1st Canadian official regulatory response to Bitcoin – securities commission issues alert against use of Bitcoin highlighting Ponzi risks

By Christine Duhaime | February 5th, 2014

Securities regulator issues warning over bitcoin ATMs & threatens prosecution

Canada issued its first official regulatory response to bitcoin today and it came from the Autorité des marchés financiers which issued an alert to consumers about the use of Bitcoin.

The Autorité, which is Québec’s securities commission, said in a statement that it will prosecute Bitcoin businesses for violations under the Securities Act, the Derivatives Act and the Money Services Businesses Act.

The statement was in response to the introduction in Québec of ATM machines at a retail location that accepts cash and sell Bitcoin.

The Autorité said that bitcoin and other digital currencies, also known as crypto currencies, are not covered by the financial services compensation fund or the deposit insurance fund and warned Canadians that they may lose money from Bitcoin.

The Autorité stated that bitcoin may result in the creation of Ponzi schemes by fraudsters and may be used to facilitate fraudulent transactions or false investments. However, it does not necessarily follow that an ATM transaction gives rise to greater Ponzi scheme or fraudulent transaction risks merely by virtue of the fact that Bitcoin is involved.

The Autorité referred to the bulletin issued several months ago from the Banque de France which warned, inter alia, of the money laundering and terrorist financing dangers of Bitcoin and other virtual currencies as a result of its anonymity.

Canada’s diamond trade being used for money laundering and terrorist financing, report finds

By Christine Duhaime | February 3rd, 2014

Canada is among a handful of countries where the diamond industry is being used for money laundering and terrorist financing, according to a report by a global financial crime body.

The report by the Financial Action Task Force, a Paris-based global body that sets standards to combat money laundering and terrorist financing, says that Canada has reported to it that its diamond industry is vulnerable to diamond smuggling and illicit diamond trades by drug traffickers.

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Marijuana brownies & the “smell of money laundering” – email evidence leads to arrest of Bitcoin guru over money laundering charges

By Christine Duhaime | January 27th, 2014

One of Bitcoin’s earliest enthusiasts, Charlie Shrem who ran BitInstant, a New York based Bitcoin exchange, was arrested today and charged with money laundering conspiracy, operating an unlicensed money transmitting business and failure to file suspicious activity reports to FinCEN.

The complaint was filed by U.S. Attorney for the Southern District of New York, on Friday and unsealed today. It also charges a Miami man, Robert Faiella, aka “BTCKing,” with similar offenses in connection with the sale of Bitcoin on the Silk Road website. More than $1 million in Bitcoin sales are alleged to have been transacted between Shrem’s company and BTCKing.

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The elusive female terrorist and Russia’s sweeping new anti-terrorism laws

By Christine Duhaime | January 27th, 2014

 In a weird case of real life emulating fiction, the mass hunt for the alleged prospective suicide bomber, the so-called black widow of Chechnya, Ruzana Ibragimova, before the Sochi Olympic Games is playing out a little like the film From Paris With Love, the fictional story of a female terrorist in France aligned with al Qaeda, who plots to blow up the U.S. Embassy at a gathering of world leaders. The terrorist evades detection for months until an American counter-terrorism agent comes to Paris and solves the case. The terrorist is killed when she is just about to set off a bomb hidden under her clothing.

Female suicide bombers are more deadly

Although the Sochi black widow is an alleged al Qaeda-aligned terrorist suspect at this point, like the film, she is not unattractive, and like the terrorist in From Paris With Love, is harder to detect because of it. Most people cannot reconcile the fact that a terrorist can be a woman, let alone an attractive one.

Black Widow

But the reality is that female suicide bombers are more deadly than men. According to counter terrorism research, over 40% of the suicide attackers in Chechnya are women and statistically speaking, they are more effective killers, killing an average of eight more people per suicide attack than their male counterparts (Chechen black widows average 21 deaths; men average 13). Perhaps more dangerous still, they appear to have inspired others, including young teenage girls, to emulate their behavior and become suicide bombers. From a counter terrorism perspective, women are less easily profiled, and therefore their actions are less predictable.

Terrorists from the Northern Caucasus have undertaken some of the most complex and bloody attacks in Europe. In 2002, they attacked the Moscow Theatre, seized hundreds of hostages that resulted in 130 deaths. In 2004, they seized 1,300 hostages at a school – 355 people were killed, over half of which were children.

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PetroTiger executives charged with money laundering and bribery from Colombian transaction

By Christine Duhaime | January 7th, 2014

Two executives of PetroTiger, Ltd., a British Virgin Islands oil and gas company (“PetroTiger“), were charged with money laundering, wire fraud and bribery under the U.S. Foreign Corrupt Practices Act (the “FCPA“) for allegedly bribing foreign public officials to obtain a $39 million contract from Ecopetrol S.A., a state-owned petroleum company in Columbia (“Ecopetrol“), Latin America’s second largest oil company by market value.

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US federal court rules NSA surveillance program legal and necessary for counter terrorism

By Christine Duhaime | December 28th, 2013

NSA program legal and necessary for counter-terrorism

A U.S. federal court ruled today ruled that the National Security Agency (“NSA“) collection of personal telecommunications records is not only legal but is a valuable tool necessary to counter the threat of terrorism.

According to various media reports, the NSA collects, views, categorizes and retains our telecommunications records including our phone calls, texts, and emails. One of the more invasive, but valuable aspects, of the NSA surveillance program is, as the Court noted, that if plumbed it can reveal a “rich profile” of each of us as well as a comprehensive record of all of our associations to one another.

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OFAC sanctions in a nutshell

By Christine Duhaime | December 24th, 2013

Summary of OFAC sanctions

Until FACTA comes in force, the Office of Foreign Assets Control (“OFAC“) remains the singularly most important agency in the U.S. in respect of financial crime for multinational and foreign companies and yet surprisingly, the OFAC regime appears to be relatively ignored from a compliance perspective.

OFAC yields enormous power and influence in global financial markets and over the activities of multinational and foreign corporations.

What does OFAC do?

OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, drug traffickers, traffickers of weapons of mass destruction, and other threats to U.S. national security, foreign policy or the economy of the U.S.

It has jurisdiction over financial transactions that flow through the U.S. financial system and exercises that jurisdiction to impose controls on financial and other transactions and freeze assets. Most financial transactions, wherever situated, use the U.S. financial system by virtue of the correspondent banking regime. OFAC’s authority is derived from the exercise of the President’s national emergency powers, as well as by legislation.

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Thoughts on foreign corruption rankings

By Christine Duhaime | December 4th, 2013

2013 Corruption Index

According to Transparency International‘s newly published 2013 Corruption Perceptions Index, the new top ten corrupt nations are Somalia, North Korea, Afghanistan, Sudan, South Sudan, Libya, Iraq, Uzbekistan, Turkmenistan, and Syria. The ten least corrupt are Denmark, New Zealand, Finland, Sweden, Norway, Singapore, Netherlands, Australia, Canada and Luxembourg.

The results are based on surveys from entities that rank certain countries. Some surprises include that the United States was ranked more corrupt than Hong Kong, which is inconsistent with the reality of doing business in Hong Kong. Likewise, China ranked 80th and Vietnam ranked 116th but there is no material difference in either in terms of corruption however, in China foreign corruption is much more sophisticated.

Foreign businesses in China and Vietnam, including Canadian businesses, say it’s impossible to conduct business there without bribes. Foreign companies are usually given specific directions by government officials on how to make illicit payments to them. More often than not it involves travel and shopping sprees.

According to some foreign businesses, including Canadian businesses, the following is currently one of the preferred methods to pay a bribe to a government official from China: (a) the foreign business opens an account in the government official’s name at a coveted luxury designer store in Hong Kong (there is just one that is coveted by men in China); (b) the foreign business transfers the amount of the bribe to that account; (c) the foreign business arranges and pays for a trip to Hong Kong for the government official for a shopping spree; (d) the government official from China travels to Hong Kong, enjoys a week or so as part of an all-inclusive trip funded by the foreign business, and uses the credit in his name to buy luxury goods at the store; and (e) if there is a credit balance remaining after the purchases at the store, the balance is refunded in cash to the government official minus a handling fee kept by the store.

With the advent of gift cards, also known as stored value cards, corrupt government officials sometimes ask for prepaid gift cards loaded with the amount of the bribe by foreign businesses.

It is next to impossible to detect the use of stored value cards when the cards are bought using funds from bank accounts in Asia that are transferred to stores in Hong Kong where the cards are issued. These transactions contribute to the shadow banking system, allowing the exploitation of existing vulnerabilities in the reporting requirements that are imposed on financial institutions and international travelers. Bribery payments to foreign government officials in China (or anywhere) are proceeds of crime and can be prosecuted as such in conjunction with corruption offenses.

Financial services firms and institutions expect 40% increase in regulatory compliance for FATCA and anti-money laundering

By Christine Duhaime | December 3rd, 2013

According to a 2013 Financial Crime survey, 2014 is expected to be an expensive one for regulatory compliance , with more than 20% more being spent for each of anti-money laundering compliance and compliance with the U.S. Foreign Account Tax Compliance Act (“FATCA“), for a total of a 40% increase.

Cybersecurity

The financial crime risk that senior officers perceive as being at the forefront is cybercrime (such as online fraud and account fund theft). The weak point in protection against cyber-security was seen as the use of mobile devices externally by employees and remote log-ins that expose and may compromise security systems at financial services firms.

FATCA

The biggest change in regulatory compliance in respect of financial crime is the increased focus on insider trading and FATCA. Until recently, financial services firms appear to have believed that FATCA would apply just to private banking and now realize the breath of its applicability. The emergence of tax sharing agreements is also seen as a matter of increased compliance scrutiny for firms.

FATCA comes into force July 1, 2014. Its intent is to stop tax evasion by U.S. persons and entities. It is a reporting regime that requires all foreign financial institutions (“FFI“) and foreign non-financial entities (“NFFE“) to identify and report to the IRS in respect of accounts held by U.S. persons or U.S. foreign entity worth US$50,000 or more. A 30% withholding tax is imposed on the U.S. source income of any FFI or NFFE that fails to comply with FATCA.

Basil III

Looking further afield, respondents to the survey noted that Basel III will be a regulatory compliance concern over the next three years. Basel III regulations include a number of requirements for banks and financial institutions, such as:

  • Capital – quality & level of capital with a minimum of 4.5% of risk-weighted assets; capital loss absorption at point of non-viability; capital conservation buffer of 2.5%; and countercyclical buffer of up to 2.5%.
  • Risk Coverage – securitization improvements; higher capital for trading and derivatives activities; counterparty credit risk strengthening for measuring exposure.
  • Containing Leverage – non-risk based leverage ratio that includes off-balance sheet exposure.
  • Risk Management & Supervision – better management of risks with sound compliance practices.
  • Market Discipline – Enhanced disclosure of components of regulatory capital and reconciliation to reported accounts.
  • Liquidity – sufficient liquid assets; net stable funding ratio to address liquidity mismatches; improved liquidity management; and monitoring of liquidity.

The projected compliance costs for regulatory matters in respect of financial crime means that financial institutions and service firms will be required to engage numerous more professional financial crime personnel and consultants to meet regulatory requirements.

Germany state-owned bank and several corporate offices raided over wind energy investigation into alleged mafia money laundering

By Christine Duhaime | November 19th, 2013

The EU investigation into the use of wind farms to launder proceeds of crime widened today with several police raids in Austria and Germany, including a raid on the offices of the state-owned bank, HSH Nordbank. The Nordbank financed several wind farms, including one in Calabria, Italy, alleged to have been erected and operated as a money laundering front for the ‘Ndrangheta mafia. The bank is not alleged to be implicated in the investigation.

In 2008, the U.S. Department of the Treasure added the ‘Ndrangheta to the Office of Foreign Assets Control (“OFAC“) Specially Designated Nationals list. As a result, “U.S. Persons” are prohibited from dealing with, or trading the property of the ‘Ndrangheta, including cash, securities and other property. A U.S. Person for the purposes of OFAC includes U.S. citizens; permanent resident aliens; corporate entities (including associations, firms and JVs) located in the U.S. (incorporated, registered or located there); foreign branches of U.S. entries; and in some cases, subsidiaries of U.S. entities. A foreign entity with a U.S. office or with a U.S. subsidiary, is a U.S. Person for OFAC purposes and it must not complete transactions involving property of the ‘Ndrangheta.