Introduction
The breadth and complexity of international economic sanctions and the severity of the penalties for breach have led many financial institutions to engage in “de-risking.” This strategy involves the wholesale refusal of services to classes of people who may not themselves be the target of sanctions but are affected by them, such as family members or known associates of persons designated under targeted financial sanctions, or, in some cases, residents or nationals of sanctioned countries. This chapter focuses on the latter, specifically on money transfers to and from Iran and the UK and US. Where individuals or businesses need to remit money to or from sanctioned countries like Iran, they may be forced to turn to IVTS in the absence of practical access to regular international banking systems. IVTS are arrangements that facilitate transactions involving the transfer not of money, but of value. IVTS are viewed as high risk from an anti-money laundering perspective and operators of such businesses in the UK and the US are required to obtain a license and abide by strict regulatory requirements. Where regulatory action is taken against unlicensed IVTS operators, their customers may increasingly find that their funds are subject to civil forfeiture despite there being no allegations that those funds were themselves the proceeds of crime. This chapter will consider the developments which have led to this state of affairs, the wider policy issues at play, and the remedies available to those who find themselves in the crosshairs of sanctions and anti-money laundering measures, in circumstances where they are not themselves accused of wrongdoing.
Sanctions and Anti-money Laundering Measures: Iran
Iran has long been the subject of economic sanctions imposed as a result of its involvement in what the US describes as “support for acts of international terrorism,”Footnote 1 and its attempts to acquire nuclear weapons. While US sanctions against Iran started in 1979, the first set of broader sanctions were introduced following the U.S. State Department designation of Iran as a state sponsor of international terrorism. In 1992, the US enacted the Iran–Iraq Arms Non-proliferation Act 1992, which stated that it was US policy to “oppose any transfer of goods or technology to … Iran whenever there is a reason to believe that such transfer could contribute to that country’s acquisition of chemical, biological, nuclear, or advanced conventional weapons.”Footnote 2
Since then, the use of economic sanctions as a tool against Iran has grown exponentially and internationally, with the country becoming subject not only to unilateral sanctions imposed by member states within the EU and other US allies, but also sanctions by decree of the UNSC,Footnote 3 and the EU itself.Footnote 4
The international consensus on Iran shifted dramatically on July 14, 2015 with the passage of the JCPOA.Footnote 5 This historic agreement, often described as the “Iran Nuclear Deal,” resulted in the almost wholesale lifting of sectoral sanctions by the EU, along with the US lifting sanctions in the energy, financial, manufacturing, and auto sectors.Footnote 6 While the JCPOA promised to herald in a new era of cooperation between Iran and the West, Iran’s new-found economic freedom was fleeting. On May 8, 2018, the US under the Trump administration withdrew from the JCPOA and reimposed (or as it was known “snapped back”) a raft of sanctions, including, importantly, secondary sanctions against Iran and non-US entities doing business with Iran which would be prohibited if conducted by a US person.Footnote 7 These are sanctions which apply where there is no nexus to the US and which permit the US authorities to take action against foreign banks and other financial institutions.Footnote 8 For example, a European bank might execute a significant transaction in euros, or another non-US dollar denomination, related to the Iranian automobile industry or petroleum or petrochemical products, or involving any Iranian person already subject to US sanctions, which was lawful in the jurisdictions in which the bank operated. However, the US authorities could nevertheless prohibit the bank from opening or maintaining correspondent or “payable through” accounts in the US – effectively preventing the bank from conducting any US dollar transactions and therefore preventing it from operating in the major international financial markets.Footnote 9
Alongside international sanctions, Iran has also been identified by the FATF as a “high-risk” jurisdiction since February 21, 2020.Footnote 10 The so-called “blacklist” refers to countries which “have strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation.” Members of the FATF are urged to “apply enhanced due diligence, and in the most serious cases, countries are called upon to apply counter measures to protect the international financial system …”Footnote 11 The identification of a jurisdiction as “high risk” by the FATF is given considerable weight by financial institutions and international businesses. Despite being encouraged to apply a risk-based approach, where a territory is “blacklisted” such businesses will often refuse to carry out any related transactions which are otherwise lawful, and businesses will sometimes withdraw from the market altogether. This is known as overcompliance or de-risking.
While the direct effect which both sanctions and FATF blacklisting have had on the Iranian economy is well documented,Footnote 12 there have also been severe unintended consequences arising from overcompliance by financial institutions.
Cause and Effect: “De-risking”
De-risking is described by the U.S. State Department as the “phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.”Footnote 13 Managing risk is a costly process for financial institutions. It requires a bank to conduct enhanced due diligence which will include extensive background research on an individual or company, in order to determine whether they may have some relation, however attenuated, with someone who is on a sanctions list or otherwise has run afoul of a sanctioning authority. If a bank engages with a sanctioned person or entity even inadvertently, it can face severe penalties; in both the US and the UK, civil monetary penalties can be imposed on a strict liability (i.e., no fault) basis. Thus, the risks arising from dealing with businesses or individuals in jurisdictions subject to sanctions are very real. Financial institutions found in breach of sanctions have been subject to substantial financial penalties.
In particular, the US has for many years pursued an aggressive policy of enforcement actions against non-US financial institutions where the transactions were in US dollars or otherwise “touched” the US. For example, in 2014, BNP Paribas was subject to $8.9 billion in financial penalties for processing transactions in breach of sanctions against Iran, Sudan, and Cuba.Footnote 14 Standard Chartered Bank entered into a Deferred Prosecution Agreement with the U.S. Department of Justice in 2019 resulting in it agreeing to the forfeiture of $240 million along with the payment of a fine of $480 million arising from various breaches of sanctions concerning Iran.Footnote 15 In 2021, OFAC entered into a $862,318 settlement agreement with a Romanian bank called First Bank SA and its parent company, JC Flowers & Co, for processing transactions in breach of sanctions against Iran and Syria.Footnote 16 Moving beyond traditional financial institutions, in 2023, OFAC levied a $968,618,825 penalty against Binance Holdings Ltd, a Cayman Islands virtual currency exchange, for allowing US users and users in sanctioned jurisdictions (Iran, Syria, North Korea, Cuba, and Crimea, the Donetsk and Luhansk areas of Ukraine) to trade fiat and virtual currency (e.g., bitcoin) through the Binance.com platform.Footnote 17
In light of the long arm of regulatory authorities (particularly US authorities) and the punishing fines which can be imposed for breach of sanctions, as well as the considerable compliance costs involved in “managing” riskier business, these actual and potential costs are for many banks disproportionate to the return on the potential business. Accordingly, banks often take the commercial decisions simply to deny services to all potential or existing clients in or connected with sanctioned jurisdictions or related to a sanctioned person.
The risk of running afoul of, in particular, the US government is exacerbated by the often byzantine nature of sanctions and AML measures which apply to certain countries. On two occasions, in 1996 and 2018, the EU made concerted efforts to restrict the application of US secondary sanctions to businesses operating within the European single market, in particular through the establishment and resurrection, respectively, of the EU Blocking Regulation following a divergence between US and EU policy, with the EU member states perceiving the US to be aggressively overreaching by way of extra-territorial sanctions. As a result, the EU Blocking Regulation is designed to prohibit commercial entities in the EU from complying with certain extra-territorial sanctions.Footnote 18 In practice, however, the operation of the regulation as resurrected in 2018 has added yet another layer of complexity to what was already a regulatory minefield. Issues of competing compliance obligations for EU operators were considered by the Court of Justice of the European Union (CJEU) in Bank Melli v. Telekom Deutschland GmbH, in which the CJEU left open the possibility of EU businesses terminating relationships with US-sanctioned entities without providing a reason.Footnote 19 Thus, European businesses that complied with US extraterritorial sanctions could at least sidestep European penalties for doing so, by declining to provide a reason for their actions. While this might provide some comfort to the EU businesses, it has not resolved the underlying issue, which was that European companies have little choice but to comply with US extraterritorial measures, even when the legitimacy of those measures is questionable. They do this in part by de-risking and denying services for ordinary business transactions, as described above.
The effect of de-risking on Iran has been thrown into sharp relief by Alena Douhan, UN Special Rapporteur on the negative impact of unilateral measures on the enjoyment of human rights.Footnote 20 Professor Douhan’s first report was prepared following a visit to Iran during which the Special Rapporteur identified that financial institutions and other businesses continue to engage in de-risking by “refusing to process payments and to deliver goods and services out of fear of financial, reputational and other consequences.”Footnote 21 In her most recent thematic report, the Special Rapporteur stated that: “[t]he multiplicity and uncertainty of sanctions regimes, the high risk of penalties for their circumvention, reputational risks and uncertain and contradictory interpretation result in growing de-risking policies and overcompliance by States, businesses, individuals and even United Nations entities.”Footnote 22
The FATF has identified the need to address de-risking caused by its own measures as a “priority” and since 2015 has sought to encourage financial institutions to avoid the practice by issuing guidance on the proper approach to be taken to the management of risk arising from particular jurisdictions.Footnote 23 Similar guidance has been issued by some international bodies.Footnote 24 However, given the complex and often overlapping web of sanctions and AML risks, and the potential for significant penalties for sanctions breaches on a strict-liability basis, it is perhaps unsurprising that many financial institutions consider the compliance risks too great and continue to opt to terminate relationships, or refuse to enter into them in the first place.
The impact of de-risking has been keenly felt both directly and indirectly by consumers of financial services. This occurs directly when consumers themselves are denied the use of banking facilities, causing them to seek out less well-regulated means of transferring funds. This occurs indirectly when the providers of even regulated money remittance services, particularly those dealing with “high-risk” jurisdictions, find that they no longer have access to traditional banking channels.Footnote 25 As such, they may rely on agents who are not subject to the same regulatory scrutiny, along with the use of cash deposits. It is for this very reason that HM Treasury and the Home Office, in the 2020 National Risk Assessment, identified de-risking as a specific cause for concern in terms of increasing the risk of money laundering and terrorist financing being facilitated by such businesses.Footnote 26 Despite this, in neither the UK, nor the EU or the US, has there been any sustained, concerted effort to address de-risking by the sanctions or financial regulatory authorities.Footnote 27
IVTS
There can be little doubt that where de-risking excludes people from traditional banking channels, they may be forced to fall back on riskier methods to transfer their funds. There are many means of transferring funds outside the regulated sphere of traditional banking. IVTS is an umbrella term for systems which have been around for centuries under different guises. Terms such as fei qian in China and hawala in the Middle East are used to describe transactions involving the transfer not of money, but of value.Footnote 28 To take an oversimplified example: A provider of such a service might receive rials in Iran, the equal value of which is to be remitted to a beneficiary in the UK at an agreed exchange rate. The Iranian service provider will arrange for a contact in the UK to deposit an equivalent amount in sterling into the beneficiary’s account in that country. In doing so, they settle their debt to the customer in Iran without the need for any money to change hands.Footnote 29
The reasons often cited for the use of such systems include their cost-effectiveness and speed, along with the familiarity and trust which people frequently feel with such services in jurisdictions where they are heavily culturally embedded.Footnote 30 In certain jurisdictions, such as Nigeria and China, IVTS are also used as a means of circumventing strict currency controls imposed by the government.Footnote 31 While an integral part of the global financial system, thought to be responsible for billions of dollars of transactions annually,Footnote 32 IVTS providers are often categorized as high-risk businesses by virtue of the fact that they rely on the use of networks of agents, tend not to maintain long-term relationships with customers, frequently effect transactions in cash, and may maintain minimal customer or transaction records.Footnote 33 It is not difficult to find examples of IVTS being co-opted by organized crime groups with a view to laundering the proceeds of their criminality.Footnote 34
For all of these reasons, while not inherently unlawful,Footnote 35 providers of such services in the UK and US are required to hold a license issued by the appropriate authorities.
Regulation of MSBs in the UK
Driven by both the FATF and the European Money Laundering Directives, the UK has introduced a series of regulations with the latest iteration being the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, more commonly referred to as the Money Laundering Regulations (MLR) 2017. The stated purpose of the MLR 2017 is to “make the financial system a hostile environment for illicit finance while minimising the burden on legitimate businesses.”Footnote 36
One category of business regulated by the MLR 2017 are Money Service Businesses (MSBs). The definition of a MSB in the UK is an “undertaking which by way of business operates a currency exchange office, transmits money (or any representation of monetary value) by any means or cashes cheques which are made payable to customers.”Footnote 37 MSBs encompass most if not all forms of IVTS. Examples include everything from large well-resourced entities such as Western Union, to small store front businesses providing money remittance services in addition to their main business. Such operators must register with HM Revenue and Customs (HMRC) or the Financial Conduct Authority (FCA).Footnote 38 To register, an MSB must satisfy the supervising authority that they are a “fit and proper person” to be registered.Footnote 39 Registration can be suspended or cancelled at any time if the registering authority determines that the operator of the MSB is no longer a “fit and proper person” within the meaning of the regulations, or if they have failed to comply with one of a number of other requirements placed on them by the MLR 2017 or the registering authority.Footnote 40 Where a person fails to register, they commit a criminal offense.Footnote 41 While this amounts to what has been described as a “regulatory offense,” if convicted, the operator of an unregistered MSB is liable to having the entire turnover of the business confiscated on conviction.Footnote 42 They also open themselves up to civil penalties being imposed.Footnote 43
The offenses identified within the statute are all aimed at the provider of the service. It follows that a person who simply uses an unregistered business to transfer funds will not commit an offense under the regulations. However, where they know or suspect that the funds which they are due to receive are criminal property, they may be guilty of money laundering, which is criminalized under different legislation.Footnote 44
Regulation of Money Transmission Services in the US
A “money transmitting business” includes
any person who engages as a business in an informal transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial system.Footnote 45
As Cassella observes, this definition appears to capture “informal money pick-up and delivery-by-courier operations” as well as more sophisticated enterprises.Footnote 46
Any person who owns or controls a “money transmitting business” in the US, which broadly corresponds with the UK definition of “money services business,” is required to obtain a license from the FinCEN,Footnote 47 and is bound to comply with a raft of measures akin to those found within the MLR 2017.Footnote 48 Such licenses are not granted in perpetuity and must be renewed every two years.Footnote 49 Where a person knowingly “conducts, controls, manages, supervises, directs or owns all or part” of an illegal “money transmitting business” they commit an offense.Footnote 50 Importantly, a business will be considered unlicensed not only where no license has been obtained, but where the business has failed “to comply with the [applicable] money transmitting business registration requirements.”Footnote 51 These requirements include the need to register the businesses and the identities of those who own, control, or otherwise participate in the conduct of its affairs in addition to a requirement to maintain a list containing the names and addresses of those authorized to act as agents on its behalf.
The breadth of the offense-creating provisions has been described in the following terms:
How all this applies to the classic money transmitting business – the storefront money remitter – is fairly clear. If the business operates without a State license in a State that requires a license, or it operates without registering with FinCEN, or the remitters knowingly transmit criminally-derived money, or money intended to be used for an unlawful purpose, they can be prosecuted under §1960 and the Government can forfeit all property involved in the offense (including the money service business itself) either civilly (under § 981(a)(1)(A)) or criminally (under § 982(a)(1)).Footnote 52
It follows that, if an MSB knowingly transmits funds for a customer, resulting from the customer’s criminal act, the MSB is at risk not only of losing the funds from that transaction. In addition, the business itself, including all of its assets, may be forfeited.
Approaches to Civil Recovery: UK and US
The above discussion illustrates how the international sanctions regime has set in motion a chain reaction. Banks refuse to provide what would be lawful services to those in or connected with sanctioned jurisdictions or sanctioned persons for fear of potentially enormous penalties for breach of sanctions and increased compliance costs associated with riskier business.
This, in turn, leads to those needing to transfer funds to or from those jurisdictions relying on “riskier” methods to move their money, such as IVTS. Despite in many cases having no real option, those same individuals are increasingly finding themselves the target of Western law enforcement agencies seeking to confiscate the funds which have passed through unregistered IVTS.
UK
In the UK, civil recovery refers to the recovery, or forfeiture, of property where it is not necessary to prove that the owner of the property is guilty of any particular crime. The core idea is that the goods, or funds, themselves have some link to, or are intended for use in, unlawful conduct, regardless of who currently possesses them, and are therefore subject to seizure. Indeed, in the case of Director of Assets Recovery Agency v. Szepietowski and Ors, the court noted that “the right to recover property does not depend on the commission of unlawful conduct by the current holder … it is not difficult to think of circumstances in which property might be recoverable from someone who is himself entirely innocent.”Footnote 53
The process can be distinguished from confiscation, where a convicted criminal is ordered to disgorge any benefit obtained by their criminality.Footnote 54 While the confiscation regime has been described as “draconian,”Footnote 55 importantly the person subject to such proceedings will have been convicted of a criminal offense which requires the prosecution to prove their guilt beyond reasonable doubt. If they are shown to have benefitted from their proven, or assumed,Footnote 56 criminal conduct, property will be confiscated up to the amount by which they are said to have benefitted. In contrast, civil recovery proceedings are in rem, meaning that they are concerned with particular property and whether it is tainted by, or intended for use in, unlawful conduct. Such property can be forfeited if it is shown to be more likely than not that it is derived from or was intended for use in unlawful conduct.
Civil recovery is now almost exclusively governed by Part 5 of the PoCA. While magistrates’ courts have long been vested with the power summarily to order the forfeiture of cash,Footnote 57 the seizure and recovery of other property, such as money in bank accounts and real property, was historically the domain of the High Court. Proceedings in the High Court can only be brought where the value of the property sought to be forfeited exceeds £10,000.Footnote 58 That court also has extensive powers to grant property freezing orders and to appoint receivers to assist in the realization of recoverable property. However, in 2017, Parliament passed the Criminal Finances Act 2017, which expanded the powers of magistrates’ courts, enabling them to freeze and forfeit monies held in bank and building society accounts,Footnote 59 and to detain and order the forfeiture of certain listed assets.Footnote 60
Magistrates’ courts are courts that for the most part deal with low-level criminal offenses. The procedure on an application for forfeiture in these courts is far more straightforward than civil recovery in the High Court.Footnote 61 It begins with the enforcement agency obtaining an Account Freezing Order (AFrO) which freezes an account for a period of up to two years while the source or intended use of the money is investigated.Footnote 62 If the enforcement agency takes the view that any of the money in the account is recoverable, or intended for use in unlawful conduct, it may make an application for an Account Forfeiture Order (AFO). Once such an application is made the account remains frozen until the application has been dealt with.Footnote 63 In light of the streamlined procedure, along with the far lower minimum threshold of £1,000 before an application can be made,Footnote 64 AFOs have rapidly become the most frequently used tools in the arsenal of enforcement agencies. Indeed, as a result of the addition of these powers, the amount recovered by the state pursuant to “forfeiture orders” increased from £41 million in 2017/2018 to £191 million in 2021/2022. Of the sum recovered in 2022, £115 million was recovered through the use of AFOs.Footnote 65 This was in part a product of a number of very high value AFOs being granted that year. While there has been a dip in the forfeiture figures since then the general trend is toward an increase in the use of summary forfeiture powers, including AFOs. The latest data shows that, in the financial year ending March 2024, the “value of AFOs have increased by 37% since financial year ending March 2021,” with the value of funds subject to AFOs sitting at £175 million and making up 76 percent of all frozen funds.Footnote 66
Whether a claim for civil recovery is heard in a magistrates’ court or the High Court, the principles which apply are broadly analogous. The central question for the court is whether the property was obtained by or in return for unlawful conduct, or intended for use in unlawful conduct.Footnote 67 The defenses available to a claim for forfeiture are also broadly the same; the most common being where the owner can show that they are a good faith purchaser, for value, and without notice as to the tainted origin of the property.Footnote 68 The notion that a bona fide purchaser may have an interest in property capable of trumping that of the original owner (or, in this case, of the State’s interest in forfeiting the property) has long been recognized in English law.Footnote 69 It is also an international norm relied upon by domestic and international tribunals in the context of civil recovery.Footnote 70 For example, if a customer pays an MSB using funds derived from crime, the business could seek to persuade the court that it had no notice of this and was acting in good faith when carrying out the transaction. However, if they were found to be on notice (or if there were matters which should have put them on notice), this will result in them being unable to rely on this exception to forfeiture. In those circumstances, the entire sum would be at risk of forfeiture despite the transaction having already been completed.Footnote 71
Where an application is made for a recovery order in the High Court, there is also an equitable defense for recipients of property who were not purchasers for value (for example, those who have received gifts). In such cases, the recipients must show that they acted in good faith, were not on notice, and that they took steps which they would not have taken had they not obtained, or expected to obtain, the property (often known as “detrimental reliance”).Footnote 72 This exception is designed to prevent the making of recovery orders which “would not be just and equitable.”Footnote 73 There is no direct equivalent in forfeiture proceedings in the magistrates’ courts. However, in such proceedings, the courts’ powers are discretionary,Footnote 74 and any order must not constitute a disproportionate interference with the respondent’s right to peaceful enjoyment of their property, enshrined in Article 1 of the First Protocol (A1P1) to the European Convention on Human Rights (ECHR).Footnote 75 This proportionality assessment is broad enough to encompass an assessment of any steps taken by the respondent before or after acquiring the property, such as taking out a loan against it, or entering an agreement to make a purchase with the funds.
In criminal confiscation proceedings under Part 2 of PoCA, where a person commits an offense by breaching the requirement to have a license or to register before engaging in certain activity, the courts have distinguished between offenses where the activity engaged in is prohibited, unless authorized (by way of registration or licenses); and those which simply amount to “a failure to obtain a licence to carry out an activity otherwise lawful.”Footnote 76 In the former, the entire proceeds and not just the profits of the unlawful enterprise are liable to confiscation. In the latter, they are not. Over time, however, the courts have interpreted this principle in increasingly restrictive fashion,Footnote 77 concluding in Jiang that the turnover of an unregistered MSB is liable to confiscation following conviction.Footnote 78
Despite the relative clarity in criminal confiscation proceedings, until recently there remained ambiguity regarding civil recovery proceedings under Part 5.Footnote 79 This was resolved, at least in so far as unregistered MSBs are concerned, by the High Court in R (Fresh View Swift Properties Ltd) v. Westminster Magistrates’ Court and Others.Footnote 80 In that case, the claimant sought judicial review of the lower court’s order of forfeiture in respect of £67,372.21. The claimant was a customer of an unregistered MSB. It had purchased the currency in exchange for an equivalent sum in Nigeria. Importantly, the magistrates’ court held that the claimant could not avail itself of the bona fide purchaser defense under section 308 of PoCA because it was on constructive notice that the MSB was unregistered. This finding was not challenged in the High Court.
The High Court held that funds paid to the provider of the money remittance service in the UK and subsequently deposited into the claimant’s account were obtained “by or in return for unlawful conduct” and therefore liable to forfeiture and that the property could properly be “followed” into the hands of the customer.Footnote 81 It also concluded that the order forfeiting the funds was a proportionate interference with the claimant’s A1P1 rights, commenting: “if you swim with sharks you should not be surprised if you get bitten. [The Respondents dispute that they] were swimming with sharks, but it is clear that they were.”Footnote 82
As identified above, MSBs are high risk businesses. The courts have in many cases taken the view that those who willingly use unregistered MSBs and thereby risk their own accounts being used to launder criminal property, can have little complaint when those funds are forfeited. However, where it is difficult for those in the most marginalized communities to access formal banking services as a result of sanctions and de-risking they may have few options but to seek out the services of such businesses to send remittances to their families overseas. Those people may also have little to no knowledge of the complex regulatory regime that applies to them. Despite this, if they cannot show that they were unaware – and had no reason to be “on notice” – of the unregistered status of the business, a court may still find that they chose to “swim with sharks” and that their property should be forfeit.
US
Civil recovery proceedings in the US are also in rem,Footnote 83 and are in many ways analogous to those in the UK. The burden rests on the government to show “by a preponderance of the evidence” that the property is subject to forfeiture.Footnote 84 There is no need for the current holder of the property to have ever been arrested or convicted of any criminal offense before the property is forfeited.Footnote 85 However, unlike the UK, the US has taken a “piecemeal approach” to what conduct can render property liable to forfeiture.Footnote 86 For example, whereas both the proceeds of a drug-trafficking offense and any property used to facilitate its commission may be forfeited,Footnote 87 in cases involving fraud only the proceeds of or traceable to the offense may be forfeited.Footnote 88
Where a person can show that they acquired their interest in the property as a bona fide purchaser for value, and that they “did not know and [were] reasonably without cause to believe that the property was subject to forfeiture” they can rely on an “innocent owner” defense.Footnote 89 It is also a defense where the person had a proprietary interest at the time the illegal conduct took place but that they did not know of the conduct giving rise to forfeiture,Footnote 90 or, alternatively, that “upon learning of the conduct giving rise to the forfeiture, [they] did all that reasonably could be expected under the circumstances to terminate such use of the property.”Footnote 91 Finally, a person is entitled to petition the court to release the property on the grounds that forfeiture would be “constitutionally excessive” (i.e., disproportionate).Footnote 92 For example, in Timbs v. Indiana the US Supreme Court ruled that the forfeiture of a $42,000 Range Rover was “grossly disproportionate” to the seriousness of the crime, which involved the sale of $225 of heroin.Footnote 93
In cases of unlicensed money transmission services, any property involved in a transaction or attempted transaction (including “clean” money which has been “comingled” with “tainted” money), or any property traceable to such property, is liable to forfeiture.Footnote 94 This was illustrated in United States v. 50.44 Bitcoins where the US secured a default judgment ordering forfeiture of the virtual currency, where its owners acted as “money exchangers” online but had failed to obtain a license from FinCEN.Footnote 95 The breadth of this provision enables US authorities to seek forfeiture of the proceeds of an unlicensed service provider from the customer who has subsequently received the funds, even though the customer had nothing to do with the licensing of the service provider and no actual knowledge that it was unlicensed (although they must still be shown to have had reasonable grounds to believe it was unlicensed).
The difficulties faced by those who seek to rely on unlicensed IVTS providers were starkly illustrated in United States v. $822,694.81 in U.S. Currency.Footnote 96 Forfeiture was sought of $822,694.81 in a Bank of America account of customers who had used the services of an agent of a Nigerian Bureau de Change to purchase US currency in exchange for an equivalent amount of Nigerian Naira. It transpired that a substantial amount of the money deposited into their account was derived from frauds perpetrated both on individuals and a law firm in the US. The customers averred that they had no knowledge of this. However, their motion for summary judgment was denied by the District Court of Connecticut which found that the bona fide purchaser defense was unavailable as a number of red flags should have put them on notice as to the fact that the sums entering their account were liable to forfeiture.Footnote 97
Those who use unlicensed money transmission services also risk falling afoul of anti-money laundering provisions, such as the prohibition on “structuring.”Footnote 98 In essence, structuring involves breaking a large transaction down into smaller transactions with a view to avoiding regulatory scrutiny. Funds traceable to illegal structuring are subject to both criminal and civil forfeiture.Footnote 99 Criminal forfeiture regimes,Footnote 100 as well as civil ones,Footnote 101 have been used to forfeit funds traceable to structuring where the defendant to the claim was not implicated in any wrongdoing in connection with the structured funds.
It is not uncommon for IVTS providers to use agents to deposit funds or to arrange direct customer to customer deposits which may arrive in a person’s account as multiple smaller cash deposits or bank transfers. To avoid forfeiture of those funds in the event enforcement action is taken, the customer would need successfully to rely on the innocent owner defense or contend that an order for forfeiture of the full amount would be “excessive” within the meaning of the Eighth Amendment to the US Constitution.Footnote 102
Case Studies: IVTS Transfers from Iran to the UK
As previously discussed, due to sanctions prohibitions, AML concerns and bank de-risking practices, those seeking to move funds to or from sanctioned jurisdictions such as Iran may often be reliant upon IVTS businesses which may or may not be registered to provide such services in the recipient jurisdiction. Given the breadth of the civil recovery regimes in the US and the UK, despite having (in most cases) committed no crime themselves,Footnote 103 such individuals may find themselves at risk of having their legitimately obtained money – or, rather, the equivalent value deposited into their accounts overseas – forfeited by the state.
Two case studies, each involving Iranian customers seeking to transfer funds to the UK, illustrate the issues faced by such individuals. In the first, Samira and her husband sought to transfer the proceeds from the sale of a property in Iran purchased using funds derived from wages earned by the husband in Iran.Footnote 104 In the second, Sayed was a student studying at a university in the UK to whom his father wished to transfer funds as a gift. The funds were originally derived from various legitimate sources, including his father’s work in Iran selling commodities. Despite each having UK bank accounts, both Samira and Sayed had tried and been unable to arrange for the transfer of their funds from Iran to the UK via traditional banking channels. Their UK banks had simply refused to effect the bank transfers and receive monies emanating from Iran. Each was left to seek out an alternative means to remit their funds. They opted to use currency exchange houses in Tehran, which are part of the everyday life of Iranian citizens.Footnote 105
The decision was taken in each case to use a number of different Iranian MSBs. The rationale was either that the customer did not wish to transfer such a large amount of money with one service provider, or that the business had indicated that they were unable to carry out such large transactions. The decision as to which MSB to use largely boiled down to trust, reputation, and whether it was registered with the CBI. In each case, only some of the MSBs, or the agents which they used, were licensed to carry out such business in the UK.
The sterling purchased using Iranian rials would invariably arrive in their UK bank accounts in the form of deposits from a number of third parties, of which some were bank to bank transfers, and some were cash deposits. While this is a common feature when using IVTS, the influx of third-party transactions and cash deposits aroused the suspicion of the receiving banks, which placed internal holds on the accounts and notified the authorities.Footnote 106 In each case, the law enforcement agency successfully obtained an AFrO, freezing the customer’s account and commencing an investigation. The threshold for obtaining an AFrO is notoriously low, requiring only that the enforcement agency convince a magistrates’ court that there are reasonable grounds for suspecting that the money is recoverable property or intended for use in unlawful conduct.Footnote 107 In both cases, that the funds had originated from a “high-risk” jurisdiction and the means by which they arrived, provided sufficient evidence to satisfy the court that the accounts ought to be frozen.
Significantly, in each case, there was no evidence to contradict the accounts provided by Samira or Sayed regarding the lawful provenance of the Iranian rials which had been used to purchase the sterling in the UK. The first question was whether the enforcement agencies could demonstrate that the funds deposited into the individuals’ UK accounts were recoverable property or intended for use in unlawful conduct. The effect of the Fresh View decision is that operating an unregistered MSB, alone, is capable of tainting the funds which pass through the business. Those funds can then be followed into the hands of the customer unless they are in a position to avail themselves of one of the defenses identified above.
While the cases of Samira and Sayed were resolved before the Fresh View judgment was published, there was evidence in each case to raise a suspicion that the funds deposited into the accounts by the third parties were criminal property (or, at least, the law enforcement agencies contended that there was an “irresistible inference” that the funds were derived from crime).Footnote 108 Each case turned on the following: first, were the customers bona fide purchasers of the currency without notice as to the tainted origin of the funds; and, second, would making an order for forfeiture be a proportionate interference with their rights under A1P1 of the ECHR.
Reliance on the bona fide purchaser defense can present real issues in practice. In both the UK and the US, the burden rests on the person raising the defense to prove that they were not on actual or constructive notice that the property was liable to forfeiture. In cases involving unlicensed MSBs, this means demonstrating not only that they did not, in fact, know that the business was unlicensed but that they would not have been on notice had they taken steps to ascertain the true position. Helpfully, the UK courts have interpreted this provision generously, finding that constructive notice “cannot be assumed or lightly inferred,”Footnote 109 and will only arise where “some sort of impropriety or irregularity [was] obvious.”Footnote 110 The question is also limited to whether a reasonable person with the same attributes as the customer would have been expected to make enquiries.Footnote 111
There was, in Samira’s case, a compelling argument that she and her husband – individuals raised in Iran with no specialist knowledge of the matters which potentially rendered the property recoverable – should not have constructive notice attributed to them. Their position was strengthened by the fact that they had sought out Iranian MSBs which did hold licenses with the CBI. Moreover, there was evidence that she and her husband had acted to their detriment in reliance on the fact that they expected to receive funds from Iran, including by incorporating a company in this jurisdiction, paying for a website to be designed, and incurring various ancillary expenses. Having been provided with a raft of evidence to support those assertions, the enforcement agency decided to take no further action.
Sayed, on the other hand, faced an additional roadblock. He was unable to rely upon the bona fide purchaser defense because the funds were a gift from his father.Footnote 112 The only option available, therefore, was challenging the basis for forfeiture and contending that an order depriving him of the funds would amount to a disproportionate interference with A1P1 of the ECHR. The fact that Sayed’s father had purchased the currency in good faith from MSBs (including one business which was registered in the UK) was relevant to the proportionality assessment. However, there is precedent for civil recovery orders being made in respect of gifted property even where the courts have accepted that the owner was “wholly innocent” of wrongdoing and was not on notice within the meaning of PoCA.Footnote 113 Therefore, while the enforcement agency was persuaded to take no further action in his case, Sayed would have been in a far more difficult position had the matter gone to trial.
In both the cases presented here, as in many others, law enforcement agencies have deployed aggressive tactics when pursuing civil recovery, often in the context of long-running and under-resourced investigations. Such tactics include “offering” settlements by which a proportion rather than the whole of the frozen sums are forfeit; and seeking to avoid the statutory time bar by applying for forfeiture prematurely, having conducted only minimal investigations, with a view to extending the AFrO beyond the two year limit (AFrOs may be in place for a maximum of two years after which the sums are released unless an in-time forfeiture application has been made, which effectively “stops the clock” on that maximum statutory period), which may place the respondent to the application under even more pressure to enter into a settlement agreeing to the forfeiture of part of the frozen sum. This approach is not infrequently combined with little to no awareness as to the operation of basic principles under PoCA, including the exceptions under section 308 and the need for orders to be proportionate. In one case, the officers’ lack of knowledge of sanctions law led them to wrongly (and ultimately unsuccessfully) suggest to the court that transfers of funds via an MSB amounted to a breach of sanctions and therefore a criminal offense. In another case, the law enforcement agency applying for forfeiture of funds suggested that the application of sanctions by OFAC (U.S. Treasury) upon a related party was evidence of a finding of criminal conduct akin to a conviction.
In the two case studies described above, Samira and Sayed were both ultimately able to resist enforcement action and forfeiture of their frozen funds. However, both had their accounts frozen for many months before the enforcement agencies were persuaded to take no further action. Accounts are regularly frozen for over a year while the respondent awaits the outcome of an investigation which leaves them in limbo and without access to funds.Footnote 114 There is also in many cases only a slim prospect of recovering the legal fees incurred in defending against the application for forfeiture.Footnote 115 It follows that, even if ultimately successful in securing the return of funds, the process can be costly and require those subject to enforcement action to place their lives on hold for a considerable period. In cases where respondents instead take a pragmatic approach and agree to forfeiture of a portion of their frozen funds, the likelihood is that their bank records will be duly “marked” and financial services withdrawn, a further example of de-risking.
Conclusion
Despite being fully cognizant of the risks associated with unlicensed operators of IVTS, the actions (imposing labyrinthine and wide-ranging international sanctions) and omissions (failing to properly address de-risking by financial institutions) of Western governments have driven those in sanctioned jurisdictions to rely on IVTS operators. This will often involve individuals, particularly those who are not sophisticated users of financial systems and cannot be expected to have knowledge of the complex regulatory regimes for IVTS in the UK and US, wittingly or unwittingly, into “swimming with the sharks.”Footnote 116 That those same individuals are now targeted by law enforcement agencies seeking to confiscate their funds in reliance on the civil forfeiture regime leads to an obvious risk of injustice.
This is not to suggest that the operators of unregistered IVTS are not legitimate targets for law enforcement action. Further, those who use such services in the full knowledge that they may, in effect, be aiding and abetting money laundering or terrorist financing may represent legitimate targets for law enforcement activity. However, at present, those who are innocent of wrongdoing and are in many cases unwitting users of unregistered IVTS, or for whom there is no practical alternative, may find themselves and a significant portion of their wealth in the hands of law enforcement in circumstances where they may not have the resources or ability to explain their cases to those investigative agencies. Additionally, it will often be months and sometimes years before they have an opportunity to plead their case in court. While it is hoped that law enforcement agencies will make sensible decisions in individual cases to avoid protracted and costly litigation (which may or may not be successful for the individual), there is a clear need for more sweeping change which addresses the underlying cause of these issues.
Arguably, the most ambitious solution to this problem would be the cessation of unilateral – and, in particular, secondary – sanctions.Footnote 117 This would considerably reduce the legal complexity associated with sanctions compliance and would go a long way toward encouraging financial institutions to re-engage with jurisdictions such as Iran by ensuring that only one clear set of sanctions applies. However, the prospect of jurisdictions such as the US or the UK being persuaded to jettison their sanctions regimes appears vanishingly unlikely.
More straightforward measures which can be taken in the meantime include increasing awareness within the financial and law enforcement communities about the effect of de-risking and of the defenses which are available where civil recovery action is taken. More can also be done by the FATF, along with national law enforcement agencies, which should take a targeted approach to the management of the risks arising from money remittance between sanctioned jurisdictions and the UK and the US.
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