Fincrime Briefing: Bank of China pays $4 million to end French fincrime probe, Airbus nears $3 billion FCPA settlement, crypto crime ‘brokers,’ and more

By Brian Monroe
bmonroe@acfcs.org
January 28, 2020

Quote of the Day: “I have self-doubt. I have insecurity. I have fear of failure. I have nights when I show up at the arena and I’m like, ‘My back hurts, my feet hurt, my knees hurt. I don’t have it. I just want to chill.’ We all have self-doubt. You don’t deny it, but you also don’t capitulate to it. You embrace it.” – Kobe Bryant

In today’s briefing, Bank of China penalized yet again for fincrime failings, this time in France, Airbus nears hefty, multi-country settlement for corrupt intermediary entanglements, U.S. administration considers muting FCPA powers, Chainalysis highlights rise of odious OTC brokers in crypto crimes, and more.

Please enjoy this unlocked story, part of the many benefits of being an ACFCS member.

Want to talk about industry trends, story ideas or get published? Feel free to reach out to ACFCS Vice President of Content Brian Monroe at the email address above. Now, on to more sweet sweet content!
ENFORCEMENT: BANK OF CHINA IN FINCRIME SPOTLIGHT AGAIN

Bank of China pays €3.9 million to end French money laundering probe

Bank of China, one of the big four state-owned banks in China, has agreed to pay €3.9m ($4.2m) in a settlement with French tax authorities who had launched a criminal prosecution into the bank.

The settlement, reported by Bloomberg, comes following allegations by Paris that Bank of China failed to notify the authorities of millions of euros its clients were transferring from France to its accounts in China. 

The case represents the first such deal negotiated directly by French prosecutors against a foreign bank. 

The investigation was initiated by Tracfin, a French anti-money laundering body. In 2013 Tracfin detected a rapid increase in the revenue of a Paris-based plumbing and locksmith shop and reported the unusual activity to the tax authorities.

In a statement Bank of China said: “Bank of China strives to comply with anti-money laundering laws and is constantly reinforcing measures to do so.”

The charge against Bank of China alleged it had engaged in “aggravated money laundering” for the transfer of €40m across 168 accounts between 2012 and 2014, (via International Investment and Bloomberg).

Monroe’s Musings: This is not Bank of China’s first tussle with investigators and regulators over financial crime and compliance failings.

But it is the latest and a further sign that regulatory watchdogs in different jurisdictions, in this case France, are taking up the mantle and mantra of strong AML compliance and cracking down on tax-evading banks set by the U.S. in recent years.  

In April 2018, The U.S. Treasury’s Office of the Comptroller of the Currency (OCC) penalized the domestic operations of Bank of China (BOC) more than $12 million for a host of AML deficiencies, including lapses related to correspondent banking, trade finance and missed suspicious activity reports. 

At the time, the lender, one of the world’s largest, was just the latest in a string of foreign banks, particularly from China, that had come under the regulatory compliance microscope.

The OCC also noted deficiencies related to the screening of blacklisted entities designated by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).

The action, originally leaked by Bloomberg in January 2016, mirrored deficiencies highlighted by the Federal Reserve in mid-2015 in a separate action against another massive, state-owned Chinese bank, China Construction Bank Corp.

The bank has operated in New York since 2009. In the earlier joint action by the Federal Reserve and New York State Banking Department, the regulators cited the Construction Bank of China, the country’s second largest, for deficiencies across the AML program and issues related to correspondent oversight, properly responding to law enforcement and other requests for information.

To read the original OCC action against Bank of China, click here

CORRUPTION: ERA OF MAMMOTH FINES NOT OVER, YET

Airbus to settle bribery cases for about $3 billion

Airbus SE reached an agreement to settle long-running bribery investigations in the U.K., France and the U.S., in a deal that could cost the European airplane manufacturer in the range of $3 billion.

A final settlement could be announced as early as this week, according to people familiar with the matter. The preliminary deal remains subject to approval by courts and authorities in the three countries, Airbus said in a statement Tuesday.

The charges involve the use of intermediaries in securing jet orders, a practice that Airbus employed as it tried to reach parity with U.S. rival Boeing Co.

A settlement, among the largest in terms of fines for violations of the Foreign Corrupt Practices Act (FCPA) in recent years, would allow Airbus to move past the long-running probe at a time when Boeing is struggling with the grounding of its 737 Max aircraft following two deadly crashes.

Record Fine

The U.K. part of the settlement is set to surpass the record 500 million-pound ($651 million) fine paid by jet-engine maker Rolls-Royce Holdings Plc., the Financial Times reported earlier.

The corruption saga has lasted almost four years. The company reported itself to authorities in 2016 after then Chief Executive Officer Tom Enders launched an internal probe. The Serious Fraud Office opened its investigation that year, followed by its French counterpart and, late in 2018, the Department of Justice.

The impact of the corruption allegations reached high into the ranks at Airbus and was partly responsible for an exodus of top management.

Last year, the company canceled publication of a book it had commissioned on its 50-year history, because a chapter that addressed the bribery episode could have interfered with the cases.

One focus of the U.K. inquiry was Airbus’s failure to disclose its use of third parties to the company’s Export Finance agency, which arranges credit guarantees for overseas sales.

The decision to cooperate in the probes allowed Airbus to keep receiving government-backed loans for overseas sales. But it also forced Enders to clean house before retiring last year.

Airbus’s sales staff weathered a major shakeup. Kiran Rao, who had already been announced as the replacement to longtime sales chief John Leahy, was sidelined and has since left the company.

After an outsider, former Rolls-Royce executive Eric Schulz, didn’t work out, Airbus went with Christian Scherer, who led its regional aircraft business, for the top commercial-jet sales role.

Fabrice Bregier, Enders’s longtime second-in-command and a candidate to become CEO, was also forced out. Guillaume Faury, who had earlier headed Airbus’s helicopters unit, replaced him and became CEO in April.

The deferred prosecution agreement marks the most significant settlement by the SFO since it changed leadership 17 months ago.

Conservative politicians, including former Prime Minister Theresa May, have questioned whether it’s worth keeping the country’s top white-collar crime prosecutor.

The success of the DPA will depend on prosecutors’ ability to prosecute individuals responsible for the wrongdoing, particularly after the SFO decided not to charge any in individuals in connection with the Rolls-Royce case.

The Parquet National Financier was set up in 2014 to focus on major financial crime after a former French budget minister was found to have used a secret Swiss account to dodge taxes.

The PNF last year reached its largest settlement with Google, which agreed to pay 500 million euros to end a tax fraud case. In court, UBS Group AG was ordered to pay a 4.5 billion-euro penalty in a case led by the PNF, (via the Luxembourg Times).

Monroe’s Musings: And you thought the era of massive, multi-jurisdictional FCPA penalties was over. Not so, it appears.

This case continues to hit on a raw nerve for many large, international companies that have tripped them up time and again: the use of far-flung, nigh-independent and, frankly, loose-end intermediaries.

This impending settlement should send shockwaves anew for massive corporates to better reign in, risk rate and even review their stable of third-party intermediaries operating on their behalf – particularly in regions of the world where graft is considered part of the normal course of business.

Now, the million dollar question: Is this settlement the last gasp of an FCPA prize fighter about to hit the mat because the administration is considering weakening the decades-old law to allow companies to be “more competitive” with, well, companies that are also bribing to get deals?

Find more about that scuttlebutt in Bloomberg piece here and below.

Or is this settlement a reinvigoration of an FCPA machine not ready to go down for the count and looking to take on all corrupt corporates, oily oligarchs and graft-gilt gatekeepers in a bid to reach the record heights counter-corruption enforcement achieved just a few years ago?

Only time will tell. 

REGULATIONS: A KIDNEY SHOT TO THE FCPA?

White House Considers Changes to Law Banning Overseas Bribes

President Donald Trump’s administration is weighing whether to seek changes to a 1977 law that makes it illegal for U.S. companies to bribe foreign officials.

“We are looking at it,” White House Economic Adviser Larry Kudlow said at the White House on Friday, in response to a reporter’s question about the Foreign Corrupt Practices Act.

“I would just say: We are aware of it, we are looking at it, and we’ve heard complaints from some of our companies,” Kudlow said. “I don’t want to say anything definitive policy-wise, but we are looking at it.”

A forthcoming book called “A Very Stable Genius: Donald J. Trump’s Testing of America,” by Washington Post reporters Philip Rucker and Carol D.

Leonnig, reports that Trump has complained about existing rules, and that he clashed with former Secretary of State Rex Tillerson in 2017 when Trump pushed to scrap the FCPA.

“It’s just so unfair that American companies aren’t allowed to pay bribes to get business overseas,” Trump said, according to an passage published by the Post. “We’re going to change that.”

The law is designed to prevent individuals and businesses in the U.S. from paying money or offering gifts to foreign officials as a way to win business overseas.

Critics of the law complain that it puts U.S. businesses at a disadvantage in places where bribes are customary, (via Bloomberg).

Monroe’s Musings: This bodes ill for a country like the United States, that just three years ago led the world in counter-corruption enforcement actions, levying penalties cumulatively in the billions of dollars. 

The U.S. also partnered with other jurisdictions to give them more complex  investigation experience tied to complex international cases, aided them in building capacity and, hopefully, provided more credibility and teeth to these regions’ counter-bribery watchdog agencies.

Talk to any financial crime compliance professional worth their salt – be they compliance officer, regulator, investigator or auditor – and they will tell you the root of nearly all financial crime, the great enabler and Pandora’s box, is corruption.

A corrupt country has no AML regime because examiners can be paid off. A corrupt country has no real bite when it comes to closing cases and crushing large illicit networks because judges and prosecutors can be bought off.

The prevailing sentiment among the enforcers of the FCPA is that weakening it will not only hurt the U.S. far more than it will spur economic development, it could be a reputational slight to this country’s perception as a champion against all forms of financial crime that we may not recover from. 

CRYPTOCURRENCY: BATTLING BREAKING BAD BROKERS

How shadowy brokers allegedly launder billions for crypto criminals

Criminals have long turned to cryptocurrencies like Bitcoin to carry out crimes including ransomware and extortion.

But as law enforcement has improved at tracking the semi-anonymous currencies, criminals have had to devise new tactics for turning ill-gotten crypto proceeds back into cash.

In response, a new breed of middlemen have emerged to help them launder billions of dollars.

So-called over-the-counter (OTC) brokers have emerged as the lynchpin of a new type of money laundering, helping to turn at least $2.8 billion worth of Bitcoin into cash for criminal entities in 2019, according to a new report from crypto forensics firm Chainalysis.

The report notes that while exchanges have always been a popular off-ramp for illicit cryptocurrency, they’ve taken in a steadily growing share since the beginning of 2019.

Here are some snapshots of the Chainalysis report:

Over the course of the entire year, we traced $2.8 billion in Bitcoin that moved from criminal entities to exchanges. Just more than 50 percent went to the top two: Binance and Huobi. 

A small segment of accounts took in most of the illicit Bitcoin sent to Binance and Huobi. The 810 accounts in the three highest-receiving buckets took in a total of over $819 million in Bitcoin from criminal sources, representing 75% of the total. Who are the whales driving this activity?

Our analysis suggests that many are OTC brokers.

OTC (Over The Counter) brokers facilitate trades between individual buyers and sellers who can’t or don’t want to transact on an open exchange. OTC brokers are typically associated with an exchange but operate independently.

Traders often use OTC brokers if they want to liquidate a large amount of cryptocurrency for a set, negotiated price. OTC brokers are a crucial source of liquidity in the cryptocurrency market.

While it’s impossible to know the exact size of the OTC market, we know that it’s huge. Cryptocurrency data provider Kaiko even estimates that OTCs could facilitate the majority of all cryptocurrency trade volume. 

The problem, however, is that while most OTC brokers run a legitimate business, some of them specialize in providing money laundering services to criminals.

OTC brokers typically have much lower KYC requirements than the exchanges they operate on.

Many of them take advantage of this laxity and help criminals launder and cash out funds, usually first by exchanging Bitcoin and other cryptocurrencies into Tether as a stable intermediary currency before they presumably cash out into fiat. 

From our analysis of transactions by various criminal groups, we put together a list of 100 major OTC brokers we believe provide money laundering services, based on the fact that they’ve received large amounts of cryptocurrency from illicit sources.

This is not an exhaustive list of corrupt OTC brokers; rather it is a sample we assembled based on our experience investigating money laundering over time. We’ll call them the “Rogue 100.” 

70 of the OTC brokers in the Rogue 100 are in the group of Huobi accounts receiving Bitcoin from illicit sources. 32 of them are in the group of 810 accounts receiving the most illicit Bitcoin, and 20 of them received $1 million or more worth of illicit Bitcoin in 2019. 

In total, these 70 OTC brokers received $194 million in Bitcoin from criminal entities over the course of 2019. Interestingly, none of those 70 Rogue 100 accounts operate on Binance, though it’s possible some of them also have accounts there or on other exchanges as well, (via Fortune). To read the full Chainalysis report, click here.

Monroe’s Musings: This is a fantastic piece of analysis by a forward-thinking firm continuing to break new ground in how to uncover the patterns of criminals trying to hide their illicit financial maneuverings through virtual worlds.

This story also highlights one of the classic tenets of criminals when it comes to laundering their ill-gotten gains: they always choose the path of least resistance. In short, when a criminal groups finds a chink in the world’s global anti-money laundering (AML) armor – be it a crypto exchange with weak due diligence, or no due diligence, or a brick-and-mortar bank that asks few questions about the origin of funds – they will flock to it.

This report by Chainalysis, and other investigative pieces by fellow crypto-sleuthing firms, puts more pressure on the legitimate exchanges engaging in proper AML to keep up the fight and potentially even more aggressively query the exchanges they do business with about their compliance countermeasures.