SEC charges Texas man with securities fraud for allegedly running Ponzi scheme involving bitcoin investments

By Christine Duhaime | July 23rd, 2013

Alleged Ponzi scheme involving bitcoin

The U.S. Securities & Exchange Commission announced today that it has charged Texas resident, Trendon Shavers, and an entity he ran called Bitcoin Savings and Trust (“BTCST“), with defrauding investors through the operation of a Ponzi scheme involving bitcoin. Bitcoin is a popular virtual currency. The charges have nothing to do with the integrity of bitcoin.

Pursuant to the criminal complaint filed in the U.S. District Court for the Eastern Division of Texas, Shavers is alleged to have sold investments in BTCST over the Internet to investors, a company in which he allegedly promoted as being in the business of buying and selling bitcoin. He is alleged to have raised approximately $4.5 million. Funds raised were allegedly used to gamble and pay living expenses.

UK independent reviewer releases 2012 terrorism report

By Christine Duhaime | July 22nd, 2013

The independent reviewer of the U.K.’s terrorism legislation has released his latest report (the “Report“) highlighting terrorism developments over the last 12 months in the U.K.

Some interesting parts of the Report are as follows:

Terrorist acts targeted against Jewish people

According to the Report, there were several terrorist incidents in the U.K. principally targeted against Jewish people. In 2012, arrests related to religiously-inspired terrorism increased from 122 to 159, and doubled in France from 46 to 91. The terrorist-related incidents targeting Jewish people include:

  • The March 2012 shooting of seven people in Toulouse, France, by Mohamed Merah;
  • The July 2012 suicide bomb attack on a bus at Burgas Airport in Bulgaria which killed the driver and five Israeli passengers;
  • The October 2012 grenade attack on a kosher grocer in Paris injuring one person and prompting a fatal shooting by police; and
  • The conviction of the husband-wife team of Mohammad Sajid and Shasta Khan in July 2012 for terrorism related to the preparation of bomb-materials.

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Money laundering and human trafficking

By Christine Duhaime | July 21st, 2013

Human trafficking – a serious and growing problem

According to a report by the United Nations Economic Commission for Europe, the revenues of human traffickers is estimated to range from $5 billion to $9 billion annually. And according to a US State Department report published in 2011, approximately 12 million people, primarily women and children are trafficked annually worldwide.

Human trafficking is a modern form of slavery which involves the transport, harbouring or sale of persons through coercion, force, kidnapping, deception or fraud for the purposes of placing them in a situation of forced prostitution, domestic servitude, debt bondage or other slavery-like practices.

Human trafficking for forced prostitution, or sexual exploitation, is the most prevalent type in the US and Canada. It is run and controlled by organized crime in both countries and tends to occur behind fronts, like escort agencies and message parlours.

In Canada, organized criminal networks with links to Eastern European organize the immigration of women from former Soviet states into Canada to work as escorts in Toronto and Montreal. The problem also exists in Vancouver there, organized criminal networks tend to originate from Asia and arrange for the trafficking of Asian women into Vancouver for prostitution.

Across Canada, the majority of victims are Canadian girls between 14 and 25 years of age and most are taken from the Peel Region in Ontario.

Police agencies in Germany, Austria, Czech Republic, Belarus, and Israel have said that there are Canadian connections to transnational human trafficking rings in these countries, meaning that Canadian organized crime is operating human trafficking in those countries, trafficking girls for forced prostitution in the Czech Republic, Germany, Israel, the United Kingdom and Canada.

During one ICE investigation in the US, young girls from Mexico reported being smuggled and trafficked into the US and forced to live in the crawl space of a house and engage in forced prostitution for the man who smuggled them into the country. When ICE agents interviewed the girls after raiding the house, they were told that the girls were forced to pay the pimp $400 a month to live in the crawl space. The pimp also made them pay $200 per outfit for clothes he bought at a second-hand shop and he charged them $25 each way for a car ride when he forced them to go to out-calls with johns. None of the money earned from forced prostitution was allowed to be kept by the girls.

The money laundering investigation into that pimp and his family revealed that various family members had bank accounts fed by a stream of wire transfers but had no apparent source of income. They had purchased four homes in the US, as well as an avocado farm and a strip mall, laundering the illegal income. To obtain mortgages, they executed letters stating that they had gifted each other the amounts of the down payments. They had also laundered money by purchasing 141 cars.

All human trafficiking activities involve money laundering. The proceeds collected from criminal activities are transformed by criminals into apparently legitimate money or other assets. Traffickers use the proceeds of crime to invest in cash intensive businesses such as real estate or strip clubs or bars. Some red flags are as follows:

Red Flags 

Red flags for johns

  • structuring deposits to avoid currency transaction reports;
  • credit card transactions with business front companies;
  • even number charges on credit card transactions;
  • cash withdrawals from ATM machines between 11pm to 6am;
  • credit card payments to online escort websites;
  • withdrawals of cash in geographical regions different than where john lives;
  • frequent international travel, including to AML risk countries;
  • past evidence from credit card statements of escort or prostitution purchases;
  • multiple bank accounts and credit cards.

Red flags for pimps

  • leasing high end vehicles;
  • structuring deposits to avoid currency teransaction reports;
  • credit card transactions with business front companies;
  • even number charges on credit card transactions;
  • credit card payments to buy classified ads;
  • most of the transactions occurring between 10pm and 6am;
  • large cash deposits;
  • unexplained and unjustified cash lifestyle;
  • mismatch between amounts spent and occupation of person;
  • frequent real estate transactions carried out by straw persons;
  • payments for rent for addresses where prostitution is known to occur;
  • frequent payments for hotel rooms;
  • common telephone numbers used to open up bank accounts;
  • frequent deposits and withdrawals with no apparent business sources.

“The Windfather” – Another report finds wind and renewable energy projects controlled by organized crime to launder money

By Christine Duhaime | July 12th, 2013

Europol report ties mafia to renewable energy

This week, Europol released yet another report tying the financing, development and operation of renewable energy projects, particularly wind energy infrastructure projects, to organized crime in Europe.

The latest Europol report follows on the heels of an earlier one, the “Serious & Organized Crime Threat Assessment 2013”, which similarly found that organized crime is involved in, and in some instances controls, renewable energy financings and project developments for the purposes of laundering proceeds of crime.

Lord of the wind

The alleged mafia and kingpin of wind energy, the so-called “Lord of the Wind”, Vito Nicastri, is effectively under house arrest in Italy and $1.7 billion in corporate assets that he controlled were recently permanently forfeited to the state. Mr. Nicastri hasn’t been convicted of an offence in connection with the forfeited assets. The assets forfeited included shares in 40 companies, 100 properties, including wind farms and the assets thereon, 66 bank accounts, life insurance policies, seven exotic sports cars and luxury yachts.

Former convictions

According to an EU fraud report, Mr. Nicastri had a criminal record dating back to 1996 when he was convicted of wind farm fraud in connection with improper payments of $15 million and of bribing public officials to obtain contracts. That should have been a red flag in the transactional due diligence process and a bar to any EU or national procurements or approval of any government licenses. Mr. Nicastri is alleged to have ties to the Cosa Nostra.

The Camorra are also alleged to be involved in renewable energy to launder proceeds of crime. In Europe, the Camorra are alleged to have large and profitable criminal operations in France, Spain, Germany and the Netherlands (in addition to Italy). In the U.S., they are one of 4 designated “transnational criminal organizations”, having infiltrated the U.S. financial system to launder proceeds of crime from drug trafficking and other serious crimes.

Generous subsidies are attractive to organized crime

Organized crime is attracted to wind energy for three reasons: (a) generous government subsidies and feed-in tariffs; (b) corporate tax credits; and (c) the ease with which they can launder proceeds of crime as a result of the lack of knowledge of the mafia, money laundering and forfeiture risks on the part of financing and governments participants in the wind and renewable energy sectors.

According to the Europol Report, organized crime is uniquely situated in that they have an abundance of cash that they need to invest (hence, launder) at a time when credit is hard to come by for corporations. The renewable energy sector provides the perfect money laundering vehicle to legitimize criminal operations because of the multi-layered corporate and financing structuring required, and the lack of money laundering awareness within the sector. Given that renewable energy is expected to grow by at least 20% by 2020, the problem is expected to get worse not better.

Other countries affected

The problem of organized crime infiltrating and controlling the wind energy sector, and generally, renewable energy, is not limited to Italy.

According to reports from ISA Intel, organized crime in Greece is actively engaged in laundering proceeds of crime through wind and other renewable energy projects.

And the Financial Intelligence Directorate for Bulgaria’s Agency for National Security reported a few days ago that according to its studies, renewable energy companies in Bulgaria act as a front for money laundering. In the Bulgarian cases, offshore companies (usually in tax havens) are used by organized crime to build and operate energy projects and finance related entities that bid on, and build energy infrastructure projects.

Lax auditing of EU Structural Funds

Renewable energy and wind energy projects are funded in the EU from the Structural Funds through its European Regional Development Fund (“ERDF“), which has allocated $295 billion in grants for renewable energy. The ERDF is used to support regional development primarily through infrastructure projects, and in particular through public-private partnerships.

Regulation No 1080/2006 of the European Parliament and of the Council on the European Regional Development Fund requires that each member state have an audit authority in place to verify the legality and regularity of  recipients of funding within three months. Unfortunately, the member state auditing function appears to have been left by the wayside. No one appears to have verified the legality or regularity of the mafia involvement in wind farms in Europe. An estimated 50% of the subsidies paid by the ERDF for wind energy related infrastructure projects involved fraud and other irregularities.

Mitigating the risks for governments and banks

The use of wind and renewable energy projects to launder proceeds of crime is a relatively new development in money laundering law. From a money laundering perspective, it may be appropriate to consider wind energy projects as high risk in some parts of the EU resulting from the Europol Report, and therefore subject to enhanced and independent due diligence.

Interpol operation into trafficking of illicit trade results in 6,000 arrests

By Christine Duhaime | July 11th, 2013

An Interpol-led investigation into the trade of counterfeit goods and products over the last two months has resulted in the arrests of more than 6,000 people in Vietnam, China, Belarus, Poland, Romania, Ukraine, Turkey, Namibia, Hong Kong, India, Thailand, Brazil, Chile, Columbia, Peru and Ecuador.

In total, 24 million fake goods were seized worth approximately $133 million on the black market, including fake alcohol, DVDs, shampoo and toothpaste, cigarettes, toys and clothing. In Namibia, machines used to change the dates on food products were also seized. In Brazil, the seizures mostly involved guns and firearms.

Those arrested will be charged with money laundering and trafficking in counterfeit goods pursuant to their national laws.

Singapore takes action against 69 financial institutions over lax money laundering compliance

By Christine Duhaime | July 11th, 2013

Singapore’s Monetary Authority of Singapore has issued a number of fines, warnings, reprimands and compliance orders to 69 financial institutions for multiple failures to comply with anti-money laundering and counter terrorist financing requirements. The move is Singapore’s effort to appear to be strengthening its anti-money laundering laws to preserve its reputation as the hub of Asia’s private banking and offshore industry.

Effective July 1 of this year, Singapore increased its money laundering fines for certain offences. Now, entities may be fined as much as $1 million.

In addition, 13 firms had their licences revoked or not renewed by the MAS as a result of lax money laundering controls.

Junket operators in Macau branching out in effort to improve reputation and diversify business but financial crime concerns remain

By Christine Duhaime | June 30th, 2013

Junkets branching out

According to this article by Reuters, traditional junket operators (also known as VIP gaming promoters) in Macau are branching out to diversify their businesses and improve their reputation.

The largest junket operator, Suncity Group, is planning to open its own casino and has expanded into mining and iron ore operations in Indonesia. It certainly has the cash flow to expand – it’s monthly gambling turnover in Macau is US$17 billion. The largest junket operators account for half of the monthly junket turnover of US$75 billion.

Gambling in Macau generates revenues of US$38 billion annually and over 75% of that comes from junket operators who independently operate VIP Rooms at the major casinos.

In exchange for commission payments tied to the rolling chip turnover, junket operators tap into their extensive social networks in Mainland China through sub-agents to recruit wealthy gamblers to play in Macau at private VIP Rooms. These high rollers are transported to Macau by junket operators who also extend credit to them to gamble at the casinos. Gambling debts are collected by the sub-agents in Mainland China. The casinos are not involved in the operation of VIP Rooms and in fact the clients lists (and clients) belong to the junket operators, not the casinos.

The most lucrative asset owned by junket operators is the VIP client lists. By relying on junket operators to run VIP Rooms, Macau casinos may have unwittingly spelled their own demise if junket operators ever decide to open casinos and compete with them.

Leveraging their lists of wealthy clients, junket operators have branched into financial services in Hong Kong. Suncity, for example, has a securities, forex and commodities trading arm, and Golden Resorts Group has a financial services group with Kingston Financial. Jimei Group has branched out to the Philippines where it has a securities firm and provides wealth management services.

Junket operators are also leveraging politics – both Polyanna Chu, the owner of Golden Resorts Group and Suncity’s CEO Alvin Chau – have joined the Chinese People’s Political Consultative Conference, China’s parliamentary advisory body.

The money laundering concerns arise in respect of the fact that junket operators recruit high rollers from Mainland China to Macau, and some of the money gambled by high rollers is alleged to be from corruption. Funds from high rollers, even if legitimately earned, are conveyed to Macau on behalf of high rollers in circumvention of the foreign export currency bank regulations which limit the amount of money Chinese residents can remove from China. In order to circumvent these restrictions, funds are advanced to high rollers in Macau by way of credit, and debts subsequently collected in China. Funds transferred out of China illegally is proceeds of crime.

Review of high risk countries for money laundering

By Christine Duhaime | June 21st, 2013

The Financial Action Task Force (“FATF“) has released its list of high risk jurisdictions for money laundering and counter terrorist financing. Reporting entities are generally required to apply enhanced due diligence when dealing with funds from jurisdictions that are high risk. The high risk countries are:

  • Vietnam
  • Syria
  • Iran
  • Kenya
  • Ecuador
  • Korea
  • Ethiopia
  • Indonesia
  • Myanmar
  • Pakistan
  • Sao Tome
  • Tanzania
  • Turkey
  • Yemen

With respect to Vietnam, Iran and Syria, the FATF recommends as follows:

Vietnam
Vietnam needs to undertake the following anti-money laundering and counter terrorist financing (“AML“) corrections: (1) establish and implement adequate procedures to identify and freeze terrorist assets; (2) make legal persons subject to criminal liability in line with international standards; and (3) strengthen international co-operation.

Syria
Syria needs to address deficiencies by: (1) providing sufficient legal basis for implementing the obligations under UN Security Council Resolution 1373; (2) implementing adequate procedures for identifying and freezing terrorist assets; and (3) ensuring that appropriate laws and procedures are in place to provide mutual legal assistance.

UN Security Council Resolution 1373 requires member states implement measures  to enhance their legal and institutional ability to counter terrorist activities, including taking steps to:

  • Criminalize the financing of terrorism.
  • Freeze without delay any funds related to persons involved in acts of terrorism.
  • Deny all forms of financial support for terrorist groups.
  • Suppress the provision of safe haven, sustenance or support for terrorists.
  • Share information with other governments on any groups practicing or planning terrorist acts.
  • Cooperate with other governments in the investigation, detection, arrest, extradition and prosecution of those involved in such acts.
  • Criminalize active and passive assistance for terrorism in domestic law and bring violators to justice.

Iran

With respect to Iran, the FATF requires that reporting entities pay special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions, and to apply effective counter-measures to protect financial sectors from money laundering and financing of terrorism risks emanating from Iran. Further, states are required to ensure correspondent relationships are not used to bypass or evade counter-measures and risk mitigation practices. The FATF has effectively given Iran until October 2013 to come into compliance in respect of AML or face stringent treatment from other countries in respect of the flow of funds in and out of Iran.

Another foreign bank in US settles economic sanctions violations

By Christine Duhaime | June 20th, 2013

Another foreign bank doing business in the US has agreed to settle with the New York State Department of Financial Services (“NYDFS“) over allegations that it violated federal economic sanctions. The Bank of Tokyo-Mitsubishi UFJ, Ltd., Japan’s largest bank, has agreed to pay US$250 million to the NYDFS to settle allegations that it provided US$100 billion in financial services to restricted designated entities and persons in sanctioned countries, including Sudan, Iran and Myanmar over a five year period. It has also agreed to engage anti-money laundering specialists to advise in respect of, and improve, its compliance regime.

According to the NYDFS, the bank routinely and deliberately omitted required information in SWIFT messages related to sanctioned countries to avoid the freezing of assets in connection therewith.

Tax evasion, beneficial ownership and money laundering – what are the issues facing Canada at the G8 Summit next week?

By Christine Duhaime | June 15th, 2013

A recent article in the Vancouver Sun on the attendance by Stephen Harper at the G8 summit in Ireland and the proposed measures to combat tax evasion contained an interesting statement buried at the end of the article as follows: “international organizations say… Canada has balked at a measure that would identify the true owners of offshore accounts and shell companies by disclosing what’s called beneficial ownership information.”

The issue at the G8 summit is not necessarily that Canada is balking at providing beneficial ownership information – it’s that in this country, such information is not in the hands of government agencies to disclose.

The question for Canadian policy makers on tax evasion and beneficial ownership is three-fold: (a) can Canada legally require the disclosure and collection of beneficial ownership information, particularly of corporations; (b) if yes, does Canada want to require the collection and disclosure of beneficial ownership internally; and (c) if yes, does Canada want to share such information externally with other countries? With respect to the first, there are constitutional and other impediments that may prevent federal action over provincially registered corporations that would need to be considered.

Beneficial Ownership in Canada

In Canada, beneficial ownership is a common law concept used to distinguish rights held by persons with a beneficial interest in property from those who hold those interests legally (i.e., in name). The law surrounding beneficial ownership is complex but in a nutshell, when a person holds property (i.e., a house or securities) legally, their name is on the property, or in other words, disclosed. When a person holds property beneficially, the property is not registered in their name and the true owner is obscured.

The tax evasion issue deals primarily with beneficial ownership of trusts, funds and private corporations, although it also involves real property ownership.

With respect to ownership (or shares) of a private corporation, directors may issue shares to shareholders who hold them legally or beneficially (as a nominee shareholder). With respect to trusts, they are different structurally but the same concept applies whereby a trustee may hold trust interests on behalf of others who are the ultimate beneficiaries of the trust property.

The beneficial ownership regime in Canada allows assets to be legally placed in corporate and trust vehicles, and without the ability to determine the natural persons who ultimately hold, or benefit from, those assets.

In addition to the placement issue, the problem in Canada is compounded by the fact that pursuant to the securities and corporate law regimes, private corporations are incorporated, and trusts are set up, without the requirement for the disclosure of beneficial ownership. While in the case of private corporations, provincial corporate statutes require the disclosure of directors on incorporation to a corporate registry, there is no requirement to disclose shareholders, beneficial or otherwise. The federal government seeks certain information on the legal ownership of shares of private corporations when certain filings are made, but not necessarily the disclosure of beneficial owners of shares.

In Canada, there is no equivalent as exists in the EU of “company service providers” whereby private companies act as law and other firms in Canada do, to set up corporations and trusts, maintain corporate records and act as the registered offices for those corporations. Corporate records are maintained by law firms and are neither public nor readily accessible to anyone except the client, unless a person attends a R&R and seeks to view what are called minute books in the case of private companies. Moreover, as client records, some but not all, are protected by privilege.

The FATF Recommendations require that “company service providers” register as reporting entities under anti-money laundering legislation and, inter alia, report suspicious and terrorist activity, and the transfer of certain threshold amounts of money by clients, but given that in Canada, the company service providers may be law firms, that requirement is not capable of being complied with in any event. But still, there are non-law firms providing incorporation and trust services, especially in Vancouver, and they could be regulated except that the Canadian Department of Finance determined that company service providers were low-risk in Canada for money laundering.

And thus Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act does not capture “company service providers.”

The FATF Recommendations also require, independent of the above, that Canada implement measures to (i) have adequate, accurate and timely information on beneficial ownership and control of corporations and trusts that can be accessed by law enforcement and to (ii) require that persons and businesses that issue bearer shares and warrants or that allow nominee shareholders and directors be subject to legal measures to ensure there is no misuse by such persons and businesses for money laundering or terrorist financing.

Canada chose not to implement these specific FATF Recommendations.

If it did, it would completely change the anti-money laundering regime and impose new obligations on every corporation (public and private) and trust entity set up in this country. Why? Simply because all private corporations issue bearer shares; some corporations issue warrants; and most corporations permit nominee shareholders and directors. Theoretically, every corporation could be subject to anti-money laundering requirements.

There is another problem with the disclosure of beneficial ownership and it’s that corporations in Canada can be federally or provincially incorporated – most are provincially incorporated. The federal government does not have the constitutional competence to legislate in respect of  provincially registered corporations or provincial corporate registries and thus it cannot require changes at the provincial level to yield up beneficial ownership information.

As a result of all of the above, the legal regime in Canada protects, whether intentionally or not, the secrecy of beneficial ownership information in Canada.

Beneficial Ownership & Tax Evasion

Under anti-money laundering legislation, banks, real estate agents and other reporting entities are required to identify their customers as part of their account opening due diligence procedures and report large and suspicious transactions.

However, when the true customer is obscured by beneficial ownership (often behind many layers of private corporations and trusts), uncovering the true nature of transactions, identifying wealth and tracing the origin of funds is not easy.

The offshore leaks scandal exposed by the International Consortium of Investigative Journalists, has brought to bear pressure on governments worldwide to take action against tax evasion by prosecuting people who are found to have funneled money to tax havens and failed to pay the requisite taxes.

So at the upcoming G8 Summit, Canada will be juggling the pressure internationally to address the tax evasion problem, together with the problem that Canada does not capture beneficial ownership information and could not readily share this information with other jurisdictions in any event.