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On August 1, 2024, the Department of Justice launched its Corporate Whistleblower Awards Pilot Program (the “Pilot Program”). Under this 3-year initiative managed by DOJ’s Criminal Division, a whistleblower may be eligible for an award of up to $50 million if she provides DOJ with information about corporate misconduct in certain industries.  As described in greater detail in the program guidance and below, the information must relate to at least one of four areas, including certain crimes relating to financial institutions, foreign corruption by companies, domestic corruption by companies and federal health care offenses involving private or other non-public health care benefit programs.

The Pilot Program has particular implications for financial institutions (“FIs”) and their anti-money laundering/countering the financing of terrorism (“AML/CFT”) compliance program personnel. Real-world application of the Pilot Program presumably will reveal the practical interplay (and possible tensions) between the Pilot Program and the relatively new whistleblower provisions under Bank Secrecy Act (“BSA”) created by the Anti-Money Laundering Act (“AML Act”), on which we have blogged frequently (see here, here, here, here, here and here).

Continue Reading  DOJ Unveils Corporate Whistleblower Awards Pilot Program – With Implications for Financial Institutions and AML/CFT Compliance Personnel

First in a Two-Part Series on the Utility of BSA Filings

Today we are very pleased to welcome guest blogger, Don Fort, who is the Director of Investigations at Kostelanetz LLP, and the past Chief of the Internal Revenue Service’s Criminal Investigation (CI) Division. 

As Chief of IRS-CI from 2017 to 2020, Don led the sixth largest U.S. law enforcement agency, managing a budget of over $625 million and a worldwide staff of approximately 3,000, including 2,100 special agents in 21 IRS field offices and 11 foreign countries. Don’s time in law enforcement included overseeing investigations of some of the most significant financial crimes involving tax evasion, sanctions evasion, money laundering, bribery, international corruption, bank malfeasance, cyber and cryptocurrency crimes, and terrorist financing.

We reached out to Don because we were interested in his perspective on the 2023 Year-in-Review (YIR) published by the Financial Crimes Enforcement Network (FinCEN), on which we previously blogged.  According to the YIR, there are about 294,000 financial institutions and other e-filers registered to file Bank Secrecy Act (BSA) reports with FinCEN.  Collectively, they filed during FY 2023 a total of 4.6 million Suspicious Activity Reports (SARs) and 20.8 million Currency Transaction Reports (CTRs), as well as 1.6 million Reports of Foreign Bank and Financial Accounts (FBARs), 421,500 Forms 8300 regarding cash payments over $10,000 received in a trade or business, and 143,200 Reports of International Transportation of Currency or Monetary Instruments (CMIRs) for certain cross-border transactions exceeding $10,000.  Although the YIR necessarily represents only a snapshot lacking full context, only a very small portion of those filings ever became relevant to actual federal criminal investigations.  But, the YIR makes clear that one of the most, or the most, important consumers of BSA filings is IRS-CI.

In our next related blog, we will discuss the utility of filings in the global anti-money laundering/countering the financing of terrorism compliance regime, from the perspective of industry – specifically, recent publications by the Wolfsberg Group, and the Bank Policy Institute, the Financial Technology Association, the Independent Community Bankers of America, the American Gaming Association, and the Securities Industry and Financial Markets Association.

This blog post again takes the form of a Q&A session, in which Don responds to questions posed by Money Laundering Watch about the impact of BSA filings, from the perspective of IRS-CI.  We hope you enjoy this discussion on this important topic. – Peter Hardy and Siana Danch

Continue Reading  BSA Filings and Their Utility to Law Enforcement:  A Guest Blog

Advisory is Accompanied by Related OFAC and DOJ Actions

On June 20, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a supplemental advisory to alert U.S. financial institutions about emerging trends in the illicit fentanyl supply chain. The supplemental advisory emphasized the increasing involvement of Mexico-based transnational criminal organizations (“TCOs”) in the procurement of fentanyl precursor chemicals and manufacturing equipment from suppliers in the People’s Republic of China (“PRC”).

The detailed supplemental advisory builds upon FinCEN’s 2019 advisory (see our blog post here) by introducing new typologies and red flags for financial institutions to try to identify and report suspicious transactions.  As we discuss, the supplemental advisory was accompanied by related actions by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of Justice (“DOJ”) as part of an apparently coordinated effort by the federal government to combat this pernicious illicit industry.

Continue Reading  FinCEN Issues Supplemental Advisory on Fentanyl Distribution and Growing Role of Transnational Criminal Organizations

Case Involves “Right to Control” Theory on Illicit Access to Bank Accounts Through Evasion of Banks’ AML Controls.  These Cases Will Continue.

In United States v. An, et al., 22-cr-640 (KAM) (E.D.N.Y. May 7, 2024), the Eastern District of New York recently addressed and rejected an argument by defendants that Ciminelli v. United States required dismissal of money laundering charges against them because the government had failed to allege that they had deprived or attempted to deprive banks of “property”. In attempting to harmonize the government’s approach with Ciminelli, the court defined a property interest by the banks in their customers’ accounts that will likely require further refinement by the Second Circuit, and perhaps draw the attention of the Supreme Court.

We previously blogged on the Supreme Court’s decision in Ciminelli, in which Justice Thomas, writing for a unanimous Court, rejected the Second Circuit’s longstanding “right to control” theory of fraud as a basis of liability under the federal wire fraud statute. In that post, we articulated the possible ramifications for the Department of Justice (“DOJ”) and its prosecution of bank fraud cases, because the opinion did not limit itself to wire fraud but instead made frequent and more general reference to “the federal fraud statutes”.  We suggested that the DOJ may have to reconsider its tactic of charging bank fraud, rather than a violation of the Bank Secrecy Act (“BSA”), based upon a defendant’s alleged acts of concealment which impacted victim banks’ ability to comply with the BSA.

The An opinion is complicated, and we summarize here only.  Although the DOJ won the motion at issue, which turned on the face of the indictment, related factual issues remain for trial.  Further, the basic legal issue may produce different outcomes in different courts.

Continue Reading  EDNY Upholds Money Laundering Charge Against Defense Attack Under Ciminelli

Last week, the United States Attorney’s Office for the Southern District of New York unsealed an indictment against global cryptocurrency exchange KuCoin and two of its founders, Chun Gan and Ke Tang, for allegedly conspiring to operate an unlicensed money transmitting business and conspiring to violate the Bank Secrecy Act (“BSA”) by willfully failing to maintain an adequate anti-money laundering (“AML”) program.  KuCoin also was charged with operating an unlicensed money transmitting business and a substantive violation of the BSA. Further, the Commodity Futures Trading Commission (the “CFTC”) filed a complaint on the same day in the United States District Court for the Southern District of New York alleging that KuCoin violated the Commodity Exchange Act (the “CEA”) and related regulations.

The indictment alleges that KuCoin failed to design and implement procedures to prevent it from being used for money laundering and terrorist financing, failed to maintain reasonable procedures for verifying the identity of customers, and failed to file any Suspicious Activity Reports.  When distilled, the indictment alleges that KuCoin had no real BSA/AML compliance program at all, because it pretended to not have any U.S. customers.  This allegation is familiar theme in similar U.S. enforcement actions, including those against Binance.

The CFTC civil complaint specifically alleges that KuCoin illegally dealt in off-exchange commodity futures transactions; solicited and accepted orders for commodity futures and swaps, and leveraged, margined, or financed retail commodity transactions without registering with the CFTC as a Futures Commission Merchant (“FCM”); failed to diligently supervise its FCM activities; operated a facility for the trading or processing of swaps without registering with the CFTC as a swap execution facility or designated contract market; and failed to implement an effective customer identification program.

Continue Reading  KuCoin and Founders Charged with Operating Illegally as Money Transmitter and Futures Commission Merchant

Today we are very pleased to welcome guest blogger Lili Infante, who is the CEO of CAT Labs – a tech company building digital asset recovery and quantum-resistant cryptography tools to fight crypto crime.  Lili previously spent a decade as a DEA Special Agent with the U.S. Department of Justice and pioneered an early federal task force focusing exclusively on crypto and dark web crimes. Lili has led numerous major crypto-related investigations to include the takedown of Hydra – the largest crypto-powered dark web criminal organization and money laundering platform in the world.

We reached out to Lili because her work is fascinating and increasingly important.  Law enforcement agencies, the U.S. Treasury Department and other regulators are focused on vulnerabilities and potential gaps in the United States’ anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) regulatory, supervisory, and enforcement regimes in regards to the use and misuse of virtual assets and decentralized finance.  Virtual assets can be the vehicle of choice for terrorist financing, fraud schemes, and state-sponsored cyber crime.  Meanwhile, agencies such as the Financial Crimes Enforcement Network (FinCEN) struggle to find proposed regulatory solutions.

This blog post again takes the form of a Q&A session, in which Lili responds to questions posed by Money Laundering Watch about investigating crypto-related illicit activity and recovering digital assets. We hope you enjoy this discussion on this important topic. – Peter Hardy

Continue Reading  Fighting Crypto Crime:  A Guest Blog.

It is challenging for law enforcement to track down and trace illicit activities conducted through digital currencies. The process can be very time- and resource-intensive.  Further, securing charges and arrests, and subsequent convictions, often requires the strong support of traditional sources of evidence, such as fact witness testimony and electronic communications.  Nonetheless, blockchain analytics is a key component of the government’s ability to pursue such cases.

On March 12, a jury in the United States District Court for the District of Columbia found Roman Sterlingov guilty on charges of money laundering conspiracy, so-called “sting” money laundering, operating an unlicensed money transmitting business, and violations of the D.C. Money Transmitters Act.  We blogged about the initial criminal complaint issued against Sterlingov here.  Sterlingov allegedly laundered $400 million through Bitcoin Fog, a bitcoin mixing service which can be used to obscure the origins of cryptocurrency transactions. 

Shortly before the trial and guilty verdicts, the Court issued an order addressing the admissibility of expert testimony related to blockchain analysis software under the factors established by the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc. to assess the reliability of expert testimony under Federal Rule of Evidence 702.  This blog post focuses on that order.

Specifically, the Court addressed proprietary software used by the private digital asset forensic firm Chainalysis, Chainalysis Reactor (“Reactor”), and whether expert testimony by witnesses propounded by the government – Luke Scholl (“Scholl”) from the FBI, and Elizabeth Bisbee (“Bisbee”) from Chainalysis – could rely upon Reactor under Daubert.  Reactor is a software used to dissect bitcoin transactions, utilizing techniques like co-spend analysis to connect multiple addresses to a single entity. The defense raised significant concerns about the reliability of Reactor.

The Court found the expert testimony admissible under Daubert.  Importantly, the Court also noted that while Reactor was important to the government’s case, it was not the sole basis for the prosecution’s theories. Other evidence, such as materials found in Sterlingov’s possession, online forum posts, IP analyses, and traditional blockchain tracing, also supported the prosecution.

The Court’s decision has potentially significant implications for future cases involving cryptocurrency transactions and digital currency-related crimes. It establishes a precedent regarding the potential admissibility of evidence derived from such software tools and underscores the evolving challenges and complexities of investigating financial crimes in the digital age.

Continue Reading  Blockchain Analysis and Related Expert Testimony Admissible In Criminal Trial

With Guest Speaker IRS Criminal Investigation Special Agent Jonathan Schnatz

We are very fortunate to have Special Agent Jonathan Schnatz as our guest speaker in this podcast on international efforts to investigate tax evasion and money laundering, and how they relate to criminal investigations and civil audits of U.S. businesses and individuals.

Special Agent Schnatz…

We previously have blogged on actions taken by the DOJ’s “Task Force KleptoCapture,” an interagency law enforcement task force with a mandate to target sanctioned Russian and pro-Russian oligarchs. While explicitly launched in May 2022 as a direct response to Russia’s full-scale invasion of Ukraine, the task force’s mission is consistent with the U.S. government’s characterization of Russia as a kleptocratic regime (see our post here) and the Biden Administration’s promotion of anti-corruption as a “core United States national security interest” (see our posts here and here).

This week, DOJ announced (via both a press release and a filmed podium announcement by Attorney General Merrick Garland) a series of enforcement actions in five separate federal cases in districts up and down the East Coast, dealing with money laundering and evasion of sanctions, in several cases centered on quintessentially oligarchic luxury goods: high-end real estate and superyachts.  The enforcement actions also emphasize the continuing themes in these cases of the use of shell companies, proxies and lawyers to allegedly evade sanctions.

Continue Reading  The American Front in Russia’s War on Ukraine: DOJ’s “Task Force KleptoCapture” Continues Focus on Operations of Sanctioned Oligarchs

Third of Three Posts in a Related Series on Recent AML and Money Laundering Prosecutions

As we have blogged, the Department of Justice (“DOJ”) has been busy lately in regards to money laundering and Bank Secrecy Act (“BSA”) / Anti-Money Laundering (“AML”) prosecutions.

In our first blog post in this three-part series, we discussed a significant prosecution of an individual, and two related corporate non-prosecution agreements involving the gaming industry.  In our second blog post, we discussed two unusual prosecutions involving, respectively, an executive of a bank and an alleged AML specialist working with small financial institutions.

In our final post of this series, we will discuss the prosecution and sentencing of a lawyer who allegedly became part of the massive fraud and money laundering scheme perpetrated by his cryptocurrency client.  Specifically, on January 25, lawyer Mark Scott (“Scott”) was sentenced to 10 years in prison for allegedly laundering approximately $400 million in connection with a fraudulent cryptocurrency scheme known as “OneCoin.”  Scott was a former partner at the international law firm of Locke Lord.  Although the alleged facts and circumstances of this case are both extreme and lurid, it nonetheless reminds lawyers of the need to be careful about getting too involved in the businesses of their clients, particularly in the presence of multiple red flags.

Continue Reading  Former Big Law Lawyer Sentenced to 10 Years in Prison for Allegedly Laundering $400 Million in Crypto Client Funds