Hong Kong Customs Arrests Family Accused of Laundering $387 Million

At a time when the financial sector globally is looking at leading-edge anti-money laundering (AML) systems and RegTech tools as “a rich area of development,” it is important to remember that money launderers continue to succeed in moving vast amounts of criminal proceeds through the global financial system with the simplest of laundering techniques.

A notable example of that fact came to light last week in Hong Kong, when Hong Kong Customs announced that it had arrested six people, including a family of five and the licensee of a money changer, on money laundering charges in the “largest money laundering case in its history.”  The case allegedly involved a total of more than US$387 million (more than HK$3 billion).

According to Hong Kong Customs, it began an investigation in 2020 after identifying a money laundering syndicate.  The initial investigation found that the family of five involved in the case “had opened more than 100 personal bank accounts in various local banks to deal with over [HK]$3 billion of suspected crime proceeds since 2018, in which [HK]$170 million was related to the money changer licensee.”

The investigations also determined “that the background and the financial status of the family members involved were highly incommensurate with the large-value transactions of their personal bank accounts.”  It identified a total of approximately HK$30 million of assets that the arrested persons held.  That total included approximately HK$15 million in bank deposits and two properties with net asset values of approximately HK$7 million and $8 million, respectively.

With regard to the money changer, Customs stated that “[i]t is not ruled out” that that individual “had used personal bank accounts of third parties to deal with large-value transactions from unknown sources, in an attempt to use the money changer company to disguise the money laundering activities.”

Ultimately, on September 10 Customs conducted an operation, designated “Operation Shadow Hunter,” in which 30 officers raided four residences and a licensed money changer and arrested the family of five and the licensee of a money changer.  It also froze the HK$30 million of the arrested persons’ assets.

All six individuals were arrested for conspiring to violate the money laundering offense in section 25 of the Hong Kong Organized and Serious Crimes Ordinance.  Under section 25 of the Ordinance, it is an offense for someone to deal with any property, knowing or having reasonable grounds to believe that that property in whole or in part, and directly or indirectly, represents any person’s proceeds of an indictable offence. The maximum penalty for a conviction on indictment is 14 years’ imprisonment and a fine of HK$5 million, as well as confiscation of the criminal proceeds.

Under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), it is an offense for a licensed money service operator to contravene the AMLO regulations,  The maximum penalty for a conviction on indictment is seven years’ imprisonment and a HK$1 million fine.

This case indicates that AML compliance officers need to ensure that their compliance programs continue to address all categories of indicators and not assume that money launderers are no longer using more basic laundering techniques.

Danish Foreign Affairs Ministry Publishes Report on Using Digital Technologies to Combat Corruption

Over the last several years, there has been growing recognition that technology — as Carlos Santiso of the Development Bank of Latin America put it — “is becoming a key ally in the fight against corruption.”  A recent report by the Danish Ministry of Foreign Affairs (available here) provides a detailed review of the ways in which digital technologies can be used to combat corruption.

The report, titled “Code to Integrity,” addressed four “avenues” for use of digital technology:

  • Avenue 1: “Use open data and open contracting to provide transparency.”  On this topic, the report advocated two principal approaches: (1) turning the public sector “into an open data platform, as public data belongs to the people and is the most valuable resource for governments to tackle corruption”; and (2) using open big data “to investigate specific patterns, and as input to design predictive analytics tools to spot corruption risks.”
  • Avenue 2: “Use e-governance to mitigate corruption opportunities.”  On this topic, the report commented that technology “takes out ‘the human hands’ when citizens or businesses deal with public authorities, reducing the opportunity for corruption.”  It advocated three principal approaches: (1) moving services online “to give citizens and the private sector direct access to public services and information and to reduce the opportunities for corruption by limiting human interaction”; (2) experiment with the use of blockchain “to enable transparent and tamper-proof transactions of money and data, giving citizens ownership of their data”; and (3) designing “principle-based policies that stipulate issues such as when to make human interventions in machine decisions.”
  • Avenue 3: “Use blockchain to ensure rights and prevent fraud.”  On this topic, the report stated that blockchain’s potential as an anti-corruption tool “is of particular interest because of its ability to keep records securely and transparently, ensuring rights to aid, land, money and preventing fraud.”  It recommended two approaches: (1) Putting records on the blockchain” in a shared digital database that every individual has equal access to and ownership over”; and (2) using blockchain “to transfer resources quickly, effi­ciently and securely,” and “to secure the integrity of public goods, records and certificates, limiting the space for corruption.
  • Avenue 4: “Use crowdsourcing to enable whistleblowing and complaints over corruption.”  On this topic, the report recommended two approaches: (1) Using crowdsourcing platforms “to provide citizens and business with a way to complain about and report corruption publicly”; and (2) cooperating “with trusted organisations and busines­ses to provide whistleblower platforms to expose corrupt behaviour inside the public sector.”

The report also discussed a number of impediments to implementing the recommendations.  In addition to the global “digital divide,” which stems from the “wildly uneven” distribution of Internet access around the world, the report expressed concern about five categories of gender imbalances that should be considered in pursuing digitalization of anti-corruption measures, in order to avoid exacerbating those inequalities.

These five categories of gender imbalances are:

  • 1.  The “digital gender gap.”  On this point, the report referred to the “lower degree of access to technology and lower digital literacy” for women around the world.
  • 2.  Discrimination in ownership of economic resources.  On this point, the report referred to the fact that “in most poor communities, women face discrimination in terms of financial independence, ownership of economic resources and with regard to inheritance rights.”
  • 3.  Greater frequency of women in the informal sector.   On this point, the report expressed concern that, because “women in Africa for example have a higher employment rate than men in the informal sector and lower representation in company ownership, there is a risk that solutions based on formal [existing] data will not capture the real significance of women in the productive sectors.”
  • 4.  Less access to formal identification.  On this point, the report stated that a formal identification “is the key to unlocking access to a number of digital anti-corruption tools such as registering a business online, paying taxes through mobile money, making a bid for public procurement contracts, voting or registering property ownership on a e-governance platform.”  An estimated one billion people around the world, however, lack formal identification, and “coverage gaps are largest in low income countries, with women and the poorest 40% at the greatest risk of being left behind.”
  • 5.  Risk of sexual extortion.  On this point, the report noted that “[b[ecause of unequal power relations, women are likely to experience corruption differently than men, especially in situations where power is abused to obtain a sexual benefit or advantage.”  It speculated that technology-based solutions “could assist women in reporting such instances, without having to challenge the entrenched power relations directly.”

Finally, with regard to these five imbalances, the report stated its intention “to initiate a conversation about the importance of adopting a gender sensitive approach to digitalisation in anti-corruption, especially considering the structural disempowerment of women in access to economic and digital resources.”  To that end, it discussed how these imbalances pertained to each of the four avenues listed above.

Anti-corruption scholars and advocates should read the report closely.  Because the report’s stated aim was “to initiate a conversation[n] about the role of new technologies in the fight against corruption,” they should take up the key points n the report to continue and expand the discussion, including with experts in blockchain and artificial-intelligence technology.

UK Financial Conduct Authority Retrenches on Criminal Investigations

Over the past 18 months, the Financial Conduct Authority (FCA), as the United Kingdom’s conduct regulator for nearly 60,000 financial services firms and financial markets and prudential supervisor for nearly 50,000 firms, has sent markedly conflicting signals about its commitment to pursue criminal as well as civil investigations under the Money Laundering Regulations 2017 (MLRs).

In April 2019, the FCA’s Director of Enforcement and Market Oversight, Mark Steward, publicly stated that he thought it was “time that we gave effect to the full intention of the [MLRs] which provides for criminal prosecutions.”  He further disclosed “that we are now conducting ‘dual track’ AML investigations” (i.e., investigations into suspected MLR breaches that could give rise to either criminal or civil proceedings).” At the same time, Steward commented that he “suspect[ed] criminal prosecutions, as opposed to civil or regulatory action, will be exceptional.”

Subsequent events have shown just how exceptional criminal enforcement by the FCA would be.  In its 2019/2020 annual report, the FCA, while declaring its aim to be “to make the UK’s financial markets robust against criminal activity,”  acknowledged that its Regulatory Decisions Committee had received 26 percent fewer cases of all types since the 2018/2019 reporting period, including only 5 criminal cases.

Moreover, the Financial Times recently disclosed that the FCA had discontinued seven of its 14 criminal investigations into MLR breaches since January 2020, and had yet to bring a single prosecution.  Five of the terminated investigations were “single track” (i.e., exclusively criminal) investigations, and the remaining two were “dual track” investigations.

As for the remaining seven investigations, only one single-track investigation was still underway, and the other six were dual track.  Furthermore, to date there reportedly have been no criminal prosecutions under the 2017 MLR, and only one criminal prosecution under the prior 2007 money laundering rules.

In response to the Financial Times reporting, an FCA spokesperson said that the FCA “only brought prosecutions ‘in the most egregious cases,’ and pursued civil or regulatory sanctions in all others.”  The spokesperson also noted that decisions on some of the remaining criminal investigations were expected “by the end of this year.”

No one expects the FCA, as a regulatory agency, to vie with the National Crime Agency or police services in conducting large numbers of criminal investigations.  But the FCA needs, as Steward commented in his 2019 speech, “to enliven the jurisdiction if we want to ensure it is not a white elephant and that is what we intend to do where we find strong evidence of egregiously poor systems and controls and what looks like actual money-laundering.”  So far, the FCA’s stance and record on criminal investigations appear remarkably elephantine.

Too Local to Prosecute?: Justice Department Obtains Indictment Against Ready-Mix Concrete Company and Individuals for Price-Fixing, Bid-Rigging, and Market Allocation

Of the many mistakes that companies can make when considering to enter into price-fixing or bid-rigging arrangements with competitors, one of the simplest may be the belief that their conspiracy is “too local”  or “too small” to attract the attention of antitrust enforcers.

Many of the price-fixing, bid-rigging, and market allocation cases that the U.S. Department of Justice and Federal Trade Commission bring are nationwide and even international in scope.  The prominence of such cases, however, may lead some companies to think that collusion confined to a single state or city will fly under the radar of federal enforcers.

Last week, the Justice Department announced the return of a federal indictment in the Southern District of Georgia that shows that the Department will not shy away from prosecuting locally-organized collusive conduct.  The indictment names one ready-mix concrete company and four individuals for their roles in a long-running conspiracy to fix prices, rig bids, and allocate markets for ready-mix concrete in the greater Savannah, Georgia area.

According to the indictment, from as early as 2010 until approximately July 2016, the charged individuals, on behalf of their three competing companies, participated in a conspiracy to fix prices, rig bids, and allocate markets for sales of ready-mix concrete.  The conspirators reportedly submitted rigged bids and accepted payments for ready-mix concrete sold through contracts and on projects that were affected by the alleged conspiracy.  In order to carry out the conspiracy, the conspirators used one of the individual defendants “as a conduit to exchange price-increase letters and other competitive information between the defendants and other co-conspirators for the purpose of coordinating price increases, rigging bids, and allocating jobs.”

One of the elements that the government must prove for a criminal violation under section 1 of the Sherman Act is that the charged conspiracy was in unreasonable restraint of interstate or foreign commerce.  In this case, although the defendants reportedly worked in the Savannah area, the indictment alleges, among other things, that (1) defendant companies engaged in the manufacture and sale of ready-mix concrete in the Southern District of Georgia “and elsewhere,” that (2) the defendants and co-conspirators (a) bid from Georgia on projects to be performed outside of Georgia and (b) sold ready-mix concrete from Georgia to locations outside of Georgia, and (3) the defendants’ and co-conspirators’ business activities in connection with ready-mix concrete “were within the flow of, and substantially affected, interstate and foreign trade and commerce.”  Such allegations, if proved, would satisfy the “restraint of interstate commerce” element.

For that reason, antitrust practitioners and compliance attorneys should integrate this case into their antitrust guidance to clients, to emphasize that there is no “too local to prosecute” defense to per se violations such as bid-rigging, market allocation, and price-fixing if those violations affect interstate or foreign commerce.

Australian Accountant Arrested for Role in Business Email Compromise Schemes

For more than a decade, one of the most persistent and successful online fraud schemes has been business email compromise (BEC) schemes.  BEC schemes typically involve two phases: (1) the use of phishing or hacking techniques to obtain identifying information about executives in a particular business or other organization; and (2) the use of “social engineering” techniques to persuade someone with appropriate authority in that business to issue and send checks to scheme members, or make outbound wire transfers to bank accounts that members of the scheme have established.  BEC schemes are also often linked to other types of online fraud directed at individuals, such as romance schemes, employment-opportunity schemes, and lottery schemes.

BEC schemes have proved fairly simple and highly profitable for cybercrime operations.  The APWG’s most recent quarterly report on phishing schemes stated that the average wire transfer attempt in BEC attacks is increasing, from $54,000 in the first quarter this year to $80,183 in the second quarter – a 48.4 percent increase.  One particular Russian BEC operation reportedly has sought an average of $1.27 million from its corporate victims.

For the most part, participants in BEC schemes, based on information from a limited number of U.S. criminal investigations, appear to range in age from mid-twenties to mid-forties.  A recent arrest by police in the Australian state of Queensland, however, shows that older persons may also become involved in BEC schemes.

In this case, Queensland police arrested a 65-year-old Brisbane accountant on charges of money laundering, for her role in a series of BEC schemes in which at least seven organizations and individuals, including senior care providers and a superannuation (pension) fund, were deceived into sending more than AU$3.3 million offshore.  One victim reportedly lost AU$1.1 million.

According to the police, the accountant, who had no relation to the victims, received her instructions online from hackers.  She allegedly caused fraudulently obtained funds to be transferred into at least 50 Australian bank accounts before she directed the money offshore.  A police search found a number of computers and mobile phones that she allegedly used to facilitate money laundering.

While there has been no trial or conviction in this particular case, the initial report of the arrest provides a timely reminder of key points that businesses and individuals should bear in mind to protect themselves against BEC schemes:

  • Never give out personal or company information to any caller when you don’t know the caller.
  • Just because an incoming email purports to come from a person in authority, such as a senior executive in your company, does not mean that it actually came from that person.  Hovering over the incoming email address with your mouse or touchpad, or pressing “reply” (without actually sending a reply) to that email address, can reveal the true address of the sender.
  • Just because a caller’s voice sounds like he or she could be a real person within a company tells you nothing about whether he or she is that real person.  Trust only the voices of people you know personally, and to protect your company from possible BEC schemes, the company should establish points of contact with third parties or vendors with the company regularly deals to allow voice-to-voice communications regarding requests for outbound funds transfers.