News

2017 saw a number of significant events, including the inauguration of Donald Trump, defeat of the Islamic State, group claims of foreign interference in  elections and a string of deadly natural disasters, not to mention the growing threat of open conflict with North Korea.

But 2017 may be remembered as much for hyper-partisan reporting, the ascension of hashtags to the Oval Office, the entrance of terms like “fake news” and “Pizzagate” into mainstream parlance, and lingering questions over the extent to which Facebook and Twitter vet their content as it will for the social and political turmoil those platforms so often reflect.

The national confusion over what does and does not constitute “fake news” extended to the financial services industry at times but was mostly drowned out by the sheer volume of actual negative news, which, fueled by deferred prosecutions, enforcement actions and new leaks of data from law firms and corporate registers, continued unabated in 2017. More

The deluge of negative news overlapped with dramatic changes in U.S. sanctions against a range of countries and individuals in 2017, as well as with efforts by banks to retool their compliance programs in line with a major regulation that takes effect next year.

The year of the shell company

In November, the International Consortium of Investigative Journalists and Suddeutsche Zeitung disclosed that they had obtained yet another batch of client records from offshore law firms, further exposing how wealthy individuals and multinational companies avoid and evade taxes and potentially engage in other financial crimes.

The leaked documents, now called the “Paradise Papers,” map out the networks of legal entities that politicians and leaders throughout the world, including Queen Elizabeth II, U.S. Secretary of State Rex Tillerson and Commerce Secretary Wilbur Ross, use to mask their finances, and have already generated civil and criminal investigations in several countries. More

Pakistan’s Supreme Court ordered Prime Minister Nawaz Sharif to step down in August after the Panama Papers, a similar cache of documents disclosed last year by the same news outlets, indicated that three of his children used offshore firms to acquire millions of dollars-worth of high-end property in the United Kingdom with suspect funds.­ More

Both releases illustrate what U.S. law enforcement has warned the financial services industry about for several years, John Tobon, deputy special agent in charge with Homeland Security Investigations in Miami, said.

“They shift the focus away from commercial banking, where I think a lot of the anti-money laundering prevention has been set up, and shine a light on private banking and complex financial products with high net-worth individuals,” Tobon said. “A lot of the negative press and pressure on political figures stems from their connection to one of these two leaks.”

More than 50 Italian financial institutions processed tens of millions of dollars on behalf of Russian politicians, oligarchs and criminals accused of misappropriating and laundering nearly $21 billion in state funds from 2011 to 2014 as part of the “Russian Laundromat” scheme disclosed by the Organized Crime and Corruption Reporting Project, or OCCRP, and Novaya Gazeta, in February.

The scheme involved more than 700 shell companies and 100 bank accounts in Russia and Eastern Europe. Italian banks featured prominently, though China was the top destination for illicit funds. More and More

In November, the OCCRP and other news outlets said they had obtained documents showing that four U.K. shell companies helped move $3 billion of suspicious funds out of Azerbaijan in at least 16,000 separate transactions involving several western financial institutions, including Danske Bank.

Amid allegations of financial impropriety and collusion with Russia, several European lenders began screening clients and accounts throughout their global operations for any links with U.S. officials and associates of President Donald Trump within weeks of his inauguration. More

The reviews preceded requests by U.S. lawmakers for the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, to provide any records outlining Trump’s commercial ties to Deutsche Bank and allegedly to Russia, as well as any links Trump’s associates may have with Russian officials. More

In October, federal prosecutors charged Paul Manafort, former chief of Trump’s election campaign, with money laundering and other violations stemming from his alleged failure to disclose several years’ worth of consulting and lobbying work for now-deposed Ukrainian President Victor Yanukovych and his pro-Russia political party.

The indictment against Manafort alleges that he and his business partner Richard Gates used shell companies and financial institutions in Cyprus and other offshore locales to avoid taxes on millions of dollars of income from his work in Ukraine. More

Eye of the storm?

Many, if not most, compliance officers in the United States spent significant resources in 2017 implementing procedures to comply with FinCEN’s pending due-diligence rule, a measure some claim represents the most significant expansion of AML regulations since adoption of the Patriot Act in 2001. More

First proposed in 2012 and finalized last year, the rule will require lenders to identify individuals who own or control 25 percent or more of legal entities seeking to open accounts from May 2018 onward.

Legal-entity accounts opened before May 2018 are exempted from the rule’s beneficial ownership requirements absent a “significant and unexplained change in customer activity” or other triggering event.

Some financial institutions plan to identify high-risk corporate beneficiaries who fall below the 25 percent threshold, which federal regulators recently characterized as a “starting point” for compliance with the rule. More and More

Congress should assist compliance by requiring the identification of beneficial owners at the time of incorporation, a panel of bankers, attorneys, former federal prosecutors and Treasury officials recommended in a report by the Clearing House in February. More

Subsequent bills incorporated many of the panel’s eight recommendations for improving the U.S. AML regime, though their ultimate adoption remains uncertain.

In June, Rep. Carolyn Maloney (D-NY) pitched legislation that would reassign the collection of data on the beneficial owners of legal entities from banks to FinCEN.

Rep. Robert Pittenger (R-NC) proposed a month later to expand the scope of financial-intelligence sharing under the Patriot Act from money laundering and terrorist financing to other financial crimes.

Like Pittenger’s proposal, legislation introduced in November by Reps. Ed Royce (R-CA) and Vicente Gonzalez (D-TX) also mandates broader exchanges of financial intelligence. A second bill pitched last month incorporates variations of all three proposals and would raise the threshold at which financial institutions must file currency transaction reports. More

A bill introduced by Sen. Chuck Grassley (R-IA) in May would, among other legal changes, make tax evasion a predicate crime to money laundering and allow federal judges to mandate temporary asset freezes to bolster investigations into allegedly undeclared assets. More and More

Industry proposals and the legislation that followed indicate a “growing consensus” that U.S. AML regulations and the Bank Secrecy Act should be updated and streamlined, Rob Rowe, vice president of the American Bankers Association, said.

“The world of banking and the world in general has changed drastically,” Rowe said. “The bills being introduced, we see them again and again, but we’re seeing more of them and it’s not like one topic and one issue, it’s broader. There seems to be momentum picking up in Congress.”

FinCEN may not end up “reclaiming” its sole authority to supervise banks that present national-security implications as the Clearing House panel recommended, but lawmakers did authorize the bureau to impose AML requirements on non-bank businesses via geographical targeting orders, or GTOs, at lower thresholds and on a broader range of transactions. More

Enforcement actions and prosecutions

Financial institutions in 2017 did not see a huge quantity of marquee legal settlements and enforcement actions, though the year began dramatically enough.

On Jan. 19, the Justice Department disclosed that Western Union had agreed to forfeit $586 million for failing to maintain an effective AML program, and aiding and abetting wire fraud, among other criminal violations. Federal prosecutors said the company processed hundreds of millions of dollars of structured payments to human smugglers in China.

Later that month, the New York State Department of Financial Services and the U.K. Financial Conduct Authority, or FCA, fined Deutsche Bank hundreds of millions of dollars after discovering that “mirror trades” processed by the lender’s branches in Moscow, London and New York helped move $10 billion of suspicious funds out of Russia from 2011 to 2015. More

“We are well aware that securities can be used to launder money and we have brought enforcement actions … but recent cases, such as the Deutsche Bank mirror-trades case, have brought to light more complex uses of se­­curities to move funds,” Susan Axelrod, executive vice president of regulatory operations with the U.S. Financial Industry Regulatory Authority, said.

The Justice Department’s investigation of the mirror-trades scheme is ongoing.

Aside from the £163 million penalty assessed by the FCA against Deutsche Bank in January, AML-related penalties and prosecutions in the United Kingdom were scant in 2017.

“What has perhaps been surprising is there have not been as many SFO [Serious Fraud Office] actions such as deferred prosecution agreements in the past 12 months as some may have predicted, and probably the same would be said of money laundering enforcement in terms of FCA actions,” said Michael Lyons, an attorney with Clifford Chance in London.

In November, HSBC’s affiliate in Switzerland agreed to pay €300 million after French prosecutors charged the bank with money laundering and other violations linked to its offshore practices. The settlement marks the first of its kind in France. More

The vast majority of the European Union’s current 28 member states failed to establish beneficial-ownership databases by June as required by the bloc’s Fourth Anti-Money Laundering Directive, or 4AMLD, which was finalized in 2015. More

EU officials subsequently launched “infringement proceedings” against at least 15 countries, including Ireland, Greece, Croatia, Cyprus and the Netherlands, for failing to implement the directive by deadline. More

The United Kingdom last year became the first country in the world to establish an open register of beneficial-ownership information, but U.K. officials in April decided against requiring the country’s overseas territories and jurisdictions to set up similar databases. More

“A challenge facing the financial sector to comply with 4AMLD is identifying the ultimate beneficial owners of legal entities,” Simon Riondet, head of financial intelligence at Europol, said. “For example, it’s quite complicated to identify the hidden owners of trusts.”

European officials and lawmakers agreed this month to mandate more due diligence over transactions with high-risk nations and impose AML rules on cryptocurrency exchanges as part of the Fifth AML Directive, but did not approve a proposal for public databases listing the beneficial owners of business-oriented trusts. More

British officials transposed 4AMLD into domestic law and also plan to implement 5AMLD despite the United Kingdom’s scheduled exit from the bloc in March 2019. More

A number of U.K. financial institutions have struggled to implement the Criminal Finances Act, which took effect in April, and its requirement to prevent tax evasion, Matthew Russell, a director in PwC’s forensic services practice in London, said.

“Is it a tax, compliance or financial crime issue? They have found it hard to decide who is responsible for it,” he said. “In that sense, the new facilitation of tax evasion offense has done a lot to help organizations think more holistically about financial crime risk, partly because it covers aspects of risks with customers, third parties and their own employees.”

Sanctions here, sanctions there

The quantity and complexity of U.S. sanctions grew again in 2017, with new restrictions levied against entities, entrepreneurs and officials in North Korea, Myanmar, Russia, Venezuela and Iran, among other jurisdictions.

The federal trial in Manhattan of three executives of Turkish state-owned bank Turkiye Halk Bankasi, or Halkbank, and a former economic minister in President Recep Tayyip Erdogan’s cabinet, outlined the elaborate steps with which U.S. sanctions may have been circumvented.

Federal prosecutors initially charged 34-year-old Turkish-Iranian gold trader Reza Zarrab last year with using exchange houses and front companies in Iran, Turkey and the United Arab Emirates to fool U.S. banks into processing transactions for blacklisted Iranians. More

Zarrab, however, eventually cut a deal and agreed to testify against Mehmet Hakan Atilla, a former deputy chief executive of Halkbank charged with fraud, conspiracy to launder money and violations of U.S. sanctions against Iran. More

Several European banks resumed operations with Iran as authorized by the Joint Comprehensive Plan of Action, or JCPOA, but a number of factors, including questions over Trump’s commitment to the nuclear accord, informed a general reluctance to process transactions for U.S. overseas subsidiaries seeking new commerce with the Islamic Republic. More

U.S. legislation approved in July required Iran’s Revolutionary Guard Corps, or IRGC, blacklisted for its support of terrorists and insurgents. The designation allows Treasury officials to review messages attached to payments involving suspected IRGC entities through the Society for Worldwide Interbank Financial Telecommunication, or SWIFT.

The Countering America’s Adversaries Through Sanctions Act mandated additional designations against entities in Iran, Russia and North Korea suspected of human rights abuses, corruption, proliferation of weapons of mass destruction and other crimes. More

“The sanctions environment has undergone whiplash this year with all of the changes from the new administration, from North Korea to Venezuela,” said Dan Tannebaum, a partner in PwC’s New York financial crime unit who specializes in sanctions and AML compliance.

The Office of the Comptroller of the Currency and federal banking agencies have also begun “digging deeper” into sanctions compliance—responsibilities typically overseen by the Office of Foreign Assets Control and DFS, Tannebaum said.

In July, FinCEN proposed to designate China’s Bank of Dandong as a “primary money laundering concern” under the Patriot Act. Two months later, U.S. lawmakers circulated legislation calling for penalties against foreign banks caught engaging in business with North Korea whether or not the transfers involve U.S. banks. More and More

The Treasury Department blacklisted Venezuela’s President Nicolas Maduro for undermining democratic processes and Vice President Tareck El Aissami for trafficking narcotics, and barred U.S. entities from trading in certain types of Venezuelan debt. FinCEN then issued an advisory describing the techniques Venezuelan officials sometimes allegedly use to move illicit funds. More

The debt-related sanctions against Venezuela compelled some U.S. financial institutions to refuse processing any transactions linked to the nation, as they did after the promulgation of similar debt-related sanctions against Russia in response to that country’s annexation of Crimea in 2014. More

In June, the White House began reimposing sanctions against Cuba that had been partially dismantled under former President Barack Obama, blacklisting dozens of businesses and authorizing restrictions against more Cuban officials. More

Old schemes, new currencies

Financial institutions remained wary of maintaining accounts for digital currency exchanges despite the impressive rise in value and acceptance of bitcoin, which topped $1,000 for the first time on the first day of trading in 2017 and exceeded $14,000 in value by December.

In July, FinCEN fined overseas bitcoin exchange BTC-e and its owner, Russian national Alexander Vinnik a combined $122 million for laundering hundreds of millions of dollars for cybercriminals.

The $12 million penalty against Vinnik represents the largest ever levied against an individual by the bureau, which fined MoneyGram’s former compliance officer, Thomas Haider, $250,000 in May. More

In an annual threat assessment published in October, U.S. investigators claimed that Mexican drug traffickers have partnered with digital currency brokers and counterfeit goods manufacturers in China to convert and move profits out of the United States. More

An old and proven system of laundering illicit cash, the black market peso exchange, also reached China, and saw a number of wealthy citizens manage to skirt capital flight controls by acquiring U.S. dollars from money brokers on behalf of Latin American drug traffickers. More

Digital currencies and the dark web have helped inform a noticeable drop in U.S. bulk-cash seizures in recent years, Mark Giuffre, an assistant special agent in charge with the Drug Enforcement Administration in Chicago said.

“I think if you look at some successes we’ve had, we and our partners have been able to indict money launderers, but there’s a new model and it’s been rapidly evolving,” Giuffre said.