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Kleptocracy & Foreign Public Corruption: New FinCEN Red Flags

Terri Luttrell, CAMS-Audit
April 26, 2022
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FinCEN's Tips for Detecting Kleptocracy and Associated Money-Laundering

FinCEN recently issued an advisory offering red flags for financial institutions to heighten awareness of kleptocracy and corruption, given global events.

You might also like this webinar, "Russian Sanctions: Impact, Implications, and Best Practices."

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New Risks to Institutions
Russia-Ukraine heightens kleptocracy concerns

The U.S. financial system has long been a desired destination for illicit funds linked to senior foreign political figures and kleptocracy, defined as a state of unrestrained political corruption. The Financial Crimes Enforcement Network (FinCEN) has profiled this global issue by naming corruption one of the eight national security priorities.

With heightened concern caused by the Russian invasion of Ukraine, financial institutions should understand how to identify corrupt activity and associated money laundering that may be flowing through the U.S. financial system. Kleptocrats steal the public’s wealth for personal gain and use their positions of power and access to state-owned resources for their benefit. Like other criminal actors, corrupt public officials launder the proceeds of their corruption through various means.

On April 14, 2022, FinCEN published an advisory urging financial institutions to remain diligent in identifying and reporting the proceeds of corruption, particularly by way of:

  • Bribery
  • Embezzlement
  • Extortion
  • Misappropriation of public assets
  • Shell companies and offshore financial accounts
  • Purchase of real estate, luxury goods, and other high-value assets
Anti-corruption Efforts
Kleptocracy risk is to FIs of all sizes

Although the current situation in Russia has increased the urgency of identifying illicit funds from kleptocracies, the U.S. government has stressed the seriousness of this crime for decades. In the 1970s, the U.S. Securities and Exchange Commission launched investigations into political corruption and started legislative efforts to thwart such acts. The U.S. The Foreign Corrupt Practices Act (FCPA) was passed in 1977 to include an anti-bribery provision to prevent unscrupulous foreign business dealings.

Then the unthinkable happened: the Sept. 11, 2001, terrorist attacks. The money that financed those attacks was tied to funds from foreign businesses and individuals. This discovery led law enforcement and financial institutions to take a stronger stance on political corruption.

In 2004, the infamous Riggs Bank (Riggs) case brought political corruption to the top of compliance officers’ lists of reasons not to sleep at night. The Office of the Comptroller of the Currency (OCC) and FinCEN assessed a $25 million penalty for money laundering violations relating to Riggs’ omission in reporting suspicious activity. The bank held several foreign private banking customers and embassy accounts, and funds flowing through Riggs were tied to financing the Sept. 11 terror attacks. The $25 million assessment was the largest imposed by regulators at that time. Riggs Bank never recovered from the financial and reputational damage and was acquired shortly after, in 2005, leading to the nationwide de-risking of foreign embassy accounts.

While political corruption is of primary concern globally, many anti-money laundering (AML) professionals within the U.S. have not historically seen this as a serious risk to their financial institutions, especially at the community financial institution level. However, the risk tied to political corruption should concern institutions, regardless of size and geographic location. As a national priority, corruption must be added to each institution’s risk assessment.

Given the current global climate, foreign corruption is as significant a risk to the U.S. financial system and national security as it was in 2004. Regulatory authorities and law enforcement officials have frequently cautioned financial institutions about this global concern, and it should continue to be on the minds of AML and fraud professionals. Many instances of political corruption involving terror financing should make AML professionals that much more diligent.

 

Russian kleptocracy

The U.S. Helsinki Commission Report emphasizes that corruption is a defining characteristic of the Vladimir Putin regime in Russia. With a top-down structure of kleptocracy, Putin and his associates often pursue the government’s illicit interests. The Panama Papers and Pandora Papers traced billions of illegal dollars associated with Putin through Sergei Roldugin, one of Putin’s primary caretakers of his hidden assets.

The political and business success of the top echelon of Russian society depends on one’s relationship with President Putin. The Helsinki Commission Report states that many former insiders who fell into isolation from Putin faced tragic death, while business thrives for those who remain loyal. In addition to kleptocracy, Russia has long been suspected of terrorism ties through its close allies with Iran and Syria. 

Stay up to date with developments on detecting public corruption.

U.S. federal legislation was introduced in 2018 to designate Russia as a state sponsor of terrorism.The legislation was dropped due to lack of support and the belief that an official designation would be counterproductive, even though Russia has killed dissidents in multiple countries. 

Venezuelan kleptocracy

Venezuela, one of Russia’s allies, is another hotbed for political corruption. Among numerous economic and political issues the country faces, organized crime and narcotics traffickers are allegedly entwined with kleptocrats, or corrupt political officials, including corruption within government contracts. Given that it’s only a short flight across the Caribbean that separates the borders, the U.S. could easily consider Venezuela its neighbor.

Political corruption is often tied to a country’s biggest asset. In the case of Venezuela, it boasts the largest proven oil reserve in the world. The vast dependency on the oil industry (95% of its export revenue) has increased political corruption through government mismanagement of the petroleum industry. In addition, Venezuela is known to have funded terrorist organizations such as the Revolutionary Armed Forces of Colombia (FARC) and Hezbollah. InSight Crime, a nonprofit investigative organization specializing in Latin American organized crime, states that kleptocracy is one of the main reasons for the near economic collapse that the country is now experiencing. The U.S. and Canada have imposed economic sanctions on Venezuela. It is critical that U.S. financial institutions carefully monitor the flow of funds in and out of any country with known political corruption or ties to terror financing.

Both Russia and Venezuela have reported ties to terrorist organizations, with funds flowing globally from illicit means to help fund their purchase of arms and terror activities. Even at the community level, U.S. financial institutions must remain diligent in ensuring another Riggs case does not occur.

Identifying Kleptocrats
Red flags of kleptocracy and public corruption

FinCEN understands the increasing risk of political corruption in the financial system. Kenneth A. Blanco, then Director of FinCEN, stated in 2018 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’s latest advisory urges financial institutions to focus efforts on detecting the proceeds of foreign public corruption, a U.S. government priority that reinforces Blanco’s pledge.

The current FinCEN advisory lists certain red flags of kleptocracy and foreign corruption that financial institutions should watch for:

  • Transactions involving long-term government contracts consistently awarded to the same legal entity or entities that share similar beneficial ownership structures
  • Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions
  • Transactions involving official embassy or foreign government business conducted through personal accounts
  • Transactions involving public officials related to high-value assets, such as real estate or other luxury goods, that are not commensurate with the reported source of wealth for the public official
  • Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.
  • Use of third parties to shield the identity of foreign public officials seeking to hide the origin or ownership of funds, such as the purchase of real estate.
  • Documents corroborating transactions involving government contracts (e.g., invoices) that include charges at substantially higher prices than market rates, overly simple documentation, or that lack traditional details.
  • Transactions involving payments that do not match the total amounts set out in the underlying documentation or that involve vague payment details or the use of old or fraudulent documentation to justify the transfer of funds
  • Transactions involving fictitious email addresses and false invoices to justify payments, particularly for international transactions
  • Assets held in the name of intermediate legal entities whose beneficial owner or owners are tied to a kleptocrat or their family member

 

For AML Professionals
More tips for detecting kleptocracy and corruption

Other than familiarizing oneself with the risk and following FinCEN guidance, what more can AML professionals do to monitor corrupt foreign funds within their financial institutions?

  • At onboarding, ensure that the institution’s customer due diligence (CDD) program asks any foreign individual (or owners/controllers of entities) if the customer is a Politically Exposed Person (PEP) or a Senior Foreign Political Figure. They should be flagged in the monitoring system for enhanced due diligence.
  • Consider flagging and monitoring domestic PEPs. Remember, a PEP can be anyone of influence or power; it can even be the local sheriff. Be aware if an institution’s specific geographic location has domestic areas that should be monitored.
  • Know an account’s beneficial owners and watch for the use of third parties when their use is not usual business practice or when it may be to shield the identity of a PEP.
  • Scan open-source databases for possible ties to PEPs or negative news to verify what the customer is stating at onboarding. Continue these searches when conducting ongoing due diligence.
  • Closely monitor all funds coming from areas known for corruption. AML professionals must know their customers and the source of funds for all foreign transactions.
  • Perform enhanced due diligence on any client with foreign government contracts.
  • Scrutinize transactions to purchase real estate involving foreign government officials or their family members or close associates.
  • Familiarize oneself with the FATF Recommendation 12 concerning preventing the misuse of the financial institution by PEPs.
  • Ensure that private banking units, trade finance departments, sanctions analysts, and legal departments are all aware of the risks of foreign political corruption.

 

SAR filing instructions for kleptocracy and public corruption

If an institution accepts clients with international transaction activity, remember this critical risk, and keep the institution clear of involvement with political corruption and possible terror financing. The FinCEN advisory gives specific SAR filing instructions for corruption-related suspicious activity:

  • Add the keyword phrase “CORRUPTION FIN-2022-A001” in SAR field 2 (Filing Institution Note to FinCEN) and the narrative section of the SAR
  • Financial institutions wanting to expedite their corruption-related SAR should call the Toll-Free Hotline at (866) 556-3974

Financial institutions are strongly encouraged by FinCEN to share information under the safe harbor authorized by section 314(b) of the USA PATRIOT Act. The FinCEN advisory reminds institutions that information sharing is critical to identifying, reporting, and preventing evolving sanctions evasion, ransomware/cyberattacks, and the laundering of the proceeds of corruption, among other illicit activities.

Learn how to keep your institution free from funds tied to corruption and terror financing. Watch the webinar, "Kleptocracy in Your Institution."

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About the Author

Terri Luttrell, CAMS-Audit

Compliance and Engagement Director
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.

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