Insights: Week Of January 2, 2023

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At the end of the year, we published an advisory on what we anticipate will happen in the sanctions space this year. Our sanctions outlook included continued sanctions against Russia, which will remain the top sanctions target this year, as well as Iran and China. The continued designations also will increasingly target non-Russian entities and foreign countries that help Moscow evade sanctions, and particularly those that facilitate access to weapons used in Ukraine.

FiveBy is watching these issues closely and monitoring possible upcoming changes. As the US government increases its focus on enforcement, monitoring regulatory developments, adverse news—both domestic and international—and engaging with compliance and policy experts is becoming more critical.

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Compliance and Due Diligence 

OFAC today sanctioned six executives and board members of US-designated Qods Aviation Industries (QAI), a key Iranian defense manufacturer responsible for the design and production of unmanned aerial systems (UAS) that Russia has been using to attack Ukraine. QAI changed its name to Light Airplanes Design and Manufacturing Industries, and OFAC has added that alias to the SDN list as well.

The United States and Turkey this week took coordinated action against an ISIS linked financial network. Two entities—Sham Express and Wadi Alrrafidayn For Foodstuffs—and four individuals were sanctioned for enabling the terrorist group’s financial transfers and recruitment efforts. Turkey will also implement an asset freeze against the targets.

The Wall Street Journal has a video explaining how authorities, aided by Internet sleuths, use open source tools to find Russian oligarchs’ yachts.

Xinjiang Central Asia Petroleum and Gas Co. Ltd. has signed a $540 million deal with Afghanistan to develop an oil-and-gas field. Analysts expect more Chinese companies to explore deals with the Taliban. Xinjiang’s links to human rights violations and this engagement with a designated terrorist group almost certainly represent both regulatory risk and possible reputational damage for companies choosing to transact with the company.

If you wondered how the Taliban would continue dealing with global sanctions, there are two factors that will help the terrorist group. One is the fact that as the terrorist regime becomes more isolated, it’s looking to friends such as Russia and China for foreign investments. In addition, the Taliban are stealing the aid meant to help the people of Afghanistan.

The SEC is investigating the due diligence policies of companies that invested in FTX to find out whether financial firms followed their policies and procedures when choosing to invest in the company. The probe may mean regulatory scrutiny for hedge funds and financial firms to determine whether they met their fiduciary duties to their own investors.

Russian oligarchs collectively lost $95 billion in 2022 because of western sanctions. The biggest loser? Roman Abramovich, who lost the Chelsea football club and the biggest amount of money, his fortune reduced by 57 percent to $7.8 billion. The fortune of Gennady Timchenko, a billionaire energy investor and close friend of Putin, who has been sanctioned by the United States since 2014, has shrunk by 48 percent to $11.8 billion, and Suleiman Kerimov, another of the Russian president’s allies, has lost 41 percent dropping to “just” $9 billion.

With Nepal struggling to address a number of deficiencies to comply with AML/CFT standards, stakeholders are worried that the deficiencies could lead to the greylisting of the country by the Financial Action Task Force (FATF). Nepal was removed from the FATF grey list in 2014 after making progress on its AML regime, but apparently the country is in danger again after having identified 15 laws that need to be amended to make the regime compatible with FATF’s AML standards.

Serbia will not be imposing sanctions on Russia, claiming that the EU’s calls for the country to join the bloc’s sanctions regime are a “brutal” interference in Serbia’s internal affairs. Serbia is seeking EU membership, but refuses to align its foreign policies with the bloc, which could further complicate EU consensus on new decisions and place another Russian ally in the organization that could help Moscow circumvent and mitigate the effects of sanctions.

Coinbase has agreed to pay $100 million to the New York Department of Financial Services (NYDFS) to settle allegations of deficiencies in the exchange’s AML controls between 2020 and 2021. New York regulators allege that Coinbase’s AML program and transaction monitoring were inadequate for the company’s size and sophistication.

Taiwan has added 52 new items to its list of export controls on Russia and Belarus to closer align with US and EU sanctions and prevent “high-tech goods from being exported for military use.” The items include nuclear energy substances, miscellaneous goods and materials, chemicals, and machine tools.

French engineering company, GTT, that develops containment systems for the shipping and storage of liquefied natural gas (LNG) is stopping work in Russia to comply with international sanctions. GTT is involved in the tank design of 15 ice-breaking LNG carriers under construction by the Zvezda Shipbuilding Complex. Although work in Russia is suspended, GTT will continue other projects in Asia for Russian interests.

The Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) this week issued a joint statement warning about “significant” possible risks associated with crypto assets. Regulators are warning banks about fraud, volatility, poor risk management, and contagion within the crypto sector.

Ahead of Russia’s February 2022 invasion of Ukraine, Russian oligarch Roman Abramovich transferred the beneficial ownership of 10 offshore trusts to his seven children, indicating that he suspected or knew that the invasion was imminent. These transfers totaling at least £3.3 billion shield the assets from Western sanctions imposed after Russia’s invasion, highlighting the importance of thorough research of ownership and control of offshore entities.

Fraud and Abuse

A human-smuggling kingpin has been arrested in Sudan thanks to swift action, based on information shared via INTERPOL. Kidane Zekarias Habtemariam was the subject of two INTERPOL Red Notices, by Ethiopia and the Netherlands, for migrant smuggling, human trafficking and other related crimes. He is wanted as the leader of a major criminal organization behind the kidnapping, extortion and murder of East African migrants.

Chinese companies have channeled $1.4 trillion in US and European investments into mainland China through offshore vehicles in tax havens by the end of 2020. These findings suggest that investors are more at risk for exposure from China than previously considered. In addition, the lack of transparency could expose US investors to restricted or even sanctioned entities.

Rep.-elect George Santos is facing a renewed fraud investigation by Brazilian authorities for passing a bad check. Brazil dropped the case more than 10 years ago because he could not be located. Santos allegedly paid for $700 worth of goods in a Brazilian store using a stolen checkbook and a fake name.

Officers from Ukraine’s Cyber Police Department and the Main Investigative Department of the National Police have arrested 40 individuals in connection with a call center operation that defrauded an estimated 18,000 Kazakhstani victims. The call center staff targeted individuals in Kazakhstan pretending to be IT security workers from their banks to defraud them of their money.

Venezuela’s banking watchdog, Sudeban, has announced plans to monitor crypto-related transactions in real-time to protect the stability of the bolivar. The agency said it is working with the national cryptocurrency regulator, Sunacrip, to combat illicit activities that undermine the bolivar and the stability of the country’s exchange market.

Rick Singer, who masterminded the college admissions scandal that resulted in high-profile celebrities being arrested, has himself been sentenced to three years and six months in prison. Singer has also been ordered to pay $10 million in restitution to the federal government.

Danish police this week arrested 135 money mules on suspicion of laundering money defrauded from elderly people. The elderly victims were convinced into transferring money from their bank accounts or providing personal banking information. The mules used their bank accounts to launder the proceeds.

A US federal court this week sentenced former Bolivian Interior Minister Arturo Murillo to nearly six years in prison for conspiracy to commit money laundering. Murillo pleaded guilty in October to receiving more than $500,00 in bribes from a Florida-based company in exchange for helping it secure a lucrative tear gas contract with Bolivia’s defense ministry and laundered the money through the US financial system.

The SEC this week charged six individuals and two companies related to the CoinDeal investment scheme, which raised more than $45 million from unregistered securities sales to thousands of investors worldwide. The defendants falsely claimed access to valuable blockchain technology the sale of which would generate returns of more than 500,000 times for investors.

Malaysia’s former Prime Minister Najib Razak this week petitioned the UN asking for either relief or a retrial following a decision by Malaysia’s highest court last year that sent him to prison for 12 years in the 1MDB scandal. Malaysia’s top court upheld the corruption conviction last year.

A new Global Financial Integrity (GFI) report—Private Investment Funds in Latin America: Money Laundering & Corruption Risks—examines the money laundering risk factors associated with private investment funds in Latin America. A 2020 leaked FBI bulletin found that criminals were using “private placement funds including investments offered by private equity firms and hedge funds, to circumvent the anti-money laundering (AML) programs of other financial institutions and launder money.”

Sam Bankman-Fried this week pleaded not guilty to criminal charges that he cheated FTX investors. He faces eight criminal counts, including wire fraud and money laundering conspiracy for looting FTX customers’ deposits to support his Alameda Research hedge fund, buy real estate, and donate millions of dollars to political causes. The trial is scheduled for 02 October and could last four weeks. The judge also imposed a new bail condition, barring him from accessing FTX or Alameda assets.

New York Attorney General Letitia James is suing ex-CEO and cofounder of crypto trading platform Celsius, Alex Mashinsky, for defrauding thousands of customers out of billions of dollars by making risky investments in decentralized finance and hiding  his company’s dwindling assets and increasing liabilities. Mashinsky was also allegedly linked to FTX; Celsius reportedly lent FTX $1 billion to fund the Alameda hedge fund in exchange for FTT crypto tokens.

Aurelien Michel, a French national residing in the UAE, this week was arrested in the United States and charged with defrauding the buyers of “Mutant Ape Planet” NFTs of more than $2.9 million in cryptocurrency. Purchasers were falsely promised numerous rewards and benefits designed to increase the value of the NFTs, after which Michel executed a rug pull—a cryptocurrency scam in which a developer attracts investors, but pulls out before the project is complete, leaving buyers with a worthless asset.

FiveBy provides a weekly roundup of relevant news and insights to help readers keep abreast of regulatory developments and reputational risks. We hope you find the insights useful. Please feel free to contact us at insightsfeedback@fiveby.com if you would like other issues included in these articles.

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