New DOJ Guidelines, OCC Priorities, Weapons Diversion, and Conflicts of Interest

This week, John and Elliot discuss updates to the US Department of Justice corporate enforcement policy, the OCC’s priority areas, Transparency International’s report on corruption’s role in fueling arms diversion, and other items impacting the financial crime prevention community.

New DOJ Guidelines, OCC Priorities, Weapons Diversion, and Conflicts of Interest - Transcript

Elliot Berman: Hi, John. How are you this week?

John Byrne: Good. We're back to this week in chaos. I wanna start off by saying that we've, I've talked about this for, past couple years. I teach a class at George Mason graduate class on money laundering, terrorism and corruption. And the class is a summer class. I'm able to get really good folks like our friends, Dennis Lormel and Dan Stipano to guest lecture. And it's to cover those themes. But I gotta say the corruption part of it is a challenge, and I've changed a lot of the the US portion of coverage of corruption because of all the things that we've already begun to cover in our this week conversation.

So as that is a backdrop, I just want to mention that as we record this, there's been a lot of conversation from both sides of the aisle about the propriety of the Trump administration accepting a $400 million jet from Qatar. A country that clearly has assisted Hamas and other terrorist organizations. Leaving aside the fact that a plane to become Air Force One and then also at the end of the administration to be part of the presidential library on its face violates the Emoluments Clause which I realize most people forgot about from the first Trump administration.

We are hearing and seeing some pushback from both sides of the aisle. But I thought that was pretty interesting. And if you add to that, the meme coins and some of the other things that have happened since January it's definitely a challenge to describe to students and others what in fact is corrupt activity, at least in the United States.

Elliot Berman: Indeed. And that's one of our themes for today. Where would you like to start beyond what you just said?

John Byrne: The Economic Policy Institute, which is an organization that participated in the Marquette event that I was part of a couple of weeks ago, does some excellent blogs and podcasts and resources. They recently posted what they're calling Corruption in Plain Sight. Subtitle is How Musk Benefited From the First Hundred Days of the Trump Administration. You should read the blog. It's on the epi.org website.

The coverage includes that there were federal agencies that had at least 32 open investigations into Musk's company. Department of Labor, Agriculture, and others. It's an interesting walkthrough, very specific Department of Transportation of some of the examples of the things that were on the table prior to this administration. So I wanted to mention that as a corruption issue.

Then internationally, our friends at the Organized Crime and Corruption Reporting Project posted just the other day Lithuania is investigating a crypto startup called Bankera over a hundred million Euro token sale. And it's a combination investigation by OCCRP and what's called Lithuania's 15min. They were launching a probe with the founders of Bankera from a 2018 initial coin offering, so the Lithuanian Financial Crime Investigation Service opened an investigation after the publication in late April.

From OCCRP's own investigation, the reporters had found evidence of the co-founders used a portion of the funds raised in the ICO to finance luxury real estate purchases through a Vanuatu based bank that they had acquired. So it's a very interesting discussion. Obviously this is an international corruption investigation. So I thought I would mention that as well.

Elliot Berman: Another of the organizations that you and I have talked about in the past and interviewed folks from Transparency International US and Transparency International Defense and Security jointly issued a report called Under the Radar: Corruptions Role in Fueling Arms Diversion. It's a comprehensive report runs to 50 pages and there's a lot in it.

But it does have some key findings, and this is really focused on how corruption has resulted in weapons and ammunition being stolen or diverted from their owners generally governmental military agencies, and ending up in the hands of terrorists or cartel members or other people involved in illegal activity. They scope out the problem. They looked at 400 cases where arms were diverted during their life cycle from their original intended recipients to bad actors and took a look to see what the patterns were.

They concluded that corruption plays a key role in the diversion of arms and ammunition to criminal organizations and conflict zones. The most common type of corruption is embezzlement or theft of state owned weapons for private gain, and there's a huge human toll on civilians.

One of the big picture conclusions is that countries have not done a risk assessment related to weapons diversion. In part because they didn't have the scope of the problem. They view this report as helping frame the size of the problem to encourage countries to do such risk assessments and therefore be able to figure out how they need to mitigate those risks to reduce diversion.

John Byrne: The Trump administration, I think he's still in the Mid East as we record this, also announced that they're gonna eliminate all sanctions against Syria. These sanctions have been in place for quite a long period of time because Syria has obviously been a bastion of support for terrorists.

There is a new leader there. The interim president's name is Ahmed al-Sharaa, he took control after Assad fled to Russia last year. But it should be noted that his political roots are not in a formal political party. This is from the Washington Post, but in an Islamic rebel group with passed ties to Al-Qaeda.

So something I think to note. But at least according to Trump, they're gonna eliminate all sanctions against Syria. So something that obviously our sanctions professionals will be paying attention to and I thought we should mention that as well.

Elliot Berman: Yes. And somewhat related to corruption, I guess it depends how you look at corruption. The Criminal Division at the US Department of Justice issued updated guidelines in a variety of areas including in corporate enforcement and voluntary disclosure. So how has this worked?

Generally speaking when a US corporation was found to have violated any criminal laws, if they had self-disclosed to the Justice Department in advance of an investigation they would get credit when it came time to determine what the penalty might be. The new guidelines appear to say that if you self-disclose then there'll be no penalty.

John Byrne: And the head of the Criminal Division spoke to SIFMA at their AML conference this week, and right from the speech based on what you just said, is the following. Too often businesses, this is him speaking, too often businesses have been subject to unchecked and long running investigations that can be costly both to the Department and to the subjects and targets of its investigation. It can unduly interfere with day-to-day business operation. These costs and uncertainty have deterred companies from working with the Department and diverted the Department's resources from tackling the most significant threats facing our country. I'll just leave that there.

Elliot Berman: Yes. So as we talked briefly before we started recording, if one of the boys who lives next door threw a rock through one of my windows and I went out and wanted to talk to them about it, and they said, Mr. Berman, I'm really sorry. I would just say, okay.

John Byrne: Yeah, that's right.

Elliot Berman: And while I like the boys next door, and I'm certainly not gonna chase 'em around the neighborhood, I'd certainly have a chat with their parents about, okay, so how are we gonna resolve this problem? But I guess we're not gonna have chats with anybody's parents anymore.

John Byrne: Doesn't, does not seem to be the case.

Elliot Berman: Okay. Alright. Got that clear now.

John Byrne: Something that I just saw right before we recorded, and I haven't gone through this in detail, but interesting from KPMG in Switzerland. They just released a report the about fraudsters profiling the corporate fraudster. I thought this was interesting. Haven't read the report, but I have the key points in front of me here. Fraudsters are usually male, 36 to 55-year-old and long serving employees. They said only 8% are individual perpetrators. These, again, are the highlights from the study. It's called the Enemy Within Profiling the Corporate Fraudster again from KPMG.

46% of fraud cases were committed without any use of technology. With cyber attacks, AI and cryptocurrencies playing only a minor role to date. That's an interesting statistic. The most common offenses were a misappropriation of assets, falsified documentation, and theft. One in five fraud cases involved a loss of more than 5 million US dollars. And finally, internal controls are a key element in efforts to prevent and uncover fraud.

We'll take a look in more detail at this. And there's other items in the report, we'll certainly mention that. But anytime any of these organizations produce surveys or reports, it's always a valuable training tool. So again, just saw this and I've given you just the highlights.

Elliot Berman: Indirectly tied into the the Criminal D ivision change to their policy guidelines. We have seen the bank regulators who have levied substantial fines and other penalties against Wells Fargo over the last number of years for a variety of, bad acts. I'd even say strange acts. But one little tail piece left over from that is a former Wells executive has filed suit against the Fed, who was one of the regulators of Wells, related to the fact that the Fed has denied that person's application to receive earned deferred compensation from this person's years at Wells, which spanned from 2005 to 2018. Apparently there was a program that provided deferred compensation benefits, which is not unusual in larger organizations at executive levels. And, the Fed has characterized those as golden parachute payments.

There are banking regulations in the US that restrict those kinds of compensation benefits to for organizations that are under certain level of penalties. But the former employee is characterizing them as golden handcuffs. So golden parachute is when you leave, you get a meaningful payment for your. Golden handcuffs are compensation arrangements to try to keep you in the organization.

So it'll be interesting to see how this unfolds. It's just one tiny footnote. But it does show that these bad acts by corporations in addition to hurting their customers or their counterparties also can have a significant impact on their employees who were not bad actors. Something to watch.

John Byrne: Sticking with the agencies, the Acting Comptroller of the Currency, Rodney Hood gave a speech on the various OCC agency priorities. And in the area of digital assets, he said the following, we know that millions of Americans are investing in digital assets. I want to enable that activity to occur within the federal banking system according to a safe and sound framework. The OCC recently reaffirmed that a range of cryptocurrency activities are permissible by the institutions we supervise. We expect banks to have the same strong risk management controls in place to support novel bank activities as they do for traditional ones. Bears following.

In a related area to crypto, the FBI announced late last week that a Springfield, Virginia man was sentenced to 364 months in prison for his efforts to provide material support to ISIS. He collected more than $185,000. And sent that money to ISIS members in Syria to benefit ISIS in various ways. He would receive electronic transfers of funds and travel hundreds of miles to collect funds by hand.

He would then convert the money to cryptocurrency and send it to Turkey where it was smuggled to ISIS members in Syria. Thought I would yeah, just say, we mentioned Syria earlier in this conversation.

Elliot Berman: I think you did. Yeah.

John Byrne: In any event, it's going to continue to be interesting to see what sort of regulatory oversight, because we know Congress is grappling with trying to craft some legislation, which to date has been unsuccessful in the crypto space. So again we'll bear close watching by all of us in the AML community.

Elliot Berman: I just wanna go back to Acting Comptroller Hood's comments. I don't have any trouble with the idea that banks would be authorized to do crypto. But I think like all services and products, not every bank is capable of offering every service. And like many other banking services, financial services, there's a certain level of expertise that a bank needs to have on its staff, a certain level of systems and controls so that they can properly assess and then manage the risk.

And I think the unspoken part of many of the statements we've heard coming out of the bank regulators and other parts of the administration seem to be crypto should just be available everywhere. But it shouldn't be available from every provider. Because many of them are not prepared, and will not be able to prepare to deal with the risks related to these products.

John Byrne: It's very similar to the conversations and panel discussions that I've been part of for many years on the concept of de-risking from this perspective I vividly recall a agency officials warning smaller banks if a financial institution of a larger size has exited a relationship, and now you have the opportunity to bank that entity and you don't do your proper due diligence, understand A, you may not have the risk mitigation procedures to handle it. And B, you don't know what the problems were. You don't know that SARS were filed or what have you. So if it looks too good to be true, it most likely is.

So that to me is a similar theme to what's happening now. And so it's gonna be fascinating to watch this and, we'll continue to cover this as best we can. And I will just say it ending, my point of this is I'm reaching out to someone I'll mention it after we firm it up to interview her about her thoughts regarding crypto regulation and what are some of the challenges and I'm hoping to do that in the next couple of weeks.

Elliot Berman: And on that theme, our next webinar is next week and there's still time for you to sign up and, John, you're gonna be moderating that one. And it's on managing sanctions in the new world. Again we talked about sanctions changing possibly with Syria a very fluid area and important to talk about. That's on May 22nd and at 1:00 PM Eastern Time, and you can still, sign up for that.

And then our June webinar, which will be on June 26th, also at 1:00 PM, we're gonna look at the latest on effective risk assessments. And you'll be able to sign up for that one after next week's webinar. John, anything else going on?

John Byrne: I think it's enough for this week. We're following these things so you don't have to. We'll continue to do that and that's enough for this week in chaos.

Elliot Berman: Alright, John, you have a good week and I will talk to you next week.

John Byrne: Take care. Stay safe.

Elliot Berman: You too. Bye-bye.