Episode 112

10th June – 16th June 2024

Sanctions

This week’s sanctions news starts in the United Kingdom, were the Office of Financial Sanctions Implementation (‘OFSI’) has amended an entry to the Myanmar Financial Sanctions Regime. International Gateways Group of Company Limited has previously been associated with the supply of military equipment to the regime in Myanmar. There was also one amendment to the Myanmar regime later in the week. OFSI has also published Personal Staff Payments Licensing Guidance. The guidance sets out the circumstances in which OFSI may licence payments for the personal staff of designated persons. OFSI has also upgraded the OFSI Travel Licensing Guidance into the new digital guidance format. Finally, there have been 44 designations, 42 to the Russia Financial Sanctions regime, with two further amendments to existing designations, and two on the Central African Republic sanctions regime. New targets include ships in Putin’s shadow fleet, institutions at the heart of Russia’s financial system, and suppliers supporting Russia’s military production. As the press release provides: ‘The new sanctions against Russia target vessels in Putin’s shadow fleet, used by Russia to circumvent UK and G7 sanctions and continue to trade in Russian oil, together with targeting of suppliers of munitions, machine tools, microelectronics, and logistics to Russia’s military, including entities based in China, Israel, Kyrgyzstan and Türkiye, along with ships which transport military goods from North Korea to Russia.’

In the US, the Office of Foreign Assets Control has designated 10 ‘individuals, entities, and vessels, including tanker captains, in multiple jurisdictions that have engaged in the illicit transport of oil and other commodities, including for the network of Houthi financial facilitator Sa’id al-Jamal. This action targets maritime shipping and financial facilitators, several vessel managers and owners, and a company involved in forging shipping documents. Today’s action, the seventh round of sanctions targeting the network of Sa’id al-Jamal since October 2023….’ In other news linked to US sanctions, a tanker, The Primorye, is widely reported to have been concerned in sanctions evasion by collecting, then delivering, crude oil. The journey is understood to have gone from the Black Sea port of Novorossiysk to a destination some 70 miles east of Singapore, where it promptly disappeared from the electronic identification system used by commercial shipping, only to be identified on satellite imagery transferring its cargo to another vessel, the Ocean Hermana. These stories are no surprise, especially given the scale of Russia’s oil sales.

Now, in a timely piece of news allied to Russian oil sanctions and their evasion, the Centre for Research on Energy and Clean Air (‘CREA’) has published the results of an investigation into violations of the price cap, identifying that between ‘October and December 2023, no shipments of Russian crude oil departing from the port of Novorossiysk were traded below the price cap. In this same period, 8 of 26 shipments of Urals crude from the port were covered by UK Protection & Indemnity (P&I) insurance. There is strong evidence to suggest that these tankers conducted trades that were in direct violation of the EU/G7 sanctions, trading Russian crude oil above the USD 60 per barrel price cap according to customs data. These eight tankers covered by UK insurance transported 928,546 tonnes of Russian Urals grade crude valued at GBP 411 mn from the port of Novorossiysk between October and December 2023. CREA calculated the value of this oil based on the average barrel price per month exported out of the port of Novorossiysk, when all shipments were carried out above the price cap level according to Russian customs data. If these eight shipments had been carried out at the price cap level, the Russian crude oil would have been sold at an estimated GBP 324 mn. In addition to a lack of enforcement of the price cap, a major loophole in existing sanctions has also allowed Russia to boost its revenues from exports of crude oil. This loophole enables countries not imposing sanctions on Russia, such as India, China and the UAE, to legally import Russian crude oil, refine it into oil products, and export those petroleum products to the UK and EU.’ The CREA has urged that OFSI takes appropriate action.

I suppose the notable news from the US in relation to Russian sanctions this week is coordinated action by OFAC, the Bureau of Industry and Security, and Department of State, with a further tranche of sanctions ‘targeting the architecture of Russia’s financial system, which has been reoriented to facilitate investment into its defense industry and acquisition of goods needed to further its aggression against Ukraine. Treasury is also targeting more than a dozen transnational networks laundering gold for a designated Russian gold producer, supporting Russia’s production of unmanned aerial vehicles (UAVs), and procuring sensitive and critical items such as materials for Russia’s chemical and biological weapons program, anti-UAV equipment, machine tools, industrial machinery, and microelectronics.’ This includes sanctions on the provision of IT services, secondary sanctions on foreign banks facilitating transactions, and significant sanctions on those operating all allied sectors, and export control against Russia and Belarus.

On a similar theme, the US Department of Justice has just announced that two individuals have been sentenced to terms of imprisonment for conspiracy to sell sanctioned Iranian petroleum to China. ‘From July 2019 to February 2020, the defendants schemed to evade United States economic sanctions against the Islamic Republic of Iran (“Iran”) by facilitating the purchase of sanctioned oil from Iran, masking its origins, and selling the oil under masked origins to buyers in the People’s Republic of China. To accomplish their goal, the conspirators communicated among themselves and with third parties concerning, among other things, concealing the origin of the oil and the overall illegal transaction, financing the transaction, preparing contracts and other documents needed to effect the sale, shipping the sanctioned Iranian oil, obtaining Antiguan passports to facilitate the transaction and to establish offshore bank accounts to receive funds, distributing proceeds from the intended sale of the sanctioned Iranian oil, and concealing and disguising the nature, the location, the source, the ownership and the control of the proceeds of the intended transaction.’

And, finally, on sanctions news from the US this week, sanctions have been imposed on Nazar Mohamed, his son, Azruddin Mohamed, their company, Mohamed’s Enterprise, and Mae Thomas, the former Permanent Secretary to Guyana’s Minister of Home Affairs and current Permanent Secretary to the Ministry of Labour, for their roles in public corruption in Guyana. ‘[Two entities], Hadi’s World and Team Mohamed’s Racing Team, [were also designated] as being owned or controlled by Mohamed’s Enterprise and Azruddin, respectively. Between 2019 and 2023, Mohamed’s Enterprise omitted more than ten thousand kilograms of gold from import and export declarations and avoided paying more than $50 million in duty taxes to the Government of Guyana. To perpetuate and conceal this scheme, Mohamed’s Enterprise engaged in extensive bribery of government officials. This activity served to enrich the corrupt actors involved, undermine Guyanese institutions, and deprive the people of Guyana of important revenues.’

Bribery and Corruption

This week’s bribery and corruption news is brief and starts in the United Kingdom, where a former border guard with the UK Border Agency, has been sentenced for aiding a gang smuggling drugs through the UK border at Portsmouth. Kevin Smith was convicted of misconduct in public office and sentenced to two years’ imprisonment.

The other news is linked to the robo-debt issue in Australia which we mentioned in last week’s podcast. After the National Anti-Corruption Commission (‘NACC’) announced it would not pursue investigation after the findings of the Royal Commission, the NACC’s inspector, Gail Furness, has announced an investigation into the decision by the NACC to take no action. It is worth remembering that an additional inquiry by the Australian Public Service Commission is also happening alongside. Surely more on this to come.

And, finally, on bribery and anti-corruption news this week, the US and Ukraine have agreed a bilateral security agreement, a condition of which is that Ukraine strengthens reforms to the justice sector ‘to promote the independence and integrity of the judiciary. Additionally, it should implement robust anti-corruption measures, including strengthening all independent state anti-corruption institutions such as the Specialized Anti-Corruption Prosecutor and the National Anti-Corruption Bureau of Ukraine.’ The efforts Ukraine has been taking to root out corruption, as well as fighting off the invasion by Russia, have been prominent across the media, with allegations and convictions against a range of government officials and others to ensure that it smooths its path to EU accession and to become a broader and stronger part of the international community.

Fraud

To fraud news now, where we start in the European Union, with two stories from the European Public Prosecutor’s Office (‘EPPO’) which has, first, announced that ‘searches were carried out in Romania and Spain, as part of an investigation into a €10 million procurement fraud involving EU funds for the modernisation of water infrastructure and the improvement of energy efficiency. The EPPO in Bucharest and law enforcement officers carried out six searches [across the country]. Documents were also obtained from a hospital and a public company – the beneficiaries of the funds. One search was also conducted in Andalusia (Spain), by the EPPO in Madrid. The second story from the EPPO comes from Italy where the office in Milan and the Italian Financial Police (Guardia di Finanza) have arrested a third suspect in an ongoing investigation into a large VAT fraud scheme, with estimated damage of approximately €50 million. Earlier in this investigation, two individuals were already arrested, on suspicion of being the primary organisers of a VAT ‘carousel’ fraud – a criminal scheme that takes advantage of EU rules on cross-border transactions between its Member States, as these are exempt from value-added tax (VAT). Further investigative measures allowed for the identification of a third suspect.’

Staying with the European Union, and Eurojust, the European Union Agency for Criminal Justice Cooperation, which has reported the dismantling of a fraudulent investment scheme. ‘The organised crime group (OCG) used an investment model that focused on the leasing and subleasing of cryptocurrency machines, such as exchange machines and hardware for mining. The suspects were able to target thousands of victims, causing losses of up to €113 million. During an action day on 11 June, six arrests were made, 29 searches were conducted and the suspects’ assets were frozen. The advertised investment concept involved the leasing of cryptocurrency products, such as investments in server storage for internet cloud services and the subleasing of crypto exchange machines. The suspects promised returns of 70% before tax to those joining the scheme. Investigations by German authorities showed that the promised returns were not only unrealistic, but also impossible, as the leased equipment and systems allegedly did not exist. As the promised investment scheme did not exist as advertised, the suspects created a pyramid scheme, where most of the revenue for earlier investors came from more recent investors. The funds collected were not used for the promised investments, but mainly for the suspects’ living expenses.’

In other fraud news this week, and just when you thought it was safe, along comes another fraud on the Covid-19 recovery schemes in the US. Actually, these stories have been ticking over for the last few weeks, but there has been so much other news that I have let them go, but this week, ‘two individuals have been sentenced … for their roles in a multi-state scheme to obtain millions of dollars in Paycheck Protection Program (‘PPP’) funds for themselves and others through the submission of dozens of fraudulent applications to PPP lenders. [The individuals concerned]… pleaded guilty to one count each of conspiracy to commit wire fraud and conspiracy to engage in unlawful monetary transactions [and will be sentenced at a later date]. [The individuals]… conspired to submit fraudulent PPP applications on behalf of numerous actual or purported businesses and non-profit organizations across the United States … and to collect kickback payments from the borrowers for securing loan amounts. Shortly after PPP funds first became available in April 2020, [they] began submitting PPP applications on behalf of their businesses and those of others. [They]… identified potential applicants and provided those applicants’ information …[which was]… then submitted applications for those borrowers online, fabricating employee numbers and monthly payroll expenses…. As a result, between May and August 2020 …[they]… obtained approximately $7 million in PPP funds.’ Now, staying with responses to the pandemic, only this time in the UK and contracts for the supply of PPE. The National Crime Agency (‘NCA’) has announced the arrest of an unnamed individual in connection with an investigation into alleged conspiracy to commit fraud. The investigation is part of an investigation into PPE Medpro which received £203m worth of contracts to supply PPE which was said to be substandard.

In the UK, the Centre for Finance, Innovation and Technology (‘CFIT’) has announced the formation of a new sectoral coalition to fight financial crime through enhanced verification. ‘CFIT’s coalition will unite big tech providers, trade associations, major retail and challenger banks, fintech firms, digital ID solution providers and credit agencies to explore how collaboration can make the UK economy even more resilient against fraud. Participants will carry out data-driven research and testing on solutions to verify the legitimacy and identity of businesses interfacing with financial services, as well as other security challenges in commerce and payments for UK businesses and consumers. The coalition will aim to demonstrate how tackling prevalent financial crime will prevent businesses and their customers from being defrauded. It will also enable banks and the fintech community who provide financial services to these groups to generate efficiency savings, reduce their liability, and optimise customer journeys.’

And, finally, on fraud news this week, the Payment Systems Regulator (‘PSR’) has rejected a request from the Payments Association to delay the implementation of the new rules, due to be introduced in October, for a year to ensure that the correct systems and technology is in place to ensure that the new system operates smoothly. The regulator has responded that the industry simply needs to get on with it.

Money Laundering

The money laundering news this week starts in the UK, where two bodies have responded to HM Treasury’s Consultation on Improving the effectiveness of the Money Laundering Regulations. First, the Chartered Institute of Taxation (‘CIOT’), while broadly being in agreement with the suggestions made in the Consultation document, has said that, in conjunction with the Accountancy AML Supervisors’ Group (‘AASG’), that there are areas where the consultation might turn attention. These are:

‘Requirement to be supervised - The MLRs don’t explicitly require relevant persons to be supervised. The MLRs set out which businesses are in scope, and which organisation is the supervisory authority for each category of relevant person but there is no express requirement for those relevant persons to apply / register with a supervisory authority. Such explicit wording would help the professional body supervisors (PBSs) stop members who look for loopholes because they don’t want to be supervised.

Fines and sanctions - For tax and accountancy professional bodies, our most serious sanction is to exclude a member but because ‘accountancy’, ‘tax adviser’, ‘tax agent’ or ‘tax accountant’ are not reserved terms, these individuals may continue to offer tax and accountancy services. There seems to be a disconnect with the professional bodies’ desire to remove such practitioners from professional body membership and HMRC’s obligations as default supervisor – HMRC sees that they have only a limited number of circumstances where they can refuse supervision – and we believe that the MLRs could be amended to allow HMRC to consider professional body exclusion, or AML misconduct, as a relevant factor to refuse supervision.

Director verification - The MLRs require the relevant person to take reasonable measures to determine and verify the full name of the board of directors for a body corporate. In the accountancy sector guidance (‘AMLGAS’), it explains that this means the relevant person must confirm the director is who they say they are (ie, normal identity checks on the individual such as a obtaining a passport) but this may be done on a risk-basis. Although HM Treasury has approved this guidance, and therefore requirement, the equivalent wording is not included in Joint Money Laundering Steering Group (JMLSG) or the legal sector guidance. We therefore ask that government re-considers the wording of Regulation 28 (3) (b) (ii) to make it clear whether the verification checks on a director should be the equivalent to the verification checks on a beneficial owner. It is important that we have consistent approaches on director verification across all regulated sectors.’

Now, just in case you might be thinking of responding to the Consultation, it closed at one minute to midnight on Sunday 9th June. Never mind, I’m sure there’ll be another. Secondly, responding to the same Consultation, the Association for Financial Markets in Europe (‘AFME’) has given a very detailed, but a very mixed response, to the Consultation.

Now, it would hardly be an episode of the podcast as the moment without some mention of Turkey and its efforts to remove itself from the Jurisdictions Under Increased Monitoring – the ‘grey list’. This week’s update on what is becoming borderline soap opera is that it has been reported that Treasury and Finance Minister, Mehmet Şimşek, will travel to the Financial Action Task Force’s Singapore meeting at the end of this month where it will announce its updates on the ‘black list’ and the ‘grey list’. Frankly, I’m starting to think that it is in the bag. There has been too much news, though it does depend on who is doing the briefing, and it is surely the case that a Minister would not travel to the determination without having some indication of what is likely to be a positive outcome. We’ll see. Tick-tock, tick-tock.

Now, just before we close this week’s money laundering news, an interesting publication concerning the Financial Action Task Force and the weaponisation of its Standards by the Royal United Services Institute (‘RUSI’). The publication – at 45 pages a designated ‘long read’ – posits that while ‘standards and processes of the Financial Action Task Force (‘FATF’) are intended to uphold transparency and integrity within the global financial system, which in turn should curb the laundering of the proceeds of crime, stem corruption and protect the financial system from terrorist financing abuse [they might nevertheless], as with other global policy instruments, …[be]… weaponised by authorities worldwide as part of holistic campaigns to crack down on targets who threaten their interests, most often civil society actors such as watchdog organisations, journalists, opposition figures and other critics who threaten regime interests or stability.’

Market Abuse

On market abuse news this week, the US Department of Justice has charged the founder of an AI company with securities fraud. ‘[Joonko Diversity Inc] was a company that purported to offer an artificial intelligence-based product designed to help prospective employers identify and hire job candidates from diverse backgrounds. To induce prospective and existing Joonko investors to invest approximately $27 million in funding rounds in 2021 and 2022, Raz made false claims regarding central aspects of Joonko’s business, including by falsely representing how many customers Joonko had at the time and falsely representing the identity of those customers. For example, Raz falsely represented that Joonko’s customers included some of the world’s largest companies, including a credit card company, sports apparel brand, online travel company, and luxury fashion brand. In truth and in fact, and as Raz knew, these companies were never Joonko customers. In addition to overstating the number of customers that Joonko had and the identity of those customers, Raz also made false representations about Joonko’s actual and anticipated revenues. After RAZ made false and misleading statements regarding Joonko’s customers and revenue, several investors who received those statements invested in a series of funding rounds with Joonko. Specifically, on or about June 1, 2021, several investors, including venture capital firms, invested a total of approximately $10 million in a Series A round with Joonko. On or about June 2, 2022, several investors, including venture capital firms, invested a total of approximately $17 million in a Series B round with Joonko.’

Other Financial Crime News

In other financial crime news this week, the European Union Innovation Hub for Internal Security, with assistance from Europol and others, has published its first report on encryption, ‘…[which]… highlights that endorsing the benefits of encryption for privacy while acknowledging the challenges that this technology poses to combat serious organised crime and terrorism is of utmost importance. The objective is to advance a constructive discussion on encryption and to identify a balanced solution to protect individuals and society from malicious actors.’ The report has five key conclusions:

‘Introducing legal frameworks for lawful access to data and the use of encrypted communications in judicial proceedings is paramount for achieving the right balance between privacy and security.
Further research and monitoring on technologies using cryptography, such as telecommunications (5G, 6G networks), biometrics, DNS, the blockchain, and quantum computing, are needed to ensure both lawful access to data and privacy.
Collaboration with academia and private industry is essential for the creation of new tools to both serve law enforcement investigations without compromising the overall security of communications.
Artificial intelligence solutions can both help and hinder law enforcement efforts to fight serious and organised crime, requiring a multi-faceted and collaborative approach.
While quantum computing can significantly improve investigations, it also poses a significant threat to encryption, requiring a swift transition to post-quantum cryptography.’

Cyber Crime

We end this week’s financial crime news with a round-up of cyber-attack news, starting with more medical-based cyber-attack news. First, the fall-out from the cyber-attack last week on the systems of the London hospitals. With news that treatment and operations were cancelled, including rounds of cancer treatment, as well as blood which was sampled for testing to be destroyed, there are now reports that indicate the extent of the attack was such that it will take a number of months to resolve the issues from the attack. Attacks of this kind typically take a number of months to resolve, as the attack on the British Library last year demonstrated. While many services at the British Library are back online, the thesis database remains offline, some eight months after the attack. Remains to be seen the precise length of total downtime in this instance, but we’ll certainly watch this one with interest.

And, finally, for this week’s FCWP, a direction to a little light reading. I have highlighted the issue of cyber-warfare in this podcast a number of times over the last couple of years, not only in the conflict between Ukraine and Russia, but also in the attacks on other nations not actively engaged in a physical conflict. Well, this week a blog post by Lennart Maschmeyer, Senior Researcher at the Center for Security Studies at ETH Zurich, with the title of Cyber Conflict and Subversion in the Russia-Ukraine War. As the piece provides, ‘[delving] into these operations shows how Russia-sponsored hacking groups have exploited unique opportunities provided by territorial conquest and reveals an intriguing, underappreciated insider dimension to some of the war’s most damaging cyberattacks. These developments suggest hacking groups are increasingly fusing cyber operations with traditional subversive methods to improve effectiveness.’ A couple of others. First, the US Government Accountability Office has published a blog post on the biggest challenges to federal cybersecurity and, secondly, the World Economic Forum has published a post on the alert given by cybersecurity experts of the threat to the Paris Olympics posed by cyber threats.

References

Association for Financial Markets in Europe, Consultation Response: AFME response to HM Treasury’s consultation on improving the effectiveness of the Money Laundering Regulations.

Centre for Finance, Innovation and Technology, CFIT Forms Industry Coalition – ‘Fighting Economic Crime Through Enhanced Verification’.

Centre for Research on Energy and Clean Air, War profiteering: Eight UK-insured tankers violate price cap, boosting Kremlin revenues by GBP 87 mn.

Chartered Institute of Taxation, Improving the effectiveness of the Money Laundering Regulations Response by the Chartered Institute of Taxation.

Eurojust, Eurojust supports authorities in dismantling EUR 113 million fraudulent investment scheme.

European Public Prosecutor’s Office, EPPO conducts searches in Romania and Spain in probe into €10 million fraud.

European Public Prosecutor’s Office, Italy: EPPO arrests a third suspect in investigation into €50 million VAT fraud.

European Union Innovation Hub for Internal Security, First Report on Encryption.

Europol, First Report on Encryption.

HM Treasury, Improving the effectiveness of the Money Laundering Regulations.

Office of Financial Sanctions Implementation, Financial Sanctions Notice: Myanmar.