A Guide to Anti-Money Laundering for Crypto Firms

Politically Motivated Money Laundering, FIU Under Pressure and AML Failure

PEPs Knowledge & Training

Money laundering goes underwater, the German FIU may see its operations under review and a US brokerage firm failed badly on AML regulations.

We share our financial regulatory highlights from the week of 10 August 2020.

Political Money Laundering Happening Underwater

In a Malaysian scandal not tied to 1MDB, the former chief minister of Penang Lim Guan Eng has pleaded not guilty to a second corruption charge regarding a $1.5 billion undersea tunnel project. He also faces a third charge of corruption – with each charge carrying a maximum jail sentence of 20 years plus a fine.

Lim was accused of using his position as Penang’s chief minister to receive a bribe of around $787,000 to deliver the contract to a construction company local to the area. The former minister has criticized the charges as politically motivated, noting a vague timeline and lack of proof.

The former minister’s wife, Betty Chew Gek Cheng is facing three charges of money laundering. The charges are due to Lim allegedly getting $88,711 for his wife from the local construction company. These charges come with a potential jail sentence of 20 years each and a fine of $2385 or five times the bribe, whichever is greater.

Prime Minister Muhyiddin Yassin took power in March after he pulled his party out of the ruling coalition and then-premier Mahathir Mohamad resigned in protest.

Political commentators in the region have suggested that the scandal could see early elections triggered, which are currently not expected until 2023.

The case is a strong example of the types of risks that PEPs can be exposed to and the need to closely monitor their financial activities in order to deliver robust reports to law enforcement where necessary.

Wirecard Takes Down FIU?

The Wirecard controversy has yielded new insights into how AML procedures were carried out by the German Financial Intelligence Unit (FIU) customs authority.

It appears that while a great deal of information was sent to the FIU via approximately 1000 suspicious activity reports (SARs), dozens of which were highly relevant, few of them were passed on to law enforcement at the Bavarian State Criminal Police Office and the public prosecutor’s office for further investigation.

The FIU has been rechecking the SARs since the Wirecard scandal broke at the end of June and has discovered 97 reports so far that “could possibly be related to the allegations currently raised” against Wirecard.

50 SARs were confirmed to have been sent to the relevant law enforcement bodies, but this was only done once the Wirecard scandal had been reported on internationally. Prior to June 2020, only two reports from the FIU were received according to Munich’s public prosecutor office.

Chairman of the Bund Deutscher KriminalBeamter, Sebastian Fiedler made it clear that the FIU’s operations need to be reconsidered, commenting that there could be: “countless other scandals in the data pool of the FIU,” Fiedler also called on Federal Finance Minister Olaf Scholz to have the processes around the FIU handled independently. Scholz has expressed a firm interest in reforming how financial regulation operates in Germany already.

As the investigation into Wirecard continues, the role of the FIU is taking centerstage. This is not the first time that the FIU has faced harsh criticism specifically around not passing on money laundering reports or intentionally delaying them. And when they do arrive the quality of the reports themselves has often been criticized.

The Bundestag Finance Committee wants to address this issue and it seems as though reform may come in as part of the changes enacted by Scholz. The Federal Ministry of Finance spokesperson commented that the FIU must forward all criminal offenses: “immediately to the responsible law enforcement authorities,” something that should already be happening.

US Brokerage Firm Pays $38 Million for AML Failures

Interactive Brokers, which runs one of the country’s largest e-trading platforms, has agreed to pay $38 million to settle claims of anti-money laundering failures, regulators announced on Monday.

The total fine combines three settlements from the US Securities and Exchange Commission (SEC), the US Commodities Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA).

The largest settlement — a $15 million fine levied by FINRA — was based on the regulator’s findings that Interactive Brokers’ anti-money laundering program didn’t keep pace with the company’s growth over the five-year period from January 2013 to September 2018. This is despite the fact that, according to FINRA, a member of the company’s compliance team warned of being “understaffed” and of “struggling to review reports in a timely manner.”

Separately, the SEC found that the company didn’t file the appropriate suspicious activity reports (SARs) for several transactions that should have raised red flags associated with possible manipulation of microcap securities. The regulator, which fined Interactive Brokers $11.5 million, asserted that from mid-2016 to mid-2017, the company failed to file over 150 SARs.

Finally, Interactive Brokers will pay the CFTC $11.5 million for gaps in its compliance program from June 2014 to November 2018. Notably, the gaps permitted a New York trader, Haena Park — who was found guilty in 2017 of defrauding investors of over $23 million — to conduct transactions without scrutiny.

While Interactive Brokers did not admit or deny wrongdoing as part of these settlements, it has agreed to take steps, including hiring independent consultants, to shore up its AML program in light of the regulators’ findings.

A reevaluation of their compliance program couldn’t come at a better time. Interactive Brokers and other brokerage firms are reporting a surge in trading activity and record new customers. Just last month, Interactive Brokers announced impressive second-quarter numbers: its daily average revenue trades were up 111% year over year, and the number of customer accounts surged to 867,000. Therefore, implementing a compliance solution that facilitates automation and prioritizes scalability will be even more important for brokerage firms than ever.

Originally published August 13, 2020, updated November 17, 2021

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