Insights: Week of February 21, 2022

US troops deploying to Europe. Courtesy of the US Army

Russia this week staged a full invasion of its sovereign neighbor, Ukraine, after recognizing Ukrainian regions of Donetsk (DNR) and Luhansk (LNR) as independent people’s republics and sending troops inside DNR and LNR early in the week under the guise of “peacekeeping.” In response, the United States and its allies imposed severe sanctions not just on major Russian banks, elites, their family members, and others, but also financial institutions, individuals, and entities in Belarus for their support for the Russian invasion.

  • President Biden early in the week directed that full-blocking sanctions be imposed against two Russian banks—Vnesheconombank (VEB) and Promsvyazbank (PSB)—and their subsidiaries, freezing any assets in the United States that belong to these entities, prohibiting US persons and entities from transacting with them, and effectively shutting them off from the US dollar and the global financial system.
  • After Putin’s overnight invasion, the US Treasury’s Office of Foreign Assets Control (OFAC) added 15 individuals and 76 entities to the Specially Designated Nationals and Blocked Persons (SDN) list, introduced blocking sanctions against major Russian financial institutions, VTB, Otkritie, Sovcombank, and Novikombank, as well as imposed prohibitions against correspondent and payable-through accounts for Sberbank, not fully blocking Russia’s largest financial institution, but cutting off its ability to transact in US dollars.
  • The United States this week also rescinded the sanctions waiver for Nord Stream 2 AG, designating the firm and its CEO Mattias Warnig under Protecting Europe’s Energy Security Act (PEESA).  All property and interests of the company and Warnig in the United States or that are in the possession or control of US persons must be blocked and reported to OFAC, and corporate officers of Nord Stream 2 AG are also subject to visa restrictions.
  • In a new executive order (EO) earlier this week, President Biden ordered sanctions against the separatist regions of Ukraine—Donetsk and Luhansk “people’s republics.” The EO prohibits new investment, trade, and financing by US persons of anything in the two regions.

The EU today agreed to a second tranche of sanctions against Russia. Ejecting Russia from SWIFT, as well as freezing the assets of Putin and Foreign Minister Lavrov are options that are on the table for future sanctions. If the EU decides to sanction Lavrov, we assess the bloc should also examine the assets of his longtime companion, Svetlana Alexandrovna Polyakova, who apparently has significant assets of her own, many of which raise corruption and kleptocracy red flags. The current agreed-to sanctions include a ban on the export of aircraft and spare parts necessary for the maintenance of Russian fleets. Three-quarters of the aircraft in the Russian aviation fleet originated in the United States, EU, or Canada. The EU will also ban the export of specialized oil-refining technology as well as semiconductors, and it will penalize more banks — although it will stop short of targeting VTB, Russia’s second-largest bank, which is already sanctioned by the United States and the UK.

Compliance and Due Diligence

China has sanctioned Lockheed Martin and Raytheon Technologies over arms sales to Taiwan. China says the arms sale earlier this month “undermined China’s security interests, seriously undermined China-U.S. relations and peace and stability in the Taiwan Strait.” The United States is bound by the 1979 Taiwan Relations Act to provide Taiwan with the means to defend itself, and US weapons sales always attract China’s anger, since they have been going on for a while. This is the first time, however, that the companies have faced sanctions under China’s new anti-foreign sanctions law passed last year in response to US sanctions against Chinese companies.

The United States this week sanctioned an international network run by IRGC-QF and a Huthi financier that supported and financially facilitated the Huthis’ attacks on allied and US assets in and near Yemen. The complex web of individuals and front companies shipped fuel, other petroleum products, and commodities throughout the Middle East, Africa, and Asia, with the proceeds financing Huthi attacks in Yemen and on its neighbors. There has been pressure on the Biden administration to redesignate the Huthis as a foreign terrorist organization.

The EU plans to give its new AML agency oversight of crypto companies amid concerns that digital assets could be used to evade current regulations. The new regulator will likely begin operations in the next two years, and officials from Germany are reportedly at the forefront of setting up the agency, with support from Italy, Luxembourg, Austria, Spain, and the Netherlands.

The EU this week imposed sanctions on the Myanma Oil and Gas Enterprise (MOGE) and 22 additional Myanmar officials for the entity’s support to Myanmar’s military that seized control of the country from its democratically elected government last year. Human rights campaigners say that MOGE is a major source of funding for the Tatmadaw. We assess that OFAC in the short term will designate MOGE as well.

Fraud and Abuse

There has been been another leak of bank records—this time from Credit Suisse—that shows the bank has been catering to high-level intelligence officials and corrupt actors from several countries, including the former chief of Pakistan’s ISI, criminals, including ones with links to ‘Ndrangheta, and other questionable clients that should have raised red flags at the bank. Credit Suisse claims that an “overwhelming majority” of problem accounts identified by journalists in the leaks “are today closed or were in the process of closure prior to the receipt of the press inquiries.”

The Credit Suisse leak is causing all sorts of problems for Switzerland. All three of the largest groups in the European parliament are demanding that the EU examine whether Switzerland should be categorized as a high-risk country for money laundering and financial crimes and possibly blacklisted for posing a risk to the financial integrity of the bloc. The Swiss Bankers Association says the country’s financial sector “has no interest in money of dubious origin. It attaches the greatest importance to the maintenance of its reputation and integrity,” and Credit Suisse rejects the allegations about its business practices.

Russia’s Promsvyazbank, which the United States sanctioned this week, apparently was a conduit in some of the biggest money laundering operations in history, including the Russian Laundromat and a scheme to invest stolen funds into Manhattan real estate. Bank of New York Mellon and Barclays had flagged “suspicious” transactions coming out of PSB as early as 2011. In the years before the Russian Defense Ministry took over the bank, suspicious activity reports (SARs) showed that PSB provided a conduit for anonymous shell companies to participate in global money laundering schemes and gave members of Putin’s inner circle, including the Rotenbergs, Roman Abramovich, and others access to the US financial system.

A Queens, New York, man this week pled guilty to coordinating a $653 million money laundering conspiracy, operating an unlicensed money transmitting business, and bribing bank employees. Da Ying Sze used a variety of financial institutions and methods to launder proceeds of drug deals and other crimes. Some of the methods Sze used include depositing illicit gains into financial institutions in New York, New Jersey, Pennsylvania, and elsewhere using bank accounts in the names of shell companies and conspirators. He further obfuscated the source of the illegal cash by purchasing official bank checks, writing personal and business checks, and making international and domestic wires to transfer the illegal cash to thousands of individuals and entities in the United States, China, Hong Kong, and elsewhere. Sze also routinely provided gift cards and other items of value to employees of at least one financial institution in connection with the financial transactions, providing at least $57,000 in bribes for them to turn a blind eye to red flags.

The IMF has warned Nigeria that its central bank digital currency (CBDC) is a money laundering risk, asserting that using the eNaira for cross-border payments carries the risk of financing terrorism and money laundering. The IMF encouraged Nigeria’s central bank to conduct a comprehensive risk assessment of its AML/CFT safeguards. The eNaira was introduced last fall by the central bank and uses a tiered customer model to determine daily transaction limits in which customers in the lowest tier, which includes the unbanked, can spend $120 daily while the upper tiers are limited to between $487 and $2,438 per day.

Some in the UK are not happy about plans to scrap the country’s “golden visa” program, warning that the plan would be damaging to the economy. One attorney says that the UK was jeopardizing billions of pounds in overseas investment “because of a popular myth that foreign money is dirty money.” This is a mistake. The perception—quite correctly—is that the golden visas are a huge vulnerability, allowing kleptocrats and other illicit actors to sully the UK financial system with misappropriated funds and criminal proceeds, not that all foreign money is dirty. Illicit actors can and do exploit these programs. More than 12,000 golden visas have been granted since the scheme was launched in 2008, including more than 2,500 to Russians, that allowed people with at least £2 million in investment funds and a UK bank account to apply for residency rights, along with their families.

The European Commission this week revealed a proposal to make large companies operating in the EU check that their suppliers from around the world do not use slave or child labor and that they respect environmental standards. The Corporate Sustainability Due Diligence proposal, also requires boards of large EU firms to ensure that their business models and strategies align with limiting global warming to levels agreed under the Paris climate treaty. The Commission’s proposal will only become EU law after lengthy negotiations with the European Parliament and EU governments, which are likely to take more than a year. The proposal estimates it would apply to 13,000 EU firms that employ more than 500 people and have a net turnover of more than 150 million euros.


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