The Financial Crimes Enforcement Network (FinCEN) has issued an advisory on Kleptocracy and Foreign Public Corruption, advising firms on how to focus their efforts to detect the proceeds of foreign public corruption.
Tackling corruption has been a key strategic financial objective for the Biden administration. In June 2021 it issued a memorandum highlighting that acts of corruption sap between 2% and 5% of global GDP. “Corruption threatens United States national security, economic equity, global anti-poverty and development efforts, and democracy itself,“ the memorandum said.
Corruption also featured as one of FinCEN’s own anti-money laundering and combating the financing of terrorism (AML/CFT) national priorities, announced in the same month.
This latest advisory calls out Russia specifically, although it does include examples of corruption in other countries, including Brazil and El Salvador. “Russia is of particular concern as a kleptocracy because of the nexus between corruption, money laundering, malign influence and armed interventions abroad, and sanctions evasion,” the advisory states.
“Russia’s actions in Ukraine are supported and enabled by Russia’s elites and oligarchs who control a majority of Russia’s economic interests.”
The advisory includes kleptocracy and foreign public corruption typologies that firms can review in alignment with their risk-based approach:
- Bribery and extortion
Bribery schemes often involve payments to foreign government officials by persons and entities to obtain or retain business, or for other benefits. They can be made through third-party facilitators, as well as through legal entities that are controlled by family members and close associates, to conceal the ultimate beneficiary of the payment.
In many cases, payments are laundered through a network of shell companies, offshore financial centers, or professional service providers. Financial accounts are often established outside of a public official’s country of residence to evade detection and financial institutions’ sanctions screening and AML/CFT controls.
- Misappropriation or embezzlement of public assets
This broadly encompasses the theft, diversion, or misuse of public funds or resources for personal benefit or enrichment. These assets may involve government funds, services, contracts, or publicly owned natural resources.
Public officials or their associates may exploit or deceive corporations into redirecting government resources for their own profit. Embezzlement or misappropriation of public assets can also be tied to a bribery scheme. Procurement in the defense and health sectors, large infrastructure projects, development, and other types of assistance, pose a particularly high risk of being associated with corruption-related ML.
- Shell companies and offshore financial accounts
Corrupt actors often use shell companies to obscure the ownership and origin of illicit funds and may also leverage others on their behalf while retaining control of the accounts. These shell companies can be used to facilitate the payment of bribes as well as the illicit movement of funds stemming from the misuse of state assets and government contracts.
Shell companies and offshore accounts are frequently established in foreign jurisdictions whose corporate formation regimes and financial sector offer limited transparency, and funds are integrated into the broader financial system through investments and acquisitions.
- Purchase of real estate, luxury goods, and other high-value assets
Corrupt officials and others involved in bribery and corruption often purchase US assets, such as luxury real estate and hotels, private jets, artwork, and motion picture companies, to launder the proceeds of their corruption. Real estate may offer an attractive vehicle for storing wealth or laundering illicit gains due to its high value, its potential for appreciation, and the potential use of layered and opaque transactions to obfuscate a property’s ultimate beneficial owner. The purchase of real estate in connection with criminal conduct also may include complicit real estate professionals.
The advisory also covers SAR filing guidance for US firms. FinCEN requests financial institutions reference this advisory in SAR field 2 (Filing Institution Note to FinCEN), including the key term ‘CORRUPTION FIN-2022-A001’, and select SAR field 38(m).
Corruption Red Flags
Compliance teams will find the advisory’s red flags helpful to ensure firms have appropriate controls in place. They include:
- Transactions involving long-term government contracts are consistently awarded, through an opaque selection process, to the same legal entity or entities
- Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions
- Transactions involving official embassy or foreign government business conducted through personal accounts
- Transactions involving public officials related to high-value assets, such as real estate or other luxury goods, that are outside that individual’s normal pattern of activity or lifestyle
- Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties
- Use of third parties to shield the identity of foreign public officials seeking to hide the origin or ownership of funds
- Documents corroborating transactions involving government contracts (e.g. invoices) that include charges at substantially higher prices than market rates or lack traditional details (e.g. valuations for good and services)
- Transactions that involve vague payment details or the use of old or fraudulent documentation
- Transactions involving fictitious email addresses and false invoices
- Assets held in the name of intermediate legal entities whose beneficial owner or owners are tied to a kleptocrat or family member
Next Steps for Compliance Teams
Firms operating in the US should review the guidance in detail and ensure their reporting and record-keeping processes are aligned with FinCEN’s guidance. They should also note the specific SAR filing requests from FinCEN. Those operating outside the US should review the typologies and red flags above, comparing and contrasting with behaviors regulators have identified in their own jurisdictions where possible.
Efforts to tackle kleptocrats should also not focus solely on Russia – billions of dollars from other countries continue to flow around ‘tax havens’ and supposedly ‘safe’ Western countries. Transaction and adverse media monitoring can help firms focus on areas of concern. Keeping abreast of advisories from regulators and governments will also help firms manage regulatory expectations.
Originally published April 22, 2022, updated May 6, 2022
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