Episode 113

17th June – 23rd June 2024

Sanctions

This week’s sanctions news starts in the European Union (‘EU’), where the course is clearing towards the 14th round of sanctions. There had been some news that, perhaps, the Germans had reservations and were looking at either blocking or changing the proposals to their favour. However, the Chancellor, Olaf Scholz, seems to have indicated that this is not the case and that agreement should be without problem. That being said, there is always the thorn in the side of the Commission in the form of Hungary, but the overall sense is that they may well be agreed sooner rather than later. We’ll see. Staying with the EU, a list of persons to be targeted in the 14th sanctions package has been published. The designations include 20 individuals and 22 legal entities, among whom are Polina Gagarina, a singer and actress, as well as oligarchs Igor Altushkin and Roman Trotsenko. The 14th package also includes sanctions on the re-export of Russian liquefied natural gas (‘LNG’) in the EU. And, finally, from the EU this week, the European Union’s General Court has rejected an application by sanctioned oligarch, Igor Rotenberg, to have his designation removed. Rotenberg could not show he did not benefit from Russian decision-makers or from the Government of the Russian Federation.

Now, to the UK, where the response to the designations from the latest round of sanctions from the government is being felt in the possibility of legal action. You may remember that last week we reported the targeting of insurance of the oil industry, and specifically of tankers and oil products, being transported in possible breach of the oil price cap which was imposed towards the end of last year. Well, this week, Ingosstrakh, the insurance company, has announced that, as the only insurer on the latest designations list, it is looking to be removed including consideration of possible legal action since it contends thar it complies with all the obligations imposed upon it in order to operate within the law. If it happened, it would not be the first such instance of challenge to designations, with a series of oligarchs challenging designations across all jurisdictions which have imposed sanctions following the Russian invasion of Ukraine. We’ll keep an eye on this one. Also, the Office of Financial Sanctions Implementation (‘OFSI’) has issued a Licence (INT/2024/4836676) allowing for payments to the Financial Conduct Authority (‘FCA’) from a Designated Person (‘DP’), or on behalf of a DP.

In the US, the Office of Foreign Assets Control (‘OFAC’) has designated ‘two individuals and five entities that have facilitated weapons procurement for Ansarallah, commonly referred to as the Houthis. OFAC is also designating one individual and one company, as well as identifying one vessel, that have facilitated the shipment of commodities, the sale of which provides an important funding stream to the Houthis that aids in their weapons procurement.’ Additionally, OFAC has designated two individuals and seven entities that provide major sources of revenue for U.S.-designated Republika Srpska (‘RS’) President Milorad Dodik (‘Dodik’) and his family. Dodik has been the eighth president of Republika Srpska, one of the two elements of Bosnia and Herzegovina, and OFAC contends that he ‘has used his official position to accumulate personal wealth through companies linked to him…. Dodik not only robs the people of BiH through his corrupt behavior but also threatens their safety and security through his repeated threats to pursue secession of the RS from BiH. Dodik’s recent announcement of a formal decision to propose RS “disassociation” from BiH is a continuation of blatantly anti-Dayton Peace Accords (DPA) activity and threatens the peace and stability of the region. Through his corruption and secessionist rhetoric, Dodik continues to undermine BiH institutions and enrich his family at the people’s expense, further risking BiH’s future in Euro-Atlantic institutions.’

Staying in North America, only this time to Canada, where the Ministry of Foreign Affairs has announced further sanctions on 13 individuals under its Special Economic Measures (Russia) Regulations. The sanctions are a further imposition in relation to the death of Russian opposition leader, Alexei Navalny, and what Canada describes as ‘Russia’s continued gross and systematic violations of human rights. The individuals targeted are senior officials and high-ranking employees of Russia’s investigation agency, penitentiary service and police force who were involved in the ill-treatment and death of Mr. Navalny.’

And, finally, two items on a related theme. First, the Centre for Research on Energy and Clean Air has published its monthly analysis of Russian fossil fuel exports and sanctions for May 2024. The report indicates that during May, Russia’s fossil fuel export revenues saw a 6 per cent month-on-month drop to €697m per day, partly due to a 5 per cent drop in exported volumes and also due to a drop in the price of Russian crude oil. The drop in crude oil export volumes was also due to Russia’s voluntary production cuts after having exceeded its OPEC+ production commitments in April. Additionally, Russia’s refining capacity, which had been damaged by Ukrainian drone strikes, recovered sharply in May, with a 12 per cent uptick in oil products export volumes. Russian revenues from exports of seaborne oil products saw an 8 per cent month-on-month increase to €221m per day. Interestingly, India’s month-on-month imports of Russian crude increased by 8 per cent in May to the highest levels since July 2023. Russian crude comprised 41 per cent of India’s total crude imports in May, and with new agreements in place to conduct payments in rubles, the trade might grow significantly over the coming months. I would imagine that the axis imposing sanctions on Russia will be looking into this issue, especially given the payments in rubles. That being said, the report also highlights that Russian LNG comprised 41 per cent of France’s total LNG imports in May — a 14 per cent increase from last month. In May, Belgium’s total LNG imports rose 11 per cent month-on-month, with imports from Russia increasing by 15 per cent and comprising 66 per cent of their total LNG imports. That may compromise the ability for action to be taken.

Bribery and Corruption

This week’s bribery and corruption news is, once again, brief and starts in the United Kingdom, where it is being reported that the Serious Fraud Office (‘SFO’) has indicated that it is likely to bring charges against individuals bound up in the bribery investigation in relation to Glencore plc, the international mining conglomerate, which entered into a deferred prosecution agreement to meet the bribery offences. The SFO, which requires the consent of the Attorney-General in respect of some of the charges, has confirmed that the necessary consent has been requested. The charges are expected to be brought in September this year.

In China, the operations of the sportswear company, Adidas, are under the spotlight after allegations made by a whistleblower that senior staff at the Chinese subsidiary are involved in corruption and embezzlement running in value to millions of euros. Adidas is currently working on an investigation into the allegations, but it may be that the authorities are brought in sooner rather than later.

And, finally, on bribery and corruption news this week, two minor stories. First, a direction to a little light reading in the shape of a blog post by Francine Pickup, who is the Deputy Director of the Bureau for Policy and Programme Support at the United Nations Development Programme. The title of the post is Corruption is criminal, immoral, and the ultimate betrayal of public trust. Secondly, the OECD Working Group on Bribery has announced Canadian, Kathleen Roussel, as its new Chair.

Money Laundering

The money laundering news this week starts in the UK, where more bodies have published their response to the recently closed government consultation into the Money Laundering Regulations. This time, it is Spotlight on Corruption and the Wolfsberg Group which have published their submissions. First, Spotlight on Corruption is focusing on the general triggers for enhanced due diligence, complex or unusually large transactions, high risk third countries, information sharing between supervisors and other public bodies, co-operation with Companies House, regard for the National Risk Assessment (‘NRA’), system prioritisation and the NRA, Regulation of resale of companies and off the shelf companies by Trust or company service providers (‘TCSP’s). The Wolfsberg Group argues for making customer due diligence more proportionate and effective, and strengthening system coordination. It advocates ‘removing the mandatory EDD requirement for customers from FATF grey-list countries, while retaining necessary EDD measures for customers established in countries subject to a FATF Call for Action, [arguing] this adjustment ensures that resources are focused where the threat is most significant. It also recommends removing the prescriptive list of generic risk factors from the MLRs, which it contends will allow FIs the flexibility to adapt to evolving threats and align their efforts with national priorities, as identified through ongoing public-private partnerships and the NRA. It recommends modifying the approach to domestic (UK) PEPs to reduce unnecessary burdens while maintaining a risk-based approach. Removing the mandatory EDD requirement for domestic (UK) PEPs, their family members, and close associates will reduce customer friction and allow FIs to focus their resources more effectively and devote necessary attention to PEPs and other customers posing increased risk.’

The Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (‘MONEYVAL’) has published updates on Gibraltar and Hungary. In relation to Gibraltar, which is a British Overseas Territory (‘BOT’), MONEYVAL has concluded a follow-up report by noting the improved measures taken by the BOT for tackling money laundering and terrorist financing. Of particular note is that it has ‘aligned its legislation with provisions of relevant international agreements, as required by Recommendation 36 of the Financial Action Task Force (FATF). As a consequence, MONEYVAL has re-rated the jurisdiction from being ‘Partially Compliant’ to ‘Largely Compliant’ with this recommendation. As a result, MONEYVAL terminated its follow-up procedure vis-à-vis Gibraltar under its 5th round of evaluations.... Out of 40 recommendations from the FATF, Gibraltar currently has 23 recommendations rated ‘Compliant’ and 17 recommendations rated ‘Largely Compliant’.’ In relation to Hungary, again as announced in a recent follow-up report, it has also improved its measures for tackling money laundering and terrorist financing, with improved compliance with the FATF’s Recommendation 15 on new technologies, where it has been uprated from Partially Compliant to Largely Compliant. Recommendation 8 on non-profit organisations was also assessed, but remains as Partially Compliant. Out of the 40 FATF Recommendations, Hungary currently has five recommendations rated compliant, 33 recommendations rated as largely compliant, while two recommendations are rated partially compliant.

In other news from Europe, the Swiss Financial Market Supervisory Authority (‘FINMA’) has announced sanctions against HSBC Private Bank for violating anti-money laundering regulations. Specifically, the bank ‘operated two high-risk business relationships where it failed to carry out an adequate check of either the origins, purpose or background of the assets involved. In addition, a number of high-risk transactions were insufficiently clarified and documented, making it impossible to establish the legitimate nature of these transactions. The transactions in question were carried out between 2002 and 2015 and amounted to a total of more than USD 300 million. The funds, which originated from a government institution, were transferred from Lebanon to Switzerland and – generally after a short time – primarily flowed back to other accounts in Lebanon. At no time did the bank clarify why a transitory account held with it was used for these transactions. In its checks, the bank failed to recognise the indications of money laundering presented by these transactions; it likewise failed to satisfy requirements for the initiation and continuation of customer relationships with politically exposed persons, and was thus in serious breach of its due diligence obligations. The bank further failed to notify the Money Laundering Reporting Office over a protracted period. It still did not submit a report even in 2016, when it decided to close the relevant business relationships in light of various risks. Such a report was not filed until September 2020. By doing so, the bank did not comply with either the reporting obligations or the anti-money laundering requirements, in serious breach of supervisory provisions.’ In terms of sanctions, ‘FINMA has ordered the bank to conduct a review, with regard to anti-money laundering aspects, of all the current high-risk business relationships and business relationships with politically exposed persons…. The bank may not enter into any new business relationships with politically exposed persons until such time as completion of the reviews has been confirmed by the audit agent.’

In Singapore, the Ministry of Finance has issued its updated Money Laundering Risk Assessment for 2024. The updated report indicates that the main threats to the jurisdiction stem from foreign and domestic cyber-enabled fraud, with other threats coming in the form of foreign predicate crimes like corruption, tax crimes, and trade-based money laundering. In line with international typologies, ‘the most common ML typologies include: (i) illicit funds flowing into or through Singapore via bank accounts; (ii) misuse of legal persons such as shell companies to channel illicit funds; and (iii) placement of illicit funds in high value assets such as real estate and precious stones and metals. Interestingly, the banking (including wealth management) sector is assessed to pose the highest money laundering risks to Singapore. Banks have higher exposure to money laundering threats and are more easily exploited by criminals due to their role in facilitating large volumes of transactions in the financial system and servicing customers with higher ML risks, including those from jurisdictions with higher ML risks. Among the Designated Non-Financial Businesses and Professions (‘DNFBP’) sectors, corporate service providers (‘CSP’s) pose higher money laundering risks given the role CSPs play in providing upstream services such as incorporation of companies, and that they are linked to the misuse of legal persons in some instances. Other DNFBP sectors which pose higher risks include real estate, licensed trust companies, casinos and precious stones and metals sectors. Finally, in the financial sectors, a higher risk sector of note would be the digital payment token (‘DPT’) services providers (or virtual assets service providers). There has been an increase in reported cases involving DPTs and there is a range of ways in which DPTs can be exploited. Hence, while DPT activities in Singapore form a small portion of global activities, Singapore authorities are closely monitoring the risks involving the sector. Other sectors within the financial industry posing higher ML risks are payment institutions providing cross-border money transfer services (including remittance agents), and external asset managers.’

And, finally, on money laundering this week, a three interesting stories: two from the UK, and one from Australia. First, another gem of information from the annual report of a British challenger bank after the revelations reported in episode 111 of the podcast relating to Monzo bank. This time, it is Starling Bank, which has indicated that ‘on 24 November 2023 the FCA opened an investigation into the Bank’s compliance with UK money laundering regulations and the FCA’s rules and principles for businesses, with a focus on aspects of its anti-money laundering and financial crime systems and control framework. The Company continues to engage and co-operate fully with the FCA. There are a number of different outcomes which may result from this FCA investigation and, therefore, the potential impact of the investigation is currently unquantifiable but could be material. In relation to this, the report further provides that it performed audit procedures which included making enquiries of the Group’s internal counsel and inspection of minutes of meetings and of regulatory correspondence and independent enquiry of the Group’s main regulators [and that it] made enquiries of external counsel and obtained legal confirmations from the Group’s external counsel.’ Secondly, given the imminent UK general election, the Financial Conduct Authority has announced that it will postpone until July the publication of its findings from the review into firms' treatment of domestic PEPs. While it would have hit the deadline initially set, the political sensitivity surrounding the general election makes delay a sensible precaution. And, finally, in Australia, AUSTRAC has refreshed its website. The changes include being able to find guidance resources easily by industry, accessing recent media and news from the main menu, discovering information about AUSTRAC’s partners and how they work together, and much more.

Market Abuse

On market abuse news this week, in the UK, the Financial Conduct Authority (‘FCA’) has updated on the prosecution of 'finfluencers’, nine of them, ‘in relation to an unauthorised foreign exchange trading scheme promoted on social media. On 13 June 2024 at Westminster Magistrates’ Court, Emmanuel Nwanze, Scott Timlin and Holly Thompson indicated pleas of not guilty. Yazmin Oukhellou, Lauren Goodger and Eva Zapico did not indicate pleas. A plea and trial preparation hearing has been fixed for 11 July at Southwark Crown Court for these six defendants. The first hearing for Biggs Chris, Jamie Clayton and Rebecca Gormley was adjourned to Wednesday 3 July at 2pm at Westminster Magistrates’ Court.’ I hadn’t heard of any of these people, but they all seem to be some form of reality TV personality from a range of programmes I have never seen, and I’m likely never to see, because life is simply too short.

In Sweden, the Financial Supervisory Authority has fined Nasdaq Stockholm, which is authorised to operate a regulated market, for ‘deficiencies in how Nasdaq Stockholm has conducted its trading monitoring, which should prevent, identify and report insider dealing. The investigations also show that Nasdaq Stockholm on two occasions initiated trading in financial instruments in violation of the regulatory framework. Nasdaq Stockholm has hereby disregarded its obligations pursuant to Article 16(1) of MAR and Chapter 13, section 3 of the Securities Market Act, [but that the violation is not] so serious that there are grounds on which to withdraw the stock exchange's authorisation or issue the stock exchange a warning, [but that instead an] administrative fine of SEK 100 million Swedish Krona,’ which is around €9m, has been levied.

And, finally, in the US, the Commodities and Futures Trading Commission (‘CFTC’) has fined Trafigura Trading LLC $55m for allegations relating to trading non-public information, benchmark manipulation, and impeding whistleblower communications. As the CFTC press release provides: ‘Between 2014 and 2019, Trafigura traded gasoline while in knowing possession of material nonpublic information it knew or should have known had been misappropriated from a Mexican trading entity (MTE). In February 2017, Trafigura manipulated a fuel oil benchmark to benefit its futures and swaps positions, including derivatives traded on United States registered entities. Between 2017 and 2020, Trafigura required its employees to sign employment agreements, and requested that former employees sign separation agreements containing non-disclosure provisions prohibiting them from disclosing company information, with no exception for law enforcement agencies or regulators, which illegally impeded individuals from voluntarily communicating with Division of Enforcement (DOE) staff during the investigation. This is the first time the CFTC has charged a company under regulations designed to prevent interference with whistleblower communications.’

Cyber Crime

We end this week’s financial crime news with a round-up of cyber-attack news, starting with a story which is something we have covered on previous episodes, namely the cyber-warfare which runs parallel to the conventional warfare following Russia’s invasion of Ukraine. As reported widely, Russian cyber-attackers have targeted many aspects of Ukrainian civilian life, including critical infrastructure. Well, in light of these attacks, it is being reported that prosecutors at the International Criminal Court (‘ICC’) are investigating whether it is possible to classify cyber-attacks as war crimes. This news comes following other inquiries which have been made, largely academic, into whether a large-scale cyber-attack on a NATO member country would trigger the mutual defence obligation under article five of the Treaty. Now, in news not entirely unrelated, the US National Security Adviser, Jake Sullivan, has spoken about the need to strengthen cybersecurity in order to protect energy supply chains. ‘As new digital clean energy technologies are integrated, we must ensure they are cyber secure to prevent destruction or disruption in services. This is a global issue and at the G7 Leaders’ Summit in Apulia, President Biden and G7 leaders committed to taking critical action to strengthen the cybersecurity of the global supply chain of key technologies used to manage and operate electricity, oil, and natural gas systems across the world. The G7 will work to establish a collective cybersecurity framework for operational technologies for both manufacturers and operators.’ He also identified that industry operatives have expressed support for the Supply Chain Cybersecurity Principles proposed by the US Department of Energy, Office of Cybersecurity, Energy Security, and Emergency Response.

References

AUSTRAC, Welcome to our refreshed website.

Centre for Research on Energy and Clean Air, May 2024 — Monthly analysis of Russian fossil fuel exports and sanctions.

Check Point Research, Threat Intelligence Report.

Commodities and Futures Trading Commission, CFTC Orders Trafigura to Pay $55 Million for Fraud, Manipulation and Impeding Communications with the CFTC.

Financial Conduct Authority, 'Finfluencers’ charged for promoting unauthorised trading scheme.

Financial Conduct Authority, Update on the FCA’s review of treatment of Politically Exposed Persons.

Finansinspektionen, Nasdaq Stockholm receives a remark and an administrative fine.

FINMA, FINMA proceedings: HSBC Private Bank (Suisse) SA violated money laundering regulations.

Francine Pickup, Corruption is criminal, immoral, and the ultimate betrayal of public trust.

Government of Canada, Canada announces additional sanctions against Russian government for its responsibility in death of Alexei Navalny.

Ministry of Finance, Singapore Publishes Updated Money Laundering National Risk Assessment.