On July 26, in United States v. Lebedev, a panel of the U.S. Court of Appeals for the Second Circuit affirmed the convictions of Yuri Lebedev and Trevon Gross, as well as Gross’s sentence, on bank fraud and bank bribery-related charges. The defendants’ scheme concerned an internet‐based Bitcoin exchange service known as “Coin.mx,” which concealed from banks and credit card companies processing its transactions that its true purpose was to allow the purchase and sale of Bitcoins. Although Coin.mx “opened bank accounts in the name of “the Collectables Club,” which falsely purported to be a private members’ association dedicated to collecting and exchanging memorabilia,” and processed credit card transactions listing the Collectables Club as the merchant, “[n]either Coin.mx nor the Collectables Club registered with federal regulators as a money‐transmitting entity or obtained state licensure for that purpose.”
As an information-technology manager at Coin.mx, Lebedev “set up various Internet Protocol (“IP”) addresses to make it appear to banks and payment processors that Coin.mx’s transactions were legitimate Collectables Club transactions.” Eventually, to avoid the risk of having banks shut down their accounts, “Coin.mx sought control of a credit union to process its transactions.” In April 2014, Coin.mx representatives contacted Gross, then Chairman of the Helping Other People Excel Federal Credit Union (“HOPE FCU”) to discuss the possibility of Coin.mx’s taking control of HOPE FCU.
In negotiations between HOPE FCU and the Collectables Club, Gross promised to give the Collectables Club a majority of seats on the credit union’s board of directors, in return for three donations totaling $150,000 to the nearby Hope Cathedral, where Gross was head pastor. “Evidence at trial demonstrated that Gross frequently used those ‘donations’ for personal expenses.” In addition, Kapcharge, a Canadian third‐party payment processing company with which another defendant in the case was affiliated sought to process payments through an account at HOPE FCU. After becoming a member of the credit union, “Kapcharge and its co-conspirators paid Gross $12,000 in so‐called ‘consulting fees’.”
Although Gross eventually had “a falling out” with Lebedev and other coin.mx epresentatives, “which resulted in Gross expelling them from the credit union and terminating their relationship,” he “continued to allow Kapcharge to process transactions through its account after Coin.mx was no longer involved in the credit union.” When the National Credit Union Administration (NCUA), HOPE FCU’s regulator, conducted an examination of the credit union, Gross failed to disclose a number of transactions, including the “donations,” and made other material misrepresentations. Ultimately, in October 2015, the NCUA placed HOPE FCU into conservatorship.
At trial, Lebedev and Gross were convicted on all counts. They were sentenced to 16 months’ and 60 months’ imprisonment, respectively, and were ordered to pay joint and several liability of $126,771.82 with their convicted codefendants. On appeal, the Second Circuit panel had little difficulty in finding sufficient evidence to support Lebedev’s conviction and rejecting Gross’s challenges to various evidentiary rulings and to his sentence.
Note: While the holdings and reasoning of the panel’s decision are unremarkable, this case is still worthy of attention by anti-money laundering and fraud compliance teams, in part for in-house compliance training. It indicates the risks of a financial institution’s failure to conduct due diligence on purportedly legitimate customers, and of other senior executives’ failures to challenge a board chairman’s effectively ceding control of the board to representatives of that customer and to inquire further into the reasons for his doing so.
Bank regulators have warned for some time about the risks inherent in financial institutions’ relationships with third-party processors. This case demonstrates how grave those risks can be for financial institutions that have inadequate compliance oversight and internal controls.