Extraterritorial Application of US Law

Court Rejects Halkbank’s Claim That the Foreign Sovereign Immunities Act Shields the Bank From Prosecution

A motion to dismiss an indictment accusing Turkey’s majority state-owned Halkbank of money laundering, bank fraud and Iran-related sanctions offenses was denied by U.S. District Judge Richard M. Berman of the Southern District of New York in a recent 16-page decision.  The Court ruled that the Foreign Sovereign Immunities Act (“FSIA”) does not bestow immunity in U.S. criminal proceedings on financial institutions owned in whole or in part by foreign governments. Even if it did, the FSIA’s commercial activity exemptions would apply and support Halkbank’s prosecution. This development is the latest in the ongoing, complex battle between Halkbank the U.S. Department of Justice – a prosecution involving potential political battles as well.

As we have blogged, the U.S. Attorney for the Southern District of New York charged Halkbank on October 15, 2019 with a six count indictment for bank fraud, money laundering and conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”), stemming from the bank’s alleged involvement in a multi-billion dollar scheme to evade U.S. sanctions against Iran.  The Court later rejected an attempt by Halkbank to enter a “special appearance” contesting jurisdiction, making it clear that international financial institutions must appear for arraignment in criminal actions.  The decision served as a warning to foreign defendants brought into U.S. federal court: issues of jurisdiction in criminal cases must be litigated only after arraignment.

Judge Berman’s most recent ruling found that Halkbank is not immune from criminal prosecution in the United States under FSIA, and that the allegations in the indictment were plead sufficiently to avoid dismissal.  This ruling of course has a potentially broader application to any foreign majority state-owned entities which allegedly scheme to violate U.S. criminal law: given sufficient nexus between the scheme and the United States, FSIA will not shield the foreign entities, because the Act only applies to civil matters that do not fall under its “commercial activities” exceptions.
Continue Reading Turkey’s Majority State-Owned Halkbank Is Not Immune from U.S. Prosecution in Iran Sanctions and Money Laundering Case

High Profile Corruption, High End Real Estate, Shell Companies . . . and Fine Art

Second of Two Posts on Evolving Issues Regarding Real Estate and Money Laundering

In our last post, we blogged on a major regulatory tool to combat the use of real estate as a potential vehicle for money laundering: the real estate Geographic Targeting Orders (“GTOs”) issued by the Financial Crimes Enforcement Network. Today we explore a major enforcement tool in action: civil forfeiture of real estate by the U.S. Department of Justice (“DOJ”).

This summer, the International Unit of the DOJ’s Money Laundering and Asset Recovery Section (MLARS) filed numerous complaints for civil forfeiture for real estate and other assets. This blog post will highlight a few – but not all – of these interesting and high-profile cases. Some of these cases may have been informed by data and leads obtained through the GTOs.

We explore here a trio of civil forfeiture actions pertaining, respectively, to alleged public corruption cases arising out of Gambia, Nigeria, and Malaysia. All of these cases involve foreign public officials who allegedly obtained wealth through corruption schemes committed abroad and laundered that money through shell companies to purchase real estate and other assets – sometimes located in the U.S., but sometimes not. Although the officials’ alleged initial crimes – the “specified unlawful activity,” or SUAs, as underlying crimes are defined under the federal money laundering statutes – took place overseas, the U.S. money laundering statutes provide that foreign misappropriation, embezzlements, and theft of public funds to benefit a public official constitute SUAs, thereby allowing the U.S. government to pursue civil forfeiture claims against assets located in the U.S. or abroad which are linked to the funds from underlying crimes committed primarily or even outside of the U.S.

This is the “civil forfeiture version” of a tactic used with increasing frequency by DOJ on which we repeatedly have blogged: the use of the criminal money laundering statutes to prosecute foreign officials for spending the fruits of entirely foreign crimes, when some of the financial transfers involved in the subsequent money laundering transactions occurred in the U.S.

Finally, another theme running throughout the allegations in these civil forfeiture actions is the unfortunate connection between money laundering and corruption and human rights abuses.
Continue Reading Civil Forfeiture of Real Estate to Fight Money Laundering: A Round-Up

The District of Connecticut recently vacated a defendant’s convictions at trial for violating the Foreign Corrupt Practices Act (“FCPA”) — but declined to similarly vacate his related money laundering convictions.  This case provides another example of how the money laundering statutes can be a particularly powerful and flexible tool for federal prosecutors, and how they can yield convictions even if the underlying offenses do not (and perhaps are not even charged).

The case involves Lawrence Hoskins, a British citizen who had been employed by Alstom UK Limited but worked primarily for a French subsidiary of Alstom, the parent company.  Hoskins allegedly participated in a corruption scheme involving a project in Indonesia.  The bidding process for the project also involved Alstom Power Inc. (“API”), another subsidiary of Alstom that is based in Windsor, Connecticut.  According to the government, Alstom hired two consultants, Sharafi and Aulia, who bribed Indonesian officials to secure the contract for the project.

Much ink has been spilled by the media and legal commentators regarding the district court’s decision (which the government is appealing) to vacate the defendant’s FCPA convictions, on the grounds that he did not qualify as an “agent” of API for the purposes of the FCPA statute.  We will not focus on that issue here. Rather,  we of course will focus on the fact that the defendant’s convictions for money laundering, and conspiring to launder money, nonetheless survived.  Importantly for the money laundering charges, the district court did not find that there in fact was no underlying corruption scheme.  Rather, the court found that the defendant could not be convicted under the FCPA for allegedly participating in this scheme.  Thus, there was still a “specified unlawful activity,” or SUA, which produced “proceeds” to generate money laundering transactions.

The case also reminds us that, as we have blogged, it is relatively easy for the U.S. government to prosecute foreign individuals for conduct occurring almost entirely overseas, because the nexus between the offense conduct and the U.S. does not need to be robust for U.S. jurisdiction to exist.
Continue Reading High-Profile FCPA Prosecution Reflects: Government Can Lose on Lead Corruption Charges But Still Win on Related Money Laundering Charges

Case Sheds Light on Latest Methods to Evade Detection: “Peeling” Chains

On March 2, the U.S. government sanctioned and indicted two Chinese nationals for helping North Korea launder nearly $100 million in stolen cryptocurrency. The indictment, filed in the District of Columbia, charges the defendants with conspiring to commit money laundering transactions designed to both “promote” and “conceal” the underlying crimes of wire fraud (the theft of the cryptocurrency via hacking) and operating as an unlicensed money transmitter — the latter of which is also charged in the indictment as an additional count.

According to the related and detailed civil forfeiture complaint, these funds were only a portion of those stolen in 2018 by state-sponsored hackers for North Korea from a South Korean exchange. These actions, notable in several respects, provide a glimpse at the latest methods of laundering cryptocurrency.

Anyone attempting to launder illicit cryptocurrency faces at least two big challenges. First, due to rigid know-your-customer rules, one cannot simply deposit large amounts of funds at an exchange without raising red flags. Second, because all cryptocurrency transactions are recorded on a blockchain, they can be traced.

To clear these hurdles, the complaint alleges that North Korean hackers used “peeling chains.” In a peeling chain, a single address begins with a relatively large amount of cryptocurrency. A smaller amount is then “peeled” off this larger amount, creating a transaction in which a small amount is transferred to one address, and the remainder is transferred to a one-time change address. This process is repeated – potentially hundreds or thousands of times – until the larger amount is pared down, at which point the amount remaining in the address might be aggregated with other such addresses to again yield a large amount in a single address, and the peeling process goes on.
Continue Reading Two Chinese Nationals Charged with Money Laundering Over $100 Million in Cryptocurrency for North Korea

Court Rejects Attempt by Halkbank to Enter “Special Appearance” Contesting Jurisdiction

Turkish state-owned bank Halkbank’s efforts to avoid appearing in U.S. federal court for arraignment were squashed recently in a twenty-seven-page opinion issued by the Honorable Richard M. Berman of the U.S. District Court in the Southern District of New York. The Court made clear that for a foreign entity to challenge personal jurisdiction in a criminal case, it must first accept service of the indictment against it, appear in court, and enter a plea.  This outcome differs from civil cases, in which defendants challenging personal jurisdiction can and in fact must enter a “special appearance” challenging (only) personal jurisdiction, lest they be deemed as potentially having waived the issue and accepted the jurisdiction of the court.

As we previously blogged, on October 15, 2019, the U.S. Attorney for the Southern District of New York charged Halkbank with money laundering, bank fraud, and sanctions offenses under the International Emergency Economic Powers Act, or IEEPA, arising from the bank’s alleged involvement in a multibillion-dollar scheme to evade U.S. sanctions regarding Iran. This indictment follows the 2018 conviction of its former Deputy General Manager for International Banking after a lengthy jury trial that also implicated other senior-level officials at Halkbank. The Court then issued a summons directing Halkbank to appear for arraignment on October 22, 2019, and served the summons on the law firm that had represented Halkbank in connection with the DOJ investigation of the bank.

As we will discuss, the Court’s opinion is strongly worded, and sends a definite message to foreign defendants with limited nexus to the U.S. that they still will have to appear in U.S. court to litigate jurisdiction and their claimed lack of ties to the U.S.  As we have blogged, the Department of Justice is charging foreign defendants with increasing frequency based on alleged misconduct occurring entirely outside of the U.S. — often predicating jurisdiction upon incidental financial transactions flowing through New York, often through correspondent bank accounts.  Further, the consequences of the ruling against Halkbank might be felt more keenly by some individual defendants, who — unlike entities — are subject to pretrial detention once they physically appear in the U.S.
Continue Reading Federal Court Makes Clear That International Financial Institution Must Appear for Arraignment in Criminal Action

ABA Tax Fraud Panel to Discuss IRS CI and Crypto Criminals

The Internal Revenue Service – Criminal Investigation (IRS CI) has made it clear that it is focusing on the abuse of digital currencies to further tax evasion, money laundering, and other offenses. IRS-CI also has made it clear that this is an international effort, and that it is trying to partner with law enforcement agencies across the globe in order to coordinate and share investigative leads.

This is a hot topic, and we are honored that Ballard Spahr will be moderating a panel on these very same issues, at the ABA’s annual Tax Fraud/Tax Controversy Conference in Las Vegas on December 12, entitled Charging Cryptocurrency Violations—Tax Crimes or Money Laundering.  We are pleased to be joined by our wonderful panelists, Evan J. Davis, Betty J. Williams, and Ian M. Comiskey.  This is a unique conference, and we invite you to attend if you are interested in the fascinating cross-section of tax evasion and money laundering.

This blog will discuss the recent efforts by IRS-CI to “up its game” in investigating cross-border offenses committed through cryptocurrency, such as its participation in the international Joint Chiefs of Global Tax Enforcement task force. We then will discuss a recent high-profile case which exemplifies these two goals of fighting crypto-related crime and collaborating with foreign law enforcement officials to do so: the notorious “Welcome to Video” case, which led to a global takedown of a darkweb child pornography website, its administrator, and its customers. The Welcome to Video investigation, led by IRS-CI, also illustrates a key point we will discuss at the ABA conference: that cryptocurrency is only “pseudo-anonymous,” and that its protections can yield to a determined combination of modern digital forensics and old-fashioned investigative techniques.
Continue Reading IRS CI Highlights International Efforts to Tackle Cryptocurrency Abuse, Money Laundering and Tax Evasion

Arrest is Culmination of Elaborate FBI Sting Targeting Banker Who Allegedly Catered to Drug Dealers

On November 12, 2019, the U.S. Attorney for the Southern District of Florida announced two key money-laundering developments concerning high-profile Guatemalans: the arrest of Alvaro Estuardo Cobar Bustamante, the director of a national Guatemalan bank, and the unsealing of a case against and guilty plea of Manuel Antonio Baldizon Mendez, a former presidential candidate in Guatemala who cooperated in the FBI and DEA sting operation against Cobar.

The government’s press release, coupled with its charging documents discussed below, underscore Guatemala’s strategic importance to drug traffickers and, by extension, money launderers. These developments likewise emphasize: (1) the increasing degree of international coordination often required to root out and prosecute both crimes; and (2) the United States’ willingness to prosecute alleged bad actors abusing the financial system, of which we have blogged about here.

Guatemala’s Strategic Importance to Central and South American Drug Trafficking Organizations

Since at least as early as 2013, the FBI and DEA have conducted extensive and numerous investigations into Drug Trafficking Organizations (“DTOs”) in Guatemala. Both agencies have emphasized the strategic importance of Guatemala for large-scale DTOs because it is a key transportation hub in the cocaine trafficking pipeline that begins in Colombia and moves through Central America and Mexico before branching off into various locations in the United States. Colombian and Mexican DTOs, seeking to avoid detection from U.S. law enforcement, often buy and sell multi-ton quantities of cocaine in Guatemala which, in turn, creates a plethora of opportunities for Guatemalan DTOs to serve as intermediaries receiving and re-selling cocaine.
Continue Reading International Efforts to Combat Guatemalan Money Laundering Schemes Nets High-Profile Arrest and Guilty Plea

The Hagia Sophia Church in Istanbul, Turkey

Indictment Alleges that Bank and its Officers Used Front Companies to Evade Prohibitions on Iran’s Access to the U.S. Financial System

The U.S. Attorney for the Southern District of New York has charged Turkish state-owned bank Halkbank (formally known as Türkiye Halk Bankasi A.S.) with money laundering, bank fraud and sanctions offenses under the International Emergency Economic Powers Act, or IEEPA, arising from the Bank’s alleged involvement in a multibillion-dollar scheme to evade U.S. sanctions on Iran. As alleged in the six-count indictment, senior officials at Halkbank designed and executed the Bank’s systemic and illicit movement of Iranian oil revenue moving through the Bank to give Iran access to the funds. This case is an extension of prosecutions initiated in late 2017 against nine individual defendants in the scheme, including bank employees and the former Turkish Minister of the Economy.
Continue Reading DOJ Charges Turkish State-Owned Halkbank With Money Laundering, Fraud, and Iran-Related Sanctions Offenses

Town of Metula at the Israel-Lebanon border – the site of 2006 rocket attacks by Hizbollah

On September 25, 2019, the Southern District of New York dismissed a complaint brought by victims of rocket attacks in Israel perpetrated in 2006 by Hizbollah, operating in Lebanon. Kaplan v. Lebanese Canadian Bank, SAL, Civ. No. 08 Civ. 7253, 2019 U.S. Dist. LEXIS 162505 (S.D.N.Y. Sept. 20, 2019). The Complaint was brought under the Anti-Terrorism Act, 18 USC 2333 (“ATA”). In it, the Plaintiffs alleged that the Lebanese Canadian Bank, SAL (“LCB”) provided banking services to five members of Hizbollah (“Hizbollah affiliates”), and by doing so, they materially supported an act of international terrorism.

Specifically, the Complaint alleged, among other things, that LCB failed to take certain due diligence measures, including reviewing public sources, and as a result continued to bank with members of Hizbollah. According to the Complaint, the bank’s customers’ afficilation with Hizbollah was “notorious public knowledge” due to news articles, reports, and Hizbollah’s own media sources. The Plaintiffs alleged that, even if the bank did not have actual knowledge, the bank at least should have known because it had a duty to perform due diligence on its customers, monitor and report suspicious or illegal banking activities, and not provide banking services to terrorist organizations.

Although the Kaplan case arises in the context of international terrorism and potential liability under the ATA, its analysis and conclusions can apply to more mundane state law tort claims against financial institutions by investors or consumers defrauded by the institution’s (former) customers. These claims often attempt to bootstrap allegations that a bank knew should have known about the customer’s fraud scheme due to the bank’s anti-money laundering (AML) monitoring and reporting obligations under the Bank Secrecy Act (“BSA”). As we have blogged, courts hold that evidence of an imperfect AML program and potential red flags about a customer fall short of the high bar required to sustain a claim for aiding and abetting a fraud or other tort against third party non-customers.


Continue Reading Anti-Terrorism Act Liability Requires More than Mere Failures of Customer Due Diligence