In today’s edition of Daily Compliance News:
Treasury study: Facilitation of Money-Laundering; Terror Finance Through the Trade in Art.
The DOJ arrests two for Bitcoin hack and money laundering scheme.
Welcome to this special podcast series, Integrity Matters sponsored by K2 Integrity. For this series, I visit with Koby Bambilia, Managing Director, and Olivia Allison, Senior Managing Director. Over the series, we look some issues and trends going forward into 2022. In this Part 2, I am joined by Koby Bambilia who looks at trends regarding AML going into 2022. Some of the highlights include:
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Koby Bambilia Profile
K2 Integrity
I recently had the chance to visit with Koby Bambilia, Managing Director at K2 Integrity. We looked at some key anti-money laundering (AML) trends in 2021 and how they might impact AML investigations, prevention and enforcement going forward into 2022. We consider the impact to-date from the passage of the AML Law of 2020 then move to some of the key questions on AML going into 2022. Has COVID and the global crises created shifts which allowed bad actors take advantage of the financial system? Finally, what are some of the key risks to mitigate these risks and get ahead of the rule making as we head into 2022?
We began by considering the focus of Department of Treasury (Treasury) and its regulators. Here there are several topics that were given priority as part of the national Strategy for Countering Corruption, terrorism and other illicit activities. These priorities include cybercrime, virtual foreign currency, domestic terror financing, criminal organizations, human trafficking, smuggling, drug trafficking, corruption, fraud and proliferation financing. Bambilia related, “we can easily see that the list is quite extensive yet. There is something in common for all these priorities. If you look at the priorities, they include predicate crimes that generate illicit funds thought assets, which allows criminal actors to launder through the financial system.” As money laundering is linked to all these priorities it remains a priority.
Bambilia believes financial institutions need to incorporate these AML priorities into their risk-based Bank Secrecy Act (BSA) compliance programs by assessing the potential risk associated with the client base, the products and service services they offer, in conjunction with their geographic areas and countries of operations. Bambilia believes that government examiners will soon ask to see and review what steps banks and financial institutions have taken with regards to these priorities. In other words, whatever steps you take Document, Document, and Document so you can show the regulators when they come knocking.
As Treasury continues to issue regulations stemming from the AML Law of 2020, banks and financial institutions should be prepared to face new and revised beneficial ownerships and obligations in 2022. Bambilia believes, “December’s proposed rule to implement the Corporate Transparency Act, gave us all the preview into the Treasury Department’s mind and approach to developing a national registry of beneficial ownership information.” Moreover, this should also act as a reminder to meticulously follow the Beneficial Ownership Rule, which requires covered financial institutions to identify beneficial owners of each customer at the time a new account is being opened and to determine the true and official owners based on both the control and ownership prongs. Bambilia also noted, “looking ahead into 2022, beyond the immediate implications, the proposed rule will also require changes to existing customer due diligence obligations for financial institutions.” Finally, they will most probably be the subject of a future FinCEN rule making.
It is clear that COVID-19 had immense impact on everything relating to illegal activities and bad actors. Ransomware is the tool most bad actors are using, even with financial institutions. Bambilia related, “those nefarious actors are probing to obtain both customer and commercial credentials, as well as proprietary information to defraud financial institutions and to disrupt business functions.” Interestingly, Bambilia and colleagues observed a significant increase in criminal attempts to exploit the pandemic through phishing campaigns and business extortions, email compromise and traditional fraud schemes.
Tying all this back to our initial discussion, the proceeds of these activities are being channeled and funneled through the regular banking and financial systems. This puts a higher burden on financial institutions as they are uniquely positioned to observe and detect the suspicious activity that results from cybercrime. Now they are required to report it through the normal channels of Suspicious Activity Report. This has led to an increased need for financial institutions to process, review and monitor transactions that go through their system and evaluate those transactions with a sufficient and comprehensive set of skills required to identify the illegal activities and to properly report it to authorities.
Just as ransomware attacks have become more ubiquitous so have ransomware payments. In September 2021, OFAC issued an updated advisory on potential sanction risks for facilitating ransomware payments, which is specifically designed to disrupting criminal networks and virtual currency exchanges responsible for laundering these ransom payments to encourage improved cyber security across all sectors, including the banking industry. Bambilia said this “emphasized the need to properly report ransomware incidents and related sanctions to US government agencies, including both Treasury and law enforcement.” It also re-emphasized the need to properly monitor bank transactions for potential illegal activities.
We turned to a discussion of what businesses and financial institutions need to do to prepare for the upcoming regulations and increased enforcement. Bambilia emphasized that a strong compliance program for AML, BSA and sanctions is the best place to start and build upon going forward. Bambilia laid them out as follows:
We ended by recognizing that it is up to all employees, not simply the compliance function, to be a part of these new efforts. Employees need to understand their role on the first line of defense and how to report up violations or raise their collective hands to ask for information as AML regulations continue to evolve. COVID-19 has impacted compliance functions in many ways so compliance will have to re-double its efforts as well. Banks and financial institutions must commit the requisite resources to upgrading their compliance programs to meet these new regulatory requirements as well.
Bambilia concluded, “I will end by saying that the world of financial crimes continues to evolve. And our thinking must be as always one step ahead of those looking to take advantage of our financial systems. It is not just about identifying it, understanding today’s threats, but also being prepared for the threats of tomorrow.”
Check out the K2 Integrity website here. Check out my full interview of Koby Bambilia here.
Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. This week, Matt and Tom begin a special two-part podcast series of several topics they will be following in 2022. Today in Part 1, we consider
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Matt in Radical Compliance
We are exploring the recently released the United States Strategy on Countering Corruption (the “Strategy); subtitled “Pursuant To The National Security Study Memorandum On Establishing The Fight Against Corruption as a Core United States National Security Interest”; in response to President Biden’s prior declaration of corruption as a national security issue of the United States. Over this 5-part series I will be delving into the Strategy and considering how it will impact the compliance professional. Yesterday, we considered Pillar 1, modernizing, coordinating, and resourcing US government efforts to fight corruption. Today we take up Pillar 2, curbing illicit financing.
Today, we also pay tribute to New Orleans native Anne Rice who died over the weekend. Rice is best known for her first novel, Interview with the Vampire, which was published in 1976. According to her New York Times obituary, “Ms. Rice was a largely unknown writer when she turned a short story she had written in the late 1960s into “Interview With the Vampire,” her first published novel. It features a solitary vampire named Louis who is telling his life story to a reporter, but Ms. Rice said the tale was her story as well.” She went on to state, “I really got into the character. For the first time, I was able to describe my reality, the dark, gothic influence on my childhood. It’s not fantasy for me. My childhood came to life for me.” The book became a bestseller. Rice “found herself with a considerable fan base, which she proceeded to entertain with a series of follow-up novels that became known collectively as the Vampire Chronicles. The books, more than a dozen in all, are widely credited with fueling a revival of interest in all things vampiric.” So, farewell to many a gothic, chilly and scary night, all courtesy of Anne Rice.
The fight against illicit financing is extraordinarily significant. The Strategy noted, that in “today’s globalized world, corrupt actors bribe across borders, harness the international financial system to stash illicit wealth abroad, and abuse democratic institutions to advance anti-democratic aims. Emerging research and major journalistic exposés have documented the extent to which legal and regulatory deficiencies in the developed world offer corrupt actors the means to offshore and launder illicit wealth. This dynamic in turn strengthens the hand of those autocratic leaders whose rule is predicated on the ability to co-opt and reward elites.”
It is most interesting to highlight that the US government is pointing to “major journalistic exposés” as a major source of information on illicit financing, providing wrong all the naysayers who criticized publication of the Panama Papers, Paradise Papers and the Pandora Papers. This pointing to the public releases of information on illicit financing also should end the calls for these types of releases to criminalized. But more than simply the monies involved, “corrupt actors and their financial facilitators have taken advantage of vulnerabilities in the U.S. and international financial systems to launder their assets and obscure the proceeds of crime. Similarly, corrupt actors amass ill-gotten wealth through illicit gains of other resources, including minerals and wildlife.”
The Strategy recognizes the US role as the pre-eminent leader in global banking and financing. The Strategy outlines what it calls ‘Lines of Effort’ or LOEs which will add more “human resources to synchronize anti-corruption work as a core domestic and foreign policy priority”. The US also commits to working in “coordination with global partners to magnify” to both expand and magnify the US efforts. The next two lines from the Strategy speak directly to the compliance professional. “We will seek to foster and learn from governmental and non-governmental partners pioneering innovative solutions. And we will dedicate and steward financial resources by matching appropriate means to critical ends.” This means more information will be collected from actors in the private sector such as public and private corporations.
There are several Strategic Objectives to guide this initiative. First, the US will address deficiencies in the current Anti-Money Laundering (AML) regime. This will include additional work in beneficial ownership transparency, in US government procurement, real estate transactions, sources of private equity funds and investments, gate keepers, offshore and tax havens, digit assets and arts and antiquities. Most interestingly, while the places and strategies of money-laundering are well known and have begun to be addressed, this is the first real push against gatekeepers.
Many professionals and service providers, including lawyers, accountants, trust and company service providers, incorporators, and others, have been used as registered agents or who act as nominees to open and move funds through bank accounts. This is usually with little to no understanding of the underlying source of the funds, the character of the actors involved or even who is behind the curtain. All basic due diligent inquires by the compliance professional. When you add these advisors to create “opaque corporate vehicles” you can see why “complicit professionals are often sought by criminal organizations to facilitate their illicit activities.” Yet even while law enforcement “has increased its focus on such facilitators, it is both difficult to prove “intent and knowledge” that a facilitator was dealing with illicit funds or bad actors, or that they should have known the same.”
This same type of effort will be made at the international level. The US will expand its level and presence with key international players such as “the Europe-based Camden Asset Recovery Interagency Network and its regional bodies, and the International Anti-Corruption Coordination Center, which has multi-country membership and observers.” The US will act with what it calls “Proactive disruption” to “prevent the establishment of new safe havens for corrupt actors and their ill-gotten gains.” Finally, the US “will work with allies and partners to push key gatekeepers and facilitators to tighten ways in which corrupt actors move money.”
Many of these initiatives are processes which compliance professionals are currently doing. Moreover, the basic information generated through due diligence and other investigative skills will be of great use for the government’s efforts. Finally, any information that the government generates to unmask UBO’s will benefit the greater compliance community.
Join us tomorrow where we pay honor to Dave Campbell and consider Pillar 3 – Holding Corrupt Actors Accountable.
