Contributor’s Special Report: Revenue Sharing Agreements – A Path to Success or the Next Vehicle of Crime? – CFCS
Through Eian Weiner
Third year law student at Benjamin N. Cardozo Law School
December 9, 2019
With minor edits and content additions by ACFCS Vice President of Content, Brian Monroe
When it comes to organized criminal associations seeking to legitimize their illicit trafficking, one overwhelming commonality seems to have manifested itself over time: these groups have developed a shrewd understanding of the financial sector and the range of defenses of compliance created to stop them.
Whether in the banking sector, the insurance sector, the securities sector or a commercial activity,  the criminal of yesteryear has since adapted to ensure the prosperity of their [illegal] Commercial activities. But what about the financial criminal of tomorrow?
With the rise in popularity of online trading markets – many of which remain unregulated, particularly if they reside on the darknet – privatized trading platforms must anticipate and prepare for all the potential risks associated with creative and aggressive criminals who attempt to move soiled products in their operations.
Indeed, this would include developing and implementing adequate financial crime compliance protocols to address the growing threat of economic malfeasance.
And there is a growing market that could be a prime target for criminal infiltration. As the student debt crisis in the United States nears its breaking point, those looking for an alternative method of engaging in financial criminal activity may have just found one: privately funded revenue sharing agreements (ISAs).
In recent years, privatized ISA markets have emerged as another way to invest their money.
Provided that these platforms undoubtedly fall within the regulatory scope of US trade-related policy, it is quite possible that privatized ISA markets have consistently failed to understand the need for proper compliance programs.
Why is it so important to subject these platforms to something like the anti-money laundering (AML) programs required for physical banks, money service businesses – like senders and money changers – and, more recently in many jurisdictions, crypto exchanges?
In the case of ISAs, this means a way where desperate students seek out a funding mechanism and care little about its tax source – a dynamic that could benefit criminal groups brimming with cash and looking for ways to make it appear as the origin. legal.
Is an ISA Safe?
Before developing this notion, it would be helpful to briefly explain the characteristics and purpose of an ISA.
An ISA is an alternative method for a student to finance the cost of his or her higher education, a system also referred to more broadly as human capital contracts.
These types of human capital contracts are not entirely new ideas, originating as far back as the 1770s by Adam Smith and “The wealth of nations,”But more recently resurfaced in public consciousness with Nobel Prize-winning economist Milton Friedman, detailing human capital contracts in a note buried in his 1945 co-authored book, Income from independent professional practice.
These ISAs reside in a unique link between banking, lending, securities and higher education, having the attributes of some but none of the required government oversight or binding financial crime compliance protocols in place in formal financial institutions.
They are not routinely managed or administered by banks, but have a lending function, and although the funds have some of the characteristics of a security because they can be financed by investors, they usually do not come with a loan. the fight against crime and anti-crime. – Anti-fraud ties required for entities under the formal heading of financial institution.
By entering into a contract with a money lender, be it a private company or a publicly funded research institution, the student essentially promises to cover the cost of their degree by allocating a part of its future income to the money lender for a set number of years.
While comments on the potential societal and economic benefits of ISAs are widespread, It is imperative for these new private lenders to appreciate the scale of risk associated with ISAs funded by investors.
Some tout these provisions as a powerful way to reverse the cost of a college education, shifting the payment pressure from the student to related businesses and investors – apparently because they have deeper pockets and are spreading and spreading. assume these costs more easily.
In an ideal configuration, the company could also mentor the student and prepare them for a given field, rather than simply securing their future financially.
Others denounce the provisions of the ISA as simply an updated form of indentured bondage that raises troubling questions with nebulous answers: Does society actually “own” the individual until such time. ‘he paid his pound of flesh within the agreed timeframe?
But in order to better understand how ISA markets might be infiltrated by sophisticated criminals, we must first examine the current regulatory framework – or the lack of it.
Before an individual can invest their funds in many of these ISA markets, they must first meet the lax prerequisites necessary to be considered an “approved investor” under Section 413 (a) of the Securities Act. from 1933.
Merely meeting the requirements of this law does not negate the ISA market’s implied responsibility to screen “accredited investors” for any illegal activity.
In other words, “approved investors” Seeking to invest their funds in students through a private ISA provider do not go through the same selection process as those seeking to invest their funds with a regulated financial institution.
Aside from the extent of the trade, this in itself should be a cause for concern.
Where is AML when it comes to an ISA?
But in order to better highlight the potential criminal vulnerabilities of the ISA market, it is essential to first understand the multitude of AML control and compliance rules and sanctions in place at financial institutions, which are costly and costly, knowing that the banks that flouted these rules have paid penalties in the billions of dollars.
In the United States, regulated financial institutions are required by the Office of Foreign Assets Control (OFAC) of the United States Treasury to design and implement effective screening programs to ensure that they are not dealing with people. considered Specially Designated Nationals (SDNs) and other blacklisted entities.
The SDN List is made up of sanctioned entities considered to be an immediate threat to the economy, foreign policy, or national security of the United States (e.g. terrorists, transnational criminal organizations, drug traffickers, etc.).
Generally, if a person or entity on the SDN list tries to do business with a registered financial institution, the institution will generally block, reject and prohibit these and future transactions.
In addition, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) – the country’s financial intelligence unit and administrator of its AML rules – requires all financial institutions to file a suspicious activity report (SAR) immediately after filing. identified a suspicious transaction and, upon further examination, is considered “suspicious” and exceeds $ 5,000.
Likewise, many banks subscribe to third-party “negative news” services that screen potential customers on the Internet and tailor-made databases to see if they have ever been formally linked to a crime. , convicted, or were part of a business with a high criminal profile or failure to comply – something that an ISA market business should consider.
Due to the perception that they are not scrutinized to the same extent as a regulated financial institution, ISAs may soon become the next vehicle for criminals to “clean up” illegitimately earned income.
The covert operations of those attempting to launder their money through seemingly legitimate sources should be faced with ingenuity and swift action, even if you are a private company not subject to formal AML rules.
Regardless of their privatized status, it is imperative that each private ISA marketplace institutes comprehensive compliance programs, similar to those of a regulated financial institution (e.g. American Express, Bank of America, JP Morgan Chase, Wells Fargo , etc.).
While the volume of investments that a large financial institution manages eclipses that of an ISA marketplace, that does not mean that ISA markets are out of reach for criminals seeking to embed their illegitimate funds.
 Eric Lichtblau, New hiding place for drug profits: insurance policies, NY Times, December 6, 2002, at A1.
 Zach Friedman, Student Loan Debt Statistics 2019: A $ 1.5 Trillion Crisis, Forbes (February 25, 2019, 08:32), https://www.forbes.com/sites/zackfriedman/2019/02/25/student-loan-debt-statistics-2019/#759209cf133f.
 Jillian Berman, New student bill promises future income “open license for discriminatory funding”, MarketWatch (August 5, 2019, 11:23), https://www.marketwatch.com/story/are- Income-share-agreements-an-innovative-answer-to-the-student-debt-crisis-or-a-predatory-financial-product-depends-who- you-wonder-2019-08-05.
 Annie Nova, Income-sharing deals could mean interest rates for students over 18%, CNBC (Aug 25, 2019, 9:30 AM), https://www.cnbc.com/2019/08/25/ Income-sharing-agreements-could-cost-students-more-than-loans.html.
 Securities Act 1933, § 4 (a) (2); 17 CFR § 230.501 (a) (1990).
 David Canellis, Here’s how criminals use Bitcoin to launder dirty money, TNW (November 26, 2018, 16:35 UTC), https://thenextweb.com/hardfork/2018/11/26/bitcoin-money-laundering-2/.
 See, for example, Transnational Criminal Organizations Sanctions Regulations, 31 CFR pt. 590 (2017); Terrorism Sanctions Regulations, 31 CFR pt. 595 (2017); Foreign Narcotics Sanctions Regulations, 31 CFR pt. 698 (2017).