US Government Anti-Corruption Strategy May Require Extra Due Diligence by US Firms (UPDATED)

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The recent US government strategy to combat corruption includes a “name and shame” tactic to publicly identify individuals involved in kleptocracy and fraud and will almost certainly impact the reputation of US firms that previously could conduct business with foreign kleptocrats in relative obscurity. Individuals identified by this strategy may not be included on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list, but engaging with them presents a risk that may require additional know-your-customer (KYC) and enhanced due diligence research to avoid reputational damage.

  • On 15 June, the State Department designated two former Namibian public officials for involvement in significant corruption that not only undermined the rule of law in the country, but also the public’s faith in its government institutions and public processes. Bernhardt Esau and Sakeus Shanghala were allegedly involved in the multi-million dollar Fishrot corruption scandal, accepting bribes in exchange for access to Namibian horse mackerel. Although the duo and their families are barred from entering the United States, they have not been added to the SDN list, which would bar US persons from doing business with them.

  • The law firm of Steptoe & Johnson in May signed a Belarussian oligarch and close associate of President Lukashenko as a lobbying client, according to a recent disclosure. Vladimir Peftiev is a former co-owner of a Belarussian military equipment exporter and chief economic advisor to Lukashenko, who was sanctioned by the EU for several years for his alleged financial support to the Lukashenko regime until the European Court of Justice annulled sanctions against him. Peftiev has not been sanctioned by the United States, but his wife, Olga Makarova, set up more than 12 offshore companies in the illicit finance hubs of the British Virgin Islands and the Seychelles, according to the Panama Papers released in 2016.
  • On 17 June, the State Department designated Guatemalan Congress member Boris España Cáceres for bribery and interfering in public processes. Both he and his immediate family are barred from entering the United States. España is not designated by OFAC and would not be flagged by list-based screening, but his public classification as a corrupt foreign government official represents a reputational risk for investors and potential business partners.

Firms that limit their due diligence to list-based screening or perfunctory research about their potential business partners and clients without delving deeper into potential links to corruption are at risk of being publicly linked to kleptocrats, politically exposed persons, or their facilitators, causing damage to their reputation and brand. Additional designations pursuant to the Global Magnitsky Act are likely to target corrupt foreign government officials but may not list linked entities through friends and family or tangential connections that may not be legally prohibited from doing business in the United States but may represent significant reputational risk for any company engaging in transactions with them.

Each US firm and financial institution must examine its own risk appetite and compliance program to determine whether its existing due diligence processes are sufficient to protect it not just from committing regulatory infractions but from harming its reputation. US firms and financial institutions perform customer due diligence and screening to ensure their clients and business partners are not laundering money through their accounts and are not sanctioned by OFAC. Entities that are 50 percent or more owned by a sanctioned individual or company may not appear on the SDN list, but they are also blocked and US firms and financial institutions are prohibited from transacting with them.

But what about entities linked to sanctioned individuals or transnational criminal organizations (TCOs) with whom transactions may be legal? How will the reputation of a large US tech firm or financial institution be impacted if they are found to have transacted with the family member of a foreign kleptocrat or with a politically exposed person (PEP) connected to a corrupt regime?

  • After Russian oligarch Oleg Deripaska was sanctioned by OFAC in 2018, he handed control of his company, Terra Services, Ltd. and others, to his cousin Pavel Ezubov. British authorities in late 2018 raided a storage unit owned by Terra Services, confiscating at least 25,000 documents that were requested by US prosecutors as part of Special Counsel Robert Mueller’s investigation into the Russian interference in the US elections in 2016. Ezubov is not sanctioned by the United States and is not blocked. However, his familial ties with a US-designated oligarch and control of his former firms represents a risk of which US firms should be aware.
  • A Miami attorney since at least 2008 has been acting as a gatekeeper for individuals with links to the Maduro regime in Venezuela. The attorney has helped several individuals connected to Maduro, including US-designated Raul Gorrin and Gustavo Perdomo, establish bank accounts and lines of credit, as well as purchase luxury properties and high-value goods, allowing them to remain anonymous despite their links to the regime. Gorrin and Perdomo and companies linked to them were not designated by OFAC at the time the attorney provided his services, but an adverse media search would have revealed their links to the Venezuelan government and Gorrin’s bribery of several Venezuelan government officials.

The US government’s strategy to bar kleptocrats from gaining access to the US financial system and publicly name and shame corrupt individuals who undermine the rule of law and the public’s confidence in their governments, should prompt US firms to engage with risk intelligence firms such as FiveBy that employ experts in link analysis who can help inform decisions about transacting with individuals and entities that may be connected to corruption. Anti-money laundering experts and regional and linguistic experts can help US firms research links to foreign kleptocrats and PEPs. Expert analysts can help draw connections—however tenuous—to individuals and entities that could jeopardize firms’ reputations and help inform risk decisions.

Research that FiveBy performs in this sphere can include analysis into family connections and ownership structures that may reveal deep links to foreign kleptocrats meant to obscure ownership and control not readily apparent with list-based screening and a cursory examination of business registries. Personal history, previous addresses, previous business connections, and adverse media can also reveal possible reputational risks of transacting with an individual. Location, tax identification numbers, and corporate registries can provide red flags that can inform risk decisions. Knowledge of sanctions evasion and money-laundering methodologies can also expose individuals behind shell and front companies, investors from possibly unconnected sources that could indicate an attempt to obfuscate misappropriated funds. Expert analysts can help trace complex ownership and structures to reveal ultimate beneficial owners and help firms make informed decisions about their potential partners and clients.


UPDATE: We have created an explainer video on corruption and kleptocracy. Please check it out.


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