QUESTION
We convened a staff meeting of compliance and legal personnel to discuss how our anti-money laundering program responds adequately to foreign corruption. Our bank and its nonbank mortgage division are involved in loans to foreign nationals, borrowers who are American citizens with foreign bank accounts and properties, and we also have borrowers, both foreign nationals and American citizens, whose assets are situated in kleptocratic regimes.
Our employee training includes a section on fraud management, including procedures for identifying assets corrupted by kleptocracy. However, we need to outline the types and means by which kleptocracies engage in public corruption. Recently, we had to decide whether to approve a large loan to a Russian national. We denied it to comply with the sanctions mandate.
We have completed your AML Test, which found some important weaknesses in our AML program. The recommendations were implemented.
Due to the sanctions, we want to outline the specific ways that foreign public corruption impacts our AML program. Please help us to answer two important questions:
1. What types of kleptocratic crimes can show up in AML compliance?
2. What are some Red Flags involving kleptocratically corrupted assets?
ANSWER
The Financial Crimes Enforcement Network (FinCEN) has issued an advisory on kleptocracy and foreign public corruption (“Advisory”).[i] It urges financial institutions to focus their efforts on detecting the proceeds of foreign public corruption. This implementation is a priority for the U.S. government as it continues to implement the U.S. Strategy on Countering Corruption.[ii] The Advisory provides typologies and potential indicators of kleptocracy and other forms of foreign public corruption, namely bribery, embezzlement, extortion, and the misappropriation of public assets.
Last year, President Biden established the fight against corruption as a core national security interest.[iii] The proceeds of foreign public corruption travel across national borders and can affect economies and political systems far from the origin of the proceeds.
To advance their strategic, financial, and personal goals, kleptocratic regimes and corrupt public officials may engage in bribery, embezzlement, extortion, or the misappropriation of public assets, among other forms of corrupt behavior. They may exploit the U.S. and international financial systems to launder illicit gains, including through shell companies, offshore financial centers, and professional service providers who enable the movement and laundering of illegal wealth, including in the United States and other rule-of-law-based democracies. These practices harm the competitive landscape of financial markets and often have long-term corrosive effects on good governance, democratic institutions, and human rights standards.
As but one instance, we have all become aware of the Russian kleptocracy. Studies, investigatory books, and considerable reporting have shown that Russian kleptocrats and other corrupt public officials steal the public’s wealth for personal gain and use their positions of power and access to state-owned resources for their personal benefit. Like other criminal actors, corrupt public officials launder the proceeds of their corruption through various means, including funneling money through shell companies or purchasing various high-end assets, such as real estate, yachts, private jets, and high-value art.
I mention Russia because it is of particular concern as a kleptocracy since it is founded on the nexus between corruption, money laundering, malign influence and armed interventions abroad, and sanctions evasion. The latter comes up continually in anti-money laundering compliance in Russia and other countries where sanctions apply. Corruption is widespread throughout the Russian government and manifests itself as bribery of officials, misuse of budgetary resources, theft of government property, kickbacks in the procurement process, extortion, and improper use of official positions to secure personal profits.
Russia’s further invasion of Ukraine highlights foreign public corruption perpetrated by kleptocratic regimes like that of Russian President Vladimir Putin. Russia’s actions in Ukraine are supported and enabled by Russia’s elites and oligarchs, who control a majority of Russia’s economic interests. These individuals have a mutually beneficial relationship with President Putin that allows them to misappropriate assets from the Russian people while helping President Putin maintain his tight control on power. Oligarchs are believed to be directly financing off-budget projects that include political, malign, influence operations, and armed interventions abroad.
The U.S. government has imposed sanctions on many of these individuals and the businesses and state-owned entities they control as part of U.S. efforts to hold President Putin and his supporters accountable for Russia’s invasion of Ukraine and restrict their access to assets to finance Russia’s destabilizing activities globally.
Guided by some aspects of the Advisory, I will briefly outline the typologies and how money laundering is usually accomplished. Afterward, I will list ten Red Flags associated with kleptocracy and foreign public corruption.
Typologies
Wealth Extraction
According to the Advisory, foreign public corruption can take many forms, and this corruption can occur at every level of government. For instance, in Russia, “President Putin has allowed the resources of the Russian people to be siphoned off by oligarchs and elites, who amassed their fortunes through their personal connections to Putin and the abuse of state-owned entities and assets.” This activity is not unique to Russia. Kleptocratic activities throughout the world are often associated with other criminal behavior.
Bribery and Extortion
Bribery schemes often involve payments to foreign government officials by persons and entities to obtain or retain business or other benefits. These schemes, which generally benefit both parties involved, may be employed to influence political outcomes, secure lucrative contracts with governments or state-owned enterprises, gain access to natural resources or obtain fraudulent documents such as passports or visas, among other purposes.
In certain situations, however, parties can be coerced and extorted by corrupt public officials to pay bribes to gain access to or continue their operations in the country of concern. This is a form of a protection racket. As you consider AML compliance requirements, be sure that your procedures recognize that, according to the Advisory, “bribes and extortion payments can be made through third-party facilitators, as well as through legal entities that are controlled by family members and close associates, to conceal the ultimate beneficiary of the payment.” [Emphasis added.]In many cases, payments are laundered through a network of shell companies, offshore financial centers, or professional service providers. Financial accounts into or from which bribes are deposited or withdrawn are sometimes established outside a public official’s country of residence. The purpose is to evade detection and financial institutions’ sanctions screening and anti-money laundering (viz., countering the financing of terrorism) controls.
Embezzlement or Misappropriation or of Public Assets
Broadly generalized from a legal perspective, embezzlement is the fraudulent taking of personal property by someone to whom it was entrusted. It is most often associated with the misappropriation of money. And embezzlement can occur regardless of whether the defendant keeps the personal property or transfers it to a third party.
In the context of public funds or resources, embezzlement or misappropriation of public assets encompasses the theft, diversion, or misuse of public funds or resources for personal benefit or enrichment. Corrupted assets may, among other things, involve government funds, services, contracts, or publicly owned natural resources. Public officials or their associates may exploit or deceive corporations, including financial institutions that seek to do business with the government, into redirecting government resources for their own profit. Embezzlement or misappropriation of public assets may also involve a bribery scheme.
Laundering Illicit Proceeds
Kleptocrats and other corrupt public officials typically use the same methods to launder their illicit gains as those used by other criminal actors, whether drug traffickers or transnational organized crime syndicates. To describe but a few, the following are salient; however, crooks of all stripes constantly come up with new ways to launder their illicit assets.
Shell Companies and Offshore Financial Accounts
Corrupt actors like to use shell companies to obscure the ownership and origin of illicit funds. They may also leverage their family members and close associates to create shell companies and open business or personal accounts on their behalf while retaining control of the accounts. Shell companies can be used to facilitate the payment of bribes and the illicit movement of funds stemming from the misuse of state assets and government contracts.
In addition, per the Advisory, these shell companies and offshore accounts are frequently established in foreign jurisdictions whose corporate formation regimes and financial sector offer limited transparency to law enforcement, regulators, or financial institutions. The funds are then integrated into the broader financial system through investments and acquisitions from these offshore financial centers.
Purchase of Real Estate, Luxury Goods, and Other High-Value Assets
The United States is one of several countries targeted for the integration of assets. The criminals, whether corrupt officials or others involved in bribery and other forms of corruption, purchase various U.S. assets, such as luxury real estate and hotels, private jets, artwork, and even motion picture companies, to launder the proceeds of their corruption. They use anonymous companies or straw purchasers to acquire high-value assets that maintain a relatively stable value.
Real estate often offers a vehicle for storing wealth or laundering illicit gains due to its high value, its potential for appreciation, and the potential use of layered and opaque transactions to obfuscate a property’s ultimate beneficial owner. According to the Advisory, the purchase of real estate in connection with criminal conduct also may include complicit real estate professionals and the use of legal entities and nominees to avoid detection.
Red Flags
FinCEN identifies the following financial red flag indicators[iv] to assist financial institutions in detecting, preventing, and reporting suspicious transactions associated with kleptocracy and foreign public corruption. It is not meant to be comprehensive. Your AML Program, testing, and training should encompass at least these Red Flags.
1. Transactions involving long-term government contracts consistently awarded, through an opaque selection process, to the same legal entity or entities that share similar beneficial ownership structures.
2. Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.
3. Transactions involving official embassy or foreign government business conducted through personal accounts.
4. 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 or that fall outside that individual’s normal pattern of activity or lifestyle.
5. Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.
6. Use of third parties to shield the identity of foreign public officials seeking to hide the origin or ownership of funds, for example, to hide the purchase or sale of real estate.
7. Documents corroborating transactions involving government contracts (i.e., invoices) that include charges at substantially higher prices than market rates or that include overly simple documentation or lack traditional details (i.e., valuations for goods and services).
8. 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.
9. Transactions involving fictitious email addresses and false invoices to justify payments, particularly for international transactions.
10. Assets held in the name of intermediate legal entities whose beneficial owner or owners are tied to a kleptocrat or their family member.
Chairman & Managing Director
____________________________
[i] Advisory on Kleptocracy and Foreign Public Corruption, FIN-2022-A001, April 14, 2022, Financial Crimes Enforcement Network
[ii] United States Strategy on Countering Corruption, December 2021, The White House
[iii] Idem
[iv] Op. cit. 1
