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April 18, 2022

By: Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci

FinCEN to Banks: Look Out for Proceeds of Russian Kleptocracy
(But Other Businesses Need to Pay Attention as Well)

The Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury, has issued a new advisory urging financial institutions to increase their efforts to detect the proceeds of Russian corruption. The alert is the latest in a series of FinCEN announcements concerning Russian sanctions evasion[1] and high-value assets involving Russian elites.[2]

The alert identifies key red flags of kleptocracy and reminds financial institutions of their main reporting obligations. Failing to report as and when required can carry severe penalties (up to five years in prison for willful violations and substantial fines for negligent violations). Therefore, financial institutions should closely review all Russia-related transactions, pay special attention to red flags identified by FinCEN, and work with counsel to ensure that they are meeting all of their due diligence and reporting obligations. 

Although the FinCEN announcements directly concern financial institutions, it is important for all investors and U.S. businesses to be mindful of the “red flags” identified by FinCEN as potential links to money laundering and corruption, especially businesses engaged in international transactions and businesses in sectors, such as real estate, that are vulnerable to exploitation by bad actors. 

How the U.S. Government Views Russia’s Kleptocracy

The FinCEN alert notes that:

  • Russia is of particular concern as a kleptocracy because of the nexus between corruption, money laundering, malign influence and armed interventions abroad, and sanctions evasion.
  • Corruption is widespread throughout the Russian government and manifests itself as bribery of officials, misuse of budgetary resources, theft of government property, kickbacks in the procurement process, extortion, and improper use of official positions to secure personal profits.
  • Russia’s actions in Ukraine are supported and enabled by Russia’s elites and oligarchs who control a majority of Russia’s economic interests.
  • These individuals have a mutually beneficial relationship with President Putin that allows them to misappropriate assets from the Russian people while helping President Putin maintain his tight control on power.
  • Oligarchs are believed to be directly financing off-budget projects that include political malign influence operations and armed interventions abroad.

The Government Advises U.S. Businesses to Look for These Red Flags 

The alert identifies the following red flag indicators of kleptocracy and foreign corruption:

  • 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.
  • Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.
  • Transactions involving official embassy or foreign government business conducted through personal accounts.
  • 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.
  • Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.
  • 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.
  • 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).
  • 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.
  • 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.

As noted above, although FinCEN publishes this list of red flags to ensure that financial institutions are alert to potentially illegal transactions, these same red flags may identify potential violations of the Foreign Corrupt Practices Act, as well as violations of U.S. trade sanctions, export controls, and other financial crimes. In such cases, the failure to recognize and block problem transactions, including transactions with partners and affiliates, can expose U.S. parties to significant liability. Even the negligent failure to have and enforce adequate compliance programs can be deemed reckless, exacerbating potential penalties.

The Government Reminds Financial Institutions of These Obligations

In light of the concerns related to Russian money laundering, the alert also reminds financial institutions of the following key reporting obligations:

  • Under the Bank Secrecy Act (BSA), a financial institution must file a Suspicious Activity Report (SAR) if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity, or
    • is designed to disguise funds derived from illegal activity;
    • is designed to evade regulations promulgated under the BSA;
    • lacks a business or other apparent lawful purpose; or
    • involves the use of the financial institution to facilitate criminal activity, including sanctions evasion.[3]
  • The BSA also requires financial institutions to establish due diligence protocols with risk-based controls and procedures that include reasonable steps to identify senior foreign political figures (along with their families and their associates) and to conduct scrutiny of assets held by such individuals.[4]
  • FinCEN’s Customer Due Diligence (CDD) Rule requires banks, brokers or dealers in securities and mutual funds, as well as futures commission merchants (FCMs) and introducing brokers (IBs) in commodities to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.[5]
  • Section 312 of the PATRIOT Act (31 U.S.C. § 5318(i)) requires certain U.S. financial institutions to implement a due diligence program for private banking accounts held for non-U.S. persons that is designed to detect and report any known or suspected money laundering or other suspicious activity.[6]
  • Banks, brokers or dealers in securities, mutual funds, and FCM/IBs must also comply with their general due diligence obligations for correspondent accounts under 31 CFR § 1010.610(a), in addition to their general AML/CFT program obligations under 31 U.S.C. § 5318(h) and its implementing regulations (which apply to all U.S. financial institutions).[7]
  • Money Service Businesses (MSBs) have parallel requirements with respect to foreign agents or foreign counterparties and are required to establish adequate and appropriate policies, procedures, and controls commensurate with the risk of money laundering and the financing of terrorism posed by their relationship with foreign agents or foreign counterparties.[8]
  • A financial institution must file a SAR on a transaction involving a person identified by the Office of Foreign Assets Control (OFAC) as a Specially Designated National, even if it has filed a blocking report with OFAC. If the facts and circumstances surrounding the OFAC match are independently suspicious and are otherwise required to be reported under existing FinCEN regulations, a SAR report is required. If a financial institution has information not included in the blocking report filed with OFAC, it should file a separate SAR including that information.[9]
  • Ransomware attacks and payments on which financial institutions file SARs should also be reported to OFAC at: OFAC_Feedback@treasury.gov if there is any reason to suspect a potential sanctions nexus with regard to a ransomware payment.[10]

Conclusion

Until there is a new détente with Russia, which seems highly unlikely any time in the near future, the U.S. government will continue to devote significant resources to identifying, freezing, and, where possible, seizing the proceeds of Russian corruption. In his State of the Union address, President Biden said the United States is joining with its European allies in fighting kleptocracy, promising that “We are coming for your ill-begotten gains.”[11] Consistent with the President’s aggressive tone, the head of DOJ’s new “KleptoCapture” Task Force recently stated “[W]e are interested in bringing every tool to bear. … in charging the most impactful cases and inflicting the appropriate degree of punishment….”[12] 

This approach means that anyone who may be handling criminal proceeds from the former Soviet Union is in the crosshairs of the U.S. enforcement authorities. Red flags and reporting requirements must be taken seriously. Government agencies frequently cite the failure to recognize and act on red flags as evidence of negligence, or even worse, willful blindness, either of which can carry penalties. Therefore, companies – not just financial institutions -- ignore the FinCEN red flags at their peril and should work with qualified counsel to make sure that they have adequate compliance programs, including Know Your Customer and (for financial institutions) CDD protocols, to detect money laundering, sanctions evasion, and other financial crimes.

Robust compliance programs can block problematic transactions and serve as a valuable defense when and if mistakes happen. Conversely, the failure to recognize red flags, or to establish and maintain compliance programs can be cited as an “aggravating factor” in enforcement actions. Special care should be taken in investments, mergers, and acquisitions, after rigorous due diligence, to ensure that targets have appropriate safeguards in place and to implement appropriate compliance programs after closing. Throughout all of these processes, in light of FinCEN’s repeated alerts, special attention should be paid to transactions from Russia and the former Soviet Union. 


[1] https://www.fincen.gov/sites/default/files/advisory/2022-04-14/FinCEN%20Advisory%20Corruption%20FINAL%20508.pdf 

[2] https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf

[3] See 31 CFR §§ 1020.320, 1021.320, 1022.320, 1023.320, 1024.320, 1025.320, 1026.320, 1029.320, and 1030.320.

[4] See 31 CFR § 1010.620(c).

[5] See 31 CFR § 1010.230.

[6] See 31 CFR § 1010.620(a-b).

[7] See 31 CFR §§ 1010.210, 1020.210, 1021.210, 1022.210, 1023.210, 1024.210, 1025.210, 1026.210, 1027.210, 1028.210, 1029.210, and 1030.210.

[8] See FinCEN, “Anti-Money Laundering Program Requirements for Money Services Businesses with Respect to Foreign Agents or Foreign Counterparties,” Interpretive Release 2004-1, 69 FR 239, (December 14, 2004). See also, FinCEN, “Guidance on Existing AML Program Rule Compliance Obligations for MSB Principals with Respect to Agent Monitoring,” (March 11, 2016).

[9] See FinCEN, The SAR Activity Review, Issue 8, Section 5 “Revised Guidance on Filing Suspicious Activity Reports Relating to the Office of Foreign Assets Control List of Specially Designated Nationals and Blocked Persons,” pp. 38-40, (April 2005).

[10] https://www.fincen.gov/sites/default/files/advisory/2022-04-14/FinCEN%20Advisory%20Corruption%20FINAL%20508.pdf

[11] https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/03/01/remarks-of-president-joe-biden-state-of-the-union-address-as-delivered/

[12] https://www.washingtonpost.com/washington-post-live/2022/04/08/transcript-targeting-oligarchs-with-andrew-adams/

April 18, 2022

By: Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci

FinCEN to Banks: Look Out for Proceeds of Russian Kleptocracy
(But Other Businesses Need to Pay Attention as Well)

The Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury, has issued a new advisory urging financial institutions to increase their efforts to detect the proceeds of Russian corruption. The alert is the latest in a series of FinCEN announcements concerning Russian sanctions evasion[1] and high-value assets involving Russian elites.[2]

The alert identifies key red flags of kleptocracy and reminds financial institutions of their main reporting obligations. Failing to report as and when required can carry severe penalties (up to five years in prison for willful violations and substantial fines for negligent violations). Therefore, financial institutions should closely review all Russia-related transactions, pay special attention to red flags identified by FinCEN, and work with counsel to ensure that they are meeting all of their due diligence and reporting obligations. 

Although the FinCEN announcements directly concern financial institutions, it is important for all investors and U.S. businesses to be mindful of the “red flags” identified by FinCEN as potential links to money laundering and corruption, especially businesses engaged in international transactions and businesses in sectors, such as real estate, that are vulnerable to exploitation by bad actors. 

How the U.S. Government Views Russia’s Kleptocracy

The FinCEN alert notes that:

  • Russia is of particular concern as a kleptocracy because of the nexus between corruption, money laundering, malign influence and armed interventions abroad, and sanctions evasion.
  • Corruption is widespread throughout the Russian government and manifests itself as bribery of officials, misuse of budgetary resources, theft of government property, kickbacks in the procurement process, extortion, and improper use of official positions to secure personal profits.
  • Russia’s actions in Ukraine are supported and enabled by Russia’s elites and oligarchs who control a majority of Russia’s economic interests.
  • These individuals have a mutually beneficial relationship with President Putin that allows them to misappropriate assets from the Russian people while helping President Putin maintain his tight control on power.
  • Oligarchs are believed to be directly financing off-budget projects that include political malign influence operations and armed interventions abroad.

The Government Advises U.S. Businesses to Look for These Red Flags 

The alert identifies the following red flag indicators of kleptocracy and foreign corruption:

  • 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.
  • Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.
  • Transactions involving official embassy or foreign government business conducted through personal accounts.
  • 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.
  • Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.
  • 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.
  • 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).
  • 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.
  • 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.

As noted above, although FinCEN publishes this list of red flags to ensure that financial institutions are alert to potentially illegal transactions, these same red flags may identify potential violations of the Foreign Corrupt Practices Act, as well as violations of U.S. trade sanctions, export controls, and other financial crimes. In such cases, the failure to recognize and block problem transactions, including transactions with partners and affiliates, can expose U.S. parties to significant liability. Even the negligent failure to have and enforce adequate compliance programs can be deemed reckless, exacerbating potential penalties.

The Government Reminds Financial Institutions of These Obligations

In light of the concerns related to Russian money laundering, the alert also reminds financial institutions of the following key reporting obligations:

  • Under the Bank Secrecy Act (BSA), a financial institution must file a Suspicious Activity Report (SAR) if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity, or
    • is designed to disguise funds derived from illegal activity;
    • is designed to evade regulations promulgated under the BSA;
    • lacks a business or other apparent lawful purpose; or
    • involves the use of the financial institution to facilitate criminal activity, including sanctions evasion.[3]
  • The BSA also requires financial institutions to establish due diligence protocols with risk-based controls and procedures that include reasonable steps to identify senior foreign political figures (along with their families and their associates) and to conduct scrutiny of assets held by such individuals.[4]
  • FinCEN’s Customer Due Diligence (CDD) Rule requires banks, brokers or dealers in securities and mutual funds, as well as futures commission merchants (FCMs) and introducing brokers (IBs) in commodities to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.[5]
  • Section 312 of the PATRIOT Act (31 U.S.C. § 5318(i)) requires certain U.S. financial institutions to implement a due diligence program for private banking accounts held for non-U.S. persons that is designed to detect and report any known or suspected money laundering or other suspicious activity.[6]
  • Banks, brokers or dealers in securities, mutual funds, and FCM/IBs must also comply with their general due diligence obligations for correspondent accounts under 31 CFR § 1010.610(a), in addition to their general AML/CFT program obligations under 31 U.S.C. § 5318(h) and its implementing regulations (which apply to all U.S. financial institutions).[7]
  • Money Service Businesses (MSBs) have parallel requirements with respect to foreign agents or foreign counterparties and are required to establish adequate and appropriate policies, procedures, and controls commensurate with the risk of money laundering and the financing of terrorism posed by their relationship with foreign agents or foreign counterparties.[8]
  • A financial institution must file a SAR on a transaction involving a person identified by the Office of Foreign Assets Control (OFAC) as a Specially Designated National, even if it has filed a blocking report with OFAC. If the facts and circumstances surrounding the OFAC match are independently suspicious and are otherwise required to be reported under existing FinCEN regulations, a SAR report is required. If a financial institution has information not included in the blocking report filed with OFAC, it should file a separate SAR including that information.[9]
  • Ransomware attacks and payments on which financial institutions file SARs should also be reported to OFAC at: OFAC_Feedback@treasury.gov if there is any reason to suspect a potential sanctions nexus with regard to a ransomware payment.[10]

Conclusion

Until there is a new détente with Russia, which seems highly unlikely any time in the near future, the U.S. government will continue to devote significant resources to identifying, freezing, and, where possible, seizing the proceeds of Russian corruption. In his State of the Union address, President Biden said the United States is joining with its European allies in fighting kleptocracy, promising that “We are coming for your ill-begotten gains.”[11] Consistent with the President’s aggressive tone, the head of DOJ’s new “KleptoCapture” Task Force recently stated “[W]e are interested in bringing every tool to bear. … in charging the most impactful cases and inflicting the appropriate degree of punishment….”[12] 

This approach means that anyone who may be handling criminal proceeds from the former Soviet Union is in the crosshairs of the U.S. enforcement authorities. Red flags and reporting requirements must be taken seriously. Government agencies frequently cite the failure to recognize and act on red flags as evidence of negligence, or even worse, willful blindness, either of which can carry penalties. Therefore, companies – not just financial institutions -- ignore the FinCEN red flags at their peril and should work with qualified counsel to make sure that they have adequate compliance programs, including Know Your Customer and (for financial institutions) CDD protocols, to detect money laundering, sanctions evasion, and other financial crimes.

Robust compliance programs can block problematic transactions and serve as a valuable defense when and if mistakes happen. Conversely, the failure to recognize red flags, or to establish and maintain compliance programs can be cited as an “aggravating factor” in enforcement actions. Special care should be taken in investments, mergers, and acquisitions, after rigorous due diligence, to ensure that targets have appropriate safeguards in place and to implement appropriate compliance programs after closing. Throughout all of these processes, in light of FinCEN’s repeated alerts, special attention should be paid to transactions from Russia and the former Soviet Union. 


[1] https://www.fincen.gov/sites/default/files/advisory/2022-04-14/FinCEN%20Advisory%20Corruption%20FINAL%20508.pdf 

[2] https://www.fincen.gov/sites/default/files/2022-03/FinCEN%20Alert%20Russian%20Elites%20High%20Value%20Assets_508%20FINAL.pdf

[3] See 31 CFR §§ 1020.320, 1021.320, 1022.320, 1023.320, 1024.320, 1025.320, 1026.320, 1029.320, and 1030.320.

[4] See 31 CFR § 1010.620(c).

[5] See 31 CFR § 1010.230.

[6] See 31 CFR § 1010.620(a-b).

[7] See 31 CFR §§ 1010.210, 1020.210, 1021.210, 1022.210, 1023.210, 1024.210, 1025.210, 1026.210, 1027.210, 1028.210, 1029.210, and 1030.210.

[8] See FinCEN, “Anti-Money Laundering Program Requirements for Money Services Businesses with Respect to Foreign Agents or Foreign Counterparties,” Interpretive Release 2004-1, 69 FR 239, (December 14, 2004). See also, FinCEN, “Guidance on Existing AML Program Rule Compliance Obligations for MSB Principals with Respect to Agent Monitoring,” (March 11, 2016).

[9] See FinCEN, The SAR Activity Review, Issue 8, Section 5 “Revised Guidance on Filing Suspicious Activity Reports Relating to the Office of Foreign Assets Control List of Specially Designated Nationals and Blocked Persons,” pp. 38-40, (April 2005).

[10] https://www.fincen.gov/sites/default/files/advisory/2022-04-14/FinCEN%20Advisory%20Corruption%20FINAL%20508.pdf

[11] https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/03/01/remarks-of-president-joe-biden-state-of-the-union-address-as-delivered/

[12] https://www.washingtonpost.com/washington-post-live/2022/04/08/transcript-targeting-oligarchs-with-andrew-adams/