Iranian national who owned a bank in Malta indicted in US for sanctions avoidance and money laundering

By Christine Duhaime | March 30th, 2018

An Iranian foreign national named Ali Sadr Hashemi Nejad, was arrested following an indictment in New York for allegedly running a scheme to defraud banks, avoid US sanctions and launder proceeds of crime. Nejad was the Chairman of a bank in Malta called Pilatus Bank. The US DoJ alleged that the Pilatus Bank was financed with proceeds of crime. If the allegations are true, they clearly must not have had an AML officer on staff.

According to the indictment, Nejad washed $115 million from a Venezuelan company to an Iranian company through the US financial system under a construction contract in violation of US sanctions, and set up corporate entities in Dubai, Hong Kong, Cyprus, Switzerland and Turkey to obfuscate beneficial ownership, and in particular, to hide that Iranian foreign nationals were behind the companies as shareholders. He did this, according to the indictment, by using other passports that did not tie him to Iran and did not inform bankers that he was an Iranian foreign national.

Despite being an Iranian foreign national and high risk for sanctions avoidance, the media in Malta reported that Nejad obtained a bank licence in Malta for the Pilatus Bank less than 30 days after applying – likely the world record in obtaining a bank licence, which usually takes 2 years to obtain. In this recent FinTech article, a Euro bank magazine quotes Nejad talking about “trust” and reputation in banking.

Nejad is a Maltese and Iranian PEP with, according to media articles, ties to Mehdi Shamszadeh, an Iranian foreign national who ran the Iranian government’s shipping agency called the Islamic Republic of Iran Shipping Lines, which was later subject to US sanctions. Shamszadeh was sentenced to death in Iran following a conviction for defrauding Iran through financial crimes.

In this clip hashtagged #arroganza, Nejad, in imperfect English, tells a reporter that he or she “better learn some English to ask some questions.” In this clip, Nejad is asked by reporters about banking an account that the reporters allege engages in money laundering.

In 2004, Nejad claimed refugee status in the US on the alleged grounds that he would be prosecuted by Iran if he returned. He was granted refugee status in the US and then once granted, returned to Iran after getting a green card.

Nejad is what is called a dual passport holder. He could only have returned to Iran with a valid Iranian passport which meant that he updated his Iranian passport from the US and returned to Iran as an Iranian foreign national in 2010. You cannot get an a passport renewed in Iran if the Iranian government is aware that the person claimed refugee status in the US. It suggests Nejad misrepresented himself to two governments – the US and Iran – for immigration purposes and to travel internationally. Nejad also has no less than 4 passports from St. Kitts and Nevis. To return to Iran, Iranians typically fly to Dubai on their “new” passport from the US, UK, Germany or Canada, then switch passports to their Iranian passport in Dubai and fly to Iran on Iranian passports so that they can enter the country.

A reporter in Malta, Daphne Caruana Galizia, who had written about the Pilatus Bank, was assassinated in Malta in October of 2017. She was being sued by Nejad.

A good article about how Iranians use the dual passport system is here, with several examples of sanctioned Iranians living in Canada (primarily Vancouver) using Canadian-issued travel documents.

Here is the Offshore Leaks page on Nejad.

Suspected Mexican cartel member indicted for trafficking enough fentanyl to kill 10 million people

By Christine Duhaime | March 27th, 2018

Authorities in New York indicted a man alleged to be part of the Sinaloa Mexican cartel in connection with trafficking fentanyl in quantities that would kill 10 million people. Francisco Quiroz-Zamora, aka the “fat one” was charged under the Kingpin Act, which is significant because it carries a term of imprisonment of life on conviction. The Sinaloa cartel is the cartel which el Chapo belongs to. Zamora was from San José del Cabo, Mexico. The Sinaloa and CJNG are fighting for control of the port city of Manzanillo, the city which is where fentanyl is shipped to from China. Manzanillo is on the list of cities that the US government recommends not visiting because of the cartel violence.

Under cover agents worked on the case and they say that Zamora left bags of fentanyl at public venues, including hotels. Fentanyl equal to two grains of salt in size is enough to be fatal. It is highly potent and much cheaper to the wholesaler, at 1/10 of the cost so the cartel is now sending fentanyl to the US for less investment costs and lower transportation costs.

A luxurious penthouse on Central Park West was used to package fentanyl, before the drugs were trafficked on the streets of New York, which also would have been dangerous for the apartment owners in the building.

US Issues sanctions against Venezuela’s ICO – the Petro Coin

By Christine Duhaime | March 25th, 2018

Executive Order 

President Trump issued an Executive Order imposing economic sanction on the initial coin offering (“ICO“) by the Government of Venezuela, called the Petro coin (the “Petro ICO“).

The Executive Order makes it illegal to engage in transactions, dealings or financings in connection with the Petro ICO, which would include buying, selling, trading, marketing, listing or facilitating, in any way, the Petro ICO by any US person or any person in the US.

It is also illegal to attempt to violate the Petro ICO sanctions, as well as to conspire to violate the sanctions or to avoid or evade them (sanctions avoidance that occurs, for example, when money is moved through a secondary country to hide its illegal origin). Effectively, this means that any digital currency exchange in the world that has a bank account, is subject to the Petro ICO sanctions to the extent any of their funds transit through the US financial system.

World’s 1st Sanctions Against a Digital Currency

The economic sanctions against the Petro ICO are the first sanctions issued in the world against a digital currency.

The Petro ICO is concerning from a financial crime perspective for a number of other reasons:

  • It’s the issuance of a securities without securities law considerations or disclosure to protect investors;
  • It is represented to investors as allegedly backed by both oil and gold but is likely backed by neither and no evidence is provided as to that backing;
  • It is available for sale to non-Venezuela citizens provided they pay in Euros, Yuan, Rubles and Turkish Lira;
  • One can also buy the Petro ICO with Bitcoin, Ether and NEM. The digital currency NEM has its own controversy – it was allegedly the victim of theft from hacking. A reporting issuer company in Vancouver (e.g., a public company) issued a press release alleging that it had traced millions of dollars worth of that stolen NEM to a Vancouver digital currency exchange. But no law enforcement agency followed through, if true, to investigate or obtain the identity of the wallet holder, or to forfeit the assets as proceeds of crime. No Canadian digital currency exchange lists NEM for trading which means that the company that issued the press release had information in respect of the OTC trades of that exchange, which is only possible if the information is insider information or confidential information, which raises a number of other questions about disclosure of information as part of a possible investigation but it also confirms that in Vancouver, the Petro ICO may also be capable of being OTC traded in Vancouver at that unidentified exchange, to avoid US sanctions law;
  • According to the Petro ICO White Paper, Venezuela has said the Petro coin is available all around the world (irrespective of sanctions law impediments); and
  • Venezuela claims it has already sold over $5 billion worth of Petro coins to people in over 127 countries but it’s unclear how anyone will be able to hold them or cash out with sanctions in place. It also means that such sales were OTC which is problematic because OTC trades occur without visibility.

NEM Confirms that Venezuela Is Using its Blockchain

According to the Venezuelan government’s White Paper for the Petro ICO, NEM is the Blockchain it is using for the coin. NEM went so far as to publish on Twitter, hence confirm, that the Venezuelan government is using NEM for the Petro coin.

The official website for the Petro ICO is here.

Bitcoin and taxes in Canada – do you have to pay?

By Christine Duhaime | March 19th, 2018

As tax time approaches, purchasers, sellers, traders and holders of digital currencies are wondering whether taxes are payable on digital currencies in Canada. The answer is that it depends.

While the Income Tax Act governs in respect of taxes payable in the digital currency space, the issue of taxes payable on digital currencies in Canada is anything but clear because different government agencies are not on the same page on the legal nature of digital currencies.

Bank of Canada

First of all, the Bank of Canada has apparently said since 2013, that digital currencies are not money, currencies, assets or a securities and earlier this year, that digital currency trading is gambling.

And that’s what may cause confusion because in Canada, gambling winnings are not taxable. The exception is if the gambling activities are professional or are undertaken as a business. Professional gamblers, for example, must pay taxes on their winnings whereas winnings from occasional gambling activities are not taxable.

Continue reading →

First unexplained wealth orders take effect in the UK against a non-UK person

By Christine Duhaime | March 18th, 2018

The National Crime Agency in the UK has been granted the first set of Unexplained Wealth Orders (“UWO”) under the Criminal Finances Act, by the UK High Court requiring that an unnamed foreign national from Asia provide a written statement explaining how they obtained sufficient wealth to purchase property. The foreign national subject to the first UWO is a politician and a politically exposed person who owns mansions and office property worth over US$30 million in London. Under the UWO, the owner is prohibited from transferring the properties.

The Criminal Finances Act came into force at the end of January, 2018, following evidence that the UK was being used by corrupt foreign nationals or PEPs to purchase expensive real estate with proceeds of crime or corruption. Several research studies showed that over US$6 billion of proceeds of foreign corruption is parked in London real estate.

Broad application

UWOs are available for property over £50,000 in two cases: (a) where there are reasonable grounds to suspect that the person, or a person connected to them, is or has been involved in the commission of a serious criminal offence in the UK or anywhere else in the world; or (b) where the property is held by a PEP.

The application of the legislation is quite broad and can capture anyone connected to the person targeted including business partners. Essentially, if a person is suspected of having property they clearly could not afford based on their salary or reported income, or taxes paid, or if they are connected to such a person as a business partner, shareholder, family member or otherwise connected, they could be subject to a UWO.

Interim freezing orders

In terms of disclosure, UWOs require proof of legitimate sources of wealth and the disclosure of owners, including beneficial owners, shareholders, trustees, etc. or the property or asset subject to the UWO. If a person subject to a UWO refuses to comply with the disclosure of information to prove the legitimacy of wealth, their property is subject to forfeiture by the government. UWOs are issued with interim freezing orders over the property to prevent a situation where wealth can’t be proven and the person attempts to sell the property.

It is likely that assets held by people from places like Iran, Nigeria and China will be the most difficult to prove were paid for with funds obtained lawfully. With respect to Iran, that is because Iranians as a matter of course, violate sanctions law by funnelling money illegally through Dubai to hide its origin and move it to places like London and Vancouver. Sanctions avoidance is a serious criminal offence. With respect to China or Nigeria, while there is no issue of sanctions, often their foreign nationals have acquired wealth from corruption.

Any property, shares or money from anywhere

It is important to note that UWOs have an international reach: a person does not need to be a UK resident, and the property can be located outside the UK – ergo, you can be chilling in Canada with property in Canada, or in a Canadian bank, or be holding shares of a Canadian company and be subject to a UWO if you have unexplained wealth.

Also, a UWO can be made in respect of any “property” worth more than £50,000 – not just real estate. “Property” is defined broadly under the Proceeds of Crime Act 2002, to include property wherever situated, including money, bank accounts, cars, boats, shares, real property and other intangible or incorporeal property.

How the US Alien Tort Statute might expose Canadian financial institutions

By Christine Duhaime | March 18th, 2018

The US Supreme Court this term is ruling on a case that may impact Canadian banks and other financial institutions. The case, Jesner v. Arab Bank, involves over 6,000 petitioners from Israel who were victims of terrorism in the Middle East who filed a tort claim against a corporation in New York, the Arab Bank, under the Alien Tort Statute, 28 U.S.C. 1350 (“ATS“). The ATS allows a civil action by a foreign national in the US for a tort committed in violation of the law of nations or a US treaty. The US Supreme Court has interpreted the ATS to permit litigation of a narrow set of common law actions derived from the law of nations available for alleged violations of international law norms that are specific, universal and obligatory.

The petitioners allege that the Arab Bank violated international law by financing (e.g., banking) and facilitating (e.g., exchanging foreign currency and wiring funds) the activities of a terrorist organization that committed the terrorist attacks in the Middle East that caused their injuries. Although the victims are in another country and the torts occurred in another country, the nexus to the US is that the Arab Bank had a branch in New York (as well as a correspondent relationship), and wired funds through the US.

The case is important and being closely followed because the US Supreme Court is being asked to determine whether a corporation can be held liable under the ATS. The petitioners allege that the Arab Bank violated the law of nations insofar as it financed terrorism, and also insofar as it directly and indirectly engaged in genocide and crimes against humanity as a result of banking terrorist organizations and wiring  funds for them. In their view, the ATS can be used to hold foreign corporations civilly liable essentially for terrorist financing that caused injuries to foreigners.

A number of groups, including the U.S. Chamber of Commerce, have filed to defend against corporate liability, pointing to the fact that there are more than 150 ATS lawsuits against US and foreign corporations doing business in two dozen industry sectors arising out of corporate activity in more than 60 countries which would be harmed by the ability of foreigners to sue corporations for torts that occurred outside the US.

Interestingly, the US federal government filed its brief, arguing that the ATS allows corporate liability but that in this case, no liability should flow because the mere fact that a bank managed and wired  transactions through its US branch does not establish a sufficient nexus to the US. It also argued that holding foreign banks liable may cause foreign banks to be less cooperative with the US to prevent terrorist financing, including in particular in respect of the Kingdom of Jordan and its efforts to defeat ISIS.

The reason why I think it may cause exposure to some Canadian banks and financial institutions in particular, is because at least one large Canadian bank relied upon a legal opinion it received from a law firm in respect of anti-money laundering law and counter-terrorist financing law that effectively advised the bank that AML and CTF laws only kick in to affect the on-boarding of a bank’s clients if and when there is a predicate criminal offence that occurred in Canada. The opinion arose in the context of the practice by some Canadian banks to allow the receipt of funds from smurfing of hundreds of wires from China of up to US$50,000 each from one person that violated China’s federal banking laws on reporting outflows of currency – it apparently advised the bank that, provided  no criminal offence had been committed in Canada, the Criminal Code of Canada allowed the receipt into Canada by banks of funds from other countries. In order words, the opinion was that as long as no offence occurred in Canada in connection with a client’s funds, the bank was go-to-good and it did not need to undertake due diligence beyond the borders of Canada for AML and CTF purposes in respect of funds.

There are problems with that advice. The Criminal Code prohibits importing into Canada (whether by wire transfer or other means), of any property (which includes funds) or proceeds thereof obtained or derived from an indictable offence that occurred anywhere, whether in Canada, China or the Middle East. In anti-money laundering law, the concept of funds or income “lawfully obtained” has always been used and it means income or funds obtained lawfully under the laws of the country from where the income or funds arise (see for example, the Criminal Finances Act 2017).

If one or more Canadian bank acted upon the view that only criminal offenses that occur in Canada were relevant for AML and CTF on-boarding purposes, then it means there is a gaping hole in how they on-board when it comes to banking clients from foreign countries which may impact them if the US Supreme Court decides banks, including Canadian banks, can be held liable under the ATS for foreign torts committed that injure foreigners.

Thinking ever further ahead, it is likely going to be in the area of injuries sustained from torts committed by cybercriminals and cyberterrorists in foreign countries against foreign nationals or foreign corporations, that have a Canadian banking connection, that may come back to bite Canadian financial institutions who have a too-narrow view of the application of the Criminal Code of Canada if the US Supreme Court holds foreign corporations liable for foreign torts in Jesner v. Arab Bank. Illustrative is the case of US v. Baratov, the 22-year-old Canadian convicted hacker who had no job but was able to buy a Mercedes Benz, an Aston Martin, a home, multiple Rolexes and to blow through millions in cash and his Canadian bank did not de-risk him despite the lavish lifestyle not matching his unemployed status.

The Howey Test

By Christine Duhaime | January 31st, 2018

Digital currency issuers often ask about the Howey Test and its applicability to their activities. Here is our summary of the law.

In determining whether digital currencies are securities, securities regulators in Canada have expressly stated that they are evaluating digital currencies within the framework of three court decisions that considered the elements of investment contracts under securities legislation. 

SEC v. Howey

The first decision, SEC v. Howey Co., 328 U.S. 293 (1946), U.S. Supreme Court (Howey), involved an appeal to the US Supreme Court of a decision that found that Howey Inc. had issued securities without being registered to do so or exempt from registration. Pursuant to §2(1), §3(b) and §5(a)of the Securities Act of 1933 (the US Securities Act) sellers of securities (which by definition include an investment contract), are required to register pursuant to §5(a) of the US Securities Act unless exempted under §3(b) of the US Securities Act.

Howey Inc. owned citrus groves in Florida and it sold part of its groves to investors to finance land development.  Each investor signed a land sales contract and a service contract.  The service contract gave Howey Inc. a leasehold interest, possession of the groves and authority to cultivate, harvest and market the crops.  The Securities and Exchange Commission (SEC) took the position that Howey Inc. was issuing unregistered and non-exempt securities.  It filed an action to restrain Howey Inc. from the offer and sale of securities, alleging a violation of §5(a) of the US Securities Act.

The legal issue in Howey turned upon a determination of whether the land sales and service contracts were an investment contract and therefore a securities within the meaning of §2(1) of the US Securities Act.  If affirmative, Howey Inc. was required to register the securities under §5(a) of the US Securities Act, unless exempted.

The US Supreme Court held that an investment contract for the purposes of the US Securities Act meant a contract, transaction or scheme whereby a person: 

(a)        invests money;

(b)       in a common enterprise;

(c)        is led to expect profits;

(d)       solely from the efforts of the company or a third party

(the Howey Test)

The US Supreme Court held that the contracts that investors entered into with Howey Inc. were investment contracts because Howey Inc. offered the opportunity to contribute money and share in the profits of an enterprise that it managed.  The opportunity was made to persons in distant localities who lacked the equipment and experience to cultivate, harvest and market the citrus groves on their own and such persons had no desire to occupy the land or to develop it; they were attracted to the investment solely by the prospect of a return on their investment. The US Supreme Court held that a common enterprise managed by Howey Inc. or third parties on behalf of Howey Inc. with personnel and equipment to operate the groves was essential if investors were to achieve a return on their investment.

Since all four elements of the Howey Test were met the investors provided capital with the expectation of sharing in the profits of a common enterprise while the promoters solely managed, controlled and operated the enterprise – the arrangement was an investment contract and therefore the illegal issuance of securities.

State v. Hawaii Market Center, Inc.

Similar issues arose in the second case State v. Hawaii Market Center, Inc., 52 Haw. 642 (1971) which varied that part of the Howey Test that dealt with management control. In that case, Hawaii Market Center, Inc. (Hawaii) intended to open a retail store which would sell merchandise to persons holding Hawaii-branded cards. To raise money to open the retail store, Hawaii recruited founder-members who would participate in the management of the company. The State of Hawaii filed an action against Hawaii to enjoin it from promoting its investments, arguing that the contracts were unregistered securities whose distribution was unlawful. Hawaii argued that because investors participated in the management of the company, the fourth prong of the Howey Test was not met because the investment potential was not solely from the efforts of Hawaii and therefore there were no investment contracts and securities regulation did not apply.

The Court held that the Howey Test was too restrictive and that an investors participation in a company was not the relevant consideration.  What was relevant was the quality of the participation by the investor.  In order to negate the finding of a securities, an investor must have practical and actual control over the managerial decisions of a company.  In this case, although the investors could expect a profit not solely from the efforts of Hawaii but also from their own efforts, they had no actual managerial control and no power to influence how the capital raised was used.  Therefore, the Court held that the Howey Test was met and the contracts were investment contracts required to be registered before distribution.

Pacific Coast Coin v. OSC

In the third case, Pacific Coast Coin Exchange of Canada Limited v. Ontario Securities Commission, (1978), 2 S.C.R. 112, Pacific Coast Coin Exchange of Canada Limited (Pacific Coast) offered for sale silver coins on margin to investors for a fee of 2%. Purchasers entered into commodity agreements. The Ontario Securities Commission brought an application against Pacific Coast, alleging that the commodity agreements were investment contracts and therefore Pacific Coast was trading in securities illegally.

The Supreme Court of Canada on appeal, considered just two prongs of the Howey Test whether there was a common enterprise and whether profits were solely from the efforts of others.  It held that the test of a common enterprise could be met in Canada when an enterprise was undertaken for the benefit of the investor and the company. In this case, the investors role was limited to providing money to buy silver on margin and the managerial control over the success of the enterprise was that of the company, and therefore there was a community and a common enterprise.

Since the success of the investment made by each investor was dependent upon the quality of the expertise brought to the administration of the funds by the efforts of Pacific Coast alone, the elements of the Howey Test were met, and the commodity agreements were held to be securities.

The Howey and Hawaii cases formed the material basis of the SECs Report of Investigation Pursuant to §21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207 (the DAO Report) published on July 25, 2017.  The DAO Report considered whether The DAO, an unincorporated organization in Canada launched by residents of Toronto which issued an initial coin offering (ICO), violated the US Securities Act by marketing and selling securities to US residents.  

From April 30, 2016 to May 28, 2016, The DAO offered and sold 1.15 billion DAO coins for 12 million Ether, valued at US$150 million. To promote The DAO, Ethereum launched a website, published a white paper and included a link through which DAO coins could be purchased for Ether.  DAO coin holders acquired certain voting and ownership rights.  The DAO would earn profits by funding projects that would provide DAO coin holders a return on investment.  Like all ICOs, investments in The DAO were made anonymously (i.e., the digital currency was sent from an unknown and unidentified Ether wallet of an investor to an unknown and unidentified Ether wallet address held by The DAO). 

In the DAO Report, the SEC concluded that the ICO met all four prongs of the Howey Test and DAO coins were securities. Because they were securities, The DAO was required to register to offer and sell DAO coins. The DAO Report analyzed just three of the four prongs of the Howey Test. 

With respect to the first prong of the Howey Test, an investment of money, the SEC held that the investment of money could take the form of Bitcoin or Ether for the Howey Test to be met under US law. 

With respect to the second prong of the Howey Test, the reasonable expectation of profit, the SEC held that investors expected to earn profit when they sent Ether to The DAOs wallet because the promotional material from The DAO made that express representation to investors. Thus, a reasonable investor would have been motivated, at least in part, by the prospect of promised profits on their investment into The DAO.

With respect to the third aspect, profits derived from the managerial efforts of others, the SEC held that profits to investors were derived from the managerial efforts of The DAO creators who held themselves out as experts to investors. While DAO coin holders had voting rights, those rights did not give them meaningful control over the business because their ability to vote was perfunctory and they were widely dispersed and limited in their ability to communicate with one another. The anonymity and international nature of The DAO made it impossible for them to join together to effect change or exercise meaningful control, and thus for all the foregoing reasons, The DAO was determined to be a securities.

Other applicable legislation

Irrespective of securities laws, almost all ICOs regardless of where issued are done so in material violation of anti-trust laws and consumer protections laws. They are also usually issued and managed in material violation of sanctions laws, federal banking laws, and international treaties governing commerce. Many are also structured purposely to defeat the rule of law whereby the jurisdiction of the operating minds of the ICO is obfuscated to prevent future litigation; for example, the ICO says it is located in the Bahamas when in fact the directors and officers are all in Toronto.

Selling watches and other stuff may land you in hot water

By Christine Duhaime | October 21st, 2017

The high end jewellery chain, Cartier, was fined US$384,000 for violating US sanctions on four occasions for selling expensive jewellery to Shuen Wai Holding Limited, a Hong Kong company.

But surprisingly, the purchases took place in California and Nevada. Shuen Wai Holding Limited is on the OFAC List of Specially Designated Nationals and Blocked Persons and American persons and entities are prohibited from dealing with OFAC listed persons. The US Treasury noted, in assessing the fine, that Cartier’s failed to undertake the most basic due diligence of running client names through OFAC’s free database.

The Hong Kong company is listed under the Foreign Narcotics Kingpin Designation Act, which includes many of the worst drug organizations and facilitators in the world.

OFAC noted that the enforcement  highlights the risks for retailers that engage in international transactions and sell to customers or ship products to persons and entities on the sanctions list.

The non-techie guide to the Blockchain, distributed ledger tech and Bitcoin

By Christine Duhaime | September 3rd, 2017

This guide to Bitcoin, Blockchain, distributed ledger tech, and digital currencies is taken from a collection of presentations, comments, speeches we’ve made at conferences or written articles from 2012 to 2015.

Bitcoin

Consumer payments and ways of transferring value in Canada and globally have shifted over the last several decades from paper-based media, such as cash and cheques, to card-based media such as credit and debit cards, electronic methods such as pre-authorized payments through ACH, and more recently, digital methods such as digital currencies.

A digital currency is a digital form of a monetary instrument with a bidirectional flow, meaning it allows users to both buy and sell, or use, the digital currency. Bitcoin is the most popular digital currency. Bitcoin operates peer-to-peer and machine-to-machine (M2M). Unlike traditional fiat currencies that are issued by national governments and controlled by central banks, Bitcoin has no central monetary authority and is not backed by any central bank, authority or government. The supply of Bitcoin is not controlled by any central governmental authority, and it is not yet legal tender.

Users can buy digital currencies in person, at an ATM or online with real monetary instruments and can subsequently use digital currencies to buy goods and services globally or to transfer value. The purchase and selling price of digital currencies is determined by supply and demand in the digital currency market.

Trust me — “Because its trustless, its trustworthy”

The transactions for goods and services bought or sold using digital currencies are not processed through a centralized authority, or clearing house. A Bitcoin transaction is processed through the Blockchain, which acts similar to a third party clearing house except that the clearing (or reconciliation and verification of transactions) component is entirely M2M on the Blockchain (i.e., direct).

Cryptographic software validates each transaction through a process referred to as mining where participants compete to make records by solving computationally complex cryptographic problems. In the transactional validation process, transactions are time-stamped via a hash algorithm which creates an ongoing chain, and a decentralized digital and permanent record (the ledger) that theoretically cannot be altered or eliminated. A proof-of-work concept records the transactions chronologically and publicly. The shared public distributed ledger is the Blockchain. The Blockchain, by design, prevents anyone from double-spending, and therefore using digital currencies they do not own. 

Although it may appear an oxymoron to say so, financial transactions on any distributed ledger tech, including the Blockchain, are  designed to be trustless and therefore they are trustworthy. What I mean by that is that it is designed with a lack of trust in respect of all its users (me, you and the system), which makes the system trustworthy.

Not everyone in the space agrees on this point, however, if you read the White Paper from Satoshi Nakamoto on the technology of Bitcoin, it appears evident that part of what he was attempting to accomplish was to facilitate online gambling, and Bitcoin makes sense to the online gambling space, more than any other space.

By contrast, other online currencies or payment systems, such as bank credit cards are indirectly settled – they involve a central administrator or financial institution middleman that sits between the transacting parties. These intermediaries validate and reconcile transactions to avoid double spending by a person. In other words, there is a human involved. Digital currency transactions on the Blockchain rely on computer software to perform that function, cutting out the institutional go-between in financial transactions, and no human is involved.

As a result of the Blockchain, it is possible to buy currency, shop for goods or services and remit value internationally almost instantaneously, purely M2M without the need for institutional middlemen.

Ethereum & Smart Contracts

Canadians created distributed ledger technology early on. It’s true – Canadian talent, including law firms, were involved in the space early on when few in the mainstream world knew what a Bitcoin was and many more were disparaging the technology.

For example, Ethereum is a distributed ledger company that was created in Toronto. It moved to Switzerland when Canada announced the world’s first regulation of digital currencies. Its digital currency is called Ether. It is a distributed ledger that is programmable by users. Etherium promotes something called “smart contracts” which are not actually contracts or smart contracts. They are escrow payments that are, in essence, arrangements established purely by computer coding. The theory behind it is that a contracting party will buy Ether through Etherium and pre-pay certain Ether into a wallet and have it programmed to be held in escrow. Upon the fulfillment of the relevant legal condition precedent under the contract between the parties, the payment held in escrow on the distributed ledger is automatically released to a contracting party as a matter of computer coding.

The Ethereum distributed ledger is also often mischaracterized as able to “enforce legal contracts” or the so-called smart contracts. However, it does the opposite – these smart contract complete the payment terms of a contract voluntarily by pre-agreement of the parties and performs no enforcement function whatsoever.

Ethereum is very novel but it cannot create legal contracts or contracts that are enforceable on the distributed ledger – what it can do is much more simple – its tech can be used for escrow payments in Ether that are auto-released to an Ethereum wallet, irrespective of the existence of a contract between parties.

I think the potential more cool applications of smart contracts include the possibility of creating invoices that automatically execute a payment when a shipment arrives or the issuance of dividends which are automatically paid to shareholders if corporate profits reach a certain level. Imagine the articles of incorporation with dividend rights whereby declarations of dividends are auto paid by smart contracts.

Cool Law Enforcement Uses 

Independent of traditional uses of digital currencies, there are a much broader set of potential applications for Blockchain beyond the payments industry which are significant. As noted earlier, a distributed ledger operates as an online ledger where all the validated transactions that are processed through it are recorded, linked, and can be traced.

In some respects, the distributed ledger is like a public searchable database of all of a bank’s transaction records for every financial transaction ever completed by a customer. If a person’s wallet address is known, anyone can view the history of their financial transactions. In my view, as a financial crime legal expert, if wallet addresses were eventually not anonymous, the Blockchain and distributed ledger technology would be the world’s most perfect counter-terrorist financing and anti-money laundering tool for law enforcement because its unique features mean that it is a permanent depository of evidence, in the legal sense. If you are a lawyer and work in the space of foreign asset recovery and tracing proceeds of crime through the financial system you will get what I mean by the benefits of having a permanent bank of evidence for financial crime.

Read here for the financial crime risks of digital currencies.

Law Purposes

There are other legal applications of distributed ledgers and the Blockchain. It allows for the permanent recording of certain records in circumstances where it may be commercially expedient to do so, such as to record the date of issuance of stock options and other securities-related transactions. It has applications as well in cases where it is legally expedient to record certain legal information or triggering dates, such as notice periods, limitation periods, warranty periods, or the commencement of options to exercise certain legal rights. Such application are not yet legal in the sense that no court of law or judicial or legal body has vetted or approved such use as legally relevant, let alone legally binding upon any third party or government agency.

Distributed ledgers and the Blockchain can revolutionize not only the banking sector, but equally the role of law enforcement, financial transactional reporting, and the practice of law and the administration of justice by virtue of what I call the “permanent bank of evidence.”

Vision for the Future

This is what I believe are the promises of the tech:

  • A reduction in terrorist financing if transactions were operated through a distributed ledger system by virtue of the permanent evidence of transactions on the distributed ledger and Blockchain that can be used simultaneously and cooperatively by law enforcement agencies globally;
  • Elimination of some forms of fraud because of the impossibility of double spending using distributed ledger and the Blockchain for financial transactions that could save billions in many areas from environmental fraud arising from the carbon credit trading systems, securities-law related fraud and bribery payments to politically exposed persons;
  • Elimination of bank corruption in developing countries, for example in places like Vietnam, where we have seen citizens that are required to pay bank employees bribes, in addition to bank fees, for the privilege of using the banking system to remove or deposit money into their bank accounts or cash pay cheques;
  • An inexpensive remittance system that can service millions of poor and unbanked populations, mostly in Africa and Asia, that allows them to receive value from relatives abroad to keep their families alive, and allows more fortunate Canadians to send value directly to them;
  • Empowerment, and sometimes the survival, of marginalized or undocumented sectors of the population who are denied financial services because they live in refugee camps in destitution or live on the street with no government issued ID to set up bank accounts. We have seen this first hand in Jordan and Turkey;
  • Financial freedom for women, especially those who are denied banking services because of social, political, economic or geographical circumstances, for example, because they live in repressive societies where women cannot receive banking services or are victims of human trafficking whose ID is confiscated by traffickers;
  • Ability to quickly and easily transfer value to hundreds of thousands of volunteers who work with international aid organizations around the world in times of crisis when traditional financial institutions are shut down (or destroyed) such as during a terrorist attack, a tsunami, or an earthquake. This is a serious concern that is ever present in the counter-terrorism field; and
  • To provide financial inclusion to First Nations across Canada who are unbanked because they lack permanent residences (are homeless or live in halfway houses) to set up bank accounts or there are no bank branches within proximity to them.

Obviously, the case studies above to advance humanity or law and justice are unique to my experiences in law but nonetheless they present real problems that one day could be solved with distributed ledger tech and digital currencies.

US to adopt national money laundering & terrorist financing strategy that includes risks from digital currencies

By Christine Duhaime | August 7th, 2017

US President Trump signed new sanctions legislation into law on August 3, 2017, against Iran, Russia and North Korea, and at the same time, adopted a new national strategy to combat terrorist financing and money laundering. The legislation, “HR3364 – Countering America’s Adversaries Though Sanctions Act” is more than about sanctions. In large part, it’s about financial crime.

Pursuant to HR3364, the President is required to develop a national strategy for financial crime to deal with illicit finance. The strategy must be developed with bank regulators, the AG, the Secretary of DHS, the NSA and budget officials.

US National Strategy on Financial Crime

The national financial crime strategy must include:

  • an evaluation of how the US is addressing its own risk assessment and if it supports counter-terrorism efforts;
  • goals and priorities to disrupt and prevent illicit finance running through the US financial system. The goals will include the dollar value of money laundering that goes through the US system.
  • details of the most significant threats of money laundering that go through the US financial system;
  • comments on the extent to which law enforcement is going after money laundering, terrorist financing and funds used to finance illegal drug trafficking;
  • commentary on striving towards a P3 with financial institutions for financial crime mitigation;
  • plans to develop more cooperative efforts with other countries to address illicit finance;
  • analysis on trends in illicit finance using cryptocurrencies in respect of cyber crime; and
  • an analysis on how to leverage technology to get better at financial crime.

Financial Inclusion Tech

There is also a plan to create technology to establish a money services business to facilitate the transfer of money to Somalia. The Somalia pilot project will be used to try to find a way in which the US government can lead the way in addressing financial inclusion and provide banking in high risk areas with compliance with financial crime law.