FinCEN Issues Advisory on Kleptocracies and Foreign Corruption

On April 14^th, the Financial Crimes Enforcement Network (FinCEN) issued an advisory on kleptocracy and foreign public corruption. This alert urges financial institutions to make a concerted effort to detect any proceeds of Russian or other foreign corruption. This foreign public corruption includes bribery, embezzlement, extortion, and misappropriation of public assets. This guidance comes following the sanctions against both entities and individuals after Russia’s invasion of the Ukraine.

Check out our expert discussion of this updated guidance on our This Week in AML podcast.

They explain why this is not limited to Eastern Europe and why it’s a global issue, as well as sharing which money laundering tools stood out to them.

The FinCEN advisory identified several red flags of kleptocracy and noted that any failing to report could lead to severe penalties for negligence and failure to conduct due diligence.

In addition to this, the US Department of the Treasury launched the Kleptocracy Asset Recovery Rewards Program that offers reward payments for any ‘information leading to seizure, restraint or forfeiture of assets linked to foreign government corruption, including the Government of the Russian Federation.’

Here are some of the red flag indicators that financial service providers should be aware of when identifying kleptocracy and foreign corruption:

1. Transactions involving long-term government contracts consistently awarded, through an opaque selection process, to the same legal entity or to entities that share similar beneficial ownership structures.
2. Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.
3. Transactions involving official embassy or foreign government business conducted through personal accounts.
4. Transactions involving public officials related to high-value assets, such as real estate or other luxury goods, that are not commensurate with the reported source of wealth for the public official or that fall outside that individual’s normal pattern of activity or lifestyle.
5. Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.
6. Use of third parties to shield the identity of foreign public officials seeking to hide the origin or ownership of funds, for example, to hide the purchase or sale of real estate.
7. Documents corroborating transactions involving government contracts (e.g., invoices) that include charges at substantially higher prices than market rates or that include overly simple documentation or lack traditional details (e.g., valuations for good and services).
8. Transactions involving payments that do not match the total amounts set out in the underlying documentation, or that involve vague payment details or the use of old or fraudulent documentation to justify transfer of funds.
9. Transactions involving fictitious email addresses and false invoices to justify payments, particularly for international transactions. Assets held in the name of intermediate legal entities whose beneficial owner or owners are tied to a kleptocrat or his or her family member.

US Financial service providers may choose to look to the Foreign Corrupt Practices Act for further parallel information and ways to identify corruption and fraud.

What  actions  should you take if you encounter any of the red flags? Here are some examples:

• Under the Bank Secrecy Act (BSA), a financial institution must file a Suspicious Activity Report (SAR) if they suspect, or have reason to suspect, a transaction is conducted, or being attempted to conduct, that is derivative of illegal activity.
• This also applies to the use of a financial institution to facilitate illicit activity, including evasion of sanctions.
• Due diligence protocols must be implemented, and foreign public officials may need to have their assets scrutinized.
• Section 312 of the USA Patriot Act requires certain US financial institutions to perform due diligence for private banking accounts held for non-US persons. This is designed to detect, and report suspected money laundering or other suspicious activity.
• Financial institutions must file a SAR on a person if they have been identified by the Office of Foreign Assets Control (OFAC) as a Specially Designated National.

For additional resources in filing a SAR, consult our guide to writing a useful SAR narrative.

Never feel unprepared when you’re in touch with our managed services providers. Simply get in touch and we can walk you through navigating this FinCEN update.