danielamariaguzman - Tumblr blog

[danielamariaguzman]

Love, in the Time of Fake News: A Colombian Story of MisInformation

The first notifications I get each morning are not from the likes of The New York Times, El Tiempo or the BBC. As I wake up and check my phone habitually, trying to make sense of the events and issues that matter each day, I am hit by the ubiquitous Whatsapp viral meme message. Today, it is a meme of Gustavo Petro, former mayor of Bogotá, who is running for Colombia’s presidency on a leftist progressivist platform. The Mona-Lisa smile headshot of the former M-19 activist and now career politician is captioned, in Spanish: “Searching for idiots: I was a guerrilla member, pyromaniac, assassin, I ruined Bogota and I promised much and didn’t follow through with anything, I contracted without necessity and I aspire to be President of Colombia.” But wait, there’s more. “I want to develop a government like Venezuela’s. Would you give me your vote?” The flagrant accusations made in this image, forwarded with nonchalance without a single phrase of explanation, are terrifying. Whether they are true or not, I cannot verify in the two seconds it takes me to digest the information. Nor do I analyze why my friend, a Colombian living in the United States, highly educated and with no affiliation to a news organization would send me this meme. This is the experience of “fake news” that Colombians are facing - along with the rest of the world as social media blurs the lines between truth, rumors, and propaganda. There are thousands of chain messages like these passed on in Whatsapp, Facebook and Twitter, relating to the upcoming Presidential elections about all of the presidential candidates,ranging from the comical to the defamatory. Besides the smear campaigns flooding social networks, as is expected in any presidential election, there are serious allegations that are portrayed as public service announcements, often forwarded to “warn the population” - the latest being a series of messages that claim the government census is a plot to gather voter data and commit election fraud through the electronic vote. The thing is, the electronic vote does not exist in Colombia. The pervasiveness of these false information campaigns is troubling, to say the least, for a country that has just signed a peace deal to end the longest civil conflict in the hemisphere, is looking forward to presidential elections this year, and has a long road in transitional justice, reconciliation and post-conflict development. Political analysts in Colombia are still reeling from the results of the 2016 plebiscite which was President Juan Manuel Santos’ idea to gain buy-in on the peace process and the product of four years of negotiation in Havana with the FARC. It failed spectacularly, as the rest of the world watched in shock as Colombians rejected their own peace deal. As my father would say, “ahi estamos pintados”, or a Colombian colloquialism meaning “we screwed up”.

The problem was not the rejection of the peace deal, as I myself do not agree with all of the specifics of the 323-page agreement, which contains complex legal and political language. The issue was expecting a population, which is incredibly disparate in education and resources, to be able to make a “yes” or “no” decision on whether to end a war. It was the polarization and politicization of peace that created a schism between Colombians that continues to deepen nearly two years later. Political analysts consider the elections in Colombia this May to be a Referendum, Part II. The divide was created with the epic assistance of social media campaigns. Juan Carlos Velez,the Centro Democratico campaign manager even admitted to using social networks to spread an “indignation campaign” to get people out to vote for “No”. Alvaro Uribe, the godfather of the Centro Democratico party and a vehement opponent to the peace deal and former ally Santos, was one of the most egregious offenders, publishing false information frequently on his Twitter account like the rumor that demobilized FARC members would receive a COP $1.8 million salary. Another message that all Colombian citizens would have to contribute 7% of their pension funds to the peace fund also became viral, provoking the anger of millions of Colombians,a country where the average GDP per capita is still only $14,000.

The great ease of disseminating information nowadays through these informal channels can cause incongruent injury to the unity of a state. In these times, when a misinforming meme can hop from phone to phone, to news network, fake news becomes a self-fulfilling prophecy.

It’s up to the institutions that once wielded truth as their power, also known as the fourth estate, to discriminate fact from falsity. The press is the only watchdog that can combat the epidemic of fake news in Colombia by fact-checking, calling out propagandists, and investigating the truth. 

It will mean nothing to the future of Colombia if weapons of war are turned in but weapons of communication are exploited and used to misinform the population. Social media users themselves must be wary of what they read and even more so of what they spread. For peace to fully be accepted, for a new leader that benefits the country, and for the well-being of Colombians, we have to stop believing everything we read. Today, in response to the Petro meme, I simply asked “En serio?” to my probably clueless friend who had himself received it from another chain. “No lo se,” he replied. At least not knowing is an acceptance of uncertainty, and not a reality.

[danielamariaguzman]

Thoughts on the role of journalism under repression of freedoms by the state

Justice relies on journalism. Journalism relies on us. 

Last night, at a professor’s organized student dinner, I met two journalists - one from Nigeria who has dedicated his life to fighting endemic corruption in his native country, and another from South Africa, who for the past ten years has used humor and longform exposes to awaken the public and induce positive change in governance. 

As they each recounted the history of their work and the publications they now run, I saw a familiar emotion across their faces, although they had both very unique life stories. It was a resigned disappointment, but firmness in their beliefs. Throughout the years, they’ve faced countless obstacles, often times posed by their very government, that makes the work of fact-digging, decoding often complex information, and disseminating otherwise obscured information, even more impossible. 

When I asked the two journalists, why they continue their endeavor, “impossible” as it is, they looked at me with the same resignation, and one responded for both, saying “if we don’t do it, things will stay the same.”

This sense of accountability and justice is what I feel keeps this kind of risky, but necessary, reporting alive. 

And yet, the paradox is that this type of journalism is incredibly hard to do in the places where it is truly needed. I think of the two Burmese reporters, Wa Lone and Kyaw Soe Oo, who were arrested Dec. 12 and accused by the Burmese government of having “illegally acquired information with intention to share it with foreign media.” They remain jailed 63 days later and have continually been denied due process. 

The same reporters, who have been stripped of their liberty under an arcane law imposed by the Burmese government, are being awarded with a PEN/ Freedom to Write Award for their investigation in a Reuters Special Report which exposed the horrific massacre of the Rohingya Muslim community in a village in Burma’s Rhakine state. For months, these reporters risked their lives to obtain information that could potentially be used in an international war crimes tribunal to hold those who ordered and committed these acts to be held accountable. 

The irony is wretched - these probably beaten and tortured journalists who have lost their freedom for writing about these realities will have discovered the centerpiece of an international criminal investigation. Other cases are no less perilous, and still rely on journalists to be the eyes, reluctant but committed, that watch horrors that are sometimes even too difficult to write in words. 

In Venezuela, a new anti-hate law imposed by the Maduro government is a perfect storm of legal framework that allows the government to censor (and jail up to 20 years) under a broad and unclear blanket rule. It exploits a value that we already have as a society: not promoting hate. Other illiberal democracies like Turkey have also implemented hate speech laws to disguise the repression of the press, which tops the list of countries with most journalist jailed at 73 (December 2017 figure from CPJ). 

How can journalists keep performing this sacred task of reporting violations of law, from the corrupt to the crimes against humanity, in such an environment? Even in the U.S. which has so often been upheld as a beacon for freedom of the press and freedom of speech, there is an erosion of the respect and safety for journalists that was once enjoyed. The rhetoric used by Trump towards the media has allowed for a climate of mistrust of journalists, an environment that enables the accusation and repression of journalists on anti-state charges.

There are organizations and advocates that are working very hard on making it safer for journalists to do this important work. There are NGOs like the Committee to Protect Journalists and local organizations that strive to empower and protect reporters. But I also feel that the best protection we can give to there human rights watchdogs is to disseminate the information they bring to the world.

 If the stories that they risk their lives to are brought under the public spotlight and believed, the illiberal governments of the world that jail journalists for dissidence may not have enough leverage to keep imprisoning them. When the information that governments wish to hide is widely public knowledge, governments lose the power to gag the guardians of truth.

[danielamariaguzman]

About the Jovem Jornalista project

By Daniela Guzman

The United Nations Sustainable Development Goals were created in 2015, a year before the Jovem Jornalista program in Rio de Janeiro was born. The global goals, as part of the 2030 agenda, were constructed and refined in negotiations by UN member states and in an extensive consultative process with civil society.

 Brazil was one of the most vocal states in the negotiations of the Sustainable Development Goals. This is no coincidence—Brazil, a regional economic powerhouse, the first of the BRIC nations, and the world’s seventh largest economy has high stakes regarding development.

 Brazil must strike a delicate balance between economic growth, environmental concerns and social causes. While it is a rapidly developing nation, Brazil faces looming challenges: eradicating poverty, improving public services in health and education, mitigating climate change and pollution, ensuring economic development, building and maintaining just institutions and rule of law.

 In light of these challenges, the SDGs provide clear objectives for a 2030 agenda. With unique contexts coloring the capabilities of each member state, it is up to national governments and civil society to work with the United Nations to create a strategy owned and championed by citizens.

 This is one of the overarching themes of the Jovem Jornalista program. By teaching workshops on journalism and reporting to young Cariocas with a special focus on the SDGs, young people in this city are taking the initiative to learn about the challenges and solutions emerging in their own communities and sharing that with the world.

 I was coordinator of the program Jovem Jornalista when the program launched in July 2016, less because of my qualifications, and more because of the confidence given to me by my colleagues Francisco Filho, Layla Saad, Romulo Paes and Laura Hildebrandt from Rio Plus Centre, also one of six worldwide thematic UNDP centers, focusing specifically on Sustainable Development. Their support allowed this program to flourish, and they continue to promote the sustainability of this program and many initiatives in Rio de Janeiro through research and partnerships. The Centro Integral de Estudos de Desenvolvimento Sustentavel (CIEDS) made the program run smoothly, including a seamless transition when I left Rio to finish my masters program at Columbia University. To both of these institutions, I thank you for believing in this project.  

 To the young individuals whom I had the fortune of meeting through this project, and who taught me more than I taught them: keep chasing your individual goals, as they will get us all closer to these universal ideals. The group of young Cariocas came to this project without any expectation of where it would lead, and they are the core of this program. In a formative time in their own lives and an important moment for their country, they told the story of Rio de Janeiro’s progress on the SDGs with a new perspective.

 While the world had its eyes on the Olympic city, this group diversified the conversation about Rio de Janeiro – its challenges and its marvels – and built the foundation for other young people to participate in this project. But I can’t speak for the incredibly talented group of people who actually participated in the project – nor their ability, ambition and resilience. It is only appropriate to let their own voices convey the message.

[danielamariaguzman]

Grassroots cultural initiatives for the Sustainable Development Goals in Rio de Janeiro

Published on the UNDP| Rio+ Center site on August 12, 2016

Text and video by Daniela Guzmán Peña

The 2016 Olympics are in full swing, with the first week of sporting events coming to a close. The Olympics are not just about highlighting the endurance and dedication of the world’s best athletes – it’s a chance for the entire world, those watching from all corners of the globe, to participate as observers and cheerleaders for their own teams.

Rio de Janeiro has a special role as the site of the 2016 Olympics, responsible for welcoming the world for the next few weeks as the Marvelous City becomes a stage for the competitions. Besides this host role, Rio de Janeiro has a particular responsibility for its own citizens, to ensure that the Olympics has a positive impact on the population as an inclusive participatory experience.

The legacy of the 2016 Olympics in Rio de Janeiro has left its mark on the geography of the city, with new transportation systems like the VLT, the Metro na Superfície, a brand new Metro line to the Olympic Village, as well as the renovation of Porto Maravilha and incredible additions to the city’s landscape, like the majestic Museu do Amanhã.

However impressive these creations in infrastructure and the expected surge in the tourism economy and foreign investment, Rio de Janeiro’s most incredible – and sustainable – development successes are its social programs which have begun as grassroots projects created by and for the community.

The “Carioca” people are consistently the most sustainable and impressive force the city has in developing a better life. On this urban scale, community members are developing programs that exemplify the Sustainable Development Goals of the 2030 UN Agenda.  From working groups that advocate for disabled children’s rights to urban permaculture clusters, to dance and music collectives, Cariocas are making strides in the reduction of inequality, access to quality education for all, promoting gender equality, improving health and life in cities, and creating more peaceful societies and institutions, among other challenges that affect the entire world.

The SDGs, created in 2015 to replace the Millennium Development Goals, are 17 different categories of goals that UN member countries are undertaking to make the world a better place to live and to address problems like climate change, poverty, conflict, and illiteracy. The Rio+ Center, a legacy of the Rio+20 Conference in 2012, is taking a magnifying glass to the city of Rio de Janeiro to find people, projects and places that portray the SDGs in action.

The video in this blog is one such story. Ballet Manguinhos is a grassroots project that started in 2012 by the community members of Complexo de Manguinhos, a favela in the northern zone of Rio de Janeiro, which has historically had problems with drug gang violence and crime, like many informal communities in the city. Manguinhos has risen above the stereotype by creating and sustaining projects that give at-risk youth hope and opportunities through dance, music, skating and other initiatives.

Daiana Ferreira de Oliveira, the creative director of Ballet Manguinhos, says the project gives young people ages 6-18 the opportunity to take ballet classes for free at five different public locations that they have secured for practicing. The Ballet also takes dancers on field trips to local museums, libraries and parks as cultural development.

Daiana: “It helps them with developing social skills and self-esteem, not only ballet”

Through a project called Dançando e Lendo, or Dancing and Reading in English, the ballerinas can take home books about dance, read with their families and then present to their peers, combining physical activity with literacy.

The Ballet has been invited to perform with other Carioca dancers and musicians, integrating the community of Manguinhos with their own city. With an annual performance showcasing the work of over 200 dancers, Ballet Manguinhos has developed a large audience beyond the boundaries of their community.

As a tool for social development, dance has helped community members like Luiz Felipe Moreira, 17, find a respite from the difficulties of life in a favela and a way to identify himself in a positive way. He has a scholarship with another ballet school in Rio de Janeiro because of the progress he has made at Ballet Manguinhos, as one of the principal senior dancers of the school. By transforming individuals like Luiz Felipe, these programs are changing the community from inside out on a micro level.

Ballet Manguinhos is one of several social projects that the community of Manguinhos has developed and maintained with few outside resources, the most potent source of fuel being their own community members who dedicate time and talent. Guilherme Hadasha, a resident of Manguinhos for decades and an expert in Afrobrazilian musical rhythms and instruments, as well as a virtuoso in classical music, conducts a workshop with young people in the community that creates musical instruments made out of recycled materials.

“The project is a cultural, environmental and socially inclusive project with the purpose of valuing Afrobrazilian culture in a creative way,” said Hadasha. “We tell indigenous and African stories through percussion and oral history.”

With the three pillars of sustainability exemplified through the work of these two projects, Manguinhos has revitalized young lives. There are several other programs in Manguinhos that, while they don’t receive large amounts of funding, continue to serve the community, provide better quality of life for residents, and promote the SDGs.

Sustainable development requires policy at the top for a larger change, but Rio de Janeiro is a true example of how grassroots projects that involve civil society can be truly transformative.

[danielamariaguzman]

Mediation in the era of globalization and power fragmentation: leveraging multilateral coherence and unity

Daniela Guzman Peña Master of International Affairs Candidate Columbia University, School of International and Public Affairs Economic and Political Development, International Conflict Resolution

I. Understanding an evolving world of war and peace 

To explain the purpose and scope of this piece, a useful exercise is to imagine a sustainable peace agreement as the summit of a mountain. There is a wealth of literature on the diverse historical and situational contexts of internal conflicts – similarly, each mountain has its own unique steepness, terrain, and precipices. In this analysis, the focus is not on the mountain, but the mountain climber as a representative of mediation strategy - and with the understanding that each “ascent” is different due to the specificities of each conflict.

 This piece asserts that each movement of a mountain climber, from understanding her overall position on the mountain, to maneuvering her limbs to keep moving up without falling, to gripping certain ledges or protrusions of the mountain face to keep balance, are akin to the way a multilateral mediation process works today. 

In a globalized world where more actors have power to leverage in internal conflict situations, multilateral mediation coherence and unity will be key in achieving success. With more interveners, and a complexity of actions, relationships and objectives, working toward a common goal will be key in reaching that pinnacle of peace.

a. Globalization, interdependence and public opinion

Before globalization and the post-Cold War era that enabled the emergence of multilateral mediation, wars were fought for limited objectives, as an extension of diplomacy , and were often not of the scale that would require international multiparty mediation. In fact, before the 19th century, stabilizing conflicts through mediation was about establishing order within a state, or seldom a neighboring state.  After the Treaty of Westphalia, mediation effectively disappeared because there were both less interventions and less interest in getting involved in the affairs of sovereign states. In the 19th century however, imperialism and a new state of interdependence facilitated the creation of mediation mechanisms. Positive public opinion was key to remaining a strong state within and maintaining vital international relationships externally (Schultz, 2011). The alliance of the great powers in Europe, the Concert of Europe and the Vienna System of International Relations which dictated most foreign policy in Europe in the 19th century were the roots of multilateral power in mediation. The creation of an International Secretariat with the League of Nations, carried further in the United Nations, with wider responsibility and negotiating rights paved the way to multilateral mediation (Hammarskjold, 1953). Today, globalization, fragmentation of power, and a change in the power dynamics of the political panorama have made multilateral mediation a reality, not just a tactic.  The management of this new paradigm, namely the unity of mediating actors and the coherence of their strategy is the most important aspect in effectiveness in conflict resolution. Dag Hammarskjold, a renowned diplomat, predicted this in the mid-twentieth century, saying that “the new state of interdependence between nations war anywhere becomes the concern of all.” (Hammarskjold, 1953). He describes the first and major change in diplomatic techniques, and therefore substance, as the multilateral element. b. End of bipolarity and unilateralism – why these approaches fail today The dominance of the US as a world power in the 20th century, along with its mistrust of international secretariat organizations like the United Nations Security Council,  shaped diplomatic action, and the US was successful in several unilateral third party mediation attempts.  The end of the Cold War also brought the death of a bipolar power struggle between the US and the Soviet Union.  The end of this rivalry opened up possibilities for other players to get involved in mediating interstate and intrastate conflicts.  While there were some middle power unilateral mediation attempts, it is becoming less frequent because of the nature of conflict and the availability of more and different kinds of power that can be involved in conflict mediation. The unilateral or faction-backing alliance approach is usually not sustainable, because of countervailing international forces. This method stems from American imperialism and muscular international competitive diplomacy, the type of strategy that led to the American occupation of Iraq in the 2000s. (Ricks, 2010). In Iraq, Sunnis were using Americans to mediate conflict against the Shia government. With this concentration of power, the Americans were forced to take ownership of the conflict and that meant pouring resources for years into a conflict that could only be solved by the warring constituencies. This horse-backing approach doesn’t work because it often demonizes the other side, as well as distances it, making it difficult to know and understand the adversary’s next move. It comes from a theory that a preponderance of force is enough to end a crisis and establish a new government. However, this often fails to acknowledge the breadth of power available to the opposition.   For power diplomacy to function as a strategy, referencing the mountain climber narrative – every limb must work in sync in order to reach a negotiated settlement. In the 20th century, the five stories of mediation (the consensual, alliance, power diplomacy, partitionist, and integrationist approaches) have clashed and interfered, as “ripeness” theory helped to justify the very different paradigms to be enacted together.   As the special UN envoy for the Syrian crisis, Kofi Annan integrated consensual and power diplomacy theories to essentially create pressure from the international community on the government to achieve a ceasefire, an important step on the way to peace. However, the unilateral motives of certain actors in the working group that he had assembled dismantled that leverage, prematurely preventing civil society grassroots peacebuilding initiatives to meet the top-down endeavor to persuade the al-Assad regime and the Syrian opposition into a negotiated settlement (Hill, 2015). Technology developments in 20th and 21st century allowed civil society to participate in conflict resolution more than ever, as access to information and a growing sense of moral responsibility  pushed mediators to attempt “operate in daylight” (Hammarskjold, 1953). Perhaps the most important reason that multilateral mediation has become indispensable is the risk of the regionalization or internationalization of a domestic conflict, leading multiple and diverse international actors to respond. II. Multiparty mediation realities and complexities In today’s world, we find it harder to trace historical traditions  to mediation and peacemaking strategy because our  world is increasingly interconnected, in which traditions have melded to create composite mediation strategies that have less geopolitical attachments, and have created a library of academic theories translated to tactics informed by the context of the internal conflict. This can actually create a dysfunctional environment in which there is a lot more friction due to the diversity of strategic perspectives. Multiplicity and diversity can help or harm mediation, as it adds complexity to the process, but can also add more avenues to success through alternative levels and types of power.  

A mediation process or system that utilizes the diversity of advantages and resources of state, non-state, international and domestic players in a multiparty setting, but that keeps a common goal as the overarching focus of the mediation is a success.   When these multiple actors do not align in their broader political interests, multilateral mediation can exacerbate the conflict.  Multilateral mediations should operate in a unified and coherent approach in which policy contexts are addressed in a uniform manner to create the strongest leverage tool possible.

a. Leveraging different types of power in multilateral mediation A strong multiparty mediation team requires unity in the overall goals to be achieved through a peace process and transitional government, but the intervening actors are not usually the same in stature, composition or power dynamics. In fact, the strongest multilateral mediation should leverage different types of power: reward power, also known as the “carrot” approach, coercive power, which is the corresponding “stick”, expert power, which utilizes a deep expertise of the warring parties and the context to gain buy-in from all parties, legitimate power, based on certain rights and legally sanctioned authority,  referent power, based on a desire of the parties to the conflict to maintain a valued relationship with the mediator, and informational power, which is often manifested as message-carrying.  This combination of different capacities and roles can be more effective than the dilution of power in just one mediator, who could lose power if their strength becomes a weakness.

In the Oslo peace talks between Israelis and Palestinians, a secret channel initiative under the guise of Norway’s more informal, less threatening role  than the US or another major power or international organization allowed the process to proceed without preconditions. This is especially useful in situations of medium to high levels of protracted and violent conflict. (Chester A. Crocker, 1999). Martin Griffiths’ persona and perceived role as a “cowboy” independent diplomat under the auspices of the Centre for Human Dialogue allowed him to gain entry to mediate the conflict between the Indonesian government and the Aceh rebels; the rebels saw him as high profile enough to gain international media recognition for their cause, and simultaneously, the government saw him as non-threatening in comparison to a UN envoy or a state-led mediation. (Griffiths, 2006). Another depiction of utilizing different types of power is the High Commissioner on National Minorities taking on the problem of marginalized minorities in Central and Eastern Europe, particularly during the Bosnian wars in the 1990s, maintaining a healthy distance with the formal diplomatic institutions which allowed them to gain entry and it also increased confidence in the mediator’s impartiality. (Chester A. Crocker, 1999). With this consensual, civil society approach, in combination with the coercive power strategy implemented by Richard Holbrooke, and the alliance of NATO and the UN, the Bosnian crisis deescalated (Holbrooke, 1998). Non-state actors with a sense of cultural or social approximation to the warring parties can often be a powerful instrument, such as in the case of Mozambique’s multiparty mediation. The Catholic church through the community of Saint Edigio, and its close relationship with Jaime Goncalves, facilitated the mediation between the government and the opposition, while keeping the US, UN and other major players closely informed throughout the process. (Chester A. Crocker, 1999). Having different types of stature can broaden the coalition of mediators to address different weak points of a peace process and reduces the ability of spoilers to reach out to allies.   An important benefit of the multilateral mediation process is that it has the ability, under the circumstances of mediator coherence and unity, to catalyze a regional, or international systemic change through the use of top-down and grassroots strategies, and mid-level talks that can be agent to redefine future relationships, the ultimate and often elusive goal of a peace process.  The Comprehensive Peace Agreement for Cambodia, a product of a multilateral mediation process in 1991 became an agent for broader systemic change to redefine relations between China and Vietnam, US and Russia and US to all of Indochina. (Chester A. Crocker, 1999). 

b. The risks of multilateral dysfunctional multiplicity and individual interests It is crucial that two-track multilateral mediation processes which employ civil society peace building initiatives also have a strong “noose” of political and public pressure from the top – mediation in Syria has struggled to reach a point of feasibility because this top-down chain of power has been severed several times by unilateral political interests (Hill, 2015). This could also be a reason for the inefficiency of the American intervention in Iraq in the late 2000s, as civil society initiatives were employed but with a lack of a strong policy context.   Multilateral mediation requires shared analysis among the various interveners, or else they can undermine each other. During the Great Lakes crisis, the number of diverse interests and actions of the UN, OAU, EU, Arusha Group and the US compounded the difficulties of reaching a settlement because they were too focused on narrow agendas without fully grasping the larger elements of peace. (Chester A. Crocker, 1999). Conclusions: Unity and Coordination 

Political disunity among multilateral mediators can be a major risk to the peace process and can actually exacerbate conflict. Bosnia remains an example in which multilateral mediation succeeded eventually, but the EU-UN partnership could have brought peace much earlier, with much fewer deaths, if they had not underminded each others efforts. They had the resources to leverage, but found it difficult to manage them. (Chester A. Crocker, 1999). 

A coherent political strategy, and building support and finding resources for that coherent strategy, is necessary if a multilateral mediation is to be successful and sustainable. Tunisia is exemplary of what coherence and unity under a political context can achieve through different mediating parties. The Tunisian National Dialogue Quartet, which won the Nobel Peace Prize in 2015, was an effort by four civil society organizations to mediate conflict after the 2011 Tunisian revolution and the catalyst of the Arab Spring. The quartet, made up of the Tunisian General Labour Union, the Tunisian Confederation of Industry, Trade and Handicrafts, the Tunisian Human Rights League, and the Tunisian Order of Lawyers, was created when security in the country was threatened following the assassination of two key politicians and deadly clashes between Islamists and secular parts of society. To prevent an internal full-fledged interstate conflict, the dialogue group worked to unify Tunisians under common objectives. (Nobel Peace Prize for Tunisian National Quartet, 2015). In conclusion, understanding and creating a common objective among the multiple actors in a mediation process is vital to peace. If these actors can put aside individual political interests in a unilateral framework and shift to a coherent, unified multilateral approach, they will be able to gain entry from different angles, apply pressure and incentivize the warring parties, and reach a negotiated settlement that is more inclusive of all levels of society, with the buy-in of the political players as well as civil society.   Laurie Nathan, in a recent paper for the BRICS Policy Center, summarizes the importance of “ the essence of international mediation in civil wars – that is, the overarching, dominant and most significant characteristic of this form of peacemaking – is the challenge of managing complexity.” (Nathan, 2013).

This location of power, in a globalized era with power becoming more amorphous and fragmented, will likely be a focus of mediators in intrastate conflicts in the future. With mediation efforts naturally becoming more multilateral, the cooperation of these efforts will either prove to be an innovative key to more effective peacekeeping. However, if parties involved in mediation fail to see the broader consequences of their interventions, multilateral mediation could produce more friction and keep sustainable peace at an unfathomable distance. 

As internal conflict becomes an international issue with high stake humanitarian and environmental consequences, it will be pertinent for the power players in the mediation processes to accept their positions with care, and with the understanding that conflict can only be resolved if the mediators themselves are aligned, coherent and aware of the higher objective of peace.

Footnotes

Bibliography Carnevale, P. (2002). Mediating from Strength. In J. Bercovitch, Studies in International mediation: Essays in Honor of Jeffrey Z. Rubin. London: Palgrave. Chester A. Crocker, F. O. (1999). Herding Cats. Washington, D.C.: United States Institute of Peace . Covino, R. (2013). Stasis in Roman Sicily. ELECTRYONE Vol. 1, 18-28. Griffiths, M. (2006). The Professional Maverick . In H. Martin, Kings of peace, pawns of war : the untold story of peace-making. London: Centre for Human Dialogue. Guehenno, J.-M. (1998). The Impact of Globalisation on Strategy. Survival, 40(4), 5-19. Hammarskjold, D. (1953, October 21). New Diplomatic Techniques in a New World. Address to the Foreign Policy Association. Hill, T. H. (2015). Kofi Annan’s Multilateral Strategy of Mediation and the Syrian Crisis: The Future of Peacemaking in a Multipolar World? International Negotiation, 20(3). Holbrooke, R. C. (1998). To End a War. New York: Modern Library. Lederach, J. P. (1997). Building Peace. Washington, D.C.: United States Institute of Peace. Nathan, L. (2013). What is the Essence of International Mediation in Civil Wars? The Challenge of Managing Complexity. BPC Papers, BRICS Policy Center. Nobel Peace Prize for Tunisian National Quartet. (2015, October 9). BBC . Ricks, T. E. (2010). The Gamble: General Petraeus and the American Military Adventure in Iraq. New York: Penguin Books. Schultz, M. (2011). Humanitarian intervention: a history. (B. Simms, Ed.) Cambridge: Cambridge University Press. Serwer, D. (1999). A Bosnian Federation Memoir. In F. O. Chester A. Crocker, Herding Cats. Washington, D.C. Soto, A. d. (1999). Ending Violent Conflict in El Salvador. US Institute of Peace.

[danielamariaguzman]

Climate change, land stress and resource mismanagement fuel security challenges in Rio de Janeiro

Daniela Guzman Peña  Master of International Affairs Candidate, Class of 2018 Economic and Political Development, International Conflict Resolution

Introduction: Nexus of land and resource management, climate change and security issues

This paper examines the intersection of challenges that an increasingly globalized and interconnected world faces today and will be the major drivers of conflict on local, regional and international scales. However, because this cross section is much more visible on a local scale, this article focuses on one city, Rio de Janeiro, Brazil, and analyzes how environmental change, climate change, urbanization and the loss of biodiversity are pushing the city to the brink of urban violence and conflict. 

In light of the recent economic and political volatility affecting Brazil, compounded with the international spotlight  of the World Cup in 2014 and the 2016 Olympics, Rio de Janeiro is a contemporary and revelatory example of the composite nature of the environmental-security nexus. 

Rio de Janeiro: rapid urbanization and socioeconomic exclusion in the Global South

Over the next 10-20 years, the world is likely to see accelerating demand for most natural resource commodities (food, water, and land likely to be the most scarce), as well as increasingly volatile markets (Andrews-Speed, 2012). In urban megacities, like Rio de Janeiro, Brazil’s second largest city, these problems are only exacerbated by rapid urbanization, large migration of rural populations to cities with a scarcity of available land, economic inequality, and the actual topography of the city which makes land management and governance uniquely difficult.

The failures to address environmental change by effectively using resources, keeping pollution at bay, and global factors in climate change have produced ill-effects, which are disproportionately felt by slum-dwellers  in Rio de Janeiro’s favelas, the Brazilian Portuguese word for slums. Inter and intra-generational tensions  over equity of land, water, electricity, and other resources have been exacerbated by the exponential growth of these ungoverned communities. In 2000, the city had 5.85 million inhabitants, of which 1.09 million live in subnormal or irregular urban agglomerations, or “islands of poverty”  within wealthy environments.

As a country becomes more urban, the rural poor, unable to find work in the the countryside, migrate to the cities  in the search of employment. The wealthier urban population wishes to benefit from a cheap labor supply while unwilling to share resources, and relegates the migrants to the outskirts of the city (Holtzman, 2014). 

The favela population of Rio de Janeiro in 2000 continued to expand  at a rate of 2.4%, six times higher than the population growth rate in the city as a whole. (Zaluar, 2010). According to the UN-Habitat definition, a slum is a run-down area of a city characterized by substandard housing, squalor and lacking in tenure security.  Land tenure has been a fundamental demand in the struggle for housing in Brazil and in many other countries. It is regarded as the most crucial step in attaining housing security, resisting forced evictions and demanding fair compensation (Williamson, 2013).

Even with substantial improvements in quality of life, including a $4 billion Brazilian government and Inter-American Development Bank-backed program  called Morar Carioca to introduce running water, sewerage systems, paving and electricity to all favelas by 2020, favelas remain a locus of violence, crime and human insecurity. 

Urban violence and security issues: Rio’s drug war

High population density, class disparity, and marginalization of the poor have contributed to urban violence. At times, the rates of homicide in Rio de Janeiro are greater than the death tolls from armed conflicts (Serafin, 2010). Rapid and disorganized urbanization increased vulnerability to crime, especially for young men, who suffer the highest unemployment rates – even more so inside favelas where youth unemployment reaches the city’s highest rates. (Zaluar, 2010).

In the past 25 years, Rio de Janeiro has been rated “Critical” for crime by the US State Department showing rising rates in robbery, rape, fraud and residential thefts. (OSAC , 2013). Drug gangs that took over favelas as points of sale and arms storage locations have also taken control of irregular domestic gas and water supply, thus one million people in the city live in areas that have no regular policing but are quite well served by some essential urban services. (Zaluar, 2010).

Despite providing these services, the drug gangs and their clashes with militarized police units have caused high death tolls, mostly homicides. (Zaluar, 2010). To prepare for the Olympic Games and the World Cup in 2014, the Brazilian government mobilized special militarized “pacifying police units” or UPPs since 2008, with around 174 of Rio’s favelas currently monitored (Holtzman, 2014). Currently, approximately 25,000 are being trained to provide extra security during the Olympic Games (Belton, 2016). In 2007, uniformed police killed 1,330 people in the state of Rio, 902 in the city of Rio. (Barbassa J. , 2015).

The Environmental Problem in the “Marvelous City”

a. Climate change and flooding Anthropogenic climate change is expected to increase potentially disruptive environmental disasters, many of which will stress local communities and societies. (Steinbruner & Husbands, 2013). This global phenomenon is affecting Rio already - every year during the summer months (November-March) torrential rains cause flooding and landslides. In 2011, torrential rainstorms in the interior mountains of Rio de Janeiro state killed several hundred people and left several thousand people homeless in one of the worst storms in a century. Heavy rains created massive landslides and left entire towns underwater for weeks (OSAC , 2013). In early 2016, 500 people were evacuated from the Pedro do Rio area for landslides. (Davies, 2016). To date, 119 communities were designated for removal by the Rio government for being deemed unstable or prone to flooding or mudslides (Barbassa J. , 2015).

The severity of torrential rains and flooding in 2010 can be attributed to “global climate changes that have local effects” according to David Zee, the coordinator of the master’s degree programme in environmental studies at Veiga de Almeida University. This is partly due to the El Nino/Southern oscillation climate phenomenon, which has increased in activity since 2009 characterized by an abnormal rise in surface water temperature in the tropical Pacific Ocean.. Alternatively, environmental deterioration also is caused by the city’s population growth. Cement is now much more widespread than forest cover, which used to help retain water in the hills and mountains (Frayssinet, 2010).

b. Air and water pollution caused by lack of governance and accountability Before the sustainability development conference in Rio in 2012, UNEP warned that the planet’s environmental systems “are being pushed towards their biophysical limits” (Barbassa J. , 2012). In Rio de Janeiro, this is especially true as it has a range of problems including air pollution  and water pollution, which are inherently linked.  Untreated sewage, industrial waste, and oil spills  have eradicated most of the region’s wildlife, including most of the biodiversity in the Bay of Guanabara, where the Olympic Sailing competition will be hosted in 2016. 

Over 20,000 fishermen struggle to survive in impoverished communities around the bay, and less than 20% of the bay is available for fishing today (Young, 2016). The discharge of organic materials reaches 465 tons per day, and only 68 tons receive adequate treatment. Industrial liquid wastes are responsible for 100 per cent of the pollution caused by toxic substances and heavy metals of the Guanabara waters (Piccin, 2011). The pollution of Guanabara Bay is linked to the growth of Rio de Janeiro and the region’s industrial expansion. Discovery of large volumes of oil in the pre-salt layers of the ocean floor near Rio has led to a second wave of industrial growth in recent years which have had negative effects. (Young, 2016).

Although the Sustainability Conferences in 1992 and 2012 in Rio have been a major driver of sustainable development, many development projects are dominated by outside-decision makers that unfairly oppress local people and their environment, leading to increased tension and conflict (Piccin, 2011). Public and private funding go to developments primarily in the wealthier South Zone of the city, and involve extracting resources or displacing low-income inhabitants. A recent project consisted of placing a 650-meter long concrete barrier around a favela to protect a nearby Atlantic rainforest from illegal population as an “eco-barrier” and is a form of social apartheid, segregating the population further (Piccin, 2011).

Conclusion

Rio de Janeiro raises many questions about the linkages between political and urban security, social inequality and the environment. As the city prepares for the Olympics, these connections will seem more concrete than ever, as the pollution of the bodies of water in Rio, air pollution from traffic, and urban disorganization and lack of security make the city’s natural majestic beauty more difficult to enjoy by the international community. More worrisome still, the citizens who live in Rio de Janeiro are facing problems that they will have to endure long after the event, including increased tensions between drug gangs and police, and urban crime as the economic crisis pushes out the middle class and further marginalizes and criminalizes the urban poor. 

If Rio de Janeiro and Brazil can understand and improve the anthropogenic effect of public policy on the environment, including land tenure policy, water and commodities management, and urban growth plans, the city can become a successful case study in addressing human security by focusing on the environmental and resource management agenda. However, this looks like a tall order, as the focus on “cleaning up” for the Olympics has become more about short-term fixes than sustainable policy changes to address longterm dilemmas.  

Footnotes

Bibliography

[danielamariaguzman]

Collaboration between FinTech ventures and traditional banking world spurs compliance and technology gains

By Daniela Guzman dguzman@acfcs.org July 9, 2015

This briefing on FinTech and its implications for compliance includes original analysis and a Q&A with Mariano Belinky, Santander InnoVentures.

Virtual currency businesses and financial technology start-ups are flourishing within the financial services market. With the advent of these nascent online exchanges, e-wallets and peer-to-peer lending services has also come concerns regarding the financial crime risks and vulnerabilities of these businesses.

The financial technology, or “FinTech,” sector has taken full advantage of advances in technology to provide users with services that fit a convenience-driven, online culture– but where does financial crime compliance fit in with innovation?

While some may be quick to say that small entrepreneurial start-ups offering financial services outside of the traditional banking market are subject to more financial crime risks, there may be an opportunity to learn from the growth of this field. The lessons in compliance, innovation, customer satisfaction and financial gains could be, and are already immense.

A paper written by Santader InnoVentures, Oliver Wyman and Anthemis Group called FinTech 2.0: Rebooting Financial Services addresses this hot opportunity for both the old and new financial worlds. The paper highlights the benefits of a collaborative endeavor with banks and FinTechs working together as partners. As banks learn from young firms providing customer-friendly services, start-ups can learn how to implement cost-effective financial crime compliance strategies.

Essentially, FinTech firms can learn the ropes from banks on the compliance end, while banks can adopt technologies their clients need and want in a digital age.

What is FinTech and why are banks paying attention?

The FinTech sector already offers a plethora of services that are not limited to the wealthy or elite. The democratization of financial services through technology is helping the sector permeate different societies and build an important demographic of users. Among the services these firms can provide, lending, transactions, financial advising, money transmitting, many were monopolized by the banking sector not even a decade ago.

With $23.5 billion of venture capital investment in 2013-2014, according to the FinTech 2.0 paper, the sector is just at the beginning of its exponential growth. Computerworld UK reported at the end of 2014 there are currently more than 3,000 FinTech start-ups. By taking advantage of advances in digital technology to develop banking products, they are attempting to overtake banks and traditional MSBs by developing faster and more cost-effective ways to deliver similar services.

FinTech firms are usually focused on providing single-purpose solutions to help customers achieve one important task, whether its sending money to their family, keeping track of a budget, or trading virtual currencies. BillGuard, one company started as a service to alert users to hidden gees charged by their bank and credit card issuers. Since then it expanded to become a comprehensive fraud monitor and spending tracker. Another company, Planwise, pivoted from being a general financial decision-making tool to becoming a listing platform for brokers. Stripe, a company founded by college students, supports mobile and e-commerce payments for giants like Twitter and Alibaba. The list of start-ups with star potential goes on.

Despite the success of these models, FinTechs are unlikely to replace traditional banks altogether, but their potential to disrupt the industry is considerable. Banks realize the competition may come in a very different disguise, as a small entrepreneurial firm, and they are taking notice. Banks like Santander, Citigroup, Barclay’s, and UBS, just to name a few, are investing in incubators and accelerators that provide funds to tech firms as a way to both learn from the ventures and to make sure the competition is under a close watch.

Apart from providing access to funds, banks can also give FinTech firms access to compliance strategies that have taken decades to perfect. Compliance in this sector is at once a great opportunity and a big obstacle.

So while some FinTech firms may still be under the radar of the regulators, many are taking the chance to team up with traditional banks to understand how to prevent and detect financial crime risks, avoid regulatory penalties, and protect their clients.

New regulations combined with a changing uncharted territory make compliance risky and difficult. Fintech is an international, cross-border concept. Domestic regulations and jurisdictions may not apply the same way they do for banks. Still, money laundering, tax evasion, data privacy, systemic risks are equally area of concern for the FinTech sector.

What does compliance look like for a FinTech business?

According to Taylor Wessing lawyer Jonathan Rogers, this might include:

Ensuring the management team has the intention to comply with regulation, supported by appropriate training and systems and controls.

Understanding how your services may cause unfair outcomes for consumers even if you do not have direct consumer interaction

Designing an approach to sales and marketing activities which includes processes to review client communications for compliance with financial promotions requirements and to minimize mis-selling risks.

Ensuring terms and conditions are fair and can be easily understood.

Setting a reward and incentives structure that does not encourage excessive risk.

Regularly reviewing your systems and controls processes (e.g. to address risks from bribery and money laundering).

This list may seem quite familiar to those in the traditional banking sector – that’s because compliance in both markets is pointed at the same goals, although the processes may differ at the outset.

A change is coming, collaboration is vital for banks and FinTech firms

Professionals on both sides of the traditional/high-tech financial services field may think this is a battle between old and new, and that each will have to safe keep its trade secrets to remain relevant.

However, the emergence of new technologies and the high demand for customer-friendly products and services is increasingly looking like a high-speed train with no brakes. Both sectors are adapting to these changes, as well as the pressure to cut costs in banking, and the policy shift towards open data.

As FinTech expands to include middle and back office processes to provide solutions to these new standards, many banks will strive to be part of this “disruptive trend” by actually supporting innovation and the launching of FinTech firms.

Interview with Mariano Belinky, Santander InnoVentures and Co-Author of FinTech 2.0

Mariano Belinky, who joined Santader InnoVentures last year after advising global banks and asset managers at McKinsey and Co, talked to ACFCS    about this next step for FinTech. He runs Santander’s venture fund to lead a financial services tech revolution. The venture has objectives in financial gain and innovation.

What does FinTech mean?

Innovation of financial technologies. There has been innovation for more than a hundred years. We just decided to put a label on it now. Dealing with the effects of the financial crisis, we decided to recapture that generation of users that decides how to consume our financial services.

How can FinTech firms support innovation and growth while also mitigating risk? How can they work together with the traditional financial system to do this, as partners rather than just competitors?

Some (FinTech) companies have decided to ignore regulation until they get slapped on the wrist. Others understand the needs of the regulatory compliance functions very early on. On our side, we do a total due diligence assessment for the companies we work with to ensure that the companies we invest in are within our compliance focuses.

The focus of this paper is that banks cannot do it alone and companies can’t do it alone, so it has to be a collaborative effort where we create the right environment for these companies to create things and develop things while we learn in the area.

Traditional financial systems can produce scale and access to clients and access to expertise on compliance and resources to help FinTech companies connect to the rails of the financial system. We as banks take that for granted.

The burden of regulatory compliance is less on FinTech firms, which makes them frictionless customer experiences. What are the fundamental ways to graft financial crime prevention into this peer-to-peer process that isn’t yet heavily encumbered by compliance programs?

While we are getting away with less regulation or regulation hasn’t caught up, we have to take advantage of the learning experience and the customer experience side of things to create security and financial crime prevention. We need to find better ways to onboard and authenticate and to monitor transactions without intruding.

How will the interconnectedness of networks and devices help, or harm, the fight against financial crime in a tech-driven financial industry?

I think that technology poses a new set of challenges to secure information and have a successful compliance program. Still, it is just as secure as any other channel. The Internet of Things is the idea that you have devices that are able to produce certain data or have a very specific interaction with the world and report back. Assets can be connected to this and produce information.

How does it help cost and efficiency? Imagine that I have a fleet of cars that I’m leasing, I can have each car in that fleet provide me with real-time information about the status of the car and the condition of the car and it helps me to better understand my collateral and prevent fraud. That applies across any type of collateral. If I have a large auto-lending business and I want to decide that I want to keep better track of the cars I can incentivize this type of client with a better deal on the loan.

How have some FinTech firms leveraged data from different sources to understand patterns that may constitute fraudulent behavior?

The use of smart data – moving away from the idea of big data and moving towards solving specific problems with a subset data – is particularly important for financial crime prevention. To identify fraud and atypical behavior is very relevant from an operational standpoint.

[danielamariaguzman]

A guide on corruption in Latin America’s seven largest economies

By Daniela Guzman dguzman@acfcs.org July 1, 2015

It seems that every day, there is a new protest on the streets of Latin America, from Mexico City to Buenos Aires. Citizens of the region are growing increasingly worried and angered over something that is not new to them, but that is expanding in scope and consequence.

Corruption in Latin America is a problem that is systemic and deep-rooted in business culture and political strategy. Despite significant efforts from the public sector, private entities, and advocacy groups, corruption continues to plague the region, causing a major economic hindrance, reducing investor confidence, and worsening public distrust.

Recent scandals have confirmed that bribery and abuse of public office are endemic and part of business in Latin America. Largely due to complex bureaucratic procedures and confusing legal systems combined with weakness in oversight and control, corruption has swelled out of control in the region.

Corruption goes hand in hand with violence and organized crime, each feeding off the other. Despite legislative efforts to introduce or revamp anti-corruption laws that criminalize crimes like bribery and extortion, Latin America is still battling corruption.

In this chart, we have compiled indicators of corruption in the region’s seven largest economies, as well as initiatives from the government and public to curtail it. Please see these footnotes for more information about the indicating factors of corruption.

Click here to see the full chart

*Transparency International, a global advocacy group dedicated to publishing reports on worldwide corruption and promoting transparency through local chapter groups, has ranked 175 countries and territories around the world based on how corrupt their public sector is perceived to be. See the Corruption Perceptions Index results for 2014. A country or territory’s score indicates the perceived level of corruption on a scale of 0 (highly corrupt) to 100 (very clean).

**Control of corruption refers to perceptions of the extent to which public power is exercised for private gain. Control of Corruption is one of the six dimensions of the Worldwide Governance Indicators, conducted by the World Bank.

***The FATF is an inter-governmental policymaking body whose purpose is to establish international standards, and to develop and promote policies, at both national and international levels, to combat money laundering and the financing of terrorism. The FATF has issued 40 recommendations to fight money laundering and 9 special recommendations to fight terrorist financing, though now there are just 40 recommendations.

****The Organisation for Economic Co-Operation and Development is an inter-governmental body that promotes policies that will improve the economic and social well-being of regions around the world. The OECD Anti-bribery convention established legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides for a host of related measures that make this effective. The 34 OECD member countries and seven non-member countries have adopted this Convention.

[danielamariaguzman]

US financial system strengthens barrier against terrorist financing, though emerging channels present risk

By Daniela Guzman June 18, 2015 dguzman@acfcs.org

The National Terrorist Financing Risk Assessment 2015 is the first document of its kind that analyzes a broad range of governmental and financial endeavors to cut off the funds that go toward terrorism, in the US and abroad.

The report, released Friday, was drafted by the Treasury’s Office of Terrorist Financing and Financial Crimes, with consultation from the Treasury’s Terrorism and Financing Intelligence, Internal Revenue Service, Department of Justice, Department of Homeland Security, Department of State, National Counterterrorism Center and Staff of the Federal functional regulators.

The assessment has been published at a critical time as the presence of the Islamic State (ISIL) and other related factions grow their presence and financial support. The report mentions the greater risk present for the US, as it is an international financial center and deals with a large volume and diversity of international financial transactions.

Since 9/11, the report explains, the US has reduced the ability of terrorist groups to use regulated financial institutions to move funds through the US financial system through effective regulation, supervision, investigations and enforcement.

However, the report also highlights the remaining risks, mostly due to correspondent banking relationships and the acts of complicit money services business employees in the US.

“Unlicensed money transmitters may also be used to send funds abroad, and there are aggressive investigation, prosecution and regulatory efforts underway to detect and disrupt such activity,” according to the report.

The report depicts the current panorama of risks, threats, vulnerabilities and counter-strategies on terrorist financing. To garner an accurate view of an expansive issue, 229 cases were surveyed and further analyzed to determine what specific method or channel was used to raise or move funds. To read the report, please click here.

The report mentions that while the cost of an individual terrorist attack can be quite low, maintaining a terrorist organization requires large sums; the report even quotes deceased Al-Qaeda financial chief Sa’id Al-Masri: “without money, jihad stops.”

The report also identifies the actions of US government agencies, which are designated to:

Identify, investigate and combat specific terrorist financing (TF) threats

Enforcement compliance with applicable laws and regulations

Prosecute supporters in order to deter would-be terrorist financiers.

Terrorist Financing experts highlight importance of financial intelligence in fight against terror

Professor Peter Margulies, a national security expert and professor at Roger Williams University School of Law, said the report is a logical outgrowth of the endeavor that began even before 9/11 to protect the financial system from terrorists.

There is a tendency to be more proactive in working with the international financial community, he said, that presents both good and bad news.

“The good news is the government is better at getting traditional banks to comply with regulations. The bad news, that the government acknowledges, is that it’s like playing a game of whack-a-mole,” Margulies said.

“While banks are more compliant, we have emerging issues with more informal means of transmitting resources including licensed and unlicensed cash businesses,” he said. “That space, [money services businesses (MSBs)], is still the Wild West. We should aggressively consider more regulation in that space.”

Celina Realuyo, a distinguished strategic advisor for the US government on international issues, was instrumental in the creation of a post 9/11 strategy against terrorism. Realuyo said there has been an important shift in the way the government addresses terrorism.

While post-9/11 the focus was capturing or killing the leaders of the terrorist groups, she said, now there is heightened attention and work being done to curtail financial support for these groups.

Financial intelligence has become a focal point as the US government engages the international community and the global financial system to attack the root of the problem.

Realuyo said the report shows that many of the methods employed to combat terrorist financing were created in the aftermath of 9/11, though many of those protocols have become more efficient and systematized.

While due diligence at financial institutions has improved, she said there are still gaps in unregulated channels like crowdsourcing sites, new payment systems, and other vulnerable sectors like charities and unlicensed MSBs.

“All of this is reinforcing methods that were already in place,” Realuyo said.

Important lessons learned since the fight against TF began

Margulies said the strength of the dollar against other leading currencies like the Euro has made the US financial system even more likely to face terrorist financing risks. As a major financial center, those risks are high, but so is responsibility, he said.

“We have the ability to set standards by example because we’re a major financial center. I think we’ve done a good job at setting an example,” Margulies said.

But there are always gaps, even in this country, which has some of the strongest counter-financial crime laws in the world. That is the case for informal value transfer systems, also called unlicensed money transfer operations, or hawalas.

Those networks are highly based on trust and rarely actually deal with the formal financial system, making infiltrating and prosecuting their transfer agents, or hawaladars, very difficult.

“Hawala businesses may be running rampant internationally but the government doesn’t really seem to have a solution. That requires international cooperation but that cooperation,” he said.

While international cooperation seems to be the key to improving counter-terrorist financing efforts, there have also been other key lessons learned from this fight:

Terrorist organizations have sought to draw upon the wealth and resources of the United States to finance their organizations and activities.

There is no one type of terrorist financier or facilitator

Terrorist financiers and facilitators are creative and will seek to exploit vulnerabilities in our society and financial system to further their unlawful aims.

Sources of funding for terrorism and risks to the financial sector

President Obama stated in May 2014, “for the foreseeable future, the most direct threat to America at home and abroad remains terrorism.” According to the assessment, Al-Qaeda and affiliates, ISIL and other foreign terrorist organizations threaten US national security interests.

These organizations are running what could be seen as illicit businesses and the funding is derived from a variety of illicit activity, including kidnapping for ransom, extortion of local populations and resources, drug trafficking and other crimes.

However, there are other sources of funding that appear to be legitimate causes, such as private donations to charity organizations.

US government agencies with support from financial institutions have detected donations from more permissive jurisdictions in the Middle East like Qatar and Kuwait that are ultimately destined for terror groups.

The State Department noted in August 2014 that “private fundraising networks increasingly rely upon social media to solicit donations and communicate with donors and recipient opposition groups or terrorist organizations.”

According to the report, given the large size and diversity of the US charitable sector and its global reach, the sector remains vulnerable to abuse.

State sponsorship and the provision of weapons and other types of material support is yet another way that terror groups collect funds. Despite diplomatic attempts at cutting off state sponsorship, Iran still gives millions of dollars in aid to Hizballah each year.

Counter Terrorism Finance tactics and the work ahead

The US government has taken a multi-pronged approach to collaborate with agencies at different departments to detect the movement of money destined for terrorism.

The FBI uses Suspicious Activity Reports and Currency Transaction Reports related to TF in order to interdict and seize funds. DHS detects the movement of bulk cash across US borders and maintains data about the movement of commodities and persons in and out of the US. HSI initiates investigations of terrorist financing involving transnational crimes to include smuggling and trade-based money laundering (TBML).

These investigative efforts are supported by the financial intelligence and analytical work of FinCEN. There are about 30,000 searches of the data taking place daily, according to the assessment.

The report cites the improvement of an AML/CFT legal framework, effective supervision and targeted financial sanctions, which have succeeded in making it more difficult for terrorists and their facilitators to access the US financial system.

As a result however, terrorist groups have increasingly turned to unregulated channels including unlicensed money transmitters and cash couriers.

While the physical movement of cash and movement of funds through the banking system are the two predominant methods of moving money to terrorists, according to the cases studied in the report, there are other avenues that are much less regulated and are being exploited in light of better enforcement of compliance programs at financial institutions.

“Licensed and unlicensed money support businesses, movement of cash is a significant vulnerability,” said Margulies.  “You also need more cooperation from Customs Agencies all over the world,” he said.

While the report flags trade, unlicensed money transmitters, new payment systems and cybercrime as real emerging risks, there is a lack of regulatory reform, he said.

“It’s very important that the report address this issue in a very careful way. I would like to see more policy on these issues,” Margulies said. “If we want to continue being on pace with our adversaries we need to keep up.”

[danielamariaguzman]

Largest casino penalty ever imposed on Northern Mariana Islands’ Tinian Dynasty

By Daniela Guzman dguzman@acfcs.org June 4, 2015

The Financial Crimes Enforcement Network imposed a $75 million penalty on Tinian Dynasty Hotel & Casino for willful and egregious violations of the Bank Secrecy Act, the bureau’s largest penalty against a casino and one of its largest monetary sanctions ever.

An undercover operation revealed that the casino, located in the US territory of the Northern Mariana Islands, had no existing anti-money laundering (AML) program and failed to delegate responsibility of the AML compliance program to any of its staff.

According to a statement by the agency, or FinCEN, the casino failed to file thousands of Currency Transaction Reports (CTRs), a document central to monitoring large cash transactions of more than $10,000.

The casino, operated by Hong Kong Entertainment (Overseas) Investments, Ltd., accommodated customers who wanted to conduct large financial transactions without reporting them to the government, providing “helpful hints for skirting and avoiding the laws in the US and overseas,” according to the statement.

“Tinian Dynasty’s actions presented a real threat to the financial integrity of the region and the U.S. financial system,” according to the agency.

During the investigation, aided by Internal Revenue Service Criminal Investigation and the US Attorney’s Office for the Districts of Guam and the Northern Mariana Islands, undercover agents posing as customers told casino staff that they planned to gamble large amounts of money and requested that the casino not report their transactions to the government.

Tinian Dynasty helped these “customers” with their requests, and in some instances, casino employees provided detailed instructions on how the patrons could conduct the transactions without attracting law enforcement scrutiny.

Joseph Kelly, a business professor at SUNY College in Buffalo, NY, is an expert in the gaming industry and the regulations on the industry which he says is only second to the nuclear power industry in strict regulation enforcement.

Kelly said the FinCEN penalty on Tinian Dynasty shows that the US Treasury’s financial intelligence branch is focusing more on the casino industry, sending a message that non-compliance will not be tolerated.

“It’s the only place that carrying around huge amounts of money is completely normal and therefore to prevent criminal figures from money laundering, casinos have to develop strong policies,” he said.

Kelly said that in the US, gaming control boards will keep a close eye on casinos to prevent any violation of the Bank Secrecy Act (BSA), in hopes that FinCEN won’t have to interfere.

“FinCEN will work with the gaming control board and then each casino has staff to train people and to detect any sort of suspicious transaction. The gaming control boards will do whatever FinCEN suggests because they don’t want federal intervention.”

In the US, FinCEN has delegated the examination duties for casinos to the IRS’ AML division, which oversees a host of sectors subject to AML obligations, but that don’t have a federal functional regulator. IRS examiners, when they find deficiencies, then forward the findings to FinCEN’s penalty division for consideration.

The size of the penalty is also more evidence of a new, hardened mindset to harshly punish financial crime program weaknesses occurring across non-bank sectors, including casinos, chiefly due to FinCEN’ leader, Jennifer Shasky Calvery.

She took over the bureau in September 2012 from heading the US Department of Justice’s Asset Forfeiture and Money Laundering Section and has stated in conferences in recent years she was more willing to penalize a broad range of industries for program failures and had particular fears about casinos.

“Tinian Dynasty didn’t just fail to file a few reports,” Calvery said in a prepared statement. “The casino operated for years without an AML program in place. It failed to file thousands of CTRs and its management willfully facilitated suspicious transactions.”

Calvery has stated at industry conferences and in discussions with bankers she had concerns some gaming operations had lax AML controls with no impetus to improve them and risk losing high-net worth customers, even though these higher risk individuals could have ties or illicit entities. FinCEN also usually works with local gaming control boards to coordinate actions.

Kelly said that in the case of Tinian Dynasty, there seemed to be no gaming control board for extra scrutiny.

Tinian Dynasty opened in 1998, in a Pacific paradise closer to the Philippines than to the continental United States.

The hotel and casino came under question in April 2013 when the US Attorney for the Districts of Guam and the Northern Mariana Islands announced that a criminal complaint was filed against two individuals and the casino with conspiracy to cause a financial institution to fail to file currency transaction reports.

The 2013 criminal complaint states that in May 2012, IRS CI initiated an undercover investigation in which the two individuals accommodated agents posing as gamblers in their desire to use large amounts of currency but not file reports with the government.

Each of the nine transactions that the casino failed to file in regards to the undercover operation were above the reporting threshold for CTRs.

In 2013, Kenneth Hines, Special Agent in Charge of IRS CI in the Pacific Northwest region, responded to the criminal complaint, saying “federal laws that regulate the reporting of financial transactions are in place to detect and stop illegal activities.”

FinCEN is honing in on casino anti-money laundering violations, as other nations like Singapore and Macau also step up their own regimes to address significant vulnerabilities.

Kelly said that FinCEN is issuing the penalty as a warning to other casinos and non-financial institutions that may be skirting the law, although he said this case is extremely rare.

“What strikes me here is that FinCEN found that the policies were rueful over a long period of time. This happening at any casino in the US would be shocking,” Kelly said.

It may not be so shocking, however.

In March 2015, FinCEN made another move toward a New Jersey Casino, the Trump Taj Mahal Casino Resort, for long standing anti-money laundering violations. The Atlantic City casino was fined $10 million in a civil penalty for several willful BSA violations, including violating AML program requirements, reporting obligations, and recordkeeping requirements.

“Trump Taj Mahal received many warnings about its deficiencies,” Shasky said in a statement in March.

“Like all casinos in this country, Trump Taj Mahal has a duty to help protect our financial system from being exploited by criminals, terrorists, and other bad actors. Far from meeting these expectations, poor compliance practices, over many years, left the casino and our financial system unacceptably exposed.”

FinCEN press release: www.fincen.gov/news_room/nr/pdf/20150603.pdf

[danielamariaguzman]

In high-stakes world of FCPA internal investigations, information governance rises in importance

By Daniela Guzman dguzman@acfcs.org, June 3, 2015

The US Securities and Exchange Commission and the Department of Justice have continued their escalation of enforcement of the US Foreign Corrupt Practices Act, with a large surge of corporate enforcement actions toward the end of 2014.

Increasingly, the US is not the only player in anti-corruption enforcement, with countries like Germany, the UK, China, and Poland all bringing parallel cases against companies for bribery and graft in recent months. Amid this intensifying enforcement environment, companies of all sizes and types are viewing internal investigations into corruption allegations as a key step in mitigating potential compliance failings and garnering leniency from government agencies.

Filtering through data, collecting the information necessary, and analyzing the evidence are all crucial parts of an investigation, and they cannot be done without an effective eDiscovery strategy. eDiscovery, or the electronic collection of information as evidence in a legal case, is not only useful for litigation, but as a tool for internal information governance, experts say.

Hal Marcus, an eDiscovery attorney and director of product marketing for Recommind, a San Francisco- based eDiscovery software company, is one such expert who believes that the lines between investigatory use and litigation use of eDiscovery and information governance are blurring.

“When you start an internal investigation you have to be ready to pivot into full-fledged eDiscovery very quickly,” Marcus said. Before joining Recommind, Marcus designed and launched new product lines for evidence and case management at companies like Thomson Reuters.

“You have a short time frame staying ahead of any other whistleblowers that may emerge and expose a violation externally to the SEC or the DOJ. You have to own it and explore any data you can find that can put it to rest quickly–meaning you have to prove a negative, which is never easy to do–or root out the problem and decide whether you’re going to self-report, what you’re going to present to your board, and what actions you’re going to take to remediate,” Marcus explains.

Information governance, data management intersect with FCPA compliance

With those high expectations, fact-finding and data analytics become a high priority for companies that are conducting an internal investigation. Marcus said attorneys should always care about fact-finding, whether it is reactive, in a litigation context, or proactive, in an investigatory context.

“You’ve got to get to the data that matters most. Your goal is to be confident that you’ve rooted out the problem and know the extent of the liability,” Marcus said.

Companies can use the same tools, platforms and analytics that empower fast review for litigation for an internal investigation, which requires some structural planning. Companies that are vulnerable to FCPA risks, including any US companies doing business internationally, may consider their information governance plan as a pillar of anti-corruption compliance. Marcus said businesses are beginning to become aware of the importance of data collection and eDiscovery tools.

“More and more corporations are beginning to get serious about this,” Marcus said. “There’s more attention being paid to not just litigation readiness but more broadly to information governance and how it overlaps with data privacy issues.”

Cloud-based data spread across borders creates investigative challenges

Companies that do this may be in a much stronger position if an allegation arises because they can quickly collect and analyze important data. Does this mean that larger companies with more financial resources will be at an advantage if they need to conduct an internal investigation? Not necessarily.

Although there are several factors that play into the effectiveness of an internal investigation, data processing can be effective for companies of different scales because of the broad platforms that exist to analyze the data. As smaller players are able to enter the international market, they may have less access to internal information governance systems, but they may have data in the cloud, which can be beneficial if they can access the data efficiently.

“The playing field is pretty level as far as your ability to leverage the data analytics tools. The real difference is: Where is your data and how are you going to collect it?”

Cloud-based data programs present an interesting situation for companies that exist in multiple jurisdictions – where does the data reside? In an FCPA investigation, this is particularly relevant as information about a multinational company or US company doing business abroad could be retained in several different locations, all with distinct data privacy laws.

In an internal cross-border investigation, companies must be aware of local laws so any data collection or transfer of information does not breach regulations.

Marcus said there’s no consistent best practice that addresses the challenges of a cross border investigation, but urges attorneys and investigators to be creative.

“Sometimes you have to be remote, sometimes you need to have feet on the street. Sometimes it means getting the information from the cloud, or getting the information to an intermediary country for processing and management,” Marcus said.

Working with companies with a global footprint and data centers in multiple continents allows investigators to have more options on how to creatively get data. Data privacy laws are constantly evolving, Marcus explained, and it is not uncommon for investigators to turn to local counsel who know the laws of the country where the information is physically located in order to remain compliant.

Email records, financial transactions are key data for internal investigations

In the investigatory process, companies have a short time frame to find the data necessary for self-reporting and analyze it for their own benefit. However, improving accessibility to data like electronic communications, financial records, and other information can be essential in an FCPA related case.

Tim Treanor, an anti-corruption lawyer with international law firm Sidley Austin LLP, said eDiscovery is highly important for internal investigations, especially in FCPA cases because of the communication records aspect.

“Electronic communications are created by people who are not considering the fact that they may have their communications reviewed at some point, and sometimes the communication happens contemporaneously with the events that are in question,” Treanor said.

“You’re not relying on peoples’ memories,” Treanor said. In a bribery case, emails won’t necessarily contain the word “bribe” or “corruption” or “kickback,” but they may be supporting evidence of a violation.

However, like many financial crime cases, confirming or refuting the existence of corrupt payments in internal investigations often comes down to following the money.

“Your biggest buckets of evidence include emails, text messages and then the second bucket is financial records, records of payments in particular,” Treanor said.

“Bribery is a financial transaction, so you have to look at your accounting records to see what you can learn about the movement of money.”

[danielamariaguzman]

Flash Crash trader case raises doubts on regulation and resilience of securities industry

By Daniela Guzman dguzman@acfcs.org May 14, 2015

For the last five years, in a suburban home near London’s Heathrow airport, a 36-year old British futures trader, Navinder Sarao, made a fortune amassing nearly $40 million through what US authorities allege are illegal tactics to manipulate the stock market.

Sarao, who was charged last month with wire fraud, price manipulation, attempted manipulation and spoofing, is facing 22 counts and up to 380 years in prison for his alleged crimes, following investigations by the US Commodities and Futures Trading Commission (CFTC), the Securities Exchange Commission (SEC) and the US Department of Justice.

The explicit charges in the case are perhaps not as shocking as the implications of his arrest – US authorities are saying that Sarao played a significant role in the Flash Crash of May 2010, when the stock market went on a nearly 1,000-point ride before regaining its losses.

Scotland Yard took Sarao into custody in April this year, and US authorities are attempting to extradite him to Chicago, the physical location where the trades technically took place.

Sarao’s five million-pound bail was denied, and he is awaiting a trial with the British High Court next week to fight the impending extradition.

Dubbed the Hound of Hounslow, his assets have been frozen worldwide. In comments last week, he said he had not “done anything wrong, apart from being good at my job.”

The Flash Crash – market volatility due to one trader’s actions?

The CFTC and SEC issued a report on the Flash Crash in September 2010, in an effort to explain why the Dow Jones Industrial Average took a nosedive of 600 points in minutes.

The report mentions a chain reaction started by a Kansas-based mutual fund which placed a single order on the futures market. Later on, the suspects of the domino effect were found to be other firms that had used faulty algorithms to trade on the market.

It was clear regulators were trying to solve the mystery of why the market had gone out of control on May 6, 2010, but couldn’t  put a finger on it.

The wild swing  worried the industry, which had regained its losses almost immediately, but market watchers feared a reprise. Five years later, the CFTC and the Department of Justice had a culprit, thanks to an anonymous whistleblower.

While the trades came ahead of the market crash, they “contributed to an extreme E-mini S&P order book imbalance that contributed to market conditions that led to the Flash Crash,” the DoJ said in a press release.

In essence, the Justice Department claims that the trades Sarao made before the crash were significant enough to cause a shakeup in the market by artificially changing the supply and demand of these particular futures contracts.

The Chicago Mercantile Exchange (CME) had warned Sarao about his high frequency trades that seemed to be cancelled as soon as they were ordered before, but they were just warnings.

Some experts say the connection seems improbable.

Lawrence Baxter, a lawyer and professor at Duke University at the Global Financial Markets Center, said the allegation seems “bizarre and unconvincing.”

“It’s an unusual situation,” Baxter told ACFCS. “The SEC and CFTC investigation and the official report said there was a ‘bad algorithm’ and now clearly that isn’t the cause and they aren’t explaining why there’s a different cause.”

Baxter said high speed trading is a very widespread tactic that is present in 60 percent of the market.

He said that while there are many traders who do the same thing, it would be difficult for one sole trader to be responsible for the Crash.

“It seems like he is a scapegoat,” Baxter said. “If he is guilty of spoofing, it’s hard to believe the systems weren’t able to mitigate it,” he said.

Spoofing is a type of high speed activity which layers multiple trades that the trader does not intend to have executed in order to create an artificial supply and demand and manipulate the market price.

After other investors glom on to the manipulated security, the first investor then closes the long position by selling the security at the inflated, higher price. The industry reaction to Sarao’s case is to the effect of “yeah, right.” said Baxter, echoing postings from blogs like Zero Hedge to Michael Lewis, who is famous for his exposé on the Wall Street high-frequency traders (HFTs), “Flash Boys.”

Baxter said that while industry reactions are not always an accurate gauge of the egregiousness of the suspected action , the allegations from authorities will have to be supported  by some strong evidence in Sarao’s trial to uphold the implicit claims.

Some experts are asking, why now?

The criminal complaint on Sarao and his company, Nav Sarao Futures Limited, PLC, describes activity from 2009 to as recently as April 2015. Sarao continued to do high frequency trades much after the crash, and was not apprehended until last month.

“The people at the CFTC who decided to come forth, five years after the fact, with this new and improved explanation for the flash crash, must have known they would be creating a controversy with themselves at the center of it,” Michael Lewis wrote in Bloomberg last month.

“It’s actually sort of brave of them,” he told Bloomberg.

In a statement, the CFTC Director of Enforcement, Aitan Goelman, said that prosecuting Sarao sends a message to the broader trading sector and makes   “clear that the CFTC, working with its partners on the criminal side, will find and prosecute manipulators of US futures markets wherever they may be.”

High speed trading pervasive, creates ethical and regulatory grey area

While some may disagree on Sarao’s role in the Flash Crash, the case focuses primarily on his practices of manipulation and spoofing through high frequency trading.

“Spoofing is definitely a criminal offense of the Commodities Exchange Act,” Baxter said. “Even if he was doing it to enhance his position is still criminal. “

The Dodd-Frank Act, a powerful set of measures to bolster financial stability, accountability and transparency signed into law in 2010, explicitly outlawed spoofing, opening the door to criminal charges against traders like Sarao.

Withdrawing offers is not illegal unless the trader does it intentionally and profits from the activity, creating a very grey area of regulation, explains financial markets professor Sugata Ray of the University of Florida.

Ray said that algorithmic trading constitutes the majority of the volume in the markets.

“Not all algorithmic trading is bad,” Ray said. “Algorithms, for example, are also used by market makers, who use them to rapidly adjust their quotes to movements in the markets. This in turn results in markets with lower transaction costs in the form of smaller bid-ask spread.”

So what is the difference between the “good” algorithmic trading that largely dominates the market and the nefarious kind  of algorithmic, potentially high-frequency trading (HFT) that authorities say Sarao executed from his Hounslow home?

“The line between illegality and ‘smart trading’ is blurry,” Ray said.  “Many things that seem ‘smart trading’-ish also seem like they could be ‘wrong’ but turn out not to be illegal, unless the SEC decides to categorize it into one of a number of potential ‘illegal’ boxes.”

Ray is the author of the upcoming book, Principles of Quantitative Equity Investing, and believes that in Sarao’s case, the regulators are looking at him because something bad actually did occur.

“There is a fair amount of discretion the regulators have regarding when and whether to pursue action and, like most US legal actions, that decision is often based on realized outcomes, rather than intentions. So many actions that traders were taking during the period of the flash crash that were in the grey zone will now be in the spotlight as investigators comb through the order and trade data.”

Repercussions of the Hound of Hounslow’s case

On the surface, Sarao’s case may confirm the worries of industry experts who have warned that HFT and algorithmic programs that allow traders to “flash” sell and buy stocks can be tremendously disruptive to the financial system.

However, experts in the securities industry warn that the new revelations brought forth by the judicial and regulatory authorities of the US against Sarao should be taken with a grain of salt.

Michael Lewis’ “Flash Boys” 2014 novel on the murky world of high frequency traders became a wild success, exposing the inner plumbing of the stock market that allows the elite and tech-savvy to control the financial system.

Lewis’ book was incendiary, spurring several lawsuits and general discomfort in the industry about an allegedly rigged system.

But even Lewis himself wrote an opinion piece in Bloomberg when the charges were unveiled, asking hard questions about the case that raise doubts about the CFTC’s deductions that Sarao, one lone trader, could have caused such a fuss in the markets on that May day five years ago.

“How can a guy working from his parents’ house in suburban England, whose only actionable orders were to BUY stock market futures, cause such a sensational collapse in US stocks? On the day of the Flash Crash, Sarao never actually sold stocks,” Lewis wrote.

In 2014, he told the UK Financial Conduct Authority he was successful at trading because “he had always been good with reflexes and doing things quick.”

As Sarao’s case unfolds, evidence of his operation may reflect potentially illegal practices that may be widespread, and sparingly enforced. These spoofing tactics have become more commonplace, and antiquated regulatory regimes lack not only the resources to attack the current problem, but to even recognize how the evolving technologies and methods may become ripe tools for financial warfare.  According to J.R. Helmig, founder of Leveraged Outcomes, LLC, who since 2003 has counseled extensively on HFT methods being used as attack vectors, the role of critical infrastructure protection is often overlooked.

“It’s not just a matter of having the policies and screening software in place.  One also has to examine the role of the underlying technological infrastructure and the ability to protect the control systems from cyber security threats.  What if the authorities cannot control the circuit breakers because hackers have penetrated the control mechanisms?”

If the allegations of US authorities are correct, that one individual could have the potential to cause a disturbance in the global financial system – one of the most unthinkable financial crime risks there is.

Press Release CFTC:

http://www.cftc.gov/PressRoom/PressReleases/pr7156-15

Statement Chicago Mercantile Exchange:

http://cmegroup.mediaroom.com/2015-04-22-CME-Group-Statement

Navinder Sarao Criminal Complaint:

http://www.documentcloud.org/documents/1999093-sarao-criminal-complaint.html#document/p1

[danielamariaguzman]

First FinCEN civil action on virtual currency exchanger makes waves in FinTech sector

By Daniela Guzman dguzman@acfcs.org May 7, 2015

The US Treasury’s Financial Crimes Enforcement Network (FinCEN) executed its first civil enforcement action against a virtual currency exchanger Tuesday in a $700,000 penalty against a San Francisco-based firm and its subsidiary for a host of anti-money laundering program deficiencies.

The fine against Ripple Labs Inc. related to its failure to register  with FinCEN while acting as a money services business and failing to implement adequate anti-money laundering (AML) controls, including properly monitoring for aberrant activity and filing suspicious activity reports (SARs).

The company’s subsidiary, XRP II, LLC, assumed the function of its parent to sell virtual currency and also lacked an AML program and did not report suspicious activity related to its business, in violation of the Bank Secrecy Act.

FinCEN Director Jennifer Shasky Calvery announced the penalty this week. The Vienna, VA-based agency worked in tandem with the US Attorney’s Office for the Northern District of California, which also announced a settlement agreement with the two associated companies.

Ripple Labs  and its subsidiary will not be prosecuted criminally. Ripple Labs forfeited $450,000 as part of the settlement, which will be credited to partially comply with the $700,000 penalty.

Marco Santori, a counsel at the Pillsbury law firm in New York City and chairman  of the Bitcoin Foundation’s Regulatory Affairs Committee, said the Ripple Labs penalty underscores the increasing regulatory burden in the digital currency space.

“It’s really the first public announcement of FinCENs intention to move away from understanding the industry to an enforcement posture when they are actively enforcing the guidance they published in March 2013,” he said.

Several factors helped the company with this settlement agreement, including its cooperation with the government in the ongoing investigation of its business practices. The three-year agreement stipulates that the company must enhance its AML program and train its employees to more effectively implement the controls.

Ripple Labs was founded in 2012 and is the second-largest cryptocurrency by market capitalization after Bitcoin, was formerly called OpenCoin and developed what is called the “Ripple protocol.”

Its website describes its team as a group of “experienced cryptographers, security experts, distributed network developers, Silicon Valley and Wall Street veterans” that work to code the open-source software. XRP is another math-based currency that is native to the Ripple network.

Must ‘look-back’ to move forward

Both companies will have to transact activity through a registered MSB and comply with the Funds Transfer and Funds Travel Rules. Pursuant to the agreement, the companies will also have to conduct a three-year “look-back” review to file SARs for prior missed suspicious transactions.

The companies are also required to have an outside independent auditor who will review their compliance with the Bank Secrecy Act every two years up to 2020, and will check for 11 steps that it will need to take to fulfill the agreement.

US Attorney Melinda Haag said, in a press release issued by FinCEN on the penalty, that the agreement demonstrates the vigilance on financial markets to ensure security and prevent misuse.

“Ripple Labs Inc. and its wholly-owned subsidiary both have acknowledged that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would-be criminals to avoid detection,” she said.

“We hope this sets an industry standard in the important new space of digital currency,” she added.

Multilateral investigation reveals exchanger had AML dark corners

In addition to being the tax authority of the United States, the Internal Revenue Service also handles a wide range of financial crime issues, including AML/BSA compliance for money services businesses through its AML division.

That division inherited responsibility for the AML exams of virtual currency businesses when FinCEN officially declared they would be treated as MSBs and would be held to the same expectations of regulatory compliance.

The IRS and its criminal investigation division worked in tandem with the US Attorney’s Office and FinCEN to handle the investigation.

According to the US Attorney’s Office, Ripple Labs failed to file a suspicious activity report when it negotiated a $250,000 transaction with a former felon convicted of dealing with explosive devices in 2013. Ripple Labs also sold its subsidiary XRP while not registered with FinCEN.

FinCEN released guidance in March 2013 clarifying the applications of the regulations implementing AML rules on in the virtual currency space. Pursuant to federal law, MSBs including exchangers and administrators, must register with FinCEN.

IRS CI Chief Richard Weber commented that federal regulations are in place to detect and stop illegal activities, including those in the virtual currency arena.

“Unregulated, virtual currency opens the door for criminals to anonymously conduct illegal activities online, eroding our financial systems and creating a Wild West environment where following the law is a choice rather than a requirement,” he said.

The ripple effect of the penalty on the fintech sector

While Ripple Labs has been cooperating with the US government, and therefore saw its original criminal charges dropped, the civil action may cause an aftershock in the financial technology industry, specifically for virtual currency businesses.

The case shows that cooperation and compliance can mollify regulators, though the reputational damage it has caused, and the actual cost of the penalty, are still to be seen.

Though the penalty may not seem high compared to fines issued on major banks and other financial institutions for their AML lapses that have soared into the billions of dollars, but can be difficult to bear for a smaller startup operation.

Looking ahead, though, the compliance costs for virtual currency startups may rise significantly, including by implementing better training procedures for staff, acquiring new technology for monitoring systems, and other must-haves the regulators are looking for to check off during investigations and audits.

Santori said the cost of noncompliance is higher than the costs of compliance, and virtual currency companies are taking notice.

Compliance at times an afterthought, must be at the forefront

The Ripple Labs penalty is another confirmation to new and prospective companies focused on revenues that they should invest in compliance.

“I think that by and large virtual currency companies have been fairly diligent about upholding their federal obligations and FinCEN has on multiple occasions noted that. They have said that virtual currency companies have filed SARs and [currency transaction reports (CTRs)]. State compliance is really the biggest challenge.”

State licensing is an uneven landscape with different requirements depending on the jurisdiction, he explained.

On a Federal level, he said FinCEN has been working very closely to understand the industry.

“I think they should be applauded for that. This settlement is just another example of that,” Santori added.

Ripple Labs Spokeswoman Monica Long issued a comment on behalf of the company, highlighting that Ripple Labs was one of the first to create a compliance program in the virtual currency landscape.

“We’ve been consistent in our message of supporting a compliant and healthy Ripple ecosystem,” she said in the statement. “We have not willfully engaged in criminal activity, nor has the company been prosecuted. We couldn’t agree more with Chief Weber’s observation that a ‘Wild West environment’ is untenable in financial services.”

Regulators still weary of virtual currency, mindful of criminal actions

Virtual currency advocates are striving to change the image of Bitcoin in the eyes of regulators who see it as an avenue for crime.

However, major cases like the Silk Road dark web marketplace, which was shut down by investigators in 2013, have tainted the reputation of the modern cryptocurrency system, also revealing dark corners where traditional AML compliance rules don’t necessarily apply.

Without a centralized authority approving transactions, and with no personal identity attached to Bitcoin transactions, the tenets of Know-Your-Customer and Customer Due Diligence are somewhat moot points in the virtual currency ambit.

In the Silk Road case, Ross Ulbricht, the site’s administrator,  was later found guilty on all seven charges in federal court, including narcotics and money laundering conspiracies and a “kingpin” charge.

Prosecutors said Ulbricht enabled more than 1 million drug deals on Silk Road and earned about $18 million in bitcoins through the sale of illegal drugs.

The US Department of Justice seized millions of dollars in Silk Road bitcoins through the case. US Attorney Preet Bharara said in a statement after the verdict that “the supposed anonymity of the dark web is not a protective shield from arrest and prosecution.”

[danielamariaguzman]

Hunting trade-based money laundering, FinCEN order hones in on Miami exporters

By Daniela Guzman dguzman@acfcs.org Apr. 30, 2015

In an effort to close in on trade based money laundering channels, US federal regulators are heightening scrutiny on some 700 electronic exporting businesses in the Miami area.

In a rarely used move, the US Financial Crimes Enforcement Network (FinCEN) issued a Geographic Targeting Order to augment reporting requirements for many businesses that serve as the US hub for exports to Latin America, increasing transparency on what regulators believe could be black market foreign exchange channels and drug cartel money laundering schemes.

The order, issued last week, is a collaborative effort between the FinCEN, Homeland Security Investigations and the Miami Dade State Attorney’s Office South Florida Money Laundering Strike Force, agencies that are honing in on trade-based money laundering schemes (TBML).

John Tobon, Assistant Special Agent in Charge of the Financial Investigations Division of ICE Homeland Security Investigations, said the Miami Geographic Targeting Order has been in the works for several months, based on law enforcement research and data from financial institutions that revealed how concentrated the activity was.

The GTO went into effect Apr. 28, 2015. It lowers the reporting threshold on cash transactions from $10,000 to $3,000 for covered businesses for the next 180 days. Businesses will have to file IRS Form 8300, similar to a bank’s currency transaction report, to monitor for cash transactions that may be connected to TBML.

“Organizations are repeatedly conducting transactions just under the 10k limit to avoid the 8300 requirement. We wanted to lower it to not overly burden businesses but alert us” to potentially illicit transactions, Agent Tobon said.

A FinCEN press release said the complex schemes used in trade are a “primary method used by drug cartels, including the Sinaloa and Los Zetas, to launder criminal money.” Enforcement agencies say the GTO will allow them to gather more information about cash transactions, particularly the individuals and entities behind the cash.

The latest GTO highlights the growing concern from enforcement agencies over trade-based money laundering, a tactic some estimate moves between $730 billion to over $1 trillion in illicit proceeds globally each year.

It also drives home FinCEN’s fairly recent emergence as a more aggressive enforcement agency, and one seemingly much more willing to issue GTOs than in the past. Before last year, FinCEN’s only GTO was issued in 2011, targeting casinos in Las Vegas. In less than twelve months, the agency has issued three – on armored cars transporting currency near the US southwest border, the Los Angeles “fashion district,” and now Miami export firms – with others speculated to be coming soon.

Increased reporting from exporters provides insight on currency exchange schemes

Regulators say the order does not determine that the Miami firms are involved in criminal activity, though the sector has been allegedly exploited by drug traffickers or other offshore criminals that utilize the exporting companies as money laundering vehicles.

The order covers businesses means a trade or business located in US zip codes 33172, 33178, 33166, 33122 and 33126, mostly covering the areas of Doral, located near Miami International Airport, and some areas near downtown that are dotted with “mom and pop” style electronic exporters.

“The GTO does not prohibit businesses from deciding whether to do business with a certain client,” Tobon explained.

“The GTO does require additional information from the businesses that were not obligated to do so before, like information on third parties delivering cash in excess of $3,000.”

Whether affected by a GTO or not, businesses involved in trade should conduct risk-based due diligence on cash transactions. Three questions to ask include:

1) On whose behalf is this payment being delivered?

2) Who is delivering it?

3) What role does the person have in the company that is exporting it?

The GTO doesn’t necessarily target bad actors solely within the exporting industry in Miami.

Miami was targeted geographically because the city serves as a hub for US exports to Latin America. Electronics are particularly viable for money laundering schemes because they are high value goods and acquired mostly from the US in countries like Colombia, Venezuela and Mexico.

While exporters send goods to those countries, they expect to be paid in US currency. Many exporter clients in Latin America use peso brokers to get dollars at a cheap price.

“There is a lot of money in Miami that is waiting to be laundered from drugs,” says Juan Villa, consultant with Miami-based AML Class.

“Cartels use companies here that export to Mexico or Colombia that need to buy products and send dollars back to the US. It’s very common. If they take large amounts of cash now, they will have to ask many questions.”

For banks, GTO raises own set of due diligence and reporting concerns

Michael McDonald, a pioneer in anti-money laundering compliance and Wellington, Fla.- based consultant and former IRS criminal investigator says the purpose of the order is to understand the flow of cash into the US.

“Law enforcement wants to gather information with 8300s on who is bringing the cash to the company and perhaps target seizure and forfeiture,” McDonald said. While peso brokers are legal in many countries, some drug cartels can convince or even extort businesses to take their drug money in order to pay for invoices.

Businesses that take cash from peso brokers will need to augment their customer due diligence, as well as comply with the reporting requirements designated in the order. Furthermore, banks with accounts fitting the profile of the exporting businesses will have to continue filing their own cash transaction reports.

“The banks are looking and watching the flow of funds through those accounts. It wouldn’t surprise me if banks file CTRs if a business deposits a lot of cash. When the regulators get that CTR, they look for the 8300 from the business to see if it was needed,” McDonald explained.

A 8300 form is used to monitor a series of transactions in a 12-month period, which allows the IRS to look for structured cash payments.

“The 8300s were made to create a paper trail and lump these structures all together,” McDonald explained.

Tougher standards, potential ‘de-risking’ may catch export industry off guard

Some electronics exporter businesses have robust compliance departments, McDonald said of clients that have asked for AML consulting services in the past. The businesses want to prove to their bank that they are compliant to lower their risk profile.

However, some businesses don’t have much contact with the AML landscape at all and may find themselves in a difficult position as they are targeted by a federal regulator for the first time.

Bill Marquardt, of FTI Consulting in Miami, says that the order is designed in a small enough group of potential businesses that the additional reporting burden won’t be that significant, but it will still give the government information on potential criminal activity.

“For those unsuspecting, however, I think it will be burdensome and some customers of banks in these areas may be at risk for ‘de-risking’,” Marquardt said.

“Banks may effectively stop doing business with some of these businesses which is sort of counterproductive because it stops the flow of information to government working on these cases.”

In contrast, some experts in Miami believe that the issue is still too premature for banks to make these decisions. Juan Villa, a consultant with AML Class based in Miami, says that the order is meant to add transparency to the different currency exchanges that occur within trade from US to Latin America. When it comes to banks, it is just too early to tell, he says.

“The banks have not taken on the implications of the FinCEN order,” Villa said.  “Exporting companies have always been categorized as high risk, so banks will continue to monitor them.”

The electronics exporting industry in Miami may be at risk for TBML, but it’s important to note that the GTO is only focusing on a small portion of the problem.

“Any business that receives third party payments, whether they be cash or wires is susceptible to money laundering,” Tobon of HIS said.

“Every single industry and every commodity that is exported is at risk of being exploited for these types of schemes. Every industry with a commodity that is wanted overseas and industries that deal with countries with very restrictive foreign currency policies.”

GTOs rise as an enforcement tool against TBML

GTOs are a rarely used enforcement tool, though last year’s success in the Los Angeles garment and fashion district substantially raised their profile. In October 2014, more than 1,000 federal agents raided over 70 locations in the LA fashion district, eventually seizing more than $90 million in cash and arresting nine people. In the wake of the raid, FinCEN issued a GTO, noncompliant companies and their illegal counterparts were forced out of the area.

“When we issued a similar GTO in the Los Angeles area last year, many speculated about whether we’d be doing the same in other parts of the country,” said FinCEN Director Jennifer Shasky Calvery. “We are committed to shedding light on shady financial activity wherever we find it. We will continue issuing GTOs, as necessary, as well as exercising FinCEN’s other unique anti-money laundering authorities.”

Before the Los Angeles raid, FinCEN issued a GTO in 2014 covering the US-Mexico border at two California ports of entry focusing on armored car companies moving bulk cash, and another on Las Vegas casinos in 2011.

While the geographic targeting approach on trade-based money laundering may be taking force now, TBML itself is by no means a new scheme.

FinCEN released guidance and red flags for trade-based laundering in February 2010, stating that money laundering techniques, particularly tied to Central and South American trade, were on the rise. From January 2004 to May 2009, financial institutions filed more than 17,000 suspicious activity reports identifying nearly $280 billion in potentially criminal transactions tied to trade.

Tobon, of HSI, says that the cooperation between financial institutions, regulators and governments, and trade-related businesses is key to combating the problem.

“We’re trying to enlist this industry in the fight against money launderers by asking them to apply a risk based assessment of their customers,” Tobon said.

“The broader goal is to let the exporters know that they do in fact have an AML responsibility. We’re trying to ensure transparency in that transaction.”

[danielamariaguzman]

Experts say cybercrime is a global problem that requires self-accountability, training and cooperation between public and private sectors

By Daniela Guzman dguzman@acfcs.org Apr. 23, 2015

Cybersecurity is a term that has developed in response to “cyber-warfare.” The internet has created a new domain for attacks on nation-states, private corporations, financial institutions and other entities that operate in this global network.

Governments of the world are urging companies, including banks, to reinforce their protective barriers to prevent hackers from infiltrating their systems and stealing information or directly siphoning funds as breaches become a daily disaster, one that often goes undetected.

Breaches have occurred all over the world, through the exploitation of vulnerabilities in security networks or even social engineering. The new globalized threat also presents a tool for terrorists to achieve their nefarious purposes at a distance and virtually anonymously. State-sponsored attacks have also created a cyber-battleground by using dexterous hacker groups as proxies to steal important government intelligence or trade secrets.

However, as speakers at the ACFCS conference in New York City this week emphasized, cybersecurity is a global problem, but it is also an individual responsibility. While there is a universal network that stores information vital to national security and the financial system, there is no universal watchdog keeping that data safe.

The duty falls on the shoulders of the private companies and financial institutions that are restructuring their organizations to fall in line with the new expectations of regulators.

The focus on cybersecurity is not a passing trend, nor does it only apply to financial institutions. Every business is a technology business now, thus, every business needs an effective cybersecurity strategy that focuses on preventing breaches just as much as a cogent response to an attack that involves the government and its clients.

Regulators as well are adding more expectations to cybersecurity protocols for financial institutions under their governance, including a focus on third-party vendor virtual data security.

Due diligence on third parties will be a key point for financial institutions as they strive to align with regulator examinations.

The New York Department of Financial Services announced in 2015 that their examinations would include tests to prove these new protocols. The Federal Financial Institutions Examination Council also updated its priorities for 2015 with a focus on banks identifying and responding to cyber-attacks.

The Federal Financial Institutions Examination Council, the interagency body that also puts together the anti-money laundering exam manual, updated its priorities for the rest of 2015 with a focus on banks.

The Framework for Improving Critical Infrastructure Cybersecurity, developed by the National Institute of Standards and Technology in February 2014, with the aid of government, military, the intelligence community, academia and industry professionals, is being used as a guide to institutions in the event of an attack. The framework is composed of five steps:

Identify critical data

Protect

Detect

Respond

Recover

Experts from the legal field, the military and the financial services industry talked about the explosive nature of data breaches at the annual ACFCS Financial Crime Conference in New York City this week.

One of those speakers, John Walsh, CEO of SightSpan Inc. in Charlotte, North Carolina, is a highly regarded industry leader on the subjects of risk management, financial crime management and other relevant security topics.

He highlighted the importance of the NIST framework as to how institutions can learn to protect themselves from cyber threats.

“This cybersecurity framework is very important. If you learn this framework, you will learn the future,” Walsh said at the ACFCS conference. “There is no one protecting us and we have a false sense of security in our homes and businesses.”

Walsh said that although cybercrime has become a global problem, it is up to each individual firm to protect themselves against intrusions.

“This is a new problem and we need a new solution. We don’t have a decade to solve this problem. No firm in the US is safe right now in my opinion,” Walsh said.

“The problem extends much further than the financial services industry or corporations. It also affects governments of the world. The threats to the medical community are beyond imagineable,” Walsh said.

Joseph DeMarco, partner at DeVore & DeMarco LLP in New York, specializes in counseling clients on complex issues involving information privacy and security, theft of intellectual property, computer intrusions, on-line fraud, and the lawful use of new technology.

He founded and headed the Computer Hacking and Intellectual Property Program as the Assistant United States Attorney for the Southern District of New York, where he handled cybercrime investigations.

DeMarco, with his experience in the private sector and the government, has a unique perspective on how to handle cyber-attacks. He said it is important for institutions to remember that they are a target for hackers, but also for regulators.

“Breaches are going to have a significant legal component to them,” DeMarco said at the ACFCS Conference.

“In the interests of government regulators, they won’t tell you what you need to do. They will point you to prior enforcement actions, but most of those companies have settled because they don’t want the negative publicity. The minute they tell you what standard to apply, they have set the bar, and they don’t want to set it low,” DeMarco explained.

As companies and banks struggle to prepare themselves for attacks, they also have to design an efficient strategy post-breach to avoid trouble with regulators.

A number of states have passed laws requiring companies to disclose data breaches. The Sarbanes-Oxley Act of 2002 and post-financial crisis Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have also imposed significant disclosure requirements on data breaches.

“The first question you need to be prepared to answer isn’t what happened, but why did you take so long to tell us? What did you know and when did you know? If you have good answers to those questions, regulators can be pretty reasonable,” DeMarco explained.

In 2014, cyber breaches dominated headlines.

Major banks, corporations and even national governments were victims of attacks, some of which have ongoing repercussions. In October 2014, JPMorgan Chase revealed that names, addresses, phone numbers and email addresses of the holders of 83 million accounts were exposed when the bank’s computer systems were compromised.

The bank apparently had a weak authentication scheme, which allowed for the infiltration, according to reports by The New York Times. In response, the bank increased their security staff to more than 1,000 individuals, mostly former military and government security experts.

While the hackers did not empty out accounts by directly stealing money, the information purloined in this attack could be used to propagate thousands of financial crimes, including identity theft, tax fraud, and more.

Apart from fixing the weak authentication system and boosting its cybersecurity team, JPMorgan had to launch a damage control campaign to assure its clients that their money was still safe, despite the massive breach.

This example is, unfortunately, one of many recent breaches.

Target and Home Depot also suffered from attacks, which exposed tens of millions of credit cards and accounts, as well as health insurance company Anthem, which had 80 million social security numbers stolen.

Experts say there are more attacks to come as hackers become better at finding Achilles heels in the security systems of companies, hospitals, schools, military weapon control systems, and other crucial entities.

The US government has responded to the threat with several initiatives, including the nation’s first cybersecurity summit. President Barack Obama urged the private sector to share information on hacks with investigators, keeping lines of communication open both ways.

Banks are also being urged to implement training that educates employees on the red flags of a breach so they can alert IT personnel. Part of this endeavor to protect critical infrastructure includes two executive orders issued in 2013 designed to work with owners and operators to prepare for, prevent, mitigate and respond to threats.

Perhaps the most groundbreaking effort to protect the US from hackers has been the new sanctions programcreated by the Obama administration.

Through an executive order, which is usually reserved for terrorists, traffickers or organized crime groups, the government has implemented a sanctions regime against foreign cyber hacking groups that threaten the US economy, national security or foreign policy objectives.

The order covers any individual or group that:

Harms or compromises any services or computer networks supporting what the government considers critical pieces of infrastructure, such as banks, power grids and military installations.

Causes a significant compromise of such infrastructures themselves in providing power or services.

Causes a significant disruption in the general availability of a computer or network of computers.

The order also covers any entities directly or indirectly responsible or complicit, not just the attackers themselves, and extends to any entities gaining or stealing trade secrets and using those pilfered technologies to gain money. Those funds, thusly, would be forfeit.

There are also punitive orders against any individuals or entities trying to evade these orders and help a designated entity engage in any transactions.

As the US government uses this tool to combat cybercrime, the financial services industry is making strides in securing their systems to protect their clients’ information and funds.

As the private and public sectors strategize to block intruders from cyberspace, hackers are also one step ahead, with new malware being developed every day. The challenge now is to educate and train professionals, in any industry, to know what cyber risks they face.

[danielamariaguzman]

Combating the financing of terrorism, expert Nick Kochan says, is an intelligence task

By Daniela Guzman dguzman@acfcs.org Apr. 9, 2015  Nick Kochan is an investigative journalist and noted author from the United Kingdom and has extensive experience as an author and journalist in the fields of banking, management and forensic studies. His books on corruption, white collar crime and British politics have won acclaim. Kochan is an accomplished conference speaker and conference moderator. He has addressed conferences hosted by The Economist magazine, the Financial Times, a number of government agencies in the field of law enforcement and private companies. Nick has expertise in the areas of terrorist financing, bribery and corruption, money laundering, human trafficking, financial crisis, operational risk and other topics.  Kochan’s most recent book, ‘Corruption: The New Corporate Challenge’, has been hailed as an essential and pioneering analysis of the UK Bribery Act, and other corruption-related issues. He is currently working on a book on terrorist financing. Mr. Kochan discusses in this ACFCS podcast how the financial system, national governments, and local economies intersect with terrorist groups. From 9/11 to the emergence of the Islamic State, there have been improvements and challenges in the fight against the financing of terrorism, but one thing remains clear: money is the lifeblood of terror.  Read some key points of the interview with Nick Kochan, or you can hear the entire discussion here:

The distinction between money laundering and terrorist financing: The money launderer wants to use the system:

- to get the money out of the system

- to hide the fact that he is using criminal moneyneeds to disguise the money to escape the criminal source.

The terrorist financier wants to use the system:

-to use the system to buy terrorist materials and fund terrorist cells

-As a vehicle, not a moneymaking venture

- Money may be clean at the outset, does not apparently have a criminal source, so no machination is really needed

The key to understanding financing of terrorism is understanding the individuals behind the money. It is an intelligence task.

9/11 revolutionized the whole perception of terrorist finance. Money is the oxygen of terrorism.The Islamic State is complicated for the financial system because it may not have that much contact with it.

It is an institution unlike Al Qaeda or the FARC; they are self-contained and control the people in the large region that is taken over. They are not reliant to the extent of other terrorist groups of international transfers or funds because of taxes, oil revenues, funds from sale of antiquities, etc. So contact with the international financial system is very low.The role for banks and law enforcement is to apprehend foreign fighters at borders that are on their way to fight. They may be found with large amounts of money that they can’t explain.

National governments and financial institutions have collaborated more after 9/11 to combat terrorist financing.  

The general sense is that banks are very much on the front lines as seen through the FATF requirements and FinCEN guidance on CFT. However, they are not up to speed on the tactics of terrorist financing. Terrorist groups are very adept at moving goods, rather than money.

Terrorists are part of their local economy. They will have an interest in making money, not because they are financial criminals like money launderers that want to get rich, but because they want to fund their activities. They will set up their entities that will reflect their economies where they are established. Al Shabaab exports charcoal. The Tamil Tigers are involved in trade. The FARC uses the drugs industry, etc. They are in the black market economy, leeching off their local produce.

[danielamariaguzman]

BitReserve Compliance Chief: Cryptocurrency and new virtual payment platforms are the future, not just financial crime risk

By Daniela Guzman dguzman@acfcs.org April 1, 2015

Hear an interview with Juan Llanos in Spanish here:

Along with getting easy access to trivia answers, movies, music and geospatial coordinates, consumers now have significantly more options to move money around the world online. With increasing frequency, this has meant transmuting deposited cash into virtual currencies not backed by authorities, the most popular example in recent years being Bitcoin.

In that system, individuals can deposit or wire their own money to a person or exchange already holding bitcoins, who will then allot the depositor a corresponding chunk of bitcoins. The individual can then spend the money in venues that accept Bitcoin, send it to other individuals or hold it, in hopes the value will go up.

Transactions are logged through a public and transparent “blockchain” ledger, though the humans behind the coded names buying and selling bitcoins are not necessarily visible.

The volatility tied to Bitcoin – in the past year it has gone as high as nearly $700 to below $200 – is a concern for individuals and a barrier to entry. Additionally, the currency’s cachet has been dampened by its connections to highly publicized cybercrime cases like Silk Road.

Even so, the technology underlying Bitcoin is something other savvy firms can piggyback upon to gain the benefits of cheaper transfers, with fewer barriers than the formal money transfer networks, says Juan Llanos, chief of transparency and compliance at San Francisco-based BitReserve.

The company borrows the cryptocurrency platform to provide people with a way to hold and use Bitcoin as stable, real world money, move between currencies, and send it and receive it instantly. The company profits on the exchanges between their digital Bitcoin card and currency.

“Without Bitcoin, we wouldn’t be talking about other virtual emerging payments – it was the catalyst for the conversation about the cost of moving money,” said Llanos in an interview with ACFCS.

“There are risks and costs to the traditional payment system, so emerging virtual payment platforms are both a challenge and an opportunity,” he said. “Digital money and cryptocurrency is a genuine invention, and we can no longer ignore it.”

But while these mobile payment systems are on the rise and online transfer systems are now a universe accessible by the phone in your pocket, other emergent payment systems  utilizing cryptocurrency protocols, such as the controversial Bitcoin, are still in their relatively nascent stages and represent risks tied to financial crime as well as opportunities for innovative payment companies, Llanos believes.

These platforms, however, are attractive for providing an alternative to traditional currency – centralized, controlled by an authority, and subject to fees – by providing an at times anonymous, decentralized, and free, or significantly lower cost, method to hold and send money domestically or internationally at the push of a button

The benefits of that sector’s most desired and despised denizen, Bitcoin, are just starting to be discovered and understood by the consumer world as the technology is simultaneously examined for efficiencies and vulnerabilities by public and private sector entities.

National governments, regulators, and startups are hoping to virtually cash in by leveraging the attributes of Bitcoin’s technology for their own gain, but also adding the requisite financial crime counterpoint checks to better weed out criminals and fraudsters, the stratagem of Llanos’ firm.

Traditional banking and payment services have strived for decades to develop robust policies and teams dedicated to fighting risks such as money laundering, terrorist financing, data breaches and fraud.

But as Bitcoin and other similar platforms emerge, the question also rises to the fore regarding how compliance can have a role in a virtual world.

Typically, compliance duties would have to be borne by the individuals or exchanges selling the bitcoins or at the physical nexus of the real and virtual worlds – the banks holding the accounts for the exchanges, which recently became subject to formal anti-money laundering rules after a US Treasury ruling.

Thus far, though criminal groups have turned to Bitcoin to move money and purchase illicit goods anonymously, the technology itself has been  surprisingly resistant to being infiltrated by financial criminals.

So far no one has been able to hack into the fundamental system.

Llanos, though, believes that with the right leverage, Bitcoin can become a more convenient, more secure way for the world to hold and move money, and, if the companies involved take compliance seriously, can be less alluring to organized crime groups.

In his role, Llanos takes a risk-based and data-driven approach to compliance, avoiding what could be a vacuum of dismissing innovation to satisfy risk prevention.

One of the major distinctions with the cryptocurrency model from the traditional banking and payment model is the separation of value from ownership, he said.

In the traditional banking sector, your personal information and identification are connected to funds – without authentication and verification of your identity, it’s almost impossible to access the financial system.

In that paradigm, know-your-customer due diligence, is a  central pillar of financial compliance, and a requirement under anti-money laundering rules, which forces  institutions to bar potentially risky clients from holding accounts and subsequently conducting transactions that may be crime-related.

Critical to Bitreserve’s business strategy is understanding more about potential customers by asking them compliance-related questions to get a sense of their business throughput, assigning them a risk score and monitoring transactions to determine if the funds are too high or regions too risky, Llanos said, steps that some companies in this space may be skipping.

“We’re very aware of the risks and we’re very knowledgeable about the compliance obligations and operational deterrent and detective techniques that need to be implemented,” he said.

“We’re working on all components of a sound AML and Sanctions Compliance program: customer identification, reporting and record-keeping, suspicious activity detection, and we’re also taking a holistic view of risk management, with a view to achieving both effectiveness and efficiency in our work,” Llanos said.

The virtual currency world, though, is a bit of an anomaly, as its purpose is to separate identity from the transaction.

Though Bitcoin uses a ledger system that is open to the public, personal information is essentially private. Privacy has become a rarity in the modern world, Llanos said. That’s why virtual currency presents a unique opportunity in financial autonomy and secrecy.

Companies like BitReserve, which create a link between bitcoin technology and real world currencies are in demand, and can be the key to mitigating risks that may arise from an unmanned digital network, though it’s critical that any third-parties .

“Every single website requires a personal ID and we authorize a merchant to subtract funds from our account. It’s uncontained and unchecked. The reason why there’s hacking incidents is there’s a broad opportunity for attacks,” Llanos said.

While it is important to look at virtual currency through a risk-based approach, it is equally important to recognize the advantages to a system that exists apart from the traditional hierarchy and authority of the financial system.

Llanos said that evolution of the financial services industry is inevitable, though it can be hindered if new technologies are dismissed as only “risks” and not opportunities for development, accessibility and convenience.

The learning curve and knowledge gap is the main obstacle to financial inclusion, Llanos explains.

“Let’s accompany the evolution with caution and the permission to innovate. The world condemns people to be poor by not allowing them to access the financial system,” he said.