Insights: Week of May 9, 2022

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A group of industry associations this week released recommendations for best compliance practices for money services businesses (MSBs), not only to help them mitigate illicit financial risk, but also bolster the confidence of banks and financial institutions that transact with these money transmitters, thereby reducing the risk of de-banking. The MSB Best Practices Guide aims to help MSBs develop risk-based compliance programs and implement best practices to meet their regulatory requirements.

  • The guide includes recommendations to conduct regular risk assessments based on the MSBs business models, geographic footprints, and vulnerabilities;
  • Proper staffing, internal controls, training, and independent testing are also recommended as AML/CFT “pillars,” mirroring the approach recommended by the Association of Certified Anti-Money Laundering Specialists (ACAMS), which also includes customer due diligence. Treasury’s recommendations for the five pillars of an effective sanctions compliance program also include the four principles the MSB Best Practices Guide lists, as well as management commitment.

Although MSBs have no current obligation to perform customer due diligence and know the nature and purpose of customers’ transactions and their patterns of financial behavior, these strategies help develop customer risk profiles and increase the confidence of banks and financial institutions in their relationships with MSBs. In addition, given the possible regulatory changes around the corner, MSBs should be proactive in their efforts to enhance their AML and sanctions compliance programs, reassess their risks and vulnerabilities, and be ready for new requirements. For example, the Treasury Department today published its National Strategy for Combatting Terrorism and Illicit Financing that suggests the possibility of including select MSBs that provide virtual asset services in the USA PATRIOT Act Section 314(a) program to facilitate information sharing between law enforcement and financial institutions. Requiring MSBs to search their records in response to law enforcement requests and identify information about possible terrorist financing and other financial crimes will almost certainly strain already thin resources, and the best practices listed in the guide will help more effective resource allocation.

Compliance and Due Diligence

The United States this week—on a Sunday, no less—issued designations against Kremlin-controlled media companies, several executives of Sberbank and board members of Gazprombank, and Moscow Industrial Bank and its subsidiaries. A state-supported defense company, Promtekhnologiya, which produces rifles that are used in Russian military operations, has also been added to the SDN list. Media companies that are now sanctioned include Channel One, Russia-1, and NTV Broadcasting Company. According to the Treasury press release, the United States is also cutting off Russia’s access to certain key services from US companies, which Russian companies and elites use to build wealth, generate revenue for Putin’s war machine, and evade sanctions. A determination pursuant to EO 14071 prohibits the provision of accounting, trust and corporate formation, and management consulting services to any person located in the Russian Federation.

The UK this week sanctioned Vladimir Putin’s financial network, including members of his inner circle, such as his ex-wife, Lyudmila, and his girlfriend, Alina Kabaeva. The UK says that Putin relies on his network of family, childhood friends, and selected elites to support his lifestyle, which seems modest on the surface, but is lavish thanks to close friends and family who keep his assets in exchange for high-level government positions and significant wealth.

Hungary is demanding what amounts to hundreds of millions of dollars from the EU in exchange for its support on a partial ban on Russian oil in the bloc’s sixth tranche of sanctions. Hungary wants the money to replace the Russian oil currently being imported and demands that any ban on Russian oil be limited to deliveries by sea, which would benefit Hungarian group MOL because its refineries use cheap Russian Urals crude.

Russian Switzerland-based company Bitriver may take sue the United States over its inclusion on the SDN list. The company insists it does not help the Russian government circumvent sanctions and that the designation is damaging its reputation and international business. Bitriver asserts that there are no legal grounds for the sanctions against it and intends to demand that US authorities remove it from the SDN list.

Russian importers are reaching out to small Indian businesses to help mitigate the effects of sanctions and secure fresh produce, auto parts, medical devices, and other key goods. Representatives from Russian chambers of commerce are traveling to New Delhi, Mumbai, and Bengaluru to meet with companies willing to set up new subsidiaries or joint ventures to export goods to Russia. Private sector players in Russia are opening specialized bank accounts at home for rubles-to-rupees transactions.

Russia has imposed sanctions on the former Germany-based unit of Russian gas producer Gazprom, Gazprom Germania, as well as on Poland’s EuRoPol GAZ—the owner of the 684km-long Polish part of the 4,000km-long Yamal-Europe gas pipeline, which transports natural gas from the Yamal peninsula to European consumers. Gazprom Germania subsidiaries that have been hit with Russian sanctions are located in the United States, Switzerland, Hungary, Britain, France, Bulgaria, the Benelux region, Romania, and Singapore.

One of the Catholic Church’s most senior members has been arrested in Hong Kong for breaking China’s national security law. Cardinal Joseph Zen, along with singer and actor Denise Ho, ex-legislator Margaret Ng, and academic Dr Hui Po Keung, were detained for being associated with a now-defunct organization that helped protesters in financial need and accused of “colluding with foreign forces.” The arrests come days after the Chinese government appointed a new hardline pro-Beijing leader for Hong Kong, John Lee Ka-chiu, who is already sanctioned by the United States. Will we see more Magnitsky-style sanctions in response? The UK is already calling for sanctions against high-ranking officials in response to the detentions.

The United States is considering banning US suppliers from selling advanced equipment to Chinese chip makers. The proposed rules would tighten restrictions on Semiconductor Manufacturing International Corp (SMIC), China’s top chip foundry, as well as state-backed chip makers Hua Hong Semiconductor, ChangXin Memory Technologies (CXMT) and Yangtze Memory Technologies Corp (YMTC), all of which rely on core US technology to fabricate chips.

The United States will allow some foreign investment in areas of northeast Syria outside government control without violating sanctions to help the region previously controlled by ISIS. That area of northeast Syria, bordering Turkey and Iraq, contains some of the country’s limited oil reserves and agricultural land, but the general license issued by OFAC applies to agriculture, clean energy, manufacture, and reconstruction work, but not to oil.

The United States this week sanctioned members of an ISIS financial facilitation network who have played a key role in facilitating the travel of extremists to Syria and other areas where ISIS operates. The individuals, designated pursuant to Executive Order (EO) 13224, also conducted financial transfers to support ISIS efforts in Syria-based internally displaced persons (IDP) camps by collecting funds in Indonesia and Turkey, some of which were used to smuggle children out of the camps and deliver them to ISIS foreign fighters as potential recruits.

The Senate and House of Representatives this week have both passed a resolution calling for targeted sanctions on the military coup in Sudan, increasing pressure on the Biden administration to take concrete steps against those involved in the coup. The resolution is nonbinding, but it does send a message to President Biden that the legislature supports identifying and sanctioning the leaders, accomplices, and enablers who facilitated the overthrow of the government in Sudan last year.

Fraud and Abuse

An organized-crime prosecutor from Paraguay, Marcelo Pecci, was assassinated this week while on his honeymoon, when gunmen arrived by Jet Ski on a private beach where he was relaxing and shot him. Paraguay’s vice president believes that the murder was related to organized crime, given Pecci’s job. In Paraguay, Pecci had most recently worked with a team of prosecutors that in February began seizing luxury vehicles, airplanes, cattle, and other property that Paraguayan authorities said drug traffickers had bought with hundreds of millions in narcotics profits.

Plans to crack down on fraud and money laundering in the UK have been unveiled as part of a wide-ranging Economic Crime Bill to “drive out dirty money” from criminals and Russian Putin supporters. The legislation seeks to protect the UK’s financial system from exploitation amid concerns that London has earned a reputation as a money-laundering hub used by Russian oligarchs, criminals and kleptocrats. It will also give the Companies House corporate registrar new powers to investigate people suspected of fraudulently registering companies in the UK.

Some businesses in Hungary, tied to Prime Minister Orban and operating in strategic sectors, have Sberbank accounts, as they carry out various projects with Russian partners, providing a possible explanation about Hungary’s continued obstruction of the EU’s latest sanctions package. Gas traders, railroad car builders, transport services, and logistics, construction, and nuclear energy companies are among those tied to Russia and to Orban through oligarchs who benefit from public projects.

French prosecutors are investigating allegations against Ahmed Naser Al-Raisi, the president of the international police agency INTERPOL, of “complicity in torture.” The complaint, introduced by two UK citizens, alleges “torture” and “arbitrary detentions” against the INTERPOL chief—then a senior security official in the United Arab Emirates—in 2018 and 2019. Al-Raisi was elected president of INTERPOL last November, amid harsh criticism from human rights groups, which accused him of having a long record of overseeing human rights abuses.

A chemical engineer has been sentenced to 14 years in prison over what prosecutors say was a scheme to steal trade secrets to benefit the Chinese government and a Chinese company.  Xiaorong “Shannon” You was sentenced Monday after a jury convicted her last month of charges that include possession of stolen trade secrets and economic espionage. Prosecutors say You accessed secrets about BPA-free internal coatings of beverage cans while working at Coca-Cola in Atlanta and Eastman Chemical Company in Kingsport, Tennessee—trade secrets that cost major chemical and coating companies nearly $120 million to develop.

The US government wants to seize a mega-mansion in an exclusive area of Los Angeles that it claims was bought with millions in bribe money linked to the former finance minister of Armenia and his sons. The federal complaint states that the US government is seeking the forfeiture of the 33,652 sq foot mansion, located in Holmby Hills, because it was allegedly bought illegally with bribe money paid by an Armenian businessman to Gagik Khachatryan, a former high ranking Armenian politician.

The State Department is offering up to $15 million in rewards for information that helps identify and locate the leaders of the Conti ransomware organization. Up to $10 million of this reward is offered for information on Conti leaders’ identities and location, and an additional $5 million will be paid if the information leads to the arrest and/or convictions of individuals who conspired or attempted to participate in Conti ransomware attacks. The FBI last year warned that Conti operators targeted more than a dozen US healthcare and first responder organizations.

Spain has fired its intelligence chief after several politicians were targeted with Pegasus spyware, including Prime Minister Pedro Sanchez, Defense Minister Margarita Robles, and several supporters of Catalonian independence. Spain’s National Intelligence Centre (CNI) has been criticized for its role in spying on Catalan separatists and taking a full year to discover that the handsets of the Prime Minister and key defense and security officials had been breached, possibly by a foreign power. The head of the CNI admitted in a closed-door parliamentary hearing last week that she had given her agency permission to hack the phones of several separatists.

New US and UK intelligence suggests that Russia was behind an operation targeting commercial communications company Viasat in Ukraine, causing outages for Ukrainian customers and impacting windfarms right before Russia’s invasion. The UK’s National Cyber Security Centre (NCSC) also assesses that Russian Military Intelligence was almost certainly involved in the 13 January defacements of Ukrainian government websites and the deployment of the Whispergate malware.

Israeli-American cybersecurity firm, Cybereason, has uncovered a “massive” hacking operation, led by a hacking group believed to be backed by China, that had engaged in intellectual property (IP) theft and industrial espionage on three continents. The company said that the Winnti Group employed sophisticated methods to target technology and manufacturing companies in the United States, Europe, and Asia and steal sensitive proprietary information.

Before Catalonia’s historic parliamentary vote in 2017 to declare independence from Spain, Carles Puigdemont, the leader of the region, received an offer of money and armed troops from a mysterious “Russian group” in exchange for Catalonia’s break with Madrid. Puigdemont met with men who presented themselves as envoys of the Russian government in his official residence on the eve of Catalonia’s independence vote. Chief among his interlocutors was Nikolai Sadovnikov, whom Catalonian leaders privately described as “Putin’s envoy.” Sadovnikov denies these allegations.

The Council of Europe’s AML inspectorate (Moneyval) has upgraded the Vatican to the watchdog’s ordinary process of assessments and evaluation, offering a broadly positive rating of progress the Holy See has made in the financial security sphere during the last 12 years. However Moneyval also flagged concerns about staffing and funding for financial security operations, which it said delays Vatican money laundering investigations.


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