IELR Blog

Official Blog of the International Enforcement Law Reporter

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

by Leave a Comment

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”

by Leave a Comment

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

by Leave a Comment

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.

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

by Leave a Comment

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.

Bill Introduced to Counter Foreign Corruption and Promote Good Governance

by Leave a Comment

On February 4, 2021, U.S. Senator Ben Cardin (D-Md.) and Senator Roger Wicker (R-Miss), incoming Chair of the U.S. Helsinki Commission and Co-Chair, respectively, re-introduced legislation that would strengthen the U.S. Government’s anti-corruption initiatives.  S.158, the Countering Russian and Other Overseas Kleptocracy Act, or CROOK Act, would create an anti-corrupt action fund to furnish additional funding targeting reform in foreign countries and streamlining work supporting the rule of law abroad.

Substance of the CROOK Act

As explained by its authors, the anti-corruption fund established in the CROOK Act would help countries where U.S. assistance could significantly increase the opportunities of successfully transitioning to democracy, combating corruption, and establishing the rule.  For instance, in 2014, Ukraine established important reforms.  In 2018, Ethiopia made important reforms after the election of a new Prime Minister.  After the December 2018 parliamentary election, Armenia made reforms.  The fund would provide a mechanism to allocate aid and take advantage of new political will more quickly.  The financing for the fund would come from a $5 million surcharge to individual companies and entities that receive a $5 million criminal fines and penalties above $50 million for violating the Foreign Corrupt Practices Act (FCPA).

S. 158 would create several complementary mechanisms to have a whole-of-government approach to U.S. efforts to fortify the rule of law abroad. These include an interagency taskforce;[1] the designation of embassy anti-corruption points of contact to liaise with the task force; reporting requirements designed to combat corruption, kleptocracy, and illicit finance; and a consolidated online platform for easy access to anti-corruption reports and materials.

In its introduction, the CROOK Act mentions systematic corruption in both Russia and China, and their pernicious effects on the U.S. and the world.

The CROOK Act expressly mentions the work of technical assistance programs that combat  corruption and strengthen the rule of law.  The latter includes  through assistance provided by the Department of  State’s Bureau of International Narcotics and Law  Enforcement Affairs and the U.S. Agency for International Development, and through programs like the Department of Justice’s Office of  Overseas Prosecutorial Development, Assistance and  Training and the International Criminal Investigative Training Assistance Program.  These programs can have lasting  and significant impacts for both foreign and U.S. interests.

Quickly civil society organizations, such as Transparency International U.S., endorsed the bill.

Analysis

The bill will help bring a more whole-of-government approach to U.S. anti-corruption policy.  It seems strange that so much emphasis in the bill and its marketing is on systematic corruption in two countries that coincidentally are U.S. rivals – Russia and China.  It follows a legislative trend.  Sec. 5506 of the Anti-Money Laundering Act (AMLA) of 2020, which is part of the National Defense Authorization Act, calls for Treasury study and strategy on money laundering by China, especially on the extent and effect of illicit finance risk concerning China and Chinese firms.  The latter includes financial institutions, an assessment of the illicit finance risks emanating from China, and a strategy to counter these money laundering activities.  Sec. 5507 of the AMLA requires a  study and report to Congress on how authoritarian regimes in foreign countries and their proxies use the U.S. financial system to conduct political influence operations, sustain kleptocratic methods of maintaining power, export corruption, fund nongovernmental organizations, media organizations, or academic initiatives in the U.S., and undermine democratic governance in the U.S. and the partners and allies of the U.S.

[1]    The inter-agency task force will be composed of representatives appointed by  the President from appropriate departments and agencies,  including the State Department, U.S.A.I.D.,  the Treasury Department, the Justice Department, Homeland Security, the Defense Department, the Commerce  Department, the Millennium Challenge Corporation, and the intelligence community.

ABA CJS Int’l Crim. Law Comite Speakers Will Discuss Developments in Int’l Law Enforcement, Esp. the Impact of COVID and US Sanctions on the ICC

by Leave a Comment

International Committee Mid-Year Double Header: (1) The Impact of COVID-19 on International Law Enforcement and (2) American Sanctions Relating to the International Criminal Court

At the CJS Committee on International Criminal Law Mid-Year meeting on Saturday, Feb. 20, 2021 from 3:45-515, there will be two short presentations.

Judith Friedman, a Senior Trial Attorney with the Criminal Division’s Office of International Affairs and winner of Norm Maleng Minister of Justice Award in 2020, will discuss Developments in International Law Enforcement, especially the impact of the Coronavirus”.

Kristin Smith, Esq., director of the Atrocity Crimes Initiative and Staff Attorney with ABA CJS, will discuss the US sanctions on the ICC and summarize the litigation (two cases: the OSJI v. Trump and the just filed Sadat v. Trump), as well as relevant ABA/ ICC Project activities and statements.

Below please find the ZOOM LINK for the International committee meeting: Saturday, February 20th  at 3:45 PM-5:15 PM Eastern Time.

Topic: International Committee Meeting (Please see attached for agenda)

Time: Feb 20, 2021 3:45 PM Eastern Time (US and Canada)

https://americanbar.zoom.us/j/98072937375?pwd=c2dTR2JudDF1OXNkS3FoV1NsUmF0UT09

Meeting ID: 980 7293 7375

Passcode: 422275

Also on the agenda are the following:

  1. Prior meeting – substantive presentation
  2. Committee Newsletter
  3. past issue
  4. new issue – call for contributions of articles and news
  5. Potential issues for programs
  6. international aspects of the Anti-Money Laundering Act of 2020
  7. decision of SDNY of Jan. 4 of US Dist. Court Judge Katherine Polk Failla, enjoining US sanctions against persons associated with the ICC
  8. Annual ABA Convention: potential program on extradition
  9. Other substantive developments and policy issues

The meeting is open to non-Committee members.

 

 

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

by Leave a Comment

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

by Leave a Comment

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).

U.S. and Mexico issue Joint Statement on Proposed Dismissal of Charges against Mexican General

by Leave a Comment

On November 17, 2020, the Attorney General of the United States William P. Barr and Fiscalía General of Mexico Alejandro Gertz Manero issued a joint statement.  The statement announced that the U.S. government has decided to seek dismissal of the U.S. criminal charges against former Mexican Secretary of National Defense General Salvador Cienfuegos Zepeda.

Statement

The U.S. government arrested Cienfuegos on October 15, 2020 in Los Angeles, California, on U.S. charges of conspiracy to manufacture, import, and distribute narcotics into the U.S. and money laundering.

The rationale for seeking dismissal was that the U.S. Department of Justice (DOJ), recognizing the strong law enforcement collaboration with Mexico, decided to dismiss U.S. criminal charges, so that Mexico can investigate and, if appropriate, charge him under Mexican law.

The statement explains that the DOJ, at the Fiscalía’s request and pursuant to the Mutual Assistance in Criminal Matters Treaty, has furnished Mexico evidence in this case and commits to continued cooperation to support the investigation by Mexican authorities.

Implementation and Implications

Judge Carol B. Amon of the U.S. District Court in Brooklyn, the presiding judge, ordered the acting U.S. attorney Seth DuCharme to personally attend a hearing before her on November 18.

The DOJ explained in a filing with the court to dismiss the case that it decided that its relationship with Mexico and important foreign policy considerations were more important than prosecuting the case.1

As soon as Cienfuegos was arrested, Mexican officials expressed surprise and anger at  the absence of disclosure by the U.S. government of its investigation and prosecution of Cienfuegos.   Apparently, Mexico was upset of the lack of cooperation on the case, especially since Mexico has extradited most of persons requested by the U.S.2

The upshot was that Mexico gave the U.S. government an ultimatum: the failure to dismiss charges would lead to a termination of Mexican criminal cooperation with the U.S.3

The current issue of the IELR will discuss this matter in more detail.

  1. Michael S. Schmidt and Natalie Kitroeff, U.S. to Repatriate Mexican Ex-Official, N.Y. Times, Nov. 18, 2020, at A19, col. 1.
  2. Id.
  3. Kevin Sief and May Beth Sheridan, U.S. agrees to return former Mexican official, Wash. Post, Nov. 18, 2020, at A19, col. 5.

Conference: Indigenous Rights and Extractive Industries in the Amazon

by Leave a Comment

With funding from the United States Embassy in Suriname and the sponsorship of the Youth Education and Leadership Foundation and Global Americans, we are pleased to present “Indigenous Rights and Extractive Industries in the Amazon,” a two-day virtual conference on human rights and environmental issues in the Amazon.

The conference will be broken up into two panels and hosted through Zoom.  Although the first webinar occurred on Sept. 23, it was recorded and is available on the website with GlobalAmericans https://theglobalamericans.org

Moderator: Guy Mentel, Executive Director, Global Americans

Extractive Industries in the Amazon
September 30, 10:00 AM to 11:00 AM EDT

Speakers:
– Mark Pieth, Professor at the Basel Institute of Governance, former Chair of both UN Illegal Drug Trafficking and OECD Anti-Bribery Working Groups

Prof. Pieth will focus on the problem of the gold trade in the Amazon. He has recently authored a book on Gold laundering: the dirty secrets of the gold trade and how to clean it up amazon.com/Gold-Laundering-dirty-secrets-trade/dp/3906195953
– Luz Nagle, Professor at Stetson University Law School and former Judge in Medellín

Prof Nagle will focus on human trafficking, organized crime, and corruption in the illegal mining industries in the Amazon

– Bruce Zagaris, Partner with Berliner Corcoran & Rowe LLP & Founder of the International Enforcement Law Reporter

Mr. Zagaris will focus on the illegal timber trade.
– Julia Marisa Sekula, Climate Security Program Coordinator at Instituto Igarapé
Ms. Sekula will focus on the problems in the Amazon in Brazil.

Moderator: Guy Mentel, Executive Director, Global Americans

To register, go to https://docs.google.com/forms/d/e/1FAIpQLSeVkK3Ilu7jEAGBy-X77uLL9e1KGTumte-PhbrSNBhlrFbfgg/viewform

 

Indigenous Rights in the Amazon
September 23, 10:00 AM to 11:00 AM EDT

Speakers:
– Luis Gilberto Murillo, Colombia’s former Minister of Environment and Sustainable Development
– Ine Apapoe, Lecturer at the Anton De Kom University of Suriname
– Magda Monteza, Strategic Planning Specialist, Panamanian Ministry of Government
– Jorge Andrés Forero Gonzáles, Director of Peacebuilding, Al Centro (Colombia)

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.

Pages

Categories

Sign up for our mailing list!
Get the latest blog posts, and an exclusive discount offer for one year's subscription to the International Enforcement Law Reporter.
We respect your privacy.