FinCEN files reveal problems at ING’s Polish unit, Australia considers AML reporting reforms, and US authorities take civil action over AML/ CFT failures at Bitcoin mixers.

We share our financial regulatory highlights from the week of 19 October 2020.

FinCEN Files Shift Focus To Poland

The publication of the FinCEN Files in September, a major leak of US Suspicious Activity Reporting (SARs) to the Financial Crime Enforcement Network (FinCEN), the US national Financial Intelligence Unit (FIU), has left many jurisdictions questioning the actions of some of their leading Financial Institutions (FIs). This week, the European media focus shifted to Poland, where the Files have revealed that the Polish unit of the Dutch bank ING, ING Bank Slaski, was suspected of involvement in the laundering of illicit funds for Russian and Ukrainian oligarchs. 

According to the SARs issued to FinCEN and revealed in the leak, ING Bank Slaksi was suspected to have been used in a ‘mirror trading’ money laundering scheme, where companies or individuals use the same broker to simultaneously purchase and sell shares of the same value in different currencies. 

In the case reported in the Files, two Dutch securities traders, Tristane Capital and Schildershoven Finance, were alleged to have used the services of ING Slaski both to purchase shares denominated in Roubles on behalf of two companies, Cypriot Serbenta and British Ergoinvest, and sell those shares on their behalf in other European and international currencies. 

According to the leaked SARs, Ergoinvest – a shell company registered in the sleepy English commuter town of Potters Bar – received $307 million transferred into its account from Schildershoven’s account at ING Bank Slaski as a result of such trades in 2014. Ergoinvest is reportedly one of at least 140 other companies listed in FinCEN Files that are registered to the same UK address.

Although it is not clear exactly who has been behind this activity, the Files suggest that Ukrainian and Russian oligarchs, especially those closely linked to Russia’s President Putin, were significant clients of the Dutch traders, possibly including the President’s cousin, Igor. Other names linked to the scheme in the Files include that of Pakistani fraudster Altaf Khanani, currently in prison in the US, who is believed to have laundered funds for the Colombian and Mexican drugs cartels as well as Al-Qaeda and Hezbollah. 

The revelation of the existence of this scheme provides another example of the ingenuity with which illicit funds have been transferred from Russia and other Former Soviet Union states into the wider international financial system, using financial openings in the Baltic, east-central Europe, and the Caucasus. In recent years there have been a series of news stories about various ‘Laundromat’ schemes via Moldova, Azerbaijan and elsewhere, mirror trading schemes in Moscow, and the ongoing scandals linking the Baltic branches of Scandinavian banks to money laundering. The link to Poland is new, but it appears to be part of a familiar narrative.

As Anastasia Nesvetailova, director of the City Political Economy Research Centre in London told German news outlet Deutsche Welle, “Poland is not the new frontier, it simply got into the news headlines with this case.” She went on to explain that “ING is one of the many big banks, including Deutsche, Danske, Raiffeissen…which had been enabling money laundering out of post-Soviet space…ING hit the headline this year, Danske last year, Deutsche a few years back, and we can expect more such revelations to come out.” 

Nonetheless, Nesvetailova commented that it was also important to focus on how criminals are operating now, as well as in the recent past, and she stressed the increasingly important role that cryptocurrencies were playing in money laundering schemes. For companies operating in the regions around Russia therefore, especially those dealing in both fiat and crypto exchange, this recent case should give pause for thought. If, as it seems likely, that illicit actors are using every vulnerability they can find in the financial system, AML protections will only be as effective as their weakest link.  

AUSTRAC To Revamp Reporting Regime

The Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia’s national Financial Intelligence Unit (FIU), is looking to reform its current reporting framework, according to one of the agency’s senior leaders reported in the Australian Financial Review

Speaking at an industry event earlier this month, Dr Nathan Newman, the agency’s national manager of regulatory operations, informed the audience that AUSTRAC was looking at the current system of reporting used by AML/CFT Reporting Entities (REs) in financial services and other obligated sectors. 

Although there are no specifics at this stage, Dr Newman explained that “we received some money in the budget which means we will be replacing our near-20-year-old system to something far more adept and user-friendly which will be a positive for the industry.” He went on to note that A$100m of new funding would be available for the reform. 

Under Australian Federal Law, REs are expected to report suspicious activity by customers, whether transactional or otherwise, via a ‘Suspicious Matter Report’ (SMR). AUSTRAC has to receive the report within three days of a suspicion being formed, and within 24 hours if the activity is related to terrorism. Currently, REs are expected to report online at the AUSTRAC site. AUSTRAC analysts then triage the SMRs and disseminate to federal, state and territory law enforcement agencies if appropriate. 

AUSTRAC also requires REs to supply Threshold Transaction Reports (TTRs) for the transfer of physical currency of A$10,000 or more (or the foreign currency equivalent) as part of a designated service and International Funds Transfer Instruction reports (IFTIs) for any transfers into, or out of, Australia. REs are given 10 working days to complete these reports.  

The AUSTRAC approach to reporting is typical of many other developed countries which follow the Financial Action Task Force’s (FATF’s) 40 Recommendations. However, it has been criticized for maintaining a relatively cumbersome reporting portal, which requires extensive details from REs on SMRs, including Customer Due Diligence (CDD) data, transactional analysis and supporting intelligence such as photographs, videos or relevant social media. AUSTRAC has also admitted in the past that around 80% of the submitted SMRs do not see immediate use, and REs do not receive feedback on the quality or impact of their reporting. The additional unused reporting remains in AUSTRAC databases for searching by partner agencies at a later date. 

Dr Newman’s comments about the future of the SMR regime come against a backdrop of increased international activity around AML/CFT reform. In the UK, the parallel ‘Suspicious Activity Reporting’ (SAR) system is under revision, and US authorities have also recently announced their intention to look again at the robustness of their approach. 

The speech also comes in the wake of increasing enforcement activity by AUSTRAC in recent months. In September, it handed out a record A$1.3bn fine to leading Australian bank Westpac, and a $1.24m penalty for US bank State Street, both for breaching IFTI reporting requirements. Earlier this month, the agency further announced that it was concerned about AML compliance concerns at payment services provider, Paypal Australia.

AUSTRAC’s current pace of activity and positive focus on reporting reform is welcome in light of the recent controversy over the leaked ‘FinCEN Files’, a selection of US SARs filed by US financial institutions with FinCEN (mentioned in the story above). Many of these SARs, showing vast amounts of suspicious funds flowing through the financial system unimpeded, have led critics to ask whether the current retrospective reporting approach is ‘fit for purpose.’ 

If AUSTRAC can develop a more efficient, agile and reactive approach to reporting – and potentially one that will make better use of the material the industry provides within SMRs – then it will be a major step forward for AML/CFT effectiveness in Australia.  

FinCEN Fines Crypto Entrepreneur

In the first action of its type, FinCEN this week fined crypto entrepreneur Larry Dean Harmon $60m for AML/CFT control failures at Helix and Coin Ninja, the Bitcoin ‘mixers’ he founded and headed as Chief Executive Officer (CEO). 

FinCEN noted that Harmon made a virtue of Bitcoin mixers’ capacity to transmit cryptocurrencies in a way which obfuscated their point of origin, using this as a selling point for his services, along with the promise that he did not conduct CDD. Despite undertaking $311 million worth of transactions in cryptocurrencies, Harmon is reported not to have collected or verified any customer names, addresses, and even actively deleted customer data that came into his possession. 

FinCEN stated that Harmon had intentionally contravened every relevant aspect of the US Banking Secrecy Act (BSA):

  • operating Helix as an unregistered money services business (MSB) from 2014 to 2017 and Coin Ninja from 2017 to 2020;
  • ignoring requirements to have effective AML/CFT policies, procedures and controls in place;
  • and failing to report suspicious transactional activities. 

FinCEN also stated that Harmon’s actions were clearly intended to allow criminals to use his services for a range of illegal activities, such as drugs and weaponry sales, the distribution of child pornography, and the laundering of the proceeds of crime. FinCEN said that Harmon advertised his services in “the darkest spaces of the internet.”

Alongside this civil action, Harmon is also being prosecuted in the District of Columbia (D.C.) by the US Department of Justice (DoJ) on money laundering conspiracy charges, and for running an unlicensed MSB. Charles Flood, Harmon’s lawyer for the criminal case, has said that the US federal government’s actions were based on the improper categorization of a BitCoin mixer as an MSB when the offenses are alleged to have taken place. Mr. Flood said that he was looking “forward to explaining all of this to a D.C. jury in the criminal trial.”

FinCEN’s civil enforcement action and the DoJ prosecution of Harmon are major milestones, as they come seven years after FinCEN provided its first guidance requiring crypto exchanges to register as MSBs and fulfill the requirements of the BSA, and over a year since it clarified that crypto mixers were covered by this requirement. The DoJ’s action is also the first time that ‘mixing’ crypto has been defined as a criminal activity for the reason that it obfuscates the source of funds. This will give many in the crypto sector pause, especially if they are involved in trading privacy coins or other transactions that are protected to ensure anonymity. 

Together with the recent release of the US Attorney General’s Cyber-Digital Task Force report on cryptocurrency enforcement (on which we reported last week), the actions against Harmon seem like a broader declaration of intent by US federal authorities to start tackling perceived AML/CFT risks in the crypto space. 

Although some in the sector might find this disconcerting, it is a positive development. Part of the process of securing the growth in the crypto sector will be a wider perception amongst those who do not currently use it that it is ‘safe’. Tackling egregious behaviors and drawing clear boundaries about what is – and is not – acceptable will send a message that will be to the sector’s benefit in the long term. 

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