Archives for January 2021

The Biden administration took actions on January 26, 2021 to suspend the Trump administration’s recent sanctions against the Houthi rebel group in Yemen. The Treasury Department will exempt from sanctions certain transactions by the Houthi.

The Trump Administration’s Sanctions

Former Secretary of State Mike Pompeo designated the Houthis as foreign terrorists on January 10, 2021, which led to the application of sanctions against the Houthi on January 19, 2021. This move followed sanctions against four Houthi leaders on December 10, 2020 and accompanied sanctions against three more individuals in the Houthi command.

Secretary Pompeo stated of the Houthi, otherwise known as Ansarallah, “The designations are intended to hold Ansarallah accountable for its terrorist acts, including cross-border attacks threatening civilian populations, infrastructure, and commercial shipping.”

The Houthi are backed by the Iranian government, while the Saudi Arabian government is an ally of the United States. The sanctions would have the impact of weakening Iran’s position in the conflict, as well as strengthening Saudi Arabia’s.

Countering Iran has been a cornerstone of President Trump’s foreign policy, as he removed the U.S. from the Iran nuclear pact, or the 2015 Joint Comprehensive Plan of Action (JCPOA), in 2018 and subsequently implemented a program of “maximum pressure” sanctions against Iran. The January sanctions against the Houthi, which took effect one day before President Biden’s inauguration, may have been a last-ditch attempt by the Trump administration to cement its legacy.

Humanitarian Crisis in Yemen

The United Nations and aid groups denounced the Trump administration’s sanctions against the Houthi, claiming they would exacerbate the humanitarian crisis in Yemen. The United Nations World Food Programme states, “Sixteen million Yemenis are food insecure, of which nearly 5 million are acutely food insecure.” The United Nations has warned that Yemen is on the brink of a large-scale famine.

The North of the country, where the Houthi are in control, is where the majority of the Yemeni population is located. Therefore, aid groups are required to cooperate with the Houthi government in order to disseminate resources. The Houthi have control of the constitutional capital Sana’a.

Secretary Pompeo stated, “The United States recognizes concerns that these designations will have an impact on the humanitarian situation in Yemen,” Pompeo said in his statement. “We are planning to put in place measures to reduce their impact on certain humanitarian activity and imports into Yemen.”

Some of these measures included allowances for aid groups, the United Nations, and the Red Cross to continue working in Yemen. Nevertheless, aid groups continued to denounce the sanctions as a major impediment to their work.

Analysis

Some of the Biden administration’s first foreign policy hurdles have been to undo or overcome the actions taken by the former administration in the final hours before President Biden’s inauguration. The Biden administration’s exemptions of the Houthi’s financial transactions from these sanctions aim to avert further starvation and suffering in Yemen, which stands on the verge of a famine. It also signals that the Biden administration’s policies regarding Iran will be nowhere near as strident as the Trump administration’s; President Biden may in fact rejoin the Iran nuclear pact, championed by President Obama.

On January 8, 2021, the U.S. Attorney for the Southern District of New York filed a Motion in Limine in the case of United States v. Geovanny Fuentes Ramires. Ordinarily, the filing of a routine pre-trial motion of this type would not attract much attention, but in this case, the government’s factual allegations are striking. Before delving into the more salacious aspects of the court filing, it is necessary to review the case against Ramires himself.

 

Ramires’ arrest was a significant event in and of itself. Based in Honduras, he is alleged to be one of the largest cocaine and arms dealers in Latin America. Ramires was arrested on a sealed Complaint from the Southern District of New York alleging significant narcotics trafficking and firearms offenses. At the time of his arrest, he was accompanied by a Honduran Congressman, and the Complaint alleges that Ramires operated with the support of Honduran government officials and the Honduran National Police. His trial in New York is currently scheduled to begin on January 27, 2021.

 

At his trial, Ramires appears to rely upon the testimony of Honduran officials to establish a defense of the government’s charges. The government’s Motion in Limine seeks to introduce evidence of Honduran government corruption among other evidence. One item of evidence concerns a witness identified as “CC-4”, according to the description provided by government, CC-4 is described as the president and brother of Tony Hernandez. This describes President Juan Orlando Hernandez. According to the government’s factual allegations in the Motion in Limine, Hernandez accepted a $1 million payment for the Sinaloa Cartel to protect cocaine shipments transiting through Honduras. The Honduran President also saw that Ramires received equipment, support and protection from the Honduran military.

 

In some of the more salacious allegations, Hernandez is reported to have said that he sought to move “massive quantities of cocaine to the United States” and “wanted to shove drugs right up the noses of the gringos.”  President Hernandez denies any involvement with Ramires, and he has not been indicted in the United States, at least in any publicly available documents.

 

If the government’s allegations are true, there can be little doubt that Honduras is truly a narco-state where narcotics traffickers are in complete control. The son of President Hernandez’s predecessor, Fabio Lobo is currently serving a 24-year prison sentence in the Unites States for conspiracy to import cocaine into the United States. According to the government, Fabio Lobo was a “fixer” who used his political and family connections to assist Devis Leonel Rivera Maradiaga, the former leader of the Cachiros Drug Organization. According to Maradiaga, who is currently serving a prison sentence in the United States, President Hernandez began cooperating with narcotics traffickers even before his presidential term began.

 

What is most surprising is that until recently, President Hernandez earned high praise from the highest levels of the U.S. government, including the President of the United States himself, Donald Trump, who said at a December 2019 meeting in Florida: “We’re delighted to have with us President Juan Orlando Hernandez. . .[turning toward Hernandez] And I have to tell you—thank you, sir—that President Hernandez is working with the U.S. very closely. You know what’s going on on our southern border. And we’re winning after years and years of losing. We’re stopping drugs at a level that has never happened.”

 

To be fair, Donald Trump is not the first American politician to praise Hernandez. In 2015, while serving as Vice-President, President Biden met with President Hernandez to review the ongoing cooperation between the United States and Honduras. It now appears that at least two administrations were duped by President Hernandez.

 

President Hernandez continues to serve as President of what the U.S. government says is a corrupt narco-state, while being a close U.S. ally. The level of corruption and what appears to be the complicity of the U.S. government undermines trust in the ongoing anti-narcotics efforts of both the U.S. and Honduras. Change is needed.

On December 2, 2020, the UN Commission on Narcotic Drugs voted with 27 States in favor, 25 against, and one abstaining, to remove cannabis from its list of Schedule IV Narcotic drugs.  Cannabis has been listed as a Schedule IV drug for sixty years under the Single Convention on Narcotic Drugs of 1961.

Schedule IV Narcotics

The UN CND recommends the strictest controls for Schedule I and Schedule IV narcotics. Schedule I includes drugs that are addictive and pose a high risk of abuse, while Schedule IV includes “certain drugs listed in Schedule I that are highly addictive and highly liable to abuse and rarely used in medical practice.” Cannabis and heroin were listed together as Schedule IV narcotics prior to the vote on December 2, 2020.

The recommended control measures and prohibition of cannabis were never binding for States party to the Convention. However, the United Nations’ official stance against the use of cannabis for medical research has potentially influenced national laws and research into the drug. Therefore, the removal of cannabis from Schedule IV means that states may initiate or expand research into the effects and medical uses of cannabis in the future. Ecuador, which voted in favor of removing cannabis from Schedule IV, stated that, moving forward, cannabis production, sale and use, should have “a regulatory framework that guarantees good practices, quality, innovation and research development.”

Michael Krawitz, executive director for the US advocacy group Veterans for Medical Cannabis Access, suggested that the move could open opportunities for cannabis use as a pain reliever and ultimately reduce the use of opiates for the same purposes.

The UN’s stance on cannabis has also been influential in shaping nations’ laws on the criminality of cannabis possession and use. Now that the UN no longer classifies cannabis as a Schedule IV narcotic, many states may move forward with the decriminalization of marijuana, which would significantly decrease prosecutions for individuals’ possession or use of marijuana.

States across the globe have already begun decriminalizing the possession of cannabis derivatives, a trend that will likely continue following the CND’s decision. Mexico is the latest state to loosen its legal controls on cannabis. The Mexican Senate approved a landmark bill in November 2020 that decriminalizes the possession of up to 28 grams of marijuana. Meanwhile, Canada legalized the use of marijuana for recreational purposes in October 2018. There are many states around the world, a number of whom voted on this proposal in the CND, where cannabis use is already decriminalized if not fully legalized.

Still, the CND’s decision may not push all countries to loosen its controls on the drug. The Netherlands, which decriminalized marijuana in 1976, may soon see tighter controls in its capital Amsterdam. The city is currently considering a law that would limit recreational use to its own citizens, in response to the impact of drug tourism on organized crime in the country.

The Process of Removal

The process of removing cannabis from the list of Schedule 4 drugs began in January 2019, when the World Health Organization released six recommendations concerning the classification of cannabis in international drug control treaties. The WHO’s Expert Committee on Drug Dependence was responsible for the investigation behind these proposals.

The UN CND first viewed the proposals in May 2019. Since then, member States have been reviewing their positions in preparation for the decision made last month. The UN CND rejected five of the six recommendations.

The WHO’s failed proposals included inter alia recommendations to move the psychoactive components of cannabis, including dronabinol and its stereoisomers (delta-9-tetrahydrocannabinol) and tetrahydrocannabinol (six isomers of delta-9-tetrahydrocannabinol), to Schedule I of the 1961 Convention, which already includes cannabis and cannabis resin; to delete extracts and tinctures of cannabis from Schedule I of the 1961 Convention; and to add a footnote to Schedule I of the 1961 Convention to read “Preparations containing predominantly cannabidiol and not more than 0.2 per cent of delta-9-tetrahydrocannabinol are not under international control”; and to add certain preparations of dronabinol to Schedule III of the 1961 Convention.

Looking Forward

The WHO recommended that cannabis remain listed as a Schedule I narcotic. The CND did not remove this classification in its recent vote, nor did it vote to reconfirm the classification, which would be unnecessary for it to remain classified thus. Proponents of looser regulations may continue to push for cannabis’ removal from this schedule in the future.

However, the recent decision of the CND may encourage many states to create or expand research programs into the effects and uses of cannabis in the future. Advocates for legalization of the drug also hail this decision as a step in the right direction.

On January 1, 2020, the Senate voted to override President Trump’s veto of the annual military policy bill (the National Defense Authorization Act – NDAA).  Division E of the Act is the Anti-Money Laundering Act of 2020 (the AMLA or Act), which contains a number of international enforcement elements.  This post discusses selected international enforcement aspects.

Increased Authority to Issue and Enforce Correspondent Account Subpoenas

The Act increases the ability of the Department of Justice (DOJ) and Treasury’s authority to issue and enforce correspondent account subpoenas under 31 U.S.C. § 5318(k).  Before, the DOJ and Treasury could issue such subpoenas to any foreign bank with a correspondent account in the United States and could “request records related to such correspondent account.”[1]  The Act widens this authority to permit DOJ to request “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States,” if the records are the subject of an investigation concerned a violation of U.S. criminal laws, a violation of the Bank Secrecy Act (BSA), a civil forfeiture action, or a Section 5318A investigation.[2]

If a foreign financial institution does not comply, the Act authorizes the Attorney General to seek contempt sanctions from a court, and the Attorney General or Secretary of the Treasury may direct covered U.S. financial institutions to end their correspondent relationships with the non-compliant foreign financial and impose penalties on those institutions that fail to do so.[3]

Pilot Project to Share SAR Information Internationally

FinCEN has promulgated guidance allowing sharing of Suspicious Activity Reports (SARs) information internationally with foreign parent organizations or U.S. affiliates in other countries.[4]   The Act requires the Treasury within one year after the enactment of legislation to issue rules that establish a pilot program for financial institutions to share information related to SARS “with the institution’s foreign branches, subsidiaries, and affiliates for the purpose of combating illicit finance risks.”[5]

The Act allows the Secretary of the Treasury to prohibit sharing with certain jurisdictions, such as state sponsors of terrorism, states subject to sanctions imposed by the U.S. government, or those the Secretary has determined cannot reasonably protect the security and confidentiality of such  information.[6]

Provisions on Cryptocurrency and Antiquities Dealers, Advisors, and Consultants

The Act adds to the definition of financial institution and money transmitting businesses under the BSA, which are subject to anti-money laundering due diligence, businesses engaged in the exchange of transmission of “value that substitutes for currency.” [7]   The Act also expands the definition of financial institution to include antiquities dealers, advisors, and consultants.

The Act requires Treasury to prepare a study within one year that evaluates money laundering and terrorist financing through the art trade, including the markets that should be subject to regulation, the extent to which the regulations, if any, should target high-value trade in works of art, and “the need, if any, to identify persons who are dealers, advisors, consultants, or any other persons who engage as a business in the trade in works of art.”[8]

Foreign Financial Intelligence Unit Liaisons (FFIUL)

• 6108 of the Act requires the appointment of not more than six FFIULs, co-located in a U.S. embassy, U.S., or a foreign government facility, among other things, to facilitate capacity building and outreach on AML/CFT regulatory and analytical frameworks; and coordinate with representatives of the DOJ at US Embassies.[9]

International Coordination

• 6112 of the Act requires the Secretary of the Treasury to work with foreign counterparts, including bilateral contacts, the Financial Action Task Force, the IMF, the World Bank, the Egmont Group of FIUs, the OECD, the Basel Committee on Banking Supervision, and the UN, to promote stronger AML frameworks.

Financial Services De-Risking

• 6213 of the Act states Congress supports effective measures to stop the flow of illicit funds and promote AML/CFT and sanctions goals, and AML/CFT and sanctions policies that do not unduly hinder or delay the efforts of legitimate humanitarian organizations to fulfill the needs of humanitarian crisis, prevent or alleviate human suffering. § 6213(c) requires the GAO to conduct a de-risking analysis and evaluate the effect of AML/CFT on individuals and entities, including charities, embassy accounts, money-service businesses, and correspondent banks that have been subject to categorical de-risking by financial institutions operating in the U.S. and or otherwise have difficulty accessing or maintaining certain financial services in the U.S. and evaluate the consequences of financial institutions de-risking entire categories of relations with individuals and entities mentioned above in this section. The GAO should propose changes to those requirements resulting in de-risking.

GAO Study on Fighting Illicit Networks and Detecting Human Trafficking and Drug Trafficking

• 6504(c) of the Act requires the GAO to study how a range of payment systems and methods, including virtual currencies in online marketplaces, are employed to facilitate human trafficking and drug trafficking.

Treasury Study and Report on Trade-Based Money Laundering

• 6505 of the Act requires Treasury to conduct a conduct a study, in consultation with appropriate private sector stakeholders, academic and other international trade experts, and Federal agencies, on trade-based money laundering and proposed strategies to combat trade-based money laundering.

Treasury Study and Strategy on Money Laundering by the PRC

• 6506 of the Act requires the Treasury to conduct a study, relying substantially on information obtained through the trade-based money laundering analyses of the GAO, on, inter alia, the extent and effect of illicit finance risk relating to the PRC Government and Chinese firms, and a strategy to counter Chinese money laundering.

Treasury Study on Efforts of Authoritarian Regimes to Exploit the Financial System of the U.S.

• 6507 of the Act requires the Treasury Secretary and Attorney General, in consultation with the heads of other relevant national security, intelligence, and law enforcement agencies, to conduct a study for Congress on how authoritarian regimes in foreign countries and their proxies use the financial system of the U.S., inter alia, to: “(1) conduct political influence operations; (2) sustain kleptocratic methods of maintaining power; (3) export corruption; (4) fund nongovernmental organizations, media organizations, or academic initiatives in the United States to advance the interests of these regimes; and (5) otherwise undermine democratic governance in the United States and the partners and allies of the United States.” The study should make recommendations for legislative or regulatory action, or regulatory action, or steps to be taken by U.S. financial institutions that would address exploitation of the financial system of the U.S. by foreign authoritarian regimes.

Kleptocracy Assets Recovery Reward Act

• § 9701-03 of Division H of the NDAA establishes the Kleptocracy Asset Recovery Rewards Program in the Department of the Treasury, and authorizes appropriations for the purpose of paying rewards under the program.

Combating Russian Money Laundering

• § 9711-9714 of Division H of the NDAA requires a report if the Secretary of the Treasury determines that certain institutions, transactions, or money laundering activities require domestic financial institutions or domestic financial agencies to take special measures described in 31 U.S.C. § 5318A(b), and permit implementation of such special measures.  These provisions would enable Treasury to impose special measures on transactions emanating from Russia, certain Russian financial institutions, and/or certain categories of transactions.

The current issue of the IELR will have a more comprehensive discussion of the AMLA and related provisions.

[1]    31 U.S.C. § 5318(k)(3)(A).

[2]    AMLA, § 6308 (31 U.S.C. § 5318(k)(3)(A)(i) as revised).

[3]    AMLA, § 6308 (31 U.S.C. §5318(k)(D), as revised).

[4]    FinCEN, FIN-2010-G006, Sharing Suspicious Activity Reports by Depository Institutions with Certain U.S. Affiliates (Nov. 23, 2010), https://www.fincen.gov/sites/default/files/shared/fin-2010-g006.pdf.  FinCEN, Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices and Controlling Companies, January 20, 2006 https://www.fincen.gov/resources/statutes-regulations/guidance/interagency-guidance-sharing-suspicious-activity-reports.

[5]    AMLA, § 6212 (adding 31 U.S.C. § 5318(g)(8)(B)(i).

[6]    AMLA, §6212 (adding 31 U.S.C. § 5318(g)(8)(C).

[7]    AMLA, § 6102(d).

[8]    AMLA, § 6111(e).

[9]    AMLA, § 6108, adding  31 U.S.C. § 310(h).