Kleptocracy – What Does it Mean to Community Financial Institutions?

By: Terri Luttrell, CAMS-Audit

The term kleptocracy has been used in the financial crimes profession for years, but many AML professionals do not understand its meaning and therefore are not adequately monitoring for it within their BSA/AML program.

So, what is a kleptocrat?

A kleptocrat is a term associated with political corruption and is defined as a ruler who uses their power to steal their country’s resources. A kleptocracy is defined as a state of unrestrained political corruption. This global issue is peaking a renewed concern around the world, but is it important for United States financial institutions? What about our small to mid-sized community financial institutions?

Many community financial institutions believe that kleptocracy is not a risk for their institution’s profile as they conduct few foreign transactions, such as wires and ACHs. While it could be safe to assume a lower risk for kleptocrats hiding stolen assets in some institutions, addressing the risk and the mitigating factors should be part of your risk assessment and written BSA/AML Policy. Here are three things to consider surrounding kleptocracy and your BSA program.

1. Ask about whom your customers are doing business with as part of your onboarding and continuing customer due diligence.

Do you know your customer’s customers well enough to ensure corruption is not hiding within your financial institution? Bribery and illicit payoffs through government contracts have become common as indicated by FinCEN advisory FIN-2017-A006 concerning the widespread corruption in Venezuela, our near neighbor to the south.

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2. Document your understanding of kleptocracy as it relates to your institution’s risk profile.

For those community financial institutions that do not believe this is a significant risk to their BSA/AML program, documented mitigation may be as simple as imposing the following guidelines in their BSA policy and procedures:

  • Reference the institution’s compliance with the Foreign Corrupt Practices Act (FCPA) to include what mitigating factors were put in place. Examples could be:
    • AML monitoring software scenarios that detect the flow of funds from an international source, particularly involving areas of concern.
    • Know your customer and whom they do business with, especially if foreign governments are involved. Document extra due diligence procedures as necessary.
    • Beneficial owners must be known. Go below the required 25% ownership when something doesn’t feel right.
  • Reference the FinCEN Advisories on political corruption to show your knowledge and importance of the global issue- and your level of residual risk associated with the issue.
    • Procedurally, add the SAR narrative keyword requests referenced by FinCEN.

3. Scrutinize real estate purchases and know your geographic targeting orders (GTOs) imposed by FinCEN.

Kleptocracy isn’t limited to just wires and ACH transactions. Financial criminals are using less conspicuous methods to hide their illicit gains, such as big-ticket purchases including real estate. The GTOs have been renewed and expanded over the last few years so ensure your institution is aware of the areas more susceptible to this.

The United States has long been a desired destination for kleptocrats to hide stolen assets from foreign governments due to the strength of the dollar and the financial system. FinCEN Director Kenneth A. Blanco stated that “…the United States will not be a safe haven for corrupt politicians seeking to hide and profit from their ill-gotten gains or money they have stolen from their people while the citizens of their countries suffer.” FinCEN has issued several specific advisories since 2008 concerning political corruption, the latest in 2018 advising that corrupt senior foreign political figures and human rights abuses are directly linked in many cases. The U.S. Department of the Treasury is committed to protecting both the U.S. and international financial systems for those who facilitate such activities.

Community financial Institutions cannot become complacent in the areas traditionally thought of as the “big bank” problems. Bad actors understand that the large institutions have very sophisticated tools in their BSA programs to catch illicit activity on a large scale. These same criminal transactions, some as serious as kleptocracy and human rights violations, terror financing, and human trafficking, are now being detected at the community financial institution level. Have written policies, procedures, and practices in place to continue to monitor for these serious offenses, even if there is a lower risk within your financial institution.

About the Author

Terri Luttrell, CAMS-Audit

Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size. She has successfully worked with institutions in developing BSA/OFAC programs, optimizing various automated solutions, and streamlining processes while ensuring all regulatory requirements are met. As the Senior Manager of Strategy and Engagement at Abrigo, Terri provides insights that contribute and support long-term banking strategies based on analysis of market and industry trends, competitor developments, and financial and regulatory technology changes. She is an audit-certified anti-money laundering specialist and a board member of the Central Texas chapter of the Association of Certified Anti-Money Laundering Specialists (ACAMS). Terri earned her bachelor’s degree in business administration, specializing in business and finance, from the University of North Texas.

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