seems to stem from the Miami go-fast boat culture.
In Miami, he and Almeida were business associates with a person named Donald Aronow, who invented the “go-fast” boats that were used by Mexican drug cartels to run drugs up the coast to the US.
Aronow was murdered in a gangland style hit on February 3, 1987, in Miami. Together with several others, he operated a Marina called Fort Apache in Miami, allegedly frequented by international drug traffickers, as a meeting place of sorts.
In one court proceeding in Florida, there was testimony that the Marina was called “Ester’s Palace” in reference to the palace of Queen Ester in Iran to depict the sybaritic experience available at the Fort Apache Marina where Almeida would treat customers as follows: “snow blind’em, eye wash’em and take their cake.”
“Snow blind” is a cocaine user’s term that means to be blinded by cocaine (physically as in incapacity after taking cocaine, or in terms of addiction to the extent that cocaine addiction drives a user’s actions). Essentially, the whole expression, if it is to be believed, means that at the Marina, customers, including narcotics traffickers, were plied with cocaine and robbed blind.
The well-respected US judge, the Chief Judge A. Jay Cristol, a former US Navy captain, wrote an entertaining judgment here in respect of some of these parties where he mused that transportation equipment sold to Colombia, such as Aronow’s go-fast boats, equipped with turbo jet engines that can travel 600 miles at 60 miles per hour without refuelling, were no doubt acquired for sport fishing.
For the drug cartels to transition from go-fast boats to a submarine and reach out to the same group of drug trafficking transportation facilitators in Miami, makes sense. In addition to manufacturing and selling the cartels go-fast boats, they had also procured military helicopters for the cartels.
The identification, detection and interception of narco subs is usually performed by the US Coast Guard and other Coast Guards, often with the navy and drug enforcement agencies. Interceptions of narco subs can be very dangerous, as depicted in this video below.
On November 5, 2020, in a joint US-Colombia operation, law enforcement agencies raided a facility near the Cucurrupí River in the Chocó area of Colombia, where a fully submersible narco sub was under construction. The narco sub was seized and several of its builders were arrested.
December 5, 2020, a combat ship with the US Navy (specifically, with the US Naval Forces Southern Command, US 4th Fleet), with US Coast Guard officers on board, detected and intercepted a narco sub in the Eastern Pacific Ocean and seized 2,810 kilograms of cocaine worth US$106 million. The narco sub had a crew of three, who were arrested.
A new report from Future Directions International (the “Report“), based in Australia, is highlighting concerns about illicit proceeds and the fishing industry, particularly with China.
The Report, available here, says that China has the largest distant water fishing fleet in the world, estimated to be over 3,000 vessels, accounting for 40% of the distant fishing vessels worldwide. By comparison, the US has 300 distant water fishing vessels. The Report says that the Chinese fishing fleet is militarized and there is anecdotal evidence that the armed Chinese Coast Guard often accompanies Chinese fishing vessels to distant waters. The Chinese maritime militia is a subset of China’s national militia. China is the only fisheries superpower.
The Report notes that China has overfished its own waters, and moved to distant waters where it is exploiting the waters of other countries, particularly in Latin America and West Africa where enforcement tends to be weakest.
Illegal fishing off Canada
Illegal fishing also occurs off the coasts of Canada. This article here on homeland security, describes a two-month patrol by the US Coast Guard through the North Pacific Ocean in an international law enforcement operation to detect and deter illegal fishing. During the operation, the US Coast Guard conducted at-sea inspections on 11 foreign fishing vessels and reported 14 suspected violations involving three Chinese fishing vessels fishing for squid. As a result of the inspections, the fleet of 31 foreign vessels departed to avoid further inspection.
Global rankings of IUU
According to the IUU Fishing Index, available here, Chinaranked the worst in terms of illegal, unreported and unregulated fishing, referred to as IUU.
IUU fishing continuing
At the beginning of this year, China said it was taking steps to stop illegal distant water fishing originating from its vessels.
However, throughout June and July, 2020, Ecuador reported that there were 340 fishing vessels near the Galapagos Islands, most of which were Chinese flagged. The US Government took notice and commented on Twitter.
Ecuador claimed that at least 149 of those vessels turned off their tracking systems to prevent monitoring of their activities. When vessels go dark, their locations cannot be ascertained.
A month earlier, Argentina arrested a Chinese vessel illegally fishing off its coast. It had gone dark as well, and when eventually detained, had 1,000 tons of dead fish on board. In June, in Ghana, a Chinese fishing vessel was arrested for IUU fishing a second time. And two weeks ago, Ecuador detected a whole fleet of 300 fishing vessels from China off its coast.
In 2016, Argentina sank a Chinese fishing vessel when it refused to heed calls to stop.
In June 2018, the US Coast Guard and Chinese Coast Guard intercepted a Chinese vessel off Japan with 80 tons of chum salmon that had been fished illegally. The vessel, the Run Da, was apprehended using a 5.6 mile long drift-net on the high seas off the coast of Japan to catch chum salmon. There is a worldwide drift-net moratorium.
Over 3 billion people rely on fish as a primary source of protein, and sustainable fishing is a significant global food security issue. When it comes to poor nations, fish provides the necessary protein for over 158 million people. China alone accounts for one third of all fish consumption in the world.
The IUU fishing of squid is of growing concern. China accounts for up to 70% of squid captured in distant waters, controlling the supply, using unsound practices such as trawling nets between fishing vessels. Its unsound because it captures other fish (referred to as by-catch or collateral damage) and results in waste and greater environmental damage.
China is not the only country engaged in IUU fishing by any means. The point of the Report, however, is that the scope and breadth of the activities from China in IUU fishing, presents a greater set of risks that impact global food security.
Crimes at sea, and in particular those that involve moving and laundering the proceeds of crime are so-called blue crimes. IUU is a type of blue crime that does not occur as an isolated predicate offence. Often it is associated with human trafficking, human smuggling, modern slavery and murder, as well as trade based money laundering.
Transnational criminal organizations
The Report also notes that illegal, unreported and unregulated fishing has become a new business for transnational criminal organizations (“TCO“), citing legal research from Professor Dr. Anastasia Telesetsky, a marine expert.
In earlier research, Professor Telesetsky found that the combination of flags of convenience, offshore shell companies in tax havens and little oversight of the shipping sector enables TCOs to engage in illegal distant water fishing. Responses by governments to view illegal distant water fishing as an issue of fishery management, as opposed to one of international organized crime, means that they approach the problem with the wrong lens to address the issue.
IUU fishing is US$23 billion in proceeds of crime
Experts estimate that between 1/8 to 1/3 of the global fishing industry is illegal, amounting to US$10 billion to US$23.5 billion in proceeds of crime that is laundered per year. In the US, officials estimate that between 20% to 32% of wild-caught seafood is illegal.
Governmental lack of capacity, coupled with lack of an approach of illegal fishing in terms of networking of criminality, means that criminals are outcompeting government counterparts in fisheries.
Maritime intel and security
A very cool intel tool that looks at the South China Sea (and beyond) that allows maritime researchers a bathymetric snapshot of the political landscape, the fisheries landscape, the military landscape, the legal claims landscape and the energy landscape, is the Maritime Awareness Interactive Map.
The US 7th Fleet maintains a continuous forward presence in the Indo Pacific maritime region, over 124 million square kilometres, and its operations encompass 36 maritime countries with over 50% of the world’s population. Its former commander, Navy Vice Admiral Robert L. Thomas Jr., said in 2016 that he was more concerned with the escalation of future skirmishes between national coast guards and fishing vessels in and around places like the South Luconia Shoals (off Malaysia), Second Thomas Shoal (off the Philippines) and Sharborough Reef (off the Philippines). An International maritime arbitration panel ruled that China has no claim to those areas, or waters surrounding them as an exclusive economic zone.
Financial crime and food security
The 24 Hr Conference on Global Organized Crime on November 10, 2020, will discuss illegal distant fishing, money laundering and TCOs (see YouTube below), if you want to learn more about this important area of financial crime risk intersecting with environmental issues and food security.
The US government established a fraud portal here, designed to provide information in respect of the goal of stopping fish and seafood from IUU fishing from entering the US market place.
York Regional Police in Ontario announced the arrest of 29 people following the raid of an illegal underground casino at a 20,000 square-foot mansion in Markham, Ontario, during the summer. The operation dubbed “Project Endgame”, resulted in several raids of illegal underground casinos operating in York region.
The first bust was on July 3, 2020. Police raided a commercial unit at 3276 Midland Avenue in Scarborough, that was being used as an illegal casino and seized gambling tables, slot machines and $20,000 in cash. Five people were arrested.
Luxury mansion casino
Then on July 23, 2020, York Regional Police, together with the OPP and Durham Regional Police raided a $9 million mansion at 5 Decourcy Court in Markham that was being used as a large high end casino called “Mackenzie No. 5 Club”, replete with slot machines, mahjong tables, a full service bar, a restaurant that served shark fin, a cash exchange area and hotel-style rooms above.
The mansion is owned by Wei Wei, a Chinese foreign national. He, his wife, Xiang Yue Chen, and their two children were charged with various offences related to operating a gaming house, possession of firearms, illegal sales of alcohol and dealing with proceeds of crime.
Loaded guns and semi-automatic rifle seized
Police seized 11 guns, including a semi-automatic AR-15 rifle, $1 million in cash, shot machines, thousands of chips, gambling tables and $1.5 million in alcohol. The $9 million mansion was restrained.
York Regional Police believe that the mansion owned by Wei Wei and his wife, Xiang Yue Chen, may have been used for human trafficking of women for sex, and continue to investigate.
A third raid took place in Vanghan. Three people were arrested and more than $70,000 in cash was seized.
Wei Wei was reported as having met with Canada’s Prime Minister and advocates for the Government of China in Canada.
29 charged with criminal offences
Several Chinese foreign nationals were found gambling at the underground casinos and were charged. They are Chiu-Wing Luk, Wei Xia Lu, Qian Zhang, Guo Jiang, Yuan Jin, Dan Li, Mei Ying Pang, Rui Qian Huang and Chi Shing Yeung.
Several additional Chinese foreign nationals and three Bulgarian foreign nationals were charged with keeping a common gaming house – they are Yuan Hung Li, Nan Chen, Haibin Chen, Tseng Hsiu Lee, Yan Yu Yang, Ivo Milnaov, Jianyang He, Xinran Wang, Qihan Tang, Emily Ho, Sinuo Du, Jun Liu, Siwen Zhang, Edmond Bilbili, and Nikolay Kolev.
The foreign nationals charged may also be naturalized Canadians but typically underground gambling operations in Canada for mahjong are set-up, funded by, operated by, loan sharked by and frequented by foreign nationals from China who continue to use their Chinese ID and have dual lives in two countries.
Wei Wei a high risk PEP
Wei Wei, his wife and two children are foreign and domestic (both) politically exposed persons under anti-money laundering law, which made them, and continues to make them, high risk when it comes to banks, for money laundering. It is surprising that they were able to obtain a large mortgage and financing to buy the mansion in the first place when it was foreseeable, given their PEP status, that they may be implicated in proceeds of crime allegations that would put the asset at risk for banks.
Link to organized crime
York Regional Police said that the illegal underground casinos was organized crime exploiting and demonstrating their money and position in a belief that they were above the law.
“Money moving through underground casinos leads to huge profits for criminals that fund other ventures such as prostitution and drug trafficking,” York Regional Police Chief, Jim MacSween, said in statement.
“This illegal high-stakes gambling also leads to gun violence, armed robberies, kidnappings, extortion and other serious violent offences within our community.”
Because Bulgarian foreign nationals were arrested and organized crime is involved, it is possible that it is the Bulgarian mafia – they offer crime as a service to the Italian mafia.
Even The Bridal Path once had an underground casino
Toronto and its surrounding area have a history of underground luxury casino operations in mansions that have been shut down by police.
People who grew up on The Bridal Path, a ritzy street in Toronto with 40 or so of the most expensive mansions in Canada, say that an owner of one of the mansions on The Bridal Path ran an unground luxury casino for several years. Cars would line up all the way down the street on casino nights and the parties would last until 6am. It was often raided and would re-open a week later.
The Commodities Futures Trading Commission (“CFTC“) today filed a civil enforcement action in the SDNY against the owners – operators of a digital currency exchange called BitMEX, for alleged violations of the Commodity Exchange Act. BitMEX processed trillions of dollars in transactions, received over US$11 billion in Bitcoin and made more than US$1 billion in fees. The CRTC says that BitMEX has customers that are US residents and that it transacted using the US financial system.
Parallel criminal indictment
In a parallel proceeding, the US Attorney for the Southern District of New York unsealed an indictment against the three owners of BitMEX, namely Arthur Hayes, Ben Delo and Samuel Reed, for alleged violations of the Bank Secrecy Act.
With respect to the CFTC, it says BitMEX solicited and sold swaps, futures options and futures contracts and derivatives in digital currencies through their online platform, without being registered to sell such financial products, and further, that it did not have anti-money laundering procedures in place to protect the financial system.
The CFTC alleges, for example, that BitMEX altered on-boarding records of a US resident to “Canada” in order to have records that did not reflect the on-boarding of US residents, and that it was searching for a “favourable jurisdiction” to operate from (Isle of Man, Jersey and Gibraltar (typically used by illegal online gambling websites)).
BitMEX corporate entities HDR Global Trading Limited, 100x Holdings Limited, ABS Global Trading Limited, Shine Effort Inc, Limited, and HDR Global Services (Bermuda) Limited,were named as defendants in the CFTC filing. The CFTC says that as opposed to having the entities operate distinctly with different functions, all the corporate entities operated as one digital currency platform, sharing the same resources, personnel and one email address. The CFTC pleadings set out in length, the ways in which BitMEX attorned to the jurisdiction of the US, perhaps anticipating a defence argument of a lack of jurisdiction.
Lack of AML compliance
With respect to the indictment in the SDNY, Hayes, Delo and Reed, as well as Gregory Dwyer, were indicted for a failure to implement and maintain an adequate anti-money laundering program, and conspiracy to evade anti-money laundering legislation.
Seychelles shell company
The indictment states that BitMEX set up a paper company in the Seychelles in part because they said that it costs “just a coconut” to bribe regulators in that country.
The indictment states that one of the executives lied to US federal investigators, and in order to attract attention to the exchange in the US for client growth, rented three Lamborghinis for the 2018 Consensus Conference in New York and left them parked on the street for media attention – a move that BitMEX referred to as a “stunt”.
TOR access to the darknet
From its inception in 2014 to the date of the indictment, BitMEX did not file one SAR with an FIU anywhere in the world, and accepted financial transactions from Iran irrespective of sanctions. Further, BitMEX implemented TOR access to allow users to trade on BitMEX anonymously using the darknet.
BitMEX’s CEO’s last point of reference was Vietnam – it is possible that he is in that country.
It is expected that the US government will file to forfeit assets at BitMEX, currently at US$2 billion, otherwise there is a risk of liquidation.
In announcing the indictment today, the FBI Assistant Director William F. Sweeney Jr. said that the defendants will soon learn that the price of their alleged crimes will not be paid with tropical fruit but rather could result in prison time.
The US Securities and Exchange Commission (the “SEC“) filed charges against three Canadians, four Americans and nine private companies in the US District Court for the Southern District of California, for numerous violations of the Securities Actof 1933 and the Securities Exchange Act of 1934, for alleged manipulative market behaviour, including pump and dump schemes involving at least 20 microcap issuers.
One of the issuers, Abby, Inc., lists its principal securities regulator as Alberta and another, VMS Rehab Systems, is based in Ottawa. A third, Argus Worldwide Inc., had an office in Ottawa and its contact telephone number is in Ottawa: (613) 731-5935, a number shared with VMS Rehab Systems and several past issuers such as NPS International Corporation, AuraGenix and Seakinetics Corp.
The SEC alleges that the defendants made over US$6.6 million from illegal trades.
The nine companies named as defendants are Adtron Inc., dba Stockpalooza.com, ATG Inc., DOIT, Ltd., DOJI Capital, Inc., King Mutual Solutions Inc., Optimus Prime Financial Inc., Orca Bridge, Redline International and UAIM Corporation.
Canadians allegedly participated in scheme
The three Canadians are Andrew McAlpine, who resides in the Cayman Islands and operated a brokerage firm in Belize; Ontario-based Ashmit Patel, a securities lawyer who practices in Illinois; and Ottawa-based Michael S. Wexler,the CEO of two of the microcap issuers.
The four Americans are Ongkaruck Sripetch, who goes by other aliases; Amanda Flores; Brehen Knight; and Dominic Williams. Williams allegedly controls Optimus Prime. (Optimus Prime is the name of the leader of the autobots from the film Transformers).
Entities associated with McAlpine have been charged by the SEC in the past.
Activities undertaken in concert
The SEC complaint alleges that all of the defendants worked in concert to: acquire shares of various microcap issuers; pay for the promotion of those issuers using third parties, such as Stockpalooza.com, in order to cause the price of the shares to increase; and sell those shares when the market prices had been artificially increased from paid promotional activities.
One of the microcap issuers that the network allegedly paid for the pumping of, using Stockpalooza.com, was Argus Worldwide Inc.
The SEC also alleges that some of the defendants engaged in scalping and wash trading to cause share prices and trade volumes to increase artificially. Some defendants are also accused of selling restricted shares before the expiry of the hold periods. The alleged pumping and dumping of the shares of two Canadian entities – Abby Inc. and VMS Rehab Systems, are described in the SEC complaint in detail here.
Stockpalooza.com issued a promotion campaign of other issuers not named in the SEC complaint, including for an issuer named Largo Resources Ltd.
Securities lawyer alleged participation
Based on the allegations in respect of Patel, he appears to have acted somewhat like a broker and a banker for some of the defendant entity clients, selling their shares, receiving proceeds from the sales and disbursing the proceeds back to the clients, minus commissions – if accurate, the activity appears to be a type of law firm washing of funds whereby the firm acts as banker, clearing house and perhaps even as obfuscator.
Patel was accused in the past by the Alberta Securities Commission of participating in a pump and dump fraud scheme with another lawyer in Calgary, Canada. The two lawyers allegedly made false claims in respect of mining interests in Africa and Alberta to boost the share price of an Alberta-based mining microcap issuer, and then allegedly sold shares of that mining issuer when the prices were artificially high and subsequently, violated the terms of a regulator’s order by trading during a cease trade order.
Although the SEC complaint is a set of allegations, it illustrates the classic method of how securities fraud works, and in particular pump and dump schemes. They operate like a network in which the same actors are used repetitively over multiple years moving from one microcap issuer to the next, to complete aspects of the work required to achieve the goals in a manner that attempts to anonymize the actors in the network and their activities, to shield them from detection.
It also illustrates the role of professional facilitators in this type of securities activities with the use of professional firms. In this case, the SEC alleges that a professional firm was a witting participant (as opposed to unwitting, which also happens).
It demonstrates the sophistication, planning and advanced preparation in a sustained manner of the actors who form the nodes of a network to undertake the fraudulent activities, as alleged in the SEC complaint.
Parellel criminal indictment unsealed
A parallel criminal case was filed by the US Attorney’s Office for the Southern District of California following an indictment obtained in January, 2020, against Sripetch, Wexler, Patel and McAlpine for pump and dump activities associated with the same scheme.
Sripetch was arrested in the US. He was transferred to California from Washington State.
McAlpine arrested en route to Toronto
McAlpine was arrested by the FBI when a private jet he appears to have arranged from the Cayman Islands to Toronto, made a stop in Florida.
Chances are that Sripetch and McAlpine were arrested on the same date because it was the first date following the filing of the indictment in January 2020, that McAlpine booked a flight out of the Cayman Islands and traveled over US air space. Indictments are often sealed until arrests can be coordinated, especially if it involves foreign nationals.
The Canadians, Wexler and Patel, are in Canada. An arrest warrant was issued for each of them in the US. Wexler is a long time member of the Rideau Club in Ottawa and no doubt easily locatable from that close membership network as a result.
List of microcap issuers
The microcap issuers whose shares were manipulated by one or more of the defendants, according to the SEC complaint, are:
Abby Inc.,(ABBY) (it shares a CEO telephone number with Smart Ventures Inc.);
A Vancouver issuer named Mountain Valley MD Holdings Inc. (“Mountain MD“), was cease traded by the Ontario Securities Commission today for a failure to file its required disclosure documents and based on the fact that a director, officer and insider had or may have, material information in respect of Mountain MD that such person did not disclose to the market place. Mountain MD says on its website that one of the five members of its management is a lawyer at a firm.
As an aside, in Canada, Bitcoin companies frequently put a lawyer’s name and likeness on their website and in pitch decks without the consent or knowledge of the lawyer. No big firm that I am aware of allows any of its lawyers to cross over into management of an issuer, client or not, or to use their name, likeness or logo on a website or pitch deck for, among others, liability reasons. Here, the SEC charged a Canadian Bitcoin person for misrepresentation for using the names of people in a pitch deck without their knowledge or consent.
Mountain MD is a triple listed issuer and a mining company that pivoted to cannabis and pharma. On or around July 31 2020, it issued a press release referencing vaccines, Covid-19 and approvals from the US government. In August 2020, it issued another press release mentioning vaccines and Covid-19. There is no known cure for Covid-19 at this time.
Mountain MD shares an office in Vancouver with two other BC issuers: Pepcap Resources Inc. and Cielo Waste Solutions Corp.
Pepcap Resources Inc.
Mountain MD’s office mate, Pepcap Resources Inc. is interesting. It was cease traded recently, and the order was subsequently revoked. It has no functional website, although it allegedly owns a mine in Indonesia, according to its Sedar filings. Its Vancouver office rings to an Australian telephone number (61-40-301-8601) for Tek Sian Kwan. According to Sedar, to reach the issuer Pepcap Resources Inc., a shareholder must contact an entity called One Tech Platforms LLC, at an email address that goes to One Tech Platforms LLC, which presumably forces a shareholder to disclose financial and shareholder information to that entity.
One Tech Platforms LLC
Mr. Kwan’s is the founder of One Tech Platforms LLC. It is a California corporation, according to its website, located at Suite 750, 1920 Main Street in Irvine. Except that a law firm occupies the whole of Suite 750, 1920 Main Street in Irvine, California, not a tech company.
According to its website, One Tech Platforms is a FinTech that allegedly owns the “sole patent” to use QR codes for mobile payments. It is, it says, a payment processing company used by major banks and law enforcement.
It is allegedly the “only FinTech that provides US federal and state regulators full transparency” in respect of financial transactions, as the alleged “gold standard in traceability,” able to create an unbreakable audit trail for the Banking Services Act (there is no Banking Services Act in the US). No FinCEN or California state registration appears to exist for One Tech Platforms.
Mr. Kwan’s third company recently appears to have filed for receivership in Australia. He has a fourth company in the Cayman Islands which is a Hong Kong issuer.
Gek Suan Margaret Wee, aka Wee Gek Susan Margaret, aka Margaret Wee, aka Margaret Ang, was a director of Pepcap Resources Inc. until a few months ago. She is the founder of JMC Technologies in Singapore, although her telephone number is actually in California ((213) 908-1418). Mr. Kwan says he works at JMC Technologies in Singapore as well, so they are non-arms length in respect of PepCap Resources Inc.
The address of JMC Technologies is actually the address for International Health Management Pte. Ltd., Sin Coal Pte. Ltd., and several others, and appears to be an R&R office used by many entities identified in the Offshore Leaks database, and so it looks like there is no physical office of JMC Technologies in Singapore, just like there appears to be no physical office of One Tech Platforms at the location in Irvine, California.
What they actually do between Vancouver, California, Hong Kong and the Cayman Islands and where they actually are, seems a bit of a mystery.
I went on Wikileaks this week to find what information, in any, was discussed in diplomatic channels during the early days of fentanyl trafficking. I didn’t quite find what I was expecting but I did find a series of emails from analysts at a US private intelligence firm discussing Israeli and Russian spies who use fentanyl to take out people or extract information from them.
A bit of background.
According to this article in Vanity Fair, in 1997, the Israeli prime minister approved a hit on a then-little-known Hamas operative named Khalid Mashaal, who was working in Amman. The hit involved Mossad agents with fake Canadian passports confronting Mashaal on the street, inserting fentanyl into his ear and waiting for him to die.
Attempted murder of Khalid Mashaal
It may have worked except that Mashaal had body guards. The agents succeeded in inserting fentanyl in Mashaal’s ear but the body guards caught the two fake Canadian spies and apprehended them. Mashaal was on death’s door when the King of Jordan intervened with Israel.
A deal was brokered for Jordan to release the two spies who attacked Mashaal and for Israel to disclose what poison had been inserted into Mashaal’s ear so that he could be saved and to release several Palestinian prisoners. Mashaal was saved with Narcan; the two spies returned to Israel; and several Palestinians were released from Israeli jails. Mashaal became legendary among Hamas as “the man who would not die,” eventually becoming the leader of Hamas from 2004 to 2017, and amassing a fortune of US$2 billion.
Fast forward to 2010.
Murder of Mahmoud al-Mabhouh
According to some Wikileaks emails, at the end of January of 2010, analysts at a US private intelligence firm began emailing each other about a news report alleging that a commander of Hamas named Mahmoud al-Mabhouh, was poisoned with an unknown substance at a hotel in Dubai by Israeli spies.
al-Mabhouh was one of the founders of the al-Qassam brigades, the military wing of Hamas. He arranged arms supplies from Iran to Gaza. He lived in Damascus, where Mashaal lives. He was killed at the Al Bustan Rotana Hotel in Dubai, after having been followed from the airport by several Eastern European men. The Dubai Police said that lab tests confirmed that he was poisoned with something and possibly smothered as well.
Fentanyl to extract intel
Some of the dialogue in the Wikileaks emails from the private intelligence firm in connection with the hit on al-Mabhouh in 2010, are eye-popping as to the use of fentanyl by spy agencies to take out people. I’ve summarized the more interesting excerpts below:
“With fentanyl, the point is that it should look like a natural death.”
“Ck [check] with GF; he knows infectious diseases.”
“I think he may be the assassin.”
“Mossad likes a modified form of fentanyl to kill.”
“Putting fentanyl into the ear is what the Izzies did to Meshaal [Mashaal].”
“If you have a pure form of fentanyl, it would be easy to kill someone very quickly … If you’re actually intending to kill someone, doing it in the ear would be a good bet as long as you can keep the person from showering.”
“Fentanyl has been used by the Soviets for years to get some information.”
“Typically, it would cause the person to go to the doctor for a minor ailment. The doctor would prescribe fentanyl … the person would be messed up so much that they were grasping for something to orient to, so that if someone came and gave them a little sympathy, they would grasp onto that person who would then manipulate them into giving whatever information they wanted.”
(In reference to fentanyl being used by spies to kill people): “J&J is a strong buy. You lads should buy as many shares as you can.”
“Dutch or Danish company, correct. Israelis and Russians especially were playing with this stuff.”
“No, it was made by Johnson & Johnson (love that company) … the Israelis stole the patent from some Eurotrash company.”
“I’ve been in touch with Mayo [Clinic] and Dr. Wilson who worked on the Mossad bunged poisoning of the Hamas terrorist Khalid Mishal [Mashaal]. Can’t go into how I know him … In the Khalid hit, the bungled op was gummed up.”
“Perhaps the lads got it right this time? Nice field test for the next dude marked for death.”
“That list is long.”
In conclusion as to the hit on al-Mabhouh, the US private intelligence firm alleges: “so, the Mossad did do it.”
Wikileaks, lawyers, Iran, China, oil and methanol
I had only used Wikileaks once before this week and that too was fruitful. It was to read up on a lawyer and a law firm in Malta that, in 2008, had made an in-person disclosure to Malta’s bank regulator and to the US Embassy about their client from Iran. The client was a politically exposed person (“PEP“) close to the Iranian leadership who ran its oil export operations, with indirect ties to Canada, named Reza Hamzehlou, aka Reza Hamzelou, aka ضا حمزه لو، مدیر.
Hamzehlou sets up shells
The Wikileaks cable in respect of Hamzehlou showed that his Malta lawyer and the Malta law firm went to the governments of Malta and the US and disclosed Hamzehlou, his business associates, the advice Hamzehlou had sought and all of the companies in which Hamzehlou was associated with that were relevant to the Iranian government’s oil movements and payments back into Iran through Hamzehlou’s many companies.
The law firm provided emails and other evidence to both governments. The lawyer and the law firm made the disclosures because they said that they did not want any issues with the US government. Terrorism laws and often sanctions laws, require that natural and legal persons take active steps in respect of risks of terrorist financing, likely resulting in the disclosure in this case. The Wikileaks cable is a rare window of visibility into the secret disclosure process of lawyers and law firm to foreign and national governments.
Methanol sales to China
Fast forward two years.
Hamzehlou was often in the news, promoting his sanctions avoidance success and one such touting of sanctions avoidance prowess was reproduced in a Wikileaks email, highlighting Hamzehlou saying that US sanctions have not only not impeded Iran’s oil exports but that Iran was increasing sales and shipments of methanol to China.
Fast forward ten years to today.
Iran has become almost a sole source supplier of methanol to China. Why was Hamzehlou selling methanol to China and in such high volumes? For vehicles. China blends methanol into gasoline and liquefied petroleum gases. Blending methanol into gasoline allows China to extend the gasoline supply.
Hamzehlou indicted in Iran
Clearly, the Malta law firm who made a disclosure was on to something.
Hamzehlou is on trial in Iran, indicted in connection with a massive financial crime fraud case. His co-indicted defendants are an Iranian-Canadian who obtained Canadian permanent residency and an Iranian whose children acquired permanent residency in Canada, from Iran.
Canadian ties to indictment
They are accused of perpetrating the biggest fraud in the history of Iran using state-sponsored sanctions avoidance methods in which billions of dollars funnelled through shell companies (e.g., the reason for the legal advice in Malta that Hamzehlou sought) wasn’t returned to the government; allegedly, large portions were siphoned off and parked in other countries. The Iranian government has accused Hamzehlou of pocketing €7 million cash and acquiring €8 million in property from funds that are proceeds of crime. The amount alleged to be missing from Iran, though, at the hands of Hamzehlou and his co-defendants, including the one Iranian-Canadian, is much larger – it is €6 billion.
Irancell used Hamzehlou to move money
Irancell, the Iranian state-owned telecommunications company that controls Internet and cell phone access (and now 5G) in Iran, which is 51% owned by the Iranian government (some Iranians say its an open secret that the 51% is owned by the Iranian Revolutionary Guard), used Hamzehlou’s company and his team to move money out of Iran, according to Mohammad Reza Mokhber Dezfuli, the former CEO of Irancell. If that team included the co-indicted Iranian-Canadian, its unclear what that means for Canada, especially considering the IRG allegedly majority owns Irancell.
Mohammad Reza Mokhber Dezfuli left Irancell and now operates the Supreme Cultural Revolution Council (the Iranian revolution organization) in Qom for the Supreme Leader Ayatollah Khamenei. The connections to money movements and the Ayatollah seem awfully close to Canada.
The two other co-indicted persons in the financial crime case in Iran with Hamzehlou that are either Canadian permanent residents or have children that are, are known in Farsi as مرجان شیخالاسلامی آل آقا and سید امین قرشی سروستانی.
The US Commodity Futures Trading Commission (the “CFTC“) has filed a complaint in the US District Court for the Western District of Texas, against five Canadians and one American, alleging that they operated a binary options financial scheme illegally, which was in effect a fraud.
The five, all from Ontario, are David Cartu, Jonathan Cartu, Joshua Cartu, Leeav Peretz and Nati Peretz. The American is Ryan Masten.
According to the CFTC’s complaint, the Cartu brothers operated a binary options trading service that was a massive fraud and in concert with the Peretz brothers, they offered binary options trading of commodities to Canadian and American investors through an online platform, one of which was called “Beeoptions.”
The CFTC alleges that the two groups of brothers made material misrepresentations to secure money from innocent investors, promising them quick returns of up to 85%, and operated through a number of offshore companies incorporated in, among other places, Belize, Seychelles and Ireland.
The CFTC alleges that the binary options sold by the defendants were managed like a casino where the investor always plays against the “house”, so to speak. The orders from investors to place a bet on a binary option were not actual transactions on their platform; rather, the CFTC says that mere book entries were made on the back end to give the illusion of trades through an account. The payments from investors were payments to the binary options enterprise and no money ever changed hands after the investor paid the Cartu brothers’ branded platforms to place a bet.
A binary option is a securities. This type of option, like the casino example that the CFTC used, is a gamble on the future price of a commodity, a stock or Bitcoin, for example, at a precise date and time. The gamble on the future price is a yes / no proposition which yields returns to the person if the price increases and nothing to the person if the price decreases and in the latter case, the person is out their money entirely.
In the case of Beeoptions, and similar platforms like it operated by the defendants, regulators allege that the house always won even when it didn’t. Here, David Cartu allegedly said in an Israeli Court proceeding that he did not own Beeoptions but also allegedly said that it had a payments processing relationship with the now defunct WireCard.
The Times of Israel reported that Joshua Cartu operated an online gambling website in Cyprus (possibly betsafe.com). He is Ferrari-endorsed.
In order to obfuscate the financial transactions and minimize being de-risked by banks, the CFTC alleges that the Cartu brothers set up a FinTech payment processor in Ireland called Greymountain Management Limited. It did not have a licence to operate as a payments processor. It processed US$165 million in transactions for the Cartus and other third-party providers. Among other terms, the Canadian brothers referred to their payment processor as “SnowPay.”
SnowPay’s users were primarily from the US and Canada (60%); 20% were from Africa; and 10% from the EU.
SnowPay made large payments to the brothers in offshore companies, according to the CFTC. Two Cartu brothers received US$9.2 million each in payments from SnowPay and the third received US$4.8 million.
The CFTC is seeking an order for disgorgement, restitution and monetary fines as against the 5 Canadians, and one American. The restitution amount sought may be at least US$165 million, equal to the amount of payments processed by SnowPay. It could be more because that is just the amount processed through their FinTech payments processor, Greymountain.
In terms of assets, Joshua Cartu was fairly transparent about his wealth acquisition. He has a private jet and several luxury vehicles, and likely an account at HitBTC. He lives in a luxury condo at Vörösmarty 1 Building, Vörösmarty Square in Budapest.
He may have ties to the online gambling website betsafe.com – it crosses over at the same events that Joshua Cartu was at for periods of time.
Betsafe is operational in Canada and accepts bets from Canadians, even though that is contrary to the Criminal Code and provincial gambling statutes. It processes payments, and has funds on deposit at Canada’s Interac and with Visa, MasterCard and PaySafe. No Canadian provincial gambling regulator has made a move to shut down betsafe from Canada so there are assets there if it is or was tied to the defendants during the relevant time described in the CRTC complaint.
David Cartu is believed to be in Ontario. Jonathan Cartu is believed to be in Israel. Joshua Cartu is believed to be in Budapest. The Peretz brothers are believed to be in Israel. Masten is believed to be in Texas.
In May of this year, the Ontario Securities Commission commenced proceedings against the Cartu brothers (here).