Dipping Through Geometries

Over the past year, the United Arab Emirates has been the focus of sustained public criticism for failure to adopt and implement effective anti-money laundering (AML) measures.  For example, in April 2020, the Financial Action Task Force (FATF) issued a Mutual Evaluation Report that acknowledged “significant improvements” that the UAE had made to its AML/Counter Terrorist Financing (CFT) system in recent years, but also noted that “[t]he risk of criminals being able to misuse legal persons in the UAE for ML/TF remains high” and deemed it “a major concern that the UAE authorities do not recognise the importance of using the full range of sanctions (particularly fines and barring orders) to create a dissuasive environment.”

More recently, the United Kingdom’s Treasury and Home Office issued a national risk assessment on money laundering and terrorist financing that described the UAE as “an attractive location for those who also wish to launder the proceeds of crime from abroad – overwhelmingly foreign nationals using UAE systems, rather than Emirati nationals themselves.”  It credited the UAE with “continu[ing] to enact its programme of reforms to improve its AML/CTF regime in line with FATF’s recommended actions.” At the same time, it stated that the deficiencies that FATF identified “expose the UAE, and other countries, to abuse by international controller networks which continue to launder the proceeds of crime to and from countries including the UK.”

In the face of these criticisms, in the last four months the UAE has taken additional steps to improve its AML/CFT regime.  First, on September 25, 2020 the UAE central bank stated that “[t]o mitigate the risk of financial crimes . . . banks are urged to put more efforts toward combating money laundering and financing of terrorism.”

Second, on November 24, the UAE Ministry of Economy announced the development of a strategic plan to support efforts to combat money laundering practices within the UAE, as well as the establishment of an Anti-Money Laundering Department within the Ministry.

Third, the UAE Minister of Justice issued a series of ministerial resolutions to set up special federal courts in four emirates to handle money laundering cases.  Each court reportedly will have minor, major, and appeals circuits to hear money laundering crimes.

Fourth, the Minister of Justice also announced that 200 law firms in the UAE had failed to comply with AML procedures and were suspended from practicing for one month. Those suspensions were to be lifted once those firms fulfilled their obligations.  Seven other law firms were also fined AED 100,000 (US $27,229) each for AML violations.

These measures indicate that the UAE appears to be making genuine efforts to improve its AML/CFT system.  The UAE will need to sustain that commitment in the coming year to continue to bring that system to maturity.

In the wake of the January 6 insurrectionist attack on the United States Capitol, and the threat of right-wing extremist groups conducting armed protests in state capitals across the United States, one of the many questions that law enforcement agencies across the United States are now actively exploring is whether such groups are largely self-funding or are receiving more substantial funds from other sources.

Two recent sets of news reports indicate that the latter is a genuine cause for concern.  First, on January 15, multiple news media reported that a French computer programmer “transferred more than $500,000 in Bitcoin to far-right activists” shortly before his suicide.  The programmer reportedly sent approximately $250,000 in Bitcoin to Nick Fuentes, a far-right activist who participated in the Capitol insurrection.  In total, the Bitcoin transfers went “to 22 addresses, including many belonging to American far-right activists and organizations.”  NBC News subsequently reported that the FBI is investigating the Bitcoin transfers.

Second, on January 18, the Times of Israel reported that a $100,000 grant was made through a San Francisco-based Jewish federation to the Tea Party Patriots, a conservative activist organization that reportedly helped to organize and promote the rallies that preceded the January 6 riot.  Organizers of the insurrection stated that the Tea Party Patriots helped to fund the rallies, although the Tea Party Patriots denied doing so.

The donation was apparently an example of donor-advised funds, which the Times of Israel described as “a system of funding that allows philanthropists to give donations to the causes of their choice via their local Jewish federation.”  Subsequently, the San Francisco federation stated that it would monitor its donor-advised funds.

These developments indicate that the legacy of the Trump Administration, which includes responsibility for fomenting the Capitol riot, poses policy challenges for companies, as Matt Kelly recent wrote, but legal and compliance challenges as well.  U.S. financial institutions should immediately take three steps to address those challenges.

First, financial institutions need to review whether any of their accountholders have affiliations with extremist or insurrectionist organizations, and if so, to conduct enhanced due diligence and take other actions as appropriate.  Second, they need to increase their monitoring of funds transfers from foreign-based accounts to the accounts of such organizations.  Third, they should actively explore using their authority, under section 314(b) of the PATRIOT Act, to share information with each other concerning substantial funds transfers that could constitute financial support for domestic terrorist activities.

In addition, companies in other industries need to identify any donations they may have made to organizations whose agendas appear to extend beyond wholly peaceful protests and advocacy to support for insurrection and violent attacks on public officials and institutions, and to end those donations.  Failure to do so could subject a company not only to reputation risk, but to more severe consequences if law enforcement authorities should trace those donations to groups who engage in violent insurrectionist or extremist activities.

As numerous countries around the world continue to grapple with the COVID-19 pandemic, it is important for governments and law enforcement to maintain a steady and comprehensive focus on the trends in COVID-related crime.  While reported rates for crimes involving physical force, such as assaults and property crimes, have dropped this year in multiple countries such as the United States, Canada, France, and the United Kingdom,  a number of those countries have also seen substantial increases in reported rates for cyberattacks and other cybercrimes exploiting the pandemic.  For example, Canadian firms reportedly have been “bombarded” by COVID-related cyberattacks, and the Federal Bureau of Investigation has reported on upsurges in COVID-related online fraud and various categories of cyberattacks (malware, phishing, and ransomware).

One country that is seeing a marked disparity between the reported incidence of physical crimes and COVID-themed cybercrimes is Japan.  This past summer, the Japanese National Police Agency (NPA) released statistics showing that for the first half of 2020, Japan was “on course to set a record for the fewest criminal cases in a postwar year,” with an overall 15.4 percent decrease in crime compared to the first half of 2020.

On October 1, however, the NPA released statistics showing that in the first half of 2020, police across Japan had handled 608 COVID-19 cybercrime cases. The principal categories of those cases included the following:

• Face Mask Order Fraud: 286 cases (47 percent) were fraud cases that involved members of the public failing to receive face masks that they had ordered online.
• Government-Benefit Fraud: 155 cases (25 percent) were apparent fraud cases in which people were sent suspicious emails, from alleged mobile phone companies, that instructed recipients to apply for government-offered cash benefits via a website link.
• Credit-Card Theft: 55 cases (9 percent) involved the theft of credit-card data that would-be purchasers of face masks had provided.
• Obstruction of Business: 57 cases (9 percent) involved obstruction of business, “such as false information posted online claiming that infected people were in certain eateries.”  Some of these cases reportedly led to police action.
• Malware: The NPA also confirmed multiple cyberattacks on companies, which included hackers reportedly posing as a public health center and urging email recipients to open files attached to those emails.

In addition, the NPA reported a total of 885 fraudulent-money transfer cases in the first half of 2020 involving Internet banking services, with losses totaling approximately ¥512 million (US$4.8 million).  The NPA indicated that a majority of those cases involve cybercriminals falsely representing themselves as financial institutions or parcel delivery firms and urging victims to access phishing sites where their personal data can be stolen. Japanese police reportedly have arrested a small number of individuals who fraudulently applied for government funds intended to assist businesses during the pandemic.  So far, however, there are no indications that Japan, or any other country for that matter, can successfully track and apprehend a significant number of those responsible for COVID-related online crimes.

In recent years, a number of companies have embraced, in principle and practice, the concept of “efficient infringement” of other companies’ patents.  The concept, which bears some similarity to the concept of “efficient breach” in contract law, refers to the situation in which a company “deliberately chooses to infringe a patent given that it is cheaper than to license the patent.”

Because of various legal and regulatory changes over the past decade, Professors Adam Mossoff and Bhamati Viswanathan have argued, “a company economically gains from deliberately infringing patents” and “pays less in either legal fees or in court-ordered damages than it would have paid in a license negotiated with a patent owner.”  As they noted, a company’s calculation of the costs of efficient infringement fails to take into account that efficient infringement, like opportunistic breaches of contract, “threaten the viability of legal institutions and the policies that drive them, such as incentivizing investments and promoting commercial transactions.”

A recent federal court decision in a highly publicized patent trial may prompt companies to reconsider whether “efficient infringement” is necessarily less costly than licensing.  On October 5, 2020, the U.S. District Court for the Eastern District of Virginia, after a 22-day bench trial, found not only that Cisco Systems had infringed four patents that cybersecurity solutions provider, Centripetal Networks, asserted, but that the case was “an egregious case of willful misconduct beyond typical infringement.”

In support of that conclusion, the District Court made numerous findings and conclusions, including:

• Four of the patents that Centripetal asserted were valid and directly infringed, and Centripetal had proved that direct infringement of each element of the asserted claims by a preponderance of the evidence;
• Centripetal and Cisco were direct competitors with regard to the infringing software as well as firewalls;
• Enhanced damages were warranted by the evidence, given Cisco’s willful infringement of the four patents; and
• Cisco had pre-suit knowledge of Centripetal’s asserted patents.

Under the patent damages provisions of the relevant patent statute, 35 U.S.C. § 284, a court is authorized to “increase the damages up to three times the amount found or assessed.”  In this case, the District Court concluded that the relief due to Centripetal included the following elements:

• Actual Damages: Actual damages that Centripetal suffered as a result of Cisco’s infringement totaled $755,808,545.  Because of Cisco’s “willful and egregious” infringement, those damages were multiplied enhanced by a factor of 2.5x to equal $1,889,521,362.50.
• Pre-Judgment Interest: The District Court awarded Centripetal pre-judgment interest of $13,717,925 applied to the actual damages before enhancement plus Centripetal’s costs.  After adding the enhanced damages and pre-judgment interest, the District Court directed a total award of $1,903,239,287.50, payable in a lump sum due on the judgment date.
• Running Royalty:  In addition, the District Court imposed a running royalty of 10 percent on the apportioned sales of the accused products and their successors for a three-year period, followed by a second three-year term with a running royalty of 5 percent on those sales.  The Court also specified that for the first three-year term of 10 percent, the annual royalty “shall not be less than $167,711,374.10 and shall not be more than $300,076,834,” and for the second three-year term of 5 percent, the annual royalty “shall not be less than $83,855,867.00 and shall not be more than $150,038,417.” (Emphasis omitted)

Cisco has stated that it will appeal this decision to the U.S. Court of Appeals for the Fourth Circuit.  It is possible that the Fourth Circuit could reach a different conclusion regarding the computation of damages and the running royalty.  It appears less likely, however, that the Fourth Circuit would reverse the District Court’s decision altogether, given the District Court’s thorough review of the evidence at trial and its efforts to reach its conclusion by comparing this case to other cases in which enhanced damages have been awarded.

In any event, this decision should serve notice that patent infringements can sometimes be highly inefficient for willful infringers.  Whether or not it indicates that the pendulum is beginning to swing, however slowly, in favor of smaller patentholders confronted with infringement by larger competitors remains to be seen.

As a swift followup to its recent arrests of six individuals (including five family members) allegedly involved in a money laundering scheme that moved more than $387 million, Hong Kong Customs arrested the director of a possible shell company for her alleged role in laundering more than $51 million (HK$400 million).

According to Hong Kong Customs, in connection with Operation Shadow Hunter, in which the first six individuals were arrested two weeks ago, Customs investigators reviewing documents seized in the operation found the company director’s business registration.  The investigation found that “the suspect’s bank accounts were tied to more than 100 suspicious financial transactions involving about HK$400 million in 2018 and 2019.”  Another source said that “the amount of money was unusual given the woman’s profile and background, adding that less than HK$1,000 [US$129] remained in her accounts.”

A law enforcement source also stated that “the woman knew the family members [previously arrested], and that a small portion of the HK$400 million had been transferred to multiple bank accounts owned by the family.”  Most of the money was reportedly “transferred to bank accounts of other shell companies,” and that those bank accounts “were also linked to money laundering activities the family was allegedly involved in.”  Investigators are still seeking to determine whether the same ringleader is behind the director and the family.

This latest arrest provides further confirmation that Operation Shadow Hunter is the largest money laundering investigation in Hong Kong’s history, and indicates that Hong Kong Customs likely has far more ground to cover in discovering the full scope and extent of this laundering operation.