Week In Crypto: Tether Named in US AML Probe, Japan Tightens AML Laws And Texas Investigates FTX

October 21, 2022
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A US investigation into an alleged sanctions-busting ring brings more bad news for Tether, Japan doubles its penalties for AML offences and Texas pursues FTX in an untimely securities probe.

A US investigation into an alleged sanctions-busting ring brings more bad news for Tether, Japan doubles its penalties for AML offences, and Texas pursues FTX in an untimely securities probe.

The US Department of Justice (DOJ) has charged five Russian nationals and two Venezuleans with crimes including illegal procurement, smuggling and money laundering using cryptocurrency.

On Wednesday (October 19), the DOJ unsealed a 12-count indictment accusing the defendants of illegally obtaining US military technology and smuggling millions of barrels of sanctioned Venezuelan oil.

As part of the same scheme, the defendants are also accused of laundering tens of millions of dollars on behalf of Russian oligarchs, sanctioned entities and the world’s largest energy conglomerate.

The defendants include Russian nationals Yury Orekhov, Artem Uss, Svetlana Kuzurgasheva, Timofey Telegin and Sergey Tulyakov, and Venezuelans Juan Fernando Serrano Ponce and Juan Carlos Soto. All are linked to state-owned enterprises in each country.

Both Ponce and Soto are accused of brokering illicit oil deals for the Russian defendants via Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company.

On Monday (October 17), Orekhov was arrested in Germany and Uss was arrested in Italy. Both will undergo US extradition proceedings, but the other defendants remain at large.

In the DOJ’s 49-page indictment, Tether’s USDT stablecoin features prominently as the alleged payment and money laundering method of choice between Orekhov, Ponce and Soto.

In November 2021, the trio are accused of coordinating a transaction of 500,000 barrels of sanctioned Venezulan oil worth $17m. The oil was supplied by PDVSA and was to be paid for using USDT.

In communications intercepted by the DOJ, Orekhov allegedly told Serrano: “As soon as we start berthing, we will immediately transfer. USDT works quick like SMS.”

In February and March 2022, the defendants allegedly coordinated another shipment of sanctioned oil worth $33m - the proceeds of which were to be laundered using USDT.

“Webs of shell companies, cryptocurrency and an international network of fraudsters failed to shield Orekhov and his cronies from apprehension by US law enforcement”, said Andrew Adams, director of Task Force KleptoCapture, a DOJ unit that specialises in Russian sanctions enforcement.

“Today’s arrests reflect the power of those controls when enforced by a dedicated team of expert agents and devoted foreign partners.”

Japan move towards tougher AML penalties

The money laundering threat posed by cryptocurrency has also been in the spotlight in Japan this week, as lawmakers moved towards introducing tougher controls and penalties.

As reported by local news agencies Bit Times and Coin Post, the Japanese government has approved a Cabinet decision to pursue amendments of AML/CFT laws within the Foreign Exchange Act and the Act on Prevention of Transfer of Criminal Proceeds.

The amendments will introduce new requirements for crypto-asset service providers, such as stricter disclosure rules on transfers in line with recommendations from the Financial Action Task Force (FATF).

For example, when a transfer is initiated, crypto exchanges will be obliged to share the identity of both the sender and recipient with each other, rather than just the standard wallet address.

Crypto exchanges must also keep up-to-date lists of sanctioned entities so that funds can be frozen immediately if and when these entities attempt to transact.

Finally, the maximum sentence for money laundering offences will be raised from five to 10 years in prison. The amendments will first need to be approved by Japan’s National Diet.

As noted by the local media, the proposed legislative changes are built around the FATF’s Travel Rule recommendations for virtual asset service providers (VASPs), which were originally published in 2019.

In its latest review of the recommendations, FATF noted that as of March 2022, 29 out of 98 responding jurisdictions reported having passed Travel Rule legislation, but only 11 jurisdictions have started enforcement and supervisory measures.

Texas opens securities probe into FTX

In another fast-moving area of crypto regulation, state regulators in Texas have announced that they are pursuing an unregistered securities investigation into FTX, the world’s second-largest crypto exchange.

The investigation came to light after the Texas State Securities Board (TSSB) and Texas Department of Banking (TDB) published an objection to FTX’s takeover of Voyager Digital, the Canadian crypto lending platform that filed for bankruptcy in July this year.

As of this month, the takeover bid is almost a done deal, but is still awaiting a judge’s approval for Voyager’s bankruptcy payout plan.

However, prior to the takeover bid, Texas regulators believe that FTX was offering unregistered securities in violation of state law - a complaint which, if upheld, would have ramifications for the Voyager deal.

“The proposed sale, or decision authorising the sale, intends to reduce the debtors' culpability for an unlawful activity for which state-regulatory fines and penalties may apply,” the objection states.

As such, the TSSB and TSB is investigating several FTX subsidiaries and executives, including FTX US, FTX Trading and FTX CEO Sam Bankman-Fried.

In the objection, TSSB’s director of enforcement Joseph Rotunda said he was able to download the FTX Trading app and open a yield-bearing account using his own identity from Austin, Texas.

"The FTX Trading App shows that I am earning a yield on ETH,” he said. “The yield is valued at 8 percent APR. Based upon my earning of yield and an ongoing investigation by the Enforcement Division, the yield program appears to be an investment contract.”

Prior to filing for bankruptcy, Voyager’s business model revolved around the same kind of yield-bearing offerings, though like FTX, it was not a registered agent or dealer in securities.

“FTX US should not be permitted to purchase the assets of the debtor [Voyager Digital] unless or until the Securities Commissioner has an opportunity to determine whether FTX US is complying with the law," Rotunda added.

J.P. Morgan poaches former Celsius exec

Finally, turning to Celsius - another distressed crypto lending platform - J.P. Morgan has hired one of its former executives as its new head of crypto regulatory policy.

Aaron Iovine, who confirmed the hire via his LinkedIn account, was previously head of policy and regulatory affairs at Celsius from February to September this year.

Iovine’s time at Celsius straddles the company’s descent into bankruptcy, which began with its freezing of withdrawals in June this year.

After filing for bankruptcy in July, investigations into Celsius’s “liquidity issues” have since evolved into a wider investigation of suspected fraud, market manipulation and unregistered securities offerings.

These charges were explored in a previous Week In Crypto, after a Vermont regulator alleged that Celsius had already been insolvent since 2019.

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