FINANCIAL CRIME WAVE – RUSSIA AND CHINA WORK TO GO AROUND SWIFT, EU HITS SYRIAN OFFICIALS, AND MORE

In this week’s Financial Crime Wave, Russia works with China to create a unified payments system to reduce reliance on Western platforms, the European Union blacklists Syrian officials due to civilian attacks, Tesco Bank hackers bragged before attack, and more.

Payments systems

Russia working with China to create payments system beyond SWIFT

Russia wants a mutually-compatible payments system with China in order to reduce the risk from further financial sanctions by the West, Prime Minister Dmitry Medvedev said in a recent interview. Russia has introduced a new national payment system to cut reliance on Western systems, such as Visa and MasterCard. Those operators stopped providing services to clients of one Russian bank after Washington imposed sanctions over Moscow’s role in the Ukraine crisis. Russia has been largely integrated into the global economy since the 1991 collapse of the Soviet Union. But the Ukraine crisis, the biggest confrontation since the Cold War, has led officials to look for ways to reduce reliance on the West. After hitting Russian officials and lawmakers with visa bans and asset freezes over the annexation of Crimea, the United States and European Union are threatening measures affecting entire economic sectors if Russia escalates the crisis. Visa and MasterCard stopped providing services for payment transactions for clients at private lender Bank Rossiya, under U.S. sanctions over what the West says is Russia’s illegal annexation of Crimea from Ukraine and support for separatists in eastern Ukraine. Medvedev said his proposal would cut reliance on global payment systems, including SWIFT, the network which supports most electronic transactions, (via Reuters).

Sanctions

EU blacklists 17 Syrian government officials, central bank governor due to civilian attacks

The European Union on Monday placed 17 Syrian ministers plus the central bank governor on a sanctions blacklist targeting the regime of President Bashar al-Assad over attacks on civilians. They face travel bans and asset freezes for “being responsible for the violent repression against the civilian population in Syria.” They face travel bans and asset freezes for “being responsible for the violent repression against the civilian population in Syria, benefiting from or supporting the regime, and/or being associated with such persons,” an EU statement said. EU leaders agreed at a summit in October to increase sanctions against the Assad regime, citing devastating attacks on Syria’s second city of Aleppo, and added 10 top military and government officials to the list. But suggestions they might also sanction Russia, which has backed long-time ally Assad’s offensives against rebel forces and flown many of the missions against Aleppo, were dropped after sharp differences emerged, (via al-Monitor).

Cybersecurity

Hackers who hit Tesco Bank bragged about lax controls months before attack

Hackers boasted of thefts from Tesco Bank months before the company reported losing 2.5 million pounds in an attack. Cybersecurity company Cyberint said it had discovered posts on a variety of dark web forums whose members had described the lender as being a “cash milking cow” and “easy to cash out”. It is not clear, however, whether there is any link between these claims and the money stolen just over a week ago. Elsewhere, the Sunday Times suggested that the raid had involved the use of contactless payments triggered by smartphones. The Financial Times was first to report that Cyberint had carried out its own probe of hidden web pages following the thefts earlier this month. The Israeli company said it had found discussions about a tool that “brute forced” access to Tesco’s accounts by testing thousands of login and password combinations until one was found to work. It said the bank had repeatedly taken steps to prevent such attacks, but the hackers had apparently bypassed the measures, (via the BBC).

Fraud

New York Attorney, couple used flophouses to take advantage of recovering addicts

The New York State attorney general filed Medicaid fraud and money laundering charges on Thursday against a lawyer who runs two outpatient substance-abuse programs in New York City and a couple who ran flophouses that forced residents to seek help from those programs. Their arrangement was detailed in an investigation by The New York Times last year. Anthony Cornachio, who runs the NRI Group in Midtown Manhattan and Canarsie Aware in Brooklyn, and Yury Baumblit, 66, and his wife, Rimma, 60, who ran the flophouses, face up to 25 years in prison if convicted of the new charges, filed in Kings County Criminal Court in Brooklyn. Mr. Cornachio, 74, who is also the lawyer for the Village of Island Park on Long Island and a trustee at Nassau Community College, was arrested on Wednesday, the attorney general’s office said. “We allege that the defendants engaged in a deliberate scheme to exploit those struggling with substance abuse in order to line their own pockets with millions,” the attorney general, Eric T. Schneiderman, said. “Medicaid cannot serve as a personal piggy bank for criminals and fraudsters who have little regard for the well-being of their fellow New Yorkers,” (via the New York Times).

Terror finance

If you are a money exchanger in Yemen, you can’t say no to terrorists

When fighters from Al Qaeda seized control of a stretch of southern Yemen in 2015, they looted millions of dollars from the central bank, spreading such fear that other banks shut down. But during the year Al Qaeda reigned, Al Omgy Brothers Money Exchange kept running its business here in the coastal town of Al Shihr. It held accounts for the national oil company, disbursed salaries for the Yemeni government and earned the praise of local officials for providing needed services during a tough time. And if members of Al Qaeda wanted to open accounts, too, well, the company could not really say no, according to Muhammad al-Omgy, who runs the money exchange with his brother, Said. The United States was not impressed. This month, the United States Treasury Department designated the brothers and their company as having provided “financial services to or in support of” Al Qaeda in the Arabian Peninsula, which is widely considered to be the terrorist group’s most dangerous branch. Any of their assets subject to United States jurisdiction are blocked, and Americans are generally prohibited from having transactions with them, (via the New York Times).

Enforcement

FinCEN, U.S. Treasury officials tackle aggressive enforcement, de-risking

As the Financial Crimes Enforcement Network (FinCEN) works to ensure that the financial system that is resistant to abuse and able to share valuable information with law enforcement, Acting Director Jamal El-Hindi today said at a money laundering conference this week in Washington, D.C., that FinCEN would “think more creatively” about how it exercises its statutory authority. El-Hindi pointed to a number of steps FinCEN has taken recently to be “appropriately aggressive” toward money laundering and terrorist financing threats, including increased use of 314(a) lists, geographic targeting orders and other advisories. He highlighted the geographic targeting order in Miami, for example, which led to arrests of a number of co-conspirators in a complex money laundering scheme. Moreover, banks and regulators have a “shared responsibility to expand access to the financial system while protecting it from illicit activity,” Acting Treasury Under Secretary Adam Szubin said at the same conference. In his remarks, Szubin addressed the ongoing derisking trend. While he acknowledged that Treasury has not found evidence that derisking has had a “global systemic impact” on the financial system, he attributed the rise in derisking activity to heightened prudential standards and legitimate risks over uneven AML/CFT standards by banks and jurisdictions throughout the world, (via the American Bankers Association).

Corporate transparency

EU Beneficial ownership registers vital to fight financial crime

The European Union needs a European register of beneficial owners of companies, consistent definition – and handling – of suspicious transactions and enforced transnational cooperation, similar to the United States’ Financial Crimes Enforcement Network (FinCEN), experts on anti-money laundering (AML) enforcement in Belgium and Germany told Parliament’s Panama Papers Inquiry Committee on Monday. Philippe de Koster of the Belgian Financial Intelligence Unit, an independent administrative authority involved in the fight against money laundering and terrorist financing, told MEPs that money laundering is not a fiscal issue, but a criminal one. There is always a crime behind money laundering and tax evasion, and under Belgium’s penal code, money laundering is considered as bad as the underlying crime, he said, calling for similar standards under EU law. He also made a plea for greater coordination among Europe’s financial intelligence Units. “We don’t need much money, but we do need the courage to sit together and deal with what’s coming at us…like brothers-in-arms,” de Koster said, (via New Europe).

Regulations

New Zealand tarries in extending AML rules to attorneys, accountants

The New Zealand national government is taking longer than expected to extend anti-money laundering (AML) rules to sectors beyond banking, including lawyers, accountants and real estate agents, according to Grant Robertson, a Labour Finance spokesperson. “When the heat was on National earlier this year in the wake of the Panama Papers, John Key committed his government to fast-tracking legislation to widen the groups covered by anti-money laundering provisions. But now with public attention elsewhere he has quietly slammed on the brakes, and it now looks like there will be no change in the rules before the next election,” he said. He believes certain individuals are “putting their interests ahead of New Zealand’s,” a trend that happened in prior sectors, in particular around more stringent rules on the foreign trust industry. Top officials, industry insiders and political powerbrokers successfully put “pressure on the government to back-off or water down proposals. This is despite the potential damage to New Zealand’s international reputation and the concerns of government officials that we are leaving the door open to corrupt money and individuals,” (via the Scoop).

Money laundering

Mexico struggling in fight against money laundering investigations, prosecutions

Mexico’s fight against money laundering has been losing funds and efficiency. With the budget for these types of investigations down by nearly 50 percent, the success rate for prosecutions has declined in recent years.  The laundering of criminal proceeds has increased on a yearly basis and is now equivalent to nearly 2 percent of the country’s Gross Domestic Product (GDP), according to figures from Mexico‘s National Institute of Statistics and Geography (INEGI) and the Finance Ministry. According to these figures, at least 200 billion pesos — nearly $10 billion — are being laundered annually. For comparison, the amount of illicit cash that was laundered during the 1990s is believed to only have reached around 0.5 percent of the GDP. Of the 204 money laundering probes launched between 2012 and July 2013, only 75 were presented before a judge, for a rate of 36 percent, according to official reports from the administration of President Enrique Peña Nieto. By July 2014, the rate had gone down to 30 percent, before reaching 27 percent a year later and finally falling to below 20 percent by July of this year. (See Animal Politico’s chart below) More than 80 percent of the money laundering investigations launched over the past year were thus never assigned to a judge, rendering the identification of the culprits impossible.

HKMA warns on blockchain money laundering risks

The Hong Kong Monetary Authority has released a sobering assessment of blockchain — the much-hyped technology some banks are researching to cut costs — including a warning that it may raise the risk of money laundering.Bottom of Form The anonymity afforded by some distributed ledger platforms may facilitate illicit activities such as the trafficking of criminal gains, the sale of illegal goods and ransom payments, the HKMA said in a study on the technology released Friday. While the report highlighted blockchain’s cost and time-saving qualities, the technology predicated on a shared network of transaction records also offered legal, risk management and regulatory issues, the HKMA said. The HKMA study throws a cautionary light on a technology that banks around the world are researching for use in areas such as trade finance and mortgages, as they try to trim expenses and boost profitability. Blockchain could reduce banks’ infrastructure costs worldwide by $15 billion-$20 billion a year by 2022, according to law firm White & Case, (via Bloomberg).

Corruption

In Donald Trump administration, does FCPA enforcement get watered down?

Here are some of the potential ramification of a Trump presidency on anti-corruption, according to one expert.

§  First, the Foreign Corrupt Practices Act (FCPA) is likely to be substantially weakened, perhaps even repealed (though I think the latter possibility is still relatively unlikely). The FCPA “reform” crowd–the Chamber of Commerce, the defense bar, and their various supporters–will now have a Congress that is likely to support “reforms” that substantially weaken the statute, and a President who is already on record as calling the FCPA a “horrible law.”

§  Second, even putting aside possible changes to the FCPA itself, I fully expect that the era of vigorous FCPA enforcement, which ran from about 2000 (give or take a couple years) up to the present, is over. It’s hard for me to imagine that the Attorney General of a Trump Administration (Rudy Giuliani, perhaps?) would make prosecuting foreign bribery a significant priority, or would devote substantial resources to this area.

§  The DOJ’s Kleptocracy Initiative, which had been making so much exciting progress in its relatively short lifespan, is also likely to be on the chopping block. It seems to me highly unlikely that going after foreign kleptocrats–or indeed highlighting kleptocracy as a problem–is something that a Trump Administration will have much interest in, (via the Global Anti-corruption Blog).

Legislation

India ends use of its two largest notes to cut down on corruption, money laundering

India has discontinued its two largest rupee notes in a surprising move against corruption. Notes worth 500 and 1,000 rupees will be invalid starting at midnight local time, Prime Minister Narendra Modi announced during a televised address to the nation. The unexpected move is designed to fight against corruption and money laundering, Modi said, calling them “diseases” and “obstacles” to the country’s economic success. Modi said that policy changes had largely failed to root out corruption. Two years ago, he said, India was ranked 100th in terms of global corruption perception, and the country has only improved to 76th. The idea is that Indians who have stockpiled undeclared income will now be forced to come out of the shadows. “This step will strengthen the hands of the common man in the fight against corruption, black money and fake currency,” said Modi, who leads the ruling Bharatiya Janata Party. That transition will not be an easy task. The Reserve Bank of India (RBI) estimates that there are 16.5 billion 500 rupee notes and 6.7 billion 1000 rupee notes currently in circulation. ATMs will be shut on Nov. 9 and 10 to help implement the change, (via CNN).