IELR Blog

Official Blog of the International Enforcement Law Reporter

G7 Vows to Act on Corruption, Ransomware, Forced Labor, and Illicit Financing

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On June 13, 2021, at the conclusion of its meeting the G7 announced in its Communiqué joint action against several criminal and international enforcement matters.

Corruption, Illicit Financial Activities, and Misuse of Shell Companies

The Communique recognizes “the need action on corruption, including by sharing information on illicit financial activities, tacking the misuse of shell companies, and curtailing the ability of illicit actors to hide wealth.”

As part of its G7 Fact Sheet the Biden Administration underscored how on June 3, 2021 President Biden declared efforts to combat corruption a “core U.S. National interest,” and issued a National Security Student Memorandum on the Fight Against Corruption to elevate this effort.

The G7 Fact Sheet states the U.S. will tackle “the misuse of shell companies, limiting the ability of bad actors to launder dirty money in real estate purchases, improving corruption-related information sharing, and reforming foreign assistance to focus on anticorruption as a cross-cutting priority.” [1] The Fact Sheet says the U.S. welcomes the G7 commitment to take collection action in combatting corruption.

Ransomware

The Communique states the G7 reiterates its interest in stable and predictable relations with Russia.  In that regard, it states that it will “identify, disrupt, and hold to account those within its borders who conduct ransomware attacks, abuse virtual currency to launder ransoms, and other cybercrimes.”[2]   The Biden Administration’s G7 Fact Sheet states the transnational criminal enterprises committing ransomware leverage infrastructure, virtual currency, and money laundering networks.  They target victims worldwide, often operating “from geographic locations that offer a permissive environment for carrying out such malicious cyber activities.”

The G7 Fact Sheet states the international community –both governments and private sector actors – must cooperate to ensure that “malicious cyber activity is investigated and prosecuted, that we bolster our collective cyber defenses, and that States address the criminal activity taking place within their borders.”

Removing Forced Labor from Global Supply Chains

The Communique expresses concern about the use of all forms of forced labor in global supply chains, including state-sponsored forced labor of vulnerable groups and minorities and supply chains of the agricultural, solar, and garment sectors – the main supply chains of concern in Xinjiang, China.

G7 leaders agreed to uphold human rights and international labor standards, and protecting individuals from forced labor.  Hence, they commit to ensuring all global supply chains are free from the use of forced labor.  They propose to identify areas for increased cooperation and collective efforts to eradicate the use of all forms of forced labor in global supply chains, in accordance with international and national law.[3]

International Human Rights Concerns

The Communique mentions concerns about international human rights violations in Russia, Belarus, Myanmar, and Ethiopia’s Tigray region.

Analysis

The commitments in the G7 Communique to stronger international enforcement initiative are importance for setting and reinforcing international enforcement cooperation.  The nature of the G7 meetings and communiques limit the commitments to broad policy statements.  The follow up comes from action by international organizations, such as the EU, the OECD, the World Bank Group, and national governments. The limits of the Communiques are inability to implement the broad policy decisions, including when governments and policies change from time to time.

 

[1]   G7 Communique, paragr. 48.

[2]   G7 Communique, paragr. 51.

[3]    G7 Communique, paragr. 29.

Cryptocurrency Creates Potential Opportunity for both Ransomware Attacks and Agency Seizures

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By Austin Max Scherer[1]

On June 7, the Justice Department seized much of the ransom that a major U.S. pipeline operator had paid last month to a Russian hacking collective.[2]  This resulted from investigators tracing more than 75 Bitcoins worth as the money moved through a “maze” of at least 23 different electronic accounts belonging to DarkSide, the hacking group.[3]  DarkSide operated by providing ransomware to affiliates.  Iin exchange, DarkSide reaped a cut of the affiliates’ profits.[4]  DarkSide began as an affiliate for another Russian hacking group called REvil, the group that recently used ransomware to try to extort money from JBS, one of the world’s largest meat processors.[5]  Law enforcers viewed this seizure as a warning to cybercriminals that the United States would go after the hackers’ profits, which typically derive from cryptocurrencies.[6]  In addition, law enforcement now hope this recent action will encourage victims of ransomware attacks to notify the authorities to help recover ransoms.[7]  The Federal Bureau of Investigation (FBI) actively discourages ransom payments; however, ransom payments are still legal and they are even tax deductible![8]

Seizure of Ransom Payments

Law enforcement  has found a breakthrough due to the fact that, “bitcoin transactions are available on a publicly distributed ledger, in many cases law enforcement can trace bitcoin payments and track stolen funds.”[9]  Furthermore, the FBI was able to obtain the private key for the hackers’ accounts, the key essentially serves as a password which enabled the FBI to move bitcoin out of the wallet.[10]  The seizure itself yielded $2.3 million worth of bitcoin.[11]  The Special Prosecutions Section and Asset Forfeiture Unit of the U.S. Attorney’s Office for the Northern District of California  is handling the seizure, with significant assistance from the Department of Justice Criminal Division’s Money Laundering and Asset Recovery Section and Computer Crime and Intellectual Property Section.[12]  The task force stated they would prioritize the disruption, investigation, and prosecution of ransomware and digital extortion.[13]  Conversely, the ransomware attacks are generally unsophisticated.[14]  “Hackers often use phishing and send employees emails containing suspicious links or attachments.”[15]

This coincided with President Biden’s first foreign trip, as he is expected to discuss the issue with Russian President Vladimir Putin.[16]  Senior Biden administration officials deemed ransomware, as a national threat.  Secretary of State, Antony Blinken stated the following, “states cannot be in the business of harboring those who are engaged in these kinds of attacks.”[17]  FBI Director Christopher Wray further emphasized this complaint by stating, “if the Russian government wants to show that it’s serious about the issue, there’s a lot of room for them to demonstrate some real progress that we’re not seeing.”[18] Antony Blinken and Christopher Wray’s concerns are supported by the fact that, according to Chainalysis, a firm that tracks cryptocurrency payments, victims paid at least $412 million in cyber ransom attacks last year.[19]

Biden Administration Responses

In response to the series of ransomware incidents, the Biden administration, “announced that it would require pipeline companies to report significant cyberattacks that the government would create 24 hour emergency centers to handle serious hackings.”[20]  However, even these efforts may not be enough as the FBI emphasized that all government agencies, private sectors, and, “even the average American.”[21]  It would be quite the optimistic approach for the government to believe that all players in the cryptocurrency world will partake in dismantling these ransomware attacks, so a wait and see approach is best suited for now.

Several government officials have called for action against the ransomware attackers and the foreign states that harbor these attackers.  Senator Mark Warner stated the following, “We must make clear to Russia-and any other adversaries-that they will face consequences for this and any other malicious cyberactivity.”[22]  In addition, Microsoft reported, “the goal of the hackers was not to go after the aid agency itself, instead, its motivation appeared to be to use emails purporting to be from the U.S. government to get inside groups that have revealed Russian disinformation campaigns, anti-corruption groups and those who have protested the poisoning, conviction and jailing of Russia’s best-known opposition leader, Alexie A. Navalny.”[23]  Furthermore,  government officials have taken the position that the U.S. response to SolarWinds, a software supply, should have been harsher.   The question then becomes, how does the U.S. implement a harsher response, and with sanctions applied to Russia already substantial, how much of a role can sanction play?  One answer is that to be effective, sanctions must be multilateral and well-coordinated.  The last four years the U.S. has not coordinated its sanctions. President Biden’s trip to Europe should provide some insight to these inquiries.  Another response to ransomware attacks and cybercrimes has been prosecution of the perpetrators.

The current issue of the IELR will have a more comprehensive discussion of the ransomware attacks, the seizure, and implications.

 

 

[1] Rising third year law student, Washington College of Law, American University; M.S., Finance, American Univ; B.A., George Washington Univ.

[2] Katie Benner and Nicole Perlroth, Seizing Money, U.S. Retaliates For Cybercrime, N.Y. Times, Jun. 8, 2021, at A1.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Sadie Gurman, David Uberti, and Dustin Volz, Pipeline Ransom Money Seized By U.S., Wall St. J., Jun. 6, 2021, at A1.

[10] Ellen Nakashima, Authorities recover about $2 million paid in ransom to pipeline hackers, Wash. Post, Jun. 8, 2021, at A18.

[11] Id.

[12] For Immediate Release: Department of Justice Seizes $2.3 Million in Cryptocurrency Paid to the Ransomware Extortionists Darkside, Dept. of Justice, Jun. 7, 2021, https://www.justice.gov/opa/pr/department-justice-seizes-23-million-cryptocurrency-paid-ransomware-extortionists-darkside (last visited Jun. 10, 2021).

[13] Id.

[14] Rachel Lerman, Meat supplier JBS paid $11 million in ransom after hackers targeted plants, Wash. Post, Jun. 10, 2021, at A22.

[15] Id.

[16] Nakashima, supra note 10.

[17] Benner and Perlroth, supra note 2.

[18] Id.

[19] Nakashima, supra note 10.

[20] Benner and Perlroth, supra note 2.

[21] Id.

[22] Nicole Perlroth and David E. Sanger, Calls for Action Against Russia for Cyberattack, N.Y. Times, May. 29, 2021, at A1.

[23] Id.

ANOM: A global covert investigation conducted through an encrypted app trap

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Sara Kaufman[1]

On June 8, 2021, the Federal Bureau of Investigation (FBI) and Australia’s Federal Police (AFP) publicly announced the arrests of more than 800 individuals utilizing a FBI-controlled encrypted platform to facilitate their criminal activities.[2]  ANOM, a highly popular encryption platform amongst criminals worldwide, was secretly used as a surveillance tool in an investigation known as “Operation Trojan Shield” in order to discreetly observe and curtail the criminal activities in Australia and beyond.[3]

As technology has grown over the years, criminals have utilized hardened encrypted devices as a tool to obstruct any federal investigations against them.  Encrypted devices are tools that both send and retrieve encrypted electronic communications, allowing criminals to openly discuss their activities with confidence that their contents will remain secure.[4]  For many years, contents in encrypted devices did in fact remain secure; communication was often limited to a self-selected group of individuals using the same encryption platform.  Law enforcement agents therefore would be unable to collect evidence regarding the conversations that criminals were having on their encrypted devices.

Companies that provided these encrypted devices were generally aware that their target audience is utilizing their products for criminal activity; in March 2018, the CEO of Phantom Secure, Vincent Ramos, and four other principals of the company were indicted for aiding and abetting the distribution of cocaine.  During his plea hearing in October 2018, Ramos admitted that Phantom Secure laundered drug trafficking proceeds, as well as aided and abetted the importation, exportation, and distribution of illegal substances across international borders.[5]  Phantom Secure was not the first, nor would it be the last, of the many encrypted devices to appear on the black market to plan and executive criminal activity.

 

Operation Trojan Shield

While the FBI previously dismantled hardened encryption companies utilized amongst criminals to communicate – such as Phantom Secure – new platforms would emerge as substitutes for their predecessors.  In “Operation Trojan Shield,” various European law enforcement agencies, the FBI and AFP collaborated with a confidential source to construct, market, and upkeep the next encrypted communication platform to arise on the black market.[6]

The devices themselves were encrypted but the FBI, AFP, and the confidential source collaborated to build a master key into the existing encryption system.[7]  This allowed law enforcement to decrypt and store messages as they were transmitted.  For devices located outside of the U.S., an encrypted “BCC” of each sent message is routed to an “iBot” server located outside of the U.S.  The message is then decrypted with the master key and then immediately re-encrypted with the FBI encryption code.  The newly encrypted message is then passed to a second FBI-owned iBot server to be decrypted for viewing within the U.S.[8]  Given the high level of technical care and expertise needed to set up this master key process, the collaboration between the FBI, AFP, confidant, and other European law enforcement agencies was needed to ensure that ANOM could be launched effectively and discreetly within criminal networks.

ANOM could only be used on devices sold within the black market and were stripped of the ability to make calls or send emails.  In order to get a hold of an ANOM-encrypted device, each criminal had to be green-lighted by another criminal who was already using the software.[9]  Each ANOM user was identified by a Jabber Identification – similar to a smartphone PIN – was chosen by each user to identify themselves as opposed to using their real names.[10]  The high level of exclusivity and security behind ANOM increased the confidence that users that their communications would remain private.

Results of the investigation

As high-profile criminals such as Hakan Ayik praised ANOM and encouraged its use to their associates, thousands of criminals worldwide began utilizing ANOM devices to openly discuss their activities.  Between October 2019 and May 2021, a total of 11,800 ANOM devices were registered in over 90 countries, with the highest number of users based in Germany, the Netherlands, Spain, Australia, and Serbia.[11]

Considering the strong reputation that ANOM had amongst criminals, plans to import, export, or distribute drugs were sent between encrypted devices without the use of coded language.[12]  Text messages shown in a search warrant affidavit filed May 18, 2021, display open conversation regarding cocaine hidden in French diplomatic packages or underneath layers of bananas in shipping trucks.[13]

Through the surveillance of ANOM users, law enforcement agencies from the U.S., Australia, and the European Union were able to seize numerous tons of drugs and millions of dollars in cash.[14]  Australian police officers also claim to have acted on 20 “threats to kill,” thereby protecting many innocent civilians who may have otherwise lost their lives.[15]

Although the criminals that utilized ANOM encrypted devices strongly advocated for their high level of security, this could not be further from the truth.  The review of messages sent on ANOM devices has opened numerous high-level public corruption cases internationally, as well as investigations of distributors for money laundering, international drug trafficking, and obstruction of justice.[16]

While new encrypted platforms used to emerge once their predecessors were taken down by the FBI, Operation Trojan Shield severely damages the trusted foundation of encrypted devices for communications amongst criminal actors.  Though the use of new technology such as encryption devices has allowed discreet criminal activity to go undetected, law enforcement across the globe has proven that, with joint efforts, they can utilize the same tools for their benefit.

The current issue of the IELR will have a more comprehensive discussion of the law enforcement initiative and its implications.

[1] Legal assistant, Berliner Corcoran & Rowe LLP; B.A., Amherst College.

[2] Rachel Pannett and Michael Birnbaum, FBI-controlled ANOM app ensnares scores of alleged criminals in global police sting, The Washington Post, June 7, 2021, https://www.washingtonpost.com/world/2021/06/08/fbi-app-arrests-australia-crime.

[3] Cheviron Aff. ¶ 14, May 18, 2021. https://www.justice.gov/usao-sdca/press-release/file/1402426/download.

[4] Cheviron Aff. ¶ 9, supra.

[5] Cheviron Aff. ¶ 10, supra.

[6] Ben Westcott, For years, the underworld thought its phones were safe. They fell for an encrypted app trap, CNN, June 9, 2021, https://www.cnn.com/2021/06/08/australia/afp-fbi-ANOM-app-operation-ironside/index.html.

[7] Cheviron Aff. ¶ 13, supra.

[8] Id.

[9] Ben Westcott, supra.

[10] Cheviron Aff. ¶ 14, supra.

[11] Cheviron Aff. ¶ 19, supra.

[12] Cheviron Aff. ¶ 29, supra.

[13] Cheviron Aff. ¶ 14, supra.

[14] Ben Westcott, supra.

[15] ANOM: Hundreds arrested in massive global crime sting using messaging app, BBC.COM, June 8, 2021, https://www.bbc.com/news/world-57394831.

[16] Cheviron Aff. ¶ 20, supra.

Biden Administration Declares Anti-Corruption a “Core U.S. National Security Interest”

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On June 3, 2021, the Biden Administration released a memorandum establishing combating corruption as a core United States national security interest, thereby stimulating several international anti-corruption initiatives.

The memorandum promises to make the fight against corruption a core U.S. national security interest.  The Biden Administration promises to “lead efforts to promote good governance; bring transparency to the United States and global financial systems; prevent and combat corruption at home and abroad; and make it increasingly difficult for corrupt actors to shield their activities.”

The memorandum directs Assistant to the President and National Security Advisor, in coordination with the Assistant to the President for Economic Policy and the Assistant to the President for Domestic Policy, to conduct an interagency review process.  The interagency review process will include the Office of the Vice President and fourteen agencies.

Strategy Components

The above-mentioned persons and agencies are directed to develop a Presidential strategy.  The strategy is to modernize, increase, coordinate, resource and improve the ability of key agencies to promote good governance and prevent and combat corruption, including, as required, by proposing relevant legislation to the Congress.

Another component of the strategy is to combat all forms of illicit finance in the U.S. and international financial systems, including by robustly implementing Federal law requiring U.S. companies to report their beneficial owner or owners to the Treasury Department; reducing offshore financial secrecy; improving information sharing; and, as necessary, identifying the need for new reforms.

The strategy will hold accountable corrupt individuals, transnational criminal organizations, and their facilitators, including by identifying, freezing, and recovering stolen assets through increased information sharing and intelligence collection and analysis, criminal or civil enforcement actions, advisories, and sanctions or other authorities , and where possible and appropriate, returning recovered assets for the benefit of the citizens harmed by corruption.

According to the memorandum, the strategy participants must strengthen the capacity of domestic and international institutions and multilateral bodies focused on establishing global anti-corruption norms, asset recovery, promoting financial transparency, encouraging open government, strengthening financial institutions’ frameworks to prevent corruption in development finance projects, and combating money laundering, illicit finance, and bribery, including, where possible, addressing the demand side of bribery.

A goal is to support and enhance the capacity of civil society, media, and other oversight and accountability actors to conduct research and analysis on corruption trends, advocate for preventative measures, investigate and uncover corruption, hold leaders accountable, and inform and support government accountability and reform efforts, and provide those actors a safe and open operating environment domestically and internationally.

The strategy will work with international partners to counteract strategic corruption by foreign leaders, foreign state-owned or affiliated enterprises, transnational criminal organizations, and other foreign actors and their domestic collaborators, including, by closing loopholes exploited by these actors to interfere with democratic processes in the U.S. and abroad.

Increasing efforts to quickly and flexibly enhance U.S. and partner resources of investigative, financial, technical, political, and other assistance to foreign countries that indicate the will to reduce corruption are part of the strategy.

The strategy will help and enhance the capacity of domestic, including State and local, authorities and institutions, as well as partner and other foreign governments at all levels, to implement transparency, oversight, and accountability measures, which will counter corruption and provide their citizens with accessible and usable information concerning government programs, policies, and spending.

A goal is to promote partnerships with the private sector and civil society to advocate for anti-corruption measures and act to prevent corruption.

A final priority is to develop best practices and enforcement mechanisms such that foreign assistance and security cooperation activities have built-in corruption prevention measures.

Analysis

The Memorandum states that, by effectively preventing and combating corruption and showing the advantages of transparent and accountable governance, the U.S. government can obtain a critical advantage for the U.S. and other democracies.   In his recent speeches President Biden has set as a challenge for the U.S. its battle with autocracies and dictatorships.

The Memorandum mentions the possibility of the inter-agency group supporting new legislation when appropriate.  In this regard, on February 4, 2021, U.S. Senators Ben Cardin (D-MD) and Roger Wicker (R-MS) introduced legislation to create a global anti-corruption action fund at the State Department to strengthen  the rule of law abroad and counter transnational corruption. The Countering Russian and Other Overseas Kleptocracy (CROOK) Act (S.158) – would fund programs by utilizing large  fines imposed under the Foreign Corrupt Practices Act against U.S. and foreign companies caught bribing foreign officials. In January 2021, Representatives Bill Keating (D-MA) and Brian Fitzpatrick (R-PA) introduced a companion draft (H.R.402) in the House.

The Memorandum prioritizes combating all forms of illicit finance in the U.S. and implementing Federal law requiring U.S. companies to report their beneficial ownership to the Treasury Department.  In this regard, the Corporate Transparency Act, enacted as part of the Anti-Money Laundering Act of 2020, requires the reporting of beneficial ownership information to Treasury’s FinCEN.  Although FinCEN has issued an Advance Notice of Proposed Rule-making, it may be 2023-24 before the regulations become effective.

The current issue of the IELR will have a more comprehensive discussion of the implications of the Memorandum.

Americas Ministers of Justice and Attorneys General Approve Recommendations to Use Information Technologies for International Cooperation

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On May 18 and 19, 2021, the Ministers of Justice and Attorneys General of the member states of the Organization of American States (OAS) participated in the Eleventh Meeting of Ministers of Justice, or Other Ministers, or Attorneys General of the Americas (REMJA – XI).  Ecuador hosted the virtual meeting.  The Ecuadorian Attorney General, Dr. Diana Salazar, hosted the meeting.

During the meeting, the States made detailed recommendations on the use of information technologies (ICTs) in their justice systems and in international cooperation.  The Justice Studies Center of the Americas (JSCA), the REMJA Working Group on Legal Cooperation in Criminal Matters, and the REMJA Working Group on Legal Cooperation against Cybercrime made presentations on the present state of affairs in the region and on their role in supporting the modernization of justice systems by, among other things, training prosecutors and judges, promoting international legal cooperation, and developing such instruments as proposed treaties, model laws, and guides to best practices.

International legal Cooperation in the Americas

REMJA XI recommends that the OAS members who have not yet become a member of the five regional cooperation agreements, do so promptly.

The meeting recommends that the Working Group on Legal Cooperation on Criminal Matters updates and considers the proposed “Protocol to the Inter-American Convention on Mutual Assistance in Criminal Matters regarding Joint Investigation Teams” (PENAL/doc.42/18). The Working Group should evaluate incorporating in it the use of ICTs, as appropriate, and that the OAS members study the possibility of initiating formalities with the appropriate bodies so that in the future, consideration may be given to its adoption.

Legal Cooperation Against Cybercrime

REMJA-XI urges the Chair of the REMJA Working Group to convene its Tenth Meeting in the first quarter of 2022, to develop effective and inclusive strategic approaches to fight cybercrime, bearing in mind the relevance of the Budapest Convention on Cybercrime in this regard; to develop national and regional cybercrime coordination, cooperation and training strategies and policies in OAS countries; and, to develop key principles for mainstreaming gender and inclusion into cybercrime capacity building efforts.

The meeting recommends that the OAS members that have not yet done so, consider evaluating to accede to the Council of Europe’s Convention on Cybercrime, and adopt the legal and other measures required for its implementation.

The meeting recommends fortifying, through the REMJA Working Group, four aspects of international cooperation:  (i) capacity building, (ii) cybercrime evidence gathering, (iii) legal cooperation in cybercrime, and (iv) legislative developments.

Justice Studies Center of the Americas (JSCA)

REMJA-Xi congratulates the JSCA on the work since REMJA X in evaluating criminal justice reform processes; providing technical support for the implementation of reformed criminal justice systems in Mexico, Guatemala, El Salvador, Costa Rica, Panama, Colombia, Ecuador, Peru, Brazil, Paraguay, Uruguay, Chile, and Argentina, promoting new models for the management of prosecutors’ offices with the development of capacities for criminal analysis and strategic criminal prosecution; identifying and disseminating best practices in the investigation of complex crimes; fostering the improvement of criminal defense standards; promoting pre-trial services; and developing skills for criminal litigation, for the conduct of hearings, and for appraising evidence, together with court and case management models.

The meeting    congratulates the JSCA and the U.S. Government on the agreement through the Bureau of International narcotics and Law Enforcement Affairs (INL) of the U.S. State Department to collaborate on the project Technical Support for the Implementation of the New Adversarial Criminal Justice System in Argentina’s Federal Justice System through the program Training Program on Criminal Investigation and Litigation in an Accusatory System for Justice Officials.  Project implementation started in 2018 and has been extended to 2023.

Strengthening the REMJA

The meeting discusses steps to strengthen the REMJA, including that the annual OAS Regular Fund consider providing the necessary resources for holding the meetings that are to be organized within the REMJA process.

The meeting also recommends the establishment of a voluntary contribution fund into which states can make voluntary contributions to finance programs and projects in the areas covered by the REMJA process.

The current issue of the IELR (June) will discuss in more detail the decisions and implications of the decisions of REMJA-XI.

U.S. Tax Court Rules Against Constitutional Challenge to Passport Denial for Delinquent Taxpayers

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On March 30, 2021, the United States Tax Court granted summary judgment to the Internal Revenue Service with respect to a taxpayer debtor/physician’s constitutional challenge to the IRS’ certification of the delinquent tax debt under IRC, § 7345.  The taxpayer’s outstanding tax balance was close to $500,000 and so the IRS turned to a new tool in its collection toolbox – § 7345.1.  Under this section, the IRS certified that Robert Rowen, the taxpayer, had a seriously delinquent tax debt to the Treasury secretary, who then transmitted the certification to the State Department.  The IRS notified Rowen of the certification.  At the time of the suit and the Tax Court’s opinion, the State Department had not taken any action concerning Rowen’s passport.  Nevertheless, Rowen petitioned the Tax Court, challenging the IRS’s certification as unconstitutional and a violation of the Universal Declaration of Human Rights (UDHR).

Opinion

The court held that the certification does not deny his right to travel or his rights under the UDHR.

Judge Emin Toro authored the court’s opinion and observed that this is the first time the court has considered the merits of certification under 26 U.S. § 7345.  Judge Toro observed that §7345 was enacted as part of the Fixing America’s Surface Transportation Act (FAST Act).   The opinion explains that the IRS certifies the delinquent tax debt and sends it to the Treasury secretary, who must then transmit the certification to the State Department.  The State Department can revoke, deny, or limit a tax delinquent individual’s passport.

The opinion rejected Rowen’s argument that § 7345 violates his due process rights under the Fifth Amendment since it forbids international travel.  Rowen claimed such travel is a fundamental right.  The opinion ruled that claim was meritless since the plain text of the statute does not prohibit international travel.  The opinion observed that § 7345 only certifies that an individual has a serious tax delinquency.  Thereafter, the State Department makes any passport-related decisions.    The opinion also rejected Rowen’s claim that §7345 violates his right to travel under the UDHR, since the statute does not impose a limit on the right to travel.

According to the opinion, Rowen’s procedural due process and statute of limitations claims do not have merit because he did not make such arguments in his summary judgment motion.  In addition, Rowen to not introduce evidence establishing that the period of limitations has elapsed.  The opinion found that the IRS’s certification was not erroneous and that the IRS met the requirements for certification under § 7345.  Hence, the IRS was entitled to summary judgment.

Judge Paige Marvel wrote a concurring opinion, stating that the court’s opinion does not foreclose a constitutional challenge in a future case with appropriate facts and squarely presented arguments to the entire tax collection mechanism created by FAST.

Analysis

Clearly the taxpayer’s petition and request for summary judgment were flawed in their efforts to challenge one of the new mechanisms to collect taxes.

The current issue of the IELR will discuss the implications of the case in more detail.

FinCEN Starts Beneficial Ownership Regulation Comment Period and Announces Staff Changes

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On April 1, 2021, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) to request public comment on a wide range of questions related to the implementation of the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA).

Advance Notice of Proposed Rulemaking

This ANPRM is the first in a series of regulatory actions that FinCEN will undertake to implement the CTA, which is included within the Anti-Money Laundering Act of 2020 (AML Act).  The AML Act is part of the FY 2021 National Defense Authorization Act, which became law on January 1, 2021.

The CTA amended the Bank Secrecy Act.  The CTA requires corporations, limited liability companies, and similar entities to report certain information about their beneficial owners (the individual natural persons who ultimately own or control the companies).  This new reporting requirement will enhance the national security of the United States by making it more difficult for malign actors to exploit opaque legal structures to launder money, finance terrorism, proliferate weapons of mass destruction, traffic humans and drugs, and commit serious tax fraud and other crimes that harm the American people.

Pursuant to the CTA, FinCEN  must  maintain the reported beneficial ownership information in a confidential, secure, and non-public database.  In addition, the CTA authorizes FinCEN to disclose beneficial ownership information subject to appropriate protocols and for specific purposes to several categories of recipients, such as federal law enforcement. Under the CTA, FinCEN must revise existing financial institution customer due diligence regulations concerning beneficial ownership to take into account the new direct reporting of beneficial ownership information.

FinCEN encourages all interested parties, particularly those that would be affected by the beneficial ownership information reporting provisions or would seek access to reported beneficial ownership information, to submit written comments.  The comments can come from interested persons outside the U.S.   Such written comments will help inform FinCEN’s implementation of all aspects of the beneficial ownership reporting rulemaking.

Comments should be submitted by May 5, 2021.

This ANPRM seeks comment on FinCEN’s implementation of certain provisions in Section 6403 of the CTA. Section 6403 requires reporting companies (corporations, limited liability companies (LLCs), and similar entities, subject to certain statutory exemptions) to submit to FinCEN specified information on their beneficial owners—the individual natural persons who own or control them—as well as specified information about the persons who form or register those reporting companies. Section 6403 further requires FinCEN to maintain this information in a confidential, secure, and non-public database, and it authorizes FinCEN to disclose the information to certain government agencies for certain purposes specified in the CTA, and to financial institutions to assist in meeting their customer due diligence obligations. In both cases, these disclosures are subject to appropriate protocols to protect confidentiality. This ANPRM seeks comment on numerous questions as FinCEN begins to develop proposed regulations implementing these provisions.

While only the regulations implementing the reporting requirements must be promulgated by January 1, 2022, with an effective date to be determined. FinCEN also requests comment on its implementation of the related database maintenance use and disclosure provisions. Section 6403 requires that the final rule on customer due diligence requirements for financial institutions be revised will be the subject of a separate rulemaking, about which the public will receive notice and opportunity to comment.

Staff Changes

Today, FinCEN announced a change in staff. Director Kenneth A. Blanco announced he will depart FinCEN on April 9, after serving as the organization’s director since December 2017. Michael Mosier, former FinCEN Deputy Director and current Counselor to the Deputy Secretary of the Treasury, will return to FinCEN as Acting Director. AnnaLou Tirol, former Associate Director of FinCEN’s Strategic Operations Division, is serving as FinCEN Deputy Director.

Mr. Mosier most recently served as Counselor to the Deputy Secretary of the Treasury, a role he assumed last month after serving as FinCEN’s Deputy Director and first Digital Innovation Officer. Mr. Mosier previously worked at the cryptocurrency analytics, compliance, and investigations firm Chainalysis, where he was Chief Technical Counsel. Prior to FinCEN and Chainalysis, Mr. Mosier was an Associate Director at Treasury’s Office of Foreign Assets Control. Mr. Mosier has also served as a Deputy Chief in the Department of Justice’s (DOJ’s) Money Laundering & Asset Recovery Section. He also served a tour at the White House National Security Council as Director for Transnational Organized Crime. Mr. Mosier began his public service as a prosecutor with the Manhattan District Attorney’s Office, and has served as an Adjunct Professor of Law at Georgetown University Law Center. He previously worked at a law firm representing technology, media, and financial services clients.

Ms. Tirol is now serving as Deputy Director. In this capacity, she assists in overseeing FinCEN’s wide-ranging work to enhance the national security of the United States. Ms. Tirol joined FinCEN in September 2019, serving as Associate Director of the Strategic Operations Division, where she worked extensively to promote FinCEN’s strategic partnerships with government and private industry stakeholders, both domestically and internationally. Ms. Tirol came to FinCEN after overseeing DOJ’s Public Integrity Section prosecuting public corruption matters. She began her public service as an Assistant U.S. Attorney in San Diego, and has served overseas tours for DOJ in Belgrade, Serbia, focusing on anti-corruption issues, and in Panama City, Panama, focusing on anti-money laundering and countering the financing of terrorism. Ms. Tirol is an Adjunct Professor of Law at Georgetown University Law Center.

Director Ken Blanco will depart on April 9th to Citi to lead Financial Crimes Compliance

 

 

FATF Starts New Project to Study and Mitigate the Unintended Consequences from Incorrect Implementation of Standards and Announces More Jurisdictions on its Black and Grey Lists

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On March 17, 2021, the Financial Action Task Force announced the start of a new project “to study and mitigate the unintended consequences resulting from the incorrect implementation of the FATF Standards.

Mitigation Project

The project started in February 2021 and will examine the following four areas

  • “De-risking, or the loss or limitation of access to financial services. This practice has affected non-profit organizations (NPOs), money value transfer service providers, and correspondent banking relationships, in particular;
  • Financial exclusion, a phenomenon whereby individuals are excluded from the formal financial system and denied access to basic financial services;
  • Suppression of NPOs or the NPO sector as a wholethrough non-implementation of the FATF’s risk-based approach;
  • Threats to fundamental human rightsstemming from the misuse of the FATF Standards or AML/CFT assessment processes to enact, justify, or implement laws, which may violate rights such as due process or the right to a fair trial.”

The FATF will conduct the project in two phases:

Phase One: research and engagement. The project will analyze these unintended consequences resulting from the misuse of the FATF’s Standards on preventing and combating money laundering and the financing of terrorism. This work will rely on the knowledge and experiences of members of the FATF’s Global Network of 205 jurisdictions, its observers, and outside stakeholders.

Phase Two: solutions. The second phase will develop options the FATF could consider to prevent and mitigate these unintended consequences.

According the announcement, the FATF welcomes input to inform this project, including scholarly research; industry and civil society perspectives; and documented instances of unintended consequences. Information may be sent to pscf@fatf-gafi.org.

The announcement states the project is an opportunity to study trends and propose solutions. Any information provided to the FATF Secretariat will be shared with the project team and the source will be identified.

New Lists of High-Risk Jurisdictions and Jurisdictions in Need of Increased Monitoring

On February 25, 2021, the FATF announced its list of High-Risk Jurisdictions (also commonly referred to as its “blacklist”) subject to a Call for Action (Iran and North Korea) and jurisdictions in need of increased monitoring (commonly referred to as its “grey list”).  The list has the following jurisdictions: Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Senegal, Syria, Uganda, Yemen, and Zimbabwe.

One of the problems with the list of high-risk jurisdictions is that they’ve been on the list now for many years and they are also on international and national sanctions list.  As a result, many banks and financial institutions will not process transactions, even ones that are for genuine humanitarian purposes due to the risk of large penalties.

Another practical problem is that jurisdictions on either list tend to also land on the European Union list of high-risk jurisdictions for money laundering (commonly referred to as its AML/CFT blacklist).

Although the FATF does not mandate the application of enhanced due diligence measures for jurisdictions under increased monitoring, it encourages member jurisdictions to take the listing into account when undertake their risk analysis. The measures to be applied will vary, but may result in: (a) a requirement to perform more comprehensive due diligence on the customer’s source of funds and source of wealth and/ or (b) increased internal controls on business acceptance and ongoing monitoring.

Practically speaking, regulators around the world take into account the listing as do the electronic databases used by financial institutions and intermediaries when they are on-boarding and reviewing clients for customer due diligence.  As a result, banks and financial institutions from the metropole tend to limit or terminate correspondent bank relationships (de-risking) and withdraw from having branches or subsidiaries in the jurisdictions, especially because the listed jurisdictions tend to be small jurisdictions.  The result is that persons and businesses in these jurisdictions increase higher costs to bank, especially internationally.  Ultimately, the listings lead to financial exclusion of the small jurisdictions and their inhabitants, even though many already experience a high degree of lack of access to formal financial markets.

The current issue of the IELR will have a more comprehensive discussion of the issues raised in this post.

FinCEN Will Require Persons to Report Virtual Currency as Part of Foreign Bank and Financial Accounts and Will Require Recordkeeping for Transfers into Crypto Wallets

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FinCEN is moving rapidly for reporting crypto currency and assets.

Reporting Virtual Currency on FBARs

On December 31, 2020, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) in a notice stated it intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR)  on IRS FinCEN Form 114 to include virtual currency as a type of reportable account under 31 C.F.R. § 1010.350.

At present, FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account.[1]  As a result, a person with a foreign account holding virtual currency need not report such as holding on the FBAR unless it is a reportable account under 31 C.F.R. § 1010.350 because it holds reportable assets in addition to virtual  currency.

It remains to be seen how virtual currency will be reported on the FBAR.  Because FBAR penalties may be as high as 50 percent of an account’s highest balance per violation, the stakes are high.

Meanwhile, the Internal Revenue Service 2019 Form 1040 Schedule 1 added a question, inquiring whether taxpayers received, sold, sent, exchanged, or acquired a financial interest in virtual currency.  The recordkeeping for tax purposes alone on virtual currency is very challenging.

On December 31, 2020, the IRS issued draft instructions  on what constitutes reportable virtual currency transactions.  The instructions provide more guidance than did the previous version released October 23, 2020.  However, many tax attorneys have criticized the new guidance.[2]

Recordkeeping on Crypto Wallets

FinCEN will propose to amend the regulations implementing the Bank Secrecy Act (BSA) concerning reports of  foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

On December 23, 2020,  FinCEN issued a notice of proposed rulemaking requesting public comments on a proposal to require banks and money service businesses (“MSBs”) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status (“legal tender digital assets” or “LTDA”) held in unhosted wallets  or held in wallets hosted in a jurisdiction identified by FinCEN. FinCEN is proposing to adopt these requirements pursuant to the Bank Secrecy Act (“BSA”).

FinCEN proposes to prescribe by regulation that CVC and LTDA are “monetary instruments” for purposes of the BSA. However, FinCEN does not propose  to change  the regulatory definition of “monetary instruments” or otherwise alter existing BSA regulatory requirements applicable to “monetary instruments” in FinCEN’s regulations, including the existing currency transaction reporting (“CTR”) requirement and the existing transportation of currency or monetary instruments reporting requirement.

FinCEN is providing a 15-day period for public comments with respect to this proposed rule.

Analysis

Although there are many important technical and procedural issues, including whether Treasury is affording sufficient time for comments on the new regulations, the bottom line is that Treasury and other law enforcement agencies believe significant amount of crime is occurring due to the lack of transparency surrounding virtual currencies and digital assets, especially in international transactions.

The current issue of the IELR will have a more comprehensive discussion of these two regulatory initiatives.

[1]    See 31 CFR 1010.350(c).

[2]    Kirstin Parillo, New Draft 1040 Instructions Add More Crypto Details, Tax Notes Today  Int’l 2021 TNTI 5-3, Jan. 8, 2020.

Congress Passes Anti-Money Laundering Act over President’s Veto

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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, except for the beneficial owner/entity transparency provisions that were discussed in the December 2020 issue of the International Enforcement Law Reporter.

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).

Disclaimer

Nothing in this blog constitutes or is intended to constitute legal advice. Neither transmission nor receipt of such materials creates an attorney-client relationship. Blog readers and subscribers should consult with an attorney. This blog may be considered attorney advertising under the rules of some states. The hiring of an attorney is an important decision that should not be based solely upon advertisements. Prior results do not guarantee similar outcomes.

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