The Troika of Money Laundering, Sanctions and Corruption—Ongoing Challenges for Internationally Operating Financial Institutions

By Sven Stumbauer, Managing Director and Anti-money Laundering and Sanctions Practice Leader, Grant Thornton

Recent geopolitical events and changing legislation ushered in a new, rapidly evolving wave of challenges for financial institutions (especially in the United States), which are managing their regulatory exposures and strengthening their risk-management processes while scanning the horizon more than ever before in an effort to comply with a myriad of new regulations.

Most notably, recent changes include:

• The passage of the U.S. Anti-Money Laundering Act of 2020 (AMLA) (part of the National Defense Authorization Act for Fiscal Year 2021),
• The U.S. Strategy on Countering Corruption,
• 2022 Strategy for Combatting Terrorist and Other Illicit Financing,
• Sanctions against Russia and Belarus.

The United States is ramping up enforcement tools

The passage of the AMLA—and the subsequent regulation implementation by the Financial Crimes Enforcement Network (FinCEN)—will increase anti-money laundering (AML) enforcement activities and regulatory exposure for financial institutions in the United States and, by extension, their counterparts and affiliates across the globe. Further, the AMLA may well be the most impactful legislation on the AML landscape since the enactment of the USA PATRIOT Act¹ in 2001, and it presents a considerable overhaul to the Bank Secrecy Act (BSA).

While the AMLA contains numerous changes to existing AML rules and regulations, the following changes deserve particular attention and should drive the short- and long-term planning of banking executives:

• Increasing penalties for AML violations;
• Increasing US regulators’ authority to seek documents from foreign financial institutions.

The AMLA codifies additional civil penalties for repeat AML violations. For each additional violation, repeat offenders are subject to further penalties of three times the profit gained or avoided loss as a result of the violation or two times the maximum penalty for the violation—whichever is greater.

The new law also requires certain officers or employees of financial institutions convicted of AML violations to repay any bonuses paid to those individuals in the calendar year during which or after the violation occurred. The significance of these provisions cannot be overstated since some financial institutions, based on their histories of regulatory-enforcement actions, appear to run afoul in the same or closely related areas of non-compliance.

Expanded authority against foreign financial institutions

The AMLA significantly expands the statutory authority to seek documents from foreign financial institutions. For instance, the U.S. Department of the Treasury (Treasury) and the Department of Justice (DOJ) are authorized to subpoena a foreign financial institution that maintains a correspondent account in the US. This subpoena power includes both the foreign financial institutions’ correspondent accounts and any account at the bank, provided the records are relevant to the investigation.

Such subpoenas will most likely be challenged in various courts. However, under the AMLA, if a foreign financial institution fails to cooperate, the DOJ can impose sanctions against it and require the US correspondent bank to end its relationship with the foreign financial institution.

The US war on international corruption

In December 2021, President Joe Biden’s administration unveiled a far-reaching approach to combating corruption: the United States Strategy on Countering Corruption² (Strategy). This Strategy outlines a global approach to rooting out corruption that is seen as a US national-security threat.

The Strategy states that US officials will “continue to evaluate and implement measures as needed to further safeguard our financial system, and will work with like-minded partners and relevant multilateral institutions to do the same. We will make it harder to hide the proceeds of ill-gotten wealth in opaque corporate structures, reduce the ability of individuals involved in corrupt acts to launder funds through anonymous purchases of U.S. real estate, and bolster asset recovery and seizure activities.”

Broadly speaking, the Strategy relies on “five-mutually reinforcing pillars”. Pillars Two and Three should warrant a closer look from financial institutions since they touch on many AML issues for financial institutions. Overall, the Strategy emphasizes:

• Modernizing, coordinating and resourcing the U.S. Government’s efforts to fight corruption;
• Curbing illicit finance;
• Holding corrupt actors accountable;
• Preserving and strengthening the multilateral anti-corruption architecture;
• Improving diplomatic engagement and leveraging foreign-assistance resources to advance policy goals.

Pillar Two: Curbing illicit finance

As stated in the Strategy, the US “bears particular responsibility to address [its] own regulatory deficiencies, including in [its] AML regime, in order to strengthen global efforts to limit the proceeds of corruption and other illicit financial activity”. The US also plans on “addressing deficiencies in the U.S. anti-money laundering regime, by effectively collecting beneficial ownership information on those who control anonymous shell companies, and by increasing transparency in real estate transactions”.

Pillar Three: Holding corrupt actors accountable

Pillar Three describes the use of increased enforcement as part of the overall strategy, most notably by:

• Continuing to enforce foreign bribery cases through the Foreign Corrupt Practices Act (FCPA), money-laundering charges and forfeitures for promoting corrupt schemes and laundering corruption proceeds as appropriate.
• Establishing a pilot Kleptocracy Asset Recovery Rewards Program that will enhance the U.S. Government’s ability to identify and recover stolen assets linked to foreign-government corruption held at US financial institutions; and
• Working with the private sector to improve the international business climate by encouraging the adoption and enforcement of anti-corruption compliance programs by US and international companies.

National priorities that cover (almost) everything

In May 2022, the Treasury released its 2022 Strategy for Combatting Terrorist and Other Illicit Financing³ (2022 Strategy). The proposed 2022 Strategy includes four goals to address the key risks identified by the 2022 National Money Laundering, Terrorist Financing, and Proliferation Financing Risk Assessments.⁴ Those goals are as follows:

• Increasing transparency and closing legal and regulatory gaps in the U.S. Anti-Money Laundering/Combating the Financing of Terrorism (CFT) framework exploited by bad actors;
• Making the AML/CFT regulatory framework for financial institutions more effective and efficient;
• Enhancing operational effectiveness in combating illicit finance; and
• Utilizing technological innovation to combat illicit financial risks.

According to the Treasury’s press release, the 2022 Strategy also highlights specific threats that should assist financial institutions “in assessing the illicit finance risk exposure of their businesses”.

The eight key threats specified in the 2022 Strategy are:

• Fraud,
• Drug trafficking,
• Cybercrime,
• Professional money laundering,
• Corruption,
• Human trafficking and human smuggling,
• Foreign and domestic terrorist financing,
• The financing of weapons of mass destruction.

The overall message seems to be that financial institutions should look at financial crime holistically rather than drawing a distinction between fraud and money laundering.

Weaponizing the financial system: sanctions against Russia and Belarus

Since the geopolitical events of February 2022, the US and other jurisdictions have issued a plethora of sanctions against Russia and Belarus. Shortly after imposing sanctions, FinCEN issued an alert⁵ warning financial institutions about the risks of potential attempts to evade sanctions. FinCEN highlighted the following red flags:

• “Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds or (iii) countries involved particularly sanctioned jurisdictions.
• Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration.
• Use of third parties to shield the identity of sanctioned persons and/or Politically Exposed Persons (PEPs) seeking to hide the origin or ownership of funds, for example, to hide the purchase or sale of real estate.
• Accounts in jurisdictions or with institutions that are experiencing a sudden rise in value being transferred to their respective areas or institutions, without a clear economic or business rationale.
• Jurisdictions previously associated with Russian financial flows that are identified as having a notable recent increase in new company formations.
• Newly established accounts that attempt to send or receive funds from a sanctioned institution or an institution removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
• Non-routine foreign-exchange transactions that may indirectly involve sanctioned Russian financial institutions, including transactions that are inconsistent with activity over the prior 12 months. For example, the Central Bank of the Russian Federation may seek to use import or export companies to engage in foreign exchange transactions on its behalf and to obfuscate its involvement.”

While the red flags identified by FinCEN should seem familiar to most financial institutions, they should also motivate financial firms to take a hard look at their compliance efforts. An added wrinkle of the sanctions imposed against Russia and Belarus is the speed at which they have been implemented as well as their complexity. The nuance of some sanctions might lead some financial institutions to excessive de-risking or declining transactions, despite these transactions being potentially permissible.  

Things to consider now

Given the backdrop of various legislative initiatives and strategies, coupled with the myriad of various new sanctions regimes being imposed across the globe, financial institutions should consider taking a hard look at their overall financial crime framework and forward-looking strategy and consider focusing on the following topics and questions:

Risk appetite: Given the changing regulatory landscape, has our overall risk appetite changed? Are we still operating within our risk-tolerance levels?

Risk assessment: Is our risk assessment dynamic enough to account for all legislative changes and strategies? Have we recently conducted a “true up” exercise?

Correspondent banking/agent relationships: In line with assessing our overall risk assessment, do we have a good command of the AML, sanctions and corruption risks posed by our counterparties? Do our due-diligence efforts reflect these new realities?

Customer due diligence: Are we confident that our due-diligence efforts are sufficiently robust to reflect the true beneficial ownership/control persons, as well as any potentially related parties?

Monitoring systems: Regarding both AML and sanctions, are we confident that our detection scenarios address the new realities and potential changes in customer behaviors?    

While it is almost impossible to completely future-proof any financial institution against all aspects of financial crime, focusing efforts on the above key areas enables financial institutions to adapt more rapidly to changes and challenges—those we see coming and those we don’t.

References

¹ U.S. Congress: Public Law 107–56—Oct. 26, 2001: “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001.”

² The White House: “United States Strategy on Countering Corruption,” December 2021.

³ U.S. Department of the Treasury: “National Strategy for Combating Terrorist and Other Illicit Financing,” May 2022.

⁴ U.S. Department of the Treasury: Press Release: “Assessments for Money Laundering, Terrorist Financing, and Proliferation Financing,” March 1, 2022.

⁵ Financial Crimes Enforcement Network: FIN-2022-Alert001: “FinCEN Advises Increased Vigilance for Potential Russian Sanctions Evasion Attempts,” March 7, 2022.