In this week’s Financial Crime Wave, a rare court battle between a bank and a regulator on anti-money laundering compliance programs, an analysis of a new way to better structure financial crime compliance programs to better highlight the nexus between organized criminal and terror groups, IRS to end voluntary disclosure program, and more.


Appellate Court rules for FDIC, reject’s bank’s claim AML rules are unconstitutionally vague, exam biased

The Ninth Circuit Court of Appeals this week affirmed an order requiring California Pacific Bank to comply with the U.S. anti-money laundering (AML) rules, collectively called the Bank Secrecy Act, in all, rejecting the bank’s protestations arguing that the regulations are unconstitutionally vague and the federal regulator at the helm, in this case, the Federal Deposit Insurance Corp., had a biased examination process.

A three-judge panel found there was more than enough evidence to support an administrative law judge’s finding that the financial institution had lax AML internal controls, weak training for staff and deficient independent testing – called the “four pillars” of an AML program –  and as a result failed to comply with related program rules, (via Ninth Appellate Circuit).

Bulk of AML programs, even in face of higher regulatory scrutiny, rising penalty figures, failing to actually detect, prevent laundering, terror finance schemes: opinion

Regulators are holding financial institutions responsible for the real-life consequences of anti-money laundering (AML) failures. Firms must reconfigure their transaction monitoring programs to identify the emergent, multi-dimensional money laundering and terrorism finance methods that are defeating today’s rules-based detection scenarios. Adopting an actor-centric hybrid threat finance (HTF) model can cut compliance costs, reduce risk, improve regulatory relations, and increase the usefulness of suspicious activity reports (SARs). The best way to address these challenges is with a detection platform based on the hybrid threat finance (HTF) concept derived from the U.S. Department of Defense “hybrid threat” doctrine.

The military, intelligence, and law enforcement communities recognize the hybrid nature of international conflict relations, in that threat organizations across different classifications are deeply interconnected. HTF methodology targets the extension of those connections into financial markets, focusing detection strategies on the fund flows and intersections between one or more threat groups or operational echelons in international and retail banking, gaming, MSBs, and digital currency exchanges.

Institutions should adopt an “actor-centric” HTF model that targets bad actors with precision, increasing SAR efficacy rates and decreasing false-positive alerts. This concept relies heavily on a typology matrix, which analyzes a bank’s geographic nexus of services, products, and customer base, while cross-referencing identified risks in the global threat landscape. Matches between geography, product line, and high-risk customer profile are tied to specific threats, which leads to the implementation of targeted detection scenarios, (via Reuters).

Virtual currencies

BIS debates pros, cons of state-issued crypto currencies, with potential benefits for AML compliance, but threats to bank business models

The Bank for International Settlements (BIS) referred by many as the “bank for central banks,” has released a paper on the possible impact of state-issued cryptocurrencies, as well as arguments for and against the introduction of such monetary instruments. Pros include easier AML compliance, while cons include threats to commercial banks’ business models.  The BIS report noted that state-issued cryptocurrencies, which BIS refers to as central bank digital currencies (CBDCs), are worth thinking about because of their potential impact, even though few countries are likely to issue them anytime soon. The report argues that such instruments “could have far-reaching ramifications for the role of money, the financial system and the economy.”

The report also details potential pros and cons for AML compliance. At one end, non-anonymous crypto exchanges, and transactions allowed only and tied directly to live humans, could be a major blow to criminal groups and ease customer onboarding, risk ranking, monitoring and suspicious activity reporting. But due to the structure and technical acumen of the country and systems involved, not bolting AML at the outset could leave the door open to criminal groups, (via ETH News).

Crypto ad crackdown continues

Following move by Facebook, Google bans advertisements related to unregulated crypto currencies, virtual currency exchanges, initial coin offerings, (via Business Today, India).

Regulators battle for crypto dominion

New York federal judge rules that U.S. securities regulator, the CFTC, can regulate cryptocurrencies as commodities, further muddying waters about how sector should be monitored, regulator, (via Coin Telegraph).

Tax evasion

IRS ends voluntary disclosure program that breached Swiss secrecy

U.S. Internal Revenue Service ends extremely successful tax evasion voluntary disclosure program that became boon for individual evaders, bane to banks that facilitated large scale tax schemes that eventually cracked Swiss bank secrecy, (via Forbes).


Lawmakers finally tackling key U.S. AML vulnerabilities

Congress at crucial step, has critical chance to actually improve AML programs, foster innovation and arm banks, regulators and law enforcement to take down large scale domestic, international organized criminal, terror groups, (via the Hill).


Chinese banks again in U.S. AML hot seat

Fed nails one of the world’s largest banks based in China for weak AML programs, due diligence, risk ranking missteps and missed SARs, (via the Federal Reserve).

Money laundering

Federal authorities bust top executive selling encrypted, secure Blackberry phones to Sinaloa cartel

For years, a slew of shadowy companies have sold so-called encrypted phones, custom BlackBerry or Android devices that sometimes have the camera and microphone removed and only send secure messages through private networks. Several of those firms allegedly cater primarily for criminal organizations. Now, the FBI has arrested the owner of one of the most established companies, Phantom Secure, as part of a complex law enforcement operation. A complaint charges Vincent Ramos, the founder and CEO of Canada-based Phantom, with racketeering conspiracy to conduct enterprise affairs, as well as conspiracy to distribute narcotics, and aiding and abetting.

Crucially, the complaint alleges that Ramos and Phantom were not simply incidental to a crime, like Apple might be when a criminal uses an iPhone, but that the company was specifically created to facilitate criminal activity. The complaint alleges that even members of the notorious Sinaloa drug cartel used Phantom’s devices, and that the “upper echelon members” of transnational criminal groups have bought Phantom phones. A second source also familiar with the secure phone industry told Motherboard that the devices have been sold in Mexico, Cuba, and Venezuela, as well as to the Hells Angels gang. Cheviron estimates that 20,000 Phantom devices are in use worldwide, with around half of those in Australia; bringing in tens of millions of dollars of revenue to Phantom, (via Motherboard).


SEC calls for crypto trading exchanges to be registered, called those touting ICOs “potentially unlawful”

The U.S. Securities and Exchange Commission said on Wednesday that many online trading platforms for cryptocurrencies should be registered with the regulator and subject to additional rules, in a further sign regulators are cracking down on the digital currency sector. In a statement, the SEC said these “potentially unlawful” platforms may be giving investors an unearned sense of safety by labelling themselves as “exchanges.” The regulator said these platforms need to register with the SEC as a regulated national securities exchange or an alternate trading system, or ATS.

The new statement marks the latest effort by the SEC to apply federal securities laws to the rapidly growing cryptocurrency sector. SEC Chief Jay Clayton has repeatedly expressed concern about cryptocurrencies and “initial coin offerings,” or ICOs, and has urged investors to exercise caution. “The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not,” the agency said on Wednesday. The regulator said any platform providing trading of digital assets that behave like securities and which operate like exchanges must register with the SEC as a national securities exchange, or seek an exemption such as ATS registration, (via KYC 360).


Key updates to Canada’s AML, CFT regime: capturing, displaying beneficial ownership details, extending AML to more sectors, including real estate, luxury goods

New proposals to strengthen Canada’s anti-money laundering (AML) regime are both diverse and far reaching, including buttressing some of the biggest fincrime vulnerabilities, such as opaque corporate ownership standards and sectors without compliance oversight. Some would extend the reach of Canada’s AML/ATF regime. Others would reduce the burden of this regime on reporting entities.  Some of the more noteworthy proposals are:

  • New requirements to enable authorities to access and receive accurate, up-to-date beneficial corporate ownership information.
  • Expanding Canada’s AML/ATF regime to new parties, including: (1) mortgage insurers, land registries and title insurance companies; (2) non-federally regulated mortgage lenders; (3) unregulated financing, leasing and factoring businesses; and (4) dealers in high-value goods.
  • A regulatory “sandbox” for fintech companies that would allow for exemptive relief and administrative forbearance for emerging technology companies, (via Fasken).


Customs fraud explosion

EU starts to go after multi-billion dollar U.K. customs fraud, (via KYC 360).

Identity theft

Synthetic ID fraud on the rise

In a twist on ID theft, criminals are deploying figments of their imaginations, in what is often called synthetic-identity fraud. It’s one of the fastest growing forms of identity crimes, the Justice Department says, and among the hardest to combat, (via the WSJ).


Watchdog body tackles TBML

Wolfsberg releases video on trade-based money laundering, in attempt to raise awareness of massive money laundering technique, (via Wolfsberg).

Terror finance

UK terror-related arrests soar more than 50 percent to record high in 2017, a year marred by high-profile, homegrown attacks

The number of people arrested for terrorism-related offences in Britain rose by 58 percent to a record high of 412 in 2017 – one of the most intense periods of terrorist attacks in recent history, though many were later released without formal charges. The Home Office quarterly statistics published on Thursday show there were 412 arrests in 2017 compared with 261 in 216. The record figures include 12 people arrested for the Westminster attacks in March, 23 people linked to the attack in Manchester in May, 21 arrests connected with the London Bridge attack in June and one arrest in connection with the Finsbury Park mosque attack later that month.

A further seven arrests were made in connection with the attack on Parsons Green tube station in September. The figures reflect the growing threat from jihadists in Britain. The director general of MI5, Andrew Parker, spoke in October of “a dramatic upshift in the threat this year” to the “highest tempo I’ve seen in my 34-year career.” The detailed Home Office figures show that the 412 arrests in 2017 resulted in 135 people being charged – 110 of them for terrorism-related offences. More than half – 228 or 55 percent – were released without charge, 33 were released on bail pending further investigation and 13 faced alternative action, (via The Guardian).


South Texas prosecutors target homes in Florida, California in Mexico corruption scandal

Federal prosecutors in Corpus Christi on Wednesday filed civil lawsuits to forfeit condo units in Florida and California they alleged were purchased as part of a money laundering scheme involving former Mexican officials. The move is further evidence of those in real estate either shirking their responsibilities to detect illicit finance or actively aiding criminal groups, something on the minds of the U.S. Treasury with their recent spate of geographic targeting orders focusing on pricey real estate in Florida, California and other locales. Prosecutors allege that José Manuel Saiz Pineda, the former governor of the southern Mexican state of Tabasco, bought the property using money stolen from that state. He faces money laundering and bank fraud charges in Corpus Christi.

The government is trying to seize property in Houston as well, and the allegations mirror those in cases against former government officials from other Mexican states who are accused of laundering stolen funds in San Antonio and South Texas. In those cases, prosecutors here allege that government officials embezzled tens of millions of dollars in Mexico and transferred the money to U.S. banks, where it was shifted to offshore accounts in some cases and used to buy real estate in others. The investigations have resulted in property seizures across San Antonio, as well as in South Padre Island, Brownsville and McAllen, (via My San Antonio).


Organized criminal group using copycat government websites to siphon more than $40 million jailed for dozens of years

Members of a criminal gang that created copycat websites of key government departments and mislead consumers to pay more for services than they should have been sentenced to a total of more than 35 years. The group defrauded the public out of over £37 million, making it one of the largest UK online crime cases, according to the National Trading Standards (NTS) which explained that they operated a number of ‘copycat websites’, impersonating official government services to sell passports, driving licences and other key documents for vastly inflated prices.

“These sites mimicked official websites run by eleven government agencies and departments and manipulated search engine results to appear more genuine,” NTS explained, “they knowingly misled hundreds of thousands of consumers into paying more than they needed for a number of government services including new or replacement passports, visas, birth and death certificates, driving licenses, driving tests, car tax discs and the London Congestion Charge.” The gang also set up websites that mimicked the American, Turkish, Cambodian, Vietnamese and Sri Lankan official visa sites where travellers could apply and pay for electronic visas to visit those countries. The illegal profits funded a glamorous lifestyle for the defendants, with extravagant spending on expensive cars and luxury holidays, the NTS explained, (via KYC 360).


Donor-advised challenges in non-profit sector

An IRS update on the financial crime risks and evasion vulnerabilities tied to donor advised funds in the non-profit sector, (via the IRS).

Fiscal sponsorship debacle

In that same vein, a more than year-long investigation related to the fincrime gaps around the fiscal sponsorship of non-profits, (via the Cause of Action Institute).

Corporate transparency

EU continues designations for tax weaknesses, corporate opacity

EU adds three jurisdictions to tax blacklist, as some countries move to gray list in tightening focus on financial crime regimes, (via KYC 360).