The Financial Crimes Enforcement Network (“FinCEN”) recently issued an advisory urging financial institutions (including certain cryptocurrency businesses) to implement controls to help detect proceeds of foreign public corruption. The Advisory describes the types of corrupt payments and arrangements that financial institutions should be looking for and identifies red flags to help those institutions detect and report suspicious transactions that may involve kleptocracy and foreign public corruption.
Targeting Corruption. FinCEN reemphasizes that fighting corruption is a priority for the Biden Administration (as Orrick discussed here) and focuses on the “crucial role” financial institutions play in “identifying corrupt activity and associated money laundering on the part of foreign public officials” and kleptocrats, which it describes as those who wield political power or influence to enrich themselves at the expense of their nation.1 “Foreign public corruption erodes public trust and disproportionately harms the most vulnerable in societies[,]” said FinCEN Acting Director Himamauli Das in the press release accompanying the Advisory. Das urged financial institutions to “remain vigilant and promptly report suspicious financial activity.”2
While the Advisory’s cautions relate to public corruption globally, FinCEN singles out Russia as a “particular concern,” describing “widespread” corruption in, and linked to, the country, and the role that Russian kleptocrats and oligarchs play in supporting Russian President, Vladimir Putin’s regime, including Russia’s invasion of Ukraine. The Advisory builds on FinCEN guidance issued in recent weeks concerning the use of digital assets (crypto) and ransomware and the purchase of luxury goods and high-value assets to evade Russia sanctions.
Types of Corruption. The Advisory provides an overview of kleptocracy and foreign public corruption under the umbrellas of (1) wealth extraction and (2) laundering illicit proceeds.
FinCEN describes two methods of wealth extraction. The first, bribery and extortion, includes payments to foreign officials to obtain or retain business or other benefits, and may include coercion by corrupt officials. These improper arrangements may involve third-party facilitators or shell companies to conceal the purpose and flow of payments. The second, misappropriation or embezzlement of public assets, includes the theft, diversion, or misuse of public assets or resources for personal benefit. This type of corruption may involve officials exploiting or deceiving parties that seek to do business with the government.
Under the category of laundering illicit proceeds, the Advisory highlights the use of shell companies and offshore financial accounts to obscure the ownership and origin of illicit funds or facilitate the payment of bribes or misuse of assets, and the purchase of real estate, luxury goods and other high-value assets to launder proceeds of corruption. The Advisory also highlights U.S. government efforts against Russian elites, including pursuing their real estate, private aircrafts, and yachts.
Red Flags. The Advisory offers a list of red flags (available here) to help financial institutions detect transactions associated with kleptocracy and public corruption. The flags concern opacity in awarding government contracts; transactions involving services to state-owned companies; foreign business conducted through personal accounts; foreign jurisdictions that appear unrelated to the work of, or high-value assets not commensurate with, a government official’s role; charges at above-market rates that lack supporting detail or that do not match the documentation; and the use of third parties, fictitious emails, or fraudulent documents to conceal the origin of funds or ownership.
Suspicious Activity Reporting. The Advisory concludes with a “reminder” of Bank Secrecy Act (“BSA”) obligations for financial institutions, including scenarios in which financial institutions must file a suspicious activity report (“SAR”). The Advisory also asks institutions to specifically cite this document (“CORRUPTION FIN-2022-A001”) to indicate a connection between the suspicious activities being reported and the activities described in the Advisory. It also notes existing guidance on BSA reporting requirements and due diligence.
Takeaways. Although the Advisory and its guidance are framed in general terms, the explicit links to Russia and the types of corruption highlighted both serve as yet another indication of the Administration’s focus on such ties. Third-party analysis of SAR filings suggests that certain financial institutions, such as cryptocurrency exchanges and other “money services businesses,” may not be meeting their obligations to file corruption-related SARs.3 This Advisory suggests that such SAR filing failures will likely receive additional scrutiny from FinCEN.
The Advisory confirms that financial institutions need to take care to identify possible links to Russia. While the “red flags” listed are likely familiar to those who work in the anti-corruption field, they serve as a reminder and warning. Financial institutions should continue to prioritize the establishment of risk-based controls and procedures that include reasonable steps that can help them understand their customers and meet regulators’ due diligence expectations.
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1 FinCEN Press Release, FinCEN Issues Advisory on Kleptocracy and Foreign Public Corruption, (April 14, 2022).
2 Id.
3 Alison Jimenez, Kleptocracy Suspicious Activity Reports, Dynamic Securities Analytics, Inc. (April 15, 2022).