With arrest of Bitcoin executive, US enforcement agencies train sights on compliance officers

Date: January 29, 2014
By: Brian Kindle

Through a string of US Justice Department prosecutions, FBI seizures and regulatory guidance from the Financial Crimes Enforcement Network (FinCEN) over the last year, US agencies have made it clear that virtual currency is squarely in their sights.

The arrest this week of leading Bitcoin entrepreneur Charlie Shrem, on charges he laundered more than $1 million destined for the online drug marketplace Silk Road, raises the specter that enforcement agencies may be focusing on a new target – compliance officers of the burgeoning virtual currency industry.

In a criminal complaint unsealed in Manhattan on January 28, federal prosecutors charged Shrem, chief executive and compliance officer of the digital currency exchange BitInstant, and Robert Faiella with money laundering conspiracy and operating an unlicensed money transmitter (Title 18, US Code Section 1956 and 1960). The case is one of the very rare instances in which a compliance officer is directly implicated in a financial crime scheme, and facing individual criminal charges.

Faiella is accused of operating a currency trading service for Silk Road customers, using the name “BTCKing” and offering “easy, cheap [and] fast” exchange of cash for Bitcoin. A “deep web” site that could be accessed only by using anonymizing software, Silk Road became infamous as an online bazaar with virtually no limitation on what could be bought and sold, including drugs. Sellers accepted only Bitcoin as payment. The site was closed in October 2013 after US federal agents arrested its alleged founder and operator, Ross Ulbricht, in San Francisco.

Complaint includes rare criminal charges for failure to file SARs

Faiella’s arrest fits with the recent enforcement actions that target more or less brazenly criminal digital currency exchanges and administrators. Shrem’s alleged role in the money laundering operation is more surprising.

Shrem is the co-founder of BitInstant, and as the chief compliance officer he was largely responsible for designing the company’s AML program. According to the criminal complaint, he was also responsible for thwarting those same AML controls. It is alleged he instructed Faiella on how to avoid drawing attention as he funneled funds to Silk Road users by using multiple emails.

In an unusual charge, the complaint also accuses Schrem of a Bank Secrecy Act criminal violation of “willfully failing to file any suspicious activity report” concerning Faiella’s transactions (Title 31, US Code Sections 5318 and 5322).

A criminal complaint is usually filed in anticipation of an indictment by a federal grand jury. It is typically based on an affidavit filed by an agent of a US law enforcement agency. The Internal Revenue Service Criminal Investigation Division is the lead agency in this case.

In virtual currency, tension between compliance and anonymity

If the government succeeds in its case against Shrem, it would be another setback for a young industry that is still struggling with anti-money laundering and BSA compliance challenges. Bitcoin’s value and number of users have soared recently, and other virtual currencies are also flourishing. The industry’s rise is drawing venture capital funds and other investors, and tying virtual currency businesses more closely to the traditional financial sector.

Yet Bitcoin and other virtual currency still retain certain features, such as the potential for largely anonymous and instantaneous cross-border transactions, which make them highly attractive to financial criminals.

“Can compliance be achieved in the virtual currency industry? Absolutely,” says Dan Friedberg, an attorney at Riddell Williams, in Seattle, and an expert on emerging payment systems.

“But there’s an element of Bitcoin [and other currencies] that is fundamentally at odds with the traditional regulatory structure,” he adds, citing the libertarian streak that initially inspired Bitcoin’s creation as an alternative to traditional currencies.

“Ultimately, for Bitcoin to continue to be successful, that point of tension will have to be resolved.”

Arrests come on eve of hearings by NY regulator

Shrem is a well-known figure in the virtual currency field, having served as a vice president of the Bitcoin Foundation, an advocacy group that helps promote the currency and fund the software infrastructure that runs it. He also has been a vocal advocate at industry events for the necessity of compliance programs at virtual currency exchanges and administrators.

His arrest preceded two days of hearings by the New York Department of Financial Services (NYDFS) on virtual currency and the regulatory considerations on January 28 and 29. The case quickly became a topic of conversation at the hearings. Reactions were mixed.

“Bad guys are going to do bad things, and they’ll use whatever technology is available to them,” said Barry Silbert, CEO of the alternative securities trading platform, SecondMarket, at the hearing. Other industry members echoed this view, saying that virtual currency is just another financial instrument, no more vulnerable to financial crime use than currency.

At the hearings, some regulatory representatives noted that even currency transactions occur within the regulatory framework, such as the duty to file Currency Transaction Reports imposed on financial institutions and other businesses concerning transactions above certain thresholds.

Virtual currency regulation still in ‘Wild West’ phase

Virtual currencies are required to comply with the regulations governing United States money services businesses, according to guidance by the Financial Crimes Enforcement Network issued in March 2013. In most other jurisdictions, including the states of the United States, regulations do not exist.

“Right now, the regulation of virtual currency is still akin to a virtual Wild West,” said Benjamin Lawsky, Superintendent of the NYDFS, at the Jan. 28 hearing. He said the hearings would lay the foundation for proposed state regulation of virtual currency later in the year.

The case against Shrem and Faiella and the prosecution of Silk Road may ultimately help accelerate the push for financial crime compliance in the virtual currency industry, says Friedberg.

“Getting rid of Silk Road is a very good thing for Bitcoin,” he concluded. “However, there’s going to be a period of fallout from it. The case [against Shrem] is part of that. It’s an aftershock of Silk Road, not an attack on Bitcoin as a whole.”

Virtual currencies and their financial crime risks will be probed in detail on the panel “New World of Bitcoin and Other Virtual Currencies” at the ACFCS 2014 Conference, February 5 – 7 at the Marriott Marquis in New York. Expert speakers, including a member of the Bitcoin Foundation, a representative of FinCEN, a federal prosecutor and an ediscovery specialist will provide critical knowledge and insights on one of the key financial crime challenges of the time. To register, visit http://www.financialcrimeconference.com/

‘Super Bowl’ of financial crime draws financial crime players and leading experts to New York for ACFCS Conference, February 5-7

Date: January 29, 2014
By: ACFCS Staff

Three days after the top United States professional football teams clash in the Super Bowl near New York, many of the leading players in the financial crime field will gather in Manhattan for a scrimmage of their own to tackle the most pressing financial crime issues they face.

The encounter will take place at the ACFCS 2014 Financial Crime Conference & Exhibition on February 5-7 at the Marriott Marquis, New York.

More than 40 senior financial crime compliance officials, regulators, law enforcement agents, and other veterans will train attendees coming from many regions. Attendees will have 12 opportunities at top-rated networking events to meet the experts, their fellow attendees and first-class service providers and the Exhibition Hall.

The Conference will provide hands-on training on the hottest topics in financial crime, such as virtual currency, threat finance, cybersecurity, the law called FATCA, which takes effect July 1, anti-money laundering and other topics.

Some of the top 41 experts, who make up the outstanding speaker roster, and their contributions, are:

  • Barry Koch, Chief Compliance Officer, Western Unionthought leader in financial crime and the new quantitative, data-driven approach to AML; a global expert in financial crime compliance at money services businesses and banks
  • Serrin Turner, US Federal Prosecutor, Manhattanspecializes in virtual currency prosecutions and leads the landmark cases involving Liberty Reserve, Silk Road and others
  • Jim Bischoff, Chief, Counter Threat Finance, US Special Operations CommandSpearheads the US military’s operational mission to choke off the finances of national security threats, such as terrorism, drug, human and weapons trafficking and foreign corruption, in collaboration with financial institutions and other private sector entities
  • Hon. Ryan Pinder, Minister of Financial Services of The Bahamas – has launched a Center for Excellence in financial services, a pioneering undertaking to help financial institution personnel hone their skills across the board, particularly in financial crime control
  • Alan Cox, Acting Director, Liaison Divison, FinCEN – Veteran financial crime professional and virtual currency expert with an insider’s perspective on regulations and risks for the digital payment revolutiion
  • Mike Benardo, Chief of Cyberfraud and Financial Crime, FDIC – Leading authority and US government leader on the many cyber risks facing financial institutions and best practices to counter them
  • Jim Keenan, Well Fargo’s FATCA lead and head of customer due diligenceSenior compliance executive with hands-on expertise in building an effective FATCA compliance program in tandem with other compliance duties, such as AML
  • Paul Pelletier, Member, Mintz LevinTough-as-nails lawyer and former federal prosecutor who drove the United States FCPA enforcement surge and put megafraudster Allan Stanford in prison
  • Delena Spann, Special Agent, US Secret ServiceInvestigative expert who specializes in using innovative data analytic tools and techniques to hunt down fraudsters, and published book author on the subject
  • Dan Boylan, Senior Vice President and Audit Director, Bank of AmericaAML expert with unique insight on leveraging anti-money laundering tools and techniques for FCPA and anti-corruption compliance, and how to audit these procedures

Panels train on critical financial crime risks and hottest topics

The 13 Conference panels are packed with knowledge and insights and will cover the full range of 21st Century financial crime issues, from data analytics in AML compliance, to the risks of virtual currency, to the surge in global anti-corruption enforcement and the complexity of compliance with the new law called FATCA, which takes effect July 1, 2014. A few of the key panels include:

  • New World of Bitcoin and Virtual CurrencyCombating the financial crime threats of the new digital era
  • Data Security and Cybercrime – Innovative weapons to combat digital threats and new risks
  • FATCAWhat US and US and non-US institutions must do to comply by July 1, 2014, the effective date, and afterwards
  • Open Source Intelligence — Capitalizing on ‘OSINT’ and social media for compliance, due diligence and investigations
  • Anti-Money Laundering in the New World Order – Meeting the challenge of new laws, technologies and risks with new approaches that meet evolving regulatory expectations

“The panels will give attendees great information and practical guidance they can apply immediately and directly,” says Charles Intriago, president and founder of ACFCS, a former federal prosecutor and a pioneer in the AML field with his 1989 publication, Money Laundering Alert. “Every panel and speaker can provide attendees with crucial tips and best practices on detecting, preventing, regulating and prosecuting financial crime.”

Conference features many networking, career-building opportunities

In addition to the best practices they will learn from the experts, the attendees will meet and interact with the speakers one-on-one at the 12 networking sessions, including two receptions, two luncheons, to breakfast and several refreshment breaks.

“ACFCS recognizes that while knowledge is essential, financial crime professionals also need to build their connections and further their careers,” says Brian Kindle, ACFCS Training Director. “That’s why our conference goes to great lengths to provide great networking, so that attendees can connect with one another, with the outstanding technology and services providers in the Exhibition Hall and the great roster of speakers.”


ACFCS is a global member organization that offers the Certified Financial Crime Specialist (CFCS) certification, the credential that verifies the skill and competence of private and public sector specialists across all fields of financial crime, including FATCA and AML. ACFCS also offers training, analysis, networking and community to its worldwide audience of members and specialists.

For more information on the 2014 conference and to register now, visit www.financialcrimeconference.com

(Accredited members of the media may obtain press credentials to cover the conference by contacting Brian Kindle at 786-517-2720 or bkindle@ACFCS.org or Daniela Guzmán at 786-517-2731 or dguzman@ACFCS.org.)


Data analytics helps unmask financial crime, Secret Service expert describes

Date: January 29, 2014
By: Daniela Guzman

Delena D. Spann is a fraud analysis expert of the United States Secret Service based in Chicago where she is assigned to the Electronic and Financial Crimes Task Force. For well over 15 years she has developed an expertise in linking patterns and trends of fraud schemes and anomalies in financial transactions to establish patterns of criminal activity. A member of the ACFCS Threat Finance Task Force and the Charter Class of Certified Financial Crime Specialists, Spann will be speaking at the ACFCS International Financial Crime Conference and Exhibition on Feb.5-7, 2014 in New York on the Threat Finance and Big Data panels, where she will share some of her expertise on these topics.  In preparing for her speaking appearance, ACFCS asked her these questions.

What is data analytics from your perspective?
Data analytics is a way to combat fraud by analyzing transactional data in an organization’s accounting records and financial statements.

 How does a fraud investigation use data to uncover and zero-in on fraud?
A fraud investigation uses data to uncover fraud by examining and understanding the data that has been provided via a subpoena or other means of legal compliance. Key elements to facilitate the fraud investigation:

– Review the data and the information to analyze prior to approaching the fraud investigation, analysis process and/or fraud examination.
– Strategize your approach to the fraud investigation.
– Understand the complexity of the data & verify the validity.
– Determine the necessary documents needed for review (financial statements, checks, deposits, withdrawals, tax returns, and wire transfer receipts)

The noted elements are a start for a concise and thorough analysis.

After you gather the data, how can it be analyzed?
Data can be analyzed in a variety of ways; however, it depends on the organization and their determining factor of what process will be most useful.  I would think that most organizations will apply the most effective approach in determining the direction of the analysis, querying data, confirming associations through link analysis, commodity flow analysis, strategic analysis or a more straight forward apparatus.
Henceforth, after the analysis process a much vital component is knowing how to interpret the data; and within the data mining process lies the identity of red flags, patterns and schemes that are associated within the fraud investigation.

 How can structured compared to unstructured data, such as social network information, be used to conduct a fraud or financial crime investigation?
I am not privy to unstructured data within the data analysis process. Most of the information connected with a financial crime investigation is structured. Structured data is consistent, reliable and it verifies the source. Knowing the source of the data is critical. However, with unstructured data, you would never know the unknown or invisible actors.  An example would be the virtual world-whose actors are known as “AVATARS” who use and provide information anonymously. Within the realm of financial investigations there is always a need for more information than less to support your findings and recommendations. Most prosecutors rely heavily on accurate analysis.

What would you consider the biggest obstacle when searching for data and analyzing it in a fraud or other financial crime investigation?
The biggest obstacle would be sifting through a plethora of documentation. Whether, you’ve been provided  the information in electronic format or paper, the most viable assertion is time.   I cannot speak for all professional entities; however, from a general perspective; what once took months and years-now takes a week or depending upon the magnitude of data-a few days at the most.  I applaud the technological industry for creating more sophisticated fraud analytic tools that provide the efficiency and speed.

Is there any human element that still remains important in this investigation process?
The human element that is so vital to the investigation process is having a keen eye of  the information attained and understanding the information.No one needs to reiterate   that the devil is in the details; a fraud investigation is approaching and the perpetrator must be exposed. The end result lends itself to the following—exposing the various schemes and uncovering the nefarious workings.

 (Hear Delena D. Spann speak on data analytics and the following topics at the ACFCS Financial Crime Conference & Exhibition, at the Marriott Marquis in New York on February 5-7, 2014:

– Definition of threat finance from the perspective of Secret Service and other US enforcement agencies
– Human trafficking as emerging threat, and criminal networks involved
Public-private information-sharing and cooperation on threat finance issues
Virtual currencies and virtual worlds, and their use by threat actors
– Fraud analytic tools used by Secret Service and other US law enforcement
Tools and techniques and their application in real-world cases
Data sources and types of data needed in order to utilize analytic tools in fraud cases

To register for the ACFCS annual conference, visit our site: http://www.financialcrimeconference.com/

Financial Crime Wave – Basel’s new AML guidance, Bitcoin seizures, and more

Navigating the flood of financial crime news can be a full-time job. That’s why ACFCS brings you the Financial Crime Wave, a weekly feature providing quick updates on key events and developments across diverse fields of financial crime.

This week’s Crime Wave covers new AML standards from the Basel Committee, Canada’s hunt for tax evaders, Bitcoin seizures, and more.

Money Laundering and Sanctions

  • In new guidance, Basel Committee sets standards for AML risk managementOne of the world’s key standard-setters in the financial crime field released new guidance on recommended policies and procedures for AML programs at financial institutions this week. The document, the drily titled “Sound Management of Risks Related to Money Laundering and Financing of Terrorists,” offers a broad range of compliance best practices, from risk assessment and monitoring to staff training. The Basel Committee is made up of the central banks or banking supervisory agencies of 27 countries, and its guidance sets the pace for the formal financial sector. Read the guidance here.
  • US seizes $28 million in Bitcoins from black market websiteEven as virtual currencies like Bitcoin grow in popularity and value, they remain attractive to cyberfraudsters, drug traffickers and money launderers. That fact was driven home by the largest-ever US government seizure of Bitcoins last week from the illicit online marketplace Silk Road. The operator of the black market website, 29-year-old Ross William Ulbricht, was arrested in October on charges of hacking and drug trafficking. Prosecutors at the time estimated the seizure at $3.6 million, but since then, Bitcoin has more than tripled in value. While virtual currencies can be legitimate ways to make transactions, Silk Road is becoming a prime example of how they can be used to facilitate financial crime. Read more here.
  • Rabobank wrestles with AML, Libor rigging failings – The Dutch financial institution Rabobank was hit with a consent order by the Office of the Comptroller of the Currency in December, requiring the bank to remediate its AML program, the US regulator announced last week. In 2013, the bank was fined $1 billion by US and European regulators for participating in illegal Libor rate-rigging, resulting in the indictment of several former traders last week. Read more here.

Tax Evasion and Enforcement

  • Canada hunts tax cheats with bounty for informersJoining the global push against tax evaders, the Canadian government will offer rewards to informants who tip off tax authorities to significant offshore evasion. Starting last week, the Canadian Revenue Agency is paying up to 15% to tipsters whose information leads to the recovery of any lost taxes over 100,000 Canadian dollars (roughly $91,000 in US dollars). It is part of a number of new measures designed to crack down on tax evasion by Canadian persons. Read more here.
  • Out of options and time, 60 Swiss banks join US tax evasion dealAhead of a Jan. 1, 2014 deadline, at least 60 Swiss financial institutions agreed to enter a program with the US Justice Department that would see them turn over information on their US account holders in exchange for leniency in tax fraud prosecutions. The program creates four “levels” that Swiss banks can apply for, depending on the degree of their involvement in allegedly facilitating tax evasion by US persons with undeclared assets stashed in Switzerland. Some banks in the program will enter into “non-target” or non-prosecution agreements with US enforcement agencies, while others may still face criminal charges and monetary penalties. Read more here

 Global Anti-Corruption

  •  Fresh off latest fiasco, UK’s SFO rallies for Rolls Royce probeDespite a string of failed prosecutions and collapsed cases, the UK’s Serious Fraud Office appears undaunted in its efforts to bring corruption charges against UK companies. Most recently, the beleaguered enforcement agency has reportedly been given a surprise surge in funding reportedly “in the low millions of pounds” to pursue an investigation of Rolls Royce for violations of the UK Bribery Act. The company, the world’s second-largest aircraft manufacturer, is suspected of making bribes to government officials in China and Indonesia. Read more here.
  •  In FCPA cases, remediation pays offThe US Department of Justice and Securities and Exchange Commission have long trumpeted the importance of a proactive response to anti-corruption compliance, urging companies to correct compliance failings as soon as they are uncovered. This year, US enforcement agencies drove that guidance home, granting “significant credit” to two companies that remediated their compliance programs while FCPA investigations were still underway, according to FCPA expert Mike Volkov. Read more here. 

Target data breach gives vital lessons in protecting against cybercrime

Date: Jan. 22, 201
By: Allison Walton, President, Fortis Quay

The red bull’s-eye that the huge retailer Target uses as its brand logo took on ominous new overtones when the company landed in the crosshairs of a cyberattack last month.

The colossal data breach it suffered reportedly affected the personally-identifiable information of about 70 million customers and 40 million credit and debit card accounts. It also set off a public relations nightmare that may take years to subside when all the ensuing legal problems for the company end.

If a data breach can strike a megastore with $73 billion in revenue – even one that likely has conducted extensive penetration testing, created sophisticated prevention programs, and invested in custom technology – it can happen to any organization, large or small.

The Target data breach teaches many valuable lessons to organizations about how to prevent, manage and mitigate data breaches. It also illustrates the consequences that flow from one and provides a map for organizations on how to achieve a “litigation-ready” posture.

Breach triggers ‘preservation’ duties

Data breaches can come through a broad range of channels and malicious attacks.  They can take the form of phishing, hacking, malware, physical theft and other events. This ongoing specter provides impetus for organizations to constantly stand guard to protect all aspects of its cyber infrastructure at all times.

Data breaches frequently trigger the legal standard of “reasonable anticipation” of litigation. Once litigation is reasonably anticipated, or foreseeable, a “legal hold” should be deployed as a best practice, meaning that procedures should be implemented promptly to assure that no internal relevant records or files should be deleted or destroyed, even as part of a normal document retention and destruction policy.

Maintaining data safety is further complicated by the risks presented by high volumes of business and the complexities of maintaining both an online and a physical presence. No one expects perfection in the area of data breach, but courts and regulators expect reasonable, preventive measures and efforts to be taken.

Common pitfalls

Although perfection is not the standard, an organization encounters trouble when it neglects or fails to:

  • Implement technology and programs for intrusion and data loss prevention,
  • Train individuals appropriately, and
  • Conduct testing to ensure that it is compliant and protected.

For Target, the breach has major implications involving many financial institutions and other businesses and locations worldwide. It is facing lawsuits from customers over information that was stolen from its systems and later used for criminal purposes. The financial institutions whose data and customers were affected by the fraud may be next in line.

The following steps are essential when an organization is dealing with a data breach.

Three necessary steps when data breach occurs

1. Place relevant data sources and custodians on legal hold

When a data breach occurs, a legal hold should be executed and data of all relevant sources and custodians must be preserved for use in potential criminal or civil cases. Organizations should create and be prepared to execute a viable plan for data collection. Consider the following:

  • Government investigators and regulatory agencies will invariably probe how an organization handled the data breach, with special attention to when the organization found out, what systems it had in place, if and how it issued a litigation hold, and what steps it took to mitigate future risk.
  • Target acknowledged the breach on December 19. Almost immediately, plaintiff lawyers filed multiple lawsuits across the United States.
  • Consumer groups and state attorneys general are also planning suits. A 30-state coalition has been formed in response to the Target breach.

While the scope of the breach is important, proving damages in data breach and privacy cases is a necessary element if the plaintiffs are to succeed. By issuing a legal hold directed at relevant data sources and custodians and preparing for extensive discovery, organizations can immediately start mitigating regulatory and legal liability.

2. Conduct internal investigation

After a legal hold has been issued and disseminated, it is important to use all internal and external resources to reconstruct how the breach occurred.

  • Security, legal and IT departments, at a minimum, should participate in this evaluation.
  • Organizations should document the steps they took internally and produce all log analyses from affected systems. To assess the vulnerability of other data systems, the organizations should run penetration tests.
  • Organizations that don’t have appropriate in-house resources should have a plan to enlist the services of third parties when a data breach occurs. Last-minute decisions about partners that must be trusted is not advisable. The plan should address technical security and legal issues, which are intertwined.

Organizations that have conducted an internal review of the facts and circumstances of a breach are best prepared to respond to litigation and investigations.

3. Implement compliance programs and mitigating efforts

Data protection is a large endeavor. Organizations should consider implementing customized compliance training for employees to assure that they are protecting proprietary and sensitive data. These training and testing efforts should be measured, documented and ongoing.

  • Customer notification is a crucial aspect of how to manage a data breach. The notice should state what happened, what the consumer should do, and what the organization is doing and offering to help alleviate the damage.
  • For complete transparency, organizations should consider conducting conference calls with affected parties and their representatives.
  • Organizations should also establish a legal fund for its own defense in the potential fallout and for shareholder protection.

State attorneys general will consider the steps taken by Target to mitigate data breach risks and what it did to control the damage. Target took a welcomed step of providing breach victims with one year of free credit monitoring, identity theft insurance and issuance of new cards.

Prevention of a data breach is always the best option, but in an era of increasing cyberattacks it is difficult to achieve. If a breach occurs, organizations can reduce their legal liability and potential regulatory penalties by showing they have done their best to mitigate the risks associated with the breach.


States legalize marijuana, but money laundering laws block banking relations

Date: Jan. 22, 2014
By: Daniela Guzman

It is a booming industry with multi-billion dollar revenues, a broad customer base, and projections of explosive growth. Yet it’s also an industry whose businesses can’t find a bank willing to open an account and accept their ever-expanding revenues.

The reason? The industry in question is the recreational and in some cases medical marijuana trade in the United States, a business sector whose funds are essentially untouchable by US financial institutions due to conflicts between state legalization and federal money laundering laws.

While 20 states have enacted laws fully or partially legalizing marijuana for medical purposes, and Washington and Colorado now allow marijuana for recreational use, federal law hasn’t budged. Marijuana still remains an illegal drug, designated among the most dangerous “Schedule I” drugs listed in the Controlled Substances Act of 1970.

Under the US money laundering law, at Title 18, US Code Sec. 1956, conducting transactions with the proceeds of the sale of controlled substances, or moving the proceeds internationally, is considered a “specified unlawful activity” and  a “predicate” offense to a money laundering prosecution.

Laundering charges could face financial institutions

Financial institutions that conduct such transactions, which includes taking funds that originate with legalized marijuana dispensaries, could be exposed to money laundering charges under the US law. This offense, upon conviction, could result in huge criminal fines for the institution and prison sentences of up to 20 years for individuals that are convicted.

As a result, legal dispensaries in states like Washington and Colorado, as well as some medical marijuana businesses in other states, have been largely barred from accessing financial services, from bank accounts to loans and insurance. Until federal law is amended, US institutions face a stark choice – continue to turn away businesses connected to the marijuana trade, or risk prosecution and penalties from regulators for violating US money laundering laws.

“I see no wiggle room for banks because they cannot cross this line,” said Michael McDonald, a retired Special Agent of the Internal Revenue Service Criminal Investigation and a pioneer in money laundering law enforcement. He now advises financial institutions, including money services businesses, on compliance with the US Bank Secrecy Act and money laundering laws.

“If they do so, they do at their own risk.”

As profits soar, investors eye marijuana trade despite risks

Since California first decriminalized medical marijuana in 1996, legalization efforts have steadily gathered force across the US. Medical and recreational marijuana has already injected millions of dollars into state economies, and profits are projected to grow rapidly.

Colorado is the most recent state to pass a legalization law early this year, decriminalizing marijuana for recreational use.  Recreational dispensaries in Colorado have reported soaring profits just two weeks after the legislation went into effect.

ArcView Group, a San Francisco-based investor network, predicts that the legal U.S. marijuana industry will rise to a net worth of $2.34 billion (this year?). With an estimated growth rate of 64% for 2014, the marijuana market is increasingly attracting the attention of hedge funds and private investment firms.

Even so, the young, burgeoning industry faces serious legal roadblocks, and federal regulators and enforcement agencies have largely been silent on guidance to financial institutions.

Federal agencies acknowledge quandary, but offer no solutions

While the Department of Justice issued a memo last year saying that they would focus on eight priorities in relation to prosecution of larger marijuana-related federal crimes, they did not mention banking legal marijuana businesses as one of them. Since then, pressure from marijuana legalization advocates and some US financial institutions has placed the issue on the Justice Department’s agenda.

“In September, Deputy Attorney General Cole agreed that this issue needed to be dealt with and acknowledged that the department had begun talks with financial regulatory officials,” said Department of Justice spokesperson Ellen Canale.

“Since then the department has continued to work with relevant partners to find an appropriate solution.”

The Financial Crimes Enforcement Network, the federal agency with primary responsibility for crafting BSA and AML-related regulations for US financial institutions, has issued no guidance or rules related to the legal marijuana industry. Reportedly, FinCEN officials feel that their hands are tied unless the US Congress takes action to alter federal laws.

As banks heighten due diligence, legal marijuana goes underground

Afraid of running afoul of regulators or law enforcement, institutions in some states have increased due diligence to detect customers connected to the marijuana trade. Banks in Washington and Colorado have closed accounts associated with marijuana distributors.

As a result, billions of dollars of legal marijuana money may be circulating in cash. Without access to financial services, the business practices of legal marijuana dispensary owners don’t differ much from those of the criminal drug underworld.

Many dispensary owners have resorted to cash-only businesses that leave no paper trail. Others have taken to counting their businesses’ cash themselves, carrying it in bags, and depositing into varying ATMS at different times. This raises the specter of structuring violations at institutions who receive the deposits.

It also increases the risk that dispensary owners will themselves become victims of crime, said Erik Altieri, the communications director for the legalization advocacy group Norml.

“It’s putting an undue burden on these business owners,” Altieri said, “and the government needs to allow them to have the same tools that every other business has at their disposal.

With Congress unlikely to act, no recourse for US banks

Ultimately, it falls on the US Congress to resolve the conflict by amending existing laws, possibly by tweaking the specified unlawful activities under Section 1956. Over the last two years, six bills have been introduced in the House of Representatives that would help resolve the clash between state and federal policy on marijuana.

With all proposed bills languishing in subcommittees, however, it is unlikely that Congress will take any action on the still-contentious issue of legal marijuana in the near future. Until then, the legal marijuana industry may be stuck in the haze of illegitimacy, and US financial institutions will be forced to stay far away.

“It’s going to lend itself to tax evasion and going to create a subterranean economy,” says McDonald.

“If a distributor can’t have a bank account, they can’t be transparent from a business perspective.”


ACFCS 2014 Compliance Jobs Survey

Date: January 15, 2014
By: ACFCS Staff

The financial crime compliance field is experiencing a hiring boom, as large financial institutions in the US and beyond react to major enforcement actions and increased regulatory scrutiny. Have you or your organization been impacted by the hot compliance job market? Take our survey below.

Create your free online surveys with SurveyMonkey , the world’s leading questionnaire tool.

Compliance jobs soar in appeal and demand as institutions seek broader skills beyond AML

Date: January 15, 2014
By: ACFCS Staff

Record-breaking Justice Department fines, regulatory penalties for violations that go beyond Bank Secrecy Act and anti-money laundering transgressions, and expanding regulatory pressure made 2013 a challenging year for financial institutions that do business in the United States.

But one set of institution employees, financial crime compliance professionals, have reason to celebrate. They’re enjoying a white-hot job market that appears set to continue through 2014.

In the wake of the huge scandal at JPMorgan Chase, large and medium-sized financial institutions are scrambling to strengthen their financial crime compliance units. Their task becomes more urgent as US regulatory and enforcement agencies do not appear ready to relent. While AML-related jobs remain a focus of the hiring spree, there is a noticeable shift in employment practices among institutions looking to fill compliance jobs.

Looking for broader, non-traditional skills

More and more, institutions are seeking candidates with non-traditional skills to fill openings at departments that merge or “converge” compliance responsibilities.

“It’s more and more of a trend that institutions are combining AML, fraud, corruption, sanctions and other financial crime functions,” said Christian Focacci, founder of the job search site, AMLSource.com. “As a result, more institutions are staffing for financial crime risk management units, as many of them are calling these departments.”

“At the same time, we’re seeing hiring for very data-intensive, analytic roles that have never been staffed before,” he continued. “Financial institutions are now realizing how much data they have, and how it can be utilized in financial crime compliance. Overall, the outlook is really good in the next year and beyond.”

Salaries rising as institutions hunt for talent at all levels

That view is echoed by others in the compliance hiring field, who say that salaries are also ticking up as a result of the employment boom. Faced with growing regulatory risks, institutions are increasingly willing to pay a premium for talent.

“We saw a sharp increase in salaries in the past two to three years,” Focacci said. “It’s leveled off somewhat since then, but still going up.” A 2013 study by a money laundering industry group found that financial crime compliance salaries rose by 6% the previous year to a global median of $75,500 per year.

“All signs are pointing to a very good year for financial crime compliance,” says Jack Kelly, Managing Director at the recruiting firm Compliance Search Group, in New York. “You have major media attention and backlash from high profile scandals. When you put these things together, there’s a big push to make financial institutions beef up their internal controls and their staffs.”

FATCA looms, but FATCA hiring lags

The landmark Foreign Account Tax Compliance Act (FATCA), which takes effect on July 1, 2014, has yet to cause a significant hiring surge, say hiring professionals. This situation may change in coming months, as the effective date nears and financial institutions settle on where to place compliance responsibility for this far-ranging law.

Presently, no broad consensus has emerged on the optimal placement of FATCA compliance responsibilities. Some institutions make it an adjunct of the AML compliance department, some place it in the overall compliance department, others place it in the tax department, others make it a responsibility of the legal office, among other locations.

“To a lesser degree, institutions are hiring for FATCA purposes,” says Kelly. “It is a lagging indicator. It doesn’t happen so quickly when these laws get passed. Institutions are looking around to see what others are doing, but then reality sets in.

“It may not happen right now, but it will over time,” he added.

Higher pay and more jobs signal changing culture

While the job and pay upsurge is good news for financial crime professionals, it may leave smaller institutions out in the cold. Unable to compete on salaries and benefits with the larger multinational institutions, regional ones outside of financial hubs like New York and San Francisco are finding it difficult to attract qualified candidates for high-level positions, according to Focacci and hiring professionals.

Though the current hiring streak is unlikely to continue indefinitely, the spate of enforcement actions over the past three years may leave a more lasting impact on the financial crime landscape, by shifting the way compliance functions are perceived.

It wasn’t that long ago that as a recruiter I would speak to people and would have to explain why we were hiring for compliance,” Kelly noted. “’Do we really need this expense?’ they would ask.”

“Today they get it. They need it. People want compliance to protect themselves from regulators and legal action. The culture has shifted, and we absolutely need it.”

How has the present financial crime compliance job market affected you and your organization? Take the ACFCS Compliance Jobs Survey here.

In fallout from $106 million corruption scheme, Siemens managers face ‘copycat’ charges in Argentina

Date: January 15, 2014
By: Gonzalo Vila

In a case that vividly demonstrates the widening risks companies face from anti-corruption enforcement, a judge in Argentina ordered the indictment of 17 current and former managers of Siemens AG on charges they helped funnel more than $106 million in bribes to win contracts from the Argentine government.

The indictment late last month follows a long-running investigation in Argentina that exposed a vast bribery scheme extending to the senior management of the German engineering conglomerate and its Argentine subsidiary.

In 1998, Siemens and its Argentine subsidiaries won a government contract to produce national ID cards and build a border control system in Argentina, a deal signed by then-president Carlos Menem. In order to secure the contract, Siemens funneled tens of millions of bribes over several years to middlemen representing Menem.

In 2001, Menem’s successor, Fernando de la Rua, canceled the contract and ordered an investigation. Siemens admitted paying bribes to Argentine government officials in connection with obtaining the contract.

The bribery scheme has already had a costly fallout for Siemens. In 2008, the company was hit with a record $800 million penalty from the US Justice Department for violating the Foreign Corrupt Practices Act in connection to the Argentine corrupt payments. Five Siemens managers were also charged in the US for facilitating bribery.

Those same five managers now face charges in Argentina, along with twelve others who helped create shell corporations and falsify payment documents to help conceal the bribes.

Their indictment highlights a growing trend in anti-corruption enforcement globally – the rise of so-called “copycat prosecutions.” Corruption schemes, especially those involving large multinational companies, are often highly international in scope, with participants and violations in multiple countries. When wrongdoing comes to light, companies and their employees are left facing the threat of prosecution from multiple enforcement agencies in multiple countries for the same violations.

Siemens used global network of shell companies to funnel bribes

The investigation in Argentina shares many elements in common with the 2008 case against Siemens in the US. The company was also fined more than $280 million by the German authorities in 2007 in connection to the Argentine bribe scheme.

The 337-page resolution by Federal Judge Ariel Lijo offers insights into how Siemens engineered such a large-scale bribery operation. Participants created a complex system of transactions and fronts to justify the expenditure of large sums of money from Siemens and its subsidiaries. Among other methods, Siemens employees used a group of shell companies to create fictitious contracts for services that were never provided in order to justify and channel corrupt payments.

According to the Argentine investigation, corrupt practices to secure government contracts were an established part of the corporate culture of Siemens’ subsidiaries. Argentine officials stated, for example, that one of the subsidiaries had set aside approximately $40 million to use for bribe payments in the country.

Case a setback as Siemens tries to distance itself from corruption

In the US case Siemens acknowledged that between 1998 and 2007 about $106 million related to “Project ID” in Argentina were paid directly or through affiliates, subsidiaries and business units.

The case in the US did not focus only on corrupt acts in Argentina. It referred to the payment of more than $ 1.4 billion in bribes between 2001 and 2004 in countries scattered across the globe, including payments to secure contracts for supply transit systems in Venezuela, medical equipment in China, Vietnam and Russia, power equipment in Iraq and Israel, refineries in Mexico, and telecommunications equipment in Nigeria and Bangladesh.

For Siemens, which is trying to bury once and for all allegations of corruption and bribery, the Argentine decision falls like a bucket of cold water.

After entering into a Deferred Prosecution Agreement in the US, Siemens revamped its compliance program in 2008. The company has taken steps to improve its anti-corruption program, naming a new chief compliance officer to head Siemens’ entire compliance operations beginning this month.

Eleven countries cooperated to unravel bribe scheme

The investigation in Argentina required the cooperation of a large number of jurisdictions, including Germany, United States, Uruguay, Costa Rica, Panama, Cayman Islands, Bahamas, Channel Islands, British Virgin Islands, United Arab Emirates and Switzerland. The case evidences the international scope of corporate networks and transactions used to move money and create layers to hide corrupt payments.

As Siemens execs used financial accounts in different countries to funnel the bribe payments, it proved extremely challenging to identify the final recipients of the payments, according to the ruling.

One element in the structure of transactions and payments that drew investigator’s attention was that payments for consultant services were not agreed in the form of fees for costs, but were instead fixed amounts paid at staggered intervals. The payment arrangement tipped off investigators that these contracts were not legitimate, but instead instruments to convey bribes.

Investigators also questioned why Siemens subsidiaries outsourced advisory services for major IT projects to unknown offshore companies in other Latin American countries, including Brazil, Chile, Mexico and Uruguay. The companies were revealed to be mechanisms for moving bribe funds.

Case involved corporate collusion

The judge also noted that Siemens’ employees cut a deal with members of another Argentine company (SOCMA) in order to allow Siemens to win the bid for the ID card project.

Adding more doubts to the bidding process was the fact that a SOCMA subsidiary was later added to the project, as the company responsible for distributing documents across the country. The addition was approved by the Argentine Ministry of Interior Office.

Warning signs and affluent lifestyles

According to testimony from Siemens executives, there were rumors and warnings internally before the bribe scheme exploded into public view. Siemens employees stated that executives at the local subsidiary of Siemens had an opulent lifestyle that could be the result of corruption.

Michael Kutschenreuter, who served as business manager of one of the subsidiaries of Siemens, also submitted a brief internally in which he referred to certain issues related to the “Project ID.” He acknowledged that it was a controversial issue for the board of directors in Germany.

After the presidential elections in Argentina in 1999 that marked the end of the administration of Carlos Menem, Kutschenreuter said other executives at Siemens let him know that the project was blocked and could not continue due to the change of administration.

That reached the ears of one of the members of the board of Siemens in Germany, Volker Jung, who said that Argentina was worse than Iran because while the Iranians were corrupt at least they kept their word, carried out the projects and paid, while the Argentines were corrupt and were also unreliable.

As FATCA nears, US is accused of hypocrisy in attacking offshore secrecy while keeping its own

The United States, the author of the 2010 Foreign Account Tax Compliance Act (FATCA) that seeks to track down US persons who have financial accounts in other countries that serve to evade US taxes, is hypocritical and does not practice what it preaches, says a landmark “Financial Secrecy Index” released by the independent, London-based Tax Justice Network.

The Index accuses the United States of being “a major tax haven because it provides tax free treatment and various forms of secrecy for non-resident individuals, corporations and other entities.” (www.financialsecrecyindex.com)

The Tax Justice Network (TJN) report of November 2013 also says the US “has played a pioneering role in devising ways to defend itself against foreign tax havens, but has failed to address its own role in attracting illicit financial” flows and assets.

The amount held in “secrecy jurisdictions” worldwide, TJN says, amount to “$21 to $32 trillion of private financial wealth… located, untaxed or lightly taxed, in secrecy jurisdictions around the world.”

(Because of the seminal importance of the index and report of the Tax Justice Network, in coming weeks ACFCS.org will cover additional portions applicable to other nations.)

Secrecy has broad, deep worldwide consequences, TJN says

TJN places its work and its index in a broad context beyond mere taxes:

“The problems go far beyond tax. In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency. The secrecy world creates a criminogenic hothouse for multiple evils including  fraud, tax evasion and aggressive tax avoidance, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more. It provides multiple facilities for insiders to extract wealth at the expense of societies elsewhere, creating political impunity and undermining the healthy ‘no taxation without representation’ bargain that has underpinned the growth of accountable modern nation states. Instead of depending on tax, many countries are forced to depend on foreign aid….This is not just a ‘developing country’ issue: it hurts citizens of rich and poor countries alike.”

The index ranks 82 jurisdictions “according to their secrecy and the scale of their activities.” It said the index “is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows.”

The secrecy rankings are based on a combination of scores by which jurisdictions are given “secrecy points” and ranked on the share of the offshore financial services market they hold. Thus, countries such as the US, which was assessed 58 secrecy points out of 100, or the mid-range, ranked 6th overall because it accounts for 22 percent of the global financial services market.

Some Surprises in the “Top 10”

Using these criteria, the Index produced some surprises among the top 10 secrecy jurisdictions:

  1. Switzerland
  2. Luxembourg
  3. Hong Kong
  4. Cayman Islands
  5. Singapore
  6. United States
  7. Lebanon
  8. Germany
  9. Isle of Jersey
  10. Japan

The United States

The report highlights the problems and the implicit hypocrisy of nations, such as the United States, that fight to eliminate offshore havens to prevent the outflow of money from their taxpayers, but do little to avoid attracting money, legal or illicit, from other countries or to help them combat tax evasion.

An example of this lack of cooperation is found in the FATCA Intergovernmental Agreements the US has signed. Some of them contain explicit language about the need for the US to improve the exchange of information about foreigners who maintain assets in the US. In some cases, the language cites the need for new US legislation to facilitate this cooperation.

Major factors that rank US as offshore secrecy haven

The United States earned its 6th place rank in the FSI ratings principally because of the following factors, which the report says “help the United States attract foreign dirty money” and “arise from deliberate law-making rather than mere omission.”

  • Imposes a zero tax rate on non-resident individuals or foreign corporations from some categories of income, including interest paid by banks and savings institutions,
  • Imposes a zero tax rate on interest on government and some corporate obligations,
  • Has weak and relatively few treaty obligations to exchange relevant information with other jurisdictions,
  • Historically, the US has not required income earned in the US by non-residents to be reported to the US government. (Starting in 2013, information reporting is in place for interest from bank deposits earned by US residents from other nations.),
  • Gaps in US money laundering laws allow US financial institutions to handle the proceeds of a long list of foreign crimes if they are committed outside the US, (Title 18, US Code Section 1956),
  • A significant portion of US residential and commercial property is owned by offshore shell companies,
  • Company incorporation procedures in the US are governed by state, not federal law. Several states specialize in hosting corporations that provide secrecy, the report says.

UK territories combined are world’s largest secrecy haven

The United Kingdom, which lately has sought to reduce secrecy in its overseas territories, has a lot of work to do. Twenty one of the 82 jurisdictions ranked by the secrecy index are British territories. The Tax Justice Network says if they were evaluated as one jurisdiction they would rank first in the secrecy index, exceeding Switzerland by a large margin.

Other nations that occupy the top 30 positions include surprises like Australia, Norway, Brazil, Sweden and South Africa.

Beneficial ownership a well-guarded secret worldwide

Access to information continues to be a huge worldwide problem in the search for transparency. According to Tax Justice Network, none of the 82 jurisdictions required the automatic disclosure of beneficial ownership information to public authorities by means of a registry or on the Internet.