US government agencies continue to highlight money laundering risks associated with Russian kleptocrats and deny access to US financial system

On April 14, 2022, the Financial Crimes Enforcement Network (“FinCEN”), an office of the United States Department of the Treasury (“Treasury”), issued a 13-page advisory on kleptocracy and foreign public corruption (the “Advice”) ) urging financial institutions to focus their efforts on detecting the proceeds of foreign public corruption.[1] The advisory provides typologies and potential indicators of kleptocracy as well as what it characterizes as “other forms of foreign public corruption, namely bribery, embezzlement, extortion and misappropriation of public property” .

Several aspects of the review are worth noting:

  • First, although it is presented as a general advice from FinCEN, it is clearly related to the current situation regarding Russia. The opinion explicitly acknowledges that “Russia is of particular concern as a kleptocracy because of the link between corruption, money laundering, malign influence and armed intervention abroad, and sanctions evasion.”
  • Second, while the notice is directed at “financial institutions” (in a broad sense as it covers sectors such as casinos and precious metals/jewellery in addition to traditional banks and deposit taking institutions), a number typologies and red flags identified in it could apply to other industries.
  • Third, the notice is a further indication that compliance must be viewed holistically and can no longer be dealt with effectively in silos. The current situation in Russia and the links established between corruption, money laundering, national security, tax evasion and sanctions is another marker of an evolution that began a few years ago; to this non-exhaustive list, one could also add business and human rights issues and the necessary convergence between compliance and corporate social responsibility/ESG.
  • Fourth, the coordination and scale of the response from the western world with regard to, in particular, asset recovery and the evasion of sanctions gives rise to an increased challenge in the form of denunciation. Indeed, the notice notes that in March 2022, the Treasury launched the Kleptocracy Asset Recovery Rewards Program, which offers rewards for information leading to the seizure, restraint, or forfeiture of assets. corruption-related assets of foreign governments, including the government of the Russian Federation.[2] The EU also launched an EU sanctions whistleblower tool in early March.[3] Indeed, the European directive on whistleblowing is now applicable in all EU countries.

    Echoing these initiatives, the U.S. Department of Justice announced the formation of the KleptoCapture Task Force, “an interagency law enforcement task force dedicated to enforcing sweeping sanctions, export restrictions and economic countermeasures that the United States imposed, along with its allies and partners, in response to Russia’s unprovoked military invasion of Ukraine.[4] In recent congressional testimony, U.S. Attorney General Garland also supported changes to U.S. law to make it easier to seize and confiscate the assets of Russian oligarchs and sanctions evaders.[5]

    In a similar vein, on May 8, 2022, the Treasury’s Office of Foreign Assets Control (“OFAC”) imposed additional measures to continue to make it harder for Russia-linked kleptocrats seeking to launder their earnings. ill-gotten to do so through the US and global financial systems. OFAC has announced that it is exercising its authority under Executive Orders 14024 and 14071 to designate the accounting, trust and business formation, and management consulting sectors as categories of services that U.S. Persons may not supply to Russian Persons who are subject to, and prohibited from exporting, re-exporting, selling or supplying, directly or indirectly, from the United States. These latest measures are intended to deny Russian kleptocrats and their enablers the professional services to establish and manage legal entities and otherwise engage in financial transactions necessary to disguise the provenance and facilitate the movement of their ill-gotten gains and, ultimately account, take advantage of it.[6]

  • Fifth, companies face an increased risk of finding themselves in a “never mind if you do, never mind if you don’t” situation. On March 4, 2022, news organizations reported that Russia had enacted two new laws to combat what it describes as “fake news”. The new laws cover individuals and organizations who oppose the war in Ukraine and those who support financial sanctions against Russia or its citizens and businesses. Sentences under consideration include up to fifteen years in prison and various fines. At the same time, during a recent visit to India, Russian Foreign Minister Sergey Lavrov indicated that he had “no doubt that a way would be (found) to circumvent the artificial obstacles created by the West’s illegal unilateral sanctions”. . This also concerns the field of military-technical cooperation.[7]

In this difficult context, companies and financial institutions would be well advised to:

  • Educate boards and senior management on the increasingly complex web of risks associated with public corruption, money laundering risks and sanctions evasion.
  • Reassess their risk assessment and risk mapping in light of new geopolitical alignments around sanctions, corruption and evasion risks.
  • Review their third-party due diligence procedures, not only with respect to sanctioned entities and individuals, but also with respect to business partners more generally, as these could be used by such sanctioned entities and individuals as conduits to evade sanctions.
  • Reconsider their internal control and compliance structure to avoid gaps or possible incidents that could have serious consequences.

We continue to monitor legislative, regulatory and enforcement developments associated with the situation in Russia and Ukraine, including the response of Western governments to issues of fraud, corruption, money laundering and sanctions evasion.

Ashley C. Reynolds