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In today’s ACFCS Fincrime Briefing, OFAC continues focus on North Korea with Russian bank blacklisting, U.K. Commission finds roughly half of SARs of little investigative value, and more.
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OFAC designates Russian financial institution for helping North Korea evade sanctions – second action targeting Kremlin banks
The U.S. Treasury’s sanctions arm Wednesday designated a Russian financial institution for helping a blacklisted North Korean trading firm get access to the international financial system – the second time the agency has targeted the Kremlin’s banking sector at a time when tensions between the two world powers are rising.
The Office of Foreign Assets Control (OFAC) targeted the Moscow-registered Russian Financial Society (RFS), for providing material support to the already sanctioned North Korean trading firm, Dandong Zhongsheng Industry & Trade Co. Ltd (Dandong Zhongsheng), an entity that is owned and controlled by, directly or indirectly, U.S.- and United Nations (UN)-designated Foreign Trade Bank (FTB), North Korea’s primary foreign exchange bank.
The move comes just weeks after OFAC also penalized money remitting Giant Western Union more than $400,000 for violating terror sanctions when a sub-agent in Gambia dealt with a designating shopping center, resulting in nearly 5,000 violations and a potential penalty of more than $1 billion.
But because Western Union self-disclosed the penalty, cooperated with officials and remediated aggressively, OFAC chose a much lower fine.
Russian Financial Society “began to provide financial services to North Korea immediately upon attaining their non-banking credit organization license,” according to OFAC, a license that allows the operation to transact in multiple foreign currencies, a key concern for U.S. policy makers.
At issue is that RFS provided bank accounts for Dandong Zhongsheng and to a North Korean chief representative of Korea Zinc Industrial Group, which was also designated for operating in the mining industry in the North Korean economy and for having moved zinc from North Korea.
Since at least 2017 and continuing through 2018, RFS has “opened multiple bank accounts for Dandong Zhongsheng,” according to the action, enabling North Korea to “circumvent U.S. and UN sanctions to gain access to the global financial system in order to generate revenue for the Kim regime’s nuclear program.”
Russian Financial Society is the latest Russian financial institution sanctioned by OFAC for providing financial services to North Korea. In August 2018, OFAC designated Russian-registered Agrosoyuz Commercial Bank for knowingly facilitating a significant transaction on behalf of a top official for FTB, (via OFAC).
OFAC does not play politics in its designations – it simply follows the money and implements the goals of administration foreign policy aims. Currently, at the top of the list of jurisdictions of concern are Russia, China, North Korea and Iran.
So expect to see any attempts by these operations to help move illicit assets, or aid sanctions entities to get access, into the international financial system to face swift and harsh designations.
These moves, as well, put more pressure on large, interconnected financial institutions with ties to the countries, or in close proximity to them, to ensure the individuals and entities they are dealing with are not front companies helping blacklisted groups in their quest to legitimize sullied funds.
Jersey, Guernsey and Isle of Man to set up public registers of firms’ owners, a turnabout from former stern statements they would not comply
Jersey, Guernsey and the Isle of Man have announced they will voluntarily adopt public registers of the true owners of offshore companies incorporated in their jurisdictions – an about face from statements just months ago they would fight new requirements to capture and publicly share beneficial ownership details to prevent criminals from hiding behind impenetrable corporate structures.
In a joint statement, the three islands said they would introduce fully public registers by 2023. Campaigners welcomed the announcement as a victory for transparency and an “important first step” in the fight against tax evasion and money laundering, though they said key details needed clarifying.
The announcement follows years of scandals about the use of offshore companies. Public registers identifying the owners of anonymous shell companies are widely regarded by anti-corruption campaigners as essential to tackling economic crime.
The UK’s network of crown dependencies and overseas territories have been exposed as havens for dark money in recent years through the release of the Panama Papers and subsequent offshore scandals. Britain has come under pressure to impose reforms on its territories and former colonies.
Until now the crown dependencies had resisted public registers, saying they would introduce them only once such measures were considered a global norm.
Last year U.K. lawmakers ran a successful backbench campaign to force the UK’s overseas territories, including the Cayman Islands and the British Virgin Islands, to introduce public registers by 2020.
However, this year it emerged that the British government planned to interpret the amendment to require the introduction of the registers by 2023 if the territories failed to do so themselves by 2020, (via the Guardian).
Global watchdog groups have eagerly watched and been debating the outcome of when the international momentum building toward greater corporate transparency runs up against what many consider one of the most persistent bastions of ownership opacity – UK crown dependencies and overseas territories.
Not surprisingly, the clash got heated. Just months ago, these jurisdictions railed against the UK attempting to impose requirements to capture beneficial ownership details and make them available to interested parties, including banks and law enforcement, and even to the public.
But it appears the battle is over, with many of these jurisdictions agreeing to a phased approach to get in line with international best practices. Why is still unknown? How aggressively these regions will implement the new obligations, how and what agencies will oversee these efforts and enforce failures to comply and the depth and accuracy of the final data published in the registers.
Roughly half of SARs filed by UK financial institutions are of ‘low quality,’ banks need more guidance to prevent ‘defensive filing’
Nearly half of the hundreds of thousands of suspicious activity reports filed by United Kingdom financial institutions in recent years have little value to law enforcement, either too short without relevant information or too long with extraneous details, because they are more worried about getting dinged by regulators than creating rich relevant intelligence for investigators.
Those are some of the findings by the U.K. Law Commission in a report published Tuesday that reviewed 463,938 suspicious activity reports (SARs) between April 2017 and March 2018, a jump of 9.6 percent on the volume of SARs in 2016-17. The U.K. National Crime Agency (NCA), a critical customer of those filings, describe it as a “record number.”
The study, spearheaded the UK Home Office, uncovered that only 52.4 percent of the financial institutions reviewed by the commission could clearly and precisely detail objective and “reasonable grounds” for submitting SARs.
That is a problem because the overall number of SARs filed by institutions have more than doubled over the last decade, clogging up the system with reports that are filed “defensively,” meaning that the banks filed reports with little information in the narrative of the report as a shield against regulatory scrutiny – rather than taking the time to investigate the alert, understand the full picture and craft a report that could be the foundation of a criminal case.
To wit, reviewers noted that some 15 percent of the filings did not even meet the threshold of reasonable suspicion, meaning they have little to not value to investigative agencies that would be analyzed by the U.K.’s financial intelligence unit (FIU), similar to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).
“There was substantial variance in the quality of disclosures,” the report said. “At one end of the spectrum, SARs were unnecessarily long and contained irrelevant information which diverted the reader from identifying the essential information in the report. Other reports were incredibly brief and omitted essential information.”
The commission believes there is a fundamental disconnect for institutions to understanding their requirements under the “criminal property” section under Sec. 340 of the Proceeds of Crime Act (POCA), compounded by a lack of clear, uniform guidance on SARs across the sectors of reporting entities and a misguided effort by entities to file the reports even when they are unsure if a potential breach of law has actually occurred.
“In our discussions with stakeholders early in the project, the Law Commission heard concerns that many of the SARs being submitted are of low quality,” according to the report.
“High quality SARs – in other words SARs which are data rich, and are submitted to the UKFIU in a format which is easy to process – can provide evidence of money laundering in action,” according to the commission.
Conversely, low quality SARs, “can require as much or more time to submit and process but contain limited, or even no, useful intelligence. The Law Commission conducted an independent analysis of a sample of SARs that had been submitted to the UKFIU and found that these concerns were well-founded.”
Unfortunately, much of the filing by banks and compliance officers was done out of fear, not a good faith effort to help law enforcement, because of the threat of “individual liability,” meaning that an AML officer making the decision could be fined or face jail time for choosing the wrong disposition of an alert.
“We also heard evidence that the threat of individual criminal liability for the relevant officials working in the reporting sector (eg bank officials and those in law firms and estate agencies) for a failure to make a disclosure encourages defensive reporting,” according to the commission.
“Overcautious reporting is more likely to produce low quality SARs, and even SARs which do not meet the threshold for reporting in the first place,” the report stated. “We also found both anecdotal and empirical evidence to support our provisional conclusion that a significant number of reporters misunderstood their legal obligations under Part 7 of POCA.”
Part of the issue, as well, is that institutions are struggling with the bifurcation of the current SAR regime, where “authorized disclosure” SARs are filed to the NCA when operations believe a transactions has touched criminal property while “required disclosure” SARs are a step higher, stating institutions have a concern the foundational financial activity is illegal.
The federal regulatory agencies are also partly to blame for the current uneven regime of examinations and enforcement.
“One of the reasons for this is that there is fragmented supervision of the anti-money laundering regime,” according to the report.
“Despite best efforts, this has resulted in a lack of uniformity across approved guidance with conflicting interpretations of the key principles underpinning the anti-money laundering regime. This lack of clarity adds to reporters’ confusion and misunderstandings when they are applying the principles of the regime.
The commission issued 19 recommendations, including an AML advisory board to issue more precise regulatory and investigative guidance and require institutions ensure there is a “possibility” of a crime that is not just whimsy, fantasy or highly unlikely.
“The MPS agree that it would be beneficial for the UK to develop a single authoritative source of guidance, if it is developed by all actors,” the Metropolitan Police Service said in response to a Law Commission consultation last year. “It is apparent from engaging with individual reporters that many need assistance,” (via the U.K. Law Commission). To read more analysis, click here.
The problems noted by the UK Law Commission are not unique to financial institutions in Avalon.
These issues have been noted extensively in the United States, as banks broadly have to walk a fine line between balancing financial crime compliance resources to file SARs on what a regulatory might find suspicious, but attempt to engage in deeper, more resource-intensive investigations to create intelligence to help law enforcement counter criminals.
The only way things will change is if lawmakers, policy makers, regulators and investigators take a more collegial approach to AML reviews, coaching institutions on the right way to do an investigation and file a SAR – at least in the short term – and give them confidence a failure for good faith efforts doesn’t mean fines and jail time for the individual.
Banks should also get some form of regulatory shielding by law enforcement if they are found to be taking the time to file valuable SARs, that way the get examiner credit and more incentive to take the time to file collectively, rather than defensively.
China to strengthen international cooperation on AML compliance, financial crime investigations: Central bank
China’s central bank said on Wednesday it would strengthen cooperation with countries including European nations to curb cross-border money laundering activities – a potentially powerful move as many international investigations that lead to the country evaporate.
The People’s Bank of China (PBOC) said in a statement that cross-border cooperation would focus on anti-money laundering regulation, financial information exchange, and asset recovery among other areas, though it’s unclear if this new openness to sharing information will extend to the United States – currently in a trade war with China.
The statement, sent to Reuters via email, was given in response to a Reuters story last week in which a senior official at the European police agency Europol warned that the Baltic states were at risk from “huge inflows of criminal money” from Russia and China.
A recent report by the Financial Action Task Force (FATF), a global standard-setter in fighting money laundering, said a “large amount of illicit proceeds flows out of China annually,” and the country has struggled with endemic corruption for decades.
It has recovered 8.6 billion yuan (£992.5 million) in illegal funds from over 90 countries during 2014 to 2016.
“Of course, there is room for improvement in this area, and we are working to strengthen these aspects,” it said.
China is due to take over the presidency of the 38-member FATF on July 1, (via Reuters).
If China starts playing ball more aggressively with international investigative and foreign law enforcement agencies, it could make it much harder for organized criminal groups gaming the system in and out of China.
While China has strict currency standards, making it difficult for nationals to move funds out of the country, that has created a thriving underground economy of domestic exchangers, hawalas and similar cash-based systems to moved funds in and out of the country.
Criminal groups have used China’s unwillingness to share information with other countries to their advantage. And with more information available to foreign agencies, it gives them the chance to put the pieces together for larger money laundering networks – to target and take down the mega-laundering hubs at the heart of global financial crime scandals.