In Anti-Money Laundering, Bitcoin

The cybercurrency markets have continued their exponential growth trend in recent months, both in the United States and abroad. Global RADAR recently reported on the decision made by the Japanese government to eliminate their 8% consumption tax on the sale of Bitcoin within the East Asian island in an effort to facilitate frictionless trading and greater accessibility to this market. As a result of this move, along with the growth of global knowledge about Bitcoin and other cryptocurrencies that has been seen in 2017, those operating in the cybercurrency and financial services industries, respectively, are expecting a colossal rise in the value of Bitcoin and numerous other currencies that are currently on the market.

Upon our last report, which followed the enactment of the new Japanese legislation on July 1st, the price of a single Bitcoin had risen to over $2,500 USD. This marked a new all-time high for the digital currency, resulting in large part from several key developments seen in the world of cryptocurrency of late. To put this figure, and the continuing increase in price into perspective, Bitcoin broke the $1,900 mark for the first time just a few weeks ago in mid-May. While this number has reduced slightly over the course of the past two weeks, experts believe its growth will only continue, with the cybercurrency industry having the potential to evolve into a multi-trillion dollar industry over the next several years. However, questions still remain about the financial security involved in dealing with Bitcoin and other cybercurrencies, due in large part to the relative uncertainty that still surrounds this new and continually evolving technology.

The article “Criminals rarely use cryptocurrency” cited in BSA News Now on July 11th, 2017, examines a report recently released by the European Commission – the European Union’s (EU) executive arm responsible for legislation proposals and implementation of decisions made by European Parliament – regarding the use, or lack there of, of cryptocurrency by criminal organizations. It is widely recognized that cybercriminals prefer to be paid in Bitcoin for their roles in hacking and in the sale of private information. However, the European Commission’s findings suggest that criminal groups “rarely use cryptocurrency for illegal activities, like financing terrorism and money laundering, because it requires a certain level of technical expertise that hampers adoption” (Bamburic, 2017). Although the Commission believes that criminals groups would love to tap into the cybercurrency market due to the lack of financial transparency involved and the relative ease of transfers, as of right now data has shown that there is very little evidence of money being laundered through the virtual currency platform. The same holds true for terrorism financing efforts made through cybercurrency, although the number of cases in regards to terror financing is said to be increasing. The Commission has a grading scale for scoring risk, in this case risk involving digital currencies to finance terrorism. The scale ranges from “Level 1 – Lowly Significant” to “Level 4 – Very Significant.” The Commission ranked the risk of cybercurrency for terror financing on the lower end of the spectrum at “Level 2- Moderately Significant”.

Another factor that the European Commission believes has had an impact on the small number of criminals/criminal groups using cybercurrency to facilitate financial crime is that “criminals are not very fond of the market’s volatility, which can see major spikes in either direction in a narrow time frame, at least when it involves money laundering” (Bamburic, 2017). However, the report warns that the lack of legal framework governing currencies such as Bitcoin and Ethereum, specifically in Europe where they are not regulated, as well as the absence of international cooperation, makes this market very lucrative to criminals, albeit the aforementioned technological issues that they have had with cybercurrency thus far.  It is undeniable that the incorporation of proper Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) legislation must be developed in order to help mitigate the risk of financial crime. The European Commission will reportedly be preparing a new report in the coming months which will outline new suggestions for the regulation of the cryptocurrency industry in Europe, and Global RADAR will publish a summary of the report in the days following its release.

The full report from the Commission to the European Parliament on the current state of cybercurrency can be accessed through the following site:

http://europeanmemoranda.cabinetoffice.gov.uk/files/2017/07/10977-17-ADD-2.pdf

Weekly Roundup

Former Brazilian President Sentenced to Prison

On July 12th, former President of Brazil Luiz Inácio Lula da Silva was convicted on corruption and money laundering charges and was sentenced to over nine years in prison. Once one of South America’s most popular and compelling political figures, the guilty decision has all but tarnished what many viewed as one of the more successful Brazilian presidencies in recent memory. At some point during his two terms as President, which ran from 2003 to 2010, it was discovered that “Lula” – one of Time Magazine’s 100 Most Influential People in the World for 2010 – and his wife illegally accepted approximately $1.1 million worth of work/renovation from a construction company on a waterfront property reportedly owned by the pair. According to a New York Times article regarding the conviction, the case against the former President began “with an investigation into money laundering at a gas station. But as prosecutors continued digging, they said they discovered billions of dollars’ worth of bribes involving Petrobas and powerful contractors like Odebrecht, a large construction company with deep ties across the hemisphere” (Londoño, 2017).

The construction company involved in the case, OAS SA, reputedly agreed to work on the property in exchange for “lucrative oil contracts” with the state oil company known as Petrobas, which would have been facilitated by Lula. Petrobas is a multinational oil company based in Brazil that has become synonymous with corruption. In fact, Petrobas was at the center of the largest corruption scandal in Brazilian history dating back to 2014, which is now notoriously referred to as the “Car Wash Scandal.” Lula is now the latest in a long line of Brazilian politicians and lawmakers to be shrouded in corruption claims as a result of the scandal, leaving Brazilian citizens to worry about the dire state of the political system in their country. Lula and his counsel plan to appeal the ruling, a process that could take up to 18 months to conclude, making him a free man for the duration of the process.

HSBC Money Laundering Report Blocked

July 12th was also a busy day for the U.S. justice system. A U.S. appeals court in Manhattan blocked the highly-anticipated release of a money laundering report by HSBC Holdings Plc. that would have documented the intercontinental financial services corporation’s progress in improving its money laundering controls. The U.S. Department of Justice (DOJ) issued a $1.92 billion fine to HSBC in 2012 for the company’s conduction of business with customers operating in multipled sanctioned countries around the world, as well as “allowing itself to be used to launder a river of drug money flowing out of Mexico and other banking lapses” (Viswanatha & Wolf, 2012). In addition to the fine, the DOJ also demanded that the bank take the necessary steps to improve its compliance functions, as well as retain a compliance monitor for five years.

Fast forward four years to January of 2016, where a U.S. District Judge ruled that HSBC’s compliance report would be made public, and deemed that citizens had a “constitutional right” to access the information found in the report. This decision was regarded as “an abuse of power” by the Court of Appeals on Wednesday, thus the report will ultimately not be released. This decision comes much to the delight of HSBC, which feared that the release of the report would “compromise efforts to fight money laundering, including for terrorism, and discourage cooperation with law enforcement” (Stempel, 2017). However, many have viewed the decision to block the report’s release as a victory for private companies over public interests and general trust. HSBC customers and various media outlets across the United States and abroad had been awaiting the report’s release to see if adequate compliance revisions had been made, thus their negative reactions to this decision are warranted.

Sudan Sanctions Decision Delayed

Facing a rapidly approaching July 12th deadline, the Trump administration has decided to delay its decision on the state of its sanctions against Sudan for an additional three months. The sanctions relief efforts, launched by the Obama administration in January, “moved to lift a trade embargo and unblock Sudanese government assets that were frozen in earlier sanctions against the country and its leaders” (Schwartz, 2017). The Trump administration was set to assess the progress of the Sudanese government in its counter-terrorism cooperation efforts, as well as other areas such as humanitarian access. Had Sudan’s efforts been deemed sufficient, the United States would have likely revoked the long-standing sanctions against Sudan altogether.

The United States has continued to monitor the state of affairs in Sudan in regards to the aforementioned areas, but realizes that more time was needed for the proper, comprehensive assessment of the positive developments in the African country. Heather Nauert, a spokesperson for the State Department, stated “the Trump administration is ‘deeply committed to engagement with the [Government of Sudan] and working toward further progress on achieving a sustainable peace in Sudan, removing remaining obstructions to the delivery of humanitarian assistance, and bolstering cooperation to counter terrorism and promote regional stability’” (Schwartz, 2017). For now, the decision on the future of U.S. sanctions against Sudan will have to wait.

Citations

Bamburic, Mihăiță. “Criminals Rarely Use Cryptocurrency.” BetaNews. 10 July

  1. Web.

Londoño, Ernesto. “Ex-President of Brazil Sentenced to Nearly 10 Years in Prison for

Corruption.” The New York Times. The New York Times, 12 July 2017. Web.

Schwartz, Felicia. “Trump Administration Delays Decision on Sudan Sanctions.” Fox

Business. Fox Business, 11 July 2017. Web.

Stempel, Jonathan. “U.S. Appeals Court Blocks Release of HSBC Money Laundering

Report.” Reuters. Thomson Reuters, 12 July 2017. Web.

Viswanatha, Aruna, and Brett Wolf. “HSBC to Pay $1.9 Billion U.S. Fine in Money-

laundering Case.” Reuters. Thomson Reuters, 11 Dec. 2012. Web.

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