Head of Financial Crime, Livia Benisty shares her financial crime highlights from the week of June 24th, 2019.

Traveling Virtual Assets

FATF released its official guidance on the application of its recommendations to virtual assets.

At the private sector consultation in Vienna in May, participants raised concerns over FATF’s intention to apply wire transfer standards to crypto, specifically requiring exchanges to transmit originator and beneficiary information with a transaction. The guidance released last week confirms this requirement, known from FinCEN requirements as the ‘travel rule’.

Virtual assets are “subject to the same relevant FATF measures that apply to financial institutions”. The focus of the debate is the Interpretive Note to Recommendation 15 (INR. 15), paragraph 7(b) (details included for the inevitable moment this question appears on Who Wants to be a Millionaire).

The note includes the obligation to “obtain, hold and transmit required originator and beneficiary information”. This means originator’s name, ‘account number’ (e.g. virtual asset wallet), and physical address/identity number, as well as the beneficiary’s name and ‘account number’.

Reactions have focused on the difficulty in putting this requirement into practice given the pseudonymous nature of wallet addresses (interestingly a feature of Facebook’sLibra proposal released last week).

Some of the largest exchanges, including Coinbase, Circle, and Kraken are meeting in parallel with the G20 summit in Osaka this weekend (June 28 and 29) to discuss the proposal. The blockchain investigations firm Chainalysis has hired an ex-official from FinCEN to help clients comply. Some have argued that rather than drive transparency the rule could encourage services to go underground.

Meanwhile, responses to the UK Treasury’s consultation on the transposition of 5AMLD were sought up until the 10th June. The fifth directive is likely to be the last one the UK transposes as a member of the EU and how it is done could be indicative of the direction the UK government will go once able to exert full autonomy in this space. For interesting perspectives on the transposition, I recommend reading responses by David Carlisle at Elliptic and Denisse Rudich of Rudich Advisory.

It’s Cold Out in Jersey

Lloyds froze 8,000 accounts of offshore banking customers in Jersey when customers failed to provide identifying documents despite having been chased for three years. HSBC, Barclays and RBS in Jersey have also sent out letters to confirm identity apparently.

A couple of weeks ago the Financial Times reported that Deutsche Bank had warned almost 1,000 corporate clients that they would lose access to certain services due to missing documentation needed to verify identity.

The FTs article on Jersey mentions the fact that clients have been receiving requests from the bank for three years, but also that there is a particular push coming from an amendment to Jersey regulation implemented at the end of 2018. I would imagine a key driver is actually the reporting of issues faced by banks operating branches in the Baltics where billions of dollars flowed through non-resident accounts.

Also going on in the background is discussion around the lack of transparency in the Crown Dependencies. In March a bill requiring Jersey, Guernsey and the Isle of Man to introduce public share ownership records was pulled from the House of Commons due to likely defeat. However, last week the islands committed to increasing transparency and accessibility over ownership details to be consistent with 5AMLD.

On Deutsche, the article claims the “episode is symptomatic of the headaches stringent know-your-customer compliance rules can cause for banks, which often result in frustrating paperwork and strained relationships with even the most important clients”. I’ve heard this argument before.

Anyone that’s ever worked in compliance has heard this argument before.

Sometimes it’s true. In this case, however, it would appear to be beneficial ownership requirements causing the issue, which have not changed substantially in the EU or UK in the last few years. Given the issues Deutsche has been having recently, this might be one occasion where the rules aren’t actually the problem.

Sanctions and Trade Tariffs

A US judge has found three large Chinese banks in contempt for refusing to comply with subpoenas in investigations into North Korea sanctions violations. The banks are not named, but it seems likely they are the same three banks from a 2017 civil forfeiture action accused of using a Hong Kong front company to launder more than $100 million for a sanctioned state-run North Korea bank. One of the banks involved in that scandal, Shanghai Pudong Development Bank, could face the ‘death penalty’ of being cut off entirely from the US financial system.

This action comes at a time of tense trade talks and other investigations into sanctions evasion. Ship-tracking data indicates that Chinese customers are among those evading sanctions, buying Iranian liquefied petroleum gas (LPG). China previously sourced around a fifth of its LPG from the US before Beijing put a 25% tariff on it last year due to the trade dispute. Buyers diverted to Iran until Trump blocked all energy exports from the country in May. A fascinating Bloomberg article describes how techniques such as “switching off transponders as well as intentionally signaling wrong destinations” are part of the methods used to obscure sanctions evading activity.

Interestingly given the current Huawei sanctions, the Hong Kong front company from the 2017 case allegedly also had dealings with ZTE. That’s another Chinese telecommunications maker which pleaded guilty to selling sanctioned electronics to North Korea and Iran.

Meanwhile, the US has put further sanctions on Iran, targeting Supreme Leader Ayatollah Ali Khamenei and other top Iranian officials. The sanctions follow attacks on commercial tankers in the Gulf in May and June plus the downing of an unmanned American drone. American officials also confirmed the US covertly launched offensive cyber operations against an Iranian intelligence group’s computer systems last week. President Macron and Chancellor Merkel are expected to caution Trump at the G20 summit this week against intensifying pressure.

Further sanctions could follow. Whilst it’s not clear what form they would take, it’s possible banks, insurers or traders could be penalized, as well as other companies outside Iran supporting the country. Consumer- or industrial- goods manufacturing, or entities that move money or products into or out of the country could also be targeted.

The Telegraph reported this week that Iran is setting up a network of terror cells in Africa to attack US and other Western targets in retaliation for Washington’s decision to impose sanctions.

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