Episode 122

19th August – 25th August 2024

Sanctions

This week’s sanctions news starts in the US, where it has been reported that an army intelligence analyst has pleaded guilty to conspiring ‘with an individual who lived in Hong Kong and whom [Korbein] Schultz suspected of being associated with the Chinese Government (Conspirator A) to collect national defense information, including classified information and export-controlled technical data related to U.S. military weapons systems, and to transmit that information to Conspirator A in exchange for money.’ Schultz will be sentenced at a hearing scheduled for 23rd January 2025. There has also been a guilty plea from a Venezuelan national, George Semerene Quintero, for ‘conspiring to violate the International Emergency Economic Powers Act (IEEPA) for his role in a scheme to evade U.S. sanctions imposed on Petróleos de Venezuela S.A. (PDVSA), a Venezuelan state-owned oil company…. According to court documents, between January 2019 and December 2021, after learning of the sanctions imposed on PDVSA, Semerene and his co-conspirators devised a scheme to illegally procure aircraft parts, including bearings, rudder parts, joint slide flexes and actuators, from the United States to service PDVSA’s aircraft fleet in Venezuela, in violation of U.S. sanctions and export controls. Semerene, who was an employee in PDVSA’s procurement department, and his co-conspirators concealed from U.S. companies that the requested parts were destined for Venezuela and PDVSA, and they utilized freight forwarders and shipping companies located in the Southern District of Florida to move the parts. Semerene and his co-conspirators carried out this scheme by (1) lying to U.S. parts suppliers; (2) making false declarations on customs forms and shipping documents; (3) fabricating supplier invoices; and (4) providing false end-user certificates. Semerene and his co-conspirators further utilized third parties in other countries, including Novax Group SA, a Costa Rican Aerofalcon SL, a Spanish company, to serve as the purported purchasers and end users for the aircraft parts ultimately destined for PDVSA.’ In news of new sanctions from the US, the Office of Foreign Assets Control (‘OFAC’) has sanctioned the former Haitian President, Michel Joseph Martelly, for using his ‘influence to facilitate the trafficking of dangerous drugs, including cocaine, destined for the United States. Additionally, Martelly engaged in the laundering of illicit drug proceeds, worked with Haitian drug traffickers, and sponsored multiple Haiti-based gangs.’ And, finally, from the US this week, OFAC has updated on its modernisation.

The Federal Council in Switzerland has announced that it has ‘decided to adopt further measures of the EU's 14th package of sanctions against Russia. These measures will take effect on 27 August.’ On the subject of the EU and its sanctions against Russia, specifically its energy sanctions, the academic think tank, ‘UK in a Changing Europe’, has published some analysis by Dr Francesca Batzella on the EU’s energy sanctions policy how this might be compromised by ‘the wide range of energy policy preferences across the member states.’ You may recall that in last week’s podcast I reported on the latest report on Russian energy exports published by the Centre for Research on Energy and Clean Air which noted that on the subject of imports into the EU, Hungary headed a group of five member states of the bloc along with, in descending order, Italy, Slovakia, Belgium, and the Czech Republic. Together, they paid €1.2bn to the bloc in July. As this analysis concludes ‘If the EU wants to wean off Russian fossil fuels, as suggested in REPowerEU and other EU official documents, it will need to overcome this challenge of divided member states with diverging energy policy preferences.’

In other news, MBank, a commercial bank in Kyrgyzstan, has suspended money transfers running in both directions, effected through Russian banks which are subject to sanctions. Russian banks have been made subject to sanctions by a number of nations, including the US and UK, as well as the European Union, since the Russian invasion of Ukraine in February 2022. In the UK, the Somalia sanctions guidance has been updated. And, finally, an interesting podcast from the Washington Post on the subject of ‘Why is the US obsessed with sanctions?’ The podcast has a bit of history and some interesting discussion around sanctions and their use.

Bribery and Corruption

This week’s bribery and corruption starts this week starts in Iraq, where the United Nations Development Programme has released a Trial Monitoring First Report on Grand Corruption Cases in the judicial system of the Kurdistan Region of Iraq. For the purposes of the report, 100 cases were monitored between November 2022 and December 2023, as well as 50 verdicts issued between 2016 and 2022. ‘Key findings of the report indicate that the Ministry of Finance (25%), the Ministry of Electricity (18%), and the Municipal Councils (17%) are among the most affected government sectors by grand corruption. The analysis reveals an increase in convictions compared to acquittals, though the rate of high-level defendants remains low, with few senior government officials being charged. A significant progress is reported with the exclusion of corruption-related cases from the general amnesty regime. It also notes a notable reduction in trials conducted in absentia and a rise in felonies related to intentional damage through abuse of public office, reflecting the judiciary's progress in anti-corruption efforts. However, it highlights a concerning lack of civil society organizations (CSOs) attending trials as third parties, despite legal provisions allowing their presence.’

In China, it has been reported that the former vice-president of the Chinese Football Association, Li Yuyi, has been sentenced to a term of 11 years’ imprisonment in relation to a range of bribery and corruption allegations. This is not the first such action taken in China, with further investigations ongoing. Yuyi was also fined one million yuan.

In Hungary, though detail is scant, it has been revealed that in an attempt to release around €20bn in funding from the European Union, the government in Budapest has agreed to anti-fraud and anti-corruption measures. Hungary has struggled to shake-off its label as the most corrupt EU member state, with Transparency International commenting at the time of the publication of its most recent Corruption Perception Index (‘CPI’): ‘While some of the judicial reforms implemented by the Hungarian government as a precondition for accessing EU funds can be regarded as steps in the right direction, in the absence of additional measures these reforms are insufficient to restore the rule of law and to weed out systemic corruption in Hungary….’ In fact, there is an interesting infographic in the CPI which demonstrates the fall which Hungary has experienced among EU member states over the last 12 years, having been 18 out of 27 in 2012, which is not great, but certainly better than 27 out of 27.

To Ukraine now, where the Ministry of Defence has opened a public consultation on the anti-corruption programme for 2024 – 2026. In this podcast and elsewhere, the desire of the Ukrainian authorities to root out corruption at all levels of its society, even in the context of its defence from the Russian invasion, has been impressive. This Programme marks a further manifestation of this campaign. In seeking to maintain the zero-tolerance ethos towards corruption, this programme ‘aims to prevent, uncover, and fight corruption, ensure adherence to principles of honesty and ethics, and guarantee compliance with the requirements of the anti-corruption laws.’ A draft order was also published. The consultation is open for 12 days, so anyone wishing to respond will need to act quickly. The Ukrainian MoD has also announced efforts to renew the composition of the Public Anti-Corruption Council.

In the US, it has been announced by the Attorney’s Offices in New York and Texas that a former energy trader from Houston, Texas, has pleaded guilty to his role in a scheme of bribery concerning government officials in Mexico. ‘Javier Aguilar and his co-conspirators paid approximately $600,000 in bribes to two senior officials at PEMEX Procurement International Inc. (PPI), a wholly owned affiliate of the Mexican state-owned oil company Petróleos Mexicanos (PEMEX), in exchange for assistance in winning business for Vitol [his then employer]…. As part of his guilty plea, Aguilar consented to transfer the Texas case to New York, to consolidate the cases and to forfeit $7,129,938.’

And, finally, on bribery and corruption news this week, it is being reported that investors in Entain plc (‘Entain’), which owns a number of gambling brands, are bringing an action against the company in relation to the deferred prosecution agreement Entain reached in December 2023 as a consequence of the activities of a Turkish subsidiary. The basis of the claim is understood to be an alleged failure by Entain to make honest reports to investors about its knowledge of wrongdoing by the subsidiary. No further information is available.

Money Laundering

The money laundering news this week is a bit thin on the ground, but there is an interesting Policy Paper which is certainly worth reading. Julia Yansura has authored the Policy Paper for the FACT Coalition on the subject of Environmental crimes, illicit finance, and the unique challenges which they pose. The paper argues that because environmental crimes are unique, they need tailored solutions to address them. While the paper is principally addressed to US lawmakers, it does have more general themes which should be of interest to all working in this area. First, environmental crimes have the problem of double-laundering, which is where the illegally sourced raw material, eg, timber, is made to appear as if it is from a legitimate source by falsification of documents or corruption. The financial proceeds are then laundered through the financial system. The response of policy-makers to this problem should be to ensure that environmental crime-fighting units are sufficiently resourced and, further, that all environmental crimes are predicate offences. ‘It is also important for governments to utilize civil forfeiture (a non-conviction based asset forfeiture mechanism) where possible and appropriate.’ Additionally, the paper argues that targeted sanctions could be employed in respect of environmental crimes so that the financial sector is able to identify, by review of designations, whether an individual can be concerned in transactions with the financial institution. The use of targeted sanctions in this manner is something which has been suggested by the Financial Action Task Force in relation to the illegal wildlife trade. Of course, as one might expect in a discussion concerning sanctions, monitoring and enforcement should be sufficient to ensure that limitations on activity are observed: ‘…making sanctions designations is only a first step; ongoing monitoring by [authorities] as well as private sector stakeholders is absolutely critical.’ In relation to illicit gold mining, specifically, the paper argues that current arrangements for AML/CFT are inadequate and that the US policymakers ‘should consider adding gold to the USD$10,000 declaration requirement, while law enforcement should increase efforts to scan suitcases for gold bars, particularly at ports of entry that are known to have issues with gold trafficking.’ The report concludes that insufficient action is being taken to tackle environmental crimes and the illicit finance which they generate. ‘Governments seeking to do more should consider developing specialized responses that take into consideration the unique characteristics of these challenging crimes…. Beyond a cursory sentence in an existing AML/CFT or anti corruption framework, environmental crimes and illicit finance require greater attention and more specialized strategies.’

And, finally, on money laundering, the Canadian banking group, TD Bank, has produced its third quarter results providing: ‘The Bank’s reported results include the impact of the US$2,600 million provision for investigations related to the Bank’s anti-money laundering (AML) program, which, together with the provision taken last quarter in connection with this matter, reflects the Bank’s current estimate of the total fines related to this matter.’

Fraud

On fraud news, we start in the UK with more instances of action taken against a Covid-19 recovery fund fraudster. First, the Insolvency Service has announced that Imran Mushtaq from Derby fraudulently obtained two Covid loans worth a combined £100,000 by overstating business turnover. Mushtaq was sentenced to 20 months imprisonment, suspended for 22 months, and has agreed to repay the funds received. In addition, he was ordered to complete 120 hours of unpaid work and pay costs of £1,000. In a second case, the Insolvency Service has also announced the sentencing of a company director from Sussex for fraud on the Bounce Back loan scheme, and encouraging another to invest in an opportunity which he did not have permission to create. Lee Walkey was sentenced to eight months in prison, suspended for 12 months, and also ordered to complete 150 hours of unpaid work. Thirdly, a London taxi driver has had an 11-year bankruptcy restriction imposed for claiming two Bounce Bank loans of £50,000 each. By way of contrast with the UK cases, a court in North Carolina has sentenced Covid-19 fraudsters to terms of imprisonment. ‘Toni A. Smith, … was sentenced to 15 months in prison; and Dontae Antonio Murphy, … was sentenced to 12 months in prison.  Collectively, these Defendants were also ordered to pay several hundred thousand dollars in restitution to the Small Business Administration, which included interest and processing fees, for fraudulently obtaining Paycheck Protection Act COVID-19 loans.’

In other fraud news from the UK this week, the Financial Conduct Authority (‘FCA’) has announced a fine for the auditor, PricewaterhouseCoopers LLP (‘PwC’), for failing to report to the regulator their belief that London Capital & Finance plc (‘LCF’) might be involved in fraudulent activity. LCF went into administration on 30th January 2019, collapsing a short while later. In conducting its 2016 audit of LCF, PwC experienced aggression from a senior person at LCF, and was provided with ‘inaccurate and misleading information…. PwC found the audit very complex, and it took considerably longer to complete than anticipated. LCF’s actions, and PwC’s own work on the audit, led PwC to suspect that LCF might be involved in fraudulent activity. PwC was duty bound to report those suspicions to the FCA as soon as possible, but they failed to do so. PwC eventually satisfied itself that LCF's 2016 accounts were accurate. Whether or not its suspicions remained, it still had an obligation to report its previous concerns to the FCA.’ This is the first time that the FCA has fined an auditor.

Other Financial Crime News

In other financial crime news this week, in the UK, the National Crime Agency (‘NCA’) has published its National Strategic Assessment 2024 (‘NSA’). The NSA ‘draws on intelligence from across law enforcement, government, the third sector and private industry,’ to produce a picture of overall crime patterns. While it covers a range of threats, the focus here will be on Cyber, Fraud, and Illicit Finance. On Cyber, ‘ransomware remains the greatest serious and organised cybercrime threat, the largest cybersecurity threat, and also poses a risk to the UK’s national security….’ The Assessment identifies an increase in ransomware incidents in the past year, and that this is ‘likely due to the continued professionalisation of the threat, with multiple business models being operated. The most common model remains ransomware as a service where high-end cybercriminals sell access to the tools needed to launch an attack, making the crime type more accessible to less skilled criminals. The ransomware as a service model also makes it quicker to launch a ransomware attack and facilitates faster extraction of funds from victims as the tools and infrastructure are provided ready for use.’ In terms of responsibility, the finger is pointed, for the most part, at Russia and Russian-speaking criminals. The Assessment provides advice on protection from attack, recognising the signs, and reporting the incident, guiding readers to the National Cyber Security Centre for more information.

On fraud, the Assessment identifies fraud as a ‘widespread threat’. ‘Fraud remains the most commonly reported crime against individuals in England and Wales according to the Crime Survey for England and Wales (an estimated 37% of all crime),’ but that only 13 per cent of frauds against individuals are reported to Action Fraud. While some fraud typologies are reducing, eg, courier fraud and remote purchase fraud, others are increasing, particularly romance and investment fraud. According to reports to Action Fraud, 89 per cent of frauds are cyber-enabled, doubling in a decade. This may be due to the ’growth of generative artificial intelligence’ which has increased accessibility and which can be ‘easily obtained by the public and misused by fraud offenders,’ effectively reducing barriers to entry. As the report further provides: ‘Generative artificial intelligence has the potential to make it easier for lone offenders to carry out fraud offences.’ Once more, the Assessment provides advice on protection from fraud, recognition, and guidance on reporting incidents.

On Illicit Finance, it is ‘a realistic possibility that over £100 billion is laundered through and within the UK or UK-registered corporate structures each year.’ While much of this is laundered by conventional means, money launderers keep up with technological advancements, with the increasing use of cryptoassets to launder the proceeds of crime. In last week’s podcast, we reported on the strategic approach of Companies House in its 2024 – 2025 Business Plan to address the misuse of corporate structures by fully engaging its powers under the Economic Crime and Corporate Transparency Act 2023, which is a sentiment echoed in the Assessment. Further, and despite the significant regulatory burden imposed on professional enablers, the Assessment indicates that they ‘continue to be used to conceal and move criminal assets.’ Again, the Assessment, as with other thematic discussions, identifies what can be done in terms of protection against becoming concerned in money laundering activity.

Cyber Crime

We end this week’s financial crime news with a round-up of cyber-attack news, where two stories caught my eye. First, the city of Helsinki is believed to be readying itself for an uptick in cyber-attacks after an attack on a remote server managed by the city. Such was the extent of the attack, that the national government has ordered stress-testing and risk assessments. Two nations are believed to offer the principal cyber-threats, and there will no prizes distributed for correct guesses.

The other story is one which has rumbled on for some time, and it is the cyber-attack on the British Library from which it continues to recover. The Library was attacked in October 2023, and while certain of its services are back online, not all of them are live, with the thesis database still offline. Well, the latest news concerning the Library is that this week it has announced a tendering process for a security contractor to work with it to rebuild its infrastructure.