INSIGHTS: Week of February 7, 2022

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The US Treasury last week released a study of money laundering facilitation in the art world and concluded that although some money-laundering vulnerabilities exist in the high-value art market, current AML safeguards make the art world a less attractive money laundering vehicle. Treasury did, however, flag new technologies in the art world as a potential risk. Nonfungible tokens—or NFTs— enjoy a section of their own in the study, highlighting them as “bearer instruments that codify the ownership of a unique digital asset, such as a piece of high-value digital art and are managed via smart contracts and digital wallets.”

Treasury highlights several scenarios that could allow malign actors to abuse NFTs. Illicit actors could sell NFTs to themselves by creating a record of sales on the blockchain, or to unwitting buyers, who would buy the NFT with clean funds, unknowingly facilitating money laundering. In addition, NFT transactions can be conducted peer-to-peer, without the involvement of an intermediary, which would not involve the use of a public ledger, making NFTs a potentially attractive means of laundering dirty money. Digital art does not need to be moved, locked in a vault, or otherwise manhandled. They can simply be transferred via the Internet, and the distance from buyer to seller would not matter.

Illicit finance evolves quickly, and new technologies can present new risks, especially because in some cases, NFTs may qualify as “virtual assets,” if “used for payment or investment purposes in practice” under the Financial Action Task Force (FATF) definition, which could qualify service providers of NFTs, including NFT platforms, as regulated virtual asset service providers or as money services businesses that could have reporting requirements under FinCEN regulations.

We advise that although for now no new regulations are hiding around the corner, firms that transact in the art market should examine their risk appetites and ensure that AML vulnerabilities are included in their risk assessments.


Compliance and Due Diligence

President Biden this week issued an executive order, declaring the humanitarian crisis in Afghanistan and the country’s potential economic collapse a threat to US national security. Therefore, roughly $7 billion in frozen Afghan foreign assets held in US financial institutions will be transferred to a consolidated account at the Federal Reserve Bank of New York and will be split between humanitarian aid for the Afghan people and the victims of the September 11 terrorist attacks.

Iranian oil exports have risen to more than 1 million barrels per day for the first time in almost three years thanks to increased shipments to China despite sanctions imposed on Iran after the United States unilaterally withdrew from the Joint Comprehensive Plan of Action (JCPOA). Indirect talks between Iran and the United States on reviving the nuclear deal resumed this week, and if they are successful, Iran could restart open oil sales.

After his meeting with German chancellor Olaf Scholz this week, President Biden confirmed that the Nord Stream 2 pipeline would be suspended should Russia invade Ukraine. Scholz was a bit more restrained and did not mention the controversial project in the joint press conference, but said Germany and the United States are aligned in their positions regarding Moscow’s potential invasion of Ukraine. Meanwhile,  satellite imagery from a private US company has detected new Russian deployments on the Ukrainian border, worrying US officials that an invasion could come any time—even before the end of the winter Olympics in Beijing.

Western sanctions imposed on Russia are causing delays to the country’s next-generation airborne early warning and control aircraft. The new aircraft is now not expected to be available until 2024, although it was previously expected to be ready by late 2020. A recent article in the military and defense newspaper Voyenno-Promyshlenny Kuryer cites an unnamed Defense Ministry source, who blames delays in the delivery of electronic components for the aircraft on sanctions, some of which have been imposed on Russia in recent years by the United States, EU, and individual nations.

The Uyghur Forced Labor Prevention Act passed last month, banning the import of any product created by forced labor in China’s Xinjiang Uyghur Autonomous Region (XUAR) and will impact any company that has suppliers in China. By June 21, 2022, the United States Customs and Border Protection will block any product that it has reason to believe was produced in the XUAR or manufactured by any entity identified by the US government as using forced labor. All goods that fall into these categories will be prevented from entering into the United States, which will likely lead to changes in sourcing, as well as a rise in falsified documents.

The Biden administration has added more than 33 Chinese companies whose legitimacy it cannot verify to the “Unverified List”—a roster of businesses worldwide subject to stricter export controls because US officials are unable to perform customary due diligence on them. The inclusion on the Unverified List imposes new restrictions on these companies’ ability to receive shipments from US exporters and requires extra due diligence research by US companies that want to transact with these firms.

The EU this week sanctioned several senior figures of Mali’s transitional government, including the prime minister, citing delayed elections and a lack of reforms. Others who were designated included top military commanders who removed former Malian president Ibrahim Boubacar Keita during the first of the two coups in the African country. Those who were designated are subject to a travel ban and an asset freeze, so they cannot travel to or transit EU countries, and they can’t access any property they have in the EU.

Senator Chris Coons says that there is strong bipartisan support in the US Congress for targeted sanctions against the military in Sudan that are undermining the democratic transition there. The security forces in Sudan killed 79 protesters and wounded hundreds in an effort to stop anti-coup demonstrations that erupted hours after the coup last October. Coons stressed the need to end lethal violence against the protesters and to hold those responsible accountable for the bloodshed.

Fraud and Abuse

The Justice Department this week unsealed  an indictment charging five individuals with conspiracy to commit securities fraud and operate unlicensed money transmitting businesses, conspiracy to commit wire fraud, conspiracy to commit money laundering, and operation of unlicensed money transmitting businesses, in connection with a scheme to defraud investors in countries around the world. Robert Lenard Booth ran an operation from a boiler room in Thailand and told investors that the boiler room was a Manhattan-based investment firm, using fake identities, false and misleading webpages, email addresses, and phone numbers to support the fraudulent operation. Booth stole more than $1 million from his victims. The others ran a network of shell companies and associated bank accounts in New York, which they used to partner with multiple boiler room operations—including Booth’s—to receive the stolen “investment” funds from victims and launder the proceeds.

Luxembourg’s register of beneficial owners has revealed that hundreds of children own or hold significant stakes in companies based in the grand duchy. Although the ownership of companies by children is legal in Luxembourg, 291 minors who own or control significant stakes in Luxembourg companies, include kids whose parents are oligarchs, criminals, or politically exposed persons. The fact that many of these children were not even born at the time the companies were founded—and parents are sometimes not listed in company documents—indicates efforts to add a layer of secrecy to the ownership structures of these companies.

In the first criminal trial of a major bank in Switzerland, Credit Suisse is facing charges for allegedly allowing a Bulgarian cocaine trafficking organization to launder millions of euros, some of which was stuffed into suitcases, between 2004 and 2008. Swiss prosecutors are seeking roughly $45.86 million in compensation from Credit Suisse, contending that the country’s second-biggest bank and one of its former relationship managers were remiss in their duties to prevent the alleged drug traffickers from hiding and laundering dirty proceeds.

News Corp has experienced a cyberattack that allowed malicious actors to access the email and documents of some of the news giant’s employees and journalists. News Corp, whose entities include The Wall Street Journal and the New York Post, says it was the target of “persistent nation-state attack activity.” Cybersecurity firm, Mandiant, assessed that the attacks had a China nexus. On Tuesday, The Wall Street Journal reported that pro-China accounts had flooded Twitter messages with the #GenocideGames hashtag in an attempt to hijack it and dilute or change its meaning.

A joint US, UK, and Australia review of cyber-extortion trends assessed that Russian “sophisticated, high-impact ransomware incidents” were on the rise last year. Universities and schools were some of the top UK sectors targeted last year, as well as businesses, charities, law firms, and the National Health System. Hackers typically come from Russia or are at the very least Russian speakers, and the takedown of the REvil gang last month by Russia’s FSB security service—the first time Russian authorities took action against the group—will most likely not impact the number of attacks by Russia-linked actors.

 

FiveBy provides to our clients a weekly news roundup of relevant insights to help avoid issues associated with both regulatory and reputational risk. We hope you find this useful, if you would like to see other things included, let us know at insightsfeedback@fiveby.com

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