ANNUAL REVIEW 2018 About Us
Founded in 2014, Aperio Intelligence is a specialist, independent corporate intelligence firm staffed by individuals who collectively have decades of experience in undertaking investigations and intelligence analysis.
Our team has worked in over 150 countries, on thousands of cases, for a wide range of leading global corporations, financial institutions and law firms.
We have both knowledge of and access to relevant public and proprietary data sources, as well as a longstanding network of reliable, informed local contacts in the regions where we operate, cultivated over decades, who support us regularly in undertaking local enquiries on a confidential and discreet basis.
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We support clients in assessing complex integrity and political risks in opaque and high-risk markets through local insight and contact Find out more about the Aperio Intelligence Team at: networks. Critical to our intelligence-gathering capabilities are the www.aperio-intelligence.com languages we speak in-house, including all major European languages, as well as Russian, Arabic, Farsi, Mandarin, Cantonese and Japanese.
2 FINANCIAL CRIME DIGEST IN THIS ISSUE: ANNUAL REVIEW 2018 DANSKE BANK - REFLECTIONS ON A SCANDAL 04
FRANCE’S PROGRESS ON ANTI-CORRUPTION 07 Welcome to Aperio Intelligence’s Annual Financial Crime Review, which looks back at some of the key financial 2018 - ENFORCEMENT AND KEY CASES 09 crime developments of 2018. The Annual Review features UKRAINE’S NEW CHURCH 16 articles analysing notable developments relating to money laundering, fraud and terrorist financing, bribery and DEUTSCHE BANK’S FINANCIAL CRIME TROUBLES 18 corruption, and sanctions, that were tracked throughout the year in the monthly Financial Crime Digest. 2018 TECHNICAL DEVELOPMENTS ROUND-UP 21 [email protected]
Reflecting on 2018: It has been a corruption by ex-president Jacob Zuma, who busy year, rocked by sprawling money was forced to resign in February. The inquiry laundering and corruption scandals, is looking into “state capture,” where the and seemingly endless developments wealthy Gupta family is accused of trying to for companies to keep track of in the influence political decisions. 2018 also saw area of financial crime prevention. the resignation of Peru’s president Pedro Pablo Kuczynski due to alleged links to construction One of the lasting feelings coming out of giant Odebrecht, which is at the centre of the 2018 is that Europe is struggling in its efforts continent’s biggest corruption scandal. to combat money laundering. The numerous high-profile money laundering scandals that In the UK, the National Crime Agency secured have come to light in 2018, which includes the the first two Unexplained Wealth Orders to allegations against Danske Bank described Special Purpose Vehicle to facilitate financial investigate assets believed to be owned as “the biggest scandal” in Europe by the transactions with Iran, both of which have by a politically exposed person. The new European Commission, have pushed EU yet to show teeth. Despite the continued investigative tool, which came into force in regulators to try to address the problem, commitment by the remaining members of the January via the Criminal Finances Act 2017, beyond the successive amendments to JCPOA and the abovementioned action by the also saw its first legal challenge before the Europe’s Anti-Money Laundering Directive, EU, many companies, notably EU companies, High Court in National Crime Agency v. Mrs which now stands at its sixth iteration. In have pulled out of trade with Iran for fear of Zamira Hajiyeva [2018] EWHC 2534 (Admin). December, the European Council finished the exposing themselves to US sanctions. year by adopting an Anti-Money Laundering At Aperio Intelligence, we provide corporate Action Plan, which mandates a “post-mortem” In Malaysia, following the defeat of Najib Razak intelligence solutions designed to help our review of the recent alleged money laundering in the May elections and the forming of a new clients manage a wide range of financial crime cases involving EU banks. government led by prime minister Mahathir risks including money laundering, sanctions, Mohamad, a special task force was set up bribery and corruption. We support our clients In May, the US withdrew from the Joint to renew investigations into the 1Malaysia to manage integrity and reputation risks, and Comprehensive Plan of Action (JCPOA), Development Berhad (1MDB) corruption maximise the benefit of their investments. otherwise known as the Iran nuclear deal, scandal. The US Department of Justice has with the US reimposing the final tranche also, in 2018, brought charges against two For further information on how we can of sanctions on Iran that had been lifted in former bankers and a Malaysian financier help you, please contact us at info@aperio- accordance with the JCPOA in November. alleged to have misappropriated funds from intelligence.com or call us in London on +44 The EU updated its Blocking Statute in 1MDB and paid bribes to Malaysian and (0)20 3146 8900 or in Paris on +33 (0)1 46 support of the continued implementation of Abu Dhabi officials. A public inquiry in South 37 85 14. In the meantime, we wish you every the JCPOA and announced the creation of a Africa began in August to investigate alleged success and prosperity in 2019.
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SPECIAL FEATURE
Danske Bank – reflections on a scandal
By Adrian Ford Chief Executive Officer Aperio Intelligence
The Danske Bank money laundering scandal was one of the major financial crime issues of 2018. The scandal was the culmination of events, precipitated by the bank’s acquisition in 2007 of Finland’s Sampo Bank, including its Estonian branch. At the time, analysts slated the acquisition as “a very expensive deal” at a valuation equating to “an eastern European multiple for The laundromat scandals, in turn linked to Danske a bank in a low growth market.” The Bank, share a number of common features. In both the “low growth” market they referenced was the bank’s home jurisdiction of Russian and Azerbaijan cases, they enabled members Finland, rather than the comparatively of the elite in each country to transfer money abroad smaller Baltic or Russian operations of on a confidential basis. This reportedly included funds Sampo Bank. Yet it was in the Baltics in subsequent years that Danske obtained through fraud, rigging of state contracts, or experienced explosive growth as a result the evasion of tax or customs duties. of massive capital flows from Russia, Azerbaijan, Ukraine and elsewhere. Some EUR 200 billion of transactions flowed through the bank’s Estonian Deutsche Bank agreed to pay USD 630 million have estimated the bank could face penalties branch in a nine-year period, around ten to settle UK and US investigations into alleged of as much as USD 8 billion, more than four times the size of the country’s economy. mirror trades to launder USD 10 billion out of times the amount levied against HSBC over Under Danske Bank’s ownership, the Russia. On the basis of the mirror trades alone its involvement in laundering USD 881 million number of non-resident accounts at its (the 2013 figure appears to represent the of drug trafficking money on behalf of a Estonian branch increased by around lower end of the scale), it seems realistic that Mexican drug cartel. 6,500 from the approximately 3,300 Danske could be exposed to fines potentially accounts it inherited in 2007. exceeding those levied against Deutsche Bank. Danske’s own initial investigation into affairs at its Estonian branch, conducted by external The Danske Bank scandal was significant Of the EUR 200 billion reported to have law firm, Bruun & Hjejle, concluded that the mainly because of the sums involved. An transited the Estonia branch of Danske Bank, bank’s management had made assumptions internal Danske memorandum quoted by the if only a fraction represents money laundering about the effectiveness of its anti-money Financial Times estimates that the bank had – and Danske’s own internal investigation laundering (AML) procedures, had generally executed mirror trades in 2013 of between suggests a large fraction of transactions were over-relied on automated systems, and EUR 6-8.5 billion. To put this in context, in 2017, potentially suspicious – analysts at Jyske lacked the institutional willingness to take
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Danske Bank – reflections on a scandal
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steps to tackle the issue. Instead, profits were In response to the invested overseas. In the case of Azerbaijan, prioritised, an aggressive management style members of president Aliyev’s family are dissuaded junior staff from flagging concerns scandal, the EU has alleged to have benefited personally. In both to superiors, and numerous warnings over an recognised an urgent the Russian and Azeri cases, funds were extended period were ignored. This included spent on items such as luxury goods and cars, warnings from the Russian Central Bank, and need to address private school fees, residential property, and the Estonian Financial Supervisory Authority a number of the medical or dental fees. Some of the funds were at the time of the Sampo Bank acquisition that underlying issues also paid to unsuspecting established foreign clients of the bank “permanently participate in companies for goods. It is also reported that financial transactions of doubtful origin.” some of the monies found their way to EU politicians or other pressure groups to advance In 2013, Howard Wilkinson, Danske’s former locations, coupled with the use of UK the political interests of Russia or Azerbaijan head of markets in Estonia, wrote a damning companies and banks in EU jurisdictions. respectively. In other cases, lower-profile Azeri internal email, setting out a “near total process These jurisdictions may have attracted business owners, attempting to avoid requests failure” at the bank. His note referred principally lower scrutiny for AML compliance given from corrupt customs or tax officials for bribes, to the bank’s treatment onboarding of Lantana they are considered in general to be lower were reportedly drawn to the core laundromat Trade LLP, a UK limited liability partnership, risk. Equally, the choice of Danske Bank companies, which required no evidence of which held a sizeable credit balance at the itself, given Denmark’s positive reputation identity to facilitate payments. bank, despite filing dormant accounts in the for transparency and financial probity, is UK. Its beneficial owners were not known, but unlikely to have been entirely coincidental. Since the breaking of the Danske Bank scandal, Mr Wilkinson reportedly described them as UK limited liability partnerships featured US authorities have also taken a keen interest, including “the family of Vladimir Putin, Russia’s highly on the list of those entities linked partially as a result of the potential association president, and the FSB [Russia’s intelligence to the Russian and Azerbaijan laundromat of the Danske Bank and laundromat scandals service].” The Kremlin subsequently denied the scandals, prompting the UK government to with sanctions-busting or terrorist financing allegations of ties to Lantana Trade. announce steps at the end of 2018 to control mechanisms. Marshall Billingslea, the US the misuse of such legal entities. Treasury official in charge of counter-terrorist Danske Bank’s own review of its Estonian financing told Danish newspaper Berlingske: operation makes clear that a considerable The laundromat scandals, in turn linked to “We are following this case very closely.” number of its non-resident accounts (which Danske Bank, share a number of common made up 44 percent of all deposits between features. In both the Russian and Azerbaijan In November 2016, the US Attorney for 2007 and 2013) were suspicious. The report cases, they enabled members of the elite in the Southern District of New York indicted found that 6,200 customers screened were each country to transfer money abroad on a Iranian-Turkish businessman, Reza Zarrab, likely to have engaged in suspicious activity, confidential basis. This reportedly included in connection with a scheme involving shell yet despite this, the bank’s management funds obtained through fraud, rigging of state companies, fake invoices and incomplete considered updates to the AML system too contracts, or the evasion of tax or customs wire transactions, which they claimed expensive to justify. duties. In the Russian case, businessmen was part of a deliberate attempt to evade close to the Kremlin, owning groups involved US sanctions against Iran. Mr Zarrab was Part of the funds passing through Danske in construction, engineering, information reportedly very close to the family of Turkish Bank’s Estonian branch were reportedly technology and banking allegedly benefited president, Tayyip Erdogan, and the arrest and linked to the Russian and Azerbaijan from rigged contracts with state entities, or subsequent indictment caused a diplomatic laundromats. Both cases involved the use state-owned companies, to siphon funds rift. US authorities alleged that in 2013, a of shell companies, nominee directors abroad, some of which was reinvested in Zarrab-controlled company in Dubai, Hanedan and opaque ownership through offshore Russia whilst other amounts were spent or General Trading LLC, reportedly received over
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Danske Bank – reflections on a scandal
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USD 4 million from British-based LCM Alliance wake of the scandal, Latvia’s central bank concern has been the risk of “regulatory LLP, one of the core Azerbaijan laundromat governor Ilmars Rimsevics was detained on capture” including the potential for career companies. In May 2013, Hanedan received bribery charges, which he denied, and the moves between financial services providers another USD 1.5 million from one of the main European Central Bank took steps to wind and financial regulators to create potential Russian laundromat companies, British-based up ABLV on the basis that it had “determined for conflicts of interest, or the reluctance of PR-Vert System Ltd. that ABLV Bank was failing or likely to fail countries to tackle money laundering and other in accordance with the Single Resolution financial crime risks sufficiently, for fear of Aside from the money laundering concerns Mechanism.” Mr Rimsevics was subsequently cutting off profitable cross-border business. surrounding Danske Bank, the US has also charged with bribery in Latvia, following a four- The EU has created additional powers for the focused attention on the role played by non-US month investigation. Prosecutors reportedly European Banking Authority to take a more financial institutions, including in particular presented an infographic referencing Trasta active role in policing AML enforcement, a number of which are based in the Baltics Komercbanka, a Latvian bank which was in situations where national authorities are region, over their alleged roles in sanctions shut down and liquidated in 2017 over money deemed not to have taken sufficient action. evasion schemes, whether relating to Iran, laundering concerns, and which, together with This has led to calls for the creation of a North Korea, or elsewhere. In February Privatbank and Danske Bank were the three more centralised EU AML authority, although 2018, the US Treasury’s Financial Crimes largest recipients of funds arising from the commentators suggest national authorities Enforcement Network (FinCEN) issued a notice Russian laundromat. ought to be better placed to identify and control under s.311 of the US Patriot Act deeming money laundering risks at a national level. Latvia’s ABLV Bank “a foreign bank of primary The Danske Bank scandal will continue to money laundering concern” over its alleged play out in 2019 and more revelations are What is clear from the Danske Bank scandal financial activity including “transactions for almost certain. In response to the scandal, is that, despite its size, it is not an isolated parties connected to UN-designated entities, the EU has recognised an urgent need to case of control failure affecting a single some of which are involved in North Korea’s address a number of the underlying issues, institution. The Russian laundromat scandal procurement or export of ballistic missiles.” notably the willingness of national authorities alone is reported to have accounted for 26,746 The issuance of the s.311 notice banned US to take effective action to ensure existing payments totalling USD 20.8 billion, to 5,140 institutions from dealing with ABLV. In the EU AML legislation is enforced. A particular companies with accounts at 732 banks in 96 countries. In September 2018, Dutch bank ING agreed to pay a fine of EUR 675 million and EUR 100 million in disgorgement, to settle regulatory issues in its Netherlands business with the Dutch authorities. A range of financial institutions in the Baltics region, including ABLV Bank and Trasta Komercbanka have already failed as a result of money laundering concerns, and it is likely that others in the region, given its proximity to Russia and the former Soviet Union, have been affected by similar issues. With increased pressure from US authorities and European authorities under pressure to take assertive action to curb financial crime risks, more revelations in the year ahead are highly likely.
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SPECIAL FEATURE
France makes progress on anti-corruption, but structural issues remain
established in Article 1 and the subsequent the French authorities. Thus, as evidenced articles, the French Anticorruption Agency by numerous pronouncements by French (AFA), an independent public body placed officials and the running commentary by By George Voloshin Head of Branch under the joint supervision of the Ministry the wider legal community in 2017 and Aperio Intelligence, France of Justice and the Ministry of Budget. It 2018, the principal explanation for the Sapin was clearly modelled on the Anglo-Saxon II phenomenon lies in the purely political equivalents such as the Serious Fraud Office realm. The gist of the law thereby consists in the UK and elements of the US Justice of protecting French businesses from Department’s Fraud Section that deals with prosecution abroad, mainly in the US, for 2018 was the full year of application of international corruption (namely its FCPA corruption committed in third countries. At the new anti-corruption law in France unit). Direct comparisons with either the the same time, France had no other choice named after the former minister of UK or the US are inappropriate, though: than to demonstrate to the rest of the world economy and finance, Michel Sapin. AFA has no investigative powers and, more that it takes the fight against corruption The Sapin II bill was definitively generally, operates within an inquisitorial seriously and is ready to prosecute on adopted by the French National judicial environment reflecting a major domestic soil with all the severity implied by Assembly on 8 November 2016, difference between the common law and its Criminal Code. approved by the Constitutional Council civil law systems. on 8 December 2016 and signed Deprived of investigative powers but into law by then-president François empowered by law to submit cases for Hollande the following day. It has the Regular discussions prosecution to the Parquet National Financier official title of “the law on transparency, within French industry (PNF), AFA has so far concentrated the bulk the fight against corruption and the forums are proof of its efforts on carrying out audits of both modernisation of economic life.” corporates and local administrations, which Although the law itself deals with a of the seriousness are also covered by Sapin II stipulations. wide number of issues, being a logical with which a growing According to its annual report, in the last few extension of the previous Sapin I bill of amount of corporates months of 2017 the Agency managed to audit 1993, its key anti-corruption provisions five companies in the private sector and one are contained in Article 17. It lists approach AFA’s audits state-owned enterprise, ramping up the total among others eight main preventative number to several dozen as of mid-2018. This measures, including a code of conduct, is obviously a drop in the ocean given the whistleblowing, risk mapping, third Understanding how Sapin II came about sheer quantity of organisations to benchmark party due diligence, accounting would be impossible without looking back a against the new anti-corruption regulations. controls, training, disciplinary regimes few years when several high-profile French While not all are equally exposed to corruption for misconduct and broader company- companies were dragged to court in the and some of them, whose operations are in wide controls. US over Foreign Corrupt Practices Act low-risk industries and geographies, have little (FCPA) violations. The 1977 law had been to no material exposure, even the big-ticket The provisions of Article 17 entered into left dormant for much of the 1980s and firms will have to wait a while before hosting force on 1 June 2017, although by that 1990s before its enforcement surged from AFA inspectors. time some 1,600 French companies falling the mid-2000s onwards. The spectacle of within the Sapin II purview were already leading French corporates paying hefty fines AFA’s physical ability to do the job is supposed to enact the entirety of measures to US regulators led by the Department of constrained by its rather limited means as aiming to combat corruption at their head Justice and submitting themselves to multi- compared with its UK and US counterparts. office, branches and controlled subsidiaries. year oversight by a US-appointed corporate Nonetheless, the mere fact that AFA is out In a sign of changing times, the law also monitor was apparently too much to bear for there to make sure that those subject to Sapin
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France makes progress on anti-corruption, but structural issues remain
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allowing it to terminate parallel investigations in France and the US over corruption in Libya; the US Department of Justice and the PNF received, respectively, USD 292.8 million and EUR 250.15 million. This outcome was hailed on both sides of the Atlantic as the first successful coordinated resolution in a foreign bribery case between France and the US.
As AFA continues its supervisory and advisory work, and additional CJIPs could be in the works, much still needs to be done in order to bring the French business community up to global anti-corruption standards. A recent survey of some 3,000 French companies by a global professional services firm shows that only 6 percent of companies deem themselves to be in full compliance with Sapin II’s Article II comply, to the highest degree possible, with Although not a single case of prosecution 17. Meanwhile, 60 percent are only partially their legal obligations marks a stark departure has run its course yet under Sapin II1, AFA compliant with the risk mapping requirement from prior years of wilful blindness. The OECD has proved instrumental in putting together and evaluate their groupwide risk maps has repeatedly criticised France for inadequate so-called Conventions Judiciaires D’Intérêt as inadequate. A the same time, only 15 action against bribery and corruption, most Public (CJIP), the French equivalent of percent of the companies have procedures recently in 2014, with inconclusive trials lasting deferred prosecution agreements. More than and processes in place to assess the risks for years and the culprits often receiving a slap anything else in the law, CJIPs go against associated with their third parties, as expressly on the wrist. Regular discussions within French the long-established legal tradition towards required by Sapin II. Another challenge for industry forums are proof of the seriousness a form of transactional, or negotiated, justice many economic players, especially of a certain with which a growing amount of corporates — a novelty that is still far from consensual size, is how to reconcile their Sapin II and, approach AFA’s audits, despite the low among both academics and practitioners. for the biggest among them, Duty of Care probability of becoming the next in line. The In late 2017, the first CJIP was concluded obligations with the 2016 EU General Data personality of AFA director Charles Duchaine, between the PNF and HSBC Private Bank Protection Regulation (GDPR), effective since a judge known for several high-profile cases, (Suisse) followed by three other CJIPs with May 2018. There is no doubt that Sapin II will is no doubt one of the reasons the Agency is small-sized firms in early 2018. In May keep the French corporate world busy for being taken seriously against all odds. 2018, Société Générale signed its own CJIP many years to come.
1 In December 2018, France’s leading industrial group Bolloré SA said it had been indicted for corruption in Africa by French prosecutors. Earlier in April 2018, the same indictment had been put forward against the group’s head
Vincent Bolloré. At present, it is unclear how this case will proceed. An eventual CJIP would mean paying a fine equal to the maximum of 30 percent of the group’s average consolidated revenue over the last three years.
Otherwise, the monetary penalty payable by the company could potentially be higher.
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What happened in 2018 – enforcement and key cases
Money laundering
Who: ING Group
When: 4 September
What: The company entered into a settlement agreement with the Dutch Public Prosecution Service regarding shortcomings in the execution of customer due diligence policies to prevent financial crime at ING Netherlands.
How much: EUR 675 million and EUR 100 million for disgorgement
The failings: ING acknowledged serious shortcomings in the execution of customer due diligence policies to prevent financial economic crime at ING Netherlands in How much: USD 369 million Previous action: Rabobank had already been the period investigated (2010-2016). The warned about the money laundering concerns. shortcomings identified included: (1) missing The failings: According to the US Department In 2006 the US Treasury found a serious lack or incomplete customer due diligence files; (2) of Justice (DOJ), the bank’s practices had of oversight in the bank’s AML compliance assignment of incorrect risk classifications; (3) allegedly resulted in Mexican drug cartels programme, which resulted in both parties failure to have periodic customer due diligence exploiting Rabobank’s AML deficiencies by signing a memorandum of understanding in review processes in order; (4) failure to exit depositing hundreds of millions of dollars 2008 to address the areas of concern. The business relationships in a timely manner; (5) into rural branches in California. The DOJ bank hired a consultant to independently insufficient functioning of the post-transaction claimed that by no later than 2010, the bank investigate the programme’s failings. monitoring system; (6) incorrect client knew that high cash balances were likely When the Treasury asked for the report, the classification; and (7) insufficient availability of to be a sign of criminal activity, but failed executives lied about its existence. The bank qualitative and quantitative human resources. to address the issues while forgoing basic escaped actual criminal charges, and instead checks on the source of funds. Firstly, the entered into a five-year deferred prosecution The enforcement notice can be found HERE. investigation revealed that Rabobank had agreement that ended in December 2017. failed to identify red flags concerning patterns of cash withdrawals that fell just below a The enforcement notice can be found HERE. reportable threshold of USD 10,000, at different Money laundering times on the same day. Secondly, Rabobank conceded that at certain times it employed Who: Rabobank NA only three employees to investigate more Money laundering When: 7 February than 2,300 alerts per month. The Statement of Who: Commonwealth Bank of Australia Facts also cited that Rabobank had created a What: Rabobank pleaded guilty to a charge “Verified List” of high risk customers requiring When: 4 June brought by the US government of obstructing no investigation so as to clear high numbers of alerts with minimal staff. Furthermore, the regulators by trying to conceal weaknesses in What: Commonwealth Bank of Australia (CBA) bank failed to file Suspicious Activity Reports its anti-money laundering (AML) compliance agreed to settle civil proceedings relating on continuing suspicious activity. programme. to breaches of AML and counter-terrorism
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What happened in 2018 – enforcement and key cases
financing (CFT) laws. The offer, accepted by How much: EUR 2,205,282 of steps initiated by the bank. FINMA will Federal Court on 20 June, is the largest civil commission an independent third party to penalty in Australia’s corporate history. The failings: The FCMC has repeatedly found monitor the implementation of the measures. breaches indicating “serious deficiencies” in How much: AUD 700 million LPB Bank’s AML/CFT internal control system, The failings: FINMA’s investigation into Credit particularly relating to customer due diligence Suisse AG covered the period from 2006 to The failings: According to the Australian and transaction monitoring. The FCMC’s 2016. In regards to deficiencies in compliance Transaction Reports and Analysis Centre inspections found that LPB Bank had failed to with due diligence obligations relating to FIFA, (AUSTRAC), the bank admitted that it failed to set up its internal control system appropriate Petrobras and PDVSA, FINMA determined that observe laws to prevent money laundering and to the operational risks, for example: (1) the Credit Suisse AG had infringed its obligations financing of terrorism. The regulator found that bank failed to obtain documents to verify the in all three instances. The shortcomings were: between 2012 and 2015, CBA failed to report origin of funds in customer accounts; (2) the (1) identifying the client; (2) determining the over 53,000 suspicious transactions using its bank failed to document a reasoned judgment beneficial owner; (3) categorising a business ATMs to authorities on time. As a result, drug regarding the activities of a connected group of relationship as posing an increased risk; and gangs were reportedly able to launder money clients; (3) and the bank failed to give sufficient (4) performing the necessary clarifications by taking advantage of a loophole that allowed weight to unusually large, complex, inter-related upon increased risk plus associated for large, anonymous deposits to the bank’s transactions that had no apparent economic or plausibility checks; and (5) documentation. accounts. CBA blamed the failure to report visible lawful purpose. An above-average number of faults were suspicious transactions on time on a coding discovered in business relationships opened error in its computer systems. Previous action: LPB Bank was fined in 2016 by former subsidiary Clariden Leu AG. The for violating AML/CFT rules. second enforcement procedure related to the The enforcement notice can be found HERE. management of a PEP. FINMA found that the The enforcement notice can be found HERE. bank was too slow to identify and treat the PEP client as posing increased risks. The due diligence and documentation were incomplete. Money laundering The bank failed to meet its heightened due Money laundering diligence obligations regarding investigation, Who: LPB Bank plausibility checks and documentation Who: Credit Suisse AG When: 16 October regarding the client and certain high-risk When: 17 September transactions. The PEP case also revealed What: Latvia’s Financial and Capital Market weaknesses in the bank’s organisation and Commission (FCMC) imposed a fine on LPB What: The Swiss Financial Market Supervisory risk management. FINMA established that the Bank for breaches of the AML/CFT rules. The Authority (FINMA) concluded two enforcement bank had failed to adequately record, contain enforcement action requires that LPB Bank procedures against Credit Suisse AG, the first and monitor the risks arising from the PEP and must submit an action plan to the FCMC within relating to deficiencies in the bank’s adherence the responsible client relationship manager. a specified period addressing the deficiencies to AML due diligence obligations in relation to The relationship manager in question breached identified and perform an assessment of suspected corruption involving FIFA, Petrobras the bank’s compliance regulations repeatedly compliance by independent auditors. FCMC and Petróleos de Venezuela, S.A. (PDVSA), and and on record. However, instead of disciplining also instructed LPB Bank to dismiss board the second relating to a business relationship the manager, the bank rewarded him with high member Arnis Kalveršs for failing to ensure with a politically exposed person (PEP). FINMA payments and positive assessments. that adequate measures were taken to issued measures to improve the bank’s AML improve the bank’s internal control system. processes and accelerate the implementation The enforcement notice can be found HERE.
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What happened in 2018 – enforcement and key cases
Money laundering What: The US Financial Industry Regulatory bribery suit. SocGen had previously agreed to Authority (FINRA) fined UBS Financial Services pay EUR 250 million to the French treasury as Who: Canara Bank Inc (UBSFS) and UBS Securities LLC (UBSS) part of the overall US-France settlement. The for failing to establish and implement AML penalties include a USD 585 million fine for a When: 6 June programmes reasonably designed to monitor multi-year scheme to pay bribes to officials in certain high-risk transactions in customer Libya and USD 275 million for violations arising What: Canara Bank was fined and banned from accounts. The Securities and Exchange from its manipulation of the London interbank taking deposits from new customers for 147 Commission (SEC) and the Financial Crimes offered rate known as Libor. The most recent days by the UK’s Financial Conduct Authority Enforcement Network (FinCEN), a bureau of fines bring the bank’s total settlement to USD (FCA) for failing to remedy weaknesses in its the United States Department of the Treasury, 1.3 billion. The case concerns accusations AML systems and controls that the FCA had also announced that UBSFS agreed to pay a that between 2004 and 2009, SocGen paid identified in its trade finance business. penalty to each of the agencies in separate over USD 90 million in bribes through a Libyan actions for AML violations. broker to secure 14 investments by Libyan How much: GBP 896,100 state-owned financial institutions.In addition How much: UBS Financial Services Inc to the penalty, the bank also agreed to continue The failings: The FCA found that Canara failed (UBSFS) USD 14.5 million and UBS Securities to cooperate with the Justice Department’s to maintain adequate systems and controls to LLC (UBSS) USD 500,000 investigation and adopt and maintain manage the risk of money laundering, which enhanced compliance procedures. affected almost all levels of its business and The failings: FINRA found that, from 2004 governance structure including: (1) senior to 2017, UBSFS processed foreign currency The enforcement notice can be found HERE. management; (2) governance/oversight; (3) wires without sufficient oversight. UBSFS’s three Lines of Defence; (4) money laundering AML surveillance systems failed to reasonably reporting function; and (5) AML systems and monitor foreign currency wires through controls. The failings included an inability to customer accounts, including hundreds of Corruption recognise politically exposed persons, lack millions of dollars to and from countries known of monitoring and a governance and risk to be at high-risk of money laundering. Who: Petróleo Brasileiro S.A. management framework that was not fit for When: 27 September purpose. Canara Bank was found to have The enforcement notice can be found HERE. breached Principle 3 of the FCA’s Principles for What: Brazilian state-owned energy company, Businesses, which requires that reasonable Petróleo Brasileiro S.A. (Petrobras), entered steps are taken to organise the business’s into agreements with US and Brazilian affairs responsibly and effectively, with Corruption authorities to resolve the US government’s adequate risk management systems. Canara Who: Société Générale investigation into violations of the Foreign agreed to resolve the case and qualified for a Corrupt Practices Act (FCPA) in connection 30 percent discount. When: 4 June with Petrobras’s role in facilitating payments to politicians and political parties in Brazil, as well The enforcement notice can be found HERE. What: Société Générale agreed to resolve as a related Brazilian investigation. criminal and civil charges in the United States and France for bribing Gaddafi-era Libyan How much: USD 853.2 million Money laundering officials and manipulating the Libor interest rate benchmark. The failings: The Securities and Exchange Who: UBS Financial Services Inc and UBS Commission (SEC) charged Petrobras with Securities LLC How much: USD 1.3 billion misleading US investors by filing false financial statements that concealed a bribery and When: 17 December The failings: The French bank pleaded guilty bid-rigging scheme at the company. The in a District Court in Brooklyn to end a foreign Department of Justice (DOJ) also announced
11 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
What happened in 2018 – enforcement and key cases
a non-prosecution agreement with Petrobras. Cyber crime Sanctions According to Petrobras’s admissions, while the company’s American Depository Shares traded Who: Tesco Personal Finance Plc Who: Société Générale SA on the New York Stock Exchange, members of the Petrobras executive board were When: 1 October When: 19 November involved in facilitating and directing millions of dollars in corrupt payments to politicians What: Tesco Personal Finance Plc (Tesco What: Société Générale SA entered into and political parties in Brazil, and members Bank) was fined by the UK’s Financial Conduct settlement agreements with the US of Petrobras’s board of directors were also Authority (FCA) for failing to exercise due skill, Department of Justice, the US Department of involved in facilitating bribes that a major care and diligence in protecting its personal Treasury’s Office of Foreign Assets Control Petrobras contractor was paying to Brazilian current account holders against a cyber attack (OFAC), the New York County District Attorney’s politicians. The SEC’s order finds that senior in breach of Principle 2 of the FCA’s Principles Office, the New York Department of Financial Petrobras executives worked with Petrobras’s for Businesses. Services and the Federal Reserve for violations largest contractors and suppliers to inflate the of US sanctions and New York state anti- cost of Petrobras’s infrastructure projects by How much: GBP 16,400,000 money laundering laws. billions of dollars. The companies executing those projects paid billions in kickbacks to The failings: The FCA found that Tesco How much: USD 1.34 billion the Petrobras executives, who shared the Bank breached Principle 2 because it failed illegal payments with Brazilian politicians who to exercise due skill, care and diligence to: The failings: Criminal charges were announced helped them obtain their high-level positions (1) design and distribute its debit card; (2) against Société Générale SA for conspiring at Petrobras. Petrobras erroneously recorded configure specific authentication and fraud to violate the Trading with the Enemy Act these payments as money spent to acquire detection rules; (3) take appropriate action to and the Cuban Asset Control Regulations and improve assets, resulting in an estimated prevent the foreseeable risk of fraud; and (4) for the firm’s role in processing billions of USD 2.5 billion overstatement of assets. respond to the November 2016 cyber attack dollars of transactions using the US financial with sufficient rigour, skill and urgency. The system, in connection with credit facilities In related proceedings, Petrobras entered into FCA criticised the bank for having allowed involving Cuba. The agreement under which an agreement to reach a settlement with the cards not designed for contactless MSD the firm agreed to accept responsibility for its Ministerio Publico Federal in Brazil. Under the transactions to be allowed for that use, as conduct by stipulating a Statement of Facts non-prosecution agreement, the US will credit the nature of the original card made it easy to was announced, which includes penalties to the amount that Petrobras pays to the SEC and predict the PAN numbers. The situation was federal and state prosecutors and regulators, Brazil under their respective agreements, with exacerbated by flaws in the checks the system refraining from all future criminal conduct, the DOJ and the SEC receiving 10 percent each made and the bank ignoring warnings of the and implementing remedial measures. The and Brazil receiving the remaining 80 percent. risk in relation to the cards. Once the attack government has agreed to defer prosecution Petrobras has agreed to continue to cooperate happened, a series of errors, including failures for three years. The New York State with the DOJ in any ongoing investigations, in correct communications and coding errors, Department of Financial Services entered into enhance its compliance programme and meant the attack went on for longer than it two consent orders with Société Générale SA report to the DOJ on the implementation of its need have, and senior management were not and its New York branch for violations of laws enhanced compliance programme. alerted as soon as they should have been. governing sanctions and New York AML laws.
The enforcement notice can be found HERE. The enforcement notice can be found HERE. The enforcement notice can be found HERE.
12 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
What happened in 2018 – enforcement and key cases
Sanctions When: 7 June When: 11 May
Who: JPMorgan Chase Bank N.A. What: ZTE Corp agreed to pay a fine to the US What: Barclays Group (Barclays) is now Commerce Department’s Bureau of Industry subject to special requirements by which it When: 5 October and Security (BIS), overhaul its leadership and must report annually to the regulators detailing meet other conditions in order to be allowed how it handles whistleblowing, with personal What: JPMorgan Chase Bank N.A. agreed to resume business with US companies, for attestations from senior managers responsible to settle potential civil liability with the US conspiring to evade US restrictions by selling for the relevant systems and controls, Department of the Treasury’s Office of Foreign US equipment to Iran. A block on importing following the UK FCA and the Prudential Assets Control (OFAC) for 87 violations of the US parts was imposed in April and will not Regulation Authority’s (PRA) first case under Cuban Assets Control Regulations, the Iranian be lifted until the company pays the fine and the Senior Managers Regime against chief Transactions and Sanctions Regulations, and places USD 400 million more in escrow in a executive of Barclays, James Staley. Mr Staley the Weapons of Mass Destruction Proliferators US-approved bank. was fined GBP 642,430 for failing to act with Sanctions Regulations. due skill, care and diligence in response to an How much: USD 1 billion anonymous letter that contained allegations, How much: USD 5,263,171 some of which concerned him. The measures: ZTE has agreed to replace The failings: The settlement allegedly the board of directors of two corporate The failings: The misconduct related to Mr involves, among other things, processing net entities. All of ZTE’s executives including Staley’s attempt to identify the author of an settlement payments for bank clients between vice-presidents will be replaced. In addition, anonymous letter in June 2016 that contained January 2008 and February 2012, for which ZTE must provide the Commerce Department various allegations, some of which concerned 0.14 percent were attributable to interests of with details regarding Chinese government him. The investigation found this to be a non-US person entity members that were at ownership and control of ZTE. ZTE will also be breach of Individual Conduct Rule 2, which various times identified on the OFAC’s SDN required to retain a team of special compliance requires that individuals act with due skill, care List, sanctioned, or located in countries subject coordinators selected by and answerable to and diligence. The regulators determined that to the OFAC’s sanctions programmes. In BIS for a period of 10 years. Their function as CEO, Mr Staley should have identified that: arriving at the settlement amount, the OFAC will be to monitor on a real-time basis ZTE’s (1) he had a conflict of interest in relation to considered factors such as prior to January compliance with US export control laws. the letter, and needed to take particular care to 2012, the bank did not appear to have in Finally, the new agreement imposes a denial maintain an appropriate distance from Group place a process to independently assess order that is suspended, this time for 10 Compliance’s investigation; (2) there was participating member entities of the non-US years, which BIS can activate in the event of a risk that he would not be able to exercise person entity for OFAC sanctions risk, despite additional violations during the probationary impartial judgement in relation to how Barclays allegedly receiving red flag notifications period. These collectively are the most severe should respond; and (3) once the complaint regarding OFAC sanctioned members and that penalties BIS has ever imposed. ZTE pleaded was in the hands of the Group Compliance staff members processing the net settlement guilty in 2017 to conspiring to evade US team, it was important that Group Compliance transactions may have had actual knowledge restrictions by selling US equipment to Iran. retained control over its investigation process. of the members. The investigation found that Mr Staley made The enforcement notice can be found HERE. serious errors of judgement. The enforcement notice can be found HERE. The measures: In light of Mr Staley’s actions, the FCA and PRA were concerned about the Whistleblowing firm’s whistleblowing systems and controls Sanctions and concluded that enhanced monitoring and Who: Barclays Group (Barclays) scrutiny was required. Barclays is, therefore, Who: ZTE Corp
13 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
What happened in 2018 – enforcement and key cases
now subject to requirements by which it must Tax evasion Overview: The High Court of England and report annually to the FCA and PRA. Barclays’ Wales dismissed a legal challenge against Whistleblowers’ Champions must also attest to Who: Basler Kantonalbank the National Crime Agency’s (NCA) first the soundness of its whistleblowing systems Unexplained Wealth Order (UWO), which and controls on an annual basis. These When: 28 August means that the respondent – Mrs A, who has measures, which apply to all cases until the been officially identified as Zamira Hajiyeva, end of 2020, are the first of their kind applied to What: The US Department of Justice wife of former Chair of the International Bank a regulated firm in relation to whistleblowing. announced that Basler Kantonalbank (BKB) of Azerbaijan (IBA) Jahangir Hajiyeva – must Barclays agreed to the requirements. entered into a deferred prosecution agreement now explain how she was able to afford GBP (DPA) for helping US taxpayers conceal income 22 million worth of UK property. The High The enforcement notice can be found HERE. and assets from the United States. Court ruling rejected Mrs Hajiyeva’s challenge to the UWO on all eight grounds, which How much: USD 60.4 million included that Mr Hajiyeva was not a PEP and that the NCA, in the ex-parte assertion that Tax evasion The failings: BKB admitted that between 2002 there were reasonable grounds to suspect and 2012 it conspired with its employees, any monies of Mrs Hajiyeva, originating from Who: Zürcher Kantonalbank external asset managers, and clients to: 1) Mr Hajiyeva, were not lawfully obtained, had defraud the United States with respect to taxes; not established the “income requirement” to When: 13 August 2) commit tax evasion; and 3) file false federal the relevant standard, as Mrs Hajiyeva could tax returns. According to the terms of the DPA, What: Zürcher Kantonalbank (ZKB) entered have had independent capital. The ruling also BKB will cooperate fully, subject to applicable into a deferred prosecution agreement with refused permission to appeal. laws and regulations, with the United States, the US Department of Justice (DOJ) putting an the Internal Revenue Service (IRS), and other The court ruling can be found HERE. end to the DOJ’s investigation into the bank’s US authorities. The DPA also requires BKB legacy business with US clients concerning to affirmatively disclose certain material suspected tax evasion. information it may later uncover regarding US- related accounts, as well as to disclose certain Key cases How much: USD 98.5 million information consistent with the Department’s Swiss Bank Program with respect to accounts Case reference: CMOC Sales & Marketing The failings: In a statement announcing the closed between 1 January 2009 and 31 Limited v. Persons Unknown & 30 ors [2018] settlement, ZKB said that it has successively December 2017. Under the DPA, prosecution EWHC 2230 (Comm) adjusted its cross-border wealth management against the bank for conspiracy will be deferred business since 2009 and is committed to a for an initial period of three years to allow BKB Concerning: Cyber fraud strict tax-compliant business policy. The ZKB to demonstrate good conduct. case followed a crackdown by US authorities Overview: : The High Court awarded damages on offshore tax evasion by wealthy Americans The enforcement notice can be found HERE. to a claimant, which involved the first using undeclared Swiss bank accounts. worldwide freezing order against “persons Two ZKB bankers, Stephan Fellmann and unknown,” in a financial fraud case. The case Christof Reist, pleaded guilty to a single concerned an email fraud in which hackers misdemeanor conspiracy charge, admitting Key cases sent emails from CMOC’s accounts instructing that they provided services to US clients whilst CMOC’s bank to transfer over USD 8 million to “deliberately” avoiding learning that they were Case reference: National Crime Agency v. Mrs various recipients, the stolen funds of which using the accounts to avoid paying US taxes. Zamira Hajiyeva [2018] EWHC 2534 (Admin) were paid to accounts at 50 third party banks in 19 different jurisdictions. The worldwide The enforcement notice can be found HERE. Concerning: Unexplained Wealth Orders freezing order was granted in respect of bank
14 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
What happened in 2018 – enforcement and key cases
accounts against “persons unknown,” which Case reference: SFO v. ENRC [2018] EWCA Civ Office [2018] EWHC 2368 (Admin) included any person who had participated 2006 in the fraud, as well as the recipients of the Concerning: Fraud investigation funds. The freezing order enabled defendants Concerning: Litigation privilege to be identified by obtaining disclosure orders Overview: The Administrative Court’s ruling against the third party banks. Injunctive relief Overview: The Court of Appeal partially extended the extraterritorial scope of the UK against persons unknown was found to be overturned a controversial High Court decision, Serious Fraud Office’s (SFO) investigatory particularly appropriate where the defendants which had narrowed the scope of legal powers. The Administrative Court held that are unknown because of their activities as professional privilege in internal investigations. section 2(3) of the Criminal Justice Act 1987, cyber criminals. The High Court considered The Court of Appeal’s decision effectively which gives the SFO power to require a person that there was good reason to extend the restores litigation privilege to the position that to produce specified documents in connection principle to freezing orders, especially in existed prior to the High Court ruling. The case with an SFO investigation, has certain international fraud litigation, since it facilitated concerned an internal investigation begun extraterritorial effect to compel a foreign the grant of relief in the form of third party by Eurasian Natural Resources Corporation company to produce documents held outside banks freezing relevant bank accounts. Limited (ENRC) following a whistleblower the jurisdiction where there is a “sufficient report into alleged corruption and fraud connection between the company and the The court ruling can be found HERE. in its Kazakh and African operations. The jurisdiction.” Serious Fraud Office (SFO) opened a criminal investigation into ENRC and sought disclosure The court ruling can be found HERE. of documents created by ENRC’s lawyers and Key cases accountants during the internal investigation. ENRC refused to comply, arguing that the Case reference: R v. Skansen Interiors Ltd Key cases documents were covered by litigation privilege. The SFO subsequently sought a declaration Concerning: Bribery Case reference: Lonsdale v. National from the High Court that the documents Westminster Bank Plc [2018] EWHC 1843 (QB) Overview: In the first contested case for failure were not privileged. The High Court found that none of the documents were covered by to prevent bribery under section 7 of the UK Concerning: Suspicious Activity Reports Bribery Act 2010, the company was convicted litigation privilege, because the documents had of failing to prevent bribery. Skansen Interiors been created at too early a stage for criminal Overview: This case before the High Court Ltd, which reported bribery by two employees proceedings to be reasonably contemplated. serves as a reminder that Suspicious Activity to the National Crime Agency and the police, Following ENRC’s appeal, the Court of Appeal Reports (SARs) may be disclosable and may was itself charged with the offence before overturned the High Court’s ruling, concluding provide the basis for a defamation claim. Southwark Crown Court. Skansen’s reliance that criminal proceedings were reasonably National Westminster Bank Plc had made on the defence under section 7(2) of the Act contemplated from the point at which ENRC several SARs in relation to Mr Lonsdale and – which provides that the company can avoid engaged lawyers to conduct an internal companies he was involved with, and had liability if it had in place “adequate procedures” investigation, and so litigation privilege applied. frozen all of the relevant accounts. After Mr designed to prevent people associated with it Lonsdale applied to court, the freeze was lifted The court ruling can be found HERE. from undertaking such conduct – failed. but the bank gave him notice of closure of the accounts. Mr Lonsdale submitted a subject Details about the ruling can be found HERE. access request, and the response included Key cases no SARs, so Mr Lonsdale applied to court for inspection of the SARs. Case reference: The Queen on the Application Key cases The court ruling can be found HERE. of KBR Inc v. The Director of the Serious Fraud
15 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
Ukraine’s new church
worldwide, deriving from this (in the eyes of rights, and businesses. Furthermore it many) legitimacy as the ruler of Russia (the receives a regular flow of funds in the form By Christopher Peters relationship between Putin and the ROC is of donations, particularly from oligarchs Chief Operating Officer mutually beneficial as the Kremlin guarantees and leaders of major companies anxious Aperio Intelligence the church’s wellbeing). In a sign of how to show their loyalty to the Kremlin and its seriously this is viewed in Moscow, Putin policies. As the OCU further establishes convened his National Security Council to itself in Ukraine, the UOC-MP will find itself discuss the issue in October 2018 when it under increasing pressure to join, and it will • The recent recognition of the Orthodox became clear that Bartholomew was leaning see some of its parishes breaking away to Church of Ukraine represents a towards recognition. In addition, the Russian join the OCU (this has already started, and competition for earthly assets and Orthodox Church severed its communion with those breakaway parishes have consequently resources as well as for souls both in Constantinople, denouncing the decision as been excommunicated by the ROC). This Russia and within Ukraine schismatic and heretical. This may yet come will represent a major financial loss to the to be as major a schism as that of 1054, ROC: UOC-MP parish priests who in the past • To entrench its position, the new when the Roman Catholic Church and Eastern regularly took bags of cash donations by train church may receive certain financial Orthodox Church formally split (“The Great to Russia may stop making that journey. and economic privileges that would Schism”), though it remains to be seen how be open to abuse, as has been seen other member churches will react. Issues of ownership will rise to the fore and elsewhere with the region’s churches subterfuge with regards to ownership over For the leaders of Ukraine, and especially property, businesses and other assets cannot In October 2018, Patriarch Bartholomew of president Petro Poroshenko, this development be ruled out. For example, the Kyiv Monastery Constantinople, the “first among equals” represents a major landmark in the of the Caves, founded in 1051, a UNESCO World among the patriarchs and other leaders of the consolidation of the country’s modern-day Heritage Site and one of the preeminent centres Eastern Orthodox Church, indicated that he independence, first achieved in 1991 with of Eastern Orthodox Christianity, is under the was minded to recognise a Ukrainian orthodox the fall of the USSR, and further bolstered by joint jurisdiction of the Ukrainian State Museum church as a distinct entity, equal to other successive moves out of Moscow’s orbit, and the UOC-MP. This is at best an uneasy national Orthodox churches such as those of including the Orange Revolution in 2004, the co-administration, but should the monastery Russia, Greece, Serbia, Romania, Bulgaria and overthrow of Moscow-aligned president Viktor join the OCU, the symbolic and financial loss Georgia. On 5 January 2019, the Orthodox Yanukovych in 2014 and the subsequent to the ROC would be considerable (and Russia Church of Ukraine (OCU) received its decree of military conflict with Moscow-backed proxies might even declare it a “provocation”). A similar ecclesiastical independence (or “tomos”) from in the country’s east and south. situation surrounds many other important Bartholomew. The newly-recognised church (and lesser) sites, particularly the Pochayiv unites the Ukrainian Orthodox Church–Kyiv A struggle between the churches over Monastery in north-western Ukraine, a major Patriarchate, the Ukrainian Autocephalous lucrative assets centre of pilgrimage for Orthodox believers. Orthodox Church, and a part of the Ukrainian Orthodox Church of the Moscow Patriarchate While there are certainly issues of theological Real estate, companies, or non-tangible assets (UOC-MP) under a newly-elected leader, dogma and canonical and ecclesiastical such as trading rights that are connected to the surprisingly young Epifaniy (born 1979), law that have been, and continue to be, either side in the church dispute could come Metropolitan of Kyiv and All Ukraine. passionately debated on both sides of the to be subject to competing and contradictory issue, it should be remembered that a large claims of ownership depending on jurisdiction, This recognition has come as a slap in part of the conflict concerns access to particularly those where significant flows of the face to both the Russian Orthodox significant assets and fund flows. The ROC funds are at stake. Those doing business Church (ROC), which has up to half of its directly and indirectly owns a huge portfolio with entities engaged in this issue on either parishes on the territory of Ukraine, and to of assets across Russia and other countries, side should be aware of potential uncertain Russia’s president Vladimir Putin who has particularly including Ukraine (where the ownership issues and that both sides have a throughout his rule consistently sought to ROC is officially the UOC-MP): this includes track record of applying pressure in seemingly promote the interests of Russian Orthodoxy land, real estate, certain privileged trading unrelated areas to prevail on a given issue.
16 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
Ukraine’s new church
continues from previous page
Kyiv’s Monastery of the Caves (L) and the Pochayiv Monastery (R) – still under the Russian Orthodox Church but for how much longer?
Will the OCU copy the ROC’s business and Kirill, has been nicknamed the “Tobacco orders and medals from the ROC and a political practices? Metropolitan” by some Russian press: in a politician with major agricultural, tobacco and former role, Kirill was head of the department sporting interests who has been accused by Within Russia, the ROC enjoys a privileged for external church relations in the 1990s and the governments of Greece and Macedonia of position even though constitutionally church early 2000s when it was reportedly the largest seeking to foment unrest in those countries, and state are separate. It enjoys tax exempt importer of foreign cigarettes in Russia: The though he is not under international sanction). status on its income, but furthermore it Moscow News estimated the church’s profits has preferential and highly non-transparent from tobacco imports at USD 4 billion in 2006. As the OCU seeks to establish itself across access to the Russian Central Bank which While no evidence was put forward that Kirill Ukraine, it remains to be seen if it will follow has historically regularly injected capital into had embezzled funds or acted illegally, many the same route as the ROC in Russia. Too Peresvet, the ROC’s bank: in April 2017, the questioned the church’s involvement in the often, even while declaring themselves central bank lent Peresvet USD 1.2 billion tobacco trade which was, and remains, one of opposed on many matters, Ukraine and to keep it afloat, while its other creditors the most criminally-penetrated in Russia. They Russia have mirrored each other in terms were pressured to convert their loans into have also commented negatively about Kirill’s of their economic models and rules of 15-year subordinated bonds. Later in 2017, apparent great wealth. governance. Will the Ukrainian authorities state-controlled energy company Rosneft seek to bolster their legitimacy domestically (via its Russian Regional Development Bank) The church has also cultivated close and through close association with the new stepped in to take on ownership of Peresvet, mutually beneficial links with Russia’s richest church? Will it grant the new church certain though the extent to which it actually businessmen and politicians, including many privileges in finance and commerce, and if so, controls the bank is far from clear. In March who are now sanctioned by the US and/or how might these be applied, or abused? Will 2018, Russia’s Deposit Insurance Agency EU, such as Vladimir Yakunin (former head the new church return the favour and act as estimated that restructuring Peresvet could of Russian Railways, a close Putin ally, and a cover to corrupt politicians? Will Ukrainian cost a further USD 1.7 billion. chairman of the St. Andrew the First-Called businessmen with questionable histories seek Foundation, an important ROC fundraising to insert themselves into the new church’s The church’s tax exempt status, granted to it organisation); Konstantin Malofeev (head business and thus seek protection and favour in the early 1990s by the Russian government, of media group Tsargrad, founder of the and a white-washing of their reputations? has made it a major importer and producer investment fund Marshall Capital Partners The establishment of a national church will of tobacco and alcohol, which has in the past and head of the USD 40 million Saint Basil be welcomed by many, but the potential reportedly brought it into contact with organised the Great Charitable Foundation, understood pitfalls must not be ignored, and those doing crime structures which have historically had to have personally funded militias in eastern business in Ukraine would do well to be significant involvement in those sectors. Ukraine); and Ivan Savvidi (close ally of aware of a new force on the national scene Indeed, the current head of the ROC, Patriarch president Putin who has received multiple in political, cultural and business circles.
17 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
Deutsche Bank’s financial crime troubles
By Valentin Munteanu Senior Analyst Aperio Intelligence
Already reeling from massive fines for market manipulation in 2016 and its involvement in the “mirror trade” scandal in 2017, Deutsche Bank continued to make the news in 2018 for the wrong reasons. The bank’s profits and share price have taken a huge hit, calling into question investor confidence in the bank.
Allegations of money laundering operations in offshore tax heavens
On 29 and 30 November 2018, more than 170 police officers, prosecutors and tax inspectors raided six offices in Frankfurt offshore tax heavens for money laundering subsidiaries, registered in the British Virgin belonging to Deutsche Bank, including the purposes between 2013 and early 2018. The Islands (BVI). To provide insight into the bank’s headquarters. The massive raid which German prosecutors suspected that those scale of Regula Limited’s operations, the led to the seizure of thousands of written individuals used the offshore companies German prosecutors stated that the BVI and electronic documents was part of an to launder money from illegal activities and entity had in 2016 more than 900 clients and investigation initiated in August 2018 by the then transferred the laundered proceeds to assets under management worth EUR 311 Frankfurt public prosecutor over allegations their accounts at Deutsche Bank. All these million. The German prosecutors, however, that linked Germany’s largest bank to the transactions were allegedly carried out with did not comment on whether all or only Panama Papers1,2. the approval of Deutsche Bank’s wealth some of the transactions undertaken by management division based in Frankfurt3,4. this company were suspected to be money After the raids, German law enforcement laundering schemes5,6. officers stated that their investigation was According to German prosecutors, the intended to find out whether unnamed laundered proceeds were transferred from To date, the investigation is ongoing and its Deutsche Bank employees, together with the offshore companies to Deutsche Bank outcome is far from being clear. Follow-up Panamanian law firm Mossack Fonseca, had through a company called Regula Limited, articles in the media have revealed that the assisted individuals to open companies in which was one of the Deutsche Bank’s investigation was reportedly to be focused
1 https://www.handelsblatt.com/finanzen/banken-versicherungen/ermittlungen-in-frankfurt-geldwaesche-verdacht-razzia-bei-der-deutschen-bank/23696112.html?ticket=ST-137484-sxmAXEsy6cqpse1esvp2-ap1
2 https://uk.reuters.com/article/deutsche-bank-moneylaundering/corrected-update-3-deutsche-bank-offices-raided-in-money-laundering-probe-idUKL8N1Y42FN
3 https://www.bbc.co.uk/news/business-46382722
4 https://edition.cnn.com/2018/11/29/business/deutsche-bank-police-raid/index.html
5 https://www.sueddeutsche.de/wirtschaft/deutsche-bank-razzia-1.4232832
6 https://www.ft.com/content/bbeb6fe2-f954-11e8-8b7c-6fa24bd5409c
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SPECIAL FEATURE
Deutsche Bank’s financial crime troubles
continues from previous page
on three employees of the bank. The first After news of the Danske Bank launder money for Russian two were unnamed managing directors in clients. The US unit of Deutsche Bank is Deutsche Bank’s compliance and wealth November 2018 police suspected of assisting Danske Bank’s management units only identified as being raids emerged, the Estonian branch launder more than USD 100 50 and 46 years old. The allegations against billion for Russian customers between 2007 these two individuals were not disclosed. The bank’s shares fell 3 and 2015. Throughout this period, Danske third employee, also unnamed, is a former percent, adding to the Bank reportedly laundered up to USD 230 anti-money laundering official of the bank, 45 percent fall in the billion with the help of correspondent banks, who allegedly did not report to the German including Deutsche Bank. It is alleged that authorities suspected transactions undertaken bank’s pre-tax profits for the German bank was Danske Bank’s most at the bank’s subsidiary in the BVI7,8. the third quarter of 2018 important counterparty in the scandal12,13.
According to Bloomberg, the investigation compared with the same In January 2017, UK financial watchdog could at best result only in a hit to Deutsche period of 2017 Financial Conduct Authority and US financial Bank’s rating and prestige. At worst, however, regulator the New York Department of it could expose the bank to a fine or other Financial Services imposed a total fine forms of regulatory action, and even send transactions. The measures to be of more than USD 630 million (GBP 506 executives to court. The investigation is far implemented by Deutsche Bank were not million) on Deutsche Bank. The German from being concluded and it is believed that made public by the bank or BaFin. Only later financial institution was found guilty of reviewing the papers collected from the raids did the German regulator announce it had allowing Russian individuals launder up alone could take several months9. appointed KPMG as its special supervisor to USD 10 billion through more than 2,400 to assess Deutsche Bank’s progress in the pairs of “mirror trades” intermediated by Previous investigations and regulatory following three years. Media outlets reported the bank’s subsidiaries in Russia, the UK, action against Deutsche Bank that this was the first time that BaFin had the US, Cyprus, Estonia and Latvia. Briefly, appointed an external supervisor to monitor offshore entities controlled by Russian The latest investigation is one of a string progress in regards to mandated measures individuals acquired shares in Russian of issues to have affected Deutsche Bank. at a bank10,11. companies through Deutsche Bank (Russia) In September 2018, the German Federal paying in rubles, and then they sold the same Financial Supervisory Authority (BaFin) Deutsche Bank is also subject to stock through Deutsche Bank (London) ordered the German bank to enhance its investigations conducted by the US to a related customer for dollars. The internal mechanisms for prevention of Department of Justice into allegations aim of these transactions was to convert money laundering and terrorist financing that the German bank helped Danish bank rubles into US dollars and thus to move
7 https://www.bloomberg.com/news/articles/2018-12-03/what-we-know-about-the-case-behind-the-deutsche-bank-raids
8 https://www.reuters.com/article/us-deutsche-bank-moneylaundering/prosecutors-eye-former-deutsche-bank-anti-money-laundering-official-report-idUSKBN1O91X6
9 https://www.bloomberg.com/opinion/articles/2018-11-29/deutsche-bank-police-raid-adds-to-risk-control-concern
10 https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Massnahmen/60b_KWG/meldung_180924_60b_deutsche_bank_en.html
11 https://www.theguardian.com/business/2018/sep/24/watchdog-orders-money-laundering-auditor-to-oversee-deutsche-bank
12 https://www.bloomberg.com/news/articles/2018-11-19/danske-whistleblower-points-finger-at-deutsche-bank-in-testimony
13 https://www.cnbc.com/2018/10/04/danske-bank-under-investigation-by-us-doj-over-estonia-accounts.html
19 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE
Deutsche Bank’s financial crime record
continues from previous page
(potentially illicit) money out of Russia. the 2008 financial crisis. The bank was found Deutsche Bank reportedly did not perform guilty of offering mortgages to unqualified proper due diligence on the source of the borrowers between 2005 and 2007, which 14 money used in these transactions . were then repackaged as safe investments and used to create bonds – known as residential mortgage-backed securities – The lesson to be learnt which were later sold to investors15. from Deutsche Bank’s wrongdoings and the Conclusion subsequent hardships The impact of these investigations on the bank has endured Deutsche Bank’s reputation and financial wellness can hardly be overstated. Partly is that all financial due to the fines received, the bank has institutions must experienced three years of net losses and has lost about EUR 19 billion of market value over develop stronger internal the past five years. Furthermore, after news of mechanisms to prevent the November 2018 police raids emerged, the and combat financial bank’s shares fell 3 percent, adding to the 45 result not of a central policy of the institution, percent fall in the bank’s pre-tax profits for the but of misbehaviour by employees. crime conducted within third quarter of 2018 compared with the same their departments period of 201716. These findings suggest that financial institutions must allocate further resources The lesson to be learnt from Deutsche Bank’s to their compliance and anti-fraud units and wrongdoings and the subsequent hardships conduct broader due diligence on their clients In December 2016, the US Department of the bank has endured is that all financial and partners. The fight against shortcomings Justice ordered Deutsche Bank to pay USD institutions must develop stronger internal in these sectors might prove highly valuable. 3.1 billion in fines and USD 4.1 billion in mechanisms to prevent and combat financial Mitigating the risks of fines and regulatory customer relief in the US due to the sale of crime conducted within their departments. action can make the difference between net toxic mortgage bonds before the outbreak of Many of the bank’s wrongdoings were the profit and net loss for a financial institution.
14 https://www.theguardian.com/business/2017/jan/31/deutsche-bank-fined-630m-over-russia-money-laundering-claims
15 https://www.bbc.co.uk/news/business-38412816
16 https://www.bbc.co.uk/news/business-46382722
20 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE: 2018 TECHNICAL DEVELOPMENTS ROUND-UP
JANUARY FEBRUARY • Unexplained Wealth Orders (UWOs) come into force in the UK as part of • The UK HMRC’s report finds that money services businesses are highly the Criminal Finances Act 2017 exposed to money laundering
• The Council of the European Union removes eight countries from the EU • The Financial Action Task Force (FATF) decides to continue the list of non-cooperative jurisdictions for tax purposes suspension of counter-measures against Iran and removes Bosnia and Herzegovina and Libya from the list of high-risk jurisdictions • The UK’s new Office for Professional Body Anti-Money Laundering Supervision (OPBAS) launches as per the OPBAS Regulations 2018 • Transparency International publishes Corruption Perception Index
• The Joint Committee of the European Supervisory Authorities publishes • UK’s National Crime Agency (NCA) secures the first two Unexplained an opinion on the use of innovative solutions by credit and financial Wealth Orders (UWOs) institutions when complying with their due diligence obligations
• The US Treasury submits its “Russian Oligarch Report” to Congress, as per the new Russia sanctions package under the Countering America’s Adversaries Through Sanctions Act (CAATSA)
APRIL • The UK government launches a consultation on reforming Limited Partnerships following revelations that Limited Partnerships and Scottish Limited Partnerships have been used to launder money out of MARCH Russia • The UK’s Financial Conduct Authority (FCA) launches a consultation on proposed guidance on financial crime systems and controls in relation to • The International Monetary Fund (IMF) announces that it will review the insider dealing and market manipulation role of high-income countries in facilitating bribery and other forms of corruption around the world • The UK Bribery Act’s “adequate procedures” defence tested in the first contested case for failure to prevent bribery: R v. Skansen Interiors Limited • The US designates seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, and a state- owned Russian weapons trading company and its subsidiary, a Russian • China establishes the National Supervisory Commission bank, pursuant to CAATSA
• Following the nerve agent attack on Sergei Skripal, the UK announces • The European Commission (EC) proposes a directive for the protection a series of sanctions against Russia, which included expelling Russian of whistleblowers across the EU diplomats and launching an inquiry into money laundering in real estate
• The International Bar Association (IBA) publishes guidance on • US sanctions Russian actors for interference with the 2016 US elections whistleblower protection and malicious cyber attacks pursuant to CAATSA and EO 13694
• The US issues EO 13827 that prohibits US persons from dealing with virtual currencies issued by or on behalf of the Venezuelan government
21 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE: 2018 TECHNICAL DEVELOPMENTS ROUND-UP
MAY JUNE • UK government passes an amendment to the Sanctions and Anti-Money • FinCEN issues advisory on human rights abuses enabled by corrupt Laundering Bill to require British Overseas Territories to implement public senior foreign political figures and their financial facilitators registers of beneficial ownership by 2020 • The UK’s Financial Conduct Authority (FCA) publishes “Dear CEO” letter • US announces its withdrawal from the Joint Comprehensive Plan of on the financial crime risks posed by cryptoassets Action (JCPOA) otherwise known as the Iran nuclear deal • Europe’s Fifth Anti-Money Laundering Directive (Directive (EU) 2018/843) • The Council of the European Union adopts the Fifth Anti-Money (5AMLD) published in the Official Journal of the EU Laundering Directive (Directive (EU) 2018/843) (5AMLD) • The European Parliament publishes a research paper assessing the • UK’s Sanctions and Money Laundering Act 2018 receives Royal Assent terrorist financing risks posed by virtual currencies
• The UK House of Commons Foreign Affairs Committee publishes a • The Swiss Federal Council launches consultation on proposed report on “Moscow’s Gold: Russian Corruption in the UK” amendments to the Anti-Money Laundering Act
• The US imposes new sanctions on Venezuela following the re-election of • The UK’s House of Lords Select Committee publishes call for evidence president Nicolas Maduro on the UK Bribery Act 2010
• The UK Network and Information Systems Regulations 2018 come into • The European Commission adopts updated Blocking Statute to counter force, transposing the Cyber Security Directive (Directive (EU) 2016/1148) US withdrawal from the Joint Comprehensive Plan of Action (JCPOA)
• New Panama Papers leak reveals how Mossack Fonseca dealt with the fallout from the initial leaked documents
• The European Union imposes sanctions on Venezuelan officials following president Nicolas Maduro’s re-election JULY • Europe’s Fifth Anti-Money Laundering Directive (Directive (EU) 2018/843) • The UK’s Crown Prosecution Service (CPS), National Crime Agency (5AMLD) enters into force and member states have until 10 January 2020 (NCA) and Serious Fraud Office (SFO) establish new joint principles to to transpose the majority of its provisions compensate victims of economic crime overseas
• European Parliament publishes report on virtual currencies • The UK’s European Union (Withdrawal) Act 2018 receives Royal Assent
• UK government publishes draft Registration of Overseas Entities Bill
• UK government issues advisory notice on money laundering and terrorist financing controls in overseas jurisdictions
• Joint paper issued by the Financial Action Task Force (FATF) and the AUGUST Egmont Group on the concealment of beneficial ownership • Europe’s updated Blocking Statue enters into force as first wave of US sanctions on Iran are reimposed • UK Law Commission launches consultation on AML legislation • The Financial Action Task Force (FATF) issues report on professional • India approves Fugitive Economic Offenders Bill money laundering, and the FATF and APG publish a report on financial flows from human trafficking • Iran files lawsuit at the International Court of Justice over US sanctions • US imposes sanctions on Russia over nerve agent attack in Salisbury • The UK’s Financial Conduct Authority (FCA) publishes annual AML report for 2017/18 • US issues advisory on the sanctions evasion tactics used by North Korea
• The Swiss Financial Market Supervisory Authority (FINMA) launches consultation on proposed relaxation of AML rules for FinTechs
• The European Commission adds Pakistan to the Annex of Delegated Regulation (EU) 2016/1675 that details third countries with strategic deficiencies in their AML and counter-terrorist financing regimes
22 aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2018
SPECIAL FEATURE: 2018 TECHNICAL DEVELOPMENTS ROUND-UP
SEPTEMBER OCTOBER • European Commission proposes new measures to strengthen EU money • The UK’s HM Treasury, Financial Conduct Authority (FCA) and Bank of laundering rules, which included amending the Regulation establishing England publish the cryptoassets taskforce report the European Banking Authority to reinforce its role in supervising the sector in regard to AML, as well as new rules to combat terrorism • UK High Court dismisses challenge to National Crime Agency’s Unexplained Wealth Order (UWO) in National Crime Agency v. Mrs A • UK Court of Appeal restores applicability of litigation privilege in UK in Serious Fraud Office (SFO) v. ENRC • OECD publishes list of high-risk “golden visa” schemes
• SFO can compel production of documents held by foreign companies • UK’s Financial Conduct Authority (FCA) publishes thematic review of rules UK’s Administrative Court in R (KBR Inc) v. Serious Fraud Office money laundering and terrorist financing risks in the e-money sector
• US issues new Executive Order targeting election interference and a new • The Financial Action Task Force (FATF) adopts changes that clarify how Executive Order to further implement CAATSA the Recommendations apply to financial activities involving virtual assets
• UK Commercial Court releases written judgment in CMOC Sales & • The International Court of Justice orders US to suspend sanctions Marketing Limited v. Persons Unknown & 30 ors, in which the court against Iran that impede trade in humanitarian goods and civil aviation granted final proprietary relief and damages in fraud litigation that saw the first worldwide freezing order against “persons unknown” • The US Financial Crimes Enforcement Network (FinCEN) issues advisory on the risk that proceeds of corruption from Nicaragua may enter the US financial system and an advisory on attempts by Iran to exploit the financial system
• Russia signs decree to allow counter-sanctions against Ukraine NOVEMBER • Europe’s Directive on combating money laundering by criminal law (Directive (EU) 2018/1673) (6AMLD) published in the Official Journal
• The US fully reimposes the sanctions on Iran that had been waived under the Joint Comprehensive Plan of Action (JCPOA) DECEMBER • UK launches the new National Economic Crime Centre • UK announces new measures to address the abuse of Scottish Limited Partnerships and Limited Partnerships • The Joint Committee of the European Supervisory Authorities publishes consultation paper on draft guidelines on cooperation and information • EU adopts anti-money laundering action plan exchange for the purposes of 4AMLD between competent authorities • The US Financial Crimes Enforcement Network (FinCEN) and US • The UK’s HM Treasury publishes draft Money Laundering and Transfer of agencies issue joint statement encouraging innovative efforts to combat Funds (Information) (Amendment) (EU Exit) Regulations 2018 money laundering and terrorist financing
• The UK’s Financial Conduct Authority (FCA) publishes results of first • The UK’s Financial Conduct Authority (FCA) introduces new rules relating annual financial crime survey to authorised push payment fraud
• The UN lifts sanctions on Eritrea • Ireland establishes new Corporate Enforcement Authority via the Companies (Corporate Enforcement Authority) Bill 2018 • US issues new Executive Order targeting Venezuelan gold industry and new Executive Order targeting Nicaragua • The FATF publishes the UK’s mutual evaluation report
• UK adopts Sanctions Review Procedure (EU Exit) Regulations 2018 • EU Council agrees negotiating position on the proposal to reinforce the role of the European Banking Authority in relation to AML supervision • Russia issues new decrees to protect financial institutions from mandatory disclosure requirements relating to international sanctions • US publishes National Strategy for Combating Terrorist and Other Illicit Financing (National Illicit Finance Strategy), pursuant to CAATSA • US identifies digital currency addresses associated with designated financial facilitators for the first time • US adopts the Nicaragua Human Rights and Anticorruption Act of 2018
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