By Brian Monroe
bmonroe@acfcs.org
September 1, 2016
In this week’s Financial Crime Wave, a federal appeals judge shuts down a terror lawsuit and nearly $660 million lower court judgement, the UK’s tax authority seeks to enlist MSBs to get more income data from possible evaders, corruption permeates a South American soccer body, and more.
Terror lawsuits
This story covers a significant decision in a relatively new field of law tied to terror lawsuits, that, up to this point, has seen major victories for plaintiffs, particularly when the allegations were leveled at banks, but has reversed course in this latest ruling. A federal appeals court in New York has thrown out a $655.5 million verdict rendered last year that had held the Palestinian Authority and the Palestine Liberation Organization liable for their roles in supporting terrorist attacks in Israel that claimed American lives. In reversing the verdict on Wednesday in the case, which drew the attention of the Obama administration, the appeals court did not minimize the impact of the six terrorist attacks, which occurred from 2002 to 2004, but it held that the Federal District Court in Manhattan had lacked the jurisdiction to hear the case. “The terror machine-gun attacks and suicide bombings that triggered this suit and victimized these plaintiffs were unquestionably horrific,” said a three-judge panel of the United States Court of Appeals for the Second Circuit, in Manhattan. “But the federal courts cannot exercise jurisdiction in a civil case beyond the limits prescribed by the due process clause of the Constitution,” the court added, “no matter how horrendous the underlying attacks or morally compelling the plaintiffs’ claims.”
The plaintiffs included 10 families, comprising about three dozen people, eight of whom were physically injured in the attacks, as well as the estates of several victims who were killed. The suit was brought under the Anti-Terrorism Act, which provided for the tripling of the $218.5 million in damages awarded by a Manhattan jury. The law, which allows United States citizens who are the victims of international terrorism to sue in the federal courts, was passed some years after the 1985 murder of Leon Klinghoffer in the Palestinian hijacking of the cruise ship Achille Lauro. Judge John G. Koeltl, writing for the panel, said the attacks in Israel had not been “expressly aimed at the United States,” and evidence presented by the plaintiffs had established the attacks’ “random and fortuitous nature.” “Evidence at trial showed that the shooters fired ‘indiscriminately,’” the judge wrote, “and chose sites for their suicide bomb attacks that were ‘full of people,’ because they sought to kill ‘as many people as possible,’” (via The New York Times).
Fraud
This latest survey is yet another example of the growing aggressiveness of fraudsters, a scary reality for banks that in many cases are the desired target for criminals, hackers and charlatans of all stripes. Fraudsters are on a train that is anything but slowing down. In just the last four quarters, fraud attacks have jumped by 137 percent, affecting over $7 out of every $100 made in retail sales. Their new favorite? Digital goods. With a 186 percent spike, fraudsters seem to be fixated on attacking digital goods transactions, followed by their second favorite category: food and beverage, which showed a 116 percent increase, according to the latest data from the Global Fraud Attack Index, a PYMNTS and Forter collaboration. If that weren’t troubling enough, merchants are now being forced to bend over backwards to combat alarming levels of fraud originating outside the U.S. The total number of fraud attacks from the rest of the world (ROW) has dramatically grown by 200 percent. This spike in fraud comes against an ever-increasing cost of fraud. For attacks originating in Europe, the cost went up to 18.9 percent in Q1 2016. On the other hand, the cost increased by 14.4 percent over last quarter for transactions originating in ROW. Other key takeaways from the Global Fraud Attack Index for the third quarter of 2016 include:
There were 34 attacks for every 1,000 transactions in Q1 2016. That’s a 126 percent increase over the four quarters ending March 31, 2016.
The attack rate tripled for digital goods over the same period and more than doubled for luxury goods.
The number of attacks from botnets surged from seven per 1,000 in Q2 2015 to 27 per 1,000 in Q1 2016, (via Pymnts.com).
Tax evasion
This story illustrates a novel approach by a tax authority to get data from entities other than banks, in this case money services business, which would include money remitters, that also can move money internationally, but don’t always capture customer names. Businesses that use currency exchanges and other ‘money service businesses’ (MSBs) to escape tax liabilities will have their activities scrutinized in more detail, under new plans outlined by HM Revenue & Customs. The UK’s tax authority has proposed extending existing powers to gather data from MSBs to help identify businesses that use MSBs to avoid paying “their fair share of tax.” In its consultation paper, HMRC explained the kind of data that MSBs could be expected to share with it under new legislation. The precise data reporting obligations would be set out in new regulations, it said. The data gathered would be matched with “other taxpayer data.” MSBs would only be required to hand over data that was in its “possession or power to provide,” it said. “HMRC acknowledges that many customers are likely to conduct one-off, relatively low-value transactions through an MSB,” HMRC said. “The aim of this proposal is to allow HMRC to discover the aggregate activity of MSB customers. This will help to identify where more significant amounts of money, which may have been earned in the hidden economy, have been transacted through an MSB,” according to the authority. “This data would include identifying details of MSB customers, such as names and addresses, or the registration number and registered address of business customers. It would also include data relating to the number and aggregated value of transactions by the customer through the MSB, and may include other details related to the transactions,” it said, (via Out-law).
The European Union’s antitrust regulator has demanded that Ireland recoup roughly €13 billion ($14.5 billion) of unpaid taxes over a decade from Apple Inc., a move that could intensify a feud between the EU and the U.S. over the bloc’s tax probes into American companies. The size of the tax demand, which came in a formal decision issued Tuesday, risks further unsettling multinational companies already facing a slow-moving international effort to curb aggressive tax avoidance, showing their past behavior could land them with big bills for allegedly unpaid back taxes. The sum is the highest ever demanded under the EU’s longstanding state-aid rules that forbid companies from gaining advantages over competitors because of government help. The decision—which ordered a payment well above most analysts’ expectations—is likely to be the subject of years of appeals up to the EU’s top court. It could also set off a broader scramble by the U.S. and individual EU governments over the right to tax billions of dollars of offshore profits made by Apple and other large companies. The European Commission said tax arrangements that Ireland offered Apple in 1991 and 2007 allowed the company to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland. Apple was thereby able “to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market,” the commission said, (via the Wall Street Journal).
Whistleblowers
Whistleblower programs, much ballyhooed in recent years, but with little to show for their efforts, are finally starting to bear fruit, a detail not lost on financial crime compliance professionals, who also can be informants. The SEC awarded more than $22 million Tuesday to a whistleblower whose “detailed tip and extensive assistance” helped stop a well-hidden fraud at the company where the whistleblower worked. A lawyer said his client, a former Monsanto finance employee, received the award. Stuart Meissner didn’t identify his client. Monsanto paid $80 million in February to resolve allegations of accounting violations for a rebate program related to the weed killer Roundup. By law, the SEC protects the confidentiality of whistleblowers and doesn’t disclose information that might reveal a whistleblower’s identity. Tuesday’s award is the second biggest since the SEC whistleblower program started in 2011. The biggest, $30 million, was awarded in 2014. In June this year, the SEC awarded $17 million to a whistleblower. A 2013 award topped $14 million. The SEC has now awarded $107 million to 33 whistleblowers. Whistleblowers become eligible for an award by voluntarily providing the SEC with “original and useful information” that leads to a successful enforcement action of more than $1 million. Awards can range from 10 percent to 30 percent of the money collected through an enforcement action, (via the FCPA Blog). To read the original announcement, please click here.
De-risking
The report reveals that influential bodies are attempting to gain insight into the dimensions of bank “de-risking,” and what the affects and potential solutions. The Financial Stability Board (FSB) recently published its Progress report to the G20 on the FSB action plan to assess and address the decline in corresponding banking. The progress report is being submitted to the G20 Leaders’ Summit in Hangzhou on 4-5 September 2016, as requested by G20 Finance Ministers and Central Bank Governors in their communique following their July 2016 meeting in Chengdu. The report describes progress in taking forward the four-point action plan published last November by the FSB:
Further examining the dimensions and implications of the issue;
Clarifying regulatory expectations, as a matter of priority, including more guidance by the Financial Action Task Force (FATF);
Domestic capacity-building in jurisdictions that are home to affected respondent banks;
Strengthening tools for due diligence by correspondent banks.
The ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth. A decline in the number of correspondent banking relationships is a source of concern for the international community because it may affect the ability to send and receive international payments, or drive some payment flows underground, with potential consequences on growth, financial inclusion, as well as the stability and integrity of the financial system. The CBCG and its members have made substantial progress towards implementing the FSB action plan:
Following consultation, the Committee on Payments and Market Infrastructures (CPMI) has published in July 2016 the final version of its report on correspondent banking, with recommendations relating to (i) know-your-customer (KYC) utilities; (ii) use of the Legal Entity Identifier (LEI) in correspondent banking; (iii) information-sharing initiatives; (iv) payment messages; and (v) use of the LEI as additional information in payment messages.
The CPMI report includes an analysis using an extensive SWIFT data set. These data show that in recent years, although overall transaction volumes in correspondent banking have grown, the number of active correspondents has decreased across most regions, which suggests that there has been increased concentration in correspondent banking relationships, (via the Financial Stability Board).
Corruption
This article looks at regional soccer corruption hubs that have come out of the shadows in light of the seminal FIFA probe, crucial details for banks dealing with any related entities and individuals. South America soccer was run as a fiefdom by a few leading officials for personal gain before they were brought to account by U.S. law enforcement, the head of the regional governing body CONMEBOL said on Wednesday. The Paraguay-based CONMEBOL, many of whose officials were indicted in the U.S.-led investigation into corruption at world football’s governing body FIFA last year, had no books prior to 2013 and enjoyed diplomatic immunity, Alejandro Dominguez said. Dominguez, a Paraguayan who took charge of CONMEBOL’s Asuncion offices in January, was in Buenos Aires to give an account of the rot he found in the organization and his plans to ensure that the game benefited from all its revenue. “When we took charge of CONMEBOL, we realized we were entering a structure without any organization, something I would describe as a personal fiefdom or even a personal business … that worked according to the whims of certain people and was never held accountable,” Dominguez told a news conference. Three of his predecessors as CONMEBOL chairman were indicted by the U.S. Department of Justice, including 87-year-old Nicolas Leoz, who was its head from 1986 to 2013 and is now under house arrest with an order for his extradition to the United States. Latin Americans made up the majority of the 41 football officials who came under investigation for taking kickbacks for the rights to top football events including South America’s flagship Copa America, the world’s oldest international tournament which celebrated its centenary this year, (via Reuters).
This is a piece that would be of interest to banks and companies working in South Korea and other parts of Asia where, historically, corruption has been an endemic problem, with actions many countries would consider influence-peddling, such as expensive meals and gifts, seen as routine business practices in the region, a dynamic now expected to change. Extravagant dinners with whiskey and wine, golfing weekends, pricey beef and seafood gift sets. South Korean companies are trying to figure out how to do without these common forms of business hospitality before the nation’s toughest-ever anti-graft law takes effect next month. Conglomerates LG Group and SK Holdings are among those preparing information sessions for employees to ensure they comply with the new law. The Korea Chamber of Commerce is holding seminars, and retailers and restaurants are expanding their offerings of low-cost meal sets and gifts. The law will weaken practices referred to in South Korea as “jeopdae,” which focus on entertaining business colleagues, government officials and journalists. Passage of the legislation came after public anger boiled over when ties between regulators and the shipping industry were exposed in the wake of the 2014 Sewol ferry disaster. South Korea has seen a dozen high-profile corruption cases this year alone, including the arrest of a senior national prosecutor on charges of accepting bribes from the founder of the country’s largest on-line game maker. Personal relations between those in business and the public sector have often led to lax supervision or illicit favors, (via Bloomberg).
Cybersecurity/Virtual currency
In line with banks and other personal and financial data hubs, Bitcoin exchanges are finding themselves increasingly in the crosshairs of hackers, according to this report. When hackers penetrated a secure authentication system at a bitcoin exchange called Bitfinex earlier this month, they stole about $70 million worth of the virtual currency. The cyber theft — the second largest by an exchange since hackers took roughly $350 million in bitcoins at Tokyo’s MtGox exchange in early 2014 — is hardly a rare occurrence in the emerging world of crypto-currencies. New data disclosed to Reuters shows a third of bitcoin trading platforms have been hacked, and nearly half have closed in the half dozen years since they burst on the scene. This rising risk for bitcoin holders is compounded by the fact there is no depositor’s insurance to absorb the loss, even though many exchanges act like virtual banks. Not only does that approach cast the cyber security risk in stark relief, but it also exposes the fact that bitcoin investors have little choice but to do business with under-capitalized exchanges that may not have the capital buffer to absorb these losses the way a traditional and regulated bank or exchange would.
“I am skeptical there’s going to be any technological silver bullet that’s going to solve security breach problems. No technology, crypto-currency, or financial mechanism can be made safe from hacks,” said Tyler Moore, assistant professor of cyber security at the University of Tulsa’s Tandy School of Computer Science who will soon publish the new research on the vulnerability of bitcoin exchanges. His study, funded by the U.S. Department of Homeland Security and shared with Reuters, shows that since bitcoin’s creation in 2009 to March 2015, 33 percent of all bitcoin exchanges operational during that period were hacked. The figure represents one of the first estimates of the extent of security breaches in the bitcoin world. In contrast, data from the Privacy Rights Clearinghouse, a non-profit organization, showed that of the 6,000 operational U.S. banks, only 67 banks experienced a publicly-disclosed data breach between 2009 and 2015. That’s roughly one percent of U.S. banks, (via Reuters).
Securities fraud
This is a case of a mysterious, and possibly non-existent, company that soared to be worth an apparent $35 billion on penny stock markets, a scenario that reeked of fraud, and shows the apparent ease of running penny stock scams. A key figure is stepping away from Neuromama Ltd., the obscure search engine firm whose market value surged to $35 billion on little trading volume before U.S. regulators halted its shares. The departure of Vladislav Zubkis, listed as the chairman of Neuromama’s advisory board, is the latest twist for a firm that recently relocated to a Mexican beach town from Russia and likens itself to Google and Yahoo. Zubkis, who also goes by Steven Schwartzbard, is taking an open-ended leave of absence, the company said in a filing this week with Securities and Exchange Commission. After Neuromama’s paper value jumped to exceed that of Delta Air Lines Inc., the SEC halted over the counter trading on Aug. 15, citing “potentially manipulative transactions in the company’s stock.” The regulator also cited concerns about the accuracy of information disclosed to investors about who controlled the company, which says its ambitions include licensing “heavy ion fusion” technology, (via Bloomberg).
Enforcement
In the wake of a large penalty for financial crime compliance failings at a New York branch, Taiwan looks to bolster its international image through new AML laws and undertaking domestic investigations of its own. Taiwan’s cabinet said on Thursday it will tighten some of the island’s anti-money laundering regulations to conform more closely to international standards. The move comes after New York’s state financial regulator fined state-run Mega Financial’s banking unit $180 million for violations of anti-money laundering regulations that included lax attention to risk exposure in Panama. “The purpose of amending the law is mainly to follow global trends in strengthening anti-money laundering regulations while also strengthening the fight against cross-border telecommunications fraud,” Premier Lin Chuan was quoted as saying in a statement issued by the cabinet. The Taiwan government is investigating whether Mega and its banking unit broke local law. “We have asked the Ministry of Justice and the Financial Supervisory Commission (FSC) to set up ad hoc groups to determine what happened and who should be held accountable to prevent a similar situation from happening again,” Lin said, (via Reuters).
Compliance
The report analyzes a potential next-frontier solution to endless AML alerts, false positives and the errors inherent in human analysis: Artificial intelligence. The traditional approach of using rule-based software and large compliance teams are proving inadequate to meet with regulatory and business targets. Banks need to consider new tools and technology to better address the challenges plaguing their KYC-AML operations. One particular technique that is receiving increasing traction in financial services of late is artificial intelligence (AI). The field of AI was born in the 1950s and has since then matured enough to conduct several narrow but complex and data-intensive tasks that are time-consuming for humans, yet not sufficiently automatable by traditional rule-based technology. AI solutions in KYC-AML can bring in significant operational and cost benefits through automation of manual processes, and superior analysis and insights.
A central data pool with “intelligent” data allows for holistic customer view and ease of data access, enabling faster investigation and better results.
Data can be trained to become context-aware by incorporating prior knowledge and rules. Additionally, the solution can be made to learn and update rules based on ongoing and new cases.
Unstructured data analysis capabilities help in tracking news, social media and web information, and performing linguistic analysis, enabling easier and efficient parsing of long lists, other information sources, and employee communication.
Advanced analytical capabilities help in identifying patterns, links and networks of bad actors, and suspicious activities.
AI capabilities can also help in scanning documents and better understanding regulatory changes, (via Celent and NextAngles).
Money laundering
The case of a serial gambler and alleged narco launderer, which has tendrils to massive AML fines against mainstream Las Vegas casinos, now appears to be coming to a close. A Chinese-Mexican businessman accused of drug trafficking could be handed over by U.S. authorities to Mexican authorities as early as next week as he has nearly exhausted his legal options, ending a years-long extradition battle, his lawyer told Reuters. Zhenli Ye Gon’s July 2007 arrest in the United States and the seizure of $205 million in cash at his Mexico City home several months earlier, played a role in high-profile money laundering investigations by U.S. authorities at the British banking giant HSBC and the Las Vegas Sands Corp. casino company. U.S. prosecutors charged Ye Gon, the former owner of the now defunct Mexican pharmaceutical wholesaler Unimed Pharm Chem, with importing chemicals that cartels allegedly used to produce the illegal drug methamphetamine. Ye Gon’s attorney, Gregory Smith, says his client was a legitimate businessman. The case collapsed in 2009 after key witnesses recanted or refused to testify, according to court records. Since then, Ye Gon has been imprisoned in a Virginia jail, held on the basis of an extradition request from Mexico, where he faces charges of drug trafficking and money laundering. Ye Gon’s attorney Gregory Smith, has fought extradition, arguing in court that Ye Gon would likely be tortured or killed if he returns to Mexico. Earlier this month, Ye Gon, 53, all but exhausted his legal options when a federal appeals court in Richmond, Virginia rejected a bid to have his extradition reconsidered, (Reuters).