Insights: Week Of May 8, 2023

Beijing skyline: Courtesy of walter688 from Pixabay

A recent effort by Beijing to restrict overseas access to China-based data sources, such as company records, will make compliance officers’ work more challenging. China in recent weeks increased pressure on foreign companies specializing in collecting information, such as auditors, management consultants, and due diligence and law firms.

  • China recently questioned staff at consulting firm Bain & Co.’s Shanghai office and raided the Beijing office of US due-diligence company Mintz Group, signaling that foreign firms will almost certainly have a tougher time researching potential customers, clients, and business partners in the country.
  • Corporate databases that contain corporate-registration information, patents, procurement documents, and other insights have been severely restricted or outright cut off to foreign entities.

US companies seeking to comply with the requirements of the Uyghur Forced Labor Prevention Act will need to examine their supply chains closely to ensure they are not importing goods that have links to forced labor. US restrictions on high-end chip exports to China and the rapidly expanding number of Chinese firms added to the Commerce Department’s Bureau of Industry and Security Entity List have also made compliance efforts more cumbersome.

Expert investigators can help US companies reduce their risk of engaging with counterparties that may be restricted, blocked, or linked to questionable Chinese firms. Although access to corporate databases is increasingly limited, jurisdictional, cultural, technological, and linguistic analysis can help identify risks based on location or by examining adverse media, previous legal actions, archived web pages, and the websites of potential counterparties. Researching your customer’s customers can also provide critical insights that can inform business decisions and reduce risk.

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Compliance and Due Diligence

OFAC this week designated four individuals and two entities under the Illicit Drugs Executive Order 14059. One of the individuals is the son of imprisoned Sinaloa cartel leader El Chapo. Treasury calls the individuals Los Chapitos (little Chapos), and the designations are part of the administration’s continued battle against Fentanyl. Now-designated Simulab is a Culiacan-based chemical company that Sinaloa uses to obtain precursor chemicals. Urbanizacion, Inmobiliaria y Construccion de Obras, S.A. de C.V., is a real estate company—a sector often exploited by cartels to launder and transfer drug proceeds.

The EU is working to sanction several Chinese companies for their military involvement with Russia, and China is warning the bloc that relations with Beijing would deteriorate. The list of possible designations includes 3HC Semiconductors, King-Pai Technology, Allparts Trading, Sinno Electronics, Sigma Technology, Asia Pacific Links, Tordan Industry, and Alpha Trading Investments. Several of these entities are already sanctioned or otherwise restricted by the United States, but US firms and financial institutions should monitor the others to ensure they do not transact with these entities in the event of a status change. Germany, however, is urging caution about targeting China, concerned about upsetting the balance between enforcing sanctions and upsetting the international diplomatic apple cart.

The EU also proposes prohibiting access to its ports for vessels that attempt to evade sanctions on Russian oil, citing a “sharp increase in deceptive practices, and related environmental risks” by vessels trying to circumvent the G7 price cap and a ban on imports of Russian oil to the bloc. Poland is calling for the EU to sanction Russian agricultural products. The EU so far hasn’t targeted Russian agricultural products because of the threat to food security.

The Justice Department is investigating Binance to learn whether the crypto exchange was used by Russians to evade sanctions. Binance has been cooperating with the DOJ to resolve previous complaints that the exchange was used to evade Iran sanctions before it implemented additional compliance controls. The company also wants to be regulated by the UK, acknowledging that a crackdown on cryptocurrencies has made conducting business in the United States challenging.

More than 1,000 shipments from Swiss-based Traco Power—mainly electronic converters and microchip systems—arrived in Russia via third countries between March 2022 and August 2022. Most of these high-tech products have been shipped by Chinese and Turkish companies, mainly from Hong Kong and Istanbul. They include “BRK Logistics Transportation and Trade Limited Company in Transit Transaction” and “Smart Trading Tasimacilik San Ve LTD,” which is already sanctioned by the United States.

Russian elites are still buying luxury items, enabled by a global network of middlemen in Dubai and other countries. After many Western companies pulled out of Russia, the Russian trade ministry published a list of dozens of companies whose products could be imported without their makers’ consent, including Apple, Audi, Volvo, and Yamaha.

Toronto-Dominion (TD) Bank’s handling of “suspicious” customer transactions caused regulators to refuse approval of a $13.4 billion deal to buy First Horizon. The regulators’ concerns stemmed from the way TD handled “unusual transactions” and the speed with which some of these transactions were brought to the attention of US authorities.

Treasury Secretary Janet Yellen promises to further crack down on Russia’s ability to evade sanctions. At a press conference during the G7 meeting of finance ministers and central bank governors in Japan, she explained the three-pronged approach Treasury planned to take against Russian sanctions evasion: (1) improved information sharing among allies; (2) pressuring companies and jurisdictions enabling or facilitating the evasion activities; and (3) dismantling Russian means of funding and equipping its military.

The United States has warned Georgia about possible economic sanctions should it resume direct flights to Russia. A State Department official said that resuming flights could lead to “the possible imposition of sanctions on Georgian airlines that serve aircraft subject to import and export controls.”

The Economist’s 2023 crony-capitalism index has been published. There are hundreds of billionaires around the world whose fortunes are believed to have grown thanks to their close relationships with the state. The index can be a useful tool when gauging corruption risks in particular jurisdictions.

Cryptocurrency exchange Bittrex this week filed for bankruptcy protection after being accused by the SEC of operating an unregistered securities exchange. This after a roughly $53 million fine the company paid to Treasury last fall for sanctions and AML violations. Bittrex ceased operations in the United States last month. The company’s non-US operations are based in Liechtenstein.

SLB (aka Schlumberger Limited)—the world’s largest oil services and equipment provider—has made changes to keep its Russian business in compliance with western sanctions. SLB is imposing stricter controls on equipment transfers, barring Russian employees from accessing certain software and messaging systems, and partitioning the unit from other operations. The company has rejected calls from human rights groups to withdraw from Russia, which in the long term could damage its reputation. 

The Indian government has amended the scope of its AML law to include individuals who are involved in company formation, such as directors and nominee directors. The change comes a week after the government began requiring that accountants and company secretaries maintain records of all financial transactions they undertake for their clients.

Singapore’s Parliament this week passed legislation that authorizes the Monetary Authority of Singapore to set up and maintain a secure digital information-sharing system. The platform called Cosmic is meant to make detection and deterrence of scams, money laundering, and terrorism financing easier for financial institutions and allows banks to share information about potentially risky clients.

More than $1 billion of EU exports targeted by sanctions have disappeared when transiting Russia en route to the country’s trade partners, such as Kazakhstan, Kyrgyzstan, and Armenia. The “ghost trade” almost certainly helps Putin sustain his war effort in Ukraine. A disproportionate share of the exports that never reached their official destination, were shipped from Baltic countries bordering Russia and Belarus.

Members of the Senate Foreign Relations Committee this week pressed the Biden administration to take stronger action in response to the ongoing conflict in Sudan, including using targeted sanctions on some of the key actors involved in the conflict.

A group of 21 Democrats in Congress is urging President Biden to lift sanctions on Cuba and Venezuela in order to stop increased migration to US borders. The representatives claim that US sanctions have taken a “grave humanitarian toll” on the people of those countries and are urging the White House to lift the “failed and indiscriminate” sanctions imposed by the previous administration.

US authorities have seized 13 domains used by sanctioned associates, businesses, and charities linked to Hizballah. The websites include multiple domains for the group’s Al-Manar television, as well as URLs for top officials, deputy secretary general Naim Qassem, senior officials Ibrahim al-Sayed and Ali Damush, and affiliated charities the Martyrs’ Foundation and the Emdad Committee for Islamic Charity. The Justice Department says the domains are subject to seizure as assets of entities engaged in planning/perpetrating terrorist acts against the United States.

Fraud and Abuse

Fraud by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

PwC, is working to contain the fallout from emails released by an Australian senate committee showing that the company used confidential information received while working with the government to advise corporate clients on new anti-tax-avoidance rules to win business. The firm has flown its top lawyers to Sydney and is preparing to contact affected clients, since their names could be released as the scandal evolves. PwC’s Australia chief executive Tom Seymour this week stepped down after admitting he had been copied on emails “about the marketing strategy,” but claims that he did not know the tax advice PwC had tailored was based on confidential government information.

The Justice Department this week announced the conclusion of Operation MEDUSA, which disrupted a global peer-to-peer network of computers compromised by sophisticated malware, called “Snake,” operated by the FSB. For nearly 20 years, an FSB unit, referred to in court documents as “Turla,” used versions of the Snake malware to steal sensitive documents from hundreds of computer systems in at least 50 countries, including NATO members, journalists, and other targets of interest to Russia. After stealing these documents, Turla exfiltrated them through a covert network of unwitting Snake-compromised computers in the United States and around the world.

A California man who used several telemarketing companies in Orange and Los Angeles counties to scam dozens of timeshare owners, including elderly victims, this week pleaded guilty to one count of wire fraud. Michael McDonagh and four co-conspirators fraudulently obtained over $3.5 million from victims through a telemarketing scheme that used misleading and high-pressure sales tactics to promise financial relief to timeshare owners.

Former US Senate candidate, author, and Intelligence Director of Tactical Rabbit, Everett Stern, this week released additional damaging allegations against the former head of FBI counterintelligence Charles McGonigal, who is charged with money laundering on behalf of sanctioned Russian oligarch Oleg Deripaska. Stern believes that an investigation he was commissioned to support into HSBC bank in 2018 was suppressed by McGonigal, who is charged separately in DC with taking bribes from an Albanian agent while still with the FBI.

The Justice Department this week unsealed an indictment charging an Iranian national with conducting a visa fraud scheme to help Iranians enter the United States. Hesam Fatehi Peykani allegedly carried out his scheme by charging Iranian citizens between $1,000 to $30,000 to submit tourist visa applications containing false information. The purportedly false information made the Iranian citizens appear to have strong ties to Iran to increase the likelihood of receiving a US tourist visa, even when the applicants intended to remain in the United States permanently.

Are Brazilian militias—criminal, illegal paramilitary units—turning to cryptocurrencies to move funds? The Tandera Militia reportedly moved thousands of dollars’ worth of money and coins through Tradingpfx Ecommerce—an “obscure” domestic crypto exchange. The exchange appears to now be defunct.

US crypto exchange Kraken has created a new method for flagging suspicious wallets—building a fake crypto account on the exchange to “scam bait” bad actors. Tweeting yesterday, popular streamer Kitboga revealed that Kraken had built him a “custom environment” that he used to annoy a scammer impersonating President Joe Biden.

The IRS has filed nearly $44 billion in claims against FTX and its affiliated entities. The 45 claims against FTX companies include West Realm Shires (the legal entity of FTX.US), Ledger Holdings (the parent company of LedgerX and LedgerPrime), and Blockfolio, as well as Alameda Research, among others.

The SEC has charged HSBC Securities (HSI), and Scotiabank’s investment subsidiary, Scotia Capital, with penalties over recordkeeping violations. HSI agreed to pay $15 million, while Scotia Capital agreed to pay $7.5 million.

The hype surrounding the new Pepe the Frog memecoin has attracted the attention of scammers. Security firm PeckShield says that there have been at least 10 memecoin scams created in the last three days alone involving “rug pull” schemes, as well as fake Pepe claim sites on Twitter.

  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 have any questions or suggestions.

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