Insights: Week Of January 9, 2023

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This week, we are focusing on risks emanating from associates of risky parties that may be sanctioned or involved in fraud and other financial crimes.

Our white paper that was published this week highlighted increased enforcement of sanctions evasion and the need for intensive research to prevent sanctioned individuals and entities from concealing their assets, accessing their funds, and transacting in the global financial system. Beyond sanctions, this risk also extends to parties involved in fraud and money laundering. Governments, including the United States and the UK, are increasing enforcement of sanctions, fraud, and anti-money laundering laws. In-depth examination of customers and potential business partners is critical to mitigate enforcement risks.

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Compliance and Due Diligence 

We may have more new sanctions imposed on Russia in the coming weeks in an effort to impact Russia’s capabilities on the battlefield and in the financial sector. State Department Sanctions Coordinator, Ambassador James O’Brien, recently spoke online with the Head of the Office of the President of Ukraine, Andriy Yermak. A working group is currently studying in detail all the materials submitted by the Ukrainian government and the Yermak-McFaul group, which recommends full blocking sanctions on Russia’s 30 largest banks, among other measures.

The EU may impose sanctions on 40 Iranian citizens and entities over Tehran’s brutal clampdown on anti-regime protesters. Documents prepared by EU officials created a sanctions package that includes 17 people, namely politicians, media officials, plus current and former officials in Iran’s IRGC. US-based human rights monitor HRANA said more than 500 people had been killed in the repression and close to 20,000 arrested.

Russia’s central bank will begin developing a central bank digital currency (CBDC) for cross-border settlement transactions as a means of mitigating the effects of international sanctions. The plans to move forward with Russia’s digital ruble will likely come in the first quarter of this year and will see Russia’s central bank study two possible models: one that would allow countries to enter into separate bilateral agreements with Russia to integrate into its CBDC system, and the other that would create a single platform for Russia to interact with other countries.

Russia and Iran are working on a new shipping corridor that avoids Europe and circumvents sanctions, and are looking to partner with India for the strategy. Moscow, New Delhi and Tehran signed an agreement in 2002 laying out plans for the International North-South Transport Corridor, which would connect India and Russia through Iran and Azerbaijan, bypassing the Suez Canal.

Goldman Sachs and JPMC took different paths after the United States and others sanctioned Russia’s richest oligarch, Vladimir Potanin. JPMC cut ties with his UK charity, the Potanin Foundation, while Goldman continues to provide the organization with banking and investment management services. The foundation itself is no longer subject to UK sanctions after the Charity Commission in July suspended Potanin’s powers  to oversee the foundation’s trustees. The divergent approaches emphasize the reputational risk involved in dealing with an entity that bears a sanctioned individual’s name. Goldman’s reputation is already tarnished by the 1MDB scandal.

The UK’s Financial Conduct Authority (FCA) has imposed a fine of £7.67 million on Guaranty Trust Bank UK Limited (GT Bank) for lapses in its AML systems and controls. Among other lapses, GT Bank between October 2014 and July 2019, failed to undertake adequate customer risk assessments, and despite repeated warnings from regulators, the bank did nothing to mitigate the failures in its AML policies.

French Riviera real estate agents may be in a bit of hot water. Authorities in Paris are investigating real-estate agents to verify whether they complied with sanctions targeting some of their rich Russian clients. The fraud office says that 60 percent of the agencies they audited were either unaware of their compliance obligations, or didn’t carry them out, even something as basic as list screening.

Belarus has legalized the use of digital content from “unfriendly countries” without consent from foreign copyright holders. In other words, Lukashenko has legalized theft by signing this decree. The law starting next week will allow the use of software, films, music, television programs, and other “audiovisual works” from Western countries even if the copyright holder is located in a country that has imposed sanctions on Minsk. The law mandates the payment of royalties by crediting the funds into the account of the Belarusian patent authority, which will hold the copyright holders’ money up to three years. Russia did something similar recently.

The United States and allies are preparing new sanctions on the Russian oil industry with the goal of limiting sales prices on Russian exports of refined petroleum products. The new limits will follow last month’s cap on the price of Russian crude exports at $60 a barrel. Western officials believe Russia will have a tough time reorienting its exports of refined products, which could impact global supply.

China’s eastern Jiangsu province has unveiled a policy package for the semiconductor industry, which includes at least $74 million a year in financial support over the next three years amid intensifying US trade restrictions. Jiangsu, a key chip production base, is promising a wide range of subsidies and cash awards to local chip businesses.

Republican control of the House of Representatives will allow the GOP to hold hearings on China policy issues such as Taiwan and human rights, pushing the White House toward harder policies. On Taiwan, congressional pressure could push the Biden administration further away from the “One China Policy” under which Washington withholds an explicit security guarantee for Taiwan while still leaving open the possibility of US military intervention. President Biden has already begun this shift with public comments that the US military would defend Taiwan.

Fraud and Abuse

Bulgarian law enforcement is investigating crypto lender, Nexo, for alleged money laundering and sanctions violations. Law enforcement officials yesterday raided the company’s offices in Sofia. The company denies wrongdoing and claims to have stringent AML and KYC policies. US securities regulators had been investigating Nexo, and the company eventually exited the US market after numerous issues with regulators. Bulgaria’s chief prosecutor claims that roughly $94 billion has been funneled through Nexo during the past five years. Nexo says it will sue the government for what it calls a publicity stunt of a raid.

FTX identified five billion dollars in liquid assets as part of its bankruptcy proceedings and attempts to repay creditors. The Justice Department seized $456 million worth of shares of Robinhood stock that were owned through a holding company by FTX founders Sam Bankman-Fried and Gary Wang. Bankruptcy lawyers claim Bankman-Fried’s Alameda had access to a $65 billion credit line from FTX and that customer loans were made available via a backdoor created by Wang. FTX still has not determined the final amount of what is owed to their creditors—only that there is a massive shortfall—and more liquid assets are likely to be identified as criminal proceedings against the company continue.

Rewards for Justice is offering up to $10 million for information about Hizballah financial networks in Guinea that are associated with two Lebanese tycoons who were sanctioned by OFAC last year. Ibrahim Taher and Ali Saade are allegedly using their contacts in the Guinean regime to facilitate political support for Hizballah’s operations and transferring money from Guinea for the terrorist group.

A New York-based law firm has begun an investigation into whether Bitcoin miner Core Scientific and its leadership potentially engaged in “securities fraud and other unlawful business practices,” which led to its stock price falling on several occasions. Class action firm, Pomerantz LLP, is investigating whether Core Scientific oversold its mining and hosting businesses in 2021. There are other allegations as well that impacted the company’s shares.

The Swiss branch of Transparency International says that Swiss prosecutors should enforce laws against money laundering more effectively, as the country remains vulnerable to financial corruption and crimes. Although Switzerland now routinely exchanges bank account information with more than 100 countries, having fought to clear its reputation as a place for criminals to hide illicit assets, the country has faced international pressure to shed more light on corporate ownerships, and in October announced plans to create a central registry of legal entities to combat money laundering via shell companies.

JPMC is suing the founder of fintech startup, Frank, that it acquired for $175 million for allegedly lying about the scale and success of its business. Frank, founded by former CEO Charlie Javice in 2016, offers software aimed at improving the student loan application process for students seeking financial aid. The lawsuit claims that Javice pitched JP Morgan in 2021 on the “lie” that more than 4 million users had signed up to use Frank’s tools to apply for federal aid. When JP Morgan asked for proof during its due diligence process, Javice allegedly created a roster of more than 4 million “fake customers,” when in reality, it had fewer than 300,000 customer accounts at the time.

Lanfranco Cirillo, the architect behind Putin’s 190,000 square-foot mansion dubbed “Putin’s Palace,” will not return to Italy next month to be tried for money laundering and tax evasion, and will instead be tried in absentia. Cirillo claims he has been advised not to travel out of his Moscow due to an Interpol Red Notice request that calls for his arrest pending extradition.

A coalition of crypto organizations is urging US lawmakers in the new session of Congress to make data protections a priority when developing new legislation. Signatories to the letter, addressed to incoming lawmakers, include crypto wallet provider Ledger, the developer of privacy-protecting digital currency Zcash, and peer-to-peer crypto payment platform MobileCoin. Digital rights nonprofit Fight For the Future opposes legislation introduced in the last congressional session that would require identity checks by digital wallet providers and other related businesses, while limiting the use of mixer, such as Tornado Cash and Blender.

Hackers this week have disrupted access to the websites of Denmark’s central bank and seven private banks in the country. The websites of the central bank and Bankdata, a company that develops IT solutions for the financial industry, were hit by distributed denials of service (DDoS) attacks. Access to the websites of seven private banks this week was briefly restricted after the DDoS attack on Bankdata.

A federal court in San Diego this week ordered that more than $17 million be paid to roughly 800 victims from more than 40 countries as restitution for their investment losses in BitConnect, which defrauded investors worldwide. The founder of BitConnect, Satish Kumbhani, last year was indicted for his central role in the multibillion-dollar fraud. BitConnect was a Ponzi scheme, and those involved in the fraud used up to 15 percent of the funds invested into BitConnect for personal gain.

CENTCOM has intercepted a vessel in the Gulf of Oman smuggling more than 2000 AK-47 rifles while transiting international waters from Iran to Yemen, sailing along a route historically used to traffic weapons to the Huthis. Yet another instance of destabilizing activity by Tehran, in which it funds its terrorist proxies.

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 if you would like other issues included in these articles.

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