IELR Blog

Skadden Agrees to Civil Settlement with DOJ over FARA Violations

January 23, 2019 by Bruce Zagaris Leave a Comment

On January 17, 2019, U.S. Assistant Attorney General for National Security John Demerks announced Skadden, Arps, Slate, Meagher & Flom LLP entered into a settlement agreement with the U.S. Department of Justice, resolving its liability for violations of the Foreign Agents Registration Act (FARA).

The agreement evidences that Skadden acted as an agent of the Government of Ukraine within the meaning of FARA, 22 U.S.C. § 611 et seq., by participating in a public relations campaign direct at select members of the U.S. news media in 2012. In 2012 and 2013, in response to multiple inquiries from the Justice Department’s FARA Registration Unit about its role in that campaign, a partner then at Skadden made false and misleading statements to the FARA Unit. Thereafter, the FARA Unit concluded in 2013 that the firm did not have to register. When more facts were known, Skadden was required to register in 2012. Skadden has agreed to register retroactively.

Skadden has agreed under the settlement to pay the U.S. treasury more than $4.6 million, which it received in fees and expenses for its work with Ukraine, and will ensure that it has formal, robust procedures for responding to inquiries concerning its conduct from any federal government entity and ensuring FARA compliance as to its engagements on behalf of foreign clients.

In the spring of 2012, the Ministry of Justice (MOJ) for Ukraine, with the help of Paul Manafort, hired Skadden to write a report on the evidence and procedures used during the 2011 prosecution and trial of former Prime Minister Yulia Tymoshenko and discuss questions concerning its fairness. Skadden also agreed to advise Ukraine concerning a second, potential future prosecution of Tymoshenko. According to the engagement letter between Skadden and the MOJ, the latter would pay Skadden only 95,000 Ukrainian hryvynas (approximately $12,000). Skadden understood that a Ukrainian business person would pay its fees. Eventually, the money came from a Cypriot bank account of an entity named Black Sea View Ltd., which Manafort controlled. Eventually Skadden received $4,657.578.91 for this work. The arrangements with the Ukrainian business person, the amounts paid, and advice on a second criminal prosecution of Tymoshenko were not disclosed in connection with the issuance of the report.

After it started work for the MOJ and realized that Ukraine intended to use the report as part of a public relations campaign to influence U.S. policy and public opinion toward Ukraine, Skadden’s lead partner for the Ukraine engagement, advanced the public relations campaign.

Skadden is the first large organization to be ensnared with FARA enforcement problems. The media has reported that the Skadden partner on the project who made false and misleading statements to the DOJ FARA unit is Gregory Craig, a former White House counsel under President Barack Obama. He may yet have legal exposure. (see e.g., Kenneth P. Vogel and Matthew Goldstein, Law Firm Settles Inquiry Into Work It Did for Manafort, N.Y. Times, Jan. 18, 2019, at A13, col. 1; Greg Farrell and Christian Berthelsen, Skadden Settlement for Manafort Work Suggests Ex-Partner’s Peril, Bloomberg BNA, Jan. 17, 2019).

The case illustrates that the DOJ is continuing to increase enforcement of FARA. The February 2019 issue of the IELR will carry a more comprehensive discussion of the settlement and its implications

Inspector General Criticizes GSA for Failing to Scrutinize Constitutionality of Trump Hotel Lease

January 20, 2019 by Bruce Zagaris Leave a Comment

Evan Schleicher

An Inspector General report released Wednesday, January 16^th, questions the constitutionality of the lease for the Trump Hotel in Washington. It points out while the General Services Administration recognized that the President’s business interest in the lease raised issues under the Constitution’s Emoluments Clauses, they decided not to address those issues in connection with the management of the lease. Given that all government agencies must uphold the Constitution in conducting their business, the newly released report deemed it improper that such considerations were not made during the initial leasing of the property in 2012. Despite strong evidence that the Trump Hotel lease had violated constitutional principles, the Inspector General’s report did not explicitly state that the leasing of the property had violated constitutional principles or that the lease should be cancelled. It only recommended a legal review of the language of its future contracts, which action the General Services Administration has agreed, in principle, to undertake. The lack of an investigation into the Trump Hotel lease and the lack of a recommendation to cancel the lease is troubling, because there is extensive evidence that the lease has allowed President Trump to violate Constitutional principles.

The IELR has previously reported on developments in active lawsuits involving the Emoluments Clauses and the constitutionality of the Trump Hotel lease. In November a US District Court judge denied a request for a stay in a lawsuit alleging that Trump improperly received payments from foreign governments. Most significantly, the court rejected the President’s argument that an emolument must be a profit arising from a profit or employ.

This was the third challenge to the suit by President Trump, all of which failed. As previously written in the IELR, “In Trump’s first challenge, the court found that the plaintiffs, the D.C. and Maryland governments, had standing based on proprietary, quasi-sovereign and parens patriae interests vis-à-vis the President’s undisputed ownership interest in the Trump International Hotel in Washington. In the second opinion, the court applied the term “emolument” and ruled that the President’s ownership interest in the Trump International Hotel and his apparent receipt of benefits from at least some foreign and state governments, as well as from the U.S. government itself, suggest that he has received “emoluments” in violation of the Constitution, giving rise to the lawsuit at hand.”

Previous evidence of President Trump’s violation of the Emoluments Clauses has been bolstered by new evidence regarding foreign economic involvement at the Trump Hotel. According to the Washington Post, Qorvis/MSLGroup, a firm which has long supported Saudi Arabia within the United States, spent almost $270,000 in total at the hotels and specifically spent significant funds to house US Military veterans who were lobbying against the Justice Against Sponsors of Terrorism Act, which would have been highly costly and damaging to Saudi interests both domestically and globally. While the group claimed that they made the decision based upon the price of rooms, and not based on a desire to influence the president, it is easy to imagine a similar scenario in which the chief executive of the United States is unduly influenced by economic interest. Further, it is easy to mistrust the motives both of this Saudi group and of the President in a world where the murder of Jamal Khashoggi has been slowly swept under the rug by both parties. As the original February 23, 2018 filing for the District of Columbia and the State of Maryland vs. Donald Trump, one of two active law suits involving the emoluments clauses, states: “Whatever the sincerity of the persons involved, foreign and domestic officials are put in the position of considering whether offering benefits to businesses associated with the President is important to maintaining goodwill”.

It seems that, despite the seemingly damning claims made by the Inspector General’s report, there is little which will be done about the current Trump Hotel lease. Given the nature of the claims made within the report, as well as the existing evidence and lawsuits against President Trump, it is strange that more action has not been recommended by the Inspector General. It is further strange that the GSA is paying federal rangers to keep open the Old Post Office government building (which houses the Trump Hotel) while simultaneously claiming that this decision was “unrelated to the facility’s tenant”. Taken together, these facts suggest that no serious efforts will be made by the GSA to analyze or to correct any failings in the existing lease. The Inspector General, while publishing a damning report, has failed, in large part, to hold the GSA accountable for their present failings. If there is to be any changes made to the present situation, they will be made because of pressure from the lawsuit mentioned above.

A Holiday Retrospective from the Editors: The Year in International Enforcement Law

January 11, 2019 by Bruce Zagaris and Zarine Kharazian Leave a Comment

The IELR sends everyone best wishes for a warm and joyous holiday season. 2018 was momentous for the international enforcement community.

On bilateral enforcement cooperation, the IELR reported on the U.S. and Brazil starting a permanent forum on security, covering inter alia: drug and money laundering issues; alien smuggling, human trafficking, and illegal migration.

Among the stories we covered were also many battles in cybercrime. The IELR covered some U.S. indictments of Chinese state hackers, alleging stealing technology and a coordinated announcement by five governments condemning the cybercirmes and theft of IP. The U.S. imposed sanctions for Russian cyber interference with the 2016 U.S. elections and, and there were also developments on U.S. and international law on election interference. The Democratic National Committee sued the Russian government and the Trump campaign for election interference and related offenses.

Tax transparency and enforcement remained in the news with the EU proposal requiring reporting on tax intermediaries of aggressive tax planning and the OECD initiatives on mandatory disclosure rules to combat CRS avoidance and offshore structures and preventing abuse of RBI schemes to circumvent the CRS. The IELR covered several prosecutions arising out of the Paradise Papers. The U.S. revised Voluntary Disclosure rules at the end of the year and indicted professionals and a U.S. taxpayer for tax offenses arising from the Panama Papers. The OECD and World Bank published a guide for more effective cooperation between tax authorities and anti-corruption authorities in combating tax and corruption crimes. The German police conducted a search warrant of Deutsche Bank for tax crimes arising out of the Paradise Papers. Five countries formed the Joint Chiefs of Global (Tax) Enforcement (Jr), illustrating the emerging coordination strategy of minilateral alliances and a shift from treaties to informal, nonbinding soft-law accords and transnational governmental networks.

With respect to money laundering, bank secrecy, and transparency, the President lost on three decisions on the alleged violations of the emoluments clause. Meanwhile, FinCEN issued an advisory on human rights abuses by corruption senior political figures. The ICJ declared jurisdiction and adjudicated a suit brought by Equatorial Guinea against France. The IMF adopted a new framework for anti-corruption and good governance. Investigations in multiple countries against the Danish Bank for money laundering in its Estonian branch continued. The EU adopted 5^th AML/CFT Directive and the Directive on the Use of Financial and Other Information. The IELR also reported on the FATF report on intermediaries and beneficial ownership information and its report on professional money laundering. The FAFT-MENAFATF Joint Plenary focused on combating terrorism-financing, human trafficking, and AML enforcement.

On transnational corruption the independent counsel and the U.S. Department of Justice prosecuted many high-visibility cases involving violations of the Foreign Agents Registration Act (FARA), including ones involving former Trump campaign manager Paul Manafort and his assistant Rick Gates, and the DOJ released 50 advisory opinions on FARA. The IELR covered the progress of prosecutors in Malaysia, the U.S. and Switzerland on 1MDB cases, including ones in Malaysia, Switzerland. In Peru, the Supreme Court revoked Fujimori’s pardon and returned him to prison. The U.S. entered into many joint settlements with foreign governments, including on Keppel and Petrobras. The IELR covered the U.S. Justice policy on coordinated resolutions in corporate penalties. The World Bank Office of Suspension and Debarment published a new report.

The major focus of international enforcement of the Trump Administration continued to be on migration. Madeline Henshaw-Green covered many migration enforcement developments, such as the Attorney General Jeff Sessions’ elimination of the requirement of full hearings for asylum seekers, and the rise of xenophobic, anti-immigrant policies in American and European governments. The U.S. courts required that the executive branch dismiss an alien charged with a narcotics crime, while detained for deportation purposes. Prof. Plachta covered recent initiatives by international organizations, such as the UNODC and EU to tackle the problem of migrant smuggling. Zarine Kharazian reported on the UN General Assembly’s approval of a sweeping migration accord. A U.S. court sentenced a Bosnian Serb for concealing participation in war crimes.

On counter-terrorism, international organizations updated their counter-terrorism strategies. The IELR covered a case in which the U.S. appellate court barred the U.S. government from forcibly transferring a U.S. ISIS suspect. Prof. Plachta reported on a UN Secretary-General report on the threat posed by ISIL and the European Parliament’s recommendation on terrorism-financing.

With respect to human trafficking, the U.S. Congress enacted a law enabling civil and criminal liability for interactive computer services.

Economic sanctions continued to be a hot area. In particular, the Trump Administration announced its withdrawal from the JCPOA and re-imposition of unilateral Iran sanctions. In response the EU started a process to activate blacking statute against the unilateral sanctions and initiate a vehicle to fund Iran transactions to circumvent the unilateral U.S. sanctions. Maximilian Raileanu and I reported on the ICJ decision on Iran’s application to start proceedings against the U.S. for violating the Treaty of Amity, Economic Relations, and Consular Rights and subsequently I reported on the ICJ ‘s grant of provisions measures to Iran with respect to the U.S. sanctions. Treasury issued CAATSA reports on Russian senior foreign political officials. BIS published a notice requesting information on emerging technologies. The IELR covered Russia’s existing and anticipated measures in response to international economic sanctions against Russia. The U.S. armed and action against circumventions of North Korean sanctions. Pres. Trump reversed ZTE penalties in exchange for trade concessions with China. The U.S. and the Lima Group put diplomatic and financial pressure on the Maduro regime in Venezuela. The U.S. banned the Venezuela’s new crypto-currency.

Prof. Plachta reported on the Council of Europe’s resolution on the destruction and illegal trafficking of cultural heritage.

Maria O’Sullivan discussed the Organization for the Prohibition of Chemical Weapons (OPCW) decision to attribute blame for chemical weapons violations, setting the stage for accountability for the attacks on civilians in Syria and the Skripals and Sturgess cases in Britain. In this regard, I reported on Britain’s charges against two Russians in the attacks against the Skripals and on U.S. sanctions on Russia for violation of the Chemical and Biological Weapons Treaty.

On transnational organized crime, the Council of Europe adopted a resolution on fighting organized crime through confiscation. The U.S. charged four Chinese and six U.S. residents in international drug and laundering conspiracy involving opioids. Prof. Luz Nagle discussed how the jailing of Gustavo Villegas, a peacemaker, threatened Colombia’s demobilization of transborder criminal organizations and urban criminal gangs. I reported on Guatemala’s denial of visas to principal officials of the International Commission against Impunity in Guatemala (CICIG), the major body for prosecuting organized crime and corruption, as the U.S. stood silent.

With respect to international anti-trust, the U.S. Antitrust Division led discussions on achieving a multilateral framework in competition law investigation and enforcement. Société Général agreed to pay $1.3 billion to settle U.S.-French charges on bribes to Libya and Libor fixes.

On international environmental enforcement Henshaw-Green reported on the Chinese government’s reinstating the ban on the use of rhino and tiger parts after outcries from environmental groups. I covered INTERPOL’s coordinating international enforcement operations against marine pollution.

With respect to international securities enforcement, I reported on the actions by U.S. and U.K. enforcement and regulatory authorities against stock manipulation (i.e., pump and dump) scheme with the use of offshore entities.

Concerning extraterritorial jurisdiction I reported on the Pakistan-U.S. clash over a U.S. diplomat’s accidental killing of a motorcyclist. Kharazian reported on the suit brought by the parents of Otto Warmbier against N. Korea under the FSIA for their son’s torture and wrongful death.

With respect to international human rights, Prof. Plachta reported on the ECtHR decision in Krombach/Bamerski and the ECtHR Grand Chamber’s decision (Nait-Liman v. Switzerland), adopting a restrictive interpretation the right of access to a court in torture cases.

Extradition and extradition alternatives stories, including Ecuador’s conferring citizenship on Julian Assange, remained important. A major story was Canada’s arrest and granting bail to Meng Wanzhou, Huawei’s CFO, on a U.S. extradition request. The U.S. demanded the release of Americans forbidden from leaving China until a fugitive father Liu Changming returns. The U.S. sting operation snagged a Chinese intelligence officer in Belgium who was sent to the U.S. for conspiring and attempting to commit economic espionage and steal trade secrets from multiple U.S. aviation and aerospace companies. Prof. Michael Plachta, our correspondent in the EU, continued his coverage of efforts, including by the European Court of Human Rights, to hold accountable extralegal kidnapping in the war against terrorism. Plachta also covered the ne bis in idem principle as interpreted by the Court of Justice of the EU and the same courts allowing EU Members to refuse execution of European Arrest Warrants from Poland. Plachta reported on a case allowing a European Arrest Warrant to the UK despite Brexit.

Yurij Nemets covered INTERPOL’s trimming the individual right to access information in its files.

With respect to international organizations, INTERPOL and UNODC heads discussed measures to strengthen enforcement cooperation.

With respect to international evidence gathering, prior to the resolution by the U.S. Supreme Court of the Microsoft challenge to the warrant provisions of the Stored Electronic Communications Act, President Trump signed into law The Clarifying Lawful Overseas Use of Data (“CLOUD”) Act on March 23, 2018. It establishes processes and procedures for law enforcement requests for data in other countries. The Act may reach certain data located in other countries. The Act also allows certain foreign governments to enter into new bilateral agreements with the U.S. that will prequalify them to make foreign law-enforcement requests directly to U.S. service providers, rather than via the U.S. government under a mutual legal assistance treaty. Zarine Kharazian covered U.S. v. Microsoft Corp. She and I also covered the state of the playing field within and outside the U.S. after the enactment of the CLOUD Act.

With respect to international tribunals, Prof. Plachta discussed the Khmer Rouge Tribunal convicted two persons of genocide and the ICC Prosecutor’s requests for ruling on jurisdiction in order to start an investigation, and the recent developments in the Palestine situation before the ICC.

In the gap of actions by international tribunals, national courts in France, Germany, Sweden and the U.S. acted on alleged atrocities in Rwanda, Syria and elsewhere. Prof. Plachta discussed the MH17 joint investigation team’s interim report pointing at the Russian Federation for liability in the downing of Malaysian Airlines flight MH17 over the conflict zone in eastern Ukraine in 2014.

Non-governmental organizations continued to play major roles. Fair Trials and REDRESS released a report on how the use of evidence obtained by torture is still widespread in criminal trials across the world. Linda Ramirez reported on the case brought by the Center for Constitutional Rights against the Assad regime for the death of war reporter Marie Colvin.

Professor Michael Plachta contributed many articles on economic integration and international enforcement, including the outcomes of the meetings of the EU’s Justice and Home Affairs Council, including its non-cash fraud directive, cross-border access to e-evidence, and enforcement cooperation with external actors, including the U.S. and the Western Balkans. I covered the enforcement cooperation provisions in the Trans-Pacific Partnership.

Zarine Kharazian has continued her stellar work as the assistant editor. Her work on the blog has resulted in 6,155 visits as of December 23 and reached 378 visits on Dec. 22. She continues almost every weekend to play in bands. Our new intern Evan Schleicher has contributed a blog post on the Russian seizure of Ukrainian vessels and a decision by a German appellate court in a conviction of persons for atrocities in Rwanda.

In December William Hein and Co. started carrying the IELR and has archived the IELR back to its first publication in 1985. Hein joins LexisNexis, WestLaw, and EBSCO as databases carrying the IELR. Premium subscribers can use the IELR search engine to identify and read all the back issues on our website.

We hope you enjoyed reading the IELR in 2018 as much as we enjoyed publishing it!

Best wishes for the New Year,

The IELR Team

This retrospective will be published in Volume 35, Issue 1 of the International Enforcement Law Reporter.

German Appellate Court Overturns Convictions of Two Rwandans Charged with War Crimes

December 24, 2018 by Bruce Zagaris Leave a Comment

By Evan Schleicher

Germany’s top appeals court has partially overturned the convictions of two Rwandan men, Ignace Murwanashyaka and his deputy Straton Musoni, who were accused of aiding and abetting in the committing of war crimes in Rwanda. Their original trial, which was concluded in 2015, was a massive war crimes trial in which the Higher Regional Court in Stuttgart was in session for 320 days over a period of more than four years. The indictment, making use of the German Code of Crimes Against International Law (Völkerstrafgesetzbuch, CCAIL), which was introduced in 2002 to bring German criminal law in line with the provisions in the Rome Statute of the International Criminal Court (ICC), was the first major test of the principle of universal jurisdiction. While the case resulted in convictions, it highlighted the limits of universal jurisdiction in practice. The extremely limited sentencing of these two men initially, and the subsequent overturning of major segments of their convictions, reveal the degree to which a lack of domestic resources and overwhelming international friction to a loosely defined universal jurisdiction have made current efforts, such as those in Germany, largely ineffective.

On the topic of international friction, a lack of definitional cohesion of universal jurisdiction and the absence of international criminal courts have hindered efforts to try international criminals globally. According to M. Cherif Bassiouni in his Introduction to International Criminal Law at 713-714 (2003) and the International Committee of the Red Cross, universal jurisdiction is reserved for persons who have committed the jus cogens crimes of genocide, crimes against humanity, war crimes, torture, slavery, and slave-related practices regardless of where an alleged crime was committed, and regardless of the accused’s nationality, country of residence, or any other relation with the prosecuting entity. In practice, this seemingly simple definition has caused significant controversy. Concerns over differing jurisdictional claims and infringements of state sovereignty have made the development of a common definition of universal jurisdiction impossible. Recently, the Kenyan representative to the Sixth Committee said that “Universal jurisdiction must not be allowed to become a wildfire, uncontrolled in its spread and destructive of orderly legal processes”. This poetic turn of phrase hints at another potential harm of the principle: abuse and misuse by powerful states to attacks individuals or groups. Further, there is a danger that this principle will be used to attack the sovereignty of other nations. Many States differ in their position on universal jurisdiction when discussing the immunity of Heads of States and Governments, making it possible that a powerful nation could attempt to take and try other heads of state who oppose their interests. This may seem unlikely, but even short of such a dramatic scenario, the precedent set by universal jurisdiction claims could easily produce significant confusion and conflict between nations. There seems to be no end in sight, as talks have been ongoing since 2010 on how best to define the principle.

Further, partially because of inconsistencies across nations, domestic courts attempting to try international cases and even sometimes international criminal tribunals have received little international support. Judges in the initial trial in Germany went on the record multiple times to note the difficulty of hearing evidence from Germany and it seems that they received little outside support, even from other German courts. Further there were difficulties in the translation of documents, as well as the obtaining of evidence which met the standards of German criminal code. In sum, it was a process which was hugely time consuming and extremely difficult. This is very telling when it is noted that only two men were on trial and their initial combined sentences were only twenty-one years. International legal efforts have historically required far more resources than the courts of even an advanced country can hope to provide. The International Criminal Court at The Hague and the International Criminal Tribunal for former Yugoslavia both employed hundreds of court psychologists, legal experts and translators, resources which courts such as the Stuttgart Higher Regional Court lack.

The recent reduction of the sentences initially handed out in 2015 can thus be seen as an example of the limits of the principle of universal jurisdiction, especially when undertaken by national tribunals. In fact, because of perceived and actual limitations to the notion of universal jurisdiction, courts have begun to push for trials in the countries in which the crimes were committed when such adjudications are possible and can be fair. In 2017, the Higher Regional Court in Hamm referred a war crimes trial back to Rwanda. Further, within discussions about the notion of universal jurisdiction, there has been an extensive focus on accurately defining the jurisdictions of organizations such as the ICC considering the emerging principle. In light of these simultaneous realities, it is clear that despite the potential benefits of the principle, it will require significantly more institutional cohesion and support before it can hope to produce more effective or lasting verdicts than either existing international courts or courts within the countries in which the crimes were committed can.

OFAC Sanctions Additional Russian Operatives For Cyber Influence Campaign

December 21, 2018 by Zarine Kharazian Leave a Comment

The Treasury Department’s Office of Foreign Assets Control announced on Wednesday that it would be imposing a fresh crop of sanctions on Russian operatives for recent cyber-enabled interference. Specifically, OFAC sanctioned the following individuals and entities:

Victor Alekseyevich Boyarkin, a former GRU officer who led negotiations on behalf of Russian oligarch Oleg Deripaska. Deripaska has business ties to Paul Manafort and was designated earlier in the year;
Project Lakhta, a Russian covert influence campaign designed to interfere in electoral systems worldwide (encompasses the Internet Research Agency);
Viktor Borisovich Netyksho (Netyksho), Boris Alekseyevich Antonov (Antonov), Ivan Sergeyevich Yermakov (Yermakov), Aleksey Viktorovich Lukashev (Lukashev), Nikolay Yuryevich Kozachek (Kozachek), Artem Andreyevich Malyshev (Malyshev), Aleksandr Vladimirovich Osadchuk (Osadchuk), Aleksey Aleksandrovich Potemkin (Potemkin), and Anatoliy Sergeyevich Kovalev (Kovalev), all GRU officers implicated computer hacking operations related to the 2016 U.S. presidential election; designated purusant to CAATSA Section 224;
Aleksei Morenets (Morenets),Evgenii Serebriakov (Serebriakov), Oleg Sotnikov (Sotnikov), and Alexey Minin (Minin), Russian intelligence officers who targeted the World Anti-Doping Agency (WADA), the Organization for the Prohibition of Chemical Weapons, and other international organizations; and
Alexander Petrov (Petrov) and Ruslan Boshirov (Boshirov), the GRU officers deemed responsible for carrying out the Novichok nerve agent attack on Sergei and Yulia Skripal.

In a concurrent action, the State Department added a dozen of the designated entities to the List of Specified Persons. Any person deemed to “knowingly engage in a significant transaction” with the any of the dozen individuals will risk CAATSA Section 231 sanctions.

See OFAC’s press release here.

U.S. Charges 2 Flynn Associates with Foreign Lobbying Violations on Gulen Extradition

December 21, 2018 by Bruce Zagaris Leave a Comment

On December 17, 2018, the U.S. Attorney in the Eastern District of Virginia announced the unsealing of an indictment, charging two men associated with former Trump National Security Advisor Michael Flynn with conspiracy, acting in the United States as unregistered agents of the government of Turkey, and making false statements to the FBI in connection with efforts by the Turkiish government to extradite Fethullah Gulen from the U.S.

The indictment (available on the E.D.Va. website by searching for Case No. 1:18-cr-457) alleges, Bijan Rafiekian, aka Bijan Kian, 66, of San Juan Capistrano, California, and Kamil Ekim Alptekin, 41, of Istanbul, a Turkish national with close ties to the highest levels of the Government of Turkey, engaged in a conspiracy to covertly influence U.S. politicians and public opinion against Gulen who lives in Pennsylvania whose extradition had been requested by the Government of Turkey. The plot included using a company founded by Rafiekian and a person referred to as “Person A” in the indictment. The Flynn Intel Group, referred to as “Company A” in the indictment, provided services based upon Michael Flynn’s national security expertise.

According to the indictment, the purpose of the conspiracy was to use the Flynn Intel Group to delegitimize Gulen in the eyes of the American public and U.S. politicians, with the goal of obtaining his extradition, which was meeting resistance at the U.S. Department of Justice and still meets resistance. Simultaneously, the conspirators sought to conceal that the Government of Turkey was directing the work. However, not only did Turkish cabinet-level officials approve the budget for the project, but Alptekin provided the Turkish officials updates on the work, and relayed their directions on the work to Rafiekian, Flynn, and others at the Flynn Intel Group.

The indictment alleges the scheme included using a Dutch company owned by Alptekin to appear to be the “client” of the Flynn Intel Group to pay the company’s fee of $600,000, which was to be paid in three installments. Alptekin made the payments from an account in Turkey. The indictment alleges that after Alptekin made the payments to the Flynn Intel Group, it was to kick back 20 percent of the payments to Alptekin’s company in the Netherlands, and two such kickbacks were made.

The indictment charges Rafiekian with conspiracy and acting in the U.S. as an unregistered agent of the government of Turkey. If convicted, he faces a maximum penalty of 5 years in prison for the conspiracy charge and 10 years in prison for the charge of acting as an agent of a foreign government.[1]

Alptekin is charged with conspiracy, acting in the U.S. as an unregistered agent of the government of Turkey, and four counts of making false statements to the FBI.[2] If convicted, he faces a maximum penalty of 5 years in prison for the conspiracy charge, 10 years in prison for the charge of acting as an agent of a foreign government, and 5 years in prison for each of the four false statement charges.

The indictment coincided with the sentencing hearing for Michael Flynn on December 17. Flynn admitted in his plea that he lied to the FBI about conversation with Russia’s ambassador to the U.S. and that he misrepresented in Justice Department documents his work for the Turkish government. However, after Judge Emmett G. Sullivan warned Flynn he may be incarcerated if he was sentenced on that day, in part for working in secret for the Turkish government while on the transition team, Flynn decided to postpone the sentencing to allow him an opportunity to continue cooperating with the special counsel.[3]

Initially Judge Sullivan accused Flynn of acting as “an unregistered agent of a foreign country, while serving as the national security adviser to the president of the United States.” Subsequently, Judge Sullivan apologized and observed that Flynn worked for Turkey when he was on the Trump campaign, rather than when he was in the Trump government.

The indictment of Kian and Alptekin, combined with the comments of Judge Sullivan and the Flynn decision to postpone the sentencing, show the continued efforts to investigate and prosecute failure of lobbyists for foreign principals to register as well as the filing of false registration statements. The prosecutions of Paul Manafort and Rick Gates and ongoing investigations of Gregory B. Craig and Tony Podesta have contained aspects of violations of the Foreign Agents Registration Act (FARA).

Unfortunately for Turkey the effort to use lobbyists and conceal their work on persuading the U.S. to extradite Gulen further undermines its long but unsuccessful effort to show probable cause that Gulen committed extraditable crimes for which the U.S. should extradite Gulen. Once again, if the allegations of the indictment are proved, another foreign principal and agents may have failed to take seriously the requirements of FARA.

The fact that Judge Sullivan expressed disgust at Flynn for using his high-level contacts with the White House during the transition does not bode well for President Trump’s defense of his earning money on a daily basis from his hotels and other businesses in one of the emoluments cases over which Judge Sullivan presides and has already rejected the President’s efforts to dismiss.

[1] Indictment, at pp. 17-18.

[2] Id. at 18-20.

[3] Spencer Hsu, Matt Zapotosky and Carol Leonnig, Michael Flynn’s sentencing delayed after judge tells the ex-Trump adviser he might not avoid prison time, Wash. Post, Dec. 18, 2018 https://www.washingtonpost.com/world/national-security/michael-flynn-trumps-former-national-security-adviser-scheduled-to-be-sentenced/2018/12/17/19ce1bb4-0247-11e9-b5df-5d3874f1ac36_story.html?utm_term=.455fb95982ac

U.S. Indicts 2 Chinese Hackers Associated with the Chinese Government for Global Campaigns to Steal Intellectual Property and Confidential Business Information

December 20, 2018 by Bruce Zagaris Leave a Comment

Today Deputy Attorney General Rod J. Rosenstein and other high-level U.S. officials announced the unsealing of an indictment charging Zhu Hua (朱华), aka Afwar, aka CVNX, aka Alayos, aka Godkiller; and Zhang Shilong (张士龙), aka Baobeilong, aka Zhang Jianguo, aka Atreexp, both nationals of the People’s Republic of China (China), with conspiracy to commit computer intrusions, conspiracy to commit wire fraud, and aggravated identity theft.

Zhu and Zhang allegedly belong to a hacking group operating in China known within the cyber security community as Advanced Persistent Threat 10 (the APT10 Group). The defendants worked for a company in China called Huaying Haitai Science and Technology Development Company (Huaying Haitai) and acted in association with the Chinese Ministry of State Security’s Tianjin State Security Bureau.

From at least in or about 2006 up to and including in or about 2018, members of the APT10 Group, including Zhu and Zhang, conducted extensive campaigns of intrusions into computer systems around the world. The APT10 Group used some of the same online facilities to initiate, facilitate and execute its campaigns during the conspiracy.

Starting at least in or about 2014, members of the APT10 Group, including Zhu and Zhang, obtained unauthorized access to the computers and computer networks of Managed Service Providers (MSPs0 for businesses and governments around the world (the MSP Theft Campaign). MSPs are firms that other companies trust to store, process, and protect commercial data, including intellectual property and other confidential business information. When hackers gain access to MSPs, they can steal sensitive business information that gives competitors an unfair advantage.

The APT10 Group targeted MSPs in order to leverage the MSPs’ networks to gain unauthorized access to the computers and computer networks of the MSPs’ clients and to steal, among other data, intellectual property and confidential business data on a global scale. For example, through the MSP Theft Campaign, the APT10 Group obtained unauthorized access to the computers of an MSP that had offices in the Southern District of New York and compromised the data of that MSP and certain of its clients involved in banking and finance, telecommunications and consumer electronics, medical equipment, packaging, manufacturing, consulting, healthcare, biotechnology, automotive, oil and gas exploration, and mining.

Earlier, starting in or about 2006, members of the APT10 Group, including Zhu and Zhang, engaged in an intrusion campaign to obtain unauthorized access to the computers and computer networks of more than 45 technology companies and U.S. government agencies, in order to steal information and data concerning a number of technologies (the Technology Theft Campaign). Through the Technology Theft Campaign, the APT10 Group stole hundreds of gigabytes of sensitive data and targeted the computers of victim companies involved in aviation, space and satellite technology, manufacturing technology, pharmaceutical technology, oil and gas exploration and production technology, communications technology, computer processor technology, and maritime technology.

In furtherance of the APT10 Group’s intrusion campaigns, Zhu and Zhang, among other things, registered malicious domains and infrastructure. In addition, Zhu, a penetration tester, engaged in hacking operations on behalf of the APT10 Group and recruited other individuals to the APT10 Group, and Zhang developed and tested malware for the APT10 Group.

The MSP Theft Campaign

Zhu, Zhang, and their co-conspirators in the APT10 Group engaged in the following criminal conduct:

First, after the APT10 Group gained unauthorized access into the computers of an MSP, the APT10 Group installed multiple variants of malware on MSP computers around the world. To avoid antivirus detection, the malware was installed using malicious files that masqueraded as legitimate files associated with the victim computer’s operating system. Such malware enabled members of the APT10 Group to monitor victims’ computers remotely and steal user credentials.

Second, after stealing administrative credentials from computers of an MSP, the APT10 Group employed those stolen credentials to connect to other systems within an MSP and its clients’ networks. The APT10 Group then moved laterally through an MSP’s network and its clients’ networks and to compromise victim computers that were not yet infected with malware.

Third, after identifying data of interest on a compromised computer and packaging it for exfiltration using encrypted archives, the APT10 Group employed stolen credentials to move the data of an MSP client to one or more other compromised computers of the MSP or its other clients’ networks before exfiltrating the data to other computers controlled by the APT10 Group.

During the MSP Theft Campaign, Zhu, Zhang, and their co-conspirators in the APT10 Group successfully obtained unauthorized access to computers providing services to or belonging to victim companies located in at least 12 countries, including Brazil, Canada, Finland, France, Germany, India, Japan, Sweden, Switzerland, the UAE, the UK, and the US. The victim companies included at least the following: a global financial institution, three telecommunications and/or consumer electronics companies; three companies involved in commercial or industrial manufacturing; two consulting companies; a healthcare company; a biotechnology company; a mining company; an automotive supplier company; and a drilling company.

The Technology Theft Campaign

During the course of the Technology Theft Campaign, which started in or about 2006, Zhu, Zhang, and their coconspirators in the APT10 Group successfully obtained unauthorized access to the computers of more than 45 technology companies and U.S. Government agencies based in at least 12 states, including Arizona, California, Connecticut, Florida, Maryland, New York, Ohio, Pennsylvania, Texas, Utah, Virginia and Wisconsin. The APT10 Group stole hundreds of gigabytes of sensitive data and information from the victims’ computer systems, including from at least the following victims: seven companies involved in aviation, space and/or satellite technology; three companies involved in communications technology; three companies involved in manufacturing advanced electronic systems and/or laboratory analytical instruments; a company involved in maritime technology; a company involved in oil and gas drilling, production, and processing; and the NASA Goddard Space Center and Jet Propulsion Laboratory. In addition to those victims who had information stolen, Zhu, Zhang, and their co-conspirators successfully obtained unauthorized access to computers belonging to more than 25 other technology-related companies involved in, among other things, industrial factory automation, radar technology, oil exploration, information technology services, pharmaceutical manufacturing, and computer processor technology, as well as the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

Zhu and Zhang are each charged with one count of conspiracy to commit computer intrusions, which carries a maximum sentence of five years in prison; one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison; and one count of aggravated identity theft, which carries a mandatory sentence of two years in prison.

Finally, the APT10 Group compromised more than 40 computers in order to steal sensitive data belonging to the Navy, including the names, Social Security numbers, and dates of birth, salary information, personal phone numbers, and email addresses of more than 100,000 Navy personnel.

According to Deputy A.G. Rosenstein, “(t)oday’s charges mark an important step in revealing to the world China’s continued practice of stealing commercial data. Responding to that conduct requires a strategic approach to the threats that China poses. That is why the Department of Justice recently announced an initiative to address the full range of threats. One tactic is to increase our enforcement efforts. Another is to conduct foreign investment reviews to protect against China improperly acquiring sensitive information. A third is to find ways to better protect our telecommunications networks.”

INTERPOL Rolls Back Individual Right to Access Information in its Files, Makes it Harder to Fight Abusive Red Notices

December 12, 2018 by Yuriy Nemets Leave a Comment

Over the past several years, thanks to human rights advocates’ hard work and growing attention from the media, the general public has had the opportunity to learn more about how governments abuse INTERPOL to persecute political opponents and other victims of unlawful criminal prosecutions. The discussion about INTERPOL’s internal mechanism, which provides individuals the opportunity to fight the abuse, and its shortcomings, has travelled beyond scholarly publications and entered the general news cycle. INTERPOL, in turn, has carried out reforms to eliminate some of those shortcomings. The organization has rightfully been praised for the improvements it has made and called upon to close remaining serious loopholes. Yet these reforms have also limited the rights of victims of INTERPOL abuse, and it is what the victims have lost as a result of the reforms that hasn’t received wide attention.

Article 18 of INTERPOL’s Rules on the Processing of Data (RPD) proclaims: “Any person or entity shall be entitled to submit directly to the Commission for the Control of INTERPOL’s Files a request for access to, or correction and/or deletion of data processed in the INTERPOL Information System concerning that person or entity. These rights of access to, or correction and deletion of data shall be guaranteed by the Commission for the Control of INTERPOL’s Files and be governed by separate rules.”[1] The two sentences contradict each other. The first guarantees the right to submit a request for access only, whereas the second points to an unconditional right of access. The truth is that what INTERPOL has for a long time been loosely calling the “right of access” has never been an unconditional right.[2]

Under the Operating Rules of the Commission for the Control of INTERPOL’s Files, adopted in 2008, prior to providing an individual access to the information about her or him in INTERPOL’s databases, the Commission had to obtain consent from the government source of that information.[3] The rule, however, permitted the Commission to provide access without the government’s consent if the individual possessed “sufficient evidence showing that he/she [knew] that there [was] information about him/her in INTERPOL’s files.”[4] The latter provision made a difference. It is hard to overstate how critical it is for an individual, who is fighting a request to locate and provisionally arrest her or him pending extradition (red notice or diffusion), to access the information the government submits to INTERPOL. It is often impossible to prepare a comprehensive argument against an abusive red notice or diffusion without possessing all information recorded in INTERPOL’s files, and it is not uncommon for an individual fleeing persecution to be unaware of the full extent of the criminal prosecution, including all accusations on which the red notice or diffusion is based.[5] The provision, however, was repealed in 2017 as part of the reforms following the adoption of the Statute of the Commission for the Control of INTERPOL’s Files and the Commission’s new Operating Rules.

INTERPOL’s regulations do not directly address a situation in which a red notice or diffusion is based on several offenses only some which have been proven to be politically motivated or defy the Universal Declaration of Human Rights. The regulations, however, suggest how INTERPOL could approach such a situation, in which an individual successfully argued against all but one offence behind the red notice or diffusion. Consider Article 83(1)(c) of the RPD: “[I]f the request includes several offences, the red notice may be published for all offences that meet INTERPOL’s Rules provided that at least one offence meets the above criteria.” The “above criteria” refers to the minimum requirements a red notice must comply with: the offence behind a red notice must be a serious ordinary law crime, must not raise “controversial issues relating to behavioral or cultural norms,” “relate to family/private matters,” originate from a “violation of laws of an administrative nature” or “private disputes,” must satisfy the penalty threshold and be “of interest for the purposes of international police cooperation.”[6] Would INTERPOL apply this rule by analogy and publish a red notice or diffusion if the individual proved that all but one accusation, of which he was not aware, were politically motivated or defied the Universal Declaration of Human Rights and thereby violated the INTERPOL Constitution?

There seems to be no clear answer to this question from INTERPOL. Under the Commission’s Statute adopted as part of the recent reforms, a government must justify any restriction on the disclosure of information.[7] However, “[t]he absence of justification alone will not lead to the disclosure of the content of the information but may be taken into consideration by the [Commission’s] Requests Chamber in assessing and deciding on a request.”[8] At the same time, the RPD requires that to determine whether a red notice complies with Article 3 of its Constitution, which strictly prohibits INTERPOL from undertaking “any intervention or activities of a political, military, religious or racial character,”[9] the organization must examine “all relevant elements.”[10] Therefore, both the Statute and the RPD can be interpreted as giving the Commission the power to assess all information related to a red notice, including accusations an individual has not had the opportunity to address. However, even if the Commission adopted this approach, its assessment would often lack objectivity because it would not include the individual’s argument and evidence and would be limited to the government’s submissions and information in the public domain, if any.

By allowing individuals who possessed evidence of the existence of information about them in INTERPOL’s files access to that information without government authorization, the repealed rule guaranteed a fairer, closer to due process adjudication of their complaints.[11] The rule also provided INTERPOL with more opportunities to maintain neutrality and thereby comply with its Constitution.[12] By repealing the rule, INTERPOL harmed not only the victims of red notice and diffusion abuse but itself too.[13]

Governments known for their abuse of INTERPOL’s resources have wasted no time in taking advantage of the repeal of the rule. They have used it to limit access to individuals who possess evidence that there is information about them in the organization’s databases by either agreeing to release only part of the information (partial disclosure), or by denying access altogether. The Commission, in turn, has reportedly refused such individuals access without first obtaining consent from the respective governments, and explained this approach by citing the difference between the repealed rule, which explicitly empowered the Commission to disclose the information without consulting governments, and the new rules, which do not.

The repeal of the rule has negated much of the progress INTERPOL has made in protecting individuals from persecution, which the organization considers one of its “primary objectives.”[14] INTERPOL should reinstate the rule without delay. The organization should also change its approach towards individuals who do not possess evidence of the existence of information about them in its files. In this regard, in light of its refugee policy, INTERPOL should provide refugees unconditional access to the information about them.[15] Because INTERPOL must protect all individuals from persecution, not just refugees and individuals who possess evidence of the information recorded in its databases,[16] the organization should provide unconditional – without obtaining prior consent from a government – access to every other individual who can prove that there is a reason to believe that she or he may be a target of a politically motivated or otherwise unlawful prosecution which can be used as a basis for a red notice or diffusion.

Yuriy Nemets is the managing member at NEMETS, a law firm based in Washington, DC. Yuriy is an attorney with over fifteen years of experience in domestic and international litigation and arbitration, international extradition, corporate, banking, transportation, international trade and investments, and intellectual property law. He has authored publications about international extradition, corporate, banking, and intellectual property law.

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[1] INTERPOL’s Rules on the Processing of Data art. 18(1), (2), 2016, https://www.interpol.int/About-INTERPOL/Legal-materials [hereinafter RPD].

[2] See also Rules on the Control of Information and Access to INTERPOL’s Files art. 9(a), 11(a) II.E/RCIA/GA/2004(2009) (abrogated 2016).

[3] Operating Rules of the Commission for the Control of INTERPOL’s Files art. 14(1), II.E/RCCF/CCF/2008 (abrogated 2017).

[4] Id. art. 14(5).

[5] See Fair Trials, Dismantling the Tools of Oppression: Ending the Misuse of INTERPOL, 49 (Oct. 4, 2018), https://www.fairtrials.org/publication/dismantling-tools-oppression-1 (“Applicants need to have access to information about the data being held on INTERPOL’s databses, as well as the arguments being made, to justify the data. Without such information, applications will inevitable be based on guess work, and individuals cannot be expected to make focused, succinct complaints to challenge the data.”).

[6] RPD, supra note 1, art 83(1)(a).

[7] Statute of the Commission for the Control of INTERPOL’s Files art. 35(4), 2016, https://www.interpol.int/About-INTERPOL/Commission-for-the-Control-of-Files-CCF [hereinafter Statute].

[8] Id.

[9] Constitution of the ICPO-INTERPOL, art. 3, June 13, 1956, http://www.interpol.int/About-INTERPOL/Legal-materials/The-Constitution.

[10] RPD, supra note 1, art 34(3).

[11] See also Fair Trials, supra note 5, at 20, 21.

[12] See also INTERPOL, Neutrality (Article 3 of the Constitution), https://www.interpol.int/About-INTERPOL/Legal-materials/Neutrality-Article-3-of-the-Constitution.

[13] In this regard, Fair Trials argues that the rule, which provided individuals who were aware of their INTERPOL status access to the information, has been repealed because the Commission’s Statute and its new Operating Rules contain “new broader presumptions of disclosure” and promote “improved transparency and the equality of arms” and that the repeal is “unlikely to create significant changes in practice given [Fair Trials’] experience that this provision did not, in fact, lead to disclosure in such cases.” Fair Trials, supra note 5, at 45, 50. Regardless of the Commission’s unwillingness to comply with the now-repealed provision, the provision provided individuals aware of their INTERPOL status a clear basis to argue that they had the right of access independent of any government’s will. By repealing the provision, INTERPOL has eliminated that right and, thereby, moved further away from the presumption of disclosure and towards the presumption of secrecy. The latter, as Fair Trials has rightfully noted, “prevents even people who have good reasons to believe that they are subject to an INTERPOL alert from accessing the data.” Id. at 40.

[14] INTERPOL, supra note 12.

[15] Fair Trials, INTERPOL Text on Refugee Policy – Excerpts (last visited Dec. 11, 2018), https://www.fairtrials.org/wp-content/uploads/INTERPOL-TEXT-ON-REFUGEE-POLICY.pdf?platform=hootsuite; See also Fair Trials, supra note 5, at 56.

[16] INTERPOL, supra note 12.

Canada Arrests Huawei Executive on U.S. Extradition Warrant for Sanctions Charges

December 9, 2018 by Bruce Zagaris Leave a Comment

On December 1, 2018, Canada arrested Meng Wanzhou, Huawei’s global chief financial officer, on a U.S. extradition warrant to answer fraud charges in the U.S. District Court for the Eastern District of New York.[1]During a bail hearing on December 7, 2018, John Gibb-Carsley, a lawyer with the Canadian federal Justice Department, told the court Ms. Meng committed multiple acts of fraud against financial institutions and should be denied bail. He told B.C. Supreme Court Justice William Ehrcke that Meng does not have meaningful connections to Canada, has enormous resources, and poses a serious flight risk, especially since each offense carries a maximum of 30 years in prison.[2]

In particular Gibb-Carlsey said Ms. Meng had “direct involvement” with Huawei’s representation to banks and tricked them into engaging in transactions that violated U.S. sanctions against Iran.

According to Gibb-Carsley, between 2009 and 2014, Huawei used a Hong Kong company, Skycom Tech, to make Transactions in Iran and engage in business with telecom companies there, in violation of U.S. sanctions. U.S. banks cleared financial transactions for Huawei, inadvertently doing business with Skycom.[3]

In 2013, articles by Reuters alleged Huawei used Skycom to do business in Iran and attempted to import U.S.-made computer equipment into Iran in violation of sanctions. When several financial institutions inquired about the Huawei-Skycom relationship, Ms. Meng arranged a meeting with an executive from one of the financial institutions. During the meeting, she presented PowerPoint slides in Chinese, saying that Huawei operated in Iran in strict compliance with U.S. sanctions. She allegedly falsely stated that Huawei had sold the shares it had held in Skycom. However, Mr. Gibb-Carsley said no distinction existed between Skycom and Huawei. Huawei secretly operated Skycom as an unofficial subsidiary.

In this regard, Skycom employees used Huawei email addresses and made badges and a letterhead showing the Huawei logo. Skycom documents showed that Huawei also controlled the entity to which the company was sold in 2009 until at least 2014.[4]

Gibb-Carsley said Relying on misrepresentations by Meng and other Huawei representatives, one of the banks and its U.S. subsidiary cleared more than $100 million worth of transactions concerning Skycom through the U.S. between 2010 and 2014.[5]

HSBC had officials from Exiger, a monitor due to HSBC’s prior sanctions and anti-money laundering violations, review its compliance. Exiger officials observed suspicious Iranian-connected transactions involving Huawei. Exiger reported them to the Justice Department.[6]

With respect to bail, David Martin, counsel for Meng, said Meng has two Vancouver properties with a value of $14 million that would be available to be put up for bail. Violating her bail would humiliate her father who she loves. Her father is a former Chinese army intelligence officer and the founder of Huawei. Martin observed that the PowerPoint presentation made by Meng wad done in 2013, and questioned why it has taken so long to start a criminal prosecution. Martin continued that Meng’s connections to Canada include her formerly having permanent residence status and her husband and several children having lived in Vancouver at one point. Martin said a number of conditions could be imposed for bail, including a curfew, the surrender of any passports, and surveillance if necessary.[7][8]

The bail hearing is adjourned until Monday December 10, when Martin is expected to call several witnesses to describe a program of “community custody” that could apply to Meng is she is granted bail.[9]

The case has increased uncertainty in global financial markets, producing another day of sharp losses from Asia to Wall Street. Worries about potential Chinese retaliation exist.[10] On December 8, China warned Canada of severe consequences if it did not immediately release Meng, calling the case “extremely nasty.”[11]

The U.S. and Canada have strong extradition relations, so Meng has an uphill battle

[1] Emily Rauhala and Anna Fifield, Chinese tech executive lied to evade sanctions on Iran, U.S. charges, Wash. Post, Dec. 7, 2019, at A1, col. 1.

[2] Reuters, China warns Canada of ‘consequences’ if it fails to release Huawei CFO, Globe & Mail, Dec. 8, 2018.

[3] Kate Conger, Huawei Official Charged In Iran Sanctions Fraud, N.Y. Times, Dec. 8, 2018, at A7, col. 1.

[4] Id.

[5] Keith Fraser, Huawei exec committed fraud by deceiving multiple banks: Crown, Vancouver Sun, Dec. 8, 2018.

[6] Conger, supra.

[7] Fraser, supra.

[8] Id.

[9] Id.

[10] Rauhala and Anna Fifield, supra.

[11] Reuters, supra.

U.S. Indictment Charges Professionals and U.S. Taxpayer for Tax and Related Offenses Arising From Panama Papers

December 5, 2018 by Bruce Zagaris Leave a Comment

On December 4, 2018, U.S. law enforcement announced the unsealing an indictment in the U.S. District Court for the Southern District of New York, charging four individuals with wire fraud, tax fraud, money laundering, and other crimes for their alleged roles in a decades-long criminal scheme perpetrated by Mossack Fonseca & Co. (“Mossack Fonseca”), a Panamanian-based international law firm, and related entities.

The 11-count indictment charges Ramses Owens, 50, a Panamanian citizen; Dirk Brauer, 54, a German citizen; Richard Gaffey, a U.S. citizen, of Medfield, Massachusetts; and Harald Joachim Von Der Goltz, 81, a German citizen. Owens, Gaffey and Von Der Goltz are charged with one count of conspiracy to commit tax evasion, one count of wire fraud, and one count of money laundering conspiracy. Owens and Brauer are charged with one count of conspiracy to defraud the U.S. and one count of conspiracy to commit wire fraud. Gaffey and Von Der Goltz are also charged with four counts of willful failure to file an FBAR. In addition, Von Der Goltz is charged with two counts of making false statements.

On November 15, 2018, French authorities arrested Brauer, who worked as an investment manager for Mossfon Asset Management, S.A., an asset management company closely affiliated with Mossack Fonseca, in Paris, France. On December 3, 2018, British authorities arrested Von Der Goltz, a former U.S. resident and taxpayer in London, England. On December 4, U.S. authorities arrested Gaffey, a U.S.-based accountant in Boston, Massachusetts. Owens, a Panamanian attorney who worked for Mossack Fonseca, remains at large.

The indictment alleges that, from at least in or about 2000 through in or about 2017, Owens and Brauer conspired with others to help U.S. taxpayer clients of Mossack Fonseca hide assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful and dishonest means. Owens and Brauer allegedly worked to establish and manage opaque offshore trusts and undeclared bank accounts on behalf of U.S. taxpayers who were clients of Mossack Fonseca. Owens and Brauer allegedly marketed, created, and serviced sham foundations and shell companies formed under the laws of countries, such as Panama, Hong Kong, and the British Virgin Islands, to conceal from the IRS and others the ownership by U.S. taxpayers of accounts established at overseas banks, as well as the income generated in those accounts. Typically the sham foundations “owned” the shell companies that nominally held the undeclared assets on behalf of the U.S. taxpayer clients of Mossack Fonseca.

In exchange for additional fees, Owens and Brauer allegedly helped clients who had bought the sham foundations and related shell companies by preparing corporate meeting minutes, resolutions, mail forwarding, and signature services. Owens and Brauder are also alleged to have intentionally established the bank accounts in jurisdictions with strict bank secrecy laws, thereby impeding the ability of the U.S. to obtain bank records for the accounts. Additionally, Owens and Brauer allegedly instructed U.S. taxpayer clients of Mossack Fonseca about how to repatriate funds to the U.S. from their offshore bank accounts in a manner designed to keep the undeclared bank accounts concealed. Among other things, Owens and Brauer instructed clients to use debit cards and fictitious sales to repatriate their funds covertly.

Von Der Goltz was allegedly one of Mossack Fonseca’s U.S. taxpayer clients. Von Der Goltz was a U.S. resident and was subject to U.S. tax laws, requiring him to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts. As a U.S. taxpayer, Von Der Goltz was required to file a Report of Foreign Bank and Financial Accounts (FBAR). Von Der Goltz allegedly evaded his tax reporting obligations by establishing a series of shell companies and bank accounts, and hiding his beneficial ownership of the shell companies and bank accounts from the IRS. These shell companies and bank accounts allegedly made investments worth tens of millions of dollars. Owens and Gaffey, a partner at a U.S.-based accounting firm, helped Van Der Goltz in this scheme. Van Der Goltz, Gaffey, and Owens allegedly falsely claimed that Von Der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and, unlike Von Der Goltz, was not a U.S. taxpayer.

The indictment alleges Gaffey, besides helping Von Der Goltz evade U.S. income taxes and reporting requirements, also worked closely with Owens to help another U.S. taxpayer client (Client-1) of Mossack Fonseca defraud the IRS. Client-1 allegedly maintained a series of offshore bank accounts, which Mossack Fonseca helped Client-1 conceal from the IRS for years. The indictment also alleges that, on the advice of Owens and Gaffey, Client-1 covertly repatriated approximately $3 million of Client-1’s offshore money to the U.S. by falsely stating on Client-1’s federal tax return that the money represented proceeds from the sale of a company. After Client-1 repatriated approximately $3 million in this way, approximately $1 million still remained in Client-1’s offshore account, the existence of which remained hidden from the IRS.

The indictment illustrates the trend by U.S. and law enforcement around the world to investigate and prosecute law firms, asset managers, accountants, and other enablers for their key roles in the global financial system. Assistant Attorney General Benczkowski said “the charges…demonstrate our commitment to prosecute professionals who facilitate financial crime across international borders and the tax cheats who utilize their services.” IRS-Criminal Investigations Chief Don Fort said the indictments send a message that “more investigations are on the way.”

With respect to prosecuting tax enablers, on July 2, 2018 the heads of tax crime and senior tax officials of the U.S., U.K., Canada, the Netherlands, and Australia announced an alliance on tax enforcement cooperation. At their first meeting they agreed to develop tactical plans and identify opportunities to pursue enablers of international tax crime. This new indictment shows a tangible result.

The indictment also is the latest of many indictments brought by tax authorities and prosecutors arising out of the publication on April 3, 2016 by the International Consortium of Investigative Journalists (ICIJ) of the Panama Papers investigation. As of December 1, 2016, governments in more than 70 countries have started over 150 investigations, inquiries, audits and probes into the affairs of thousands of people and corporations linked to Panama Papers.