Magnitsky-Style Sanctions, the Unmasking of UBOs, and Compliance Gaps

December 10, 2020 6 minute read

Australia considers passing its own Magnitsky-style legislation, the US is set to pass momentous UBO regulations, and DNB faces a possible fine for compliance gaps.

We share our financial crime regulatory highlights from the week of 7 December 2020.

Australia Considers Magnitsky Legislation

On a related note to one of our stories last week, Australia may implement its own Magnitsky-style legislation — an action that the Parliament of Australia’s Joint Standing Committee Foreign Affairs, Defence and Trade strongly recommends, according to a report published on December 7.

The report concludes a year-long inquiry into the use of targeted sanctions to address human rights abuses, à la the US Magnitsky Acts of 2012 and 2016. The committee reviewed more than 160 submissions from individuals and organizations worldwide. Those invited to speak before the committee included Bill Browder, who led the charge for the passage of the US Magnitsky laws, and human rights lawyers Amal Clooney and Geoffrey Robertson AO QC.

In the nearly 200-page report, the Joint Standing Committee makes many recommendations for implementing targeted sanctions against human rights violators or corrupt individuals as well as their immediate family members and beneficiaries, including banning their entry to the country, seizing their assets, and limiting access to Australia’s financial system. While designation decisions would remain in the hands of the Australian government, the committee has proposed the formation of an independent advisory committee that would review sanction requests and provide guidance.

If the Australian government were to move forward with the Joint Standing Committee’s recommendations, it would mark one of the most sweeping changes to both Australia’s sanctions regime and its human rights laws in years. It would also further align the country’s approach to human rights violations with its allies, the US, Canada, and the UK.

Nevertheless, while support for such a measure has been growing, its passage could have significant implications for Australia’s status as a preferred destination for wealthy Chinese looking to invest or relocate. China’s alleged persecution of its Uyghur minority and its crackdown on pro-democracy advocates in Hong Kong has garnered widespread criticism and has prompted Australia’s allies to sanction Chinese nationals deemed to be involved. Australia would be pressured to do the same. Although most Chinese migrants and investors would presumably not feel the impact, it could still act as a deterrent for future investment.

In addition, it could further deteriorate an already tenuous trade relationship between the two countries. Just a few days from now, on December 20, the two countries are set to celebrate the five-year anniversary of the China-Australia Free Trade Agreement (ChAfta) — an agreement that has contributed to China’s status as Australia’s primary trading partner. Yet friction has been building: Australia has grown increasingly vocal in criticizing China’s actions on the world stage and has blocked a number of Chinese investments, citing national security. And just last month, China published a list of 14 grievances against Australia and imposed tariffs and restrictions on Australian imports. Australia’s consideration of Magnitsky-style laws will no doubt add more fuel to the fire.

The Australian Parliament and the country’s foreign minister will formally deliberate the motion in 2021.

US Set To Pass UBO Legislation

In a matter of days, the US is expected to enact long-awaited updates to its BSA/AML legislation, including provisions that would crack down on anonymous shell companies and add more incentives for whistleblowers to report potential AML violations.

The proposed legislation was incorporated into the House version of the 2021 National Defense Authorization Act (NDAA), an annual defense-spending bill that must pass Congress before the end of the year. Late Tuesday evening, a bipartisan margin of 335–78 approved the bill, and the Senate is set to vote on it within the week. The measure is largely expected to pass. Further, although President Trump has threatened to veto the NDAA over other provisions, it appears to have veto-proof support in Congress.

If enacted, it would mark the culmination of a years-long effort to amend the Bank Secrecy Act (BSA) — one that last year saw the House approve and the Senate consider separate standalone bills, the Corporate Transparency Act and the ILLICIT CASH Act. The current proposed legislation includes many of the same provisions.

Most notably, it establishes federal reporting requirements for beneficial ownership information of legal entities incorporated in the US. That is, the onus would no longer fall squarely on banks to report on beneficial ownership; instead, business owners would be required to do so. Once collected, all such information would then be stored in a national database and made accessible to both local and federal law enforcement.

It also sweetens the incentives for whistleblowers who report potential violations of AML legislation. If the information the whistleblowers provide results in an enforcement action or fine of $1 million or greater, they could receive a reward of up to 30% of the fine. In contrast, the current reward is capped at the lesser of either $150,000 or 25%.

Other provisions aimed at streamlining and modernizing the existing AML framework are found in the bill as well. These include the addition of digital currency to the definition of “coins and currency” and initiatives to create new reporting mechanisms that facilitate communication and information sharing between financial institutions and law enforcement.

Possible AML Fine for DNB

Norway’s largest financial institution, DNB ASA, could be hit with a fine of as much as 400 million kroner ($45 million) for anti-money laundering compliance gaps, the bank confirmed in a statement on Monday, November 7.

The possible fine comes after the country’s Financial Supervisory Authority (FSA) carried out a routine inspection of the bank’s AML compliance program in February. The FSA has yet to release details of its findings. But the penalty is not, according to the bank, related to any specific case or investigation into money laundering but rather general deficiencies in compliance. If levied, DNB will have the unfortunate distinction of being hit with the highest ever fine from FSA for noncompliance.

This isn’t the first time DNB has faced criticism over its AML controls. Inspections conducted in 2016 and late 2018 also found major gaps — although the FSA determined that the bank had taken some steps to shore up its compliance processes in the intervening two years. Then, late last year, Norwegian police announced they were investigating the bank’s handling of transactions involving Samherji, an Icelandic fishing company accused of laundering millions of dollars obtained through illegal bribes and tax evasion through various shell companies.

Samherji allegedly used the bank to transfer over $70 million in ill-gotten funds through a shell company in the Marshall Islands, a tax haven. DNB flagged the company, Cape Cod Financial Services, as a possible risk in 2018 after Bank of New York Mellon declined a transaction from JPC Ship Management, its parent company. When it couldn’t find information on the ultimate beneficial owner, DNB closed the company’s accounts. However, that was seven years after the purported illicit activity first started.

The investigation into DNB’s handling of those transfers is ongoing, and there’s no indication that the possible fine levied by the FSA is related. But it serves to illustrate how AML compliance deficiencies can compound over time and, as a result, severely damage a financial institution’s reputation, even if it is not found to be complicit in any wrongdoing.

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