In December, the OECD issued a public consultation document, requiring mandatory disclosure rules to combat CRS avoidance and offshore structures. Comments are due January 15, 2018.
U.S. Private Investigative Firm Kroll Releases 2nd Report on the 2014 Moldovan Bank Scandal
On December 22, U.S. private investigative firm Kroll published its second report on the 2014 Moldovan bank fraud scandal. This blog post provides background on the scandal, as well as commentary on the contents of the report.
Background: The 2014 Moldovan Bank Scandal and the First Kroll Report
In November 2014, more than $750 million disappeared from three Moldovan banks over just two days. The three banks – Banca de Economii, Unibank and Banca Socială – declared bankruptcy that month, prompting the National Bank of Moldova to bail them out with $870 billion in loans. The bailout reportedly created a government deficit equivalent to roughly one-eighth of the entire country’s GDP.
In January 2015, the National Bank of Moldova commissioned the U.S. investigative firm Kroll to conduct a confidential investigation of the fraud. The Kroll report, which the speaker of the Moldovan Parliament, Andrian Candu, leaked to the public in May 2015, revealed what investigators believed to be a “co-ordinated effort within the banks to deliberately disguise” the nearly billion dollars’ worth of transactions and their beneficiaries. The investigators tie nearly all of the transactions to Ilan Shor, a Moldovan millionaire businessman and politician, or companies either directly owned by or connected to him.
According to the first Kroll Report, between 2012 and 2014, the three banks paid out more than three billion dollars in loans to companies linked to Shor. The funds were funneled through a convoluted international money laundering scheme that primarily involved using UK limited partnerships with Latvian bank accounts as “shell” companies.
The Second Kroll Report
In their second report, Kroll investigators provide more details on the profiles of the scheme’s beneficiaries. They report that at least 77 companies make up what they term the “Shor Group:” a group of companies linked to Ilan Shor all of which documentary evidence suggests participated to some degree the coordinated fraud effort.
Over a period of two years, the companies reportedly increased their ownership stake in the three banks, thereby increasing their control over the loan approval process within each bank. Loans are approved by the Board of Directors of each bank. Kroll reported that its investigators contacted two government-appointed members of the board for one of the banks, BEM, and both members stated that had not been invited to any board meetings in November 2015, and were not informed of any loans granted during that month.
In November 2014, the companies comprising the Shor Group concentrated their loan exposure, which had up until then been spread across the three banks, into one bank – BEM. According to the Kroll report, this move “allowed the Three Moldovan Banks to pool their liquidity into BEM and enabled BEM to increase lending.”
The Core Laundering Mechanism
A series of companies were then established. These companies held a total of 81 bank accounts at two Latvian banks. The majority of the accounts were held either by UK limited partnerships or offshore companies registered in offshore tax jurisdictions, such as Belize and Panama. Investigators believe most of these accounts were established solely for the purpose of laundering money. The report describes the primary laundering mechanism in detail:
The laundering mechanisms included the frequent transfer of funds between linked accounts, the splitting of funds and layering through other accounts, simultaneous issuing and repaying of an overdraft by two linked companies to disguise the onward flow and the frequent and apparently arbitrary switching of currencies between accounts.
The investigators consider both the complexity as well as timing of the laundering mechanism to be indicative of a “highly coordinated professional laundering operation.” At one point, they point to “numerous examples” in the operation where money “flowed through a series of accounts within seconds.”
Fore more commentary on the 2nd Kroll report, see the upcoming January 2018 issue of the International Enforcement Law Reporter.
Commonwealth Bank Money Laundering Probe Uncovers Drug Trafficking, Possible Terrorism Financing Through Intelligent Deposit Machines
Three weeks ago, Australia’s chief financial intelligence agency, the Australian Transaction Reports and Analysis Center (AUSTRAC), launched civil penalty proceedings against the country’s largest bank, Commonwealth Bank, for allegedly violating the 2006 Anti-Money Laundering and Counterterrorism Financing Act.
In its August 3 filing, AUSTRAC alleges that the bank racked up over 53,700 violations of the AML/CTF Act since May 2012. In May 2012, Commonwealth Bank introduced a fleet of Intelligent Deposit Machines (IDMs) at its branches. These “smart ATMS” allow users to deposit cash and checks without interacting with a teller, and have the funds instantly credited to their account as well as made available for both domestic and international transfers. AUSTRAC claims that Commonwealth Bank neglected to implement appropriate fraud controls following the introduction of the IDMs. The bank’s IDM can accept up to 200 notes – or up to $20,000 in cash – per deposit, with no limit on the number of transactions a customer makes per day.
The main violations detailed in the filing include:
- Failure to carry out a Money Laundering/Terrorism Financing risk assessment, despite an “exponential rise in cash deposits through IDMS” as well as alerts from internal monitoring systems;
- Failure to report 53,506 “threshold transactions” (TTRs), or transactions that involve the transfer of $10,000 ore in physical currency), to AUSTRAC within 10 business days of the transactions; and
- Failure to file suspicious matter reports (SMRs), despite internally identifying a pattern of “structured” cash deposits designed to avoid triggering the bank’s TTR reporting obligation.
As a result of these violations, AUSTRAC claims that at least four money laundering syndicates, three of which engaged in drug trafficking, used the IDMs for roughly $77 million worth of suspicious transactions, all of which went either entirely unreported or only partially reported to law enforcement in a timely manner.
On August 17, AUSTRAC CEO Peter Clark reported to the Australian parliament’s Senate Estimates Committee that “Six of those (in the transactions listed in the statement of claims) relate to cash transactions by five customers in whom the bank has assessed a potential link to terrorism or terrorism financing.”
The bank issued a statement earlier in the month implying that the “vast majority” of breaches were the result of a “coding error” in a 2012 software update to the IDMs that went undetected until 2015.
I will be following this developing story. For more updates and analysis, see the upcoming September issue (Vol. 33, Issue 9) of the International Enforcement Law Reporter.
Reuters Publishes Report Detailing Investigations into 2012 ICBC-Madrid Bank Money Laundering Probe
In February of last year, Spanish authorities raided the Madrid subsidiary of the world’s largest bank by assets: the Industrial and Commercial Bank of China (ICBC). They arrested seven of the bank’s directors for their alleged involvement in large-scale money laundering operations. News outlets widely covered the raid and the ensuing arrests at the time, but Spanish authorities kept developments concerning the subsequent investigation confidential.
Nearly 18 months after the initial raid, Reuters has published the first detailed account of the investigation — a two-part exposé based on the review of “thousands of pages of confidential case submissions” as well as “interviews with investigators and former ICBC employees.”
The Reuters account reveals that, according to phone communications intercepted by Spanish law enforcement and court filings, ICBC sustained a privileged relationship with a cohort of the Chinese business community residing in Spain that had allegedly accumulated large sums of cash as a result of avoiding import sales taxes on goods from China. Bank staff allegedly accepted forged documents, failed to report suspicious transactions, and solicited money transfers from individuals under Spanish police surveillance.
The collusion between the bank and Chinese money laundering networks extended into the upper levels of ICBC management. Transcripts of phone conversations wiretapped by Spanish law enforcement include at least 30 conversations between bank managers and individuals under police surveillance for suspected laundering. In a particularly incriminating conversation dated August 8, 2012, Wang Jing, a senior executive of ICBC’s Madrid branch, says to Xu Kai, an alleged senior member of a transnational money laundering network: “You have to look out for yourself and make sure these people are obedient.” From assessing the transcript of the call, officials have concluded that Wang is instructing Kai on how to avoid detection of his money laundering operation by ensuring that the individuals involved remain fully committed to the scheme.
What does the ICBC investigation tell us about the future of anti-money laundering (AML) compliance enforcement against Chinese banks?
One possibility is that Europe and the United States diverge in their approaches to this enforcement issue, with the United States pursuing a more aggressive enforcement stance, despite the risk of political fallout with Beijing. As Evan W. Krick notes in his post on the Money Laundering Watch blog, the United States’ recent slew of harsher enforcement actions against Chinese based-banks suggest that the United States “may take an increasingly aggressive path” in the near future.
As for Europe, the Reuters report notes that the 2016 raid on the Madrid ICBC branch “ignited a behind-the-scenes diplomatic spat” between Madrid and Beijing officials, and it is possible that the concern over additional diplomatic fallout may temper Spain’s as well as Europe’s enforcement efforts toward ICBC’s European branches. At present, despite the mounting evidence, provided by wiretapped communications as well as cash flow records obtained by Spanish law enforcement, that officials at ICBC facilitated large-scale money laundering operations, not a single suspect identified during the investigation has been formally charged.
For the past several months, European branches of major international banks have been gearing up for the launch of the Fourth Anti-Money-Laundering Directive. According to a European Commission press release, the EU-wide directive takes measures to strengthen existing anti-money laundering and terrorism financing rules in member states, and also “improves transparency to prevent tax avoidance.” The directive was supposed to take effect across the EU on June 26, but thus far as many as 17 member countries are reported to have failed to fully implement the rules of the directive.
WannaCry Ransomware Hero Charged For Banking Malware “Conspiracy”
On August 2, authorities arrested British cybersecurity researcher Marcus Hutchins, 22, at the Las Vegas airport. Hutchins, who works for the cybersecurity firm Kryptos Logic, was in Las Vegas attending the Black Hat and Defcon security conferences for the week.
The Department of Justice unsealed an indictment against Hutchins upon his arrest that alleges the security researcher was part of a conspiracy to create and distribute the Kronos banking Trojan, a widespread malware attack that security experts believe was created in early 2014 and distributed through the cryptocurrency marketplace AlphaBay, whose servers the DOJ seized just last month. For his alleged involvement in the Kronos scheme, the indictment charges Hutchins with “one count of conspiracy to commit computer fraud and abuse, three counts of distributing and advertising an electronic communication interception device, one count of endeavoring to intercept electronic communications, and one count of attempting to access a computer without authorization.”
Hutchins is hailed as somewhat of a hero in the cybersecurity community for his role in single-handedly crippling the worldwide WannaCry ransomware attack. Three months ago, he discovered a kill switch in the WannaCry code that immediately halted the spread of the bug. His arrest thus comes as a shock to members of the cybersecurity community, many of whom have taken to social media to voice their skepticism regarding the charges.
Treasury Department’s FinCEN Fines Russian-run BTC-e Virtual Currency Exchange $110 Million for Money Laundering Violations
On July 26, 2017, the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Treasury Department, levied a $110 million civil penalty against BTC-e Virtual Currency Exchange and a $12 million penalty against its suspected operator, Russian national Alexander Vinnik, for willfully violating the Bank Secrecy Act. The Bank Secrecy Act requires financial institutions to assist the United States government in reporting and preventing suspected money laundering.
A FinCEN assessment alleges that senior leadership at BTC-e willfully failed to implement basic internal controls designed to prevent a money services business from facilitating money laundering. BTC-e failed to collect and verify customer verification information, as well as to implement procedures to identify and report suspicious transactions to authorities. The assessment claims that as a result of these violations the cryptocurrency exchange “attracted and maintained a customer base that consisted largely of criminals who desired to conceal proceeds from crimes such as ransomware, fraud, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.”
Vinnik was arrested on Tuesday in northern Greece and indicted on Wednesday before a grand jury in Northern California. The recently unsealed indictment charges BTC-e and Vinnik with 21 counts, including one count of operation of an unlicensed money service business, one count of conspiracy to commit money laundering, seventeen counts of money laundering, and two counts of engaging in unlawful monetary transactions.
The $110 million fine marks the Treasury Department’s first penalty levied against a foreign-located money services business. According to a Department of Justice press release, Acting FinCEN Director Jamal El-Hindi stated that the FinCEN bureau “will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. AML laws.”
Florida Passes Law Criminalizing the Use of Bitcoin in Money Laundering
On Friday, May 5, 2017, the legislature of the U.S. state of Florida passed legislation designed to criminalize the use of Bitcoin and other cryptocurrencies in laundering money. The bill, which passed both the Florida House and Senate and now awaits the approval of Governor Rick Scott, adds “virtual currency” to the definition of “monetary instruments” covered under Florida’s Money Laundering Act, which would then be defined as a “medium of exchange in electronic or digital format that is not a coin or currency of the United States or any other country.”
The bill was crafted in response to a Florida court case from 2016, in which a criminal case against Floridian Michel Espinoza, who had used Bitcoin to facilitate the online purchase of stolen credit card information, was dismissed after the defense successfully argued that Bitcoin was not a currency under Florida law. The defense likened Bitcoin transactions not to money exchanges, but to “poker chips that people are willing to buy from you” — a trade for something with perceived monetary value, or property.
Circuit Judge Teresa Mary Pooler, in dismissing the case, stated that “this court is unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”
Cryptocurrency advocates and others concerned about this legislation have warned that this definition of money could lead to other items with solely representative value — “coat checks, tickets to Disney World, and discount coupons” in the words of Barry University economist Charles Evans — eventually defined as money. Like those items, cryptocurrencies are not backed by any government; their value is set by the marketplace. In fact, the IRS classifies Bitcoin and other cryptocurrencies as commodities. However, Bitcoin is often used to facilitate purchases in the same way that a more conventional currency would be, and because of its globally universal value and digital nature, is often used to facilitate illicit transactions such as drug and human trafficking.
Another U.S. state, West Virginia, recently passed similar legislation. The West Virginia law was signed by Governor Jim Justice on April 26, 2017, and will go into law on July 7. That legislation can be found here: http://www.legis.state.wv.us/Bill_Text_HTML/2017_SESSIONS/RS/bills/hb2585%20intr.pdf.
More information about the Florida legislation can be found here: https://www.myfloridahouse.gov/Sections/Bills/billsdetail.aspx?BillId=59472
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