December 2017
A Message from Ted Gavin
As we wrap up 2017, it's hard not to reflect on what an unsettled time it's been. Every year has its ups and downs, its triumphs and tragedies, but I think it's safe to say that many of us feel like we've been on a roller coaster for the past twelve months.
 
But what stands out to me is the extraordinary joy we receive from our professional family, friends, and our professional community. We're incredibly grateful for your friendship and support and we try and pay it forward by giving back. We consider philanthropy - not just in the form of dollars, but also in the form of time or talent - key to our core values as a firm. We are only as good as our community, and our community is only as good as that which we all make it. We're proud that we have the opportunity to support causes such as Credit Abuse Resistance Education (CARE), who received a $10,000 gift from us as a matching grant in celebration of all of you. CARE will use those funds to continue educating teens on proper financial skills. We also support Pathways PA (Pennsylvania) Center for Families - the only residential facility for homeless mothers and their children in the Delaware Valley; they promote education, teach parenting and life skills, they foster self-esteem, and they help women move toward attaining their own independence. We support Pathways for a lot of reasons, but the one that best seems to fit is what the late Senator Paul Wellstone said when he paraphrased Franklin D. Roosevelt: "We all do better when we all do better." So, we are putting our time, talent, and treasure into making sure the mothers and kids at Pathways have what they need to make their holiday celebrations the best they can be.
 
We're happy we got to support IWIRC and the ABI Endowment this year, as well. Stan Mastil continued his service to the Turnaround Management Association with his work on the Greater Philadelphia Chapter board, and Jeremy VanEtten served TMA and our community on the TMA Philadelphia NextGen board. Stan also volunteers with youth sports leagues and serves on the board of Volunteers of America (Delaware Valley), where they provide community-based assistance to people in need. Chuck Lewis continues to serve the Chichester (Pennsylvania) Business Association as its President and serves as the Treasurer of the Aston Fireman's Relief Fund. He also serves on the board of GreenDelco. Anne Eberhardt serves as Treasurer of the Bosnian-Herzegovinian Film Festival in New York City. And also in the entertainment arena, we were, once again, enthusiastic participants in, and sponsors of Bankrupt Talent, the annual (and, this year, semi-annual) fundraiser for various charitable causes. Ross Waetzman serves the ABI on the VALCON advisory board and serves the community as a CARE volunteer and as chair of the Pennsylvania Area Girls Lacrosse Association, which oversees 45 recreational girls' lacrosse programs with 3,000 players from Pennsylvania, Delaware and Maryland. Joe Solmonese, in addition to serving on the national board of PPFA, was elected to the CARE board of directors in early December. Our philanthropy is as varied as our personalities.
 
Our final newsletter for 2017 concludes our special multi-part series by Anne Eberhardt on money laundering. And, as a special bonus, check out the link to an article by Joe Solmonese, discussing how to break through media clutter by framing up a good story.
 
All of us at Gavin/Solmonese are grateful for your support and friendship. On behalf of everyone here, we wish you a peaceful holiday season and a very prosperous 2018.

The History and Enforcement of Anti-money Laundering Laws in the U.S.
by Anne Eberhardt, CFE, CAMS, Senior Director at Gavin/Solmonese
Part 3

The history of money laundering enforcement in the U.S. reflects a response to some of our most visceral collective anxieties that have arisen over the past half century, from drug trafficking to terrorism to massive financial fraud. Current fears that democracy has become plagued by endemic corruption, both within the U.S. and abroad, have multiplied as whistleblowers and data breaches reveal a shadowy web of corporate structures dedicated to sanitizing the wealth of criminals and kleptocrats. The emergence of crypto-currencies defies long-held assumptions regarding the monopoly power of the state to control the money supply, challenging law enforcement's ability to identify illegal activity conducted outside the boundaries of the traditional financial services industry.
 
The final segment of this series on money laundering will elaborate upon two recent cases that perhaps best represent the future of AML enforcement: the $1.7 billion civil forfeiture actions involved in the 1MDB scandal, and the arrest of Alexander Vinnik for crimes related to his digital currency exchange. These cases stand out not just for the breadth of their geographic scope but also for the highly sophisticated nature of the money laundering. Both of these cases are ongoing, and significant developments can be expected in either one of them at any time.

1MDB
Between June of 2016 and July of 2017, the Justice Department filed three civil forfeiture actions seeking to recover almost $1.7 billion in assets linked to an international conspiracy to launder money misappropriated from 1 Malaysia Development Berhad, or 1MDB. [1] 1MDB was supposedly created to promote economic development in Malaysia and to improve the well-being of the Malaysian people. However, between 2009 and 2015, more than $4.5 billion was allegedly stolen from the fund by high-level officials of 1MDB and their associates.

One of the more flamboyant characters in the 1MDB saga is Jho Low, who is accused of masterminding the diversion of money from the fund. Known for his lavish spending in the Manhattan nightclub scene, Mr. Low is a former classmate and close friend of Riza Aziz, who is the stepson of the Malaysian Prime Minister.
 
In its February 2015 series illustrating the ways illicit money is hidden through the purchase of luxury real estate, the New York Times provided a lengthy portrait of Mr. Low. [2] In early 2010, he purchased a $24 million apartment in the Park Laurel condominiums in Manhattan. Three years later, the shell company that held the apartment sold it to another shell company, which was controlled by Mr. Aziz. A similar transaction was made around the same time in California, when Mr. Low purchased a mansion in Beverly Hills for $17.5 million, which he then sold to Mr. Aziz. Meanwhile, in early 2011, using another shell company, Mr. Low purchased a penthouse on the 76th floor of the Time Warner Center Condominiums near Columbus Circle in Manhattan, paying more than $30 million, which was one of the highest prices ever paid in the building at the time.
 
The U.S. government alleges that proceeds from 1MDB were used to purchase artwork, expensive jewelry, a luxury yacht, real estate properties in the U.S. and overseas, as well as to fund the production of major Hollywood films including Daddy's Home, Dumb and Dumber To, and - perhaps not shockingly - The Wolf of Wall Street. The civil forfeiture actions seek to identify and return to the Malaysian people the stolen assets associated with the 1MDB theft, including many of the properties described in the New York Times article. In its statements to the press, law enforcement officials declared they would not allow the American financial system to be used as a conduit for corruption or as a safe haven for assets stolen by corrupt foreign officials.
 
BTC-e and Alexander Vinnik
While vacationing in a small seaside village in Greece last summer, Alexander Vinnik was arrested at the request of the U.S. Justice Department. Mr. Vinnik, a Russian national, is accused of money laundering and operating an unlicensed money services business known as BTC-e, a digital currency exchange located in Bulgaria but organized under Cyprus law, which maintains a base of operations in the Seychelles Islands and hosts web domains registered to shell companies located around the planet, including in Singapore, the British Virgin Islands, France, and New Zealand.
 
So, how did a Russian national, who ran a company organized under European laws with no obvious U.S. presence, come to find himself facing the full wrath and fury of the U.S. Justice Department? According to the indictment, "BTC-e was an international money-laundering scheme that, by virtue of its business model, catered to criminals - and to cybercriminals in particular. Through Vinnik's efforts, BTC-e emerged as one of the principal means by which cyber criminals around the world laundered the proceeds of their illicit activity. BTC-e facilitated crimes, including computer hacking and ransomware, fraud, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. BTC-e lacked basic anti-money laundering controls and policies and, as such, was attractive to those who desired to conceal criminal proceeds as it made it more difficult for law enforcement to trace and attribute funds." [3]
 
The Justice Department further accuses Mr. Vinnik of having been responsible for the hack of Mt. Gox (another digital currency exchange that ultimately filed for bankruptcy in Tokyo) and of moving the proceeds through BTC-e in an attempt to disguise his connection to the hack, then laundering the proceeds through yet another digital currency exchange, Tradehill (also now defunct). Tradehill was based in San Francisco; hence the interest of U.S. law enforcement.
 
After his arrest, FinCEN assessed a civil penalty of $100 million against BTC-e and $12 million against Mr. Vinnik. Acting FinCEN Director Jamal El-Hindi stated at the time of Mr. Vinnik's arrest, "We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. AML laws." [4]
 
Mr. Vinnik awaits extradition from Greece because the Russian government has issued its own extradition request in an unrelated fraud charge. In separate rulings, Greek courts have approved both requests, and Mr. Vinnik is fighting extradition to the U.S. where he faces decades in prison. His fate will ultimately be decided by the Greek Minister of Justice after a ruling by the Greek Supreme Court, which is expected soon.
 
The history of money laundering laws and regulations in the U.S. is less than fifty years old. During that time, significant advances in technology have given financial institutions the ability to monitor transactions for suspicious activity. As criminals have searched for alternatives to traditional banking to launder their plunder, they have discovered more sophisticated methods to elude law enforcement, including using crypto-currencies, offshore corporations, and luxury real estate. Meanwhile, one message stands out loud and clear: law enforcement will not allow the U.S. financial system to be used to pursue illegal activity and will aggressively punish any kind of financial institution caught facilitating illegal activity.
 
Nonetheless, regulators began punishing financial institutions with record fines for lapses in their AML controls, including assessing a $25 million civil penalty against Riggs Bank for, among other activities, its suspected complicity in transactions that may have provided assistance to the 9/11 attackers. In December of 2005, ABN Amro agreed to pay what was then a record penalty of $80 million for failures of its AML system to identify suspicious transfers, many between Russia and New York, and for allowing transactions that violated U.S. sanctions against Iran and Libya. By way of comparison, only a few years prior to 9/11, FinCEN reported civil penalties totaling just $2.2 million against the twelve casinos in Atlantic City for various BSA reporting failures.
 
The post-9/11 world accompanied a revolution in data storage and analytic capacity, which augmented the ability to identify suspicious activity using sophisticated algorithms. Regulators increased their expectations that financial institutions would know their customers sufficiently well to be able to flag virtually any type of abnormal financial activity.
 
Meanwhile, following the large-scale bank failures and bailouts of the 2008 financial crisis, a number of high profile frauds and Ponzi schemes were exposed, leading many to question how these kinds of systemic risks and colossal financial crimes could have gone undetected in an environment of heightened AML vigilance. Beginning in late 2008 and through the rest of 2009, FinCEN reported nine-figure penalties for AML and sanctions violations, including $536 million against Credit Suisse, $110 million against Wachovia, $298 million against Barclay's, and $500 million against ABN Amro.  And this was only the beginning.

In 2012, FinCEN penalized ING Bank $619 million for illegal transactions with Cuban and Iranian entities, MoneyGram forfeited $100 million for AML and wire fraud violations, Standard Chartered forfeited $227 million for sanctions violations, and HSBC forfeited almost $1.3 billion for AML and sanctions violations. In 2014, JPMorganChase admitted to violating the BSA for failed Madoff oversight and was fined $461 million, while BNP Paribas agreed to pay $8.9 billion - that's right, billion with a "b" - for sanctions violations.
 
As regulators have extracted eye-watering penalties for compliance failures, and financial institutions have devoted increasing portions of their budgets to AML compliance, critics question whether strengthened AML regulations have done what they were intended to do - that is, provide a paper trail to assist with the prosecutions of criminals and terrorists. Banking industry advocates argue that soaring compliance costs have contributed to the consolidation of their industry by driving out small banks that simply cannot afford the costs of AML compliance.
 
Humanitarian aid activists point out that as banks refuse to process transactions in high-risk jurisdictions, customers with legitimate business in those locations are forced out of the established financial system. For example, Somalis who reside in the U.S. experience difficulty sending remittances to their relatives in Somalia because most banks are unwilling to participate in that market for fear they will be sanctioned by U.S. regulators. These customers' remittances are thus forced underground, and the exact opposite of what the AML regulations were intended to do has been accomplished as these transactions - along with those of criminals and terrorists - are conducted beyond the reach of law enforcement.
 
Civil libertarians continue to raise privacy concerns as technology has provided government with theoretical access to every transaction processed through a U.S. financial institution. The American Civil Liberties Union argued in its unsuccessful challenge to the BSA in 1974 that the law was an invasion of its members' right of association. In his dissent, Supreme Court Justice Thurgood Marshall agreed with the ACLU that "[t]he First Amendment gives organizations such as the ACLU the right to maintain in confidence the names of those who belong or contribute to the organization, absent a compelling governmental interest requiring disclosure....The net result of [the requirement that the ACLU's bank must make and keep a record of all the checks the ACLU receives and deposits], obviously, is an easily accessible list of all of the ACLU's contributors. And given the widespread informal access to bank records by Government agencies,...the existence of such a list surely will chill the exercise of First Amendment rights of association on the part of those who wish to have their contributions remain anonymous. [2]
 
Supporters of enhanced AML recordkeeping point out that the regulations have provided significant assistance to authorities involved in active terrorist cases by providing real-time financial information that has helped law enforcement capture accomplices within hours of a terrorist attack, thereby possibly preventing additional attacks.
 
These issues raise critical questions regarding the current state of AML enforcement, as criminals, corrupt politicians, and terrorists have grown ever more sophisticated at laundering money outside the regulated financial environment. High profile data breaches over the past couple of years have revealed a sophisticated global infrastructure seemingly devoted to concealing the identities and preserving the wealth of a global political and economic elite. In response to revelations that criminals and corrupt politicians have laundered their proceeds by creating shell companies to purchase luxury real estate in all-cash transactions, FinCEN recently expanded its AML reporting rules to require title insurance companies operating in several high-end real estate markets to report information about the beneficial owners in transactions made without external financing that exceed certain threshold amounts.
 
Expect continued, and heated, debate between those who wish for greater transparency and those who wish for decreased regulation.

[1]   "Berhad" indicates the entity is a Malaysian public limited company. 

[2] Towers of Secrecy: Jho Low, Well Connected in Malaysia, Has an Appetite for New York, by Louise Story and Stephanie Saul, The New York Times, February 8, 2015,
 
[3] United States of America v. BTC-E a/k/a Canton Business Corporation and Alexander Vinnik, Case No. CR 16-00227 SI, U.S. District Court, Northern District of California, San Francisco Division, Motion to Seal Superseding indictment, Arrest Warrants and Order, Filed January 17, 2017, paragraphs 2 and 3, https://www.justice.gov/usao-ndca/press-release/file/984661/download

[4] U.S. Attorney's Office for the Northern District of California Press Release, "Russian National and Bitcoin Exchange Charged in 21-Count Indictment for Operating Alleged International Money Laundering Scheme and Allegedly Laundering Funds from Hack of Mt. Gox," July 26, 2017, https://www.justice.gov/usao-ndca/pr/russian-national-and-bitcoin-exchange-charged-21-count-indictment-operating-alleged


Based in New York City, Anne Eberhardt is responsible for furthering the firm's forensic investigation practice. As an expert witness and forensic accountant, Anne is experienced in conducting forensic analyses, building and testing financial models, resolving economic disputes, and leading teams in large-scale investigations.
Joe Solmonese discusses the power of a good story.


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