A Guide to Anti-Money Laundering for Crypto Firms

Former US Rep. TJ Cox Indicted for Wire Fraud and Money Laundering

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On August 16th, former U.S. Rep. Terrence John Cox was federally indicted on 28 charges, including wire fraud, campaign contribution fraud, and money laundering. The unsealed indictment describes schemes carried out between 2013 and 2019. Cox purportedly diverted payments, investments, and loans to secret accounts, stealing them for personal gain. The former Representative is also charged with illegally soliciting and reimbursing campaign funds from friends and close associates.

How Did the Schemes Work?

According to the Department of Justice, Cox relied on his network of business interests and Relatives or Close Associates (RCAs) for much of his fraud. This was accomplished by:

  • Using his association with organizations to fraudulently obtain funds. In one scenario, Cox is said to have secretly opened a personal bank account at California Bank & Trust. According to the indictment, he deceptively included an organization he managed, “Tax Credit company,” in the account name. Cox did not name himself. The former representative then allegedly diverted funds he solicited from clients and investors for the company into this account, stealing them for his own use. In another instance, Cox allegedly forged a board resolution to obtain a loan, resulting in a $1.28 million loss when it defaulted.
  • Using straw donations from family and friends to fund his own campaign. The goal was to bypass federal campaign contribution limits by concealing the true funding source, which is illegal. In a straw donation scheme, an apparent (“straw”) donor acts as a front for a real donor who doesn’t want their contributions discovered. They later reimburse the straw donor either directly or indirectly, such as through bonuses if the straw donor was an employee. In this case, the scheme resulted in around $25,000 in illegal donations.

PEPs, RCAs, and Financial Crime

Straw donation schemes are a common way RCA relationships can be exploited. There have been multiple indictments and convictions involving this scheme in recent years:

  • In August 2021, Navatek/Martin Defense Group’s CEO, Martin Kao, was charged with illegally contributing over $190,000 to Maine Senator Susan Collins’ campaign after she “strongly advocated” an $8 million DoD contract awarded to Kao’s group.
  • In August 2018, W. Samuel Patten admitted to a $50,000 straw donor scheme, which directed funds from a Russian-Ukrainian politician to former President Trump’s inaugural committee, evading a federal prohibition against foreign donations.
  • In 2015, the 9th Circuit Court of Appeals upheld F. Harvey Whittemore’s 2013 conviction for reimbursing family and friends for more than $130,000 in straw donations to support close friend Senator Harry Reid’s campaign.

Stories like these involving fraud, extortion, and bribery illustrate why a holistic approach to screening and monitoring PEPs involves not just looking at individuals but at their complex networks.

Key Takeaways

When evaluating accountholders, firms should consider Relatives and Close Associates (RCAs) in their definition of a Politically Exposed Person (PEP). While global definitions of PEPs vary, the FATF guidance definition is a reliable starting point. 

For example, Cox allegedly opened a personal account in the name of an entity he managed instead of in his own name. Appropriate due diligence would help to reveal Cox, a PEP, and his close associates as beneficial owners of the entity. The account would thus be high-risk and require Enhanced Due Diligence (EDD). Similarly, Cox’s friends and family members would qualify as RCAs, and are thus high-risk as well. Activity involving donations to him, especially large amounts, would need to be monitored more closely. For example, does he or an associate seem to be “refunding” this activity? 

The risks PEPs face involve complex networks of relationships, not just individual activity. A politician like Cox might be the most obvious candidate for PEP status. But relationships with friends, business partners, or in some cases business entities are what make PEPs so vulnerable. They can be exploited and involved in corruption (wittingly or not.) Firms should analyze these relational networks within their organization’s risk appetite and policies.

 

Understand PEPs and their Networks

Discover how to unearth and connect customer relationships to better fight corruption and money laundering.

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On August 16th, former U.S. Rep. Terrence John Cox was federally indicted on 28 charges, including wire fraud, campaign contribution fraud, and money laundering. The unsealed indictment describes schemes carried out between 2013 and 2019. Cox purportedly diverted payments, investments, and loans to secret accounts, stealing them for personal gain. The former Representative is also charged with illegally soliciting and reimbursing campaign funds from friends and close associates.

How Did the Schemes Work?

According to the Department of Justice, Cox relied on his network of business interests and Relatives or Close Associates (RCAs) for much of his fraud. This was accomplished by:
  • Using his association with organizations to fraudulently obtain funds. In one scenario, Cox is said to have secretly opened a personal bank account at California Bank & Trust. According to the indictment, he deceptively included an organization he managed, “Tax Credit company,” in the account name. Cox did not name himself. The former representative then allegedly diverted funds he solicited from clients and investors for the company into this account, stealing them for his own use. In another instance, Cox allegedly forged a board resolution to obtain a loan, resulting in a $1.28 million loss when it defaulted.
  • Using straw donations from family and friends to fund his own campaign. The goal was to bypass federal campaign contribution limits by concealing the true funding source, which is illegal. In a straw donation scheme, an apparent (“straw”) donor acts as a front for a real donor who doesn’t want their contributions discovered. They later reimburse the straw donor either directly or indirectly, such as through bonuses if the straw donor was an employee. In this case, the scheme resulted in around $25,000 in illegal donations.

PEPs, RCAs, and Financial Crime

Straw donation schemes are a common way RCA relationships can be exploited. There have been multiple indictments and convictions involving this scheme in recent years:
  • In August 2021, Navatek/Martin Defense Group’s CEO, Martin Kao, was charged with illegally contributing over $190,000 to Maine Senator Susan Collins’ campaign after she “strongly advocated” an $8 million DoD contract awarded to Kao's group.
  • In August 2018, W. Samuel Patten admitted to a $50,000 straw donor scheme, which directed funds from a Russian-Ukrainian politician to former President Trump’s inaugural committee, evading a federal prohibition against foreign donations.
  • In 2015, the 9th Circuit Court of Appeals upheld F. Harvey Whittemore’s 2013 conviction for reimbursing family and friends for more than $130,000 in straw donations to support close friend Senator Harry Reid's campaign.
Stories like these involving fraud, extortion, and bribery illustrate why a holistic approach to screening and monitoring PEPs involves not just looking at individuals but at their complex networks.

Key Takeaways

When evaluating accountholders, firms should consider Relatives and Close Associates (RCAs) in their definition of a Politically Exposed Person (PEP). While global definitions of PEPs vary, the FATF guidance definition is a reliable starting point.  For example, Cox allegedly opened a personal account in the name of an entity he managed instead of in his own name. Appropriate due diligence would help to reveal Cox, a PEP, and his close associates as beneficial owners of the entity. The account would thus be high-risk and require Enhanced Due Diligence (EDD). Similarly, Cox’s friends and family members would qualify as RCAs, and are thus high-risk as well. Activity involving donations to him, especially large amounts, would need to be monitored more closely. For example, does he or an associate seem to be “refunding” this activity?  The risks PEPs face involve complex networks of relationships, not just individual activity. A politician like Cox might be the most obvious candidate for PEP status. But relationships with friends, business partners, or in some cases business entities are what make PEPs so vulnerable. They can be exploited and involved in corruption (wittingly or not.) Firms should analyze these relational networks within their organization’s risk appetite and policies.   [cta_card title="Understand PEPs and their Networks" cta_img="" category="" bodytext="Discover how to unearth and connect customer relationships to better fight corruption and money laundering." cta_text="Start Here" cta_url="https://complyadvantage.com/insights/politically-exposed-persons-peps-screening-best-practices/"]

Originally published August 26, 2022, updated August 26, 2022

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