Insights: Week of April 25, 2022

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The Justice Department will focus more heavily on sanctions evasion and export-control violations following President Biden’s proposal that would give the executive branch broader authorities to seize and forfeit the assets of sanctioned Russian elites and oligarchs. US persons and companies should become even more conscientious in their compliance efforts, knowing they can be criminally prosecuted. Financial institutions often are on the front lines of sanctions violations detection and are under particular regulatory scrutiny, especially in situations where they process payments by individuals or companies that violate national security prohibitions. However, other firms also will need to enhance their know-your-customer (KYC) processes and take extra care to examine their supply chains and business partners.

  • The White House’s proposed comprehensive plan to hold Russian oligarchs and elites accountable for the war in Ukraine includes establishing an administrative authority to seize and forfeit their assets with the proceeds going to help Ukraine. The plan includes clamping down on facilitation of sanctions evasion and strengthening the government’s ability to investigate and prosecute sanctions evasion by adding the crime to the definition of “racketeering activity” under the RICO act, giving the Justice Department a way to use its forfeiture authorities against entities and individuals that facilitate sanctions evasion. The proposal also would improve the country’s ability to pursue money laundering prosecutions by extending the statute of limitations from five to 10 years.
  • Imprisoned Russian opposition leader Alexey Navalny’s anticorruption foundation (FBK) has created a list of nearly 6,000 corrupt individuals who enabled Russia’s invasion of Ukraine. The list of what the foundation describes as “bribetakers and warmongers” includes not just politicians, but media figures, members of Russia’s security forces, judges, prosecutors, celebrities and influencers who act as propagandists for Putin, as well as educators (the rectors of some of Russia’s most prestigious universities), athletes, and artists.

The Biden administration also seeks to criminalize the intentional possession of proceeds of Russian government corruption, giving regulators sweeping powers to prosecute US firms and financial institutions. US companies should exercise extra caution and perform enhanced due diligence in risky jurisdictions, such as Russia and Belarus, as well as known secrecy havens used by Russian elites and oligarchs to hide their assets to avoid criminal penalties, as well as regulatory fines and reputational damage.


Compliance and Due Diligence

Despite its refusal to reexport military equipment to Ukraine, Switzerland has implemented more EU sanctions against Russia and Belarus. The new measures include an import ban on lignite, coal and other items such as caviar, timber and seafood. Exports to Russia of Swiss goods such as industrial robots and certain chemicals, which could be used to strengthen Moscow’s industrial production, are also prohibited.

Sanctions against Russian oligarch Roman Abramovich may be around the corner. Ukrainian president Zelensky a few weeks ago asked the United States to hold off sanctioning the billionaire, in hopes that Abramovich would influence Putin and help the peace talks. But negotiations have been unsuccessful, and Zelensky is increasingly pessimistic about peace talks to end the war after seeing evidence of Russian atrocities in towns such as Bucha and Mariupol.

Germany is ready to consider including Russia’s largest bank, Sberbank, in the EU’s next sanctions package. The sixth tranche, which probably will include a phased-in embargo on Russian oil, is being finalized after Russia cut off gas deliveries to Poland and Bulgaria, violating its contractual obligations that say payments for gas will be made in US dollars. Berlin had been concerned that sanctioning Sberbank would disrupt energy-related transactions, but in light of the contract violations, Germany has moved quickly to tap alternate energy suppliers and is now preparing to back a phased-in ban on Russian oil. Ukraine and some EU states, including Poland and Lithuania, want a ban on Russian energy, but Germany and Hungary are opposed to an immediate oil embargo.

The constant flood of sanctions is making paying ransom to cyber actors difficult, because sanctions are being imposed on numerous cyber actors, banning transactions with them. OFAC warned last year that paying ransomware operators could also cause victims to violate US sanctions. So far, US enforcers have not publicly targeted a company for making a ransomware payment to a sanctioned entity, but a company that makes a payment without conducting due diligence on the recipient, or fails to proactively communicate with regulators, could face regulatory consequences.

A possible deal between Apple and Yangtze Memory Technologies Co (YMTC)—a Wuhan, China-based memory chip manufacturer—could be in trouble because YMTC sells chips to Huawei for inclusion in its new smartphone, potentially violating US export controls. A report by TechInsights, which analyzes components inside consumer electronics, that was provided to the White House and the Commerce Department, says Huawei was using YMTC chips in its Enjoy 20e phone.

European banks can apply less stringent AML checks on Ukrainian refugees to ensure they have access to basic banking services. For example, banks don’t have to require a passport from Ukrainian refugees who want to open an account with basic features and can rely on other documentation to prove that a prospective customer is a Ukrainian refugee. Banks can also postpone some customer checks to allow refugees to use prepaid cards and choose to increase monitoring or set limitations such as restrictions on person-to-person money transfers to counteract the risks.

The White House has indicated that sanctions against Putin’s girlfriend, Alina Kabayeva, may be in the works. The media last year unveiled documents indicating ownership of a luxury apartment in Monaco by a woman who has reportedly been romantically involved with Putin. Kabayeva’s grandmother also owns plum real estate, such as a luxury riverside apartment in St. Petersburg sold to her by a Putin business associate. The Kremlin has repeatedly denied a relationship between the former gymnast and the Russian president, but US officials were hesitant to impose sanctions against Kabayeva, considering those designations “too personal.”

Australian logistics company Toll Holdings has reached a $6.1 million settlement with OFAC over alleged sanctions violations involving several nations, including North Korea, Iran, and Syria, as well as its transactions with sanctioned entities. The fine could have been as high as $826.4 million but was reduced based on several mitigating factors, including Toll’s voluntary disclosure of the violations and the measures it had taken to fix the problems in its compliance program, including restructuring its compliance department and streamlining its sanctions screening process.

Two individuals have been charged with conspiring to violate US sanctions on North Korea by working with convicted sanctions evader Virgil Griffith to illegally provide cryptocurrency and blockchain technology services to the DPRK. Alejandro Cao De Benos, a citizen of Spain, and Christopher Emms, a citizen of the UK, jointly planned and organized the Pyongyang Blockchain and Cryptocurrency Conference (the DPRK Cryptocurrency Conference) for the benefit of North Korea. Both remain at large.

So far, western sanctions against Russia have not stopped Russian oil flows. But what if the next tranche targeted insurance providers? What if insurance companies were forbidden to protect tankers carrying Russian oil? What about tankers themselves? What about trading companies that handle Russian oil or the banks that finance these trades. What if EU vessels were prohibited from touching Russian crude? There are still potent options left in the West’s arsenal. How long before those options are in play?

Fraud and Abuse

The EU’s executive body this week activated a mechanism for the first time that could withhold EU budget payments to Hungary. The conditionality mechanism allows the EU to block funds if Brussels can show that the recipient country’s lack of independent courts or weak anticorruption efforts present a risk that the money—meant for infrastructure such as roads, trains, and bridges—could be misspent. The decision to block funds will likely take months and will depend on the backing of a supermajority of member states.

An unnamed engineering company with energy and military customers was recently the target of a North Korean hacking group that has been operating since at least 2009. The Threat Hunter Team at Symantec says that the attackers breached the organization in February and attributes the activity to Stonefly, which is also known as DarkSeoul, Operation Troy, Silent Chollima, and BlackMine. The group in 2009 conducted distributed denial-of-service (DDoS) attacks against US government, South Korean, and financial websites. 

China’s anticorruption watchdog—the Central Commission for Discipline Inspection—will investigate China Merchants Bank’s former chief executive days after he was removed from his position. Former CEO Tian Huiyu was “suspected of seriously violating discipline and laws.” The bank’s board last week voted to remove Mr. Tian from his positions at the company “subject to further assignment.” Tian joins at least 17 officials that have been investigated or penalized this month and dozens since October, when an inspection focused on financial institutions and regulators was launched.

The EU this week proposed laws to curb excessive litigation aimed at silencing journalists, anticorruption organizations, and human rights advocates by governments and businesses. The disproportionate lawsuits aim to intimidate the defendants, exhaust their resources, and mire them in multiple legal proceedings, often in several jurisdictions at a time. In Malta, the anticorruption investigative journalist Daphne Caruana Galizia was involved in approximately 40 defamation cases at the time of her murder 2017.

Last fall, the FBI seized luxury items from a New York townhouse. At the time the Bureau would not say why the items were seized, but apparently they and the townhouse belong to US-designated Russian oligarch Oleg Deripaska who has been evading sanctions by passing ownership of his assets to relatives, including his cousin, Russian oligrach Pavel Ezubov. The investigation of Deripaska’s assets is now part of an escalating US crackdown on ultra-rich Russians suspected of laundering money and hiding assets to help finance Putin’s regime.

North Korean hacking group, Lazarus, is still laundering the $600 million it stole from Axie Infinity despite additional sanctions imposed on it, highlighting limits to law enforcement’s ability to stop the global flow of illicit crypto. The group moved its proceeds beyond the immediate reach of US authorities by converting it into the cryptocurrency Ethereum. Since then, the gang has worked to obscure the crypto’s origins primarily by sending installments of it through Tornado Cash—a service that pools digital assets and mixes them to hide their owners. The mixing service has begun blocking addresses sanctioned by OFAC, Treasury sanctioned three more addresses associated with the gang on last week, and Binance announced it had frozen $5.8 million worth of crypto the hackers had transferred onto its platform.

A group of hackers purportedly linked to Iran this week claimed that they hacked into the system used to transfer money between Israeli banks and individual accounts. However, Israel’s National Cyber Directorate and the Bank of Israel, which operates the network, said they found no indication of hacking into any banking network. The group “Hackers of Savior” released a video that claims to show them having access to the central bank’s Zahav system, which has access to everyone who has an account at any Israeli bank. Outside experts who have looked at the video are skeptical about the group’s claims, however, and assess that the video was faked to create panic.

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