A Month in Review - May 2024:
What's In This Months Edition
?? ?? Industry Press and News
US Imposes Sanctions on Russia Linked Firms
On 1st May 2024, the US imposed sweeping sanctions on nearly 300 entities from China, Russia, and other countries for supporting Russia’s war effort in Ukraine. The sanctions target firms supplying critical components and technology to Russia's defense industry, including drone parts and military equipment. Key Chinese companies and others in countries like Turkey and the UAE were implicated. This move aims to cripple Russia’s war capabilities and sends a strong message about the consequences of aiding Russia’s military actions.
Key Takeaways for Financial Crime Consultants and Financial Institutions:
Malta Bribery Case Update
Malta's former Prime Minister Joseph Muscat and other officials have pleaded not guilty to charges in a major hospital fraud scandal. This case involves a 2015 deal where three hospitals' management was handed to a private company, which was later annulled due to fraud. Among those charged are Muscat, his former chief of staff, and a former minister, all accused of bribery and money laundering. The scandal has significantly impacted Maltese politics ahead of the European Parliament elections, with widespread criticism and protests from supporters and opposition alike.
Binance Fined for Regulatory Violations
Binance, the major crypto exchange, has been fined C$6 million (￡3.4 million) by Canada's financial intelligence agency, FINTRAC. The regulator cited two violations - Binance failed to register as a foreign money service business in Canada despite being given opportunities to do so. It also neglected to report nearly 6,000 crypto transactions over ￡7,500 to FINTRAC between June 2021 and July 2023, along with required know-your-customer (KYC) information.
This Canadian fine comes just six months after Binance agreed to pay US authorities a ￡3.4 billion penalty for breaching anti-money laundering laws. The exchange's former CEO, Changpeng Zhao, recently received a 4-month US prison sentence for failing to implement proper KYC and anti-money laundering controls.
Binance faces further regulatory issues in Nigeria, accused of money laundering and tax evasion, leading to a top compliance executive's arrest in February. Binance's new CEO claims unknown parties demanded a ￡110 million crypto bribe to drop the Nigerian charges.
????? Regulatory Updates
FCA Proposal to "Name and Shame" Faces Backlash
In our March 2024 edition, our partner Sam Corke wrote a Think Piece on the Financial Conduct Authorities (FCA) plans to name and shame firms under investigation at an earlier stage. Echoing the sentiments in this piece, last month, it was reported that the FCA was facing substantial criticism over the proposed "name and shame" policy. The intention behind this move is to increase transparency and deter misconduct. However, financial industry groups such as UK Finance and TheCityUK have voiced strong opposition, arguing that premature disclosure could unjustly harm the reputations of firms that may ultimately be exonerated, potentially making the UK less attractive as a financial hub.
Despite the backlash, the FCA defends the policy, asserting that greater transparency is essential for maintaining market integrity and consumer confidence. FCA enforcement heads Therese Chambers and Steve Smart clarified that the policy would not involve indiscriminately naming all firms under investigation but would assess each case individually. They noted that similar practices are already in use by other UK regulators without significantly impacting share prices.
The FCA's consultation on this proposal concludes shortly, and it remains to be seen whether the regulator will proceed with the policy as planned or make modifications based on industry feedback.
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FCA Chargers Social Media Influencers
The Financial Conduct Authority (FCA) has charged nine social media influencers over promoting unauthorised investments. The FCA alleges two individuals provided unlicensed advice on risky contracts for difference (CFDs) trading via an Instagram account. It is claimed they paid seven reality TV stars from shows like Love Island and The Only Way is Essex to promote the account to their millions of followers. The FCA says 80% of customers lose money on CFDs. All nine influencers face charges of issuing unauthorised financial promotions, with one also accused of breaching financial regulations. If convicted, they could receive up to two years in prison.
The case highlights concerns around the ease at which consumers can become subjected to illegal and unregulated business practices via social media, which are somewhat legitimised by "influencers" plugging these high-risk, unregulated investments online.
Think Piece: Clamping Down on Crypto Mixers
Alexey Pertsev, the founder of Tornado Cash, an open-source, decentralised crypto mixer, was recently found guilty of money laundering offences by a Dutch court and sentenced to 5 years in prison. In the US, Pertsev's co-founder, Roman Storm, awaits trial in September, facing allegations of conspiracy to commit money laundering and operating an unlicensed Money Transmitting Business. The founders of Samourai Wallet, which offers crypto mixing functionality, Keonne Rodriguez and William Longergan Hill, have been charged by the US Department of Justice with the same offences, whilst Roman Sterlingov was found guilty by a federal jury in Washington, having founded Bitcoin Fog -- a cryptocurrency mixer.
In total, Tornado Cash, Samourai Wallet and Bitcoin Fog are alleged to have facilitated the laundering of several billions of dollars.
With the above charges and trial outcomes taking place between April and May of this year, it demonstrates a concerted effort by the authorities to crackdown on services offering crypto mixing. So what is it, and what are the implications of this?
Crypto-mixing
A cryptocurrency mixer (or tumbler) is a service which enables users the ability to circumvent the transparent nature of the blockchain. Individuals seeking privacy or anonymity in their transactions can, for a small fee, provide their crypto to the mixer, wait as it's mixed around with other coins, before receiving a different coin back in exchange, free from any blockchain transactional history. Centralised (or Custodial) mixers retain a record of all transactions, and thus offer a higher degree of traceability than their Decentralised (Non-custodial) counterparts, which use smart contracts to secure the transactions and protocols to obscure the transactions.
How it was used to launder over $1bn, and the arguments for and against such technologies
Tornado Cash, which operates on the Ethereum blockchain, gained notoriety due to its links to the North Korean-based hacker group, Lazarus, who are alleged to have used the service to launder 175k ETH ($670m in today's money) in 2022.
The ETH originated from Axie Infinity, a blockchain-based play-to-earn online game, whose network was reportedly hacked by Lazarus following a fictitious job offering was made to one of Axie's senior engineers, and the stolen ETH transferred to an anonymous wallet. The crypto was subsequently identified as being placed through Tornado Cash as a means of obscuring its source and, shortly thereafter, the US Treasury Department placed sanctions on the entity, making it illegal for any individual in the US to use the protocol and freezing all assets it held.
According to Dutch prosecutors, since its inception in 2019 Tornado Cash is estimated to have laundered $7bn worth of crypto, 30% of which was deemed to be from criminal or sanctioned sources. It would seem an open and shut case then, that such mechanisms afford too much opportunity to criminals looking to wash their illicitly gained funds; however, the criminal convictions and associated press have raised questions as to both the morality in blocking this route of privately transacting and the accountability of the developers behind such open-source technology.
Over $2m has been raised so far through a decentralised autonomous organisation (DAO) seeking to support the legal expenses of the two Tornado Cash founders. Their website cites the importance of affording anonymity for personal or socio-political reasons and the inability to enjoy this while transacting on the blockchain. An example commonly referred to is Vitalik Buterin, the founder of Ethereum, using Tornado Cash in order to donate to Ukraine following Russia's invasion. The head of policy at the European Blockchain Association referred to Alexey Pertsev's guilty verdict as a "watershed moment for privacy and public permissionless blockchains".
As an open-source, decentralised piece of software, a further argument against the ruling is that no one entity or actor can control it; due to its very nature, the code behind the software is available publicly to copy, distribute or alter, the nefarious use of which is not therefore a liability of the original developers. A US Senator, writing to the US Attorney General to express their concerns over the DOJ's definition of these being money transfer businesses, likened the software being to blame for illicit finance to a "motorway being responsible for a bank robber's getaway car".
Staff members of Coinbase, the online cryptocurrency exchange, who themselves had assets frozen as part of the sanctions enforced, have also expressed their concerns on this matter as part of a lawsuit filed against OFAC, noting that the sanctioning of open-source code creates fear and uncertainty in the eyes of developers and investors, therefore hindering innovation.
For Alex Pertsev, however, the Dutch prosecutors were of a differing opinion, arguing that the case was not a matter of privacy and security or liability of private code, but about the specific, informed decisions made to enable criminal activity on a large scale. They also contend that there was a level of control exerted over it by its creators, with its fully functional interface, which had no safeguards or controls to prevent its use by criminals.
The DOJ, in their indictment, shares the same view -- in that the developers were responsible for creating a business facilitating transactions, something they were successful in arguing in their case against Roman Sterlingov where Bitcoin Fog was deemed an unlicensed money transmitter used in the process of money laundering.
The EU recently announced it too will be cracking down on such services. As part of the new anti-money laundering directive, crypto firms will be forced to collect more data on users and their transactions, enforce stronger monitoring of non-custodial wallets, and ban tools bolstering anonymity such as crypto mixers and privacy tokens.
How this will affect blockchain developers going forward remains to be seen; however, if the US follows the direction of the Dutch courts, setting a further precedent on the ramifications of misuse, it may be another step forward in enforcing a compliance-led approach to crypto technologies.