FedEx charged with money laundering over alleged drug shipments

By Christine Duhaime | August 14th, 2014

FedEx Corp. has been indicted over allegations of money laundering in connection with five shipments it made of alleged illegal prescription drugs from online pharmacies in which several persons are alleged to have died. According to ABC News, FedEx faces a $1.6 billion fine if found guilty.

According to the indictment, online pharmacies sent controlled drugs without legal prescriptions to consumers and used proceeds of crime (from their illegal drug sales) to pay their FedEx bills.

The money laundering charges were added to an existing indictment against the company in respect of the shipment of drugs and controlled substances that was the result of a nine-year investigation. The original indictment charged FedEx with conspiracy to distribute controlled substances and distribution of controlled substances.

Thoughts on FinCEN Director’s speech on bank de-risking and the refusal of banking services to MSBs (and by implication, Bitcoin)

By Christine Duhaime | August 12th, 2014

De-risking that results in unbankable businesses 

By Christine Duhaime, B.A., J.D., Financial Crime and Certified Anti-Money Laundering Specialist

In a speech delivered to the anti-money laundering legal and law enforcement community, the Director of FinCEN, Jennifer Shasky Calvery, made some interesting and compelling comments that touch on the economic costs of anti-money laundering (“AML“) law, namely the costs of compliance. As a result of massive AML compliance fines in the US and EU, many global financial institutions have eliminated certain so-called high risk accounts such as money services businesses (“MSBs“) and those belonging to politically exposed persons in a banking practice called “de-risking”.

De-risking from a legal perspective involves advising banks and other financial institutions on minimizing legal risks associated with certain business lines, or in some cases, not adopting a certain business line of services because of heightened legal risks. That advice is normally subject to the caveat that financial institutions may incur legal risks by de-risking decisions if those decisions result in the deprivation of services to certain persons, groups or sectors.

De-risking from the banking perspective involves the decision to de-risk a product, service or business line or the institution itself.

In the past year, de-risking has resulted in the almost wholesale elimination of banking services for certain legitimate business sectors in Canada, Australia and the US that are engaged in providing MSB services, including some digital currency businesses like Bitcoin exchanges, that may be competently managed and legally compliant.

Besides the business problem with that approach from the MSB’s perspective, the denial of services to MSBs is not a desirable outcome from an anti-money laundering and financial crime perspective. That’s because the ultimate purposes of the Bank Secrecy Act and in Canada the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, is to create a reporting mechanism for suspicious transactions to government agencies to: (a) prevent significant financial crimes from continuing; (b) facilitate criminal prosecution; and (c) prevent terrorism before it commences. Those purposes cannot be accomplished when financial institutions de-risk to the point of eliminating an entire business sector, such as MSB services. It may sound counter-intuitive, but the AML/CTF regime could not function without the requisite reporting of suspicious activity transactions. If we created a massive shadow banking regime such as exists in China and Vietnam, we would be more at risk from terrorist financing and other threats to the financial system and, not to be diminished, our democratic way of life generally.

Ms. Shasky Calvery spoke about the issue of de-risking of MSBs and the consequent denial of banking services, which by implication includes Bitcoin exchanges, although she did not mention Bitcoin or digital currencies.

The whole of Ms. Shasky Calvery’s speech is excellent. Relevant excerpts are below:

“I would like to discuss some of the challenges we need to address together as we work to combat … threats. While we might not leave here today with all of the answers, sometimes the hardest part is just starting the dialogue.

We have been hearing about instances of “de-risking,” where money services businesses (MSBs) are losing access to banking services because of perceived risks with this category of customer and concerns about regulatory scrutiny…But just because a particular customer may be considered high risk does not mean that it is “unbankable” and it certainly does not make an entire category of customer unbankable.

It is not the intention of the AML regulations to shut legitimate business out of the financial system. I think we can all agree that it is not possible for financial institutions to eliminate all risk. Rather, the goal is to provide banking services to legitimate businesses by understanding the applicable risks and managing them appropriately.

MSBs play a vital role in our economy and provide valuable financial services, especially to individuals who may not have easy access to the formal banking sector… banking organizations may provide banking services to MSBs that operate lawfully. The guidance [2005 Federal Banking Agencies Joint Guidance] is intended to assist banks in the decision to open and maintain accounts for legitimate businesses by identifying the programs and procedures they should have in place to perform customer due diligence and monitoring of these customers for suspicious activity.

MSBs play an important role in implementing procedures to thwart serious illicit activity that, left unchecked, could jeopardize the U.S. financial system. MSBs also play an important role in providing crucial reporting used to combat a wide range of criminal and security threats.

While we are hearing reports of de-risking, we do not yet know how widespread it is, and we are still working to gauge the impact. FinCEN continues to meet informally with industry representatives and other experts to explore additional ways to gather feedback on the issue.

One idea that has been discussed is the possibility of MSBs, depository institutions, and their respective trade associations coming together and developing a set of industry best practices, which if adopted by an MSB, could provide a depository institution with more comfort in offering banking services.”

Aligning FATCA with the AML compliance regime

By Christine Duhaime | August 10th, 2014

It has been noted by US officials that the Foreign Account Tax Compliance Act (“FATCA“), 26 USC Ch. 4, is not only one of the most significant pieces of US legislation for financial institutions, asset managers and foreign residents, it is also one of the most legally complex and technical that “will spawn significant enforcement activity not seen before.”

Now that amendments to the Income Tax Act, R.S.C. 1985, c.1, are in effect to implement the Inter-Governmental Agreement (“IGA“) with the United States, Canadian financial institutions are working to address the new due diligence and reporting requirements.

The Canadian IGA, similar to most other IGAs such as the one in Australia, is anti-money laundering law (“AML“) dependent and allows US foreign financial institutions (“FFI“) to rely upon existing AML compliance regimes, thereby saving millions of dollars in onboarding and ongoing compliance costs.

IGA provisions subject to compliance by Canada & FFIs

In Canada the IGA is operative for FFIs if:

(a) Canada complies with the IGA; and

(b) FFIs comply with §4 of the IGA.

Pursuant to the IGA, if FFIs are non-compliant, the IGA does not cover their activities.

Together, the IGA and Bill C-31 make at least two material changes to FATCA in Canada: (i) by eliminating many categories of institutions included as FFIs; and (b) by eliminating the concept of a “substantial US owner” to exclude all foreign entities banking through Canadian systems, wherever incorporated, that have a substantial US owner whose interest is in the range of 10% – 50%.

Compliance Differences with AML & FATCA

In Canada, while the IGA allows FFIs to leverage former AML procedures to carry out pre-existing account due diligence, changes needed to underlying infrastructure should be identified, together with detailed legal and operational requirements of the IGA to take into account variances brought about by the IGA to determine how to adjust the infrastructure to accommodate new regulatory requirements.

Existing AML procedures and processes will have to be expanded to accommodate the wider range of recording and reporting obligations. There will also need to be thorough employee training on the IGA  to ensure that new obligations in respect of collecting and collating information and documents from customers, and reviewing of legal documentation governing products and client relationships, are compliant.

In cases where AML procedures are not consistent across business lines, or are inconsistently implemented or enforced, additional enhancements will have to be made by FFIs and to certain business lines that tend to be more high risk, such as private banking and correspondent banking relationships, which demand more detailed customer information for compliance.

There are some fundamental differences between information collected for AML purposes and for IGA purposes that will need to be reconciled. For example, legal and beneficial share ownership pursuant to AML laws is usually triggered at 25% based on the Financial Action Task Force 2012 Recommendations, whereas the IGA imposes a different threshold for such determinations.

Onboarding of new clients will require that FFIs ensure that they have the necessary information to determine if a person or entity is a US tax obliged person and that will require having data fields to capture the indicia for certain high value accounts.

FFIs will need to continually monitor relationships to capture clients who, in the subsequent period, become a US tax obliged person. Monitoring systems is one area where leveraging off existing AML systems will be cost effective.

FFIs should also evaluate how the IGA will affect their risk assessment processes both their enterprise AML risk assessment (geographies, customers, and products) and their customer risk assessment models and processes for persons and entities. However, the IGA, like some parts of AML compliance (such as PEPs and listed terrorist identification), are obviously not risk-based.

Similarities with AML & FATCA Compliance

AML procedures for payment filtering and asset freezing, such as used for transactions in which a payee or payor is a listed terrorist or that involve a sanctioned entity or country, can be used for IGA compliance requirements.

FFIs can also leverage compliance personnel for the IGA in that the Chief AML Officer, with requisite training and education, can also be the responsible officer in most circumstances.

However, the responsible officer may have personal liability for compliance errors, including errors in respect of what constitutes a US tax obliged person.

FinOps has an article here on whether there is personal liability of responsible officers functioning under IGA countries like Canada. It suggests that internal FFI employees (with the most at stake in terms of financial exposure) may consider declining to act as responsible officers for FATCA purposes because of potential personal liability and queries whether IRS certifications should be delegated to external third parties.

Sound Risk Management Practices

Sound risk management requires identifying and managing all aspects of compliance risk, and the prospect of new exposure and significant civil and criminal penalties and fines for failure to comply with the IGA falls in that domain.

FFIs with significant assets under management should act now to designate and articulate compliance oversight before regulators visit. Boards need to ask themselves what their compliance risks and exposures are today and what they are doing about their institution’s risk exposures to make sure they are headed toward effective IGA compliance risk management.

FFIs should be making adjustments to compliance regimes, and undertaking the systems changes and employee training now to obtain the requisite level of legal comfort. For Canadian FFIs, that means having sufficient, competent evidence that will withstand the scrutiny of an IRS audit, or from a national regulator.

Six Basic Preliminary Steps

As a preliminary measure towards compliance, FFIs should undertake the following:

  1. Adopt procedures to address the objectives of FATCA (curbing tax evasion).
  2. Assess infrastructure to determine if the FFI can identify US persons and US-sourced income.
  3. Assess exposure – how many US investors are there and how large are their holdings; how much of portfolio investments will result in US-sourced income.
  4. Modify systems for compliance and consider issues such as who will bear the cost of compliance.
  5. Amend fund, asset management and precedent FFI agreements to allow for compliance and minimization of liability exposure to FFI (in other words, risk shifting to clients in all investment and client agreements and prospectuses where relevant).
  6. Train internal staff on IGA and appoint person responsible for making FATCA-related certifications and filings.

Canada imposes sanctions on the Bank of Moscow and bans CEO of Bank of Russia in new sanctions

By Christine Duhaime | August 6th, 2014

Sanctions likely to seriously impede Canadian-Russian financial transactions and therefore significant trade

By Christine Duhaime, B.A., J.D., Financial Crime and Certified Anti-Money Laundering Specialist

The Canadian government has announced the imposition of sanctions against the Bank of Moscow, the Russian National Commercial Bank and other Russian and Ukrainian-controlled businesses and financial institutions, as well as a travel ban against a collection of politically exposed persons in both countries, notably the CEO of the Bank of Russia. Canada also imposed sanctions against a distillery in the Crimea and other alcohol-producing entities.

The sanctions are in response to growing violence in the Eastern Ukraine and the build up of the Russian military along the border. The sanctions are targeted at curbing the raising of funds to support the war but the effect will be essentially a freeze on Canada-Russia financial transactions because of the inclusion of Russia’s key bank and payment processor. No doubt trade will be significantly impaired if not entirely halted.

“The Putin regime’s continued illegal occupation of Ukraine’s Crimean peninsula and its provocative military activity in eastern Ukraine remains a grave concern to Canada and the international community,” Prime Minister Stephen Harper said in a statement today.

The sanctions are imposed pursuant to the Special Economic Measures Act (“SEMA“) and its Regulations promulgated thereunder in respect of the Ukraine, and the Freezing Assets of Corrupt Foreign Officials Act and its Regulations promulgated thereunder.

SEMA prohibits all Canadian corporate entities of any type (not just banks, funds and other financial institutions) and all persons in Canada and Canadians outside of Canada from dealing in property of, or providing financial or related services to, any of the sanctioned persons or entities, or for their benefit. Moreover, assets or property of such the sanctioned persons must be immediately frozen and any transactions cannot be completed absent written authorization from the federal government.

The list of sanctioned persons and entities is as follows:

Expanded sanctions list:

Individuals (Russian)

  • Sergei Orestovoch Beseda, Commander of the Fifth Service of the Russian Federal Security Service and Commander of the Service for Operational Information and International Communications of the Russian Federal Security Service.
  • Aleksandr Vasilievich Bortnikov, permanent member of the Russian Federation’s Security Council and Director of the Russian Federal Security Service.
  • Mikhail Vladimirovich Degtyarev, member of the State Duma.
  • Mikhail Efimovich Fradkov, permanent member of the Russian Federation’s Security Council and Director of the Foreign Intelligence Service.
  • Boris Vyacheslavovich Gryzlov, permanent member of the Russian Federation’s Security Council.
  • Ramzan Akhmadovich Kadyrov, President of the Republic of Chechnya.
  • Vladimir Georgyevich Kulishov, First Deputy Director of the Russian Federal Security Service, Chief of the Border Guards.
  • Konstantin Valerevich Malofeev, Russian business figure and financier of secessionist groups in Ukraine.
  • Rashid Gumarovich Nurgaliev, permanent member and Deputy Secretary of the Russian Federation’s Security Council.
  • Nikolai Platonovich Patrushev, permanent member and Secretary of the Russian Federation’s Security Council.
  • Nikolay Terentievich Shamalov, CEO and majority shareholder of Bank Rossiya.
  • Igor Shchegolev, aide to the President of the Russian Federation and the former Minister of Communications and Mass Media.
  • Alexander Nikolayevich Tkachyov, Governor of Krasnodar Krai.
  • Valerii Yuriovych Travkin, officer in the Main Intelligence Directorate of the General Staff of the Armed Forces of the Russian Federation.

Individuals (Ukrainian)

  • Sergey Abisov, Minister of Interior of the Republic of Crimea.
  • Pavel Yurevich Gubarev, one of the self-described leaders of the Donetsk People’s Republic.
  • Ekaterina Yurevna Gubareva, so called Minister of Foreign Affairs of the Donetsk People’s Republic.
  • Boris Litvinov, Chairman of the Supreme Council of the Donetsk People’s Republic.
  • Oksana Tchigrina, spokesperson of the Luhansk People’s Republic.

Entities (Russian)

  • Bank of Moscow
  • Dobrolet (Dobrolyot) Airlines
  • Russian Agricultural Bank (Rosselkhozbank)
  • Russian National Commercial Bank
  • United Shipbuilding Corporation
  • VTB Bank OAO (former Vneshtorgbank)

Entities (Ukrainian)

  • “Army of the Southeast”
  • “Crimean enterprise ‘Azov distillery plant’”
  • “Donbass People’s Militia”
  • “Federal State of Novorossiya”
  • “International Union of Public Associations ‘Great Don Army’”
  • “Luhansk Guard”
  • “Resort ‘Nizhnyaya Oreanda’”
  • “Sobol
  • “State concern ‘National Association of producers Massandra’
  • “State enterprise ‘Factory of sparkling wine Novy Svet’”
  • “State enterprise ‘Kerch commercial seaport’”
  • “State enterprise ‘Magarach of the national institute of wine’
  • “State enterprise ‘Sevastopol commercial seaport’”
  • “State enterprise ‘Universal-Avia’”
  • “State ferry enterprise ‘Kerch Ferry’”
  • “Vostok battalion”

 

Asian newspaper says money mules from Asia are smuggling suitcases full of US cash to Vancouver to avoid FATCA and IRS

By Christine Duhaime | August 4th, 2014

Suitcases full of cash muled to Vancouver by cash couriers

According to this article in South China Morning Post, the Foreign Account Tax Compliance Act (“FATCA“), will result in the growth of Asia’s underground or shadow banking system, including an increase in the use of cash mules who transport suitcases full of US cash from Asia to Vancouver and New York to avoid the IRS.

Chinese mainlanders pay a 22% commission for cash exchange and mule services to Vancouver or New York.

Cash used to buy homes in Vancouver

To elaborate on the article, in Vancouver, real estate agents say that once a foreign national’s cash is safely smuggled into Vancouver, the foreign national from China or Hong Kong jet sets into Vancouver and buys numerous houses with cash, or deposits the funds into local bank accounts, apparently without any due diligence on the source of the funds.

The smuggling of cash and other monetary instruments into Vancouver from Asia is not new  (see here for that story) – in 2012, Canada’s CBSA seized $15 million in undeclared currency imports in Vancouver alone, an amount that is out-of-proportion to the rest of Canada and the US which seized $107 million for the entire country.

 

Financier Worldwide Magazine – Infrastructure funding and corruption in Canada

By Christine Duhaime | August 4th, 2014

Our article in Financier Worldwide, linked below, discusses the approval in Canada of the last tranche of $100 billion in infrastructure funding authorized on the unusual basis that it be used for corruption-free projects.

The approval comes as Canada grapples with the fallout from the largest corruption case in the world and the first money laundering one over the construction of the $2 billion McGill University Health Centre that was built under the public-private partnership model, and the repercussions of recent negative corruption rankings of Canadian companies in Europe.

The article also discusses the politically exposed status of the former head of the MUHC, Dr. Arthur Porter, who is resisting extradition to Canada from Panama over alleged bribery charges.

Infrastructure funding and corruption in Canada — Financier Worldwide.

Construction firms execs & accountant jailed collectively for 90 years over under-the-table payments

By Christine Duhaime | August 2nd, 2014

The founders, executives and several employees of a UK construction firm have collectively been jailed for 90 years for money laundering and fraud for under-the-table construction payments made to subcontractors. The company hired contractors and paid them under-the-table, without paying the requisite payroll or sales taxes or making other employment-related contributions, totalling £8 billion. To facilitate prosecution, the construction company participants were deemed to have operated as a “gang”, an interesting legal approach not usually used in financial crime in the UK. The construction industry is generally higher risk for tax evasion and money laundering because of the high incidents of under-the-table, or off the books payments to subcontractors.

You can read more here.

News report says that $125 million paid to listed terrorist groups for ransom payments

By Christine Duhaime | July 29th, 2014

According to this article in the New York Times, governments of the European Union have paid at least $125 million to terrorist organizations, mostly Al Qaeda, since 2008 and $66 million of that was paid last year. The US Treasury Department estimates the figure is closer to $165 million and believes that ransom payments are the most significant source of terrorist financing. David S. Cohen, the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence said in 2012 that “each transaction encourages another transaction.”

According to the New York Times article, the price for each hostage has increased from $200,000 to $10 million and has become so lucrative that terrorists wrote a business plan, launched a startup with $5 million seed money and hired organized crime groups to complete the negotiation and human transfers for a 10% commission. Part of the business plan includes how to produce videos of victims begging governments to make payments for their release. According to the article, the US and Britain are the only two targeted countries that have resisted payments to terrorist groups.

According to the article, $1.1 million was paid to free two kidnapped Canadians but it is not known by whom.

There isn’t any law on this issue but there likely isn’t Crown or government immunity for payments made by governments to terrorists that violate national sanctions and counter-terrorist financing laws. It’s unclear how a public official can, or would be protected in respect of decisions to knowingly act contrary to counter-terrorist laws irrespective of the humanitarian purposes behind the payments.

According to the article, in Switzerland the government budget in 2009 contained a new entry for humanitarian aid for “Mali” in reference to the fact that ransom payments to terrorists were routed through Mali.

UN Security Council calls on ban of oil trades from listed terrorist groups

By Christine Duhaime | July 29th, 2014

Listed terrorist group takes over energy infrastructure

The Security Council of the United Nations today called on its members not to engage in financial or commercial transactions with listed terrorist groups, in particular involving the sale of oil from Syria or Iraq that would involve the financing of terrorism.

Anti-terrorism and sanctions laws

In Canada, the relevant prohibitive legislation that applies to all persons, entities, trusts, partnerships, funds, firms, companies, foundations and joint ventures in Canada and all Canadians outside of Canada in respect of transactions involving Iran, Lebabon, Iraq, Syria and countries that trade in terrorist-controlled energy, is the United Nations Act and the Special Economic Measures Act. Although each regulation under those statues is slightly different, they generally prohibit providing funds to listed persons, terrorists or entities, or sanctioned persons or entities; dealing in their property, even indirectly; or providing any financial or other services, however indirectly.

Funds and entities must continually confirm presence of prohibited funds

Pursuant to the Criminal Code of Canada, on a continual basis, banks, trust companies, insurance companies, credit unions, investment firms and securities brokers must regularly and continually check their funds, accounts, holdings and other assets and property to ensure they do not have prohibited property (i.e., funds belonging to prohibited persons or entities, or that is controlled by or on behalf of prohibited persons or entities). If prohibited property is located, it must be immediately frozen.

Determining what is prohibited property and who indirectly controls it when dealing with beneficial ownership structures overseas is significantly legally complex, and failure to comply is an offence carrying a term of incarceration upon conviction of up to ten years.

OFAC applies to Canadian funds and entities with US connections

Compounding the complexity is the fact that US sanctions and anti-terrorism lists apply to many Canadian companies, funds, joint ventures, banks and persons who have ties to the US. A partnership incorporated or doing business in Canada that is “owned or controlled” by a company in the US, or a US shareholder or even a US person is subject to US sanctions laws. US courts have interpreted the phrase “owned or controlled” broadly (see the US appeal judgment of two Canadians who ran a company called Purolite who were indicted for sales to Cuba through a UK company that had a US branch, who later sued their law firm for sanctions advice over the precise issue of “owned or controlled”).

ISIS may earn $100 million per month on oil infrastructure

The move from the UN Security Council is in response to the Islamic State of Iraq and Syria (“ISIS“), taking over the pipelines, oilfields and critical infrastructures in Syria and Iraq and exporting oil. Taking over energy fields and infrastructure is important for terrorist groups because they need continual revenue streams to establish their own state and be in control of their own economy to continue the war and safeguard territories they have already overtaken by force.

As of today’s date, Iraqi officials have stated that the ISIS is earning $1 million per day in profits from Iraqi oil fields. And according to the US State Department, terrorists can bring in more than $12 million per month in one Iraqi city alone from extortion, imposed taxes and smuggling operations.

Executive of Canadian renewable company pleads guilty in US to money laundering

By Christine Duhaime | July 26th, 2014

Nathan Stoliar, a prominent Australian executive, has pleaded guilty in the US to several criminal charges including money laundering conspiracy, for selling fraudulent renewable energy credits, similar in some ways to carbon credits, from Canada to American companies.

Although the case was not prosecuted in Canada, it is the first Canadian instance of renewable energy fraud and money laundering that has been prosecuted.

According to American law enforcement, a Vancouver company controlled and operated by Stoliar, City Farm Biofuel, claimed to produce biofuel which was sold to a US company that was part of the scheme, Global E Marketing. It used the imports of non-existant biofuel products to generate and sell renewable identification numbers (RINs) to third parties so that the latter could comply with EPA renewable energy requirements. Stoliar’s Vancouver company allegedly made US$37 million from the environmental crime scheme. Stoliar is alleged to have created false records to conceal the production, importation, sale and fraudulent RIN generation and used Canadian bank accounts in Vancouver to launder the proceeds of crime.

A Politically Exposed Person in the US and Canada

Stoliar was a foreign politically exposed person in the US and in Canada when he set up bank accounts in Vancouver and Nevada for, inter alia, City Farm Biofuel. According to the Australian media, he was a very close associate of Eddie Obeid, a prominent Australian politician who was Minister of Mineral Resources and Minister of Fisheries in Australia. Their close association is substantially detailed in the international media. According to Australian media, Obeid was recently found by an Australian corruption commission to have acted corruptly in relation to his position while a member of Parliament. Stoliar had other close associations and business associations that likewise made him politically exposed in respect of his dealings in Canada and the US.

In the US, Stoliar was indicted on January 15, 2014 on several charges including conspiracy, wire fraud, making a false statement and obstruction of justice and faces a term of incarceration of up to 20 years.