Feds highlight AML consultant's role as coach for criminals in stock fraud
Thursday, April 20, 2017
Posted by: Brian Monroe
By Brian Monroe
April 20, 2017
The U.S. government’s highlighting of a financial crime consultant’s role in an alleged securities pump and dump scheme could foreshadow more scrutiny of a group typically known for helping banks strengthen compliance controls, not tutor criminals on how to evade them.
The U.S. Justice Department stated that four individuals, including anti-money laundering (AML) consultant Dimitrios Argyros, planned the securities fraud by controlling and secretly manipulating the value of BioCube, Inc., which sells products that detect trace amounts of the chief psychoactive ingredient in marijuana, referred to as THC. The four are also accused of laundering $2 million in proceeds.
The prosecution of Argyros comes at a time when AML consultants, and compliance professionals more generally, are facing increased risk of being held individually liable in financial crime enforcement actions – though active participation in criminal activity remains an unusual novelty.
Historically, this group of professionals were considered a boon to banks and bane to criminals, helping institutions bolster compliance controls to prevent a range of crimes, from fraud to money laundering.
But in recent years, AML consultants and compliance officers have themselves come under fire – albeit much less directly than the rare case of BioCube – for failing to create, staff or run adequate compliance programs.
On the audit side, regulators and authorities have chastised consultants for lacking independence and “watering down” results to please banks and keep lucrative accounts.
The BioCube case also indicates potential risks for institutions with AML consulting customers.
These are often viewed as lower risk clients – even though some consultants are attorneys, an inherently high-risk category – as many professionals in this field themselves are former examiners and law enforcement agents, including those from federal regulatory bodies, the U.S. Treasury and Department of Justice.
The fact that an AML compliance consultant could have used his understanding to aid criminals around controls is “not surprising,” said a former compliance officer at a large bank, who is now in a consulting and advisory role with several companies.
“Just from a numbers and raw quantitative perspective, there is a certain percentage of people who will deviate from the course,” said the person, who asked not be named. “He knows the subject matter and was very familiar with the financial and regulatory constructs, including what examiners and investigators look for.”
While it can be impossible to know what motivates a person committed to countering financial crime to “jump over the fence,” classic human frailties could be at play, said the person. “It could be money or an ego. He probably thought because he knew all the rules, he wouldn’t get caught.”
In a criminal complaint, prosecutors stated that Argyros taught the group how to create shell companies with opaque ownership structures replete with nominee names in Cyprus and the Bahamas, so they could buy and deposit BioCube shares anonymously.
He also taught them how to avoid the $10,000 customer transaction reporting (CTR) and $5,000 suspicious activity reporting (SAR) thresholds and illustrated how to label various transactions as “consulting fees” with him to make them appear lower risk to banks and pave the way for future fraudulent payments.
To further convince the co-conspirators they would not get caught, Argyros “touted his ability to capitalize on his anti-money laundering expertise during conversations with an individual posing as a co-conspirator in the money laundering scheme who, unbeknownst to Argyros, was working with the FBI,” according to court documents.
Prosecutors are also indicting Chris Messalas, a former securities broker previously barred by the Securities and Exchange Commission (SEC); Boris Rubizhevky, the former Chief Executive Officer of BioCube; and Michael Garnick, a Philadelphia-based attorney.
Messalas, Rubizhevsky and Garnick are charged with securities fraud conspiracy. Messalas and Argyros are charged with money laundering conspiracy.
Messalas faces a maximum sentence of 25 years’ imprisonment, Rubizhevsky and Garnick face maximum sentences of five years’ imprisonment, and Argyros faces a maximum sentence of 20 years’ imprisonment.
Gleaming the BioCube
The same AML expertise that Argyros allegedly brought to the scheme should have helped him realize that THC-detecting equipment might pique the interest of law enforcement.
Since 2010, BioCube has “purported to have a series of different business purposes, including, most recently, planning to market and distribute devices for detecting marijuana on a user’s breath,” according to court documents.
One immediate red flag is where the ostensibly public company trades: the OTCBB in trading parlance, or the Over the Counter Bulletin Board. That is considered the index of last resort where many small, struggling or relatively unknown firms trade as there are few if any listing requirements.
Companies on the index are also targeted by penny stock and other fraudsters who regularly attempt these pump-and-dump scams, in some cases without the target company even knowing they are being externally manipulated.
As the name implies, the scams have several key reoccurring steps: A criminal group targets a thinly traded, cheap and more easily manipulated stock – typically worth less than a dollar – and buys up a ton of it.
The group then engages in an aggressive, and fraudulent, marketing campaign through spam emails, flashy advertisements and phone calls to less savvy investors about a “hot stock.” Once the volatile stock rises to a certain point, the scammers, operating through proxies, quickly sell, causing the inflated price to crash and leaving most investors in the lurch.
In the case of BioCube, the group had planned to cause the stock to surge from three cents to a dollar, in there mind easily making an estimated $2 million to $3 million.
Too many syllables?
Supposedly high-tech companies with hard-to-understand products and hackneyed names harkening back to past glorious moments in history – such as the U.S. space race in this case – are choice targets for scammers.
The company’s website, which is still up, states that BioCube is a “biotechnology company that seeks to identify, mentor and facilitate the development of technologies, products and services for medical and biological applications. By combining scientific knowledge with innovation and proven commercial success, BioCube strives to be a market leader in the evolving medical marijuana industry.”
The company offers products including the “CannaSens Delta9,” described as “a portable marijuana breathalyzer, using sophisticated technology to identify the presence of THC, the active ingredient in cannabis.”
Argyros was doing more than analyzing for giggly gas, he was gassing about how to evade AML rules and stymie investigators.
In the alleged scheme, prosecutors state Argyros, also referred to at times through a nickname “Jimmy,” coached other members how to create offshore accounts.
But unbeknownst to them, one unnamed person was a cooperating witness (CW) recording phone conversations, in person meetings and even forwarding text conversations to federal investigators.
In November 2015, roughly a month after concocting the scheme, the CW met with Argyros about the pump and dump and explained that another unnamed person – in the complaint, the name was redacted – could open bank and brokerage accounts outside the United States, which would “conceal the CW’s identity.”
Argyros stated the setting up of foreign bank and brokerage accounts, communicating and even stating that the group was American could be problematic, according to the complaint.
“If you don’t do it properly, we’re going to have problems,” he said, according to a recorded conversation, adding that he had to set up bank and brokerage accounts in places like Cayman or Cyprus to ensure anonymity.
The group also had to make sure not to mention the United States so as to not trip rules tied to the Foreign Account Tax Compliance Act (Fatca), which requires foreign governments to report bank account details on their U.S. customers to the Internal Revenue Service.
Even for communicating, Argyros is recorded as saying not to talk through normal email channels, but that the group should potentially create a site domiciled in Canada because in the U.S., investigators can “break in,” but Canadian websites apparently don’t allow the same.
“I'm just trying to prevent anything, because we don’t want any linkage, because sometimes you send a wrong email, you understand?” Argyros stated in the conversation.
In another meeting, Argyros stated he would help the CW with “private papers” to give transactions the appearance of legitimacy. He described the “ultimate goal” of laundering the proceeds of the fraud as the CW and other members of the group “gathering assets overseas and then retiring.”
Capitalizing on AML knowledge
They could ensure there are no links to multiple bank accounts controlled by the group by only using credit and debit cards for certain accounts without their names on them, according to Argyros.
At the same meeting, Argyros “also indicated his willingness and ability to capitalize on his anti-money laundering expertise to help the money laundering scheme succeed,” according to the complaint.
He advised the CW, “not to send funds from his own company's accounts,” because that would be a “trace.”
Moreover, Argyros spelled out how to avoid tripping the attention of AML staffers and automated systems, particularly tied to even, similar transactions that creep close to the CTR threshold, a bright line that, when deliberately avoided, is also another crime called “structuring.”
“If you take $3,000 - if you bring $3,000 three times in the account, they [banks] will report you ... three-three-three, because now you're going up to nine, it's consistent, round dollar ... they [banks] put it all together,” he said in a recorded conversation, adding that a further red flag is a transaction out of scope with expected business activity.
“[I]f you go, you with your own company, that's a flag...you understand ...because now you're not consistent with what you said .... I read that if you have more than $50,000 in the account [offshore], you have to declare it to the IRS for the FATCA reasons,” Argyos said in the recording, adding that any individuals caught could be prosecuted and pay financial tax evasion and reporting penalties.
“That's the new FATCA,” he said. “It's a lot of bull[expletive deleted]. So you understand, but there are some ways to do all this at the end.”
Argyros also made it clear he couldn’t formally associate himself with any company as an owner as banks would ask too many questions, a situation that got him into trouble with a prior bank.
“I cannot put my name anywhere, it's a risk for me - I can't put it in the company, because it's a conflict of interest,” he said in a recorded conversation.
“So, let's say I would get a job at in JPMorgan they said, ‘are you a director or someone in the company’ and then they're going to say, ‘give me the other company and we'll want to do investigations' - you understand?...I almost lost a contract like that. Yeah, yeah, they wanted to throw me out.”