22nd April 2021

Illicit Finance, Fintech, and Sanctions

The EU launches a new strategy to tackle organized and financial crime and the US imposes new sanctions on Russia. 

We share our financial crime regulatory highlights from the week of April 19, 2021.

EU Organized Crime Strategy Highlights AML

The European Commission has recently announced a new Strategy to tackle Organised Crime (2021-2025) for the European Union (EU). Amongst the priorities of the Strategy is the need for the Union and its member states to take a tougher – and more consistent – line on AML.  

The Strategy provides a five-year plan for new legislation and cross-border operational initiatives that will target serious and organized criminal gangs (OCGs). As the Strategy notes, organized crime has long been a problem for the EU, but the recent COVID-19 pandemic has provided new opportunities for criminals to expand their activities into cybercrime, especially online fraud. 

Quoting the recently published 2021 Serious and Organised Crime Threat Assessment (SOCTA) from Europol, the EU’s policing agency, the Strategy states that OCGs have already sought to sell over 1 billion fake or non-existent vaccine doses. It further notes that criminal groups have continued to generate substantial revenues from trafficking arms, drugs, and people. According to Europol figures, the illicit proceeds of such major offenses amounted to 139 billion euros ($166 billion) in 2019, equivalent to 1% of the EU’s Gross Domestic Product (GDP). 

Given the scale of the problem, the Strategy argues that the EU will need to focus more on dismantling the leadership and management structures of OCGs, rather than just arresting and disrupting lower-level offenders, requiring more extensive cooperation between member states’ law enforcement agencies. The Strategy says that the Commission will thus establish a new police code to facilitate cooperation within the Union, and in addition negotiate an operational agreement with Europol’s international counterpart, Interpol. 

Alongside these measures, the Strategy also heavily emphasizes the role AML should play as a tool against serious and organized crime while noting its current limited results. According to Europol, only 1% of criminal assets are confiscated by agencies in the EU, and a negligible amount of money laundering detected and disrupted. As a consequence, the Strategy argues that the EU will require a new set of AML rules and tools for confiscating criminal profits. 

Echoing the EU’s 2020 Anti- Money Laundering Action Plan, the Strategy suggests that the EU needs to address the “major divergences” in the application of AML/CFT rules across member states and find ways to strengthen weak enforcement in some jurisdictions. It also stresses the need for better integration between the investigation and prosecution of organized and financial crimes, promoting a “culture of early financial investigations” when organized crime is involved. Plans to establish a single AML/CFT rule book and EU-level supervision are due to be released by the Commission in the second quarter of 2021. 

From the perspective of firms operating in the financial services and other obligated sectors, the announcement of the new Strategy does not indicate any changes in the EU’s approach to the AML/CFT issue. However, it does reinforce pre-existing messages about the future direction the Commission wishes to take, and the significance which it attaches to the issue. After a series of significant banking scandals in northern Europe, the EU is now seeking to ensure not only that the public sector is better prepared to fight financial crime, but that the private sector takes its obligations seriously. It will do well to take note.  

The Biden Administration Imposes New Russia Sanctions

In a new development in the worsening relations between the US and Russia, the Biden administration has issued a wide-ranging set of new sanctions in response to what the US Department of the Treasury has described as “aggressive and harmful activities” by the Russian government. 

The Executive Order (EO) authorizing the sanctions calls out, in particular, the Russian government’s efforts to interfere with elections in the US and other allied states; its sponsorship of cyberattacks, much of the recent hack of US software company Solar Winds; the targeting of dissidents and journalists such as Alexei Navalny, now in a Russian prison; and territorial aggression against neighboring states, including the ongoing conflict in eastern Ukraine.

In response, the EO authorizes the Treasury’s Office of Foreign Assets Control (OFAC), to sanction individuals and organizations involved in these activities. In the announcement, six firms in the Russian defense and technology sectors believed to support Russia’s intelligence services were designated, while existing controls on dealing in Russian sovereign debt were expanded to prohibit US financial institutions from participating in the primary market for Russian sovereign debt issued after June 14, 2021. US businesses were also prohibited from lending in any currency to Russia’s Central Bank, National Wealth Fund, or Ministry of Finance. 

Announcing the new sanctions, Janet Yellen, the US Treasury Secretary, said that “the President signed this sweeping new authority to confront Russia’s continued and growing malign behavior,” providing her department with “new authority to impose costs on the Russian government for its unacceptable conduct.” In line with this, the EO provides the Treasury Secretary with the authority to extend the sanctions to relevant new individuals and organizations, in consultation with the Secretary of State. 

According to a report from the online media outlet Bloomberg, the intention behind these measures is to convince Russian President Vladimir Putin that President Biden is a tougher character than his predecessor and that the US is prepared to escalate further if Russia does not soften its belligerent behavior. The report suggests that US officials are considering preventing US financial institutions from dealing in the secondary markets for Russian sovereign debt as a next step, amongst other measures. 

In retaliation to the US actions, Russia has so far expelled 10 American diplomats and imposed its own sanctions on eight US officials. However, the country has not applied counter-measures of equal weight to the US limits on Russian sovereign debt. The Russian Foreign Minister, Sergei Lavrov, said that it would keep unspecified additional actions against American businesses “in reserve.”

Although Russia is reportedly now reducing its military presence on the Ukrainian border, the potential for further escalation remains, due to a multitude of other potential points of friction between the US and Russia. There appears to be every chance of further US sanctions – and possible Russian responses – in the coming months, therefore, and as a result, US financial institutions with potential exposure to Russia will need to continue monitoring developments. Given a likely tough regulatory line on breaches, moreover, they will need to ensure that they have effective risk data and flexible screening platforms in place to keep pace with what is likely to remain fluid and ongoing situation. 

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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