In this week’s Financial Crime Wave, find out how international regulators are trying to craft a global, standardized AML KYC database, how de-risking is making the Caribbean a little less care free, how corporate opacity is a boon for criminals of all stripes, and more.

International regulators will write new banking rules for checking whether a potential customer poses money-laundering or terrorist financing risks. The move is part of efforts by the world’s central banks to stop cross-border banking from fragmenting under the weight of tougher anti-money-laundering rules which have prompted some lenders to pull out of markets. The Committee on Payments and Market Infrastructures (CPMI), made up of central bankers from across the world, said on Wednesday that lenders want greater clarity on how to comply with mandatory anti-money-laundering checks of customers. The aim is to create “know-your-customer” utilities, or data bases, that would obtain information on customers from across the banking sector for use by all banks. This would save time and money by avoiding many checks on the same customer. CPMI said it would ask the International Organization for Standardisation to define the basic set of information that all such utilities would collect and that all banks have to be ready to provide to other banks. Banks have also asked for assurances from regulators and law enforcement authorities that lenders can rely on information from utilities for complying with anti-money-laundering and terrorist financing rules. Tougher rules to stop money-laundering and other illegal activities have prompted banks to cut links and reduce the cost of stringent checks on who is using their systems. Such checks are harder in less developed countries that are perceived as very risky, or not worthwhile when the volume of business is too low to cover compliance costs, (via Reuters on Euro News).

The bigger picture: If this initiative bears fruit, it could be a pretty big deal for large banks involved in all manner of international business. Why? Currently, when it comes to the initial steps of implementing the AML program, this would be the know-your-customer and customer due diligence or enhanced due diligence pieces of the program, banks must typically ask certain questions, review documents and then do a risk-rating of the customer, depending on who they are, where they do business, what industry, what products and the like. This is a very labor intensive effort, if done right, and the resultant figure becomes the foundation of the risk assessment and related tuning of the transaction monitoring. But to do a very quick check of a customer, banks must typically use third-party vendor systems to check if they have been tied to criminal cases, negative news or some scheme in some part of the world, but that also is not all encompassing, airtight and ironclad. Several large banks some years ago actually created a massive AML and fraud database, called Early Warning, which helps with this. This is allowed because these institutions are considered an “association” of banks under Section 314(b) powers and protections. But if both US and large international banks create such a database, it could mean a larger universe of institutions can make more connections more quickly on bad guys currently hidden in a sea of customers and also stop certain bad apples from getting in in the first place.


Spurred by the financial meltdown and regulatory abuses, banks have tightened controls, weeding out potentially risky customers. This “de-risking” movement has hit the Caribbean most deeply, raising concern that poor regions are being shut off from global financing. Burdened by chronic back pain, Belize Prime Minister Dean Barrow avoids traveling abroad, his colleagues say. But in January, he flew to Washington and visited one government agency after another on a singular mission: reconnecting his country to the U.S. financial system. A U.S.-educated lawyer, Barrow made his case before agencies with chief oversight of American banks, including the Federal Deposit Insurance Corporation and the U.S. Treasury’s Office of the Comptroller of the Currency. His Belizean delegation described how their country had been shunned over the last year by large, reputable American banks, a trend that threatens its tiny economy. As banks scrub their books of potentially risky businesses amid a tightening regulatory noose, major U.S. financial institutions have ended relationships with regional banks across the Caribbean in the last four years, Caribbean officials and bank executives say. This so-called “de-risking” or “de-banking,” in which banks pull out of certain lines of business and even parts of the world, has intensified. Enhanced scrutiny on financial fraud and new regulations to stem money laundering and terror finance are all at play, (via Reuters).

Corporate transparency

Op-ed by Adam Szubin, acting undersecretary for terrorism and financial intelligence at the Department of the Treasury: As the official overseeing the U.S. government’s efforts to track terrorist and illicit money flows, I’m often asked about the novel or obscure ways that criminals or terrorists move money. In the years after the 9/11 attacks, questions often focused on hawala transfers. Today, people ask me about virtual currencies like bitcoin and the dark net. But there is a money laundering method that is less exotic yet every bit as dangerous: shell companies incorporated in the United States. It does not need to be this way. Congress could close this loophole by passing a simple, two-page law requiring the beneficial owner of a company to be identified whenever a U.S. company is formed. Treasury submitted a legislative proposal to Congress last month that provides a framework for closing this loophole once and for all. With every threat that we track, be it foreign terrorists, narcotics cartels, sanctioned regimes or cyber hackers, our investigators encounter American shell companies used to hide and move money. Consider the notorious arms dealer Viktor Bout, the alleged model for the movie “Lord of War,” who sold weapons to butchers and terrorists from Africa to the Balkans. Bout didn’t move his arms here, but this Soviet arms merchant moved his blood money through companies established in Florida, Texas and Delaware. A loophole in our financial system allowed for this secrecy, and it took years to uncover the full money trail, (via The Hill).

The bigger picture: This is straight from the horse’s mouth. I have met Adam and seen his rise as a top official at OFAC to his current position. He has highlighted what can be not just a stumbling block or minor inconvenience in a financial crime investigation, but a brick wall. And that is when US investigators going after criminals across the financial crime spectrum – whether they be launderers, fraudsters, corrupt politicos or cyber hackers – run into a company or entity with an impenetrable ownership structure. Without a human to investigate, surveil, wiretap, pull and monitor bank records, the entire investigation can run cold. I have heard this from many of my current and former federal investigative sources. And the worst part: this isn’t something happening in far flung locales with weak AML rules and general rule of law, it’s happening right here in the United States. The reason? That is a complicated answer replete with economic, political and state versus federal repercussions. There are very influential Congresspersons protecting this states from implementing what are now international standards. Hopefully with the global aftershocks of the Panama Papers still rumbling, the US tipping point will come soon, and finally this time, on the side of transparency.

Terror finance

The U.K. needs to do more to block funding sources for Islamic State, Parliament’s Foreign Affairs Sub-committee said in a report on Tuesday. A coalition including the U.K. and U.S. has been targeting IS cash reserves, as well as conducting airstrikes against oil infrastructure controlled by the group, which faces “an increasingly desperate struggle to raise money,” the committee said. Even so, Britain’s contribution is “under-powered compared to our potential,” it said. The U.K. has seen fresh wrangling over its role in creating the current instability in Iraq, that allowed Islamic State to prosper, following the publication of the Chilcot report last week. The inquiry, which took seven years to complete, concluded that Britain’s involvement in the U.S.-led invasion of Iraq was a failure and was carried out before peaceful options had been exhausted. “The U.K. government is in a position to help Iraq develop effective abilities of its own to counter ISIL finances,” committee chair and MP John Baron said in the report, using an alternative name for Islamic State. “Much depends on blocking access to local and international money-making activities,” he said, (via Bloomberg).


The House Financial Services Committee on Monday released a staff report of its investigation into the U.S. Department of Justice’s decision not to prosecute HSBC or any of its executives or employees for serious violations of U.S. anti-money laundering laws and related offenses. The Committee initiated its investigation in March 2013. The Department of Justice (DOJ) and the Department of the Treasury failed to comply with the Committee’s requests to obtain relevant documents, necessitating the issuance of subpoenas to both agencies. Approximately three years after its initial inquiries, the Committee finally obtained copies of internal Treasury records showing that DOJ has not been forthright with Congress or the American people concerning its decision to decline to prosecute HSBC. These documents reveal:

Senior DOJ leadership, including then-Attorney General Eric Holder, overruled an internal recommendation by DOJ’s Asset Forfeiture and Money Laundering Section to prosecute HSBC because of DOJ leadership’s concern that prosecuting the bank would have serious adverse consequences on the financial system.
Notwithstanding Attorney General Holder’s personal demand that HSBC agree to DOJ’s “take-it-or-leave-it” deferred prosecution agreement deal by November 14, 2012, HSBC appears to have successfully negotiated with DOJ for significant alterations to the deferred prosecution agreement’s terms in the weeks following the Attorney General’s deadline.
DOJ and federal financial regulators were rushing at what one Treasury official described as “alarming speed” to complete their investigations and enforcement actions involving HSBC in order to beat the New York Department of Financial Services.
In its haste to complete its enforcement action against HSBC, DOJ transmitted settlement numbers to HSBC before consulting with Treasury’s Office of Foreign Asset Control to ensure that the settlement amount accurately reflected the full degree of HSBC’s sanctions violations, (via the House Financial Services Committee).
U.S. Justice Department officials overruled their prosecutors’ recommendation to pursue criminal charges against HSBC Holdings PLC over money-laundering failings, according to a House committee report prepared by Republicans that sheds new light on the bank’s 2012 settlement. The report, which was reviewed by The Wall Street Journal ahead of its release Monday morning and was prepared by the Republican staff of the Financial Services Committee, concluded that former Attorney General Eric Holder overruled the internal recommendation and subsequently misled Congress about the Justice Department’s decision not to prosecute the U.K. bank. “Rather than lacking adequate evidence to prove HSBC’s criminal conduct, internal Treasury documents show that DOJ leadership declined to pursue [the] recommendation to prosecute HSBC because senior DOJ leaders were concerned that prosecuting the bank ‘could result in a global financial disaster,’ ” the 282-page report stated. The report also said the Justice Department refused to respond to subpoenas from the committee about the settlement, so committee staff based its findings on documents turned over by the Treasury Department, which was also involved in the settlement. In December 2012, HSBC agreed to pay a then-record $1.9 billion to the Justice Department to settle allegations it failed to spot the laundered proceeds of drug trafficking in Mexico and failed to flag transactions with countries subject to economic sanctions, such as Iran. But the bank avoided entering a guilty plea, a costly outcome that could have sparked collateral consequences including the revocation of the bank’s U.S. charter. Instead, it entered into a deferred prosecution agreement, (via the Wall Street Journal).

Tax evasion

The “Big Four” global accounting firms – PwC, Deloitte, KPMG and Ernst & Young – are the masterminds of multinational tax avoidance and the architects of tax schemes which cost governments and their taxpayers an estimated $US1 trillion a year, according to an Australian taxation expert. The controversial new claims have been made by George Rozvany, Australia’s most published author on transfer pricing, one of the principal ways in which large corporations pursue cross-border tax avoidance. Although presenting as “the guardians of commerce”, Mr Rozvany believes those firms are largely unregulated and unaccountable and have infiltrated governments at every level. To counter the global reach of those firms, he now advocates for them to be broken up. Mr Rozvany says the Big Four have strayed from their original role of verifying the accuracy of financial accounts to become “accountants of fortune” who “develop aggressive international tax avoidance practices.” Mr Rozvany stepped down last year as head of tax in Australia for the world’s biggest insurance company, Allianz. Formerly, he was an insider at Ernst & Young, PwC and Arthur Anderson. “This is not a victimless crime,” he says. “While Western governments have been cutting back their aid to the most underprivileged in society, from the homeless to orphaned children in Africa, multinational companies have been diverting ever larger profits into tax havens.” “The global community must also recognize the links between aggressive taxation behavior, money laundering, corruption, organized crime and terrorism, of which the Brussels bombings and 9/11 are chilling reminders. “This, unquestionably, is the financial sewer of humanity where the purpose for such money, no matter how malevolent, is simply hidden until used,” Mr Rozvany, who is writing a series of books on corporate tax ethics, says, (via the New Daily).

Canada AML regulations

The federal government published the final version of the amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in the Canada Gazette, June 29, 2016. A draft version of the proposed amendments to these regulations was previously issued for comment on July 4, 2015. This legal update highlights the changes between the Proposed Amendments and the Final Amendments. Concurrently with the Final Amendments being passed, the Financial Transactions and Analysis Centre of Canada (Fintrac) has issued the new Guideline: Methods to ascertain the identity of individual clients. We have described this additional guidance in respect of the new identification requirements for individuals, in a separate legal update “Fintrac Releases New Guideline on Identification Requirements for Individuals.” For instance, the Final Amendments significantly decreased the prescribed period that applies to determining whether a person who previously held a position remains a domestic PEP from 20 years in the Proposed Amendments to 5 years in the Final Amendments. This change was made in response to comments received from stakeholders during the consultation period, that the 20-year timeframe for domestic PEPs to retain their status is too long and burdensome. On the penalty side, Fintrac has had the power to impose administrative penalties (AMPs) since 2008 where an entity fails to comply with the Act or the regulations. The Final Amendments include amendments to the AMP Regulations adding certain provisions to the list of provisions that can trigger an administrative penalty, including some classified as “serious” (the penalty will range from $1 to $100,000) or “very serious” (the penalty will range from $1 to $500,000). An example of a newly listed “very serious” violation would be failing to comply with a ministerial directive. An example of new “serious” violation would be having a correspondent relationship with a shell bank or failing to register with Fintrac, (via Lexology).


SWIFT, a messaging system used by banks across the world, announced further steps on Monday to bolster its defenses against hackers, after criminals sent fraudulent payment instructions across its network. The Society for Worldwide Interbank Financial Telecommunication said it has hired two outside cyber security firms, BAE Systems and Fox-IT, to reinforce in-house expertise, and has set up a team to share cyber defense “best practice” among its customers. In February, thieves hacked into the Bangladesh central bank’s interface with SWIFT’s network, which is a pipeline for transferring funds and the backbone of international finance. They sent payment instructions to the Federal Reserve Bank of New York, telling it to transfer $951 million from Bank Bangladesh’s account to accounts in the Philippines. Most of the transactions were blocked but four went through, amounting to $81 million that remains missing. SWIFT, a Belgium-based co-operative owned by its users, had already unveiled measures to tighten up security. On Monday it announced it was also setting up a Forensics and Customer Security Intelligence team to investigate security incidents at customers. The team will help in the collection and sharing of anonymized information with customers on how best to deal with hackers. SWIFT Chief Technology Officer Craig Young said information from banks that have been subject to fraud attempts was crucial for identifying new malware, (via Reuters).


Eugene Gourevitch, a 39-year-old Berkeley-educated finance whiz, spends his days working in the library in a federal prison in Montgomery, Alabama. He’s serving a five-year sentence for wire fraud related to insider trading. How Gourevitch ended up as an inmate is no run-of-the-mill Wall Street tale of a promising career gone awry. It’s a story so snarled that it borders on the absurd, part pulp thriller, part black comedy. And it shows what can happen when the government is stuck relying on a crafty opportunist. By Gourevitch’s telling, in a telephone interview and to investigators, he was an accomplice or eyewitness to widespread looting and corporate bribery in the obscure former Soviet republic of Kyrgyzstan. He even served as a bag man at times, was kidnapped and became mixed up with the Italian mob. Tangled though his story may be, this seemingly dream informant could be the U.S.’s best hope for shedding light in a region where opacity and secrecy in government financial affairs are the norm. “He’s a guy who seems to have landed in the right place at the right time” to become enmeshed in the regime’s affairs, said Alexander Cooley, a Barnard College political science professor who has studied the central Asian country. Gourevitch has volunteered his story to help a U.S. Justice Department team that tracks down and returns stolen money to poor countries. In May 2015, lawyers for the Justice Department, the FBI and Kyrgyzstan spent 14 hours over two days grilling Gourevitch in a conference room at the Alabama prison. Bloomberg News reviewed a copy of a transcript of the questioning. After showing little sign of progress for at least two years, the Justice Department’s Kleptocracy Asset Recovery Initiative is moving forward with its probe to locate Kyrgyzstan assets, according to a person familiar with the matter. But it’s unclear how much, if at all, prosecutors will use Gourevitch’s information in their efforts, (via Bloomberg).


A new database by Texas Tribune and Reveal News compiles 140 corruption cases at U.S. Customs and Border Protection, many of which involved bribes and the smuggling of immigrants. Of the 140 cases, 30 were identified as from California, and 19 were from San Diego. Here is an example of what was found in the database: In 2006, Border Patrol Agent Oscar Ortiz admitted to a smuggling scheme. He, along with agent Eric Balderas, transported undocumented immigrants illegally, (via the San Diego Tribune).


The OCC is focusing on credit risk and strategic risk as the top risk priorities in its supervision of community and midsize banks, according to the agency’s Semiannual Risk Perspective report released today. For larger banks, compliance and operational risks remain dominant concerns, the agency added. For larger banks, the OCC highlighted operational and cybersecurity risks from their large and complex operations, as well as the ongoing challenge of integrating new rules — such as the Military Lending Act amendments taking effect in October — into their compliance management systems. Other top operational and compliance priorities for the next year include Bank Secrecy Act compliance, third-party risk management and cybersecurity, the agency added, (via the ABA Banking Journal