A former monarch flees his nation, a Chinese bank goes bust, PEPs are in trouble in Italy and the US steps up sanctions on Syria.

We share our financial regulatory highlights from the week of 3 August 2020.

Former King Leaves Spain

Juan Carlos, the former king of Spain, has announced he is abandoning the country during two investigations into his financial activities.

One investigation is from the Spanish court focused on a business contract he holds and the other is being conducted in Switzerland and is looking into potential money laundering and tax evasion by the former monarch.

The former king has continued legal immunity in Spain despite having stepped down from his role in 2014 to make way for his son, King Felipe, so the impact of his departure is unclear on that investigation.

Carlos’ departure has been described as a: “flight abroad…unworthy of a former head of state,” by Spain’s Deputy Prime Minister, Pablo Iglesias.

The departure comes after King Felipe renounced his personal inheritance from his father in March and had Juan Carlos’ stipend removed due to the money laundering investigation.

The money laundering investigation is focused on two offshore foundations associated with Carlos. One is registered in Liechtenstein and has accumulated significant wealth while moving money between undeclared bank accounts – behavior which has caught the attention of investigators and currently remains unexplained.

The second foundation, called Lucum, is in Panama and received $100 million from Saudi Arabia for unknown reasons. The money is thought to potentially have something to do with Spanish companies winning a contract to build a high speed rail link between Medina and Mecca – two Saudi cities. Prosecutors in Switzerland have spoken to a lawyer and a fund manager who are connected to Juan Carlos and King Felipe has cut ties with Lucum after discovering he had been named as a beneficiary.

Financial Leverage in China

Tomorrow Group, founded by Chinese oligarch Xiao Jianhua, has been accused by the People’s Bank of China of causing the collapse of Baoshang Bank.

Over the course of 14 years the Group is thought to have illegally borrowed $22.3 billion through 347 loans via 209 shell companies. It’s fraud occurring at an incredibly high level and speed.

Tomorrow Group also worked to undermine Baoshang Bank’s risk controls, this was possible at Xiao Jianhua controlled both businesses as Tomorrow Group had managed to take control of 89% of the bank. That level of control meant Xiao was able to push for weak corporate governance at Baoshang.

Xiao is thought to be held and awaiting trial for bribery and manipulating stock prices.

At its peak, Tomorrow Group held a stake in 44 financial institutions. This assortment of businesses allowed Xiao to funnel money through multiple layered stages of asset-management and move money across his affiliated companies.

It meant that Xiao could use loans to get quick and easy money by leveraging multiple businesses and exposing them to unnecessary risk.

These transactions were not identified by compliance teams in the businesses until regulators decided to make it more difficult for financial leverage to be achieved.

PEPs and Corruption in Italy

The governor of Lombardy, the region of Italy affected worst by COVID-19, is under investigation for fraud regarding the supply of medical equipment from a company owned by his brother-in-law.

Governor Attilo Fontana made a €250,000 payment to his brother-in-law’s company, in which his wife has a 10% stake.

Fontana denies any wrongdoing.

In his capacity as governor, Fontana had ordered 75,000 surgical gowns and 7000 sanitizing kits in a contract worth approximately €500,000. His brother-in-law’s company then decided to donate 50,000 of the gowns instead of receiving payment.

Fontana then made the supposedly illicit payment from his own private account in Switzerland which was blocked by the bank and referred to law enforcement. His reasoning is that he wanted to compensate his brother-in-law.

The story is not uncommon in the light of the pandemic. And although the facts may differ slightly and this may end without any convictions, it doesn’t change the issue that politically exposed persons (PEPs) and their relatives and close associates (RCAs) are closer to corruption than ordinary customers. That’s the case all over the world.

By their nature PEPs are more easily able to cross the line between bribery and the regular course of business, even if they don’t believe they’re in the wrong. It’s up to financial institutions to closely monitor their transactions and act accordingly.

US Increases Syria Sanctions

The US sanctioned a Syrian businessman and nine entities on Wednesday, 29 July 2020, for their alleged involvement in real estate activities that US officials say ultimately benefit the Syrian regime and its reconstruction efforts.

Wassim Anwar Al-Qattan, a businessman who appears to have close connections to several government officials in Syria, and his companies have been awarded a number of contracts by the Syrian regime to develop state-owned malls and luxury hotels in the country’s capital. In fact, Al-Qattan seems to be the contractor of choice for projects in Damascus, having been awarded the vast majority of recent large-scale real-estate projects outside of Marota City. The US government’s sanctions encompass his five companies, along with the four properties Al-Qattan’s companies have invested in.

The ten designations collectively represent the latest sanctions action related to the US Caesar Syria Civilian Protection Act of 2019, which took effect earlier this summer, on June 17.

Since then, the US has sanctioned approximately 50 individuals and entities, including the president of Syria, Bashar al-Assad, as well as his wife and son. Further, more designations targeting those who act in support of the Syrian government are likely to be announced. The US government has consistently stated that they are committed to “a sustained campaign…to pressure the Assad regime to end the conflict in Syria.”

Whether these measures have any significant impact on the Assad regime and the Syrian government’s reconstruction efforts remains to be seen. The country has been ravaged by its years-long civil war, which began in 2011 with anti-government protests, and the combined blows of an economic crisis and the pandemic have wrought further devastation.

Nevertheless, financial institutions will need to stay vigilant when monitoring their customers’ transactions and responsive to any sanctions-related changes — or risk being subject to severe enforcement actions themselves.

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