Archives for October 2019

FATF Issues Best Practices Report on Beneficial Ownership

October 28, 2019 by Bruce Zagaris Leave a Comment

On October 24, 2019, the Financial Action Task Force (FATF) issued a best practice paper, seeking to provide suggested solutions, supported by cases and examples of best practices for beneficial ownership from delegations. The paper responded to challenges faced by delegations in implementing FATF Recommendation. The results of FATF Mutual Evaluation Reports (MERs) indicate that jurisdictions find it challenging to achieve a satisfactory level of transparency regarding the beneficial ownership (BO) of legal persons.

At present FATF is conducting the fourth round of mutual evaluations of the implementation of the FATF standards on anti-money laundering (AML). FATF mutual evaluations show that jurisdictions using a single approach is less effective in making sure that competent authority can obtain accurate and up-to-date BO information to in a timely manner. Instead, a multi-pronged approach using several sources of information is often more effective in preventing the misuse of legal persons for criminal purposes and implementing measures that make the beneficial ownership of legal persons sufficiently transparent. The variety and availability of sources increases transparency and access to information, and helps mitigate accuracy problems with particular sources.

FATF R.24 requires countries take measures to prevent the misuse of legal persons for ML/TF. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.

Through a multi-pronged approach, competent authorities can obtain access to information on beneficial ownership through different sources. They can also ensure the accuracy of information by cross-checking. Key stakeholders, (including companies, directors, shareholders, obliged parties such as FIs and DNFBPs), can more easily identify incorrect beneficial ownership information in their database by reviewing different registers or requesting information from different sources. This will then trigger the obliged party to seek clarifications from the companies, and if necessary, report suspicious activities to competent authorities. Therefore, this approach encourages key stakeholders to fulfil their obligations through peer interaction and supervision.

As stated in Interpretative Note to R.24, countries should use one or more of mechanisms

the Registry Approach, which calls for company registries to obtain and update BO information;
the Company Approach, which requires companies to obtain and hold updated data on their shareholders; and
the Existing Information Approach, which uses existing data sources, such as tax authorities, financial institutions and Designated Non-Financial Business or Professionals (DNFBPs), information held by other competent authorities on the legal and BO of

companies, and available information on companies listed on a stock exchange, where

disclosure requirements ensure adequate transparency of beneficial

ownership.

The FATF best practices papers calls on stakeholders to ensure that information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country; or can be otherwise determined in a timely manner by a competent authority.

The FATF has identified some specific obstacles in the following areas to effective implementation , including: a) risk assessment; b) adequacy, accuracy and timeliness of information on beneficial ownership; c) access by competent authorities; d) bearer shares and nominee shareholder arrangements; e) fines and sanctions; and f) international co-operation.

The FATF paper on best practices in obtaining, maintaining and using beneficial ownership will help jurisdictions whose regime falls below the FATF standards, as enumerated in the MERs, take action to upgrade the quality of their implementation practices.

The current issue of the IELR will have an article discussing in more detail the FATF report.

Two of Giuliani’s Associates Arrested on Charges of Campaign-Finance Violations

October 15, 2019 by Alexandra Haris Leave a Comment

On September 20, two of Rudy Giuliani’s associates were about to leave the U.S. with one-way tickets when they were arrested outside of the Dulles International Airport in Northern Virginia on charges of campaign-finance violations. These charges accused them of funneling foreign money into U.S. elections. The timing is significant as it is known that the Soviet-born men, Igor Fruman and Lev Parnas, were linked to efforts to dig up dirt on Joe Biden and his son in Ukraine.

In total, four men were indicted, and the indictment includes two counts of conspiracy, one count of false statements to the Federal Election Commission (FEC), and one count of falsification of records. It is alleged that the four men’s scheme to avoid campaign finance laws began in March 2018.

Last Thursday, October 10, the two men appeared in federal court in Virginia where the judge set their bail at $1 million each, after prosecutors argued the men were a flight risk.

The men are said to be connected to the ongoing impeachment inquiry and have even been photographed with the president, his son, and Mike Pence. When asked about the men, Trump told reporters, “I don’t know those gentlemen…I don’t know what they do. Maybe you will have to ask Rudy.”

Significance of Indictment

The indictment is momentous because the charges suggest Giuliani’s push on Ukraine had ties to an illegal effort to influence the U.S. political system with foreign monies. In fact, Fruman and Parnas are known to be central to the current impeachment inquiry that is taking place in the House of Representatives.

While there have been quite a bit of speculation from various news outlets, CNN reported that Parnas has operated as Giuliani’s fixer in Ukraine since 2018, claiming that Giuliani, himself, told the organization that Parnas introduced him to current and former officials in the country. Democrats in the House have subpoenaed documents from the former mayor in order to understand more details of the interactions. Guiliani also confirmed to the Wall Street Journal that the two men were clients in May, and both men had dinner with President Trump and met Donald Trump Jr. a year prior.

However, this is the second subpoena relating Giuliani to Parnas, the first being part of a lawsuit filed in Florida seeking Parnas’ financial records and a record for any work he did on Giuliani’s behalf. It is alleged that he collected and distributed hundreds of thousands of dollars in donations to a Trump-allied super PAC.

Furthermore, Fruman and Parnas allegedly asked a U.S. congressman, widely believed to be former Texas Rep. Pete Sessions, to help get the ambassador to Ukraine, Marie Louise Yovanovitch, fired. According to the indictment, this request coincidentally came at the same time that they promised to raise $20,000 for that congressman’s reelection. Fruman allegedly made the donation in Parnas’ name, going beyond the limit on individual donations and violating campaign finance law. Sessions has yet to comment on the matter and has not been charged of any wrongdoing.

After facing criticism from the Trump administration for being ‘biased against the president,’ Yovanovitch was eventually fired in May. On October 10, Yovanovitch gave a powerful deposition to the House Intelligence Committee, testifying that she was ousted due to her anti-corruption work.

Amidst all of this, the indictment also explains how the two men donated more than $300,000 to America First Action, a pro-Trump super PAC, through a limited-liability company whose purpose was to mask the true source of their donations. America First Action spent more than $3 million to reelect Sessions, although he ended up losing his seat. A spokeswoman for the super PAC released a statement last week claiming they, “placed that contribution in a segregated bank account, it has not been used it for any purpose and the funds will remain in this segregated account until these matters are resolved.”

Additional Motivations for Fruman and Parnas’ Scheme

Interestingly, a portion of the scheme involving Fruman and Parnas revolved around an effort to win over politicians who could help them receive licenses for a retail marijuana business they wanted to open. The business’ venture and lobbying costs were allegedly funded by a Russian national, who has only been identified as a ‘businessman,’ which would further violate campaign finance law as the law prohibits foreign political donations. The men are said to have created an outline of a ‘multi-state license strategy’ that planned how to divide the $1-2 million dollars the Russian businessman donated to federal and state committees. In fact, when the businessman made a $1 million wire transfer in 2018 to Fruman, the men supposedly used these funds to donate to multiple political candidates in Nevada that could have helped further their marijuana business plan.

Demand Letter from Greece to Halt Sotheby’s Auction of Antiquity

October 10, 2019 by Bruce Zagaris Leave a Comment

The Greek Ministry of Culture and Sports sent a demand letter to Sotheby’s shortly before they were going to auction off a Greek antiquity. Greece claimed in the demand letter that the item (a bronze horse) was Greece’s pursuant to Greek patrimony laws and that there was no record of the item having been lawfully exported. Greece sought repatriation of the item.

Sotheby’s and the executors of the trust that had consigned the item to Sotheby’s then sued in federal court seeking declaratory judgment that the Greek antiquity was properly owned by them and could be consigned and sold by Sotheby’s at auction. The Greek Ministry moved to dismiss for lack of subject matter jurisdiction under the FSIA. The district court found that Greece’s demand letter constituted commercial activity under the FSIA because private parties routinely send demand letters seeking return of their property.

Greece made various arguments on appeal regarding its sovereign immunity under the FSIA.

The amicus that my colleague Laina Lopez and my firm filed – on behalf of Italy, Mexico, Cyprus, the Antiquities Coalition, and the Hellenic College Holy Cross Greek Orthodox School of Theology — argued one point not made in Greece’s opening brief. Amici argued that the demand letter does not constitute commercial activity because a demand letter seeking return of cultural heritage property pursuant to a nation’s patrimony laws is something only a sovereign can send; enforcement of patrimony laws is an exercise of the state’s police power. Amici also raised concerns about the practical effects of the case if the court were to uphold the district court’s decision.

The case is Barnet Recovable Trust, and Sotheby’s Inc., Plaintiff-Appellees v. Ministry of Culture and Sports of the Hellenic Republic, Defendant-Appellant, U.S. Court of Appeals for the 2d Circuit, Civ. 19-2171-cv. If you are interested in a copy, please contact Lex Haris (aharis@bcr-dc.com).

U.S. Citizen Arrested for Spying on Behalf of China’s Ministry of State Security

October 10, 2019 by Miranda Bannister Leave a Comment

On Friday September 27, 2019, U.S. citizen Xuehua “Edward” Peng was arrested in Hayward, California for providing classified U.S. security information to the Chinese government. Peng allegedly conferred at least four secure digital cards (SD) to China’s Ministry of State Security (MSS) in Beijing.

The Department of Justice filed the complaint against Peng on September 24, following a lengthy FBI investigation of Peng’s activities. A statement by the Department of Justice (DOJ) claimed Peng made at least six “dead drops” between June 2015 and June 2018.

While Peng received an empty package in the first dead drop, he retrieved a package with an SD card from the front desk of a hotel in Newark, California in the second. In the following four dead drops, Peng retrieved SD cards from hotel rooms he had booked in advance. In each of these drops, he left envelopes of cash in the hotel room, in exchange for an SD card left by his source. Two of the six dead drops took place in Newark, California, one in Oakland, California, and three in Columbus, Georgia. Four of the six dead drops resulted in Peng transporting the SD cards to the MSS in Beijing.

“The conduct charged in this case alleges a combination of age-old spy craft and modern technology,” said U.S. Attorney David L. Anderson for the Northern District of California.

The FBI employed a “double agent operation” in their investigation of Peng. An informant for the FBI exchanged an SD card for payment in at least one of the dead drops conducted by Peng.

Assistant Director John Brown of the FBI’s Counterintelligence Division said, “This case should serve as a warning to the government of China as well as any other foreign adversary looking to replicate this activity. The FBI, and our intelligence and law enforcement partners, will not waiver. We will bring all of our resources to bear to defeat hostile foreign intelligence services and protect our nation’s security.”

What’s Next for Peng

Peng, 56, is a resident of Hayward, California. Peng entered the U.S. on a temporary business visitor visa in 2001 and become a lawful permanent resident in 2006 upon marrying his then-wife. Peng was fully naturalized in 2012.

During Peng’s first court appearance on September 27, U.S. Magistrate Judge Joseph C. Spero declined to release Peng on bail, stating Peng was a flight risk. On October 2, Peng appeared before U.S. Magistrate Judge Jacqueline Corley for a detention hearing and identification of counsel. Judge Corley ordered Peng to hire a personal attorney, saying Peng’s significant financial assets disqualified him from being assigned a public defender.

The Special Prosecutions Section of the United States Attorney’s Office for the Northern District of California, as well as the Counterintelligence and Export Control Section of the DOJ, National Security Division, are prosecutors for the case.

Peng is accused of violating 18 U.S. Code § 951. This code states, “Whoever, other than a diplomatic or consular officer or attaché, acts in the United States as an agent of a foreign government without prior notification to the Attorney General if required in subsection (b), shall be fined under this title or imprisoned not more than ten years, or both.” The maximum punishment Peng faces is 10 years imprisonment with a $250,000 fine.

The Larger Threat of Espionage

There have been at least six incidences in the past three years in which the Department of Justice has prosecuted a U.S. citizen for Chinese espionage. Three former U.S. intelligence officers, and one other, have been convicted on these charges.

Assistant Attorney General of National Security John C. Demers said of Peng’s arrest, “Coming on top of our many recent Chinese espionage cases—involving both national defense and intellectual property information—this case illustrates the seriousness of Chinese espionage efforts and the determination of the United States to thwart them.”

The charges against Peng confirm the concerns of many U.S. officials that China poses a growing threat to the West. U.S. Attorney Anderson said, “The charges announced today provide a rare glimpse into the secret efforts of the People’s Republic of China to obtain classified national security information from the United States and the battle being waged by our intelligence and law-enforcement communities to protect our people, our ideas, and our national defense.”

U.S. and Australia Start Negotiations over CLOUD Act Agreement and Host Roundtable on Trusted Technology Ecosystems

October 8, 2019 by Bruce Zagaris Leave a Comment

On October 7, 2019, the United States and Australia announced they have entered into formal negotiations for a bilateral agreement under the U.S. Clarifying Lawful Overseas Use of Data Act (the CLOUD Act). The two governments also hosted a roundtable on trusted technology ecosystems.

Negotiations of a CLOUD Act Agreement

United States Attorney General William Barr and Australian Minister for Home Affairs, Peter Dutton, announced the negotiations during a meeting.

Supported by Australian legislation yet to be introduced, a bilateral CLOUD Act agreement would enable Australian law enforcement to serve domestic orders for communications data needed to combat serious crime directly on U.S.-based companies, and vice versa.

The announcement of U.S.-Australian negotiations of a CLOUD Act Agreement provides additional momentum to the U.S. government efforts of having an expedited process for directly obtaining access to electronic evidence from the platform providers.

Roundtable on Trusted Technology Ecosystems

Also on October 7, Attorney General William P. Barr and Australian Minister for Home Affairs Peter Dutton hosted a government-industry roundtable discussion titled, “Shaping a Trusted Technology Ecosystem,” with more than a dozen representatives from the tech-industry landscape.

A Department of Justice press release characterized the dialogue as a critical step in jointly addressing complex supply chain challenges faced by both nations. The collaborative discussion presented an opportunity for industry, Australia and the United States to work together on solutions to ensure an open marketplace, achieve a diverse range of secure technology options, and enhance global technology markets characterized by trust, transparency, and fair competition. One issue is whether to try to prevent Huawei from developing for the Western countries and the world in general the 5G network. The U.S. does not trust Huawei from a national security perspective because it believes that the Chinese government will control Huawei’s practices and enable the Chinese government to obtain surveillance periodically. Until now, Australia has cooperated with the U.S. on the initiative to block Huawei even though Australia is increasingly subject to Chinese economic and foreign policy pressure due to China’s growing role in Australia and the region. The issue of trusted technology ecosystems also concerns the Internet and data privacy.

U.S. and U.K. Sign Cross-Border Data Access Agreement for Cross-Border Enforcement and Warn Facebook on Proposed Encryption

October 4, 2019 by Bruce Zagaris Leave a Comment

On October 3, 2019, the United States and United Kingdom concluded the first ever CLOUD Act Agreement. It will permit U.S. and British law enforcement agencies, with appropriate authorization, to demand electronic data concerning serious crime, including terrorism, child sexual abuse, and cybercrime, directly from tech companies based in the other country, without legal barriers. Simultaneously, both governments and Australia’s Minister for Home Affairs published an open letter to Facebook, asking it to stop plans to implement end-to-end encryption across its messaging services

The CLOUD Act Agreement

The agreement will broadly remove restrictions for a wide category of investigations, not targeting residents of the other country, and assure providers that disclosures through the Agreement are compatible with data protection laws. Each signatory commits to obtain permission from the other before using data gained through the agreement in prosecutions concerning a Party’s essential interest – specifically, death penalty prosecutions by the U.S. and U.K. cases implicating freedom of speech.

The agreement will accelerate investigations by removing legal barriers to timely and effective collection of electronic evidence. The Agreement allows law enforcement, when armed with appropriate court authorization, to directly compel tech companies based in the other country to give access to their electronic data, rather than going through governments, which can take many months and even years.

The agreement will accelerate dozens of complete investigations into suspected terrorists and pedophiles.

The U.S. will have reciprocal access, under a U.S. court order, to data from U.K. communication service providers. All requests for access to data will be subject to independent judicial authorization or oversight.

In March 2018, Congress passed the CLOUD Act, authorizing the U.S. to conclude bilateral executive agreements with rights-respecting partners that remove each party’s legal barriers to the other party’s access to electronic data for certain criminal investigations. The enactment in the U.K. of the Crime (Overseas Production Orders) Act 2019, which received Royal Assent in February of this year, authorized the U.K. to conclude the agreement

U.K. and U.S. Ask Facebook to Stop Plans to Encrypt Messaging Services

The U.K. Home Secretary Priti Patel, U.S. Attorney General William P. Barr, Acting U.S. Homeland Security Secretary Kevin McAleenan, and Australia’s Minister for Home Affairs Peter Dutton sent an open letter to Facebook, expressing serious concerns with Facebook’s plans to implement end-to-end encryption across its messaging services.

The letter asks Facebook to stop the proposals, unless the company can give assurances that no reduction will occur in Facebook’s ability to keep its users safe and enable law enforcement access to content in exceptional circumstances in order to protect the public.

Analysis

The U.K.-U.S. CLOUD Act Agreement opens the door for the U.S. and the European Union to conclude a CLOUD Act Agreement. The two parties are currently negotiating such an agreement.

The current issue of the IELR will have more information on the U.S.-UK Agreement and the open letter to Facebook.

INTERPOL Announces Large-Scale Operation to Arrest nearly 250 Fugitives across Asia

October 2, 2019 by Alexandra Haris Leave a Comment

On September 23, INTERPOL announced the recent success of its coordinated operation, Operation Tighten the Net, arresting 241 fugitives across Asia between June and August 2019. These fugitives were wanted for serious crimes including human trafficking, terrorism, and murder, and some of the fugitives had been on the run for decades.

The operation involved the 10 countries of the Association of Southeast Asian Nations (ASEAN) and China, Japan, and Korea (ASEAN+3). Operation Tighten the Net targeted fugitives that these countries wanted for years, but only with a coordinated effort were they able to find success. The countries took a multilateral approach to share information about the fugitives’ cases, which serves as an example of the power and success that can arise with international cooperation.

In order to achieve the goals of the operation, the countries identified high-profile fugitives and shared intelligence with participating members. Equipped with new and crucial information, these countries could then target the fugitives to bring them to justice. Of the individuals arrested, 80 were subjects of INTERPOL Red Notices for crimes ranging from fraud, drug trafficking, money laundering, and crimes against children.

One particular case that stands out involves a Korean national who was wanted on fraud charges and had been on the run for 25 years. Through this operation, the national was finally discovered living in Thailand, their home for the last 20 years.

The results encompassed not only hundreds of arrests, but they also included the issuance of 248 Red Notices and 20 Blue Notices. A Blue Notice differs from a Red Notice in that it is used by member countries to collect additional information about an individual’s identity, location or activities in relation to a crime.

INTERPOL’s goal is to continue this cooperative crackdown and arrest more fugitives suspected of these serious crimes. INTERPOL’s Head of the Liaison Office in Thailand, Kitaek Kang, reaffirmed the organization’s intent to continue working with all ASEAN+3 partners to build on the momentum of the operation.

INTERPOL credits some of the operation’s success to a training it held in May for participating member states. The training workshop focused on INTERPOL’s fugitive investigation capabilities and criminal databases, as well as the organization’s support to mutual legal assistance matters. This educated participants on the organization’s resources and illustrated how they could then use these resources to capture the alleged criminals.

INTERPOL also claimed the operation’s success derived from the efforts of the participating National Central Bureaus (NCBs) as well as partner law enforcement organizations.

This operation is distinctive as it marks the first regional fugitive investigative action coordinated by the INTERPOL Liaison Office in Bangkok, Thailand, with support from the INTERPOL NCB in Korea.

As a result, the Commissioner General of the Korean National Police Agency, Min Gab Ryong, commented on the operation with the confirmation of Korea’s commitment to collaborate with INTERPOL against crime while securing the rule of law in the region by “synchronizing efforts with regional partners as a member of ASEAN+3.”

This positive reception was encouraging for INTERPOL since, in the past, the organization has experienced scrutiny over its true effectiveness due to its absence of police power and ability to make arrests. However, this action helps to demonstrate the impact that the organization can have on global policing. In this case, the organization facilitated international cooperation and policing while providing resources in order to complete these 241 arrests. It will be interesting to see if INTERPOL attempts to make similar efforts in other global regions.