INSIGHTS: Week of January 17, 2022

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Although we are loath to focus our insights on nothing but Russia, that is where the world’s eyes are again this week. The crisis on Russia’s border with Ukraine continues, and Russia is spreading disinformation to paint NATO (and the United States) as the aggressor. These propaganda efforts have prompted the UK’s Defense Minister to pen an essay urging the public to ignore the false flags and strawmen, remember that NATO is a defensive alliance, and understand that Russia is the instigator in the current crisis, despite the Kremlin’s disingenuous claim that the alliance is staging a “gradual invasion” of Ukraine.

After the failure of the Nord Stream 2 sanctions bill in the Senate, a group of House Republicans this week introduced the “Putin Accountability Act” as a means of ramping up pressure against the Russian president, his family, and others close to him immediately, rather than after an invasion, in hopes of changing Putin’s calculus. It also seeks to designate Russia as a state sponsor of terrorism. The United States, despite a lot of tough talk, has sanctioned very few of the oligarchs who help Putin hide his wealth. Look for cellist Sergey Roldugin on any sanctions list, and you will come up empty, even though the Panama Papers in 2016 revealed his close links to Putin’s finances. As we mentioned previously, the Biden administration has a range of options available to deter Russia’s aggression, but debates are raging about what actions would be most effective.

  • German newspaper, Handelsblatt, cited an unidentified German official this week, claiming that the United States and EU are not considering ejecting Russia from SWIFT, but are rather discussing sanctions against Russia’s largest banks. Russian media outlets Kommersant and TASS have picked up the report, citing Handelsblatt, and corruption opponents are questioning the seriousness of US and EU commitment to Ukraine’s sovereignty. The National Security Council rejected Handelsblatt’s claim, confirming that no option is off the table.
  • Iran’s former ambassador to Russia says increased banking cooperation between Tehran and Moscow can be used to circumvent US sanctions. Iran and Russia are reportedly considering linking their banking networks and conducting their transactions in their local currencies to reduce their dependence on the US dollar. Could this partnership lead to additional sanctions against Russian banks?
  • The list of 35 oligarchs close to Putin provided by opposition leader Alexey Navalny and his Anti-Corruption Foundation after Navalny’s poisoning and subsequent arrest last year can also provide an ample number of Magnitsky Act targets.

We urge US firms and financial institutions to monitor closely these developments and prepare for possible immediate consequences, as well as restrictions on transfer of technologies, Magnitsky designations on corrupt oligarchs, and Russia’s possible ejection from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international payments system should Russia invade Ukraine.

Compliance and Due Diligence

Forty-one members of the UK parliament want to impose “Magnitsky” human rights sanctions on Bahrain officials accused of torture and mistreatment of political prisoners. The House of Commons this week highlighted the case of Abduljalil al-Singace, who has been “subjected to physical and mental torture, as well as sexual abuse, at the hands of the Bahraini authorities.” Bahrain claims there are no political prisoners there, “and no person is arrested or is in custody because of their political beliefs or peaceful political activity,” adding that the government has a “zero-tolerance policy towards mistreatment of any kind and has put in place a robust system to investigate complaints and allegations.”

Despite the global focus on countering corruption during the past year, Guatemala’s corruption problem has become more entrenched. The United States has targeted corruption in the country by denying visas to those involved in filing frivolous complaints against anti-corruption judges and sanctioning individuals alleged to have accepted bribes in exchange for securing judicial appointments. However, without financial sanctions, these measures are insufficient. In addition, sanctioning intermediaries passing bribes from criminal networks will not curb corruption among high-level officials who are targeting Guatemala’s judicial system.

French energy conglomerate TotalEnergies has asked the US and French governments to sanction Myanmar’s oil and gas funds, the largest single source of income for the country’s military leaders. Total said it was using all the tools at its disposal to avoid funding the junta that overthrew Myanmar’s democratically elected government last year, but only sanctions imposed by the United States and EU against Myanma Oil and Gas Enterprise (MOGE) would allow it to legally stop payments entirely. Energy giants Chevron and Total are shareholders in the Yadana offshore gas field and the country’s pipelines, and both suspended suspended some payments to MOGE last year. This week, the two companies announced they were stopping all operations in Myanmar, citing human rights abuses and deteriorating rule of law. Will the United States and EU step up and sanction MOGE?

The Biden administration this week sanctioned a Lebanon-based travel company and three businessmen for financially supporting US-designated terrorist organization Hizballah. The sanctions target Dar Al Salam for Travel & Tourism and three of its founders: Adel Diab, Ali Mohamad Daoun, and Jihad Salem Alame for raising and laundering funds for Hizballah while Lebanon is in the midst of its greatest economic crisis. A few days later, OFAC sanctioned additional individuals and entities linked to Hizballah.

Fraud and Abuse

The Justice Department has charged four Belarussian government officials with aircraft piracy for diverting a Ryanair plane to arrest a dissident journalist last May. Leonid Mikalaevich Churo, Oleg Kazyuchits, Andrey Anatolievich LNU, and FNU LNU (last name unknown, first name unknown) allegedly engineered the diversion of Ryanair Flight 4978, which was carrying four US nationals and more than 100 other passengers on board, to arrest Roman Protasevich. Churo—the only one of the four who is sanctioned by OFAC—was the Director General of Belaeronavigatsia, the Belarusian state air navigation authority, personally communicated the false bomb threat to staff at the Minsk air traffic control center before the flight even took off from Athens, and directed the control center to divert the flight to Minsk in response to the “threat.” Kazyuchits was the Deputy Director General of Belaeronavigatsia, who directed Belarusian air traffic authorities to falsify incident reports about the diversion of the flight. The others were officers of the Belarusian state security services, who participated in communications about the fake bomb threat.

Illicit actors are using new techniques, such as global navigation satellite system (GNSS) manipulation, to evade sanctions on maritime trade. Instances of GNSS manipulation, which allow vessels to report false information about their location, have increased dramatically over the past year, according to research by maritime analytics firm Windward. GNSS manipulation is more complex than “going dark” – a technique criminals use to hide vessels’ movements by switching off their location reporting devices. With this new method, information is still reported, but the location data being fed into transmitters is computer-generated.

The United States filed a civil forfeiture complaint this week alleging that more than $6 million in proceeds from the sale of commercial property in Dallas, TX, that was maintained and improved using the proceeds of embezzlement and fraud from PrivatBank in Ukraine, are subject to forfeiture based on violations of federal money laundering statutes. This civil forfeiture action is the fourth filed in connection with the same alleged criminal activity since 2020. Other properties in Texas, Ohio, and Kentucky were allegedly acquired using funds illegally obtained from PrivatBank. Former PrivatBank owners, Ihor Kolomoisky and Gennadiy Boholiubov, embezzled and defrauded the bank of billions of dollars, prompting Ukraine to nationalize the bank. The two allegedly obtained fraudulent loans and lines of credit and laundered a portion of the criminal proceeds using an array of shell company bank accounts, primarily at PrivatBank’s Cyprus branch, before transferring the funds to the United States, where a web of shell companies using some version of the name “Optima” was used to further launder the misappropriated funds.

Former FATF chief, David Lewis, says regulations and financial penalties for financial institutions with AML/CFT regulation shortcomings have been inadequate. Lewis, who left FATF this month after six years, says “the world doesn’t need more standards or regulations, and fining banks doesn’t work.” Countries struggle to spot cross-border schemes to launder money because their insight into what happens to the funds before they enter their jurisdictions and after they are transferred is limited. Lewis also says that many governments still don’t understand why tackling money laundering is important.

The $15 million in ether (4,600 ETH) stolen from Singapore-based is being laundered via Tornado Cash, an Ethereum mixer. Tornado Cash promises to improve transaction privacy by obscuring the links between the source and recipient of the cryptocurrency. Although mixer protocols, or cryptocurrency tumblers, can be and are used to protect the privacy of activists or other politically exposed individuals, they are often used to launder the proceeds of organized crime. FinCEN says that mixers like Tornado Cash may fall under the definitely of a money transmitter, and therefore has reporting obligations under the Bank Secrecy Act. However, Tornado Cash’s activities do not fit the definition of money laundering. Because the cryptocurrency is already in the system when it is comingled, the first of the three elements of money laundering (placement, layering, and integration), the mixer’s activities do not meet the definition of money laundering. Tornado Cash does do basic list screening against OFAC’s list of known crypto wallets tied to SDNs, however list screening may be insufficient to meet compliance requirements once new regulations are implemented.

EU authorities have installed security screening devices made by a single Chinese company with deep ties to China’s military and the highest levels of the ruling Communist Party in some sensitive locations, such as airports and sea ports. A growing number of Western security officials and policymakers fear that China could exploit Nuctech equipment to sabotage key transit points or get illicit access to government, industrial, or personal data from the information that passes through its devices. In December 2020, the United States added Nuctech to the Bureau of Industry and Security Entity List, restricting exports to the company on national security grounds. Nuctech was founded as an offshoot of the elite Tsinghua University in Beijing, grew with backing from the Chinese government, and for years was run by the son of China’s former leader, Hu Jintao. Will the EU start limiting its dealings with Nuctech?

The Biden administration is launching a formal review of e-commerce giant Alibaba’s cloud business to determine whether it poses a risk to US national security. The focus of the probe is on how the company stores US data, including personal information and intellectual property, and whether the Chinese government could gain access to it. The potential for Beijing to disrupt US users’ access to their information stored on Alibaba cloud is also a concern.


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