Credit Suisse is charged in a Bulgarian money laundering scandal, the FATF releases information about AML/CFT risks amid COVID-19 and the US proposes new reporting rules for cryptocurrency transactions.
We share our financial crime regulatory highlights from the week of 21 December 2020.
Credit Suisse Charged in Bulgarian Money Laundering Probe
Swiss prosecutors have indicted Credit Suisse for allegedly failing to prevent the laundering of funds linked to a top Bulgarian wrestler and a drug trafficking ring, Switzerland’s attorney general confirmed on December 17. A former Credit Suisse manager and two alleged members of the crime ring have also been charged.
The indictments are the latest step in an investigation that is well over a decade old. In 2008, prosecutors began looking into the activity of a top-level wrestler who they say had built and managed a cocaine trafficking operation. The illicitly obtained funds were allegedly deposited into Swiss bank accounts and then laundered by way of “special finance transactions,” including the purchase and sale of real estate in Switzerland and Bulgaria.
The indicted Credit Suisse employee stands accused of facilitating those transactions from July 2004 to December 2008. Prosecutors say she actively participated in laundering 16 million Swiss francs through back-to-back credit arrangements and, more generally, helped mask the source of transactions totaling more than 140 million Swiss francs.
The wrestler involved, who Swiss authorities declined to name, has since been convicted for transporting large quantities of cocaine in several European countries.
Swiss authorities are pursuing criminal charges against Credit Suisse because it failed to fulfill its compliance obligations and prevent this activity, even though the bank was aware of deficiencies in its AML processes since at least 2004. The bank has denied this. It cites a regulatory review conducted in 2004 that found no evidence of non-compliance and a legal review the bank commissioned in 2016 that concluded that Credit Suisse’s compliance processes during the period in question were adequate.
The Swiss Federal Criminal Court will now take up the case. If found guilty, the maximum potential fine would be on the smaller side — 5 million Swiss francs. Nevertheless, the reputational damage to Switzerland’s second-largest bank would be significant, and the bank has signaled it intends to “defend itself vigorously” before the court.
FATF Updates FIs on Pandemic-Related AML/CFT Risks
Criminals worldwide keep finding new ways to exploit the COVID-19 pandemic, the Financial Action Task Force (FATF) confirmed in a December 16 report.
The 34-page report is a follow-up to one that the intergovernmental body released in May that highlighted the AML/CFT risks posed by the crisis and detailed the early policy responses. In the intervening months, the FATF collected input from over 200 countries and jurisdictions on how those risks have evolved as the pandemic has evolved. The follow-up report provides case studies from several different countries that further detail recent global trends in the predicate offenses for money laundering and changes in money-laundering tactics.
Some of these aren’t a surprise. There’s been an uptick in cases of counterfeit medical supplies and PPE fraud, an increase in corruption related to medical equipment contracts, cybercrime scams, investment fraud, charity fraud and the exploitation of stimulus measures.
Other risks are less obvious. Online child exploitation, for example, has become increasingly prevalent since children are spending more time online. The FATF also mentions an increase in property crime — a predicate offense that might, at first glance, seem counterintuitive given that people are spending more time at home. Yet with individuals and businesses leaving vacation homes, apartments and commercial properties unattended, the opportunities for theft are more plentiful than you would initially expect.
The report concludes with a warning that increased financial volatility and economic contraction will continue to exacerbate existing vulnerabilities — and expose new ones. The FATF notes that criminals may use illicit funds to take advantage of struggling small and medium businesses, especially in the real estate, construction, industrial cleaning and transportation sectors. Further, the growing amount of cash in circulation and the rise of virtual currencies are areas of concern: notably, the FATF called out money mule scams, cases of insider trading and the use of virtual currencies to launder funds as trends to watch out for.
Even as attention shifts to vaccine developments and economic recovery, these AML/CFT risks will remain. Both financial institutions and regulators must stay vigilant and ensure they’re incorporating these new threats into their risk-based approach as we move into the new year.
US Proposes New Crypto Rules
FinCEN has proposed new rules that would require financial institutions and money services businesses to verify and report on the identities of customers engaging in certain cryptocurrency transactions, according to a late evening announcement by the US Treasury on 18 December 2020.
If adopted, financial institutions would need to verify the identities of the individuals involved in transactions exceeding $3,000, where one of the parties has an unhosted wallet. They would also need to report all cryptocurrency transactions exceeding $10,000. In essence, the rules would align reporting requirements for virtual currencies and digital assets with current reporting requirements for cash transactions.
Unhosted wallets — that is, accounts not hosted by a financial institution through which a user can store, send and receive cryptocurrency — have come under increased scrutiny as the use of virtual assets becomes more widespread. The appeal of these unhosted wallets, which can live offline on a flash drive or in a software program on an individual’s personal device, is that they are much more private and difficult to link to a specific person — an aspect that authorities say criminals, terrorists and other bad actors are all too happy to exploit.
Indeed, FinCEN states that virtual currencies have increasingly played a role in facilitating criminal activities such as terrorist financing, weapons proliferation, sanctions evasion, buying and selling counterfeit goods and ransomware attacks. The agency says the rule changes will close loopholes that enable such activity and better protect national security.
Nevertheless, although the proposed rules are less strict than feared, the idea of regulating unhosted wallets has been met with opposition. The prospect of privacy and the ability to make frictionless peer-to-peer transactions are two of the primary reasons why cryptocurrencies and virtual assets have soared in popularity. Many fear regulations will isolate US crypto users and stifle innovation. Some are also skeptical that they will significantly mitigate the exploitation of cryptocurrencies and may instead have the unintended effect of pushing criminals further into the shadows.
The proposed rules will be open for public comment until January 4, and it’s uncertain whether they’ll be finalized before a Biden administration takes office on January 21. But that’s not likely to impact the trend: the US government has shown an increased willingness to bring cryptocurrency into the existing financial framework. These requirements are just the latest step on that path.