Insights: Week of April 18, 2022

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The Financial Action Task Force (FATF), which is primarily responsible for setting global anti-money laundering and counter financing of terrorism (AML/CFT) standards, this week released its report on the state of effectiveness and compliance with FATF AML recommendations. The report—the first of its kind released by the organization—outlines the results of the fourth round of mutual evaluations, which have been performed by FATF and its regional bodies since 2013, and assessed the strengths and weaknesses of countries’ AML/CFT regimes.

The good: FATF acknowledges the significant progress nations of the world have made in improving their AML/CFT regulations. The report highlights that 76 percent of countries have satisfactorily implemented the FATF’s 40 Recommendations that provide a framework of countermeasures against money laundering and terror financing to help countries combat illicit finance. In 2012, compliance with the FATF 40 recommendations stood at only 36 percent.

The bad: Numerous countries still do not have the capabilities to take effective action against illicit finance, including insufficient ability to investigate and prosecute high-profile crossborder cases and preventing malign actors from abusing anonymous shell companies and trusts for illicit purposes. In addition, a number of countries approach the FATF’s recommendations as a box-checking exercise, rather than focus on results and tailor their AML/CFT approaches to their specific circumstances.

The proactive: Countries can improve their preventive measures against illicit finance by taking the recommended actions in their Mutual Evaluation Reports—peer reviews performed by member countries an ongoing basis to assess levels of implementation of the FATF Recommendations and the effectiveness of each country’s AML/CFT regime.

To help members be more proactive and address recommendations more efficiently, FATF plans to perform mutual evaluations of member countries more frequently – every six years, instead of roughly every 10, which is the current cycle. The evaluations will also be more tailored to every country and take into account specific AML/CFT and counterproliferation risks each country faces, as well as the relative size of the country’s economy and financial sector. More frequent assessments will also provide each country with more timely insights into the effectiveness of its AML/CFT regime, help countries make faster and earlier improvements in their laws and capabilities, and ensure they are on the right track when progressing toward implementation of FATF’s recommendations.

Note: FATF members have agreed on tougher global regulations and transparency for beneficial ownership, requiring all members to have a beneficial ownership registry in place to ensure that authorities have sufficient information about the ownership of entities that can be used to evade sanctions, hide misappropriated assets, and clean criminal proceeds. Based on the last mutual evaluation cycle, only 9 percent of countries were rated as “substantially effective” in the area of transparency and beneficial ownership verification. A beneficial ownership registry that is publicly available to US firms and financial institutions will help US persons and companies assess ownership and control structures of potential business partners and clients and allow them to mitigate the risk of transacting with a sanctioned entity or one that is even partially owned by a kleptocrat or sanctioned individual, especially given the US government’s focus on stemming Russian sanctions evasion and tackling Russian corruption and kleptocracy.


Compliance and Due Diligence

OFAC this week made good on its promise to target facilitators of Russian sanctions evasion by sanctioning a key commercial bank and “a global network of more than 40 individuals and entities led by US-designated Russian oligarch Konstantin Malofeyev.” This week’s designations include Transkapitalbank (TKB), which is a privately owned bank that helps Russia evade sanctions and an a designation of Malofeyev under EO 14024 to add to his 2014 designation under EO 13660, when he was sanctioned for supporting the separatists in Eastern Ukraine. Malofeyev’s sanctions evasion network has also been designated under EO 14024, including four companies located in Moldova, and entities Tsargrad and Katekhon, which not only help spread pro-Russian propaganda and disinformation, but also act as intermediaries between pro-Russian politicians in Europe and Russian government officials. Treasury also designated companies in Russia’s virtual currency mining industry that help Russia monetize its energy sector.

The UK has imposed fresh sanctions this week on 10 Russian entities and 16 individuals in its continuing push to punish Russia for its invasion of Ukraine. The entities are defense-related production facilities that include Kalashnikov Concern, which has been sanctioned by the United States since 2014. The list also includes oligarchs and high-level defense and military officials.

The International Working Group on Russian Sanctions has published a new white paper, detailing its proposed action plan for strengthening sanctions against Russia. The proposals include a complete oil and natural gas embargo and the designation of the Russian Federation as a state sponsor of terrorism. The proposal also includes secondary sanctions on any individual or entity that helps Russia transact in the financial sector.

The International Monetary Fund (IMF) is warning that crypto mining may provide a way for both Russia and Iran to mitigate the effect of sanctions. Heavily sanctioned nations can exploit the energy resources they cannot export to power mining efforts. By expanding their mining operations, governments could also generate revenue directly from transactions fees.

The EU had so far spared Russia’s largest bank, Sberbank, from sanctions because it and Gazprombank are main payment conduits for Russian oil and gas. However, as more atrocities are being discovered in Ukraine, ostensibly committed by Russian armed forces, the bloc’s next tranche of sanctions on Russia will target banks, in particular Sberbank, as well as Russian oil.

A Russian facility that produces surface-to-air missiles (SAMs) has been shut down due to import restrictions and Western sanctions. The Ulyanovsk Mechanical Plant produces a number of different SAM models, such as the 9K37 Buk and the 2K22 Tunguska. Factory workers at Ulyanovsk were told they can either go on unpaid leave or join the Russian army in its invasion of Ukraine. Tank and warship production has also been impacted by the lack of foreign components and financial restrictions.

A plan by a group of Chinese military and business institutions to invest $471 million to set up a venture capital fund could help Beijing evade sanctions and secure high-end military technology from the United States. Guangzhou Haige Communications Group, which provides communications and navigation equipment to the Chinese military, will partner with China Poly Group and other entities to set up the venture capital fund for the development of military equipment. China Poly is among 102 state-owned enterprises under the supervision of the Chinese Assets Supervision and Administration Commission and has served as an importer and exporter of military equipment for China.

Huawei has developed and patented a chip stacking process that could help it circumvent US restrictions. If Huawei can take advantage of its innovation, given that foundries cannot produce chips for the company without an export license from the US government, the process could provide a performance boost for chips based on older nodes that are not subject to harsh US restrictions like newer technologies are.

Boxing management company, MTK Global, that represents dozens of professional fighters, this week announced that it was ceasing operations. MTK came under scrutiny by the professional sports world after OFAC sanctioned Irish crime boss, Daniel Kinahan, an alleged drug trafficker and company cofounder. Kinahan, along with former middleweight title challenger Matthew Macklin, in 2012 founded MTK—then known as MGM. Kinahan sold his interest in the company in 2017 but has remained actively involved with many of its fighters. The UAE this week also imposed sanctions on the Kinahan organization, and the cartel leaders may have to get out of Dubai, where they have been living in recent years. The UAE has frozen the cartel’s assets and is offering $15 million for information leading to the arrest of Daniel, Christopher, and Christy Kinahan.

Fraud and Abuse

As the Ukraine conflict continues, sanctions and supply-chain disruptions have intensified shortages of key commodities, making them vulnerable to corruption. Oil, wheat, fertilizer, and other important commodities are in limited supply, either directly because of sanctions, or because the conflict has disrupted supply chains from Russia and Ukraine. These shortages can lead to bribery as a way to move things along. Customs services are particularly vulnerable, because companies or their agents might seek to expedite the movement of goods through customs by paying bribes to customs agents.

A major Conservative Party donor in the UK was listed as a director of a company secretly owned by a sanctioned Russian oligarch close to President Putin. A document from 2006 was signed by “Lubov Golubeva,” the maiden name of Tory donor Lubov Chernukhina, and shows her as a director of a firm owned by Suleiman Kerimov. Chernukhina says she “does not recall consenting in writing” to being a director at the firm, and Kerimov denied any connection with her. The documents appear to show that she was appointed a director of offshore company, Radlett Estates Limited, in 2005 following its acquisition of a substantial property, 1 Radlett Place, in north London.

South Africa is gaining a reputation as an illicit finance hub for jihadists from across the continent. Last month, OFAC imposed sanctions on four people in South Africa accused of raising money and supporting ISIS activities and branches across Africa. The US action has cast new light on the connections between ISIS-core in Iraq and Syria and its growing networks in Africa. In 2019, ISIS received pledges of allegiance from two rebel groups that seemed to have little connection with one another: insurgents in Cabo Delgado, Mozambique, and the Allied Democratic Forces in Uganda, notorious for committing atrocities in eastern Congo. These affiliates have since mounted attacks not just at home but also in Tanzania and Uganda, and South Africa has become their point of common engagement.

The Cybersecurity and Infrastructure agency (CISA) this week issued a new cybersecurity advisory on Russian state-sponsored and criminal cyber threats to critical infrastructure in coordination with foreign intelligence partners. Evolving intelligence indicates that the Russian government is exploring options for potential cyberattacks, as some Russian cyber criminal organization have pledged support for the Russian government. The FSB has conducted malicious cyber operations targeting the energy sector, including UK and US energy companies, US aviation organizations, US government and military personnel, private organizations, cybersecurity companies, and journalists. The agency has been known to task criminal hackers with espionage missions, and these same hackers have separately been responsible for disruptive ransomware and phishing campaigns.

Mexico has disbanded a select anti-narcotics unit that has been working closely with the DEA to tackle organized crime in a major blow to security cooperation. In Mexico, the Sensitive Investigative Unit (SIU) that was shut down worked on some of the biggest cases, such as the 2016 capture of Sinaloa Cartel leader, Joaquin “El Chapo” Guzman. The closure threatens to imperil US efforts to combat organized crime groups inside Mexico and make it harder to catch and prosecute cartel leaders.

A global, multi-agency effort took down one of the world’s largest hacker forums and arrested several individuals, including the site’s administrator. RaidForums was an illicit marketplace for the sale of hacked data and stolen databases commonly utilized by cybercriminals. Several high-profile corporate database leaks were marketed on the site. Members of RaidForums had access to hundreds of databases from individuals, corporations, universities, and government entities. The site contained stolen data ranging from credit card information, login credentials, social security numbers, and stolen bank account numbers.

North Korea uses complex corporate maneuvers, including global networks of shell companies, commodity traders, spies, cyber criminals, banks, and ship operators to evade international sanctions. Russia, which has on occasion turned a blind eye to North Korean sanctions violations, will probably take some lessons from the DPRK’s strategies, including working with China to mitigate economic pressure. For example, Russia could take advantage of Chinese “burner banks,” which facilitate illegal transactions and are subsequently liquidated or reconstituted before their activities are discovered. China could also become a clearing house for Russian transactions, using tried and true money laundering methods, such as the black market peso exchange that is traditionally used to move drug proceeds, or the age-old hawala method of using brokers to facilitate transactions without money changing hands.

The Securities and Exchange Commission this week announced charges against Stericycle, Inc. for violations of the Foreign Corrupt Practices Act (FCPA). Stericycle, a leading provider of medical waste and other services in 16 countries worldwide, paid millions of dollars in bribes to obtain business from government customers in Brazil, Mexico, and Argentina from at least 2012 to 2016. The staff kept and emailed spreadsheets that identified government customers who received bribes and included fraudulent third-party vendors who used fake invoices to conceal cash payments to government clients. Stericycle also failed to have sufficient internal accounting controls in place, such as a centralized compliance department, to detect and prevent the misconduct and failed to implement its FCPA policies or procedures prior to 2016.

 

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