The latest news from our regional desks about financial crime, corruption, sanctions, and integrity issues worldwide.
This month’s special edition of the Red Flag Bulletin includes S-RM’s key takeaways from the FinCEN Files, and the following stories:
- The EU prepares new sanctions against Belarus, which are being blocked by Cyprus;
- The son of Angola’s former President is sentenced to five years for corruption; and
- US authorities seize a Ukrainian oligarch’s real estate assets over embezzlement allegations.
The FinCEN Files: What the leaks mean for the UK, compliance teams and banks’ reputations
In late September, a group of investigative journalists led by the ICIJ and BuzzFeed News announced that they had spent the last 16 months reviewing the “FinCEN Files”, a cache of leaked documents which included 2,100 suspicious activity reports (SARs), sent by financial institutions to FinCEN, the US Treasury Department’s anti-money laundering unit. Over the last 10 days, journalists have published hundreds of news stories about the FinCEN Files, criticising banks’ approaches to tackling money laundering, fraud and sanctions violations. Three things stand out:
First, the UK has been labelled as a “higher risk jurisdiction” by FinCEN. More UK-incorporated companies appear in the leaked SARs than from any other country – 3,000 in total. In the same week that journalists began reporting on the FinCEN files, the UK government announced that statutory directors and anyone who ultimately controls a UK company will be required to verify their identities before they are listed with Companies House. This will discourage the use of UK companies for criminal purposes, but it won’t correct false information already provided to the registry. The government has also not announced when the changes will become effective. The leaks come at the end of a difficult summer for the UK. The long-awaited Russia Report, published by Parliament’s Intelligence and Security Committee in July, recognised that the money of Russians with close links to Vladimir Putin was so deeply integrated into the UK’s economy that any new measures would only “constitute damage limitation”. A few weeks earlier, the National Crime Agency (NCA) was reminded that it will need to meet strict evidence thresholds before seeking Unexplained Wealth Orders (UWOs), after it failed to impose them on three London properties linked to the family of the former President of Kazakhstan. It also remains unclear whether the UK will commit to the EU’s standards on anti-money laundering after Brexit, and what the impact will be for intelligence sharing on financial crime.
Second, the leaks have exposed problems in the way banks are handling suspicious activity. On the face of it, the leaked SARs are evidence that US financial institutions are reporting suspicious transactions to the authorities, but many of them contained incorrect or partial information, or were filed months after the transaction was made. In some cases, several SARs were filed on the same client. The FinCEN Files come after two decades of heavy investment in compliance by banks, and stricter penalties for money laundering. However, the leaks show that the current regulatory system is producing undesirable results. Financial institutions have been filing SARs often, to cover themselves in the event that they miss a criminal transaction. But the sheer number of SARs is overwhelming law enforcement agencies, and their resources are being wasted if the reports are unnecessary, or of a poor quality. The 2,100 leaked SARs were mostly filed between 2011 and 2017, a period when FinCEN received 12 million SARs overall. The UK’s National Crime Agency has also struggled as the SARs it receives has doubled since 2008. Banks should be incentivised to provide accurate reporting promptly, and feel confident that it won’t be leaked.
Finally, the FinCEN Files underscore how financial crimes can damage the reputations of financial institutions. They are the latest of several high-profile leaks over the last five years to capture the public’s attention, and have hit banks’ share prices. Stories about individuals, such as Arkady Rotenberg, a Russian billionaire and childhood friend of Putin, who may have used a UK company’s bank account to circumvent joint US & EU sanctions, resonate differently with the public than news about fines for misconduct. S-RM remains as committed as ever to helping our clients understand and mitigate the risks they face.
Middle East & North Africa
Saudi Arabia: King Salman dismisses leader of coalition forces in Yemen on corruption grounds
In September, the Kingdom of Saudi Arabia’s King Salman issued a royal decree removing lieutenant general Prince Fahad bin Turki bin Abdulaziz Al Saud (Prince Fahad), from his position as commander of the Saudi-led coalition forces fighting in Yemen. Prince Fahad’s son, Prince Abdulaziz bin Fahad Al Saud, was also removed as deputy governor of Al Jouf in northern Saudi Arabia. Four other military officials were put under investigation. The decree was issued at the request of Crown Prince Mohammed bin Salman (MbS), who had instructed Nazaha, Saudi Arabia’s anti-corruption authority, to investigate "suspicious financial transactions at the defence ministry". Prince Fahad is the son of the late Prince Turki bin Abdulaziz, King Salman’s brother, who served as deputy minister of defence and aviation between 1969 and 1978. The episode is seen as a further attempt by MbS to eliminate potential rivals to the Saudi throne.
Lebanon: US sanctions former Lebanese ministers with ties to Hezbollah
In September, the US government imposed sanctions on Lebanon’s former finance minister Ali Hassan Khalil, and on former transport minister Youssef Fenianos, for providing material and financial support to Hezbollah, the Iran-backed political and military organisation. Khalil and Fenianos served in the Lebanese cabinet until its dissolution on 10 August, after an explosion at Beirut’s port. Their assets in the US have been frozen. It is the first time that the US has sanctioned Hezbollah’s allies within Lebanon, despite having pursued the group’s income streams for several years. The sanctions are an extension of President Donald Trump’s policy of “maximum pressure” on Iran, designed to limit Tehran’s influence in the wider region. White House officials are seeking further sanctions against other senior ministers in the near future, potentially including Gebran Bassil, a former minister of foreign affairs and a known ally of both former Prime Minister Saad Al Hariri and Hezbollah.
Pakistan: Regulatory agencies launch investigations into sugar barons
Pakistan has ordered various regulatory agencies, including the National Accountability Bureau and the Competition Commission, to investigate the country’s so-called sugar barons. The order follows the publication of a report in May 2020 by the Sugar Inquiry Commission (SIC) alleging widespread subsidy fraud, corruption, tax evasion and price collusion by members of the Pakistan Sugar Mills Association (PSMA). According to the SIC, key beneficiaries include groups connected to controversial politician Jahangir Tareen, previously an aide to Prime Minister Imran Khan, and former Prime Minister Nawaz Sharif. PSMA members have responded with legal action at the provincial level. On 17 August, the Sindh High Court declared the SIC report illegal. This was despite an earlier Supreme Court decision backing a federal investigation of the report’s findings. Auditors are reportedly resigning from sugar groups, and banks are reluctant to lend to them.
Philippines: Corruption and fraud scandal engulfs state health insurance body
Pressure on the state-funded Philippine Health Insurance Corporation (PhilHealth) intensified as it faces allegations of fraud and corruption. In August, the Interim Reimbursement Mechanism (IRM), the programme under which PhilHealth advanced emergency cash to local health bodies to deal with COVID-19, was suspended after whistle-blowers gave damning testimony at Congressional hearings. PhilHealth’s former anti-fraud officer alleged that as much as PHP 15 billion (USD 310 million) had been embezzled by “mafia syndicates” with influence over PhilHealth, who exploited the IRM’s lack of audit procedures. Commentators have criticised significant discrepancies in the amount of money certain institutions received from PhilHealth and the patients they treated, and “unbelievable” overpricing in PhilHealth’s acquisitions of IT equipment and Covid-19 testing kits. Despite the scandal, PhilHealth has requested an increase in its subsidy for next year, warning that it might otherwise face bankruptcy by 2022.
Angola: Son of former president sentenced to five years for corruption
In August, José Filomeno ‘Zenu’ dos Santos, the son of Angola’s José Eduardo dos Santos, President of Angola from 1979 to 2017, was sentenced to five years’ imprisonment by an Angolan court for fraud and embezzlement committed during his tenure as head of Angola’s sovereign wealth fund. Zenu and three other defendants, including the former governor of the National Bank of Angola, were found guilty of embezzling USD 500 million from the fund to a Swiss bank account. All four were acquitted of money laundering charges. This is the first conviction of a member of the dos Santos family in the ongoing anti-corruption campaign of Angola’s incumbent President João Lourenço (2017-present), as the government seeks to recover state assets allegedly misappropriated under the dos Santos presidency. Zenu’s sister, Isabel dos Santos, is also the subject of various criminal proceedings over allegations of embezzlement, mismanagement and money laundering, including during her tenure as head of Angola’s national oil company. She has denied all allegations against her.
South Africa: Personal information of 24 million exposed in Experian data breach
In August, South African authorities announced that Experian, the credit reporting company, had suffered a data breach that exposed the personal information of over 24 million South Africans and almost 800,000 companies. The breach was the result of social engineering, and saw Experian hand over the information to an actor who had claimed to represent a client of the company. Experian said that no credit or financial information was exposed, that it had identified the perpetrator, and that it had obtained an urgent court order for the suspect’s hardware to be seized. South African authorities have reportedly deleted the data from the suspect’s devices and Experian has said that it will be pursuing civil and criminal action against them. Investigators have revealed that the misappropriated data was not intended to be used for fraudulent purposes but “to create marketing leads to offer insurance and credit-related services”.
Belarus: Cyprus blocks EU plans to impose new sanctions after disputed election
The European Union announced that it was preparing new sanctions against Belarus, but Cyprus blocked the plans in late September because of a lack of EU action against Turkey. The EU agreed to prepare new sanctions after a violent crackdown by Belarus’ government on large-scale opposition protests after the widely disputed re-election of President Alexander Lukashenko. Sviatlana Tsikhanouskaya, Lukashenko’s primary opponent in the election, has urged the EU to reject the election results, having fled to neighbouring Lithuania following reported threats to her family. The proposed sanctions, which will reportedly impose asset freezes and travel bans on individuals responsible for electoral fraud and violence against protestors, would mark a reversal in the EU’s recent sanctions policy towards Belarus, which entailed the ending of various sanctions in 2016.
Ukraine: US authorities move to seize oligarch’s real estate assets
In August, US authorities began proceedings to seize multiple real estate assets in Texas and Kentucky owned by Ihor Kolomoiskiy, a prominent Ukrainian oligarch and the former owner of PrivatBank, a large Ukrainian bank which was nationalised in 2016 following high-profile embezzlement allegations against Kolomoiskiy. Two days earlier, the FBI had raided the offices of Kolomoiskiy’s companies in Cleveland and Miami. US authorities allege that Kolomoiskiy and his business partners embezzled billions of dollars from PrivatBank, and have laundered these funds by acquiring large commercial properties and steel and alloy plants in the US. Kolomoiskiy’s representatives have denied any wrongdoing.
US/Panama: Countries establish joint anti-money laundering task force
In August, the US and Panama signed a memorandum of understanding to form an anti-money laundering and anti-corruption task force. It will comprise Panamanian prosecutors, law enforcement and regulatory officials who will receive training and assistance from the FBI. The US reportedly plans to invest USD 5 million over the next five years in the task force with the goal of improving Panama’s capacity to investigate and prosecute money laundering and corruption.
Mexico: Ex-Pemex CEO accuses former presidents and lawmakers of corruption
Emilio Lozoya, a former CEO of Pemex, Mexico’s state-owned petroleum company, has accused several former presidents, ministers and lawmakers of corruption. Lozoya, who is currently on trial in Mexico for bribery and money laundering offences, has attempted to deflect blame by claiming that former President Enrique Peña Nieto and his ex-finance minister, Luis Videgaray, instructed him to solicit bribes to support Peña Nieto’s presidential campaign and to bribe lawmakers to secure the passage of a 2013 energy reform bill. According to leaked testimony from the trial, Lozoya has also accused former presidents Felipe Calderón and Carlos Salinas, and over a dozen other public officials, of various acts of corruption. Many of those accused have publicly rejected the allegations. President Andrés Manuel López Obrador has said that the accusations will be investigated by the attorney general’s office.
Brazil: Authorities sign USD 178 million agreement with South America’s “largest money launderer”
In August, Rio de Janeiro’s federal court approved a leniency agreement that authorities had signed with Dario Messer, a Brazilian foreign exchange dealer who is known as the largest money launderer in the region and a principal actor in the crimes investigated by Operation Car Wash. Messer is under investigation for crimes in Brazil and Paraguay. According to the agreement, he will return BRL 1 billion (USD 178 million) to the Brazilian treasury, and will serve a prison term of 18 years and nine months. Close to 15 percent of Messer’s assets are located in Paraguay, and Brazilian legal experts foresee difficulties for Brazil in ensuring that these assets are repatriated.
Slovakia: Businessman acquitted in journalist murder trial
In September, a Slovak criminal court acquitted Marian Kocner, a businessman indicted for ordering the murder of investigative journalist Jan Kuciak and his fiancée in 2018. At the time of his killing, Kuciak was investigating corruption involving Kocner and prominent Slovak politicians. The deaths sparked the largest protests in Slovakia since the 1989 Velvet Revolution, and led to the resignation of Prime Minister Robert Fico and other top government officials. The subsequent investigation and trial, marred by allegations of corruption and incompetence, were widely seen as a test of the Slovak judicial system’s ability to hold the country’s political and business elites to account. Kocner’s acquittal met with outcry from Slovak and international news outlets, and was appealed by the prosecution and sent to the Slovak Supreme Court.