Narcos Canada: Canadian banks & professions deal with significant proceeds of crime from narco trafficking and serious crimes; Canada listed again as “major money laundering country”; plus 10 money laundering areas of concern identified by the US for Canada

By Christine Duhaime | March 12th, 2020

Canada still on the Majors List

Canada made it on the “Majors List” in the annual US State Department’s International Narcotics Control Strategy Report (“INCSR“) again this year.

The Majors List is three lists and it designates countries that are (1) “Major Illicit Drug Producing and Drug Transit Countries”; (2) “Major Precursor Chemical Source Countries”; or (3) “Major Money Laundering Countries”. In 2020, Canada is on two of the three Majors List as both a “Major Money Laundering Country” and a “Major Precursor Chemical Source Country”.

Canada a “Major Money Laundering Country”

The 2020 INCSR, published last week by the US Department of State, identifies Canada as a “Major Money Laundering Country” along with several others including some well-known money laundering countries such as St. Kitts and Nevis, Dominican Republic, Mexico, Argentina, Venezuela, Vietnam, Belize, Curacao, Brazil, BVI, Cayman Islands, Colombia and Iran.

A “Major Money Laundering Country” is defined under US law as one whose financial institutions process financial transactions involving “significant amounts of proceeds of crime from international narcotics (“narco“) trafficking. Based on changes to money laundering typologies, that definition was expanded to include professions (e.g., tax advisors, accountants, company incorporators, lawyers), non-financial businesses (“NFB“) (e.g., casinos) and alternative value transfers (e.g., digital currencies) to recognize countries whose banks, NFBs, professions and other value transfer systems process transactions involving significant amounts of not just drug trafficking but also proceeds of crime from serious crimes.

Canadian banks and professions are dealing with “significant” proceeds of crime from narco trafficking and serious crimes

As a result of being on the Majors List, the 2020 INCSR found that Canada’s banks, NFBs (such as casinos), professions (such as accountants, tax advisors, lawyers), and alternative value transfer systems (such as Bitcoin and Bitcoin exchanges), deal with and process significant amounts of proceeds of crime from narco trafficking and from serious crimes.

The 2020 INCSR also identified Canada as a â€œMajor Precursor Chemical Source Country” along with several other intense drug producing countries such as Argentina, Afghanistan, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Mexico and Russia.

This year’s report is different however, with many new areas of concern for money laundering in Canada identified and several others that were identified in the past that are now gone, which may mean that Canada has made a dent in financial crime mitigation or that high risk areas have shifted (to the darknet and Bitcoin), or perhaps both.

10 areas of money laundering concern for Canada in the 2020 INCSR

There are 10 points of concern in the 2020 INCSR in respect of Canada as follows:

One – Digital currencies and real estate used for criminal activities

According to the 2020 INCSR, there is room for improved collaboration with Canada in three areas namely, digital currencies (like Bitcoin); the darknet (which by definition mean Bitcoin and so-called dark coins); and real estate transactions.

The 2020 INCSR specifically says that the US would welcome further collaboration with Canada on strengthening coordination on real estate and digital currencies used for criminal activities and investigations involving the darknet.

Two – Canada is shipping containers of cannabis to the UK

The 2020 INCSR reports that the UK has reported the illegal importation of large shipments of containers of cannabis from Canada.

Three – Violent Nigerian narco trafficking a problem in Canada

Nigerian based narco trafficking networks are popping up in Canada, following a path of similar pop-ups in France, and they are engaging in violent turf wars. The threat has grown in Canada to such an extent that the RCMP is planning to open an office in Nigeria in 2020 to address the growing threat to Canada of narco trafficking of Nigerians. The INCSR notes that illicit drugs often transit through Mozambique after Nigeria before arriving in Canada.

Four – Cocaine from Colombia coming to Canada from Guyana

Colombian cocaine trafficked to Canada is being transited from Guyana, after first being smuggled from Colombia to Venezuela. The cocaine is hidden in commodities to make it past borders. Canada is now the largest importer of goods from Guyana. TCOs use trade partners, and in fact often create them, to narco traffic. The commodities used to smuggle cocaine from Guyana to Canada would likely include shipments of sugar, rice and vehicles.

Five – Shelf companies used by criminals, narco traffickers and money launderers

Perhaps one of the most important parts in the 2020 INCSR is the concern expressed over the use of shell companies used by narco traffickers, criminal organizations, PEPs and regimes to evade sanctions and launder money, and of shelf companies to hide the true identity of shareholders of private companies for money laundering. Canada, and Vancouver in particular, has a pervasive use of shell and shelf companies, both of which are typically created and sold by larger law firms. In this post from 2016, we explain the difference between shelf companies, shell companies, numbered companies and beneficial ownership. As noted in the 2020 INCSR, the opacity of corporate structures through shell and shelf companies is of serious concern in the anti-money laundering law community.

Six – Canada requires a visa for St. Kitts and Nevis passport holders

Probably as a result of the program of St. Kitts and Nevis where anyone from anywhere can buy a passport from St. Kitts and Nevis provided they paid hefty fees and invest in a hotel-chain condo unit or a “sugar fund”, the 2020 INCSR mentions that Canada now requires that people who hold a passport from St. Kitts and Nevis must apply for a visa before entering Canada because they are high risk. For example, the Iranian foreign national, Ali Sadr Hashemi Nejad, who is on trial in the SDNY for money laundering and sanctions avoidance, was able to buy a St. Kitts and Nevis passport right after the US stripped him of a previously approved asylum claim and he was forced to leave the US.

Seven – Canadian marijuana producers are shipping product to the Caribbean

Eastern Caribbean countries such as Barbados and Antigua report an increase of marijuana being illegally imported that is from Canada, of a high grade, meaning it’s originating from British Columbia, a sign that Canadians are expanding their own narco trafficking activities.

Eight – Transnational criminal organizations in Canada are still narco trafficking cannabis to the US

Several transnational criminal organization in Canada are still exporting cannabis products into the US illegally.

Nine – Proceeds of crime from other countries is laundered in Canada

According to the 2020 INCSR, proceeds of crime that are foreign generated are parked in Canada and laundered and that laundering process involves professional money launderers, constituting a key threat.

Ten – Canada has a proliferation of professional money launderers

The 2020 INCSR identifies that Canada has professional money launderers used by transnational organized crime groups and narco traffickers and moreover that the access of transnational criminal organization to professional money launderers represents the most threatening and sophisticated actions in Canada.

Why is there an annual INCSR produced by the US State Department?

Pursuant to US law for foreign assistance, the US government makes an assessment in connection with providing foreign aid to countries (whether financial, technical, intelligence or other aid and assistance) of the extent to which countries comply with international treaties they signed in respect of financial crime. For example, Canada signed the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances which requires taking effective action against money laundering. Under US law, financial aid and assistance can be withheld for countries on the Majors List when they fail to meet international treaty obligations in respect of money laundering, narco trafficking and illegal drug production. And thus the annual report is to evaluate compliance by countries with narcotics and money laundering treaties for financial assistance.

Canadian accused of money laundering as part of sophisticated lawyer-concocted shell operation to hide proceeds of crime, extradited to New York and indicted

By Christine Duhaime | March 6th, 2020

A Canadian charged with money laundering, Enzo Vettesse, was extradited to New York last week and a 2013 sealed indictment against him, was unsealed.

On March 18, 2013, Montrealer Vettesse was caught in New York transporting a suitcase filled with US$245,000 in cash and confessed to US law enforcement that he was traveling with the money to launder it. He was released because, it appears, he then assisted US law enforcement to take down the alleged ring leader of the money laundering operation, subsequent to which his extradition was sought.

The ring leader is alleged to be Edgar Belapatino, from Peru who lives in Quebec. He too is indicted in New York and is or is being extradited.

According to an investigation by Homeland Security Investigations and the IRS, Belapatino ran a sophisticated money laundering operation to wash bulk cash using shell companies set up with lawyers to conceal the illicit source of funds from the money laundering operation.

His activities laundering money as a service, in this case bulk cash through shell companies, involved trade based money laundering where false invoices are used to create a fake paper trail.

The bulk cash was the proceeds of crime alleged to be from the trafficking of narcotics.

Homeland Security Investigations intercepted communications between Belapatino and his lawyer about setting up the shell companies in a lax anti-money laundering jurisdiction to hide proceeds of drug trafficking.

It is not Belapatino’s first brush with the law.

In 2007, Belapatino was given an ultra light sentence in Montreal of only three years for obtaining fake passports from Mexico in 2003, which he sold to 100 foreign nationals from Peru. He then smuggled those 100 Peru nationals into Canada illegally for a fee of approximately $10,000 each. It is not known how he laundered those proceeds of crime or if he was charged with money laundering for his large scale organized human smuggling operation.

Two bank employees charged with money laundering and creating “doctored” bank records to steal over $1 million

By Christine Duhaime | March 5th, 2020

In the Southern District of New York, two employees of a large national bank were charged with money laundering, bribery and wire fraud in connection with activities they allegedly undertook to create “doctored” bank records in order to steal over $1 million.

Specifically, the US government alleges that they knowingly devised a scheme to defraud others of their property and money, by false and fraudulent pretences, representations and promises and created fraudulent bank documents in the process. Further, that they attempted to conceal and disguise the ownership of the proceeds of their activities in violation of anti-money laundering law, and to transfer the proceeds of the property stolen from others through a bank account.

At their arraignment in New York, the accused bank employees argued that the AG should not inform the bank of their arrest, an argument that was rejected by the Judge.

It seems like a very unusual and inappropriate suggestion by the accused to the Judge that the bank not be informed of their arrest and of the conduct over which they are accused, and to let them go back to work.

The employees are accused of bank fraud and money laundering. The documents they are alleged to have “doctored” involve documents of the bank involving real customers. There’s no question, as a matter of law and ethics, and to preserve the integrity of the investigation and of the prosecution that the bank must be informed and the accused prohibited from any further access to the bank’s premises, files and systems.

One can’t imagine a situation where it would be advisable to reposition back into a financial services company, employees suspected of doctoring bank records.

You can read the charges here.

ICO founder with £220,000 in cash to store

By Christine Duhaime | March 5th, 2020

Inner City Press, a blog that covers trials in the Southern District of New York, and which covered one of the trials associated with the initial coin offering (“ICO“) of OneCoin, released an email by the founder of OneCoin, Ruja Ignatova, where she said she had £220,000 in cash and wanted it stored in London.

ICO founder says she has £220,000 in cash to store.

OneCoin is a US$4 billion scam that took investments from people in 175 countries. It represented to have its own Blockchain and digital currency exchange called Xcoinx, where OneCoin was allegedly listed and free-tradable. However, OneCoin did not have a coin, a Blockchain or an exchange.

Ruga Ignatova

Ignatova (here) sent emails explaining that an exit strategy would be to take the money and run and blame someone else.

Ignatova did run, the money disappeared and she has not been seen in several years. People that worked at OneCoin suggested on a podcast that the mafia allegedly infiltrated OneCoin. It could be that the “blame someone else” is going to be the mafia.

One of the persons Ignatova writes to about having £220,000, Robert Courtneidge, is a payments specialist, who is speaking at something called Blockchain Europe 2020, who works closely, allegedly, with Her Majesty’s Treasury and Financial Conduct Authority.

Several banks are hitting the stage with Courtneidge at Blockchain Europe 2020, including ING Bank, Commerzbank AG, Rabobank, Eurobank, Bank Hapoalim, as well as the European Banking Authority.

According to the Financial Times, Courtneidge was, until a few days ago, a director of a company called e-payments, that provides payment processing for prostitution services, multilevel marketing systems and the digital currency sector that almost no one has heard of. It was suspended by the organization he allegedly works closely with, the Financial Conduct Authority, for lax anti-money laundering compliance.

US releases national strategy for anti-money laundering threats to US financial system

By Christine Duhaime | February 8th, 2020

The US Department of the Treasury has released a “2020 National Strategy for Combating Terrorist and Other Illicit Financing“, which provides a roadmap to identify current money laundering and terrorist financing threats and provides strategies to mitigate the identified threats and risks.

In the Strategy, some of the key money laundering risks are identified as the proceeds of crime from fraud (securities fraud included), online cybercrime and drug trafficking and from activities of transnational criminal organizations. Fraud is identified as the largest threat.

One of the key methods identified is the use of Bitcoin and other digital currencies that are used to launder proceeds of crime, often through encrypted messaging apps and on the darknet.

In the Strategy, the use of shell companies to hide the identity of control persons behind shareholders of private companies is also identified as a key risk. The Strategy notes a study by the US Treasury that found that shell companies were used in a substantial portion of tax evasion and fraud cases, generating proceeds of crime. The problem is compounded, according to the Strategy, when money launderers structure companies through AML lax jurisdictions, making it hard to un-peel the layers of owners of companies.

The Strategy also addresses risks in the real estate sector, noting that in money laundering cases, studies show that real estate professionals such as mortgage brokers, real estate agents and to a lesser extent, real estate lawyers, were the dataset most involved in facilitation of real estate transactions that involved money laundering. The examples in the Strategy include money from China used for real estate.

The Strategy discusses the role of lawyers and notes that lawyers are not required to understand the nature or source of income of clients or potential clients, and yet they serve as access points to the US financial system, making them vulnerable to abuse by clients.

The Strategy notes that it is well-established law that privilege and the work-product doctrine do not apply to legal services where the activity was or is criminal or involves fraud and goes on to highlight the increased action by law enforcement against lawyers who assist in narco trafficking and whose trust accounts are used for criminal or fraudulent activities by clients. It provides examples, particularly of securities fraud, where lawyers provided services to facilitate securities fraud and were prosecuted. The Strategy notes that some lawyers provide services that are not the provision of legal services.

To strengthen compliance and disrupt illicit financial activities, the Strategy recommends a number of actions to take including implementing a risk-based approach to supervision, improving reporting obligations, implementing an enhanced focus on supervising transactions involving digital currencies and exchanges because of their high risk nature, and improved comprehension and attention paid to real estate transactions and finally, improved collection of beneficial ownership data to identify the control persons behind shareholders of private companies.

Accountant who worked with law firm in Panama Papers scandal faces ID theft, as well as money laundering charges

By Christine Duhaime | February 4th, 2020

Accountant Richard Gaffey, who was charged with money laundering offences, among others, in connection with the Panama Papers scandal must face charges of identity theft at his trial in connection with working with the law firm Mossack Fonseca, a judge ruled last week in New York.

Gaffey had applied to have the ID theft charges dismissed.

The case is interesting because the US government is pursuing, in part, the issue of beneficial ownership in the case. They allege that the accountant helped clients of the Mossack Fonseca law firm, and of his firm, use shell companies owned by sham foundations in offshore tax havens with lax anti-money laundering compliance to tax evade. In those corporate documents to set up the shells and foundations, Gaffey allegedly listed an elderly woman related to the client on the share registers, which the government alleges was fraud because she was not the shareholder.

Gaffey argued that he had not stolen identity, merely used it for corporate structuring purposes, and emailed it out and such.

Usually in tax structuring and tax planning files, it is accountants who set up shell and other companies, not lawyers. Conversely, in M&A, it is lawyers and not accountants who set up shell and other companies for financings. The difference is that using an accounting or advisory firm means that, for the client, no part of the accountant’s work is privileged or protected. It also means non-lawyers are often opining on complex tax law, and the advice is uninsured. People who want to be tax structured are always advised of this and opt to use accountants anyway.

Canadian CEO of Silk Road drug market who bragged that US law enforcement “don’t have sh*t on me”, nabbed and pleads guilty in the US

By Christine Duhaime | February 3rd, 2020

One of the kingpins of Silk Road, the online darknet drug market that operated with Bitcoin, and its alleged CEO, Roger Clark, a Canadian, pled guilty on Thursday in New York to conspiracy to distribute narcotics. He faces a term of incarceration of 20 years.

Clark was extradited from Thailand in 2018, and was charged with narcotics trafficking conspiracy, distributing narcotics by means of the Internet, computer hacking conspiracy and money laundering. He was facing a term of imprisonment of life if convicted.

Clark advised Ross Ulbricht on all aspects of the operations of Silk Road, including how to avoid detection of US law enforcement. He was known as Variety Jones online and he figured prominently in the Silk Road chat evidence in the trial of Ulbricht, the founder of Silk Road. According to this reporter, Clark was its CEO. Silk Road was a $200 million online drug marketplace that facilitated the sales of illegal drugs and services around the world.

At his plea hearing, a few days ago, Clark admitted he played a central role in Silk Road and had advocated for the use of violence against anyone who cooperated with law enforcement. Clark went so far as to urge and facilitate, the attempted killing of a person suspected of stealing from Silk Road. That attempt is one of the more controversial stories surrounding the Silk Road case because the person they were trying to kill lived in Vancouver and the hit man was said to be a member of the Hells Angels, who asked to be paid in Bitcoin way back in 2014. The apparent Hells Angels hit man was paid and the transaction was recorded on the Blockchain on the time and date corresponding to when Ulbricht chatted that he sent Bitcoin to pay for the deed, but the RCMP discredited the story and said that no murder took place.

The two were aware that their activities triggered the super kingpin laws. Clark wrote to Ulbricht: “Not to be a downer [but] …understand that what we are doing falls under Drug Kingpin laws, which provides a maximum penalty of death upon conviction. . . . The mandatory minimum is life.”

Ulbricht wrote: “All in.”

Ulbricht was convicted of money laundering with an underlying narcotics offence, narcotics trafficking, running a criminal enterprise, trafficking in false ID products, among others in 2015, and was sentenced to life in prison with no possibility of parole.

Clark once told a reporter in 2016, in respect of the US government that: “They don’t have sh*t on me.”

Clearly they did.

Two alleged fraudsters who hid in Canada, returned to the US to face US$17 million securities fraud litigation

By Christine Duhaime | February 3rd, 2020

For a few years, Canada was harboring two alleged fraudsters who were wanted in the US, and no one seemed to know much about it except US law enforcement – one was returned two weeks ago and the other was extradited from Canada in November.

The first, Ahmed Naqvi, who appears to be Canadian, fled to Toronto in 2015, after being charged by the SEC in Florida, and later charged criminally, with securities and wire fraud in New York. The second, Frederic Elmaleh, fled to Canada from Florida in 2017. He was charged with Naqvi. He also appears to be Canadian with US citizenship, but it is unclear.

Both men allegedly solicited over US$17 million from over 50 investors in Canada, the US and Saudi Arabia for fictitious sales of well-known public companies. Through Elm Tree Investment Advisors, which they allegedly controlled and operated in Florida, they allegedly sold units in their own investment fund that investors were told held shares of big tech companies such as Twitter, Alibaba, Square, Uber, Snapchat and others. Investors were guaranteed returns of 338% for holding shares in Twitter and 250% for holding shares in Square.

Allegedly, none of the funds yielded anywhere close to those returns and in fact they lost millions. The government alleges that the firm acted as a Ponzi scheme – money from new investors was used to pay back earlier ones.

Investors lost millions, in part because, as the AG for the SDNY alleges, Elmaleh used investor funds for fancy fast cars, such as a Bentley Continental GT and Maserati Gran Turismo, a 4,644 sq. ft. 5-bedroom Florida mansion with its own elevator, expensive watches and diamond jewelry.

  • Inside the Elmaleh mansion
  • The Maserati
  • The Bentley

When investors turned on the heat to be repaid, Elmaleh and Naqvi allegedly started to create fake financial documents, and allegedly to doctor other documents, to buy more time. They also allegedly made oral and written representations to investors to keep buying more time, telling them that their investments were generating positive returns when in fact, some of those investor funds were allegedly parked in real estate.

Naqvi then high-tailed it up to Canada where he was traced living in the Toronto area and Elmaleh followed two years later.

After Elmaleh was first arrested in 2015, a stash of weapons was located in his mansion, including:

  • AR-15 Bushmaster assault rifle with ammo;
  • Glock gun case with an empty 15 round magazine and 1 box of Luger ammo;
  • Blazing Brass ammo; and
  • Smith & Wesson 500 magnum revolver with 1 box of ammo.

Why a Canadian fund manager needed an assault rifle and a hand gun at his mansion, is unknown.

Elmaleh has numerous connections to Ontario, beyond his family. According to Court filings in the SEC matter, while the fund was operating, Elmaleh sent millions of dollars to people he knew in Toronto, often in the tens of thousands each, for purposes of which are not known. During the financial investigation, more ties to Canada were discovered, including to two Ontario companies in Toronto, one operated by Elmaleh’s father, which was alleged to have acted partly as a cover for the fund’s operations, and to have been unjustly enriched thereby.

Elmaleh’s 70-year-old parents threw in the towel after a few years of defending claims involving their son and informed the presiding Judge in the civil action that they could no longer afford fees to defend themselves. Ultimately, they were ordered to pay US$2 million, plus interest.

Both Elmaleh and Naqvi are now in jail in Manhattan pending a trial.

After Elmaleh fled to Canada, he made numerous posts on social media about Bitcoin and China-based Tron, including that he was a Bitcoin investor, suggesting that maybe there is a treasure trove of Bitcoin and Tron parked in a Toronto digital currency exchange – perhaps the one digital currency exchange in Toronto that provides a mixing and tumbling service for digital currencies to assist its users be anonymous to avoid the rule of law.

He also posted a photo of Santorini on a social media platform with the caption that [one should] “die with memories, not dreams.”

Canadian company sent US sanctioned equipment to Iran; Iranian sentenced

By Christine Duhaime | February 2nd, 2020

An Iranian foreign national living in the US, Mahin Toussi Mojtahedzadeh, was sentenced to 443 days in jail in the US, for conspiring to unlawfully export gas turbine parts from the US to Iran, using a company in Richmond Hill, Ontario. She is being removed from the US and deported back to Iran.

Mojtahedzadeh was the president of ETCO-FZC, an export company which imported turbine parts to Iran from various places through Dubai. On July 19, 2019, she pled guilty to one count of conspiring to violate the International Emergency Economic Powers Act and the Iranian Transactions and Sanctions Regulations. 

From 2013 through 2017, she worked with companies in Canada, including one that purportedly went by the name Industial Parts Solution, deliberately to violate sanctions against Iran, by having these companies acquire sanctioned equipment through Canada; the Canadian companies then forward shipped them to Iran, without having a license from the US Office of Foreign Assets Control.

Two of Mojtahedzadeh’s co-conspirators in Germany also pled guilty and were sentenced but so far, no word on prosecutions for sanctions avoidance on the Canadians in Richmond Hill, Ontario, who were part of the sanctions avoidance scheme.

SEC locates pump & dump alleged mastermind in Ibiza who used a Vancouver lawyer for the alleged scheme

By Christine Duhaime | January 26th, 2020

Biozoom boy found in Ibiza

The alleged mastermind behind the alleged pump and dump securities fraud case involving Biozoom, Francisco Abellan Villena, has been located in Ibiza, the playground for billionaires. Villena is currently incarcerated in Ibiza, perhaps on an extradition warrant from the US. He was located by an investigator in Spain hired at the direction of the SEC.

The SEC was searching for Villena to, among other things, effect service on him with a civil complaint filed in the SDNY in May 2018.

Villena in Las Vegas in a photo with Paris Hilton. This photo is over 10 years old and appears to be merely a night club photo opp (Source: promotionstocksecrets.com)

What was Biozoom?

Biozoom was a German technology company that made a hand held device that allegedly could read a person’s biometric data from their skin to monitor health metrics. Specifically, it was represented to investors as a replacement for blood tests, allegedly capable of detecting the presence of illegal drugs in one’s blood stream non-invasively from your skin surface or measuring blood sugar levels for diabetes, which may be a dubious claim because no such technology exists from a sweep of medical journals today to detect the presence of illegal drugs non-invasively merely from touching a human skin surface.

What’s an empty shell?

Biozoom was acquired as part of an asset sale by what is known as an empty public shell. An empty public shell is a reporting issuer that is non-operational, often with few assets or operations. An empty shell that is a reporting issuer is often re-invented, or pivoted, as something new. In Vancouver, for example, a number of mining companies that are reporting that are no longer viable are often re-invented as a Blockchain or cannabis company. In the US, empty shells that are reporting issuers are disclosed as shells, whether its a blank check shell or not.

RTOing of empty shells

People in Vancouver, sometimes lawyers in the securities law realm, sell or broker the sale of, empty shells that are reporting issuers to clients, sometimes for hundreds of thousands of dollars so that they can be used for a reverse take over (“RTO“). Not all RTOing of empty shells and not all sales of empty shells involve manipulative behaviour or fraud. The reason some people like to use empty shells that are reporting issuers is because its shares are listed for sale, or listable, and thus those who hold lots of such shares can sell them and, if the price magically pumps up, make a killing.

Biozoom’s RTO used complex shells and lax money laundering places

And that is what the SEC alleges four people behind Biozoom did, namely they backed Biozoom into an empty shell called Entertainment Art, Inc. that allegedly sold leather goods in Las Vegas, renamed the shell Biozoom Inc., and using a complex web of shell entities and lawyers in offshore tax evasion and known lax money laundering places like the BVI, Switzerland, Panama, Argentina, Belize and Vancouver, allegedly cooked up a scheme to issue, aggressively pump and then dump millions of shares of Biozoom to innocent investors to the tune of US$34 million.

One of the four persons charged by the SEC and alleged to have assisted with the scheme was a Vancouver lawyer named Faiyaz Dean, who the Vancouver Sun reported was, at some point, connected to another Vancouver securities lawyer named Penny Green of Bacchus Law. Seven years ago, the SEC started its investigation into Dean after the shares of Biozoom went from US$1 to US$4.

Empty shell companies are a problem for capital markets because, inter alia, as the SEC has noted, they are a breeding ground for pump and dumps and attract fraudulent behaviour. In other words, they are a high risk service and professional activity for lawyers and accountants, and also high risk for financial crime.

The accountant who flipped $6 million worth of shells

Speaking of accountants, an accountant named Jeffrey Lamson laid the groundwork for the alleged activities of Dean and Villena.

For six years, Lamson helped create a fiction of corporate viability for 22 empty shells that were reporting issuers. He was said to have recruited people to pretend to be officers and directors of the shells, and on occasion, to pretend to be the shareholders of the shells. This speaks to the ongoing concern expressed by US law enforcement and US Senators of the difficulty in attempting to ascertain from a minute book, who the true shareholders are behind the list of legal shareholders of an entity.

In order to obfuscate the true shareholders, Lamson likely controlled minute book records which he used to reflect other control persons by making inaccurate corporate records filings in the minute books. Doing this type of thing makes it impossible for investigators to know who ever was, or is, a shareholder or a director of an entity. The movie “The Laundromat” based on the Panama Papers with its ties to a Vancouver-lawyer-turned-incorporator, tells the story of a law firm that allegedly changed corporate records and back-dated them. Lamson ran what the SEC called an assembly line of shells with fraud at every juncture.

In order to keep the empty shells alive, the SEC says that Lamson filed false disclosure documents alleging that the shells were pursuing businesses when they were not. Not only that, the SEC says he forged signatures on documents for fake consultants who were paid fake consultants fees for doing no work. Lamson was keeping the shells alive to flip them to law firms and others or so that they could be brokered for hefty commissions. And flip them he did, for a whopping US$6 million. One of those he allegedly flipped to a lawyer for a hefty commission was Entertainment Art, Inc., the shell in which Dean became involved.

In 2015, Lamson was the subject of a complaint by the SEC in respect of his shell flipping activities, was permanently barred from securities activities in the US and ordered to disgorge profits from his conduct. He is serving time in jail.

The lawyer as alleged shell hunter and shell broker

Dean, the lawyer from Vancouver, was also the subject of a separate complaint by the SEC in respect of the Biozoom matter in which they allege that he, inter alia, orchestrated sham transactions and caused to be hired escrow agents to document the sham transactions as well as provided fabricated documents and false information to get the shell’s shares traded, including by false closing opinions. The SEC also alleges he was part of the acquisition of the shell that went on to sell listed shares and caused to be issued shares that violated the share restriction rules (e.g., in respect of legends). Violating the legend rules allows shares to trade when they are not free trading, at maximum pump. The whole reason there are legends to restrict trading is to protect against dumping.

Dean, as some securities lawyers do, allegedly acted as the shell broker – he sold the shell for US$430,000 and allegedly benefitted from a commission of US$105,000.

Dean has also been indicted in Arizona for wire fraud, making false statements for US securities law purposes (in particular, preparing a closing opinion with material false information) and money laundering.

The law says Dean wasn’t providing legal services

Dean’s case has an interesting aspect to it. When a lawyer becomes a business partner with a client, which happened here, the parties cease to be in the same position and a whole set of protective rights owed to the client arising from the lawyer-client relationship go out the window. And not only that, if the relationship with the lawyer was abused, knowingly or unwittingly, to commit unlawful conduct or to attempt to commit unlawful conduct or in furtherance thereof, including securities fraud, the lawyer-client relationship is gone ab initio, meaning that no duties or rights attach to the client that otherwise would. That’s because since 1833, if not earlier, Courts have held that lawyers cannot be used in furtherance of unlawful or attempted unlawful conduct and if they are, or there is such an attempt, no client gets to derive any benefit that otherwise they could derive from a lawyer-client relationship.

The law can best be summarized as follows: in order for the lawyer-client relationship to take root which gives rise to duties owed to the client by the lawyer, there must be two elements: (a) professional confidence; and (b) professional employment. If the client has or had an unlawful intent in obtaining advice or services from the lawyer, one of those elements is absent. The client either conspired with the lawyer to be unlawful or deceived the lawyer. In both cases, there is no lawyer-client relationship that was ever created.

In the first scenario, if the client hid the unlawful intent, the Courts have held that the lawyer’s advice or services were obtained by fraud, meaning the client defrauded the lawyer as to his or her unlawful purpose when he or she sought advice. The Courts have held, very specifically that, when a fraud is perpetrated on the lawyer by the client to obtain advice and the lawyer is deceived, there is no lawyer-client relationship because professional confidence was absent all along. Advice obtained by fraud perpetrated by the client is not protected and a lawyer deceived as to the true intentions of a client, is set free from the constraints of the lawyer-client relationship for all purposes. As Courts have held, if this were not the law, the result would be that a man intending to commit murder might obtain legal advice for the purpose of enabling himself to do so with impunity, and the lawyer whose advice was sought would not be at liberty to give information against his client to stop his criminal purpose which would have monstrous consequences on the rule of law. It makes sense – a client cannot lie to the lawyer about a file and use (more like abuse) the profession and then be able to benefit from his or her own deception. The lawyer and the rule of law, if that were allowed, would be doubly harmed.

In the second scenario, if the client’s unlawful intent was disclosed to the lawyer, the client is not consulting the lawyer qua lawyer as a member of the legal profession because it cannot be the lawyer’s business to further unlawful conduct. In this case, there is no professional employment of the lawyer by the client and therefore, there is no lawyer-client relationship. Courts have held that the protection of communications by lawyers in furtherance of an unlawful purpose by the client is injurious to the interests of justice and the administration of justice and does not come within the scope of professional employment. 

In Dean’s case, he will have to take a position eventually that indicates whether his services were obtained under the first scenario or the second scenario.

Two other lawyers pitched in to help with the scheme and one flipped shells for $5.6 million

Dean isn’t the only lawyer who was pursued by the SEC in connection with Biozoom. Lawyer David Lubin was barred from practicing before the SEC over fraud he committed in connection with the Biozoom shell and James Schneider was convicted of 33 counts of fraud and money laundering in Florida for writing false closing opinions in furtherance of the pump and dump, which generated proceeds of crime, securities fraud being the predicate offence. Schneider created and flipped 20 shell companies for US$5.6 million and used his law firm trust account to receive payment for the shells. Schneider is alleged to be evading civil forfeiture.

What did Biozoom boy do?

So what did Francisco Abellan Villena do in respect of Biozoom? He is alleged to have masterminded and controlled the scheme. Among other things, he allegedly located Dean for these specific services, paid him to acquire not one but two shells, the second to hold shares of Biozoom in the names of people from Argentina, and is alleged to have instructed a range of professionals to undertake the scheme, to have dumped shares when the price was artificially high, and to have made a windfall from dumping those shares. He also allegedly placed another Canadian in charge of his Argentine company – he had a preference it seems, for using Canadians, wittingly or unwittingly, for his plan.

Villena unknown location (Source: promotionstocksecrets.com)

Now that Villena has been located in Ibiza, he will be removed to the US in due course for the SEC proceedings. Villena had a previous case involving securities manipulation here.

As for Dean, he moved into Blockchain and somehow is connected to a reporting issuer called Evolution Blockchain Group Inc., which was a revived dead mining company. The SEC stepped in immediately after the reporting issuer issued a news release that it was getting into the already high-fraud area of digital currencies and was ICO’ing and immediately halted it, saying it was questionable as to accuracy. This may be the news release that was of concern.

Hopefully, US law enforcement shuts down the practice of selling shells and shelf companies

On a go forward basis, US law enforcement has said that they intend to focus on professional money launderers which includes the circle of professional services that include the sale or brokering the sale of, shell and shelf companies that are used to back into an RTO with the issuance of closing opinions that contain representations that are false and concludes with the unlawful pumping and dumping of shares on the public markets. And indeed they are – in October, another lawyer that acted for a Canadian reporting issuer settled in the US over writing closing opinions with materially false information and selling shells for RTOs for US$200,000 each.

The BC Securities Commission has tried to clean up the ecosystem since 2008

You may be wondering why it appears that many paths lead to Canada when it comes to the whole circle of services that involve unlawful pump and dumps – it has to do with the culture of how little mining companies were created and historically financed in Vancouver. The British Columbia Securities Commission here commented on the disproportionate role of British Columbia “players” in the US OTC markets who engage in abusive securities law practices and noted that such activities “damage the reputation of the province’s capital markets and harm the interests of legitimate issuers.”

That was twelve years ago, in 2008 and it has not abated, but the BC Securities Commission can only regulate its own ecosystem – it has no control over and cannot stop the activities of others in the capital markets whose members keep that circle of fraud spinning.

Villena is listed in the Paradise Papers here. And a co-indicted person, Guillermo Federico Ciupiak, is in the Paradise Papers here.

On a positive note and this is pretty cool – victims of the Argentinian aspect of the securities fraud claim of Biozoom can consult this website to file a claim for a refund.

If this sounds like a good Netflix, it would be.

Update: 2020-02-03: The US Department of Justice filed a Notice of Intent to Introduce Evidence of Other Acts in federal court in the criminal matter, notifying the parties of its intention to introduce evidence that Villena and Dean, and other defendants, were involved in a similar alleged fraudulent pump and dump scheme of Ocean Electric Inc., orchestrated allegedly by Villena and Dean, involving some of the same nominee shareholders as Biozoom, to get listed on a more senior exchange.

Update: 2020-02-11: A co-defendant in the Arizona criminal case, James Panther, and the Department of Justice filed a joint motion to postpone pretrial deadlines because they are negotiating a disposition that would eliminate the need for a trial, likely meaning Panther is pleading guilty and will cooperate in the trial as against other defendants including Dean.

Update 2020-02-24: The SEC issued an order prohibiting Dean from appearing before them as a lawyer, citing his activities as a shell hunter and re-seller for Biozoom and his actions to unlegend shares, for which he billed fees of $120,000.