IS BANKING BEST PRACTISES INSUFFICIENT TO DETER AML/CFT ?

Buried in this week's  articles detailing that alleged US Diplomatic cables identified Arab Bank as a facilitator of payments for illegal weapons of mass destruction/ballistic missile shipments, involving North Korea, Iran and Syria, was a curious, anonymous opinion. The writer, ostensibly an American diplomat, opined that the bank may have been an unwitting tool of North Korea.

What he is reportedly saying is that the bank failed to identify the aliases and front companies employed by North Korean financial professionals. What's wrong with this picture ? I am sure that the bank will tell you that they maintain both AML software, and a leading database for high-risk individuals and entities. This, unfortunately, is obviously not enough to identify determined (and talented) money launderers.

Orthodox banking best practises simply does not work against imaginative money launderers. What does work, in my humble opinion:

(1) Follow the lead of America's biggest financial institutions, and acquire access to ALL the major databases of high-risk individuals & entities. What one database, even the best, has omitted, may be covered in a lesser-known competitor. Take them all, and disregard the cries, from management, that there is duplication. If you catch only one major money laundering attempt with the information, you avoid a potential multi-million dollar fine from regulators.

(2) Create an in-house Financial Intelligence Unit, and place as its commander a former/retired law enforcement agent with actual money laundering investigative experience, or a former money launderer, if you can find one. You need someone who is qualified to perform Enhanced Due Diligence, both for the results you will get, and to lessen the burden upon your compliance staff; They have enough on their plates.

(3) Teach your compliance staff the actual techniques of money laundering. They cannot interdict, on a real-time basis, a money laundering scheme if they do not recognise it.

(4) Make sure that your compliance staff is updated, at least weekly, on region-specific emerging threats, so that they know what new issues to look for.

If you elevate your compliance programme to the level at which it becomes effective, you reduce the risk that money launderers will be able to move their funds into, and through, your bank; Good luck.

BOSTON LAWYER LAUNDERED $1.7M THROUGH BAIL DEPOSITS

Lawrence Perlmutter, a Massachusetts criminal defence lawyer, has executed a Plea Agreement, admitting to Federal charges of money laundering, and money laundering conspiracy. He has agreed to accept a sentence of 66 months for conducting a money laundering operation designed to clean narcotics profits through the porting of bail of criminal defendants arrested in Massachusetts on state drug charges.

The scheme operated in this way:
(1)  Defendants arrested on heroin or cocaine charges in Massachusetts would send a representative to a Perlmutter confederate, who operated a notary & tax preparation centre, and pay over the full amount needed to post a bond for the individual, plus a substantial fee.
(2) The cash then was deposited into Perlmutter's Trust Account, which is supposed to be used to hold client money. The remitter was marked as an associate of the defendant.
(3) A cashier's cheque was purchased immediately, and the cheque delivered to cover the in-custody individual's bond. Permutter was generally not the lawyer for the defendant being released.
(4) The member of the defendant's organisation named as remitter made the bond payment.
(5) After the case was over, the bond money, less any fees, was returned, in cheque form, to the declared owner. This in effect resulted in the narcotics traffickers obtaining a cheque for their illicit cash.

What was this lawyer thinking ? All those cash deposits, none of which actually qualifies as funds of a client being held in trust. The money was immediately converted to cashier's cheques, which is a major red flag of money laundering. Such activities were bound to be found suspicious, sooner or later, by bankers or law enforcement agents.

An investigation initiated by the Boston Police Department resulted in the indictment of Perlmutter and his co-conspirator. Sentencing has been set for 12 January, 2012.

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*United States vs. Perlmutter, Case No: 1:10-cr-10061-NMG (D Mass) .

KEN RIJOCK TO LECTURE AT THREE FFIEC FINANCIAL CRIME CONFERENCES IN 2012

If you are with FDIC, FRB, NCUA, OCC, OTS or one of the state banking regulatory agencies, and are planning on attending one of the three Financial Crimes Conferences sponsored by the Federal Financial Institutions Examining Council* in 2012 at FDIC, be advised that I will be presenting my extended seminar on Money Laundering Tradecraft at those events. Tradecraft explains the advanced and esoteric money laundering methods currently used by laundrymen, in the context of their money laundering strategies, tactics and objectives.. It will be the first time that I deliver this hands-on presentation at FFIEC.

For further information, contact the Examiner Education Staff at FFIEC. They have a page on the agency's website.
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*http://www.ffiec.gov/

FRENCH POLICE SEIZE ELEVEN LUXURY CARS IN PARIS IN MONEY LAUNDERING INVESTIGATION

French law enforcement agents have seized eleven of the most exotic automobiles in the world, reputedly worth a total of £5m, all located at the £15m French mansion of Teodoro Obiang Nguema Mbasogo, the leader of Equatorial Guinea, reportedly in connection with an ongoing money laundering investigation.

The vehicles, which are amongst the most expensive automobiles in the world, include:

(1) Two Bugati Veyrons
(2)  Ferrari 599 GTO
(3)  Maserati
(4) Rolls Royce Phantom Drophead Coupé
(5) Aston Martin
(6) Porsche Carrera GT
(7) Ferrari Enzo
(8) A couple of Bentleys

Obiang's son, Teodorin Obiang Mbasogo, reportedly drove a number of these automobiles; father and son  each owned some of these cars.

French media have stated that the automobiles were allegedly used in a money laundering operation.

A CONDITIONAL SENTENCE FOR MONEY LAUNDERING ? GET REAL, YOUR HONOUR

A judge in British Colombia has sentenced Robinderpal "Robin" Rathor, a corrections officer who also ran two currency exchange outlets, to a Conditional Sentence of two years, minus one day *. Two special conditions, that he is confined to his residence from 10 PM to 6 AM the first year, and that he perform 100 hours of community service, were imposed. Cash was also seized by Canadian law enforcement.

 Rathor, whom pled guilt to Laundering the Proceeds of Crime, was caught in a sting operation run by undercover officers of the Royal Canadian Mounted Police (RCMP), who posed as marijuana and cocaine dealers who needed to convert their US Dollars into Canadian notes. American customers generally pay Canadian narcotics traffickers in American currency, which the criminal must then exchange for Canadian. Rathor exchanged US$560,000 .

The sentence is basically the functional equivalent of probation or parole; so long as Rathor satisfies the conditions of his sentence, he avoids incarceration completely. Is this sufficient deterrence, to keep other Canadians who might be tempted to make some fast money by laundering drug proceeds ? I doubt it,.

The function of sentencing, in my personal experience, is:
(1) To deter others from committing the same offence.
(2) To protect society from individuals who have demonstrated their willingness to commit the offence.
(3) To incapacitate the offender, taking him out of society, so that he cannot continue his criminal activities.
(4) To demonstrate to the public the seriousness of the crime.

How does a non-custodial sentence, that does not involve jail or prison time, satisfy those requirements ? An aggravating factor here is that the defendant was himself a part of the criminal justice system. I fully understand that Canada, to reduce the number of individual incarcerated, has Conditional Release, but in light of the seriousness of the crime, I do not believe that it should have been imposed here, lest others be tempted by what was, in my humble opinion, a slap on the wrist.

Was justice served ? I will let you be the judge.
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* It appears that a Conditional Sentence, under Canadian law, is generally imposed for property crimes, and must be less than two years.

KEN RIJOCK TO SPEAK BEFORE THE ASSOCIATION OF BERMUDA COMPLIANCE OFFICERS (ABCO) ON 20 OCTOBER, 2011

Readers in the Bermuda Islands please note that I will be lecturing at the Bermuda Compliance Seminar, to be conducted by ABCO in Hamilton on Thursday, 20 October, 2011, from 9:30 AM to 3:30 PM. the goal of the programme is to equip financial institutions and senior managers to deal with real-time compliance issues more effectively, through a hands-on and interactive learning experience. The facility is being provided courtesy of HSBC Bank Bermuda.

The seminar will be presented in three parts:
(1) TRADECRAFT: covering both advanced and esoteric money laundering techniques, together with the methods of detecting them on a real-time basis.
(B) EMERGING THREATS: detailing both new and potential issues that have appeared in 2011, and which may appear in 2012.
(C) LIFE EXPERIENCES: My journey from bank lawyer to career money launderer to Federal prisoner to compliance officer. This section will also cover the techniques and strategies I employed, in the application of enhanced due diligence, to identify and interdict money launderers, whilst serving as a compliance officer.

The details:

Date: Thursday, 20 October, 2011.
Venue: HSBC Bank Bermuda Ltd.
            Harbourview Centre
            37 Front Street
            Hamilton
Speaker: Kenneth Rijock, Financial Crime Consultant
Start Time: 9:30 AM
End Time:  3:30 PM
Refreshments and a light lunch will be served.

An announcement has gone out to ABCO members.
All others, please contact: Tanya Esdaille
tesdaille@applebyglobal.com

WHEN IT COMES TO FINANCIAL CRIME, SILENCE CAN EQUAL CONCEALMENT

Michael McNerney*, formerly a name partner at one of Fort Lauderdale most prominent law firms, but now awaiting sentencing for his role in the billion dollar Mutual Benefits Ponzi scheme, was seeking a judicial determination that he was not guilty of concealing material facts from investors. His counsel filed a Motion to Strike Allegations of Concealment in the Indictment, arguing that he did not make any misstatements of material fact.

The Court, speaking through District Judge Adalberto Jordan, denied his motion, citing to a decision that held "the duty to disclose is a general one, and arises whenever a disclosed statement would be misleading, in the absence of the disclosure of additional material facts needed to make it not misleading." In other words, if you remain silent when you should speak up, to correct a misleading statement or impression, you are still concealing information. Remember that the next time you are at an important meeting, and something is said that needs correction, or clarification, and you fail to say anything; it could come back to bite you.

What about Mr. McNerney ? Why was he so intent on minimising his role in the fraud ? He may have his eye on returning to the practice of law eventually, and he might have sought to strike the concealment allegations so as to increase his chances of readmission. However, he did sit in on meetings with investors, and the presence of the firm's attorney, in the face of misleading statements made by sales staff,  was certainly reassuring to the investors.

By the way,  the judge sentenced him to five years in Federal Prison, (the maximum sentence for Conspiracy to commit Mail & Wire Fraud) to be followed by three years of Supervised Release, a form of parole, and ordered him to make restitution in the amount of $826m. He is due to self-surrender on 26 October.

 He will most likely be called upon to testify against his principal client, and the attorney-client privilege has an important exception; if you are engaged in a crime or fraud with your client, the privilege no longer attaches.
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* United States vs. McNerney, Case No.: 1:08-cr-21158-AJ (SD FLA).

VIKTOR BOUT IS GOING TO TRIAL IN NEW YORK

Accused master arms trafficker Viktor Bout, known in the media as the Merchant of Death, and the Lord of War, is scheduled for trial, on the 11th of October, in US District Court* in New York. He was extradited from Thailand after allegedly agreeing to supply arms and missiles to the FARC, a designated global terrorist organisation, to be used against American military and government officials in Colombia.

 Bout faces multiple Federal charges:
(1) Conspiring to kill US nationals.
(2) Conspiring to kill officers and employees of the United States.
(3) Conspiring to acquire and use anti-aircraft missiles.
(4) Providing material support to a designated terrorist organisation.

Recently, the trial judge issued an Opinion and Order suppressing his statements to DEA officers after his arrest in Bangkok, ruling that his constitutional rights were violated. The Court has also reportedly indicated that his role in earlier criminal activity was limited to transport, and denied the government's request to introduce his long reputed arms trafficking history, in Africa and the Middle East, at trial as other criminal conduct under Rule 404 of the Federal Rules of Evidence.

We will be following this case closely next week; look for an update shortly. His codefendant,  the Syrian-American accountant Richard Ammar Chichakli,  remains at large, and was last seen in Moscow.
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*United States vs. Bout, case No.: 1:08-cr-00365-SAS (SDNY). 

US REGULATORS LEVY $3M FINE FOR "RECKLESS DISREGARD" OF SANCTIONS

OFAC and the Department of Commerce Bureau of Industry and Security (BIS) have jointly settled multiple sanctions with Texas-based Flowserve Corporation* for slightly more than three million dollars**. Flowserve is a global provider of flow control products, such as pumps, valves and seals, to the oil & gas, chemical and power industries.

The admitted violations:
(1) The unlicensed export, by domestic & foreign affiliates,  of the company's products, indirectly, to Iran.
(2) The company's foreign affiliates engaging in the unlicensed export of products to Sudan.
(3)  Transactions, by the company's  foreign affiliates, involving property in which Cuba, or a Cuban national, had an interest.

OFAC stated in mitigation that there was voluntary self- disclosure, and that there had not been any enforcement action taken against the company in the five years prior to the transactions at issue. Nevertheless, the action was taken because:
(A) "Several of the apparent violations reflected a reckless disregard for US sanctions requirements..."
(B)  "... and involved awareness by facility supervisors of the conduct giving rise to the apparent violations."

The penalties are $502,408 to be remitted to OFAC, and $2.5m to be paid to BIS. It should be noted that the company fully cooperated, and has now instituted major remedial measures, including exiting all business with sanctioned countries, and conducting a one-time, post-settlement compliance audit, according to a press release dated 3 October, 2011, and appearing on the company's website.

US regulators continue to exact fines and penalties upon American  corporations committing sanctions violations, especially violations of Iranian sanctions.
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*http://www.flowserve.com/
**http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/flowserve09302011.pdf

IS LEBANON NOW HIGH RISK ?

The present government in Lebanon has reportedly abolished all visa requirements for Iranian nationals, and this development, which has been reported in a number of Middle East media, is cause for serious concern. The Comprehensive Iran Sanctions Accountability and Divestment Act, which became effective on 1 July, 2010,  more commonly known as CISADA, imposes a due diligence requirement higher than banking best practices. If information is "knowable," meaning that it exists as open-source, then US persons or entities are charged with that knowledge, whether they happen to have it or not.

If I am an Iranian PEP committed to evading UK, US, EU, UN and all other existing ballistic missile & WMD global sanctions against  Iran, I hop a flight to Beirut, without the inconvenience of obtaining a visa, and process my purchases through one or more of its commercial banks. Since a number of Iranian banks have correspondent relationships with Beirut banks, either directly or indirectly through third parties, I will not have a problem obtaining my funds.

 I may even be using a passport I acquired legitimately, several years ago, in a nation within the Schengen Zone. At the other end, the Western banker handling the matter has no clue that payment for goods en route to  a "safe" Middle East destination, will ultimately end up in Tehran. Identity of Beneficial owner, or Source of Funds ? You're kidding, of course; bank secrecy is the order of the day, frustrating any enquiry.

Unfortunately, the Western banker, and his bank, could be liable for major sanctions under CISADA, because he is charged with the knowledge that all transactions originating from Lebanese banks could be Iranian purchases, and need to be thoroughly vetted. But he has no answers and that's the problem.

Has Lebanon now reached the point where you must classify it as high risk ? We cannot say, but you need to give it some serious thought the next time a large transaction from or to that country crosses your desk; think about it.
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* 75 Fed. Reg. 49836 (16 August 2010). 

OCTOGENARIAN CONVICTED OF MONEY LAUNDERING IN UK WASA MOVING NOTES DUE TO BE WITHDRAWN FROM CIRCULATION

The money laundering conviction last week, in Isleworth Crown Court, of Jean Rogerson, an 83-year old woman said to be living on benefits, for depositing more than £122,000 in her bank account in a single day, reveals an aspect of money laundering that can be utilised, by bank frontline staff, to identify laundrymen on a real-time basis.

Money launderers, like the Defendant in this case, are sometimes tasked to place notes into the financial system that may soon either be obsolete, or will become of such high profile that their placement itself could trigger a Suspicious Activity Report. Ms. Rogerson was depositing cash that reportedly consisted of mainly £20 banknotes bearing the image of English composer Edward Elgar. The notes were then due to be withdrawn from circulation in less than two months, after which time only the Bank of England was obligated to redeem them*; acceptance was them only optional at commercial banks.

The notes had most likely been the proceeds of crime, and held in storage for some time, outside the banking system, to evade law enforcement detection. Since they were being replaced with ones containing more advanced anti-counterfeiting features, the old ones were about to expire.

That is where Ms. Rogerson came in; she reportedly stated, in response to to the bankers' query as to Source of Funds, "they give me the money, and  give it to them back." It was anticipated that she would be withdrawing the funds in current notes.

If you have read my article, Watch for Money Launderers depositing Old Series US$100 Notes**, you know that the new US$100 note, when released sometime next year, will make the old, pre-1990 and older series notes extremely visible when placed for deposit at financial institutions. I have advised that money launderers should be now moving those old notes into bank accounts, and taking out the funds in newer series notes, for probable storage. Have you seen any lately, in large numbers ?

Therefore, always be conscious of developments in local currency; when new issues are due to come out, when old series are to be retired, and when design changes make the old notes a curiosity, and raising the risk that bankers may enquire further, or raise suspicions. Money launderers always want to blend in with the legitimate customers, and they will seek to rapidly discard notes which could raise attention in the future; Watch for them.
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*http://www.bankofengland.co.uk/banknotes/withdrawn/elgar.htm
**http://www.world-check.com/articles/2010/03/07/watch-money-launderers-depositing-series-one-hund/

CANADIAN COURT RULES LAWYERS ARE EXEMPT FROM AML/CFT REPORTING REQUIREMENTS

The Supreme Court of British Columbia, in a landmark decision* this week, has held that lawyers will not be required to maintain certain financial records on their clients in their offices, where they may be accessed by Canadian law enforcement or regulators, on constitutional grounds. The case, which was brought on behalf of the fourteen provincial & territorial legal societies that regulate the legal profession, will reportedly have national implications, due to a prior agreement with the Attorney General's office.

 The Proceeds of Crime (Money Laundering) and Terrorist Financing Act  of 2001, and subsequent regulations, required solicitors to maintain financial records, involving fee transactions with their clients, and to retain these records in their offices, where they could be subpoenaed by law enforcement agencies. Interlocutory injunctions were thereafter issued, in several provinces, staying lawyers' obligations under the law, pending a ruling by a court of competent jurisdiction.

The lawyers argued that compliance with the Proceeds of Crime law violated:
(1) The attorney-client confidentiality and privilege.
(2) A lawyer's duty of loyalty to their clients.
(3) The independence of the Bar.

The Court, speaking through Justice Laura Gerow, held that the anti-money laundering laws violated the Canadian Charter of Rights and Freedoms "as it applies to lawyers and law firms because, because it puts both lawyers and their clients' liberty interests in jeopardy by requiring lawyers to collect and retain information available to the government to aid in combating money laundering and terrorist financing."

It should be noted that the profession has had a "No Cash Rule" in effect since 2004; this limits cash fee payments to under C$7500, and mandates cash refunds to clients, if the amount is over C$1000.There is also a "Client ID Rule" which requires that client personal information be secured through proper identification documents.

Will this decision hinder Canadian money laundering and terrorist financing prosecutions ? We cannot say, but we will be paying close attention, in the future, to the actions of Canadian law enforcement agencies in money laundering investigations.
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*Federation of Law Societies of Canada vs. Attorney General of Canada, 2011 BCSC 1270. Opinion entered 27 September, 2011, Docket No.: L013117. 

THE LAUNDRY MAN BY KENNETH RIJOCK - COMING SUMMER 2012

If you have read my personal story, Confessions of a Money Launderer, and wondered what personal laundering experiences were censored from that blog, I have included them in my new book, The Laundry Man, which will be published by Penguin Books UK in July 2012.* Those of you who have seen the adverts on Amazon.com have seen the cover; for others, it appears on the far right of this page. When the actual publication date is announced, it will be promptly posted here. Details of the forthcoming book tour, in the UK and the United States in 2012, will also appear here first.
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*http://www.penguin.co.uk/ 

FBI RAIDS, SHUTS BOCA RATON COMPANY ENGAGED IN LIFE SETTLEMENTS

Imperial Holdings, Inc*, a Boca Raton, Florida company that was involved in life insurance and structured settlements, was raided by the Federal Bureau of Investigation last week, under the authority of a search warrant issued by a Magistrate Judge in US District Court for the Southern District of Florida. Reports indicate that the investigation originated in the District of New Hampshire. Trading was halted in the company's publicly-traded stock on the New York Stock Exchange, which plunged 60% after the raid. A number of the company's officers and directors are also reportedly under criminal investigation. Some reports state that the company's offices are closed, but this is unconfirmed.

Imperial was engaged in three categories of finance. First, making purchases of structured settlements, which are generally long-term annuities, where the recipient agrees to receive a discounted lump sum from the company, and sells the rights to receive future payments . Second, Premium Financing, where holders of life insurance policies borrow the money necessary to purchase, or maintain, the policies. Finally, the company purchased what are known as life settlements, (in the UK called traded life policies) life insurance policies from the owners and beneficiaries, who receive a discounted payment, and assign over the death benefits to the company.

The company has announced that it is cooperating in the investigation; The company's CEO** has stated that "we are not aware of any wrongdoing, and will cooperate fully with all relevant authorities to assist in their investigation."

Companies involved in Life Settlements in the United States have been targeted by law enforcement agencies since the billion-dollar Mutual Benefits Corp.*** scandal a decade ago.

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http://www.imprl.com/
** Antony Mitchell
*** SEC vs. Mutual Benefits Corp., 408 F.3d 737 (11th Cir. 2006), affirming SEC vs. Mutual Benefits Corp., 323 F. Supp. 1337 (SD Fla. 2004).

CONTINUE TO MONITOR SOUTH CHINA SEA INCIDENTS FOR COUNTRY RISK

A high-level meeting last week in Tokyo, between Japanese defence officials and ASEAN leaders, appears to have resulted in the strengthening of mutual ties, due to China's increasingly aggressive territorial posture in the disputed South China Sea area. Longstanding unresolved territorial and economic claims by several countries, including Vietnam, the Philippines, Taiwan, Malaysia and Brunei, in the maritime region, conflict with recent Chinese actions in support of its position, that it has exclusive sovereignty over the territories and waters. Whether it will result in incident that degenerate into armed conflict is a concern among compliance officers charged with the assessment of country risk.

The recent Chinese warning to an Indian warship visiting Vietnam, to the effect that it was in Chinese territorial waters, is but the latest in a series of incidents that is troubling from a country risk point of view, involving Vietnam, the Philippines, Malaysia and Taiwan.

Japan and the Philippines have reportedly entered into a strategic partnership agreement involving security matters. The United States has also become involved, partially to insure freedom of  navigation in this strategic maritime route to Northeast Asia, and China has indicated that it is displeased with American involvement.

The most disturbing development last week was the publication, last week, of an opinion article appearing in the government-sanctioned publication Global Times, entitled "Time to Teach Those around South China Sea a Lesson*,"  written by a strategic analyst, Long Tao. The article states that it is a good time for China to take military action against Vietnam and the Philippines, alleged to be the most vocal critics of China's recent actions in the South China Sea, and states that the United States is too preoccupied with the Middle East to respond. It cites the American failure to respond to Russian military intervention in the Republic of Georgia in 2006 as authority for that belief.

Whilst the Chinese Government has distanced itself from the article, which is also critical of Australia, Japan and India for upgrades in military capabilities, it is in line with a number of statements coming from other quarters in China, notably some of its retired senior military officers.

It is suggested that compliance officers at international banks whose clients, or the bank itself, have financial exposure in Vietnam and the Philippines pay close attention to unfolding developments in the South China Sea. It could also serve as a pretext for action against Taiwan, who claims many of the islands in the region. Monitor all incidents if you have an interest in the countries bordering the South China Sea.
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* Filed on September 29, 2011. http://www.globaltimes.cn/