By Sven Stumbauer, managing director and anti-money laundering and sanctions practice leader, Grant Thornton
Pillar Two: Curbing illicit finance
As stated in the strategy, the U.S. “bears particular responsibility to address [its] own regulatory deficiencies, including in [its] AML regime, in order to strengthen global efforts to limit the proceeds of corruption and other illicit financial activity”. The U.S. also plans on “addressing deficiencies in the U.S. anti-money laundering regime, by effectively collecting beneficial ownership information on those who control anonymous shell companies, and by increasing transparency in real estate transactions”.
Pillar Three: Holding corrupt actors accountable
Pillar Three describes the use of increased enforcement as part of the overall strategy, most notably by:
Continuing to enforce foreign bribery cases through the Foreign Corrupt Practices Act (FCPA), money-laundering charges and forfeitures for promoting corrupt schemes and laundering corruption proceeds as appropriate.
Establishing a pilot Kleptocracy Asset Recovery Rewards Program that will enhance the U.S. Government’s ability to identify and recover stolen assets linked to foreign-government corruption held at US financial institutions; and
Working with the private sector to improve the international business climate by encouraging the adoption and enforcement of anti-corruption compliance programs by US and international companies.
National priorities that cover (almost) everything
In May 2022, the Treasury released its 2022 Strategy for Combatting Terrorist and Other Illicit Financing3 (2022 Strategy). The proposed 2022 Strategy includes four goals to address the key risks identified by the 2022 National Money Laundering, Terrorist Financing, and Proliferation Financing Risk Assessments.4 Those goals are as follows:
Increasing transparency and closing legal and regulatory gaps in the U.S. Anti-Money Laundering/Combating the Financing of Terrorism (CFT) framework exploited by bad actors;
Making the AML/CFT regulatory framework for financial institutions more effective and efficient;
Enhancing operational effectiveness in combating illicit finance; and
Utilizing technological innovation to combat illicit financial risks.
According to the Treasury’s press release, the 2022 Strategy also highlights specific threats that should assist financial institutions “in assessing the illicit finance risk exposure of their businesses.”
The eight key threats specified in the 2022 Strategy are:
Professional money laundering
Human trafficking and human smuggling
Foreign and domestic terrorist financing
The financing of weapons of mass destruction
The overall message seems to be that financial institutions should look at financial crime holistically rather than drawing a distinction between fraud and money laundering.
Weaponizing the financial system: sanctions against Russia and Belarus
Since the geopolitical events of February 2022, the US and other jurisdictions have issued a plethora of sanctions against Russia and Belarus. Shortly after imposing sanctions, FinCEN issued an alert5 warning financial institutions about the risks of potential attempts to evade sanctions. FinCEN highlighted the following red flags:
“Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds or (iii) countries involved particularly sanctioned jurisdictions.
Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration.
Use of third parties to shield the identity of sanctioned persons and/or Politically Exposed Persons (PEPs) seeking to hide the origin or ownership of funds, for example, to hide the purchase or sale of real estate.
Accounts in jurisdictions or with institutions that are experiencing a sudden rise in value being transferred to their respective areas or institutions, without a clear economic or business rationale.
Jurisdictions previously associated with Russian financial flows that are identified as having a notable recent increase in new company formations.
Newly established accounts that attempt to send or receive funds from a sanctioned institution or an institution removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Non-routine foreign-exchange transactions that may indirectly involve sanctioned Russian financial institutions, including transactions that are inconsistent with activity over the prior 12 months. For example, the Central Bank of the Russian Federation may seek to use import or export companies to engage in foreign exchange transactions on its behalf and to obfuscate its involvement.”
While the red flags identified by FinCEN should seem familiar to most financial institutions, they should also motivate financial firms to take a hard look at their compliance efforts. An added wrinkle of the sanctions imposed against Russia and Belarus is the speed at which they have been implemented as well as their complexity. The nuance of some sanctions might lead some financial institutions to excessive de-risking or declining transactions, despite these transactions being potentially permissible.
Things to consider now
Given the backdrop of various legislative initiatives and strategies, coupled with the myriad of various new sanctions regimes being imposed across the globe, financial institutions should consider taking a hard look at their overall financial crime framework and forward-looking strategy and consider focusing on the following topics and questions:
Risk appetite: Given the changing regulatory landscape, has our overall risk appetite changed? Are we still operating within our risk-tolerance levels?
Risk assessment: Is our risk assessment dynamic enough to account for all legislative changes and strategies? Have we recently conducted a “true up” exercise?
Correspondent banking/agent relationships: In line with our overall risk assessment, do we have a good command of the AML, sanctions and corruption risks posed by our counterparties? Do our due-diligence efforts reflect these new realities?
Customer due diligence: Are we confident that our due-diligence efforts are sufficiently robust to reflect the true beneficial ownership/control persons, as well as any potentially related parties?
Monitoring systems: Regarding both AML and sanctions, are we confident that our detection scenarios address the new realities and potential changes in customer behaviors?
While it is almost impossible to completely future-proof any financial institution against all aspects of financial crime, focusing efforts on the above key areas enables financial institutions to adapt more rapidly to changes and challenges—those we see coming and those we don’t.
Hear more from Sven Stumbauer at the Fraud & Forensic Conference on Dec. 20! Register here.