A Dutch couple are convicted for laundering Bitcoin, Singapore considers new AML rules for Virtual Assets, and the US issues warnings about art and sanctions evasion.
We share our financial regulatory highlights from the week of 2 November 2020.
Dutch Bitcoin Money Launderers Jailed
A Dutch couple have been imprisoned in Rotterdam for the laundering of 2,532 Bitcoins, with a current value of around 25 million Euros and $33 million US dollars. The man and woman- both unnamed but known to be a married couple from Hilversum in North Holland – were sentenced to 2 and 2.5 years years respectively.
The Dutch authorities also seized the couple’s Bitcoin funds, with one cache holding 1,488 BTC and another wallet 1,044 BTC, as well as 138 thousand Euros and 40 thousand US dollars in cash. The couple were fined a further 45 thousand Euros of their own personal assets each.
According to the Dutch Public Prosecution Service (OM), the couple ran an informal Bitcoin exchange for two and a half years, converting customers’ Bitcoins into Euros, with ‘no questions asked’ and no Customer Due Diligence (CDD) or Know Your Customer (KYC) checks. The couple “did not ask customers for identity papers, while large amounts were often exchanged,” court papers indicate. The couple also kept no records and the trades went unreported to the Dutch tax authorities.
Court reports suggest that the laundering scheme was intentionally designed to attract customers involved in illicit or unethical activities. The traders “came into contact with customers through advertisements on the internet and a marketplace on the dark web,” Dutch prosecutors stated. Indeed, as the prosecutors further noted, “much of the bitcoins traded bore traces of the dark web,” and the process of exchange was conducted in a clandestine manner, with customers met in public spaces, usually at fast food restaurants.
The arrests and convictions are part of an ongoing pattern in recent years, with Dutch authorities taking active measures against Dark Net markets and the illicit use of cryptocurrencies. In January 2016, the Dutch police participated in a major international operation which led to the arrest and conviction of ten Netherlands-based individuals involved in drug dealing and Bitcoin laundering. A further major operation took place in July 2017, when the Dutch police infiltrated and closed the Hansa marketplace on the Dark Net, known as a major online European drugs market, in a coordinated operation with US law enforcement and Europol, the European policing agency.
The convictions also come against the backdrop of an increasing international focus on the abuse of cryptocurrencies, both from regulatory and enforcement perspectives. The US Justice Department has recently issued tough new guidelines on cryptocurrencies, and the country’s Financial Crimes Enforcement Network (FinCEN), has taken civil and criminal action against Larry Dean Harmon, a US-based Bitcoin entrepreneur, for CDD/KYC failures.
These kinds of actions by European and other authorities send a clear message to those dealing in cryptocurrencies or other Virtual Assets (VAs) that the days of lax oversight are over. Harsh and dramatic actions are possible not only against those directly involved in criminal trades, but those indirectly enabling them by providing financial services which turn ‘a blind eye’ to the provenance of the funds involved. VA Service Providers (VASPs) – wallets, exchanges, ICOs, etc – have no excuse therefore but to make sure AML/CFT controls are properly in place. Despite what some might say, it is increasingly unsafe to not know who your customers are.
Singapore To Tackle Crypto AML
On 2 November, the Singaporean government introduced its Payment Services (Amendment) Bill to the national parliament designed to expand the scope of AML/CFT laws and regulations for VASPs in the jurisdiction. The bill is intended to bring Singapore into line with changes agreed by the international AML/CFT standard setter, the Financial Action Task Force (FATF), made in June 2019.
Under the current Payment Services Act (PSA), passed in January 2019, a financial services provider that provides payment services in Singapore needs a license endorsed by Singapore’s central bank and financial regulator, the Monetary Authority of Singapore (MAS). The business is also required to follow MAS-issued AML/CFT guidelines.
The PSA mentions VASPs (or what it calls ‘Digital Payment Token’ (DPT) service providers, a roughly equivalent term), and under the current rules, those dealing in VAs or facilitating their exchange are covered. But gaps and ambiguities remain in the original legislation, especially over whether it covers activity that facilitates VA trade, but does not involve their direct possession or handling by an entity based in Singapore. The new bill tackles this and other issues, and under its proposed terms, the following areas of activity will be explicitly covered:
- The transfer of VAs;
- The provision of custodian wallet services for VAs; and
- The facilitation of the exchange of VAs without possession of moneys or VAs by the VASP.
The new bill also seeks to broaden the definition of ‘cross-border money transfer services’ to include businesses that facilitate cross-border money transfers between originators and beneficiaries in different countries, without the funds flowing through, or being received in, Singapore.
The bill also notes that “the DPT sector continues to evolve,” and that “the development of new DPTs, including stablecoins, could lead to user adoption of some DPTs gaining traction quickly.” As a response, the bill will empower MAS to implement new measures without parliamentary action, and would provide the regulator with tools to impose customer protection measures or launch enforcement actions which it deemed to be in the public interest, or the stability of the financial system in Singapore.
The bill appears unlikely to be controversial, and could pass the Singaporean legislature within a few months. This would follow the example of the original PSA, which was introduced in November 2018, and enacted two months later. Such a speedy outcome would reflect Singapore’s desire to be seen as a world leader in financial innovation, in what has become a highly competitive arena. The jurisdiction’s government has stated that it will make Singapore an “electronic payments society,” but in the most recent FinTech Index of the Global Financial Centres Index (GFCI), released in September 2020, the jurisdiction had fallen from fifth to ninth place behind the Chinese city of Guangzhou.
The reasons for the city-state’s decline in precedence in the index are multiple, but there continue to be concerns about the quality of AML/CFT implementation at a firm level. A recent report from crypto threat intelligence CipherTrace identified Singapore as one of the three jurisdictions along with the US and UK, with the highest number of VASPs with CDD/KYC controls judged to be “weak or porous.” The report noted that “although these regions host a higher volume of VASPs in general, the large count of VASPs in these countries that require little to no KYC demonstrates the ease and volume of potential off-ramps for money launderers.”
Singapore’s move to update its laws on VASPs reflect the increasing seriousness with which leading governments and regulators are taking the potential AML/CFT risks around cryptocurrencies and other VAs, as also noted in our European story above. The critical element is the addition of greater powers for MAS in the area, which recognises how quickly the sector is moving, and the need for agile responses without recourse to legislative processes. This suggests that MAS is going to become even more proactive around VAs and VASPs in the near future.
Although this is good news – regulatory clarity and a ‘clean’ market always nurture growth – it should also indicate to those providing VA services in the jurisdiction that they need to be ready for a tougher and more intrusive approach. If CDD/KYC problems are as widespread as the recent CipherTrace report suggests, that means taking action now.
US Sanctions Agency Warns Art World
At the end of October, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), its sanctions administration, issued a new advisory on the potential abuse of the high-value art market by Specially Designated Nationals and Blocked Persons (SDNs). According to OFAC, high-value artwork is any piece valued at more than $100,000.
The advisory highlights that the art market is exceptionally vulnerable to a range of illicit activities, including sanctions evasion, because of “the mobility, concealability, and subjective value of artwork.” Historically the trade has also been notoriously opaque, with anonymity and secrecy for buyers and sellers the commonly accepted norms, and shell companies and intermediaries used to facilitate the trade and provide ‘cut outs’ for those involved.
To make the point, the advisory notes several cases in recent years where high-value art has played such a role. In December 2019, for example, the US designated Nazem Said Ahmad, a Lebanon-based art collector, for providing alleged support to to the Islamist extremist group, Hizballah. According to the US government, Ahmad was one of the group’s major financial backers, and he and his business organisation were used by the group to undertake terrorist financing and money laundering activities. Ahmad is alleged to have invested funds in high-value artwork in an attempt to avoid the impact of US sanctions, opening an art gallery in Beirut as a front. At the point of designation, Ahmad’s collection included works by Pablo Picasso and Andy Warhol, and was worth tens of millions of US dollars.
The advisory also highlights how the North Korean regime has earned tens of millions of US dollars by selling pieces from the Mansudae Art Studio, an art studio in Pyongyang, to galleries in the People’s Republic of China and Hong Kong. It further notes the examples of brothers Arkady and Boris Rotenberg, Russian oligarchs designated by OFAC in 2014, who the US Senate Homeland Security Committee recently alleged to have used a complex shell company structure to purchase art after they were designated.
To tackle these kinds of risks, OFAC stresses the need for all relevant players on the high-value art market – galleries, museums, private collectors, auction companies, agents and brokers – to undertake a risk-based sanctions and AML/CFT compliance programme. It also states that any potential involvement with a designated individual or entity should prompt immediate engagement with OFAC for guidance, and an application for a potential license to undertake a transaction. This might be allowed depending on the specific circumstances.
Nonetheless, the advisory still takes a strong enforcement line, stating that OFAC will enforce sanctions on transactions involving high-value art in which an SDN has any interest, if there are reasons to believe that they are using it as “an investment asset or medium of exchange” for future conversion into cash, gold or VAs. The advisory further clarifies that the department sees no exemptions under the so-called ‘Berman Amendment’ to the International Emergency Economic Powers Act (IEEPA), which allows any import or export of information-based materials.
Although it is not clear whether any specific case or strategic trend has prompted the issue of this new advisory, it comes as one more example of an increasing emphasis by a wide range of law-makers and regulators on the potential abuse of the art market by financial criminals. The EU’s 5th Anti-Money Laundering Directive (5AMLD), for example, brought high-value art market players within the scope of AML/CFT obligations, and all member states were expected to have transposed the requirement into law by January of this year. The UK – one of the world’s leading locations for the art trade – has also introduced the same requirements.
Despite the industry’s past reputation – and almost accepted status – as a murky place to do business, levels of regulatory expectation from authorities are now rising. It seems clear that all those involved in the high-value market will need to take a more forward-leaning approach towards fighting financial crime in the future, and as the OFAC advisory notes, a key element in doing so will be thorough effective client due diligence.