FINANCIAL CRIME WAVE – STANDARD CHARTERED FACES SANCTIONS SCRUTINY, U.K. OWNERSHIP ONUS, AND MORE

In this week’s Financial Crime Wave, British bank Standard Chartered faces more scrutiny, potential penalties related to past sanctions violations, United Kingdom details upcoming territorial beneficial ownership battles, Canada takes steps to tackle money laundering in Vancouver, and more.

Enforcement

After years of reporting AML investigations by U.S., U.K, Standard Chartered could face more fines for Iran sanctions violations

Standard Chartered Plc has already paid a painful penalty for secretly moving billions of dollars through the U.S. on behalf of Iranian clients, in violation of sanctions. But a sweeping investigation has found evidence suggesting that the bank’s Iranian business was more extensive than it admitted, according to five people familiar with the matter. Now U.S. authorities are weighing a criminal penalty against Standard Chartered and individual employees, said the people, who requested anonymity to speak about the probe. Whatever form the penalty takes, it could evince the strategy the Trump Administration will take in large-scale bank compliance failures. For instance, though the U.S. has taken a hardline on Iran and related supporters, it has eschewed in recent years eye-popping multi-billion dollar penalties for smaller fines and a focus on punishing individuals.

A coalition of enforcement and regulatory agencies, including the Justice Department, New York’s Department of Financial Services and the Manhattan District Attorney, have finished their investigation and may announce the resolution by the end of the year, the people said. The bank has also said publicly since at least 2015 it is also being investigated for anti-money laundering (AML) failures by the United Kingdom’s Financial Conduct Authority. Federal and state authorities may impose an even bigger fine than the $667 million the bank paid in 2012 to penalize it for what they view as concealment, though specific numbers had not yet been discussed in negotiations as of early August, according to the people, who declined to comment on private talks. In securities filings, the bank has said it could face a range of civil and criminal penalties stemming from the case, “including substantial monetary penalties.” Standard Chartered hasn’t set aside specific reserves for this matter, (via Bloomberg).

Money laundering

Trudeau orders his new gang-busting minister to target money laundering in B.C. in move following criticism region is becoming a dirty money destination

The federal government wants to stop money laundering in B.C. and is asking one of its ministers to focus on shutting it down. In his most recent mandate letters to federal ministers, Prime Minister Justin Trudeau asked Bill Blair, minister of border security and organized crime reduction, to focus on ending money laundering in B.C., a move likely in response to international criticism and scathing reports that the region is becoming a dirty money destination for Asia, Russia and other countries. In one case, criminals even created a “Vancouver model” to launder money from China using casinos.

According to the letter, his “work should include a focus on cutting off money laundering which, as we have seen recently in British Columbia, support our efforts to counter guns, gangs and opioid distribution.” (sic) The directive follows the release of a major report detailing how criminals are laundering money in B.C. casinos, and as the province examines money laundering in the real-estate sector, (via the Vancouver Star).

Corporate transparency

U.K. gives update on beneficial ownership registers, gives glimpse of battle ahead to capture overseas territories, dependencies

The United Kingdom’s has issued a new report analyzing a crucial piece of financial crime and compliance data: registers of beneficial ownership information, noting its desire to capture more information domestically and across currently tarrying territories. The ability to create anonymous shell companies has been a bastion for illicit groups of all stripes. The country’s Parliamentary Research Service detailed the current superstructure of capturing and publicizing beneficial ownership information and gave a glimpse of a new battleground ahead – doing the same for the country’s overseas territories, as is required by the country’s recently updated anti-money laundering (AML) laws. Currently, London is requiring overseas territories to follow in lock step with the home country, but several regions have stated they can’t or won’t, bloviating with bluster and vociferously vacillating that formal legal fisticuffs are inevitable.

The U.K. notes that beneficial ownership registers cover three distinct asset varieties: companies, properties and land, and trusts, with varying degrees of public availability. Companies are available fully to the public, with overseas ownership is slated to begin in 2021. Trusts are not yet public, though some officials have voiced a desire to change that.  “Around the world, many countries have created or have plans to create registers,” according to the report. “Among British Overseas Territories and Crown Dependencies, public registers are the exception at the moment, but will become the norm for companies by the end of 2020. In the EU, member states have until January 2020 to make public the data on the beneficial owners of legal entities such as companies,” (via the U.K. Parliament).

PEPs

Once a PEP, always a PEP?

A debate examining if the risk of once-powerful politicos and their family and associates ever dims with time, (via KYC 360).

Compliance culture

The challenges of retooling the ‘culture’ of compliance, from tellers to top management

Confessions of a compliance officer: Do banks, compliance officers and executive leaders really believe in creating a “culture” of compliance, or is it just throwing money at a problem and rote box-ticking, (via KYC 360).

Corruption                                             

Legg Mason to pay $34 million to resolve charges related to bribery scheme: SEC

The U.S. Securities and Exchange Commission said on Monday that Legg Mason will pay more than $34 million to resolve a charge it violated the Foreign Corrupt Practices Act in bribing Libyan officials to secure investments. The SEC said that between 2004 and 2010, a former Legg Mason asset management subsidiary, Permal Group Inc, partnered with a French financial services company in paying bribes to solicit investment business from Libyan state-owned financial institutions. The SEC fine is the second half of a settlement announced by the Department of Justice in June. To read more click here. To read more analysis, click here.  (via Reuters). In the prior action, the Justice Department engaged in a rare venture into the investment management space, penalizing Maryland-based Legg Mason for actions related to a subsidiary’s connection to a Libyan broker bribing government officials, (via DOJ). The earlier DOJ action also touched on the banking space.

French banking giant Societe Generale stated as well it would pay $1.3 billion in a global settlement related to corruption and currency manipulation charges in the United States and France related to allegations of bribing Gaddafi-era Libyan officials and illicitly influencing the Libor interest rate benchmark, federal investigators stated in early June, a further showing that global regulators are teaming up to tackle major corruption investigations to see all the pieces of the puzzle. The bank, based in Paris, was expected to plead guilty in the U.S. while agreeing to pay French authorities nearly $300 million in what both countries are calling the first ever such resolution coordinated and negotiated by both countries simultaneously. The actions are further evidence evincing that world powers are more closely coordinating on what large international banks are doing in their riskiest jurisdictions, following a trend of record U.S. corruption-related penalties in 2016, (via DOJ).

Governance

Compliance Vs. Self-Governance: A brief history of two governance paradigms

Compliance management will lack effectiveness and produce compliance fatigue unless it is paired and balanced with ethics management, according to one expert. Compliance management can be defined as a deficit-based approach, which construes employees as risk factors and aims at suppressing unwanted behavior. Its core methods – prescribing rules, monitoring behavior, punishing transgression – seek to regulate behavior externally. Ethics management, as a strength-based approach, focuses instead on people’s innate capacity to govern their own behavior as well as their communal affairs. Its methods focus on supporting employees in fully actualizing their capacity for self-governance.

The ultimate goal of analyzing both practices is to describe practical methods E&C practitioners can use to strengthen self-governance in organizations. To select suitable methods, we must first understand what self-governance is and how it functions. Compliance management can be traced back to Hobbesian governance philosophy, whereas ethics management, understood as the cultivation of self-governance, builds on a humanistic philosophy of governance. Thus situating the E&C field within the history of ideas is useful. It allows us to see how other disciplines have benefited from expanding beyond a narrow focus on the hierarchical regulation of behavior. They can serve as useful precedents from which to draw inspiration as we seek to apply the concept of self-governance to the field of ethics management, (via Forbes).

Tax evasion

DOJ penalizes another Swiss bank more than $60 million in DPA for helping U.S. taxpayers evade taxes

The U.S. Department of Justice (DOJ) Tuesday penalized Basel-based Basler Kantonalbank (BKB), $60.4 million in a negotiated deferred prosecution agreement (DPA), requiring the bank to admit that between 2002 and 2012 it conspired to help U.S. residents evade taxes and file false federal tax returns. At its peak in 2010, the bank held approximately 1,144 accounts for U.S. customers, with an aggregate value of approximately $813.2 million, mostly undeclared accounts. The DPA also requires BKB to affirmatively disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department’s Swiss Bank Program with respect to accounts closed between January 1, 2009, and December 31, 2017. The DPA has a three-year deadline for compliance.

The penalty amount reflects BKB’s thorough internal investigation and cooperation with the United States, as well as the bank’s extensive efforts at remediation, and its waiver of any claim of foreign sovereign immunity.  Among other remedial efforts, BKB implemented measures to require all U.S.-related accounts be tax compliant, closed a branch office responsible for much of the tax fraud and fired the employees involved in the offense, and conducted extensive outreach to former clients to encourage them to participate in IRS-sponsored voluntary disclosure programs, (via DOJ).

Latvia

EU watchdog dings Latvia on lax AML, dealings with corrupt, risky regimes

In a report published today on Latvia, Moneyval acknowledges that large financial flows passing through the country pose a significant money laundering threat, including from U.S-foe Russia. Latvia is a regional financial center, with a majority of its commercial banks focusing on servicing foreign customers, mainly from the Commonwealth of Independent States (CIS) countries. Hence one of Latvia’s key money laundering (ML) risks remains the vulnerability of CIS countries to economic crime, especially corruption. Latvia’s own level of corruption, vulnerability to international organized crime and significant shadow economy are also key factors of the overall ML risk faced by Latvia.

The report concludes that the overall appreciation of ML and financing of terrorism (FT) risk in the financial sector is not commensurate with the factual exposure of financial institutions in general, and banks in particular, to the risk of being misused for ML and FT. The general understanding of risks among designated non-financial businesses and professions is limited to risks relevant for their particular businesses and professions; it does not amount to an appropriate perception and awareness of ML/FT risks, (via the Council of Europe).

Strategies

Bringing a Compliance Program to Life: Connecting the dots

A compliance program is an interdependent function that gains exponentially from coordination and cooperation with key functions.  CCOs have to be politicians and they have to develop effective interpersonal skills.

Without an ability to connect with other individuals in a company, a compliance program will suffer some real and substantial difficulties. Compliance officers have to develop a target list of coordinators and cooperators.  A CCO should look at the overall compliance program priorities and ask two important questions:

  • What is the priority of the proposed project?
  • Who else has an important stake or role in this project? (via Michael Volkov).

1MDB

Fugitive Malaysian Moneyman, Jho Low, alleged to have pilfered billions tied to 1MDB fraud, charged with money laundering

The fugitive Malaysian financier Jho Low, a prime suspect in the theft of billions of dollars from the government, was charged Friday with eight counts of laundering money, much of it reportedly used to purchase a $250 million yacht. The Malaysian police issued arrest warrants for Mr. Low and his father, Low Hock Peng, who was charged with one count of money laundering. The warrants are a first step in seeking the pair’s extradition.

Their location is unknown but there has been recent speculation in the news media that the younger Mr. Low is in China. He is accused of playing a key role in the theft of at least $4.5 billion from a government investment fund, 1 Malaysia Development Berhad, that was established and overseen by the former prime minister, Najib Razak, (via the NY Times).

M&A Compliance

In era of mergers, they grow more complex, with regulators noting failures related to account reviews, risk ranking, decision-making

Panelists at a recent financial crime conference, including all major federal regulators, noted several trends related to banks and AML compliance, including institutions that have recently merged. An institution’s risks therefore increase and make internal controls even more important. This increases the importance of independent testing performed by a qualified entity. The panelists, from the OCC, FDIC, Fed and others, indicated some financial institutions had been cited for lax review procedures, including:

  • Insufficient reviews of accounts;
  • Conclusions inadequately supported;
  • Inappropriate risk rating of accounts and customers;
  • Inadequate screening for OFAC;
  • Inadequate testing and monitoring systems;
  • Missing or ignoring risks;
  • Insufficient monitoring of suspicious activity; and
  • AML program not evolving with an institution’s business and/or risks.
  • The regulators also discussed what they consider makes for strong governance and oversight for BSA/AML compliance, including:
  • A strong risk assessment;
  • Good board reporting (not just a data dump); and
  • Good policies/plans on what actions to take to ensure BSA/AML compliance.

Several of the banking agencies are reviewing the way they examine for AML with a goal to improve efficiency and effectiveness, burden reduction and clarity with risk-based management of BSA/AML compliance. The panelists also indicated a zero tolerance policy when it comes to BSA/AML non-compliance, (via the NAFCU).

Drug trafficking

Operation Darkness Falls Results in Arrest of One of the Most Prolific Dark Net Fentanyl Vendors in the World

The U.S. Department of Justice (DOJ), in a darknet sweep, took down MH4Life and leaders Matthew Roberts and Holly Roberts, both 35 and of San Antonio, charging them earlier this year with conspiracy to distribute controlled substances and other crimes. The Roberts’ created and operated several dark net marketplace accounts, including MH4LIFE, TRAPPEDINTIME, FASTFORWARD and MRHIGH4LIFE. They operated these accounts on dark net marketplace websites including Dream Market, Silk Road, AlphaBay, Darknet Heroes League, Nucleus and several others.

They used these accounts between 2011 and May 12, 2018 to possess and distribute fentanyl, MethoxyAcetylFentanyl (MAF), other fentanyl analogues, heroin, cocaine, methamphetamine, MDMA, LSD, marijuana, Xanax, Oxycodone and other drugs. The Roberts’ MH4LIFE vendor account on Dream Market had 2,800 verified transactions with a 4.89/5 rating as of May 2018. Dream listed that MH4LIFE had 500 verified transactions on the Agora marketplace and 719 transactions on the Nucleus marketplace. The only products listed for sale by MH4LIFE were illegal narcotics. MH4LIFE had the highest number of verified transactions worldwide of any fentanyl vendor based upon a review of Dream Market, (via DOJ).

South Africa

How the Guptas milked South Africa for diamonds, a special OCCRP investigative report

Under recently ousted President Zuma, the Gupta family made millions in South Africa. Some of that money may have been used to purchase diamonds in a scheme which defrauded a state program to help poor black dairy farmers, (via OCCRP).

Congress

Senator Elizabeth Warren has unveiled an ambitious anti-corruption bill

The bill would ban members of Congress and the White House from owning individual stocks, as well as institute a lifetime ban on lobbying by presidents and federal lawmakers. Warren’s bill also aims to boost transparency in lawmakers. It would require elected officials and candidates for federal office to disclose their tax returns, (via the Denver Channel).