On April 14, 2022, the US Financial Crimes Enforcement Network (“FinCEN”) urged financial institutions to focus on detecting, reporting, and blocking funds associated with kleptocracies and other forms of foreign public corruption.1 FinCEN emphasized how the laundering of proceeds of foreign public corruption harms the competitive landscape of financial markets and has long-term corrosive effects on democratic institutions. While FinCEN repeatedly mentions Russia as a jurisdiction of particular concern, the guidance is part of the broader US Strategy on Countering Corruption that was released in December 2021 and is targeted at all instances of foreign public corruption.2 This Legal Update summarizes some of the key points that FinCEN highlighted to help financial institutions identify potential indicators of kleptocracies and corrupt foreign public officials.
The Currency and Foreign Transactions Reporting Act, commonly known as the “Bank Secrecy Act” (“BSA”), established record-keeping and reporting requirements for private individuals and certain financial institutions.3 Some of the financial institutions covered by the BSA include banks, broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities.4 Under FinCEN’s regulations implementing the BSA, financial institutions must implement anti-money laundering/countering the financing of terrorism (“AML/CFT”) monitoring and compliance procedures.5 They also must file Suspicious Activity Reports (“SARs”) if they know, suspect or have reason to suspect that transactions conducted or attempted by, at or through the financial institution involves money laundering, corruption, BSA violations, terrorist financing or certain other crimes, including sanctions evasion.6 Additionally, FinCEN requires financial institutions to adopt risk-based procedures for conducting ongoing customer due diligence and to comply with beneficial ownership requirements for legal entity customers.7 Financial institutions subject to the BSA also must comply with generally applicable Office of Foreign Asset Control’s (“OFAC”) regulations regarding economic and trade sanctions.8 In its recent guidance issued on April 14, 2022, FinCEN reminds financial institutions about their BSA and OFAC obligations so that they may continue to be vigilant about detecting and reporting instances of foreign public corruption.
The FinCEN guidance defines “corruption” as including the abuse of authority or official position to extract personal gain and highlights kleptocracies as governments that are controlled by officials who use political power to appropriate the wealth of their nation for personal gain. It explains that kleptocratic regimes and corrupt public officials may exploit the US and international financial systems to advance their goals by laundering the proceeds of their illicit activities.
The FinCEN guidance describes typologies and potential indicators associated with kleptocracy and other forms of foreign public corruption that financial institutions should be aware of as they monitor for suspicious activity. These include:
Several of these typologies are not inherently unlawful or suspicious, and FinCEN emphasizes that financial institutions should consider the relevant facts and circumstances of each transaction. To help financial institutions identify transactions that may warrant such further scrutiny, FinCEN included 10 “red flags” in the guidance, such as if a transaction involves a government official conducting government business through a personal account.10
AML Compliance Measures
The FinCEN guidance does not impose new compliance obligations on financial institutions but explains how certain existing compliance obligations may be triggered by foreign public corruption. In particular, it highlights the following obligations:
The FinCEN guidance also reminds financial institutions of the information sharing arrangements authorized by Section 314(b) of the USA PATRIOT Act. While this sharing is not legally required, FinCEN strongly encourages it as a way to combat sanctions evasion, ransomware/cyberattacks, and the laundering of the proceeds of corruption.
FinCEN’s guidance on kleptocracies and foreign public corruption highlights the importance of AML compliance obligations in light of FinCEN’s heightened concerns regarding foreign corruption risk. FinCEN continues to emphasize how identifying the source of funds and wealth is a key step in identifying the laundering of proceeds related to foreign public corruption.
While FinCEN addresses Russia’s invasion of Ukraine throughout its guidance and mentions how Russia is of particular concern as a kleptocracy, this FinCEN guidance is part of a broader US initiative to combat foreign public corruption. Relatedly, a critical feature of the first-ever US Strategy on Countering Corruption is its “follow-the-money” pillar, focused on curbing illicit finance and money laundering by creating greater transparency, targeting gatekeepers to the financial system and encouraging greater coordination between the United States and foreign jurisdictions on anti-money laundering issues. At the heart of this pillar is the expectation of increased US enforcement in the area of corruption-related money laundering, including via providing FinCEN with expanded regulatory responsibilities and additional resources. It also highlights areas of crossover and coordination between US agencies on these topics, including FinCEN, the Department of Justice’s Foreign Corrupt Practices Unit, and the Securities and Exchange Commission, among others, as increased transparency in financial transactions is expected to translate to greater information to law enforcement that can be harnessed to investigate and root out bad actors’ and kleptocrats’ efforts to hide their illicit gains. In addition to the US Strategy on Countering Corruption, a whistleblower pilot program the Treasury Department recently implemented called the Kleptocracy Asset Recovery Rewards Program, which rewards efforts to identify and recover proceeds of corruption held by US persons or US financial institutions, will further aid US efforts to combat corruption.
Thus, financial institutions should consider the issues that FinCEN raised with respect to all of their activities, not just in connection with Russia. Financial institutions should ensure that they have robust financial crimes compliance programs to facilitate rapid identification and mitigation of threats involving kleptocrats and corrupt, foreign public officials.
Financial Red Flag Indicators of Kleptocracy and Foreign Public Corruption:
1. Transactions involving long-term government contracts consistently awarded, through an opaque selection process, to the same legal entity or entities that share similar beneficial ownership structures.
2. Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.
3. Transactions involving official embassy or foreign government business conducted through personal accounts.
4. 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.
5. Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.
6. 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.
7. 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).
8. 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.
9. Transactions involving fictitious email addresses and false invoices to justify payments, particularly for international transactions.
10. 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.