Dipping Through Geometries

It is sometimes said, in the money-laundering field, that “cash is king.”  It may be more appropriate to say that cash is a Sisyphean burden that many professional criminals must bear (or find professional money launderers to bear for them) in order to realize long-term benefits of their criminality.  Street-level transactions in crimes such as drug trafficking, arms sales, and human trafficking, generate tremendous volumes of smaller-denomination bills that must be exchanged for higher-denomination bills.  Even after exchange, large masses of those higher-denomination bills cannot easily be deposited in banks attentive to money laundering risks. As a result, major criminal operations remain dependent on bulk cash smuggling networks to begin the laundering process in less attentive jurisdictions.

A recent criminal prosecution shows the extent to which bulk cash transportation remains an essential service in money laundering operations.  On July 28, the Isleworth Crown Court in London sentenced Abdulla Mohammed Ali Bin Beyat Alfalasi, an Emirati national, to nine years’ and seven months’ imprisonment, after he pleaded guilty to removing criminal property from England and Wales in violation of section 327(1) of the Proceeds of Crime Act.  The Crown Prosecution Service (CPS) stated that Alfalasi arranged a service designed to transport cash that constituted criminal proceeds of crime out of England and Wales.  According to the National Crime Agency, which investigated the operation, first Alfalasi, and then a number of “couriers” whom he recruited, transported a total of £104 million in cash on at least 83 occasions between November 2019 and October 2020.

The NCA stated that Alfalasi’s operation collected cash from criminal groups around the United Kingdom and took it to counting houses, usually rented apartments in Central London.  Alfalasi’s money laundering method consisted of four steps: (1) filling suitcases each with around £500,000 in cash; (2) spraying each suitcase “with coffee or air fresheners in an effort to prevent them being found by Border Force detection dogs”; (3) Alfalasi or a courier flying business class to Dubai, which allowed increased baggage allowance, and checking in as late as possible to avoid detection of the cash; and (4) declaring the cash on arrival, supported by a letter from a company that Alfalasi owned, saying that the couriers were authorized to carry that amount of cash.  Alfalasi set up the company, Omnivest Gold Trading LLC, specifically to legitimize the funds.

At the time of Alfalasi’s arrest, officers of the National Crime Agency recovered three phones that contained numerous messages between him and others that discussed the collection, consolidation, and movement of the cash.  According to the CPS, the phones “also contained pictures of suitcases filled with cash, a read-out from a money counting machine and an itinerary for one courier’s journey, with Alfalasi checking in at every stage of the process to ensure the money was delivered safely to Dubai.  Credit cards were also recovered from Alfalasi’s home which had been used to buy the flight tickets.”

The Times reported that one of Alfalasi’s couriers “travelled from Heathrow to Dubai three times in August and September 2020, checking in 19 suitcases with a combined weight of almost half a tonne. She returned a few days after each trip with the same baggage weighing significantly less each time.”  To date, four of Alfalasi’s couriers reportedly have been convicted as part of Alfalasi’s operation and others remain under investigation.  The CPS deemed the case one of the largest money laundering cases that it has ever prosecuted.

This set of prosecutions shows why both customs authorities and airlines need to maintain vigilance in watching for bulk cash-smuggling operations.  As the Alfalasi case shows, experienced money launderers can be counted on to try to exploit situations in which that vigilance can weaken – such as the temptation to clear passengers and luggage quickly when departures are imminent.  Moreover, that temptation is likely to increase in the near term, as international air travel continues to grow apace despite rising ticket prices.  Bulk cash-smuggling launderers will readily bear those costs so long as they can successfully run the gauntlet and deposit their customers’ cash in jurisdictions that fail to implement effective anti-money laundering measures.

At a time when public interest in cryptocurrency is greater than ever – with total crypto transaction volume growing to a high of $15.8 trillion in 2021, according to Chainanalysis – it is important to note that cryptocurrency-based crime also reached an all-time high in 2021, with illicit addresses receiving $14 billion. 

Within the past week, a series of events demonstrated the continuing and substantial risk of losses to  crypto-related fraud and theft schemes:

• On March 24 and 25, hundreds of officers with the Latvian State Police and the Lithuanian Police, including special intervention teams, raided a total of three call centers belonging to a single organized crime group that offered would-be investors fake investments in bitcoin, commodities, and foreign currencies.  The European police organization Europol stated that the call-center operation employed up to 200 fake “traders”, speaking English, Russian, Polish and Hindi to their intended victims.  Latvian and Lithuanian Police detained more than 100 individuals, and seized cash, bank accounts, and luxury vehicles as well as €95,000 in cryptocurrencies.
• On March 28, the United Kingdom law firm Pinsent Masons reported that in 2021 there were 9,458 cases of complaints about alleged cryptocurrency investment fraud in the United Kingdom – a 64 percent increase over 2020 (5,758).  Common crypto-related schemes reported included bogus investments and social media posts that promoted fake websites and apps through which individuals allegedly could invest in digital currencies.
• On March 29, Blockchain project Ronin stated that hackers stole cryptocurrency now worth almost $615 million from its systems.  It reported that on March 23, unidentified hackers used stolen private keys to steal approximately 173,600 ether tokens and 25.5 million USD Coin tokens.  It also noted that it was working with Chainalysis to trace the stolen funds, most of which were then still in the hacker’s digital wallet.  The Ronin loss represents the second-largest crypto theft ever reported.

These events provide strong indications that the crypto sector still has far to go in combating online fraud and theft schemes.  It is noteworthy that the Latvian and Lithuanian police raids involved substantial international cooperation and coordination.  Europol worked with national investigators from both countries to establish a joint strategy and to organize an intensive exchange of evidence, and the European prosecutors group Eurojust set up a joint investigation team (JIT) into the case within one week.  In contrast, there seems to be little to no collective action within the crypto sector to work with authorities to combat crypto fraud and theft, or to urge crypto industry firms to maintain robust cybersecurity to protect buyers’ and investors’ funds.

In its latest Crypto Crime Report, Chainalysis acknowledged that “$14 billion worth of illicit activity represents a significant problem”, but also asserted that “crime is becoming a smaller and smaller part of the cryptocurrency ecosystem” because the $14 billion figure represented only a 79 percent increase over 2020.  There is no guarantee, however, that that trend will continue.  State actors such as North Korea and organized criminal groups are likely to look at the $15.8 trillion in crypto transactions and redouble their efforts to swindle or steal crypto buyers’ funds however and wherever they can.  Legitimate crypto firms need to anticipate those actions and to build effective public-private cooperative measures to ward off even greater crypto buyer and investor losses.

At a time when media reports trumpet eight- and nine-figure financial penalties for foreign-bribery, sanctions, or other major legal violations, it is important for companies to remember that their corporate compliance programs need to cover not just the highest-visibility legal fields, but all laws and regulations to which they are subject.  Some regulatory fields may carry less onerous penalties, and yet serve important public-policy objectives.

One such field is the Servicemembers Civil Relief Act.  Now nearly two decades old, the SCRA is a federal law directed at easing financial burdens on servicemembers during their periods of military service.  It provides benefits and protections for military members as they enter active duty, and for servicemember dependents.  In particular, it covers issues such as rental agreements, security deposits, prepaid rent, evictions, installment contracts, credit card interest rates, mortgage interest rates, mortgage foreclosures, civil judicial proceedings, automobile leases, life insurance, health insurance and income tax payments.  Violations of the SCRA can result in the U.S. Department of Justice filing a civil suit to obtain not just civil penalties, equitable relief, and declaratory relief, but also monetary damages on behalf of individual servicemembers.

On March 11, the Justice Department announced that  it had obtained a settlement agreement requiring BayPort Credit Union (BayPort) to pay nearly $110,000 to resolve allegations that BayPort violated the SCRA by charging excessive interest on servicemembers’ loans and repossessing servicemembers’ cars without court orders.  The settlement, which resolved a civil lawsuit that the Department had brought, must be approved by the U.S. District Court for the Eastern District of Virginia.

According to the Department, the lawsuit alleges that BayPort unlawfully charged interest in excess of 6 percent to 21 servicemembers who qualified for and sought SCRA interest rate benefits. In at least one instance, BayPort allegedly told a servicemember “that reducing the interest rate would increase her monthly payment.” The lawsuit further alleges that BayPort unlawfully repossessed three servicemembers’ motor vehicles without court orders.  In at least one of those cases, BayPort reportedly knew about the borrower’s military service,  but repossessed the vehicle from a military base.

Under the terms of this settlement, BayPort must pay nearly $70,000 to the affected servicemembers and $40,000 to the United States as a civil penalty. The agreement with the Department also requires that BayPort “revise its policies and procedures to prevent future SCRA violations and provide SCRA training to its employees.”

Although the BayPort settlement involved only modest penalties, it attracted attention not just regionally but internationally.  Compliance officers at financial institutions should therefore use this settlement in internal briefings and trainings, to emphasize to business executives the importance of maintaining sound compliance programs across the board.

It is by now common knowledge that the COVID pandemic put regulatory agencies in multiple countries under severe constraints, including delays due to staff working remotely and staffing shortages.  For example, the Chairman of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, admitted that the SEC was short-staffed, with 4 to 5 percent fewer staff than five years ago.

In Hong Kong, the situation at the Hong Kong Securities and Futures Commission (SFC) has apparently been exacerbated by the severe COVID restrictions that the Hong Kong government has placed on the population.  The SFC reportedly lost 12 percent of its staff in 2021, compared with 5.1 per cent in 2020, and is finding it difficult to recruit new staff because of Hong Kong’s quarantine rules.  SFC Chairman Tim Lui stated that the SFC’s most serious shortages were in junior professional staffing, which declined by 25 percent, and that the shortages had “been compounded by the limited ability to import talent from outside Hong Kong.”

Because the competition for financial talent in Hong Kong “is keen”, Lui said that the SFC had to set aside more money to compete with the private sector for staff, and to give a 4.5 percent pay rise to the current staff.  The expected increase in SFC staff cost is HK$140.5 million (USD$18 million), which represents a 9.5 cent year-over-year increase.  Total staff costs were projected to be HK$1.6 billion for the 12 months starting in April 2022.

Even with the planned hiring increases, however, the SFC’s total headcount by the end of March 2023 is projected to be 1,018 — only 3 per cent more than current levels.  That modest increase appears unlikely to keep pace with the continuing vitality (even with COVID restrictions) of Hong Kong as an international financial center, and the projected growth of China’s capital market, for which Hong Kong will serve as a critical gateway, to $100 trillion.  The SFC can only hope that the Hong Kong Legislative Council, which has the responsibility to review and approve government budgets, will recognize the need to provide the levels of financial support that the SFC will need in the near term and beyond.

For a number of years, Asian markets’ demand for rhino horn – whether as medicine or luxury good – has contributed to transnational illegal wildlife trade that has been pushing rhino populations closer to extinction.  One development that apparently had some effect in temporarily reducing rhino poaching in South Africa was the COVID-19 pandemic.  The number of rhinos poached in South Africa declined by one-third from 594 in 2019 to 394 in 2020.  But as the South African government eased COVID lockdown restrictions in late 2020, rhino poaching reportedly began to rise sharply, especially in late 2021.

A recent report by the South African Ministry of Forestry, Fisheries and the Environment confirmed this trend.  According to the Ministry, 451 rhinos were poached in the country in 2021.  This represents a 14 percent increase over the 2020 total of rhinos poached.  The Ministry noted that the 451 rhinos poached represented a 24 percent decrease compared to 2019, and that the 209 rhinos poached in South African national parks represented a 15 percent decline from 2020.  At the same time, the Ministry recognized that there had been an increase in poaching on private properties in South Africa.

The Ministry also reported that in 2021 there had been 189 arrests in connection with poaching activities and 61 convictions of accused rhino poachers and traffickers.  In a number of successful prosecutions, sentences ranged from 16 years’ to 85 years’ imprisonment.

Nonetheless, the unabated demand for rhino horn, coupled with the lingering effect of COVID in discouraging tourism, is likely to generate still further increases in rhino poaching in South Africa.  South African authorities are vitally dependent on tourism dollars to fund their anti-poaching efforts.  If tourism continues to lag behind the surge in poaching, and poachers continue to stalk rhinos in private properties, South Africa may again find itself facing a crisis in trying to protect its dwindling rhino populations.