Exclusive: Justice Department anti-human trafficking grants prompt whistleblower complaint

WASHINGTON (Reuters) – A U.S. Justice Department anti-human trafficking grant program is facing internal complaints after two nonprofits were denied funding in favor of two less established groups whose applications were not recommended by career DOJ officials.

Members of the Berkeley County Sheriff’s Office take part in a training session on human trafficking held by the Tri-County Human Trafficking Task Force, a project funded through the Lincoln Tubman Foundation at the Berkeley County Emergency Services Training Center in Moncks Corner, South Carolina, U.S. January 23, 2020. REUTERS/Randall Hill

The awarding of more than $1 million total to the two groups, Hookers for Jesus in Nevada and the Lincoln Tubman Foundation in South Carolina, has triggered a whistleblower complaint filed by the Justice Department’s employee union to the department’s Inspector General.

An internal department memo seen by Reuters shows that as of September 12, two long-established nonprofits – the Catholic Charities of the Diocese of Palm Beach and Chicanos Por La Causa of Phoenix – were originally on the list of recommended grant winners after receiving high marks from outside contractors hired to review applications. The annual grants help nonprofits and local governments aid human trafficking victims.

Later that month, those two organizations were replaced as recommended recipients by Hookers for Jesus and the Lincoln Tubman Foundation, which both received lower rankings from the outside reviewers. The reason, a September 23 memo says, was an effort to “distribute funding across as many states as possible.”

The change was ultimately approved by Katharine Sullivan, head of the Office of Justice Programs, OJP, which awards the grants. Sullivan defended the process as proper. “Our funding decisions are based on a merit-based review system,” she said.

In December, the American Federation of State, County, and Municipal Employees local 2830 filed a complaint in which it asked the inspector general to investigate whether politics factored in the two grant awards. An inspector general’s office spokeswoman declined to comment.

In a statement, union president Marilyn Moses said the grants call into question the department’s mission to serve the public. “Our employees take their … responsibility to the taxpayer very seriously,” she said.

This is the second time recently the union has challenged the grants review process.

Chicanos Por La Causa has opposed the Trump administration’s immigration policies. The head of Catholic Charities in Palm Beach has participated in past Democratic National Committees as a delegate or standing committee member. Both groups said they filed strong applications and intended to continue competing for grants.

Each, Reuters found, was ranked as a Tier 1 applicant, the highest level, after scrutiny by outside reviewers. Hookers for Jesus and the Lincoln Tubman Foundation were ranked in Tier 2, one level lower.

To help select grant recipients, the Justice Department contracts with outside experts called “peer reviewers” who evaluate and score applicants. The reviewers’ identities were not listed next to their comments, so Reuters couldn’t contact them.

Career department officials then receive a blind copy of the average weighted scores and divide them into tiers, with the top scores being closer to 100. They review the applications, scores and reviewers’ comments to help inform their recommendations, which get the final sign-off from OJP leadership. DOJ staffers recommended the two Tier 1 groups.

The subsequent decision to bypass two higher-scoring groups in favor of those with lower scores deviates from past practices, said several Department of Justice veterans.

“Tier 1 generally is your default. They all get funded unless there is some kind of legitimate reason not to fund them,” said Jean Bruggeman, a former DOJ Office for the Victims of Crime fellow who is now executive director of the Freedom Network USA, a coalition aiding trafficking victims.

Hookers for Jesus, which received $530,190 over three years, is run by a born-again Christian trafficking survivor who has lobbied against decriminalizing prostitution, a policy position aligning with many in the Republican Party.

Hookers for Jesus operates a safe house for female adult trafficking victims that, in 2010 and in 2018, maintained a policy of requiring guests to participate in religious activities, internal program manuals obtained by Reuters through public records requests show.

The safe house’s manuals had rules that included a ban on reading “secular magazines with articles, pictures, etc. that portray worldly views/advice on living, sex, clothing, makeup tips.” Other rules limited everything from who victims could call to banning them from bringing their purses with them on weekly shopping trips. Rule-breakers could be penalized by being assigned chores such as washing windows.

Hookers for Jesus founder Annie Lobert denied that her organization requires safe house residents to attend services at her church. “We are not going to discriminate toward anyone,” she said. “But,” she added, “we are Christian. And there is an understanding before they come in here that we are Christian.”

If the policies described in the 2018 manuals continue after the federal grant money is dispersed, they would likely violate anti-discrimination laws that prohibit using federal funding to engage in explicitly religious activities, some lawyers said.

“The fact the federal government is funding this is problematic,” said Dallas Hammer, an attorney specializing in discrimination law. “The decision-makers here could be walking the federal government right into a clear violation of the First Amendment,” which protects freedom of religion.

Sullivan, the OJP’s principal deputy assistant attorney general, said the policies described to her by Reuters from the manuals are “inappropriate.” She added: “This might be something that may be appropriate for our civil rights department to look at. Those are not facts or things that we would know ahead of time.”

In its grant application, Hookers for Jesus did not discuss its religious focus in detail, and the department did not have access to its program manuals before the award was announced.

But Sullivan disputed the notion that Tier 2 scores are significantly inferior and said the department was justified in awarding the two grants because there were no other Tier 1-scored applications in Nevada or South Carolina for that grant category.

Geography is among factors that can be considered, but experts said it typically comes into play when deciding between two groups rated at the same level.

In 2019, OJP offices collectively awarded more than $100 million in grants to help human trafficking victims, with much of the funding to be paid out over three years. Of that, $53 million went to 77 groups, including Hookers for Jesus and the Lincoln Tubman Foundation, that provide direct services to trafficking victims.

The Lincoln Tubman Foundation, awarded $549,345 over three years, was launched by the daughter of a prominent local Republican who supported President Donald Trump as a delegate at the 2016 convention and is close to South Carolina Republican Senator Tim Scott.

Its founder Brooke Burris told Reuters that services for adult trafficking victims in the Charleston area are severely lacking. She said the foundation will fund her Tri-County Human Trafficking Task Force project to offer more direct services and train law enforcement to better spot victims.

“We have almost no resources,” she said, noting that South Carolina’s state laws did not outlaw human trafficking until 2012.

The need for more awareness was apparent during a recent training session her task force hosted with law enforcement: Few officers raised their hands when a former FBI agent asked if they had ever dealt with human trafficking.

In September, South Carolina’s Sen. Scott wrote a letter calling on OJP to do a “prompt review” of the application. A Scott spokesman said such letters are standard for grant requests and that he “didn’t endorse” the project.

OJP’s Sullivan said the grant review process was the same for all recipients and a letter from a senator “would not influence a funding decision.”

Reviewers cited the Lincoln Tubman Foundation’s lack of experience. The task force is still in its “infancy” with “little to no experience,” they wrote.

“I knew those were some of our weakest points,” Burris said. Formed in 2018, the foundation is headquartered in a mansion owned by her parents, but she said she is looking for new office space. Meantime, she said she has been fielding calls at all hours to help adult trafficking victims find hotels.


This is not the first time Hookers for Jesus has received federal grant money. In 2017, Nevada announced it was giving Lobert’s group nearly $300,000 through the federal Victims of Crime Act. In her grant application at the time, Lobert said church participation was voluntary.

The funding was not renewed in 2018 after the state obtained Hookers for Jesus program manuals saying it was “mandatory” for guests of the group’s shelter, Destiny House, to attend services and volunteer at a specific church. Its staff training manual said homosexuality is immoral and abusing drugs for pleasure is “witchcraft.” Reuters obtained the manuals through a public records request.

One Nevada grant reviewer in 2018 questioned whether Hookers for Jesus treated victims like “prisoners,” while another observed the program seemed too controlling and expressed concern it forced victims to attend Bible study, the grant review documents show.

“We felt their policies were not victim-focused or evidence-based,” said Kelsey McCann-Navarro, whose office in Nevada’s Division of Child and Family Services decided not to renew the funding.

Lobert denied having policies requiring religious participation. She declined to provide Reuters a copy of her updated manuals. She added that she did not recall that the 2018 versions denounced homosexuality. “That is probably something we don’t have anymore,” she said.

Reviewers evaluating its 2019 federal application said Hookers for Jesus staff had little experience handling forms of human trafficking involving minors, men and foreign nationals.

In an interview, Lobert questioned the expertise of the reviewers. “I really caution when someone says they are an expert,” she said. Unless they run a safe house or have survived trafficking themselves, “they don’t have true expertise.”


Hunting money launderers? There’s AI for that

By Dean DeChiaro

Encouraged by a recent green light from regulators, the financial services industry is exploring new ways of using artificial intelligence to help them comply with banking regulations and to better detect fraudulent transactions used by criminals and terrorists.

This move toward new approaches to banking compliance comes despite growing concern that more government scrutiny could force the United States to fall behind similar efforts already underway overseas.

Last December, federal regulators, including the Federal Reserve System’s board of governors and the Federal Deposit Insurance Corporation, issued a joint statement encouraging the industry “to consider, evaluate and, where appropriate, responsibly implement innovative approaches” to detect money laundering operations and terrorist financing.

“The agencies realize that private sector innovation, including new ways of using existing technologies or adopting new technologies,” such as artificial intelligence, “can help banks identify and report money laundering, terrorist financing and other illicit financial activity by enhancing the effectiveness and efficiency” of their compliance programs, the regulators said.

The go-ahead resulted in a flurry of activity by banks, consulting firms and fintech companies, all of which are seeking less expensive, more streamlined ways to monitor banking transactions for possible money laundering, the cost of which has risen to roughly $25 billion per year since new compliance requirements were put in place following the Sept. 11 terror attacks.

Tim Mueller, the managing director for global investigations and compliance at Navigant, a Chicago-based consulting firm, said the current enthusiasm reminds him of the late 1990s, when he was advising banks on how to enhance their businesses using the World Wide Web.

“Although you could make some pretty significant arguments that AI is going to be bigger than the internet,” said Mueller, who gave a presentation on Navigant’s efforts to harness the technology at the annual meeting of the World Economic Forum last month in Davos, Switzerland.

“It’s kind of impossible to ignore,” he added. “If you don’t start to understand how AI can help you serve your clients better, […] you’re going to be out of business and irrelevant in the very near future.”

Still, the industry is proceeding with caution. While banks and their partners feel emboldened by the December notice from regulators, they remain wary of its stipulation that banks may not be fully exempt from punishment if pilot programs expose existing gaps in their compliance operations.

“If I’m an institution, that makes me a little nervous,” said David Stewart, who leads the financial crimes and compliance division at SAS, a North Carolina-based software company.

“Some of the things we’re doing with our clients in Hong Kong are substantially more innovative than what our clients have an appetite to do in the United States because they feel they’re under such heavy regulatory scrutiny,” Stewart said.

Increasing efficiency

In partnership with Ayasdi, a Silicon Valley-based machine-learning company that has also worked with Citibank and HSBC, Navigant is seeking to challenge the traditional means of weeding out possible money laundering when monitoring a large number of transactions, which Mueller described as “pretty dicey.”

Currently, transaction monitoring typically scrutinizes a limited data set and relies heavily on humans trained to spot red flags. Transactions are segmented by broad categories such as a client’s business type, location or risk level as determined by the bank, which allows significant data to fall through the cracks.

The strategy tends to result in a high number of false positives — normal banking behavior initially flagged as suspicious. According to Mueller’s presentation at Davos, an estimated 95 percent of alerts generated in the first phase of a transaction review are found to be false-positives, and 98 percent of alerts do not lead to the filing of a suspicious activity report.

Enter Ayasdi, which used artificial intelligence to mine four years’ worth of transaction data belonging to two of Navigant’s clients, Scotiabank of Canada and Intesa Sanpaolo of Italy, for instances of possible money laundering.

Instead of analyzing transactions using 20 or 30 categories, the banks were able to see data generated across 500 data points, said Alex Baghdjian, Ayasdi’s financial services strategy lead. False positives plummeted as a result, while the number of alerts that were chosen for further review rose.

“Not only were we able to get rid of the noise — all these alerts that were non-productive — but we also identified all these new areas of risk that were being escalated,” said Baghdjian. “Not only did we increase efficiency, but we drastically increased effectiveness as well.”

Navigant and Ayasdi aren’t alone in their pursuits. Bigger banks like WellsFargo are also experimenting with machine learning in the anti-money laundering sector. But firms are reluctant to charge too far ahead, lest they run afoul of regulators grappling with the promise and pitfalls of artificial intelligence.

“It’s not an industry that lends itself to being first movers,” said Mueller.

Regulatory woes

The December notice by regulators, which struck a largely optimistic tone while still warning banks against getting greedy, is just one recent sign the government is growing more curious about, and yet suspicious of, new innovation in compliance procedures. And it follows a larger trend in fintech: The industry’s rapid growth is prompting regulators to closely track innovation that could change forever the way Americans bank.

For instance, the Federal Reserve Bank of New York on Friday launched a 10-member “Fintech Advisory Group” of bankers, attorneys and academics in order to “establish clear points of contact with senior representatives and thought leaders” in the fintech industry.

The group, which is scheduled to have its first meeting next Monday, “will also gather insights that may inform our interaction with market participants and institutions, our training and hiring efforts, and the application of innovative approaches for internal business use,” said Kevin Stiroh, executive vice president and head of the supervision group at the New York Fed.

The move marks a departure for the Federal Reserve System as a whole, which has historically taken a hands-off approach to fintech innovation compared with other banking regulators.

Other regulators are taking on their own initiatives. The Office of the Comptroller of the Currency and the FDIC have both signaled they’re willing to work with fintech innovators, and the Consumer Financial Protection Bureau recently proposed a “regulatory sandbox” in order to allow companies to experiment with new financial products without needing to worry about breaking the law.

Still, the stakes are higher when it comes to anti-money laundering, and firms have trained a nervous eye on the December notice’s condition that U.S.-based firms would not “necessarily” face penance for past violations uncovered by current experimentation. For Stewart of SAS, the U.S. regulatory stance stands in stark contrast to what he considers more lenient approaches by the United Kingdom and Singapore.

“It’s great that the regulators are putting these advisories out there,” he said. “But if we want to continue to be competitive within the financial services industry, our institutions can’t be at a disadvantage.”

Whitewashing a $10 Billion Money Laundering Scandal

In just two days in February, Sweden’s oldest bank saw more than one fifth of its market value wiped out. Allegations that Swedbank AB had facilitated money laundering spooked investors who hadn’t viewed the lender’s leading market position in the Baltics as big a risk. The bank’s response to a scandal that has now engulfed a large part of Europe’s financial industry has been inadequate. Its effort to contain the damage and protect senior management is in danger of backfiring.

Amid allegations that clients moved 95 billion kronor ($10.3 billion) of suspect funds through the bank, Swedbank published a hastily commissioned review by the Forensic Risk Alliance into 50 clients that may have been responsible for about 40 billion kronor of transactions. It was improbable that the investigation would reveal much in just a few weeks. The forensic accounting group wasn’t even the bank’s first choice: it stepped in to replace EY, which Swedbank had to drop because of the accounting firm’s links with $230 billion of suspect transactions at Danske Bank A/S.

The FRA report – a thinly filled, heavily redacted 24 pages – shows the suspect client accounts were terminated as of May 2017. The bank said it will now move to a second phase of analysis, digging deeper into the 50 relationships to outline their corporate structures and draw up organizational charts. That information won’t be made public, and the bank doesn’t plan to share anything else with the wider world, neither on the extent of the potential flows beyond those 50 accounts, nor on how it dealt with them.

That would be a mistake. If Swedbank and its peers are to show they are serious about mapping out how dirty money flows around Europe and that they really are doing all they can to combat future crime, they will need to share considerably more information.

Consider what FRA’s report didn’t address:

  • What was the sum that flowed through the bank?
  • How quickly did Swedbank suspend suspect activities that were flagged?
  • Who terminated the relationships? The bank or the client?
  • Were Swedbank’s systems and controls fit for purpose?

On a call with analysts, Swedbank’s head of investor relations said there is no need “for a deeper or broader, a wider investigation to be presented to the market,” because the report confirms “the bank is taking actions and have taken actions throughout the year.”

But all of these are crucial details if outsiders are to assess if the bank is equipped to prevent increasingly more complex and sophisticated money laundering frauds. In fact, systems and processes weren’t even the scope of the FRA review. For now, we only have management’s word for those being up to scratch. The same team is also being investigated for potentially breaching insider information rules after giving the company’s biggest investors advance warning of the allegations when they were first reported by a Swedish broadcaster.

It’s no surprise the report was met by a chorus of disappointment. From shareholders to Bill Browder, the U.S. investor who has made combating Russia money laundering a life cause, there were calls for more transparency.

Europe is only just starting to piece together the puzzle of how Russians were able to move billions of their money illicitly out of their home country via banks in the Baltic region and their correspondent lenders. Even Swedbank admitted that its “understanding and the knowledge of this topic is quite low.”

The region’s deeply fragmented regulatory and police effort to prevent money laundering has been a proved a boon for criminals. It’s time for banks to do their bit by being thorough in their own learning and showing exactly what went wrong at their end.

Minot man sentenced to federal prison for drug, gun, money laundering

BISMARCK – A 37-year-old Minot man was sentenced Monday, March 18, to more than 12 years in federal prison after being convicted on drug, gun and money laundering charges.

Dennis Allen Corwin was the leader of a ring distributing meth in the Minot and Bismarck area, according to a news release from the U.S. Attorney’s Office.

When he was arrested in Bismarck, authorities found approximately five pounds of meth and 30 firearms in his vehicle and shop in Minot. The drug ring had transported more than 70 pounds of meth from Mexico to North Dakota.

He was convicted on charges of conspiracy to distribute and possess with intent to distribute a controlled substance; distribution of a controlled substance; possession of a firearm in furtherance of a drug trafficking crime; possession or sale of stolen firearm; possession of firearms by a prohibited person; possession of a short-barreled shotgun; and laundering of monetary instruments, the U.S. Attorney’s Office said.

Corwin will be on supervised probation for five years following his release from prison.

How Wells Fargo Uses AI, Biometrics To Fight Money Laundering

Digital banking customers of today aren’t looking for the bank with the newest features — they’re looking for the bank that can keep their data safe. Any security mishap can send customers to one of the other digital banking apps that are ready and waiting for them.

In the new Digital Banking Tracker™, PYMNTS examines the ways digital banking is changing as security measures grow more stringent, and challenger banks look to amass more customers.

Around the Digital Banking World

One such brand looking to expand within the next year is German challenger bank N26, which is seeking to branch out of its native Europe and into the United States. Following a funding round of approximately $300 million, the fully digital bank is aiming to compete with both U.S. incumbents and challengers by the end of 2019. The challenger’s expansion comes as banks around the world are launching platforms of their own, including financial institutions (FIs) in Thailand and the Philippines.

Thailand’s United Overseas Bank, for one, is opening a fully digital brand this year called TMRW. The digital bank is designed to target millennial consumers who are more comfortable using digital services, and comes equipped with live chat features to support digitally native conversations.

Meanwhile, several global scandals have brought the importance of anti-money laundering (AML) protections to the forefront. The more than $220 billion money laundering scandal involving Estonia-based Danske Bank continues to affect the global banking world. Several banks, including Germany’s Deutsche Bank, are caught in the crossfire, with their own AML protections coming under scrutiny from German regulators.

Tapping into Emerging Tech: How Wells Fargo is Fighting Fraud

To protect against the rise of money laundering and digital fraud hammering banks, many are turning to new technologies to stem the tide. Wells Fargo, for one, is using artificial intelligence (AI) and biometric authentication tools in combination to track patterns that human analysts overlook, according to Chuck Monroe, head of AI enterprise solutions for Wells Fargo.

“We’re using AI to go through and look across the internet, including the deep dark web, [for] signals that would apply to a particular AML situation,” Monroe said in a recent interview with PYMNTS. “There are lots of opportunities in the AML space to leverage AI to look much [deeper], because no human could do that level of investigation.”

To learn more about how Wells Fargo is using AI and biometrics for AML, take a look at the Tracker’s feature story.

Deep Dive: Digital Banking and Anti-Money Laundering

As the banking world gets more digital and interconnected, many banks are starting to worry about money laundering. Take the banks that were engaging in routine business with Danske Bank, for example. Several of those banks are now being examined by regulators to ensure that they’re staying compliant with AML rules to keep launderers out.

That said, the digital banking world is expanding quickly, which means that banks across the globe need to keep a careful eye on the methods they’re using for AML and other fraud protections. To find out how banks are upgrading their security, take a look at the Tracker’s Deep Dive.

About the Tracker

The Digital Banking Tracker™, in collaboration with Feedzai, brings the latest news, research and expert commentary from the FinTech and consumer banking space. It also includes a provider directory that features the rankings of more than 250 companies serving or powering the digital banking sector.

Crypto Activist and Bitcointopia Founder Pleads Guilty to Charges: Land Fraud, Money Laundering

By Bitcoin Exchange Guide News Team

The way to bitcoin-utopia is laden with regulatory issues and scam artists. In a recent confession, Morgan Rockoons the founder of Bitcointopia and a well-known crypto activist has conceded to both charges against him in two bitcoin-related cases.

He had been charged with an illegal wire transfer as well as being party to a real estate scam venture.

What was going on with money laundering?

In early 2018 Morgan Rockoons was under the microscope as the government came down heavily on him for money laundering. As such activities make traceability of money extremely hard and raise fears of funding criminal activities, this is considered pretty serious and dealt with appropriately.

When the case came out, news outlets were projecting this as a test case to see how far the judiciary of the land was willing to loosen the leash and allow cryptocurrency advocates to trade in fiat currency.

However, the events that transpired seem to suggest this has little to do with Crypto and more with a trader not following clearly laid down rules. According to the officials, Morgan Rockoons was running his operation without the requisite license and not following protocol. He is alleged to have transferred “about $9,200 in bitcoin to the agent for $14,500 in cash, taking the remainder as a transaction fee”.

That is exactly what the recent plea also seems to bring into focus; that the whole case had more to do with business fraud than any precedent-setting cryptocurrency case. This appears to be a simple case of a business being charged for money transmission violations without a proper financial license.

The Bitcoin City dream in ashes

At the time of his arrest, Rockoons was rather boisterous and was playing up his crypto credentials. After being released on bail he had started pushing the blockchain agenda more. And one of the ventures he advocated was a plan to start an idealistic community. He quickly went about advertising this “Bitcoin City”.

Soon all his channels and associates were pushing for this, a Disneyland-Ishq venture. To this end, the Bitcointopia Inc was launched giving everyone the impression Morgan Rockoons was a visionary and futurist.

However, this all came crashing down when he was arrested again. This time the prosecution alleged that the whole scheme was a fraud. Rockoons and his partners had pushed to sell almost a 1000 acre of undeveloped land in Elko County, Nevada to build a city centered around automation and blockchain technology.

As facts came out it became apparent that most of this was federally owned land with only about 10 odd acres in the embattled CEOs or his company’s name. In January, he seemed to be more combative, twitting:

” I am going to court on Monday at 2 PM, in room 4A, if you support me and my mission to protect Bitcoin & build a Bitcoin City please come to court and show support, it would mean the world to me, PS, Jail Sucks, Love Morgan, From FEDERAL PRISON XO”.

Yet that fire seems to have been extinguished in a little over a month as on the 8th of this month he pleads guilty to both charges of wire and land fraud.

As this publication has repeatedly stated, the actions of individuals cannot and should not reflect on the technology. Unlike men ideas are incorruptible. The idea of a freer and more transparent future should not get muddled by the actions of someone.

Weather Rockoons actions were deliberate or misinformed if a law has been broken and a fair trial has ensued then punishment should ensue.

Three Anti-Money-Laundering Trends Financial Institutions Should Know In 2019

By Tony Raval

As criminals become more sophisticated at performing money laundering activities, regulators are increasing their commitment to anti-money-laundering (AML) compliance. For banks, this means they must work diligently to maintain AML compliance amid a sea of growing regulation. It is now more important than ever to remain on top of AML compliance measures within institutions. In this article, we will explore three of the key anti-money-laundering trends and challenges for 2019.

1. AML Compliance For Cryptocurrency Becomes Standard

Global cryptocurrency adoption will continue to expand in 2019. This is causing regulatory bodies to work diligently to create AML standards for cryptocurrency companies. In 2018 we saw the release of the Fifth AML Directive in the EU, which created regulatory obligations for crypto exchanges. The Financial Action Task Force (FATF) will also be releasingspecific international AML standards for crypto companies in mid-2019. As more governments acknowledge the role of cryptocurrencies in the financial system throughout the year, crypto companies will need to become serious about maintaining AML compliance.

Many crypto companies are realizing that regulations are necessary in order to keep expanding the cryptocurrency market. Regulations are not something they can avoid, and crypto companies are going to have to deal with them. As one crypto company executive put it, “One cannot exist without the other.”

2. AML Becomes Automated As False Positives Continue To Increase

The number of people with access to financial services has steadily increased over time. Financial technology (fintech) is facilitating financial inclusion in previously underrepresented populations around the world, leading to an increase in consumer adoption of financial technologies and services, especially from fintech disruptors. This is increasing the transaction volume financial institutions must monitor to maintain AML compliance.

Many financial institutions use outdated technology to run their AML programs. This technology leads to a high volume of false positives, which has adverse effects on banks. Not only does this add more friction to customers during onboarding and payment processing, but it also increases operational costs for financial institutions. As fintech disruptors continue to gain market share among consumers, many banks are shifting toward automated technologies to completely transform their AML procedures.

Expect to see fraud and risk departments in many financial institutions increase their adoption of AI and machine learning for AML monitoring. AI can detect patterns in large volumes of data as well as adapt to changes in criminal activity over time. Plus, many fraud management departments will likely add blockchain technology to monitor complex transactions in conjunction with AI technology. Since blockchain is a cryptographic ledger that is decentralized, secure and immutable in nature, it is an ideal technology for maintaining AML compliance. This means that building an AML system with AI on the blockchain will identify and stop suspicious transactions effectively with minimal friction and high efficiency.

Overall, these tools should increase the effectiveness of AML while also simplifying the process for many financial institutions.

3. Financial Institutions Work To Combat Identity Theft

With the number of data breaches reaching an all-time high in 2018, the amount of identity theft taking place in the global landscape is staggering. Criminals are using stolen identity information to create synthetic identities they then use to gain access to financial services to perform nefarious activities such as money laundering. These facts are making know your customer (KYC) an essential part of an overall AML strategy. It’s a part of the process financial institutions cannot ignore.

Regulatory technology companies are creating solutions that aim to make identity management much easier for financial institutions. Rather than relying on an internal team, financial institutions can now use identity verification solutions to quickly and efficiently verify customer identities during onboarding. Automated identity checks offer companies faster results, lower consumer friction and more accurate detection of high-risk individuals.

These technologies will help financial companies remain in compliance and avoid costly fines.

It is more important than ever to maintain AML compliance. With money laundering taking place in increasingly complex ways, the pressure is mounting for financial institutions to combat financial crime. For many institutions, increased regulations will cause them to refine their AML strategies. This will cause many fraud and risk assessment departments to use new technologies to combat money laundering within their institutions, from AI for transaction monitoring to identity verification solutions for KYC checks. These trends will shift the AML landscape in 2019 and lead to better risk management by financial institutions overall.

‘El Chapo’ renews U.S. law enforcement concerns about money laundering via prepaid cards

By Brett Wolf

NEW YORK (Thomson Reuters Regulatory Intelligence) – The recent trial of Mexican drug lord Joaquin “El Chapo” Guzman has reignited U.S. law enforcement officials’ concerns about the use of prepaid cards to launder proceeds of crime.

The purported abuse of prepaid cards by Guzman’s organization to move drug proceeds out of the United States, as depicted in the trial, was “definitely not shocking,” John Tobon, a senior official with Homeland Security Investigations (HSI), told Regulatory Intelligence.

While prepaid card providers are required to have anti-money laundering programs{here} and must report suspicious activity, there remains no requirement that individuals moving cards loaded with cash report the funds when crossing U.S. borders.

In 2011, the U.S. Treasury Department proposed a rule{here.pdf} aimed at forcing those moving prepaid cards loaded with more than $10,000 in or out of the country to declare the funds – just as a similar amount of cash or traveler’s checks would have to be disclosed under existing rules.

But Treasury’s Financial Crimes Enforcement Network (FinCEN), facing industry pushback, has not finalized the rule{here}.

During Guzman’s trial last month, the jury heard testimony that the Sinaloa Cartel led by Guzman used prepaid cards to move drug proceeds from New York to South America to pay for cocaine. The cards, loaded with proceeds of narcotics sales in the United States were transported overseas and the cash was withdrawn at ATMs, the jury heard.

The jury convicted Guzman of money laundering conspiracy and other crimes, and the money laundering witness testimony served as a reminder to law enforcement that FinCEN has not issued a reporting requirement.

U.S. law enforcement officials with Homeland Security Investigations (HSI), which probes cross-border money laundering schemes, consider FinCEN’s failure to enact a prepaid card cross-border reporting requirement problematic.

“I’ve been really fighting, getting into shouting matches with FinCEN personnel because it’s one of those things where the industry has really gone out of their way to thwart these rules,” HSI’s Tobon said.

FinCEN, which in 2016 told Regulatory Intelligence that the effort to develop a cross-border reporting rule for prepaid cards was “not dead,” did not respond to a request for comment for this story.

HSI continues to see prepaid cards used to launder money and the lack of a FinCEN rule on cross-border transport of the cards is “a significant vulnerability,” Kevin Tyrell, assistant special agent in charge with HSI in Miami, told Regulatory Intelligence.

While HSI officials are concerned about transnational organized crime rings smuggling cards loaded with dirty cash out of the country, such schemes do not always involve “mules” who carry the cards. In some cases, criminals simply mail prepaid cards with impunity, Tyrell said.

If U.S. authorities conduct an “outbound inspection” of packages at a mail facility and discover a package full of traveler’s checks, they can seize the instruments and investigate whether required reporting occurred, Tyrell said.

“But if they find a package full of prepaid cards, they still can’t do anything, they just have to let them go,” Tyrell said.

FATF Issues Preliminary Guidelines on Digital Assets to Combat Money Laundering

By Ana Berman

The Financial Action Task Force (FATF), an intergovernmental organization that develops policies against money laundering, has published preliminary guidelines for cryptocurrencies on its website on Thursday, Feb. 28.

The FATF held a meeting on preliminary crypto requirements on Feb. 22. According to the organization, the new text of the Interpretive Note to Recommendation 15 — which contains  requirements for regulating and supervising digital asset services providers — has been finalized.

However, the FATF expects to benefit from private sector consultations that are scheduled for May, asking entrepreneurs to send their comments to the organization by Apr. 8. Once the recommendation is finalized, it can be formally adopted by the FATF. The final meeting is scheduled for June 2019.

Firstly, the task force urges countries to follow guidelines to prevent money laundering and terrorism financing with cryptocurrencies — an amendment from a previous edition signed in 2018.

Moreover, digital asset providers are obliged to be licensed or registered in the jurisdictions they were created, and their owners have to provide identity information to relevant authorities. The FATF also adds that crypto products must sometimes be certified, should the host country requires it.

The guidelines also compel governments to form adequate regulation and supervision over digital assets. The FATF emphasizes that monitoring must be conducted by a competent authority instead of a self-regulatory body in order to successfully prevent money laundering and terrorism financing. The country that applies the guidelines must also establish criminal, civil or administrative sanctions for violating the rules.

Finally, the FATF obliges digital asset providers to obtain and keep records of senders and beneficiaries of crypto transfers, and to provide the data to appropriate state or international authorities should they require it. If a transaction is suspected to be illicit, the country has to take measures to freeze the action or prohibit the transfer.

The FATF currently has over 30 member countries. European countries make up a large percentage of the member states, including the United Kingdom, Switzerland, Germany, France and others. While the organization first issued a “risk-based-approach” guideline for cryptocurrencies in 2015, the organization amended and updated it in late 2018 following the pop of the initial coin offerings (ICO) bubble that began in 2017.

British Columbia’s money laundering is an emergency. The public deserves an inquiry.

By David Moscrop

In June 2018, former Royal Canadian Mounted Police officer Peter German released his report into money laundering in British Columbia. His independent review found that more than $75 million (or 100 million Canadian dollars) had been laundered through the province’s casinos. Canada’s westernmost province is home to about 4.8 million people, so that’s a hefty sum per capita.

In January, we learned that German’s figure was probably low — very, very low — given that an international report put the total amount laundered at more than 1 billion Canadian dollars per year. (The Canadian government knew this, evidently, but didn’t share with British Columbia in the summer.) The new report also includes details about sources of gangsterism not found in the German report. Now, British Columbia is undertaking two parallel processes to better understand what’s happening: a second German report, this time focused on real estate, horse racing and luxury vehicles, and a Department of Finance review.

All of that is perfectly fine — and perfectly inadequate.

Wise and wily governments survive in the long run because they can anticipate and manage crises. Journalist John Ibbitson calls it the “Rhodes Maxim,” citing Paul Rhodes, a former Progressive Conservative press secretary in Ontario, who once told him that the government he served handled controversies by asking itself “How will this end?” and then going there. Smart.

The maxim comes to mind today, with demands in British Columbia for a public inquiry into money laundering in the style of Quebec’s 2011 Charbonneau Commission, which probed public works corruption. That commission’s findings led to millions of dollars in fines, the resignation of politicians and a handful of high-profile arrests — alongside 60 reform recommendations. British Columbia’s largest union, the Government and Service Employees’ Union, is leading the call for a deep dive into the dark cave of misdeeds that hide links to fentanyl trafficking, out-of-control real estate prices and, almost surely, corrupt, complicit and incompetent public officials past and present.

As public pressure mounts on the government to launch an inquiry, the city of Vancouver — a central site for money laundering — has joined the call, as has Richmond, B.C., and the province’s capital city, VictoriaSo has the B.C. Green Party, whose support is critical for the government in the legislature. British Columbians already overwhelmingly support the idea, with 76 percent in favor and 73 percent expecting that an inquiry would expose the truth about what’s been going on in the province’s shadows for all these years — and what it has cost British Columbia in dollars, reputation (the scheme has become known as the Vancouver model), real estate prices, cost-of-living challenges and even lives (money laundering is linked to fentanyl trafficking, which has killed thousands in the province since 2012).

The entire thing is an emergency. Recently, a federal case — known as the E-Pirate investigation — related to money laundering in British Columbia resulted in stayed charges when the RCMP botched the case by exposing the identity of an informant. The investigation reads like something out of a crime novel. As investigative journalist Sam Cooper, perhaps the top journalist on this file, summarized it, “The E-Pirate investigation found loan sharks allegedly connected to drug-traffickers in China used legal and illegal Metro Vancouver casinos to wash drug cash, helping ultrawealthy high-rollers from China buy Vancouver real estate, and fund fentanyl imports into Canada.”

The truth must come out. And it looks like there’s lots to out.

So far, B.C. Premier John Horgan has been noncommittal and prone to temporizing. That’s unwise. He cites cost, time and existing fact-finding efforts as reasons to wait, as well as concerns that such an inquiry could interfere with developing prosecution efforts.

Please. A wide-ranging, long-term commission is critical to exposing the truth and rooting out corruption in the province. And it’s well worth the money (as a member of the Charbonneau Commission has said) — it might even pay for itself in fines and funds saved through reforms. Moreover, findings from a commission, which can compel witnesses to appear before it and require them to testify under oath, can be used in prosecutions. Meanwhile, every day without an inquiry is an extra day for thugs and crooks to get away with illicit acts that harm citizens and residents of the province.

The public is tired of waiting and already deeply suspicious of the province after years of inadequately addressing money laundering and its attendant issues under the previous government. Now, Canada and the world are watching and waiting. The premier and cabinet ought to recognize this fact now and follow the Rhodes Maxim by starting out where this issue will inevitably end and saving everyone the time, energy and frustration from the political posturing that will precede an eventual capitulation.

The province, first under the Liberals and now the New Democrats, has already wasted too much time waiting to get serious about organized crime. The delay is undermining governance in the province and destroying the lives of innocent people. Everyone knows what the right thing to do is. All that’s left is to do is get to it.