25th February 2021

Myanmar and Sanctions; EU and 4AMLD; US and Brokerage Fine

The military coup in Myanmar leads to sanctions, the European Commission criticizes 4AMLD mistakes, and the US fines a broker-dealer for AML/CFT failures.

We share our financial crime regulatory highlights from the week of February 22, 2021.

International Community Reacts to Myanmar Coup

In the wake of the military coup in Myanmar on February 1, foreign governments called for the release of the democratically elected prime minister, Aung San Suu Kyi, and the end of repressive measures against protestors. Over the last two weeks, however, foreign governments have moved towards the use of targeted sanctions to force the generals to change course. 

The US has been one of the leaders of these moves, with President Biden placing sanctions on ten current and former military leaders involved in the coup on February 11. Three precious mineral companies with links to the military regime were also designated. In the last week, the US Treasury Department’s sanctions bureau, the Office of Foreign Assets Control (OFAC), has also designated two further members of Myanmar’s military leadership, who have been appointed to the regime’s new State Administration Council. 

These designated individuals and companies have had assets denominated in US dollars frozen, and US citizens and companies have been banned from having economic or financial interactions with them. Actions have also been taken to block the regime’s access to around $1 billion in Burmese government assets held in the US. 

But the US has not been alone. Canada has announced sanctions against nine military officials, and the UK has imposed travel bans and personal asset freezes on three of the regime’s leaders. The UK – which has previously designated 16 Myanmarese military leaders due to their alleged involvement in violence against the Rohingya – have also applied measures to prevent UK overseas aid to Myanmar from being diverted to the military. 

Meeting on February 22, the foreign ministers of the European Union (EU) issued a statement indicating that they too would take measures against the regime, and officials in the Commission are reported to be drawing up a list of individuals for imminent designation. US Secretary of State, Antony Blinken, was also involved in the EU foreign minister’s discussion, indicating a desire for a ‘united front’, especially among western countries. 

OFAC has stated that it hopes that the US and other designations will be sufficient to bring about a reversal. However, if Myanmar’s generals do not change course, the US “will not hesitate to take further action,” it has said, a threat that has been reiterated by Blinken. 

However, some countries within the Asia-Pacific region have expressed caution about taking sanctions measures against the military regime. Indonesia is pushing its ASEAN peers to support a domestically negotiated solution that would force Myanmar’s military to honor its commitments to hold a free and fair election and transfer power to the winner. Meanwhile, other ASEAN countries have cautioned western powers about placing the military regime in a more difficult position. Dr. Vivian Balakrishnan, the foreign minister of Singapore – one of ASEAN’s leading states and the major foreign investor in Myanmar – criticized the coup, but suggested that more wide-ranging international sanctions would be counter-productive, and likely hurt the general populace more than they would the new regime. 

At present, the situation in Myanmar remains febrile, with protests and violent clashes continuing between the military, police, and protestors. But despite pressure both internal and external, the military regime has shown no signs of backing down so far. Its leader, General Min Aung Hlaing has stated that he would create a “true and fair democracy,” and would only call new elections once “the emergency” was over. 

This is unlikely to satisfy the US and others and suggests that ASEAN members and their neighbors will have to face the reality of an expanding range of international sanctions against Myanmar. Although this is likely to remain focused on the military regime and its collaborators, for the time being, it is not impossible that more general measures might eventually be imposed. For businesses with interests in Myanmar and potential exposure, therefore, it will be important to keep a close watch on the situation and ensure that they have flexible sanctions solutions in place to tackle what is likely to remain an evolving situation.  

European Commission Highlights Countries’ 4AMLD Failures

On February 19, the European Commission issued letters of formal notice to Germany, Portugal, and Romania to inform them that they had incorrectly transposed the 4th iteration of the EU’s Anti-Money Laundering Directive (4AMLD) into national law. 4AMLD was enacted on June 26, 2015, and was meant to be fully transposed into member states’ Anti-Money Laundering/Countering the Financing of Terrorism ((AML/CFT) legislative frameworks by June 26 2017. 

4AMLD was introduced to ensure that the EU remained aligned with the 40 Recommendations of the Financial Action Task Force’s (FATF), the international AML/CFT standard setter, which had been revised in February 2012. It included a number of changes, including a heavier focus on a ‘risk based’ rather than compliance-led approach, and an expansion of the definition of ‘Politically Exposed Persons’ (PEPs) to include domestic as well as overseas individuals. 

However, the directive’s most significant development was the requirement for obligated businesses to maintain accurate and up-to-date information about the company’s beneficial ownership structures, with beneficial ownership defined as having 25% or more of a company’s shares. This information would be shared with governments, who were mandated to create central national beneficial ownership registries which could be accessed by banks, lawyers, and others with “a legitimate interest.”  The registries were intended to contain the names and personal details of the beneficial owners, as well as the extent of their commercial interest in the firm.  

Since the introduction of 4AMLD, the EU has widened this requirement with 5AMLD, which stated that the registries should also be made open to the public. Member states were required to transpose this obligation into national laws by January 10, 2020, but according to some observers, the process of creating public registries has been slow.  

Based on the European Commission’s press release, it is not clear which aspects of 4AMLD it believes have been incorrectly transposed by the three countries. However, the statement does make a general reference to the “proper exchange of information with Financial Intelligence Units (FIUs), requirements of customer due diligence and adequate cooperation between FIUs, or the transparency of the central beneficial ownership registers.” 

Germany, Portugal, and Romania have been given two months to provide a satisfactory reply to the Commission. If the reply does not meet the stated concerns, then the Commission has said it will issue a ‘reasoned opinion’ to the relevant states on why they believe they have not complied. This would be the second stage of five in the official infringement process, with the next stage a referral to the Court of Justice. 

Although such notices are a normal part of the interactive process between the Commission and member states, it is notable that the statement places the message in the context of the EU’s current campaign to improve its AML/CFT regime. “Money laundering scandals have revealed the need for stricter rules at EU level,” it states and notes the publication of the Commission’s Action Plan in May 2020, which discusses the need for an EU-level AML/CFT authority and a single regulatory rule book. Detailed proposals to enact the Action Plan are expected by the end of Q1 2021. 

The tone of the message suggests an increasingly tougher and more proactive approach by the European Commission on the full and effective implementation of AML/CFT rules. Although this message is primarily targeted at governments and regulators, it has significant implications for the private sector as well. With the EU and member states keen to burnish their reputations on AML/CFT, it is likely that they will look to obligated businesses – who act as the gatekeepers of the financial system – to take an equally robust approach.  

US Regulator Imposes AML/CFT Fine on Brokerage Firm

In a recent statement, the Financial Industry Regulatory Authority (FINRA) has revealed that it has fined Actinver Securities, Inc., $150,000, for AML/CFT compliance failures. FINRA is a private Self-Regulatory Organization (SRO) that oversees brokerage firms and exchange markets; Actinver is a retail brokerage business based in Texas, with significant cross-border business in Mexico. The company has not challenged the judgment. 

According to FINRA, between August 2015 and March 2017, Actinver conducted Foreign Exchange (Forex) business worth $150 million that represented an increased money laundering risk for the firm. Weaknesses in the firm’s Transaction Monitoring (TM) solution, and failure to use appropriate Forex ‘red flags’ to identify potentially suspicious activity, meaning that appropriate risk mitigation was not in place and that as a result, Actinver could not effectively fulfill its obligations to issue Suspicious Activity Reports (SARs) under the US Bank Secrecy Act (BSA). In FINRA’s view, this was not a minor failure, as the relevant Forex wires made up 21% of the firm’s overall wire activity.

The agency also stated that Actinver’s approach to client account behaviors added further significant money laundering risk. Over the August 2015 – March 2017 period, 200 Actinver Forex accounts received $110 million and sent $82 million, primarily in cash, with negligible transactions in securities. Actinver’s own AML/CFT risk assessment recognized an “unexplained high level of account activity with very low levels of securities transactions” as a potential indicator of suspicion, but its monitoring, investigating, and reporting processes and procedures did not effectively apply this judgment in practice. 

FINRA noted a range of other failures at the firm, including the lack of appropriate system testing, incorrect certification, and the inadequate collection of information on PEPs, with Actinver’s registered representatives regularly ignoring Enhanced Due Diligence (EDD) requirements. In 15 instances, the firm did not identify PEPs as PEPs, including the son of a former Mexican Army general and the brother of a former Mexican state-owned company executive, and in a further 12 out of 18 cases where PEPs were correctly identified, the firm did not conduct EDD. 

This FINRA judgment reflects an ongoing regulatory drive in the US over recent years to ensure the broker-dealer sector meets its AML/CFT obligations. In May 2019, FINRA issued Regulatory Notice 19-18, focused on the sector’s need to do better with suspicious activity monitoring and reporting, and in November 2020, the Securities and Exchange Commission (SEC), the federal agency responsible for ultimate oversight of the sector, issued a warning with regards to inadequate CDD on omnibus accounts held by foreign financial institutions. This suggests that more judgments such as these are likely to follow over the short to medium term. 

With the increasing tempo of rhetoric from the new administration on the need to tackle issues around illicit finance (see, for example, our Regulatory Highlights February 1, 2021, and February 15, 2021), it is clear that the US is going into a new phase of proactivity by regulators and law enforcement, and a focus on both closing loopholes and improving AML/CFT performance beyond the traditional targets of the legacy banking sector. Firms, therefore, need to take particular note of the developments and take their own proactive measures to ensure their effective compliance.