In today’s ACFCS Fincrime Briefing, the U.S. Treasury accused Halkbank of helping Iran evade sanctions, generating billions of dollars and FATF chides Pakistan on AML, counter-financing of terrorism, 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!

U.S. accuses Turkey’s Halkbank of engaging in multi-billion dollar Iran sanctions evasion scheme as tensions flare in roiling Syria

The U.S. has leveled a criminal case against one of Turkey’s largest banks for allegedly helping Iran evade sanctions to the tune of billions of dollars, a move that could only increase saber rattling and rising tensions reaching a boiling point over Turkey’s military offensive in Syria.

In an indictment filed Tuesday in Manhattan federal court, prosecutors accused government-owned Halkbank of participating in a wide-ranging plot to violate prohibitions on Iran’s access to the U.S. financial system along with related charges of fraud and money laundering.

The conspiracy involved high-ranking government officials in Iran and Turkey, the U.S. said.

“Halkbank’s systemic participation in the illicit movement of billions of dollars’ worth of Iranian oil revenue was designed and executed by senior bank officials,” U.S. Attorney Geoffrey Berman in New York said in a statement. “Halkbank will now have to answer for its conduct in an American court.”

The charges in the years-long case were described by a U.S. official as a frontal assault on Turkish President Recep Erdogan, according to Bloomberg. Because of the timing, there’s a risk the prosecution will be perceived as a political attack by the U.S. on Turkey for its aggression, the official added.

“The facts that emerged at the full, fair, and public trial of Halkbank’s deputy general manager, which culminated in a jury’s January 2018 guilty verdict against him, illustrated senior Halkbank management’s participation in this brazen scheme to circumvent our nation’s Iran sanctions regime,” Berman said.  

“The bank’s audacious conduct was supported and protected by high-ranking Turkish government officials, some of whom received millions of dollars in bribes to promote and protect the scheme.”

From approximately 2012, up to and including approximately 2016, TÜRKİYE HALK BANKASI A.S. (Halkbank) was a foreign financial institution organized under the laws of and headquartered in Turkey.  

The majority of Halkbank’s shares are owned by the Government of Turkey. Halkbank and its officers, agents, and co-conspirators directly and indirectly used money service businesses and front companies in Iran, Turkey, the United Arab Emirates, and elsewhere to evade U.S. sanctions on Iran.

Halkbank knowingly facilitated the scheme, participated in the design of fraudulent transactions intended to deceive U.S. regulators and foreign banks, and lied to U.S. regulators about Halkbank’s involvement.

High-ranking government officials in Iran and Turkey participated in and protected this scheme.  

Some officials received bribes worth tens of millions of dollars paid from the proceeds of the scheme so that they would promote the scheme, protect the participants, and help to shield the scheme from the scrutiny of U.S. regulators.

The proceeds of Iran’s sale of oil and gas to Turkey’s national oil company and gas company, among others, were deposited at Halkbank, in accounts in the names of the Central Bank of Iran, the National Iranian Oil Company (NIOC), and the National Iranian Gas Company.  

During the relevant time period, Halkbank was the sole repository of proceeds from the sale of Iranian oil by NIOC to Turkey.  

Because of U.S. sanctions against Iran and the anti-money laundering policies of U.S. banks, it was difficult for Iran to access these funds in order to transfer them back to Iran or to use them for international financial transfers for the benefit of Iranian government agencies and banks.  

As of in or about 2012, billions of dollars’ worth of funds had accumulated in NIOC and the Central Bank of Iran’s accounts at Halkbank.

Halkbank participated in several types of illicit transactions for the benefit of Iran that, if discovered, would have exposed the bank to sanctions under U.S. law, including:

• (i) allowing the proceeds of sales of Iranian oil and gas deposited at Halkbank to be used to buy gold for the benefit of the Government of Iran;
• (ii) allowing the proceeds of sales of Iranian oil and gas deposited at Halkbank to be used to buy gold that was not exported to Iran, in violation of the so-called “bilateral trade” rule; and
• (iii) facilitating transactions fraudulently designed to appear to be purchases of food and medicine by Iranian customers, in order to appear to fall within the so-called “humanitarian exception” to certain sanctions against the Government of Iran, when in fact no purchases of food or medicine actually occurred.  
• (iv) Through these methods, Halkbank illicitly transferred approximately $20 billion worth of otherwise restricted Iranian funds.

Senior Halkbank officers acting within the scope of their employment and for the benefit of Halkbank concealed the true nature of these transactions from officials with the U.S. Department of the Treasury so that Halkbank could supply billions of dollars’ worth of services to the Government of Iran without risking being sanctioned by the United States and losing its ability to hold correspondent accounts with U.S. financial institutions.

The purpose and effect of the scheme in which Halkbank participated was to create a pool of Iranian oil funds in Turkey and the United Arab Emirates held in the names of front companies, which concealed the funds’ Iranian nexus.  

From there, the funds were used to make international payments on behalf of the Government of Iran and Iranian banks, including transfers in U.S. dollars that passed through the U.S. financial system in violation of U.S. sanctions laws, (via DOJ). To read more analysis from Bloomberg, click here.

Monroe’s Musings: Iran, the Middle East and a major Iranian proxy, Turkey, has been on the radar of U.S. foreign policy powerbrokers for some time, with some large international banks helping Iran evade sanctions by creating seemingly unconnected shell companies in Turkey.

And Halkbank was already under intense legal pressure to defend itself against helping Iran game the system.

Even so, the timing of this, with the U.S. pulling out of Syria and Turkey stating they will move in – potentially clashing with the Kurds in the region who held the line against ISIS – and this move against one of the country’s largest banks will for sure fan the flames and foment discontent between the U.S. and Turkey, a relationship already dripping with acrimony.

Pakistan’s compliance with global AML, counter-terror standards is poor, according to latest mutual evaluation, with country likely staying put on grey list

Pakistan faces high risks of money laundering and terror financing and it needs to bolster the understanding of these risks that are also coming directly from various terrorist groups operating in the country, with investigative agencies needing to be more aggressive in sharing information on cross-border cases, the final Mutual Evaluation Report of the Asia Pacific Group says.

The Financial Action Task Force (FATF) Asian Pacific Group (APG) on Money Laundering released its Mutual Evaluation report just days before the Financial Action Task Force’s plenary meeting, going on now, which will decide on Pakistan’s status on its grey list – a move that calls on other countries and banks to give financial transactions tied to Pakistan more scrutiny due to fincrime risks.

After the APG report, chances are high that Pakistan would be retained on the grey list during the FATF plenary meetings, which started October 13 and will run to Oct. 18th in Paris.

The cut-off date for Pakistan to show improvement to APG was October 2018 and the Pakistani authorities insisted that they made a lot of progress during the past year.

Lately, the Director-General of Military Operations has been given the overall responsibility for the implementation of FATF recommendations while Federal Minister for Economic Affairs Hammad Azhar is responsible for coordination from the civilian side.

In the full APG mutual evaluation, reviewers cited a bevy of core deficiencies hampering Pakistan from better countering financial crimes, including:

• Pakistan only recently completed its first money laundering (ML) and terrorist financing (TF) National Risk Assessment (NRA) in 2017 and assigns a national risk-rating of “medium” for both ML and TF. However, the NRA lacks a comprehensive analysis.
• Competent authorities have mixed levels of understanding of the country’s ML and TF risks, and the private sector has a mixed understanding of risks, leading to a lack of capacity and missed reports of suspicious activity.
• While Pakistan has established a multi-agency approach to implement its AML/CFT regime, it is not implementing a comprehensive and coordinated risk-based approach to combating ML and TF.
• Pakistan is attempting to better use the country’s financial intelligence to combat ML, TF, predicate crimes and to trace property for confiscation purposes, but only to a minimal extent.
• Critically, the country’s financial intelligence monitoring unit (FMU) cannot spontaneously or upon request disseminate information to investigative agencies and the results of its analysis to provincial counter-terrorism departments (CTDs), in some cases needing prior court authorization.  
• The country also struggles in the area of data analysis and levying statement-making fines. Currently, the proportionality and dissuasiveness of the sanctions against natural persons could not be assessed due to a lack of information.
• Overall, Pakistan’s law enforcement efforts to address ML are not consistent with its risks.
• Pakistan law enforcement authorities (LEAs) have measures to freeze, seize, and prevent dealing with property subject to confiscation. However, LEAs are seizing some assets in predicate offences cases, but not in ML cases.
• In totality, the value of confiscated funds is not commensurate with Pakistan’s ML/TF risk profile.

The Mutual Evaluation Report of 2019 has not agreed with Pakistan’s assessment that it faces “medium” category risks of money laundering and terrorism financing.

In its National Risk Assessment report, Pakistan did not believe that money laundering and terrorism financing were high-risk category areas, (via The Express Tribune).

To read the full FATF APG report, click here.

Monroe’s Musings: What shocked me most is that Pakistan is clearly out of touch with the depth and breadth of money laundering, corruption and terror finance risks it is facing.

For the country to engage in a full scale financial crime risk assessment, and conclude its money laundering and terror finance risks only rise to “medium” and not high reveals a glaring disconnect between what politicians and investigative agencies perceive and what is really happening in and around the roiling region.

The only true way Pakistan will improve its FATF evaluation rankings, and get itself de-listed and upgraded to a better citizen of the world, is if internal authorities are honest about the infiltration of illicit and terror-tinged entities and create new laws, practices and even investigative and information sharing bodies to counter the very high-risks at the country’s doorstep.

Inside a German bank’s brazen Scheme to Woo China: Gifts, Golf and a $4,254 Wine

It was a brazen campaign to win business in China by charming and enriching the country’s political elite by Germany’s largest bank, funded by millions of dollars in baubles, electronic fineries and luxury trips – efforts that won in one area, but ultimately failed because they banked on bolstering revenues by bribery.

The bank gave a Chinese president a crystal tiger and a Bang & Olufsen sound system, together worth $18,000. A premier received a $15,000 crystal horse, his Chinese zodiac animal, and his son got $10,000 in golf outings and a trip to Las Vegas.

A top state banking official, a son of one of China’s founding fathers, accepted a $4,254 bottle of French wine — Château Lafite Rothschild, vintage 1945, the year he was born.

Millions of dollars were paid out to Chinese consultants, including a business partner of the premier’s family and a firm that secured a meeting for the bank’s chief executive with the president. And more than 100 relatives of the Communist Party’s ruling elite were hired for jobs at the bank, even though it had deemed many unqualified.

This was all part of Deutsche Bank’s strategy to become a major player in China, beginning nearly two decades ago when it had virtually no presence there. And it worked. By 2011, the German company would be ranked by Bloomberg as the top bank for managing initial public offerings in China and elsewhere in Asia, outside Japan.

The bank’s rule-bending rise to the top was chronicled in confidential documents, prepared by the company and its outside lawyers, that were obtained by the German newspaper Süddeutsche Zeitung.

The previously undisclosed documents, shared with The New York Times, cover a 15-year period and include spreadsheets, emails, internal investigative reports and transcripts of interviews with senior executives.

The documents show that Deutsche Bank’s troubling behavior in China was far more extensive than the authorities in the United States have publicly alleged. And they show that the bank’s top leadership was warned about the activity but did not stop it.

Josef Ackermann, the bank’s chief executive until 2012, said in an interview with The Times and separately in answers to written questions that he was not familiar with many of the details contained in the documents. But he defended the bank’s broader practices.

“This was part of doing business in this country,” Mr. Ackermann said. “At the time, this was the way things were done.”

For years, Deutsche Bank has been a poster child for misconduct in the finance industry. Regulators and prosecutors around the world have imposed billions of dollars in penalties against the bank for its role in a wide range of scandals.

Most recently, the bank has been under investigation for the facilitation of money laundering in Russia and elsewhere.

In August, the bank agreed to pay $16 million in a settlement with the United States Securities and Exchange Commission related to allegations that it had used corrupt means to win business in both China and Russia, violating anti-bribery laws, though it did not admit wrongdoing.

That penalty, the documents show, amounted to a small fraction of the revenues gained in China from business stemming in part from the activities.

The bank’s outside lawyers had warned executives in 2017 that they could face a penalty of more than $250 million from the S.E.C. related to China.

There is no evidence that German regulators investigated the bank’s activities in China, though they were alerted to some of it, according to the documents, (via the NY Times).

Monroe’s Musings: This story has played out several times with different banks engaging in similar activities in recent years.  

Just more than a month ago, the SEC penalized one of London’s largest banks more than $6 million for broad corruption failings by illicitly trying to boost its investment banking business by hiring the friends and relatives of powerful foreign government officials – bringing the total number of banks to fall for similar actions to nearly a half-dozen.

In the penalty order, the SEC stated Barclays PLC would pay $6.3 million to settle charges that it violated the U.S. Foreign Corrupt Practices Act (FCPA) by hiring the relatives and friends of foreign government officials in a bid improperly influence them in connection with its investment banking business.

In recent years, some half-dozen of the world’s largest banks – including Credit Suisse, Societe Generale, JPMorgan Chase and others – have paid regulatory and investigative agencies hundreds of millions of dollars for offering coveted internships and similar instruments to get an edge in certain business deals, colloquially dubbed the “princelings” scandal.

As in other past cases, the graft gaffes occurred in Asia, where some countries still consider bribery and influence peddling as part and parcel of standard business practices.

Until banks realize they can’t use graft to win business in regions where corruption is commonplace, like China, which is going through its own spasms to counter longstanding corruption in its ranks, these actions will continue to occur, tempting business lines to engage in illicit practices and hurting the reputation of the banks they work.

MEP calls for stronger EU anti-money laundering efforts amid Deutsche Bank withdrawals

The withdrawal of Deutsche Bank from five eurozone countries, including Malta, shows the European Banking Union needs to up its game in the fight against money laundering, or risk both embarrassment when it comes to perceived compliance standards along with potentially losing critical intelligence for law enforcement, Sven Giegold said.

The MEP said it was “an embarrassment” for the EBU when credit institutions withdraw from euro countries because of money laundering allegations.

“A large-scale withdrawal of correspondent banks from Malta and other risky countries would be dangerous, as payments could then increasingly shift to channels that are more difficult to control,” Giegold said.

“Deutsche Bank’s withdrawal from business with Malta and other euro countries shows that the Banking Union must finally take the fight against money laundering seriously,” the Greens/EFA group’s financial spokesperson said.

He underlined that the European Commission must not longer watch member states “doing nothing,” but should “initiate infringement proceedings for implementation failures.”

“Comparing the text of the Anti-money Laundering Directive with national legislation only masks the actual shortcomings in the lack of implementation of money laundering controls,” he noted.

In light of this, he said the Commission should replace all, or at least part of the Directive with a regulation, which would be directly applicable in all member states.

He also called on member states to increase their funding of the European Banking Authority come the next EU budget.

“In the forthcoming negotiations on the EU budget, the European member states must increase the funds for the European Banking Authority so that it can fulfil its new role in the fight against money laundering,” he said.

“In the medium term, we need a European Anti-money Laundering Authority for cross-border supervision of financial crime. Effective anti-money laundering is in the interest of all EU member states,” (via Malta Today).

Monroe’s Musings: This story is an interesting counterpoint to the piece above about Deutsche Bank’s struggles with countering corruption and building on overall strong, enterprisewide culture of compliance.

This official takes a bit of a surprising tactic, noting that not all of the blame falls on the shoulders of Deutsche executives and compliance professionals, but also lays some of the burden of failure at the feet of EU banking and regulatory groups.

In short, when a large European bank must exit several regions due to actual or perceived money laundering fears, or it has to retrench to strengthen its AML and counter-crime programs to handle suspected jurisdictional risks, it makes the bank, the EU and the jettisoned jurisdictions look bad.

This MEP also makes an excellent point I have heard from many law enforcement groups and country financial intelligence units: when a large bank, or banks, de-risk from a given region of the world, that opens up a vacuum where individuals could go to illicit groups to fulfill their needs, losing out on valuable potential sources of intelligence in the process.