Law, Governance and Technology Series

Volume 19

Series EditorPompeu CasanovasUABInstitute of Law and TechnologyBellaterra (Barcelona)Spain

Giovanni Sartor University of Bologna (Faculty of Law -CIRSFID) and European University Institute of FlorenceItaly

The Law-Governance and Technology Series is intended to attract manuscripts aris-ing from an interdisciplinary approach in law, artificial intelligence and informa-tion technologies. The idea is to bridge the gap between research in IT law and IT-applications for lawyers developing a unifying techno-legal perspective. The series will welcome proposals that have a fairly specific focus on problems or proj-ects that will lead to innovative research charting the course for new interdisciplinary developments in law, legal theory, and law and society research as well as in com-puter technologies, artificial intelligence and cognitive sciences. In broad strokes, manuscripts for this series may be mainly located in the fields of the Internet law (data protection, intellectual property, Internet rights, etc.), Computational models of the legal contents and legal reasoning, Legal Information Retrieval, Electronic Data Discovery, Collaborative Tools (e.g. Online Dispute Resolution platforms), Metadata and XML Technologies (for Semantic Web Services), Technologies in Courtrooms and Judicial Offices (E-Court), Technologies for Governments and Administrations (E-Government), Legal Multimedia, and Legal Electronic Institu-tions (Multi-Agent Systems and Artificial Societies).

More information about this series at http://www.springer.com/series/8808

Daniel Adeoyé Leslie

Legal Principles for Combatting Cyberlaundering

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ISSN 2352-1902 ISSN 2352-1910 (electronic)ISBN 978-3-319-06415-4 ISBN 978-3-319-06416-1 (eBook)DOI 10.1007/978-3-319-06416-1Springer Cham Heidelberg New York Dordrecht London

Library of Congress Control Number: 2014939426

© Springer International Publishing Switzerland 2014This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher’s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law.The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use.While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein.

Printed on acid-free paper

Springer is part of Springer Science+Business Media (www.springer.com)

Daniel Adeoyé LeslieShearman & Sterling LLPParisFrance

v

Dedicated to the memory of my late father, Hon. Justice (Dr.) S. I. Leslie—his legacy

upholds the purpose that this book serves.

vii

Up to 2 trillion USD (or 5 % of global GDP) of illegally generated money is laun-dered through our economies. The internet and mobile phones have been powerful enablers, not least through providing new means of payments, the growing use of peer-to-peer transactions, and the introduction of virtual currencies like Bitcoin. All of them are extremely swift, relatively secure, almost anonymous, and global.

Once hard currency is converted into anonymous digital money, it becomes ex-tremely difficult to trace, hence its attractions for those concerned with generating illegal profits seeking to transfer it back into the legitimate mainstream economy. The fact that private vendors create digital money in a decentralised structure means that there is little regulation and few controls, save for those imposed by the vendors themselves.

This raises a number of important issues, not least the concerns of law enforc-ers. Recent cases (Liberty Reserve, and SilkRoad) show that criminal organisations are already using digital currencies to launder their proceeds of crime. On the other hand, these cases have also shown that, although difficult, the investigation of the ownership of digital currencies is not impossible. The Bitcoin peer-to-peer network records transactions in a distributed public ledger, which can be subjected to ana-lytical monitoring tools capable of highlighting suspect transactions. And a digital transaction, unlike cash, always leaves a trace. Once the veil of secrecy is broken assets can be sought, found, and confiscated.

I therefore welcome this timely book that gives such comprehensive coverage to an important subject.

Charles MonteithInternational Center for Assets Recovery

Basel Institute for Governance Basel, Switzerland

Foreword

ix

Preface

Along with its innumerable wonders, the advent of the internet has brought with it very bad vices. The notion of convenience, which comes with the use of the inter-net, can be attributed to how the internet is being used to disguise the proceeds of ill-derived funds, or what is better known as cyberlaundering. Cyberlaundering is a phenomenon that seems negligible on face value, but, to the contrary, has very dire effects, especially on national economies, which are in no way trifling.

This treatise describes the problem of cyberlaundering, pointing out the various legal issues pertaining to it. Given that cyberlaundering is a comparatively new phe-nomenon, which is not yet conceptualized legally, criminal justice authorities find it hard to detect, investigate and prosecute cyberlaundering. An adequate legal regime against cyberlaundering is currently non-existent, as there is presently no concise international or national legal framework in place to contain the problem. Whilst the chief focus of the treatise is to devise a legal framework to combat cyberlaundering, considerable attention is also devoted to the tension that arises between public and private interests, amongst several other legal issues that come to play along the way. This is a debate that necessarily arises when legislatures resort to more radical anti-cyberlaundering laws. The treatise advocates a middle ground, which leads to the desired end of curbing the exponential growth of cyberlaundering, at the very least.

xi

Acknowledgments

Uttermost thanks to God, the author and finisher of my faith.I owe much gratitude to Professor Lovell Fernandez of the Faculty of Law,

University of the Western Cape, Bellville, South Africa; Co-Director of the South African-German Centre for Transnational Criminal Justice, for being the force be-hind this treatise. His assiduous supervision of my doctoral thesis has inspired the outcome that is this treatise. I am equally beholden in gratitude to Professor Ger-hard Werle, of the Faculty of Law, Humboldt-Universität zu Berlin, Germany; Co-Director of the South African-German Centre for Transnational Criminal Justice, without whom this treatise would be impossible. I am grateful for his dedicated guidance throughout the course of the research that has produced this treatise. By his making the research possible at Humboldt-Universität zu Berlin, and the Max Planck Institute for International Criminal Law, Freiburg, Germany, the essence of this work was achieved.

I am indebted to the German Academic Exchange Service ( Deutscher Akade-mischer Austausch Dienst) and the Foreign Service of the German Government for their generosity in funding the research, and thus making it a reality. Special thanks to Dr. Moritz Vormbaum, Faculty of Law, Humboldt-Universität zu Berlin, coordinator of the Transnational Criminal Justice Program, and Dr. Paul Christoph Bornkamm, former Senior Research Associate, Faculty of Law, Humboldt-Univer-sität zu Berlin, who both availed themselves, lending invaluable advice and as-sistance during the research. I would like to thank Frau Anja Schepke, Frau Ulrike Brodien, Windell Nortjie and the rest of the administrative team in Berlin and Cape Town for making my research stay in Germany and South Africa most comfortable.

I would also like to thank the support staff at the Cyber Law unit of the Max Planck Institute for Foreign and International Criminal Law, for ensuring a worth-while research stay at the Institute. I owe gratitude as well to the support staff at the Peace Palace Library, The Hague, the Netherlands, as well as the library staff of the Law Faculty of the University of Leiden, Leiden, the Netherlands.

I am profoundly grateful to my family, particularly to my late father, Hon. Justice (Dr.) Sunday Idowu Leslie, and affectionate mother, Mrs. Margaret Modupe Leslie, for the incorruptible values instilled in me on which I continue to thrive. I sincerely appreciate my siblings, Kayode, Tayo, Yetunde, Bimbo, Vera, Kenneth, Bukky and Bolanle, for allowing me stand on their shoulders since I can remember.

xii Acknowledgments

Very special thanks to Ms. Elzet Hurter of the Faculty of Law, University of Pretoria, Pretoria, South Africa, who saw the vision for me when I could not. I thank Lavarn Gounden and Johannes Buabeng-Baidoo for their proven friendship, while also thanking the rest of my colleagues and friends who have kept me in their thoughts and prayers during the course of the research.

D. A. Leslie

xiii

Contents

1 Introduction, Money Laundering and Cyber crime ................................. 11.1 Epistemological Basis of Study ............................................................ 11.2 Significance of Study ............................................................................ 2

1.2.1 The Problem of Cyberlaundering: A Legal Concern ................. 21.2.2 The Non-Existence of a Proper ACL Legal Regime ................. 5

1.3 Parameters of Study .............................................................................. 61.4 Money Laundering: An Overview ........................................................ 8

1.4.1 Understanding the Meaning of Money Laundering .................. 81.4.2 The History and Evolution of the Anti-Money

Laundering Legal Regime ......................................................... 111.4.3 The Process of Money Laundering ........................................... 151.4.4 Money Laundering Techniques ................................................. 181.4.5 Money Laundering and Rising Challenges: Impact

and Weight of the Problem ........................................................ 241.5 An Introduction to Cyber crime: The ‘Cyber Root’

of Cyberlaundering ................................................................................ 261.5.1 Understanding the Term ‘Cyber crime’ ..................................... 261.5.2 The Evolution of Cyber crime in Brief ..................................... 281.5.3 The Present State of the Anti-Cyber crime Legal

Regime: An Overview ............................................................... 291.6 Evaluation ............................................................................................. 32References ...................................................................................................... 32

2 Cyberlaundering: Concept & Practice ...................................................... 552.1 Deciphering Cyberlaundering ............................................................... 55

2.1.1 The Meaning of Cyberlaundering ............................................. 552.1.2 Catalysts of the Cyberlaundering Dilemma .............................. 562.1.3 Categorizing Cyberlaundering .................................................. 60

2.2 Electronic Payment Systems: New Tools for Laundering .................... 632.2.1 The Concept of Illegal Electronic Money ................................. 632.2.2 Models of E-Payment Systems ................................................. 662.2.3 Storing Methods and Examples of Electronic Money .............. 69

xiv Contents

2.3 Cyberlaundering and the Three-Pronged Process ............................... 732.3.1 Placement ................................................................................ 732.3.2 Layering .................................................................................. 742.3.3 Integration ............................................................................... 75

2.4 Vulnerable Industries and Techniques of Cyberlaundering ................ 762.4.1 Online Banking ....................................................................... 762.4.2 Online Auctioneering .............................................................. 792.4.3 Online Gambling ..................................................................... 802.4.4 Online Barter Trade ................................................................. 832.4.5 Virtual Worlds ......................................................................... 86

2.5 What the Future Holds for Cyberlaundering ....................................... 912.6 Evaluation ........................................................................................... 95References .................................................................................................... 95

3 The Present International and National Legal Framework Against Cyberlaundering .......................................................................... 1193.1 An Overview of the Current Anti-Money Laundering Regime .......... 119

3.1.1 General .................................................................................... 1193.1.2 Pillar 1: Prevention .................................................................. 1203.1.3 Pillar 2: Enforcement .............................................................. 1443.1.4 Pillar 3: Compliance ................................................................ 156

3.2 The ACL Legal Regime: A Survey of Existing Relevant Laws, Policies and Initiatives .............................................................. 1573.2.1 Present International Legal Framework Against

Cyberlaundering ...................................................................... 1583.2.2 Present National Legal Framework for Cyberlaundering ....... 165

3.3 Evaluation ........................................................................................... 177References .................................................................................................... 178

4 Regulating Cyberlaundering..................................................................... 2014.1 Rationale for Regulation ..................................................................... 2014.2 Regulatory Issues and Challenges ....................................................... 2024.3 An Adaptive Approach to Regulating Cyberlaundering ...................... 2054.4 Prevention Pillar for the ACL Legal Regime ...................................... 206

4.4.1 Threshold Factor: Conceptualizing Cyberlaundering Legally ... 2074.4.2 General Preventive Measures Against Cyberlaundering ......... 2144.4.3 Target Approach to Cyberlaundering Regulation .................... 217

4.5 Compliance Pillar for the ACL Legal Regime .................................... 2354.5.1 Duty to Comply ....................................................................... 2364.5.2 Duty to Ensure Compliance .................................................... 237

4.6 Evaluation ........................................................................................... 238References .................................................................................................... 239

xvContents

5 Prosecuting Cyberlaundering ������������������������������������������������������������������� 2635�1 Path to Prosecuting Cyberlaundering: Issues and Challenges ������������ 263

5�1�1 Practical and Logistic Challenges ������������������������������������������� 2635�1�2 The Right to Privacy ��������������������������������������������������������������� 2645�1�3 Electronic Evidence and the Question of Admissibility ��������� 267

5�2 Investigating Cyberlaundering ������������������������������������������������������������ 2725�2�1 Applicability of Conventional Money Laundering

Investigative Techniques ��������������������������������������������������������� 2735�2�2 Fundamentals of Digital Investigation ������������������������������������ 2735�2�3 Employing Digital Investigative Elements for

Cyberlaundering: A Practical Assessment ������������������������������� 2775�2�4 Mutual Legal Assistance for Cyberlaundering Investigations ��� 290

5�3 Establishing Jurisdiction for Cyberlaundering ������������������������������������ 2915�3�1 Applicability of Money Laundering Principles of Jurisdiction ���� 2935�3�2 Applicability of Cyber crime Principles of Jurisdiction ���������� 2955�3�3 Guidelines for Establishing Cyberlaundering Jurisdiction ����� 303

5�4 The Need for an ACL Prosecutorial Framework: Example of Real Cases ��������������������������������������������������������������������������������������� 3055�4�1 United States of America v� E-Gold Ltd, Douglas

Jackson, Barry K� Downey, and Reid A� Jackson ������������������� 3055�4�2 The Pending Case Against Megaupload Ltd ��������������������������� 308

5�5 Formalities for Establishing the ACL Legal Framework �������������������� 3115�6 Evaluation ������������������������������������������������������������������������������������������� 312References ���������������������������������������������������������������������������������������������������� 313

6 Conclusions and Recommendations ��������������������������������������������������������� 3376�1 The Tripple-Pillar Combat Strategy ���������������������������������������������������� 337

6�1�1 Increased Awareness Amongst Regulatory Authorities����������� 3376�1�2 Continuous Research ��������������������������������������������������������������� 3396�1�3 Capacity Building �������������������������������������������������������������������� 340

6�2 Epilogue ���������������������������������������������������������������������������������������������� 340References ���������������������������������������������������������������������������������������������������� 341

Erratum ������������������������������������������������������������������������������������������������������������ E1

About the Author ��������������������������������������������������������������������������������������������� 365

Index ������������������������������������������������������������������������������������������������������������������ 367