FinCEN this week announced in the Federal Register that it will issue a notice of proposed rulemaking in April to, among other things, require US banks and financial institutions to assess their AML/CFT programs to ensure they are “effective and reasonably designed.” The notice serves as a warning that FinCEN is formalizing its review process to measure the effectiveness of financial institutions’ efforts to stop money laundering and the financing of terrorism and implementing compliance and due diligence programs that should reflect the agency’s priorities published last year.
As we wrote in a recent advisory, the agency is performing a review to ensure the safeguards implemented to prevent malign actors from accessing the US financial system are effective, and will mandate that all banks and financial institutions not only maintain an AML/CFT program, but also ensure that their programs include a risk assessment process. Other regulations being developed and proposed by the agency include changes to real estate reporting requirements and mandating companies to identify ultimate beneficial owners.
Although no details about how the FinCEN review process will work have been released, we advise US banks and financial institutions to be forward leaning in reassessing their efforts to stop money laundering and financing of terrorism, because FinCEN is now moving from the realm of “you should start reexamining your compliance and due diligence programs” to “we will legally mandate you to do so.”
Compliance and Due Diligence
Top Biden administration security officials briefed members of Congress this week about the escalating tensions in and around Ukraine. Lawmakers said the gravity of the classified message from Defense Secretary Austin, Director of National Intelligence Avril Haines, and others added urgency to their efforts to pass the “Mother of All Sanctions” bill, but apparently, sanctions against Nord Stream 2 are still a sticking point, and some senators worry that Russia could invade before the sanctions bill is finalized.
The Washington Post has analysis about why it is not going to be easy to sanction Russian president Putin, particularly because his assets are so well hidden. Analysts have assessed for years that Putin uses his close friends and associates as “wallets” to protect his wealth from western sanctions and maintain the illusion of a “modest lifestyle,” which makes research into his close friends and associates, especially those whose hundreds of millions in assets appear incongruous with their professions, critical. Sanctioning heads of state is rare, since all diplomatic dialogue would cease, so we do not anticipate Putin will be personally designated, unless his invasion and attacks are particularly egregious or violent.
The Wall Street Journal has a glimpse provided by former OFAC senior advisor Adam Smith into how US firms are preparing for possible sanctions against Russia. Although the Biden administration promised significant sanctions against major sectors of Russia’s economy, Smith says without insider knowledge, US firms will face challenges sanctions-proofing their operations. We recommend advance research into possible designations based on assessments from expert foreign policy, compliance, and sanctions analysts.
There has been a lot of discussion and a global advisory from the federal government about how vessels are using technology at sea to evade US sanctions, and rogue regimes are using rogue shipping companies to move goods such as petroleum to do so. Maritime intelligence company, Windward, says that since January 2020, it has detected more than 200 vessels involved in more than 350 incidents that showed indications of GPS location manipulation. Windward was able to identify suspect ships using technology that detects digital tracks that don’t correspond to actual movements, such as hairpin turns at breakneck speed or drifting in the form of perfect crop circles. The strategies illicit actors use to violate US sanctions seem infinite, and all US firms should examine recommendations provided by regulators if they ship goods overseas via maritime channels.
We have been anticipating additional sanctions on Myanmar, and State Department Counselor Derek Chollet confirmed that the United States will continue imposing sanctions on the country’s military and those who support it. Treasury has been working closely with Singapore to find ways to impact the junta’s calculus, including limiting the Tatmadaw’s access to financial assets overseas, since Singapore is Myanmar’s biggest source of foreign investment. We still expect sanctions against the Myanma Oil and Gas Enterprise (MOGE)—probably one of the military’s most significant sources of revenue—especially with support from energy giants Total and Chevron who have major equities in the country’s energy sector. The United States, UK, and Canada this week issued new sanctions against Myanmar, targeting judicial officials involved in prosecutions against deposed leader Aung San Suu Kyi. OFAC also designated a directorate responsible for buying weapons for the Tatmadaw, an alleged arms dealer, and a company that provides financial support to the junta.
The Biden administration has designated an Indonesian NGO for providing support to Indonesia-based, US-designated terrorist organization, Majelis Mujahidin Indonesia (MMI). World Human Care was founded by MMI and supports its extremist activities in Syria under the guise of humanitarian work, according to the Treasury press release. MMI has also been connected to the al-Qa‘ida-linked Hay’at Tahrir al-Sham (HTS) in Syria, another designated terrorist group, and reportedly cooperated with pro-ISIS charity Relawan Media to funnel money to Indonesian ISIS women in Syrian SDF camps in Idlib, indicating sporadic cooperation between al-Qa‘ida and ISIS supporters. Terrorist groups often use charities to fund their activities. Australia today also sanctioned MMI and World Human Care.
India plans to buy one million tons of potash from Belarus after sanctions crippled Minsk’s ability to sell the crop nutrient. India has suggested that the state-run Belarus Potash Company could open a rupee account with a state-run Indian bank for potash sales. This does not look good for India, especially since the United States is still mulling whether to sanction India’s purchase of Russian weapons systems under the Countering America’s Adversaries Through Sanctions Act (CAATSA).
Two Republican senators are urging the Commerce Department to close a “loophole” in export controls imposed by former President Trump on China’s top chipmaker, SMIC, which they call a “clear national security threat.” Bill Hagerty and Tom Cotton say they were “disheartened” by media reports suggesting that Commerce was blocking efforts to tighten export controls on US technology destined for SMIC, which they say enjoys close ties to the Chinese military.
The European Banking Authority has announced that it will create a central database for AML/CFT monitoring. EuReCA will contain information on material weaknesses in individual financial institutions identified by EU authorities and will coordinate efforts by competent authorities and prevent and counter money laundering and financing of terrorism.
Fraud and Abuse
High demand, especially in Chinese markets, for West Africa’s rosewood timber, which comes from endangered Kosso trees, has promoted corruption across the region’s forestry sectors and accelerated the effects of deforestation and forest degradation. Loopholes within existing laws, lack of regulatory oversight, and corruption among Nigerian government officials sustain China’s demand for the increasingly rare Kosso. Corrupt Nigerian authorities aid and abet traffickers in this rare commodity by providing them with documents that falsely say the timber was harvested in Nigeria, allowing the wood to be (il)legally exported to China.
Money laundering through the sale of nonfungible tokens (NFTs) is on the rise, according to Chainalysis, whose research found increasing activity on NFT marketplaces that could be attributed to money laundering, based on tracking value sent to NFT marketplaces from cryptocurrency addresses known to be associated with scams, theft, malware operators, and accounts under legal sanctions.
Crypto investment fraud on social media is growing. In a new consumer protection report, the Federal Trade Commission found that social media, mainly Instagram and Facebook, have become go-to platforms for scammers. The report found that 64 percent of the reported investment scams on social media involved bogus cryptocurrency payments. Around $770 million of losses from social media rackets were reported to the FTC in 2021.
Brazilian police have arrested eight suspected members of a drug trafficking group that operated in the port of Paranaguá and specialized in concealing drugs in containerized shipments. The criminal organization relied on corrupt port workers and others within the supply chain and used a method known as “rip-on rip-off,” in which a legitimate shipment is exploited to smuggle contraband from its country of origin, or a transhipment port, to its destination, often without the knowledge of the sender or the consignee. Paranaguá is located in the state of Paraná and its port is the second largest in the country for grain shipments from Brazil, making the sheer volume of shipments an easy vulnerability for illicit actors to exploit. In addition, Paraná is strategically close to the Tri-Border Area (TBA) between Brazil, Paraguay, and Argentina, highlighting the importance of jurisdictional screening, as the TBA is a known illicit finance hub with a significant nexus to Hizballah illicit finance.
Hugo Boss has quietly removed subsidiaries of Chinese textile giant, Esquel Group, from its supplier list after media reports surfaced about the Chinese company’s deep ties to the Xinjiang region, where the Chinese government is engaged in mass imprisonment and forced labor targeting Uyghurs and other Muslim minorities. In October, a US court rejected Esquel’s request to force Commerce to remove its Xinjiang unit from the BIS Entity List. Despite the listing and overwhelming evidence of forced labor, Hugo Boss and other apparel brands kept sourcing clothes from other Esquel companies based in Guangdong, southern China, and importing them into the United States.
The UK this week seized $7.56 million from an Azerbaijani official who allegedly derived the proceeds from the Azerbaijani Laundromat. The National Crime Agency (NCA) secured a forfeiture order for the funds in UK bank accounts belonging to family members of Javanshir Feyziyev—a serving member of the Azerbaijan parliament, Chair of the UK-Azerbaijan All Parliamentary Cooperation Committee, and Co-chair of the EU-Azerbaijan Parliamentary Cooperation Committee. The laundromat is a scheme that cleaned billions of dollars stolen by Azerbaijani elite to bribe European politicians and media outlets, as well as for personal gain. The money was primarily laundered by a web of shell companies, with four main ones located in the UK.
The Defense Minister of Honduras has requested asylum from the US government due to concerns about being charged with corruption by the newly elected democratic socialist President Xiomara Castro, especially considering the role the Honduran military played in the coup that ousted her husband, former President Manuel Zelaya. Defense Minister Fredy Diaz was a member the presidential administration of Juan Orlando Hernández, who took office in 2013 and whom the Justice Department last year accused of drug trafficking and bribery. After Hernández’s reelection in 2017, protesters took to the streets to oppose him and were met with violent force by the Honduran military police, which killed at least 21 demonstrators and earned the condemnation of the Office of the United Nations High Commissioner for Human Rights.
The health monitoring app that athletes competing in the Beijing Olympics are being forced to use to report COVID infections or symptoms has significant security flaws, is linked to a company blacklisted by the United States for Uyghur surveillance, and was developed by a company chaired by a Chinese Communist Party loyalist. Everyone attending the Olympics in Beijing is required to submit their health status through MY2022 each day. The app is owned by Beijing Financial Holdings Group, a state-controlled company founded in 2018. MY2022 also includes features allowing users to report “politically sensitive” content, with “a censorship keyword list, which, while presently inactive, targets a variety of political topics including domestic issues such as Xinjiang and Tibet.”
Swiss prosecutors are pursuing $45.5 million in compensation from Credit Suisse in a money-laundering trial that will start next week. The Office of the Attorney General (OAG) indicted the bank in December 2020 after an investigation into the activities of a Bulgarian crime ring involving top-level wrestlers accused of laundering profits from cocaine trafficking. Credit Suisse is Switzerland’s second-biggest bank, and it is trying to rebuild its reputation after a series of scandals and the abrupt departure of its chairman.