Fincrime Briefing: White House issues executive orders limiting agency guidance, EU AML update, new sanctions target Guptas on graft, and more

By Brian Monroe
bmonroe@acfcs.org
October 10, 2019

Quote of the Day: “Gratitude is the sign of noble souls.”Aesop, famous Greek fabulist 

In today’s ACFCS Fincrime Briefing, the White House issues two executive orders to limit agency ability to issue guidance, EU officials plan stronger AML oversight, enforcement, U.S. targets Gupta family network tied to South African corruption scandal, 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!

Guidance

Trump issues two executive orders crimping effect, expectations around government agency guidance on industry, with tethers to AML, corporate compliance, cannabis programs

President Donald Trump signed a pair of executive orders intended to reduce the impact of agency guidance the White House believes has become a back-door means of regulation, a move that throws additional complexity around guidance that touches on anti-money laundering and corporate compliance programs. 

Industries often seek guidance from agencies to help them comply with complex rules. These agency policy statements—memorandums, circulars, bulletins, and letters—aren’t legally binding but often can serve as the basis for enforcement. Critics view such guidance as an improper shortcut around formal rulemaking.

“For many decades, federal agencies have been issuing thousands of pages of so-called guidance documents—a pernicious kind of regulation imposed by unaccountable bureaucrats in the form of commentary on how rules should be interpreted,” Trump said at the signing ceremony. “All too often guidance documents are a back door for regulators to effectively change the laws and vastly expand their scope and reach,” the president said.

On the side of financial crime, the U.S. Department of Justice (DOJ), U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), and federal banking regulatory agencies, like the Office of the Comptroller of the Currency (OCC), have put out guidance in recent years around what compliance programs should look like for banking marijuana businesses legal at the state level along with compliance parameters for non-bank corporates.  

The orders would not prevent agencies from pursing enforcement actions, but they clarify that violations of law should be based on statutes and legally binding regulations, said Paul Noe, vice president of public policy at the American Forest & Paper Association and former OMB official during the George W. Bush administration. 

Guidance documents by their nature are non-binding and cannot create a separate and independent basis for an enforcement action, Noe said.

Nonetheless, the new limits on guidance could have a broad, if uncertain, effect across multiple agencies that routinely use guidance and other documents to provide clarity to industry.

One order, called “Promoting the Rule of Law Through Improved Agency Guidance Documents,” requires agencies to post all of their guidance documents on a searchable website with the understanding that anything not posted is considered rescinded.

The order mirrors legislation (S. 380) sponsored by Senate Homeland Security and Governmental Affairs Committee Chairman Ron Johnson (R-Wis.) that would require federal agencies to post all guidance, directives, memorandums, and notices on one website.

The other order, called “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication,” is intended to safeguard against secret or unlawful interpretations of regulations, or from unfair or unexpected penalties, the White House said, (via Bloomberg Law). 

To read the full White Horse executive order on “Promoting the Rule of Law Through Improved Agency Guidance Documents,” click here

To read the full executive order on “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication,” click here

Monroe’s Musings: Here is a snippet of a discussion I had on social media about the challenges, pros and pitfalls, of financial crime compliance guidance. 

Here is my question to the financial crime and compliance sectors: How do you view guidance? 

I always thought guidance was there to help, not hurt, our cumulative counter-crime efforts? What do you think will be the outcome of regulatory bodies like DOJ, FinCEN, the OCC, Fed, OFAC and others being less willing or unable to put out guidance?

The answer, from financial crime compliance expert, Gary Ferrari:

‘Guidance’ becomes ‘regulatory expectation’ becomes ‘industry standard’ becomes examinable becomes enforceable, becomes ‘MRA’ becomes force of law. 

Sounds like going around lawmaking to me. And a moving target. And a game of gotcha! And this is, in part, how well-meaning and talented professionals wind up focusing on checklist compliance rather than risk management and intervention.

As well, fincrime compliance thought leader Jim Richards noted that these executive orders could also cause compliance challenges for guidance related to financial institutions banking cannabis businesses legal at the state level and relying on prior FinCEN guidance to prevent them from being formally charged with federal money laundering. 

Compliance

EU gauges stronger rules to fight illicit funds, strengthen AML compliance, oversight of member-state regulators with new pan-bloc body as they tweak fincrime, tax blacklists 

The European Union is considering stronger rules to counter the flow of dirty money into the region’s banks and other economic sectors in response to embarrassing and still-rumbling illicit funds scandals, along with updates to blacklists designating regional fincrime and tax scofflaws, EU officials said on Thursday.

Following a spat of money-laundering scandals at several lenders that highlighted weak oversight by national authorities, the EU is also considering setting up a new agency or beefing up existing EU-wide agencies. 

In tandem, EU officials are also working on re-introducing a controversial AML blacklist of “high-risk third countries” that caused a high-profile row with the United States – with the result being that top U.S. Treasury officials formally chastised the list and urged banks not to comply. 

Updated EU policy listing toward ‘high-risk third countries’

Ministers exchanged views on the main elements of the Commission’s revised methodology for preparing a list of “high-risk third countries” in the area of money laundering and terrorist financing, an initiative dubbed by many the EU AML blacklist. 

In the last go-around, the U.S. Treasury issued a public chastising of the EU list, on both its conclusions and methodologies, a rare divergent diatribe from longtime allies in the global fight against financial crime. The EU is hoping for a different outcome this time. 

Once the methodology is settled, the Commission will put forward a new draft list of countries in the form of a delegated act, EU officials said. 

The 5th directive on anti-money laundering and terrorist financing, adopted in May 2018, sets out an obligation to identify third country jurisdictions which have strategic deficiencies in their anti-money laundering and terrorist financing regimes that pose significant threats to the financial system of the EU. 

To read more on the updated EU AML blacklist methodology, click here

Much of the hasty and fast-tracked changes to bolster AML across the EU comes as a reaction to the Danske Bank money laundering scandal, which saw some $230 billion in suspect Russian funds move through the operation’s Estonian branch. 

Last year, the Estonian branch of Danske Bank emerged as the epicenter of the largest money-laundering scandal in the EU. 

Two Maltese banks have stopped operations since last year because of money-laundering allegations while several top leaders at Danske and other banks like Swedbank have seen massive executive turnover while other EU institutions, like Deutsche, face a bevy of probes around what they saw coming from Danske and what they reported to authorities. 

New rules under consideration could increase controls over sectors where risks of money laundering are high, such as financial services, gaming and real estate, Finance Commissioner Valdis Dombrovski.

One official said stricter rules could also hit intermediaries, like lawyers or tax advisers. The EU has already changed its anti-money laundering rules twice over the past five years to keep up with emerging threats and close loopholes.

As part of the overhaul, many ministers supported the creation of a new agency at EU level that would take over supervision powers from national authorities, officials said.

“We need to be ready to discuss some forms of EU supervisory body. It should have an independent structure and decision-making,” Finnish Finance Minister Mika Lintila said at the end of the meeting.

The European Central Bank and the EU parliament have called for an EU agency against money laundering, which they believe could better counter the flow of illicit money, estimated by the United Nations to amount to around $2 trillion a year globally.

EU removes UAE, Switzerland from tax haven lists

The European Union has removed the United Arab Emirates, Switzerland and several other countries from its list of countries that are susceptible to tax evasion, citing recent legal developments, according to the WSJ. 

The countries have implemented reforms aimed at promoting transparency and preventing tax fraud, the Economic and Financial Affairs Council said in a statement.

The council removed the UAE and the Marshall Islands from its list of “noncooperative jurisdictions,” or countries that have not sufficiently responded to the EU’s concerns about tax fraud and avoidance. The Marshall Islands will remain on a list of countries with pending commitments to fulfill, the council said.

For a list of countries that remain on the list, click here.

Albania, Costa Rica, Mauritius, Serbia and Switzerland have changed their tax laws in ways that promote good tax governance principles, the council said, (via Reuters). 

To read the full report on the EU AML update, click here. To read the EU update to its tax blacklist, click here.

Sanctions

U.S. imposes sanctions on Gupta family linked to South African corruption scandal, plundering of state assets 

The U.S. Treasury froze assets owned by three brothers at the center of a sprawling government-corruption scandal in South Africa that contributed to the ouster of former President Jacob Zuma and ensnared major international companies.

Ajay, Atul and Rajesh Gupta, who arrived in South Africa from India in the early 1990s and quickly forged connections within the ruling African National Congress, used their ties to engage in corruption and bribery to get government contracts and misappropriate state assets, the Treasury’s Office of Foreign Assets Control said. 

The department on Thursday also imposed sanctions on one of the brother’s close business associates, Salim Essa. 

“Treasury’s designation targets the Guptas’ pay-to-play political patronage, which was orchestrated at the expense of the South African people,” said Sigal Mandelker, Treasury undersecretary for terrorism and financial intelligence. “The Guptas and Essa have used their influence with prominent politicians and parties to line their pockets with ill-gotten gains.”

The U.S. sanctions are the most concrete punishment doled out to the Guptas, whose alleged grip on Mr. Zuma’s government was so strong that it was dubbed “state capture” by South African media and analysts. 

Although the scandal dominated headlines in Africa’s most-developed economy for several years and forced Mr. Zuma to step down in February 2018, none of the men have been charged in South Africa, (via the WSJ). To read the full Treasury release, click here

And complying with the various U.S. and global sanctions programs will likely not get any easier as 2019 wanes, according to a new report highlighted by the WSJ. 

Sanctions risks to rise in 2020, report says, noting growing conflictions, clashes between U.S., EU blacklisting programs

Companies will face higher sanctions risks in the coming year, as the number of sanctions programs issued by various jurisdictions expands and the divergence between the U.S. and European Union sanctions programs grows, according to a report from risk consultancy Control Risks.

The growing gulf of sanctions regimes among Western countries has increased the need for companies to understand their exposure, said Jonathan Wood, one of the authors of the report. 

The sanctions disparities have “put a new burden on the compliance department” to understand foreign policy, he said.

The report, published Thursday, identifies Iran, North Korea, Russia, Venezuela and Syria as the top countries to watch in 2020 when assessing sanctions risks.

Companies could manage rising sanctions risks by following guidelines issued by the U.S. Treasury Department’s Office of Foreign Assets Control and the EU, as well as doing due diligence throughout the supply chain beyond immediate counterparties, according to the report.

To download a copy of the full Control Risks sanctions report, click here

Monroe’s Musings: Sanctions compliance, for banks and corporates alike, seems to only go up in complexity. And this latest designation has some interesting nuances, according to Hdeel Abdelhady, strategic legal counsel at MassPoint Legal and Strategy Advisory. 

The U.S. has imposed Global Magnitksy sanctions on members of South Africa’s Gupta family for government contracting overpayments, bribery and “corrupt acts to fund political contributions and influence government actions,” she wrote.  

Implicit in the action is a broader message that the United States is poised to call out, if not punish, foreign government corruption. 

The Global Magnitsky anti-corruption sanctions – super charged by the Trump Admin – are unique among anti-corruption laws in that they: (1) directly penalize foreign officials, (2) assert U.S. jurisdiction globally, and (3) define corruption very broadly.

The action highlights the flexibility and reach of Global Magnitsky sanctions, illustrates the Trump Administration’s “network sanctions” approach to corruption (advocated effectively by at least one nonprofit, particularly with respect to Africa), and sends a not so subtle message about the current administration’s willingness to call out official corruption. 

To read more of Abdelhady’s analysis, click here.  

Cryptocurrency

Turn-key money laundering? How $800 in Bitcoin is buying $10,000 cash on Dark Web

Security researchers have identified a new trend of lucrative and illicit conversions from Bitcoin (BTC) to cash in their analysis of dozens of dark web marketplaces and forums.

Financial scammers are selling cold, hard cash for only 10 to 12 cents on the dollar to buyers willing to provide a prepaid fee in Bitcoin, according to the new Q3 2019 Black Market Report from Armor’s Threat Resistance Unit.

The money laundering scheme sees cybercriminals offer up bundles of cash — typically from $2,500 to $10,000 — in exchange for a 10% to 12% fee payable in Bitcoin. 

Once the buyer has transferred the cryptocurrency, they provide details of the bank, PayPal or Western Union account where the money should be sent. 

As an extremely simple, turn-key service, this arrangement offers buyers sky-high returns on their illicit purchase and removes the need for a money mule or the risk of logging into compromised accounts. 

As the report outlines, money mules are agents who transfer ill-gotten funds between accounts in exchange for a fee of 10% to 20% of the value. 

Such actors typically open costly business bank accounts in order to avoid triggering fraud alerts or drawing unwanted attention when transacting large volumes. 

Notably, this conversion scheme benefits those selling the stolen funds because they avoid taking possession of the funds and instead merely transfer them — meaning the buyer carries the risk, (via Coin Telegraph).