“The US Department of the Treasury…is issuing this alert to assist financial institutions in identifying funding streams supporting the terrorist organization Hamas,” the regulator explained. “FinCEN is urging financial institutions to be vigilant in identifying suspicious activity relating to financing Hamas and reporting such activity to FinCEN.”

Recent actions against Hamas

The alert is connected to a series of measures the US government has taken against Hamas, including recent designations by the US Treasury. On October 18, 2023, the Office of Foreign Assets Control (OFAC) designated eight individuals, one virtual currency wallet, and its owner for involvement in supporting Hamas. 

Six of the individuals were involved in the Palestinian organization’s secret investment portfolio, which was also the subject of sanctions in 2022. Two were upper-level Hamas operatives.

Investigations have revealed evidence that Hamas has raised funds through virtual currency services. The designated wallet, which belongs to a firm called Buy Cash Money and Money Transfer Company, was seized by Israeli authorities in June 2021. Along with the wallet, Buy Cash was designated for involvement in funding multiple terrorist groups.

“The US Treasury has a long history of effectively disrupting terror finance, and we will not hesitate to use our tools against Hamas,” said Janet L. Yellen, Secretary of the Treasury. “That includes…imposing sanctions and coordinating with allies and partners to track, freeze, and seize any Hamas-related assets in their jurisdictions.”

Alert: Seven terrorist financing red flags

The alert urges FIs to consider red flags in the context of broader risk factors, such as customer history, typical business practices, and the number of red flags exhibited. The publication lists seven key red flags firms should be especially attuned to, including:

1. Transactions associated with OFAC-sanctioned entities.
2. Transactions including information pointing to terrorist activity.
3. Transactions with an FI in a risky jurisdiction, particularly if the firm fails to follow anti-money laundering and countering of terrorist financing (AML/CFT) best practices.
4. Transactions connected to companies associated with known terrorist organizations, especially those involving Iran.
5. Nonprofit organizations (NPOs) that seek donations but don’t appear to provide charity, that support Hamas, or that seek donations on social media or virtual currency platforms.
6. An NPO customer who receives large donations in a short period from unknown donors then makes large donations to other NPOs.
7. Transactions with virtual currency addresses associated with terrorist organizations.

How firms can take action

FinCEN’s most recent alert is relevant for any firm that could be impacted by activity associated with Hamas or other terrorist organizations. In particular, FinCEN wrote the alert for:

• Casinos.
• Depository institutions.
• Firms in the insurance industry.
• Money services businesses (MSBs).
• Mortgage companies and brokers.
• Firms in the precious metals/jewelry industry.
• Securities and futures firms.

Firms are encouraged to review OFAC’s recent designations relating to Hamas and ensure their risk assessment incorporates any emerging risks stemming from these recent sanctions. Creating a process for evaluating customers’ overall risk for terrorist financing and implementing enhanced due diligence (EDD) measures for high-risk customers in line with FinCEN’s recent advisory may also be wise. Consider whether that process incorporates sound payment screening, sanctions screening, and transaction monitoring.

FinCEN asks firms to report suspicious activity that could relate to Hamas by including the key term “FIN-2023TFHAMAS” in field 2 of the suspicious activity report (SAR). For additional questions, please contact the FinCEN Regulatory Support Section at frc@fincen.gov. 

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Despite the 2017 implementation of a non-financial sector AML/CTF supervisory office, Professional Body Anti-Money Laundering Supervision (OPBAS), HM Treasury has not deemed progress in this key anti-financial crime area satisfactory. This consultation paper discusses four alternative reform models before calling for in-depth feedback in a follow-up survey.

Background

The UK’s first money laundering/terrorist financing (ML/TF) national risk assessment (NRA) in 2015 revealed key weaknesses in the AML/CTF regime’s non-financial sector supervision. At the time, the sector was supervised by private Professional Body Supervisors (PBSs). According to the consultation paper, the government created OPBAS to “ensure robust, consistent supervision across PBSs, as well as good information sharing between supervisors and with law enforcement.”

In 2018, the Financial Action Task Force’s (FATF) Mutual Evaluation Report (MER) for the UK echoed the 2015 NRA’s supervisory concerns, extending to “all AML/CTF supervisors, except for the GC” (Gambling Commission). That said, the MER called specific attention to gaps in supervision and the understanding of ML/TF risk in the UK’s 22 private accountancy and legal sector supervisory bodies. Still, it was generally hoped that the recent creation of OPBAS would result in improvements over time.

In 2022, a review of the supervisory sector revealed less progress than hoped for. While the supervision of professional bodies had improved, key weaknesses remained. In particular, the report noted that supervisory standards for the accountancy and legal sectors did not reflect the sector’s high risk. These weaknesses were linked to too many supervisors, leading to the risk of “inconsistency, regulatory arbitrage, and poor information sharing.”

In response to these remaining weaknesses, the Economic Crime Plan (2023-2026) includes a specific plan to address this deficiency through a more in-depth reform of the UK’s AML/CFT supervisory system. The plan included three specific actions aimed at this goal – actions four, five, and six. They entail:

• Strengthening existing oversight for OPBAS and HMT.
• Strengthening the AML/CFT regime’s supervision.
• Delivering a reform package for the UK’s AML/CFT supervisory regime following a consultation.

Consultation

The consultation is the first step in the current Economic Crime Plan’s sixth Action. It considers the evidence collected in the Review of the UK’s AML/CFT Regulatory and Supervisory Regime, proposing four possible reform models and collecting feedback through a survey. The four models are:

• OPBAS+ – This would retain the current supervisory structure but make vital modifications to its powers to enable more effective sector supervision.
• PBS Consolidation – This would address the issue of too many PBSs and the resulting inconsistencies created by consolidating private body supervision into two or six PBSs. Under the two-PBS option, there would be one for each sector (legal and accountancy), while under the six-PBS option, there would be two per sector for each of the UK’s three jurisdictions.
• Single Professional Services Supervisor (SPSS) – Under this model, private supervision (PBSs) would likely be eliminated in favor of a single public regulatory body responsible for the legal and accountancy sectors.
• Single Anti-money Laundering Supervisor (SAS) – This model would involve committing AML/CFT supervision to a single public entity and also removing the AML/CFT supervisory roles of the FCA and GC. PBSs would no longer supervise AML/CFT compliance but would retain supervisory powers for other matters.

The consultation is also exploring the need for dedicated sanctions supervision and how the proposed models might intersect.

Key takeaways

Firms should watch for updates across the UK’s AML/CTF regime, especially in the supervisory sector. Those in the non-financial sector currently supervised under OPBAS should pay particular attention, as significant regulatory changes will likely be coming in 2023 and beyond. It would be worthwhile for firms to also consider updating their risk management technology and risk assessments to ensure they are prepared for upcoming changes. According to the HM Treasury:

As part of its objective to drive effectiveness, the review has also considered the potential levers for government to support businesses in increasing their own effectiveness, for example through the appropriate use of new technology, ensuring businesses have up-to-date understandings of the risks they face, and improving the AML guidance regime. Focus on making incremental improvements within existing structures, in collaboration with partners across the regime, is deemed to be the most appropriate approach in this area.

Source: HM Treasury

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The guidance sets out MAS’ key observations and highlights the supervisory expectations FIs should review their controls against.

Survey Findings 

Following the regulator’s survey, four areas of firms’ compliance programs were identified as requiring improvement:

• Strengthening the screening process – FIs should regularly review the adequacy and appropriateness of screening processes to comply with the Terrorism (Suppression of Financing) Act (TSOFA), the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) (Amendment) Bill (CDSA), and other relevant MAS rules. Immediate steps should be taken to address any weaknesses identified.

• Leveraging data analytics – To better identify behavior potentially indicative of terrorist financing (TF), MAS encourages FIs to combine insights from multiple data sources. The paper notes the advantages of deploying advanced methods such as network link analysis and geographical mapping of transactions involving higher-risk TF jurisdictions to enrich the analysis.

• Conducting regular reviews to strengthen internal controls and processes – To do this, MAS suggests the following:

• • • Enhance staff awareness of TF typologies and related red flags.
    • Institute clear internal processes to facilitate the timely dissemination of information and escalation of hits on TF-related activity.
    • Conduct enhanced due diligence (EDD) measures promptly where TF red flags are identified.

• Ensuring quality and timely suspicious transaction report (STR) submissions – When FIs have additional information or valuable insights relating to existing cases, MAS encourages them to share the insights with law enforcement through supplementary STRs.  

Expectation and Requirements

In light of these findings, MAS reiterates several expectations and requirements that all obligated firms must strive to meet, including: 

• FIs should ensure that existing anti-money laundering (AML) and CFT frameworks and processes comply with the TSOFA, the CDSA, and other MAS rules.
• FIs should be aware of the external TF risk environment, including:
  • Geographies with heightened TF risks.
  • Emerging typologies. 
  • Common payment methods used.
• FIs should implement adequate controls to mitigate TF risks, taking into account the extent of their TF risk exposure, including: 
  • The size of their business.
  • The nature and complexity of their business model or transactions.
  • The geographical base of their customers.
• FIs should subscribe to MAS’ website to be alerted promptly to list changes of UN-designated individuals and entities.

The paper notes that FIs should benchmark themselves against these expectations in a risk-based and proportionate manner and conduct a gap analysis. In doing so, FIs should consider the risk profile of their business activities and customers. Where FIs observe gaps in their frameworks and controls, specific remediation/enhancement measures should be identified and implemented swiftly.  

Terrorist Financing Red Flag Indicators

Some indicators of potential terrorist financing behaviors that FIs should be familiar with include:

• Adverse media or law enforcement information that link individuals to violent extremist group(s), sentiments, or violent extremist activity.
• Subjects involved in transactions with individuals, groups, clubs, businesses and/or charities associated with violent extremist groups by the media or law enforcement.
• Transactions that involve certain high-risk jurisdictions.
• Transaction details (contact name, email address, funds totals, remittance info, etc.) that make references to words, phrases and/or numbers linked to violent extremist actors, groups, activity, or iconography.
• Excessive email money transfers followed by the depletion of funds through third parties or cash withdrawals.
• Transactions that involve persons or entities identified by media and/or sanctions lists as being linked to a terrorist group or terrorist activities.
• The use of crowdfunding, fntech platforms, and/or virtual assets to finance individuals or groups associated with violent extremism.

While no single red flag indicator determines illicit or suspicious activity, FIs should consider each transaction’s relevant facts and circumstances in line with a risk-based approach to compliance. 

Additionally, when reviewing MAS’ guidance, compliance staff should take note of the case studies featured throughout the document. These studies help contextualize the regulator’s expectations and help firms identify gaps in their current CFT controls that require remediation. 

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According to the alert, the Government of Canada states that religiously motivated violent extremism (RMVE), politically motivated violent extremism (PMVE), and ideologically motivated violent extremism (IMVE) all represent a threat to the security of Canada. IMVE is identified in the report as a type of terrorist threat that has “killed and wounded more people on Canadian soil than RMVE or PMVE.” 

Indicators of Terrorist Financing Activity 

To identify the terrorist financing activity, FINTRAC analyzed a sample of suspicious transaction reports (STRs) it received between January 2019 and October 2022. Based on FINTRAC’s analysis, the reported transactions fell into three main categories, including domestic terrorism, financing international terrorist groups, and Canadian extremist travelers (CETs).

In light of its analysis, FINTRAC compiled a comprehensive list of terrorist activity financing indicators that occur across each category, including:

• Adverse media or law enforcement information that link individuals to violent extremist group(s), sentiments, or violent extremist activity
• Subjects involved in transactions with individuals, groups, clubs, businesses and/or charities who have been associated with violent extremist groups by the media or law enforcement
• Transactions that involve certain high-risk jurisdictions
• Transaction details (contact name, email address, funds totals, remittance info, etc.) that make references to words, phrases and/or numbers linked to violent extremist actors, groups, activity, or iconography
• Excessive email money transfers followed by the depletion of funds through third parties or cash withdrawals
• Transactions that involve persons or entities identified by media and/or sanctions lists as being linked to a terrorist group or terrorist activities
• The use of crowdfunding, FinTech platforms, and/or cryptocurrencies to finance individuals or groups associated with violent extremism

For additional indicators of terrorist activity financing about CETs, compliance teams should review FINTRAC’s 2018 Terrorist Financing Assessment, as the report notes these indicators continue to be commonly observed.

Draft Guidance: Reporting STRs to FINTRAC

On December 16, 2022, FINTRAC also issued draft guidance for entities obligated to submit suspicious transaction reports (STRs) under the PCMLTFA. While the guidance may still undergo minor changes before coming into effect in September 2023, it highlights the changes due to be made to the STR form – a mock-up of which can be found here. 

FINTRAC reminds reporting entities that they must submit an STR to FINTRAC as soon as possible after measures have been taken to establish “reasonable grounds to suspect” the transaction is related to money laundering or terrorist financing. According to the guidance, the following measures should be taken to establish reasonable grounds for suspicion: 

• Screening for and identifying suspicious transactions
• Assessing the facts and context surrounding the suspicious transaction
• Linking risk indicators to your assessment of the facts and context
• Explaining your grounds for suspicion in an STR, where you articulate how the facts, context, and risk indicators allowed you to reach your grounds for suspicion

When completing an STR, FINTRAC states that a “fact” is an event, action, occurrence, or element that exists or is known to have happened or existed. Facts known to a reporting entity could include account details, a client’s financial history, particular business lines, or information about a person or entity. 

For more risk management best practices for Canadian FinTechs, download our infographic.

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Because of this, money laundering is a high priority for the legislators and officials who oversee the world of finance. New anti-money laundering strategies are constantly being created to track down and stop money launderers, and the technology used to do so is evolving at a rapid pace.

What is money laundering?

The Financial Action Task Force (FATF) defines what is money laundering as “the processing of criminal proceeds to disguise their illegal origin”. Some of the major contributors to money laundering are organized crime, drug trafficking, and smuggling, all of which can generate a substantial amount of money that requires “cleaning” before the criminal can use it in a legitimate financial system without being detected.

Across the globe, financial institutions such as banks, capital market firms, and insurers are some of the most favored channels used to launder illicit funds. One reason that money laundering can be so difficult to track down is that it is necessarily related to other crimes. Criminals will often attempt to transfer money through several countries to obscure its illegal origin, involving multiple people and multiple bank accounts. 

Of course, this means that criminals typically committed another crime through which they obtained the illicit funds they then sought to launder. When multiple counts of money laundering and interrelated criminal activity become interwoven like this, a complex network of illicit activity is created that is problematic to fully track and break down.

How Does Money Laundering Work?

While the ways criminals can launder money are diverse, the methodology remains generally consistent. The three stages of money laundering are:

Placement

The initial placement stage refers to the introduction of illegal cash or money obtained through illegal activity into a legitimate financial transaction system. Cash deposits, wire transfers, and other financial instruments are used at this stage to move the funds away from being directly associated with the crime.

Layering

The next stage is where legally sourced money is “layered” or entwined with the illegal funds that have been placed in the financial system. The intent at this stage is to obscure the audit trail of the financial sum involved, which can look like the criminal buying and selling stocks, commodities, and real estate, often across multiple borders. 

Integration

The final money laundering stage is reached when the “dirty” money and the “clean” money have been combined to the point that all of the funds appear legitimate. When the criminals have a seemingly legal explanation for the placed and layered financial assets, the funds can be received from their original illicit source through means that do not draw attention, allowing them to use the funds freely in the regular monetary system.

Examples of money laundering

When it comes to money laundering, criminals can utilize a variety of methods, schemes, and techniques to move or conceal their illicit funds. Compliance teams must be able to effectively recognize money laundering typologies to mitigate against the risk of financial crime and ensure regulatory compliance as a regulated entity. Common money laundering typologies include:

Money mules

A “money mule” is an individual who has been recruited by criminals — whether wittingly or unwittingly — to act as a proxy in the placement of criminal funds into the system. Things to look for include small transaction amounts and young people who may be less aware of the legal implications of their actions.

As money muling networks are often made up of large numbers of individuals across jurisdictions, when suspicions arise, firms should try to build a picture of any relevant associates. 

Smurfing

The typology of  “smurfing” involves moving large amounts of illicit money through the financial system by making smaller transactions. “Smurfs” will often spread these smaller transactions across multiple bank accounts to avoid detection and remain under regulatory reporting limits. 

As networks are extensive enough to move large sums of money quickly, smurfing is likely to be used in conjunction with money muling. To mitigate against this risk, transaction monitoring thresholds must be appropriately calibrated to the bank’s risk-based approach.  

Virtual assets

Although the vast majority of placement and money laundering layering is still undertaken in fiat currencies (i.e., the Euro, the US dollar, etc.), virtual assets (especially cryptocurrencies) are emerging as a growing component in the complex process of layering funds. 

Over the last few years, money laundering involving cryptocurrencies has become increasingly common. For example, the proceeds of cyber fraud or blackmail could be initially collected on Bitcoin, but then traded through several cryptocurrency exchanges for a variety of other cryptocurrencies, including privacy coins, before being cashed out.

Is money laundering illegal?

Whilst the illicit origins of the funds being laundered are what make money laundering schemes illegal, the act of money laundering is an offense in its own right. In addition to receiving a sentence for the predicate crime (a component of a larger crime that generates monetary proceeds), criminals can receive up to 14 years in custody for money laundering offenses, in addition to mandated fees and restrictions.  

However, some countries, including Germany, have made a legislative shift to separate money laundering from predicate offenses, thus expanding criminal liability beyond what was previously outlined in the country’s catalog of suitable predicate offenses.

Comply with AML regulations

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How is money laundering prevented?

Anti-Money Laundering (AML) refers to the procedures, policies, programs, and technologies that financial institutions must put in place to monitor fraudulent activity. Some AML controls include Know Your Customer (KYC) policies, record management and software filtering, holding periods, and sophisticated new technologies such as AI to monitor financial risk in real-time. 

Technological innovations have made it substantially easier to discover when the financial system is being abused, as well as to gather information about the individuals who are abusing it. Manually searching for data and monitoring accounts is tedious, inefficient, and often ineffective. Fortunately, screening systems have replaced this old-fashioned process, and have made it easier than ever before to monitor clients and determine if someone is laundering money.

To aid the fight against money laundering, many governments now legally require all financial institutions and many companies to report any suspicious activity that they notice among their customers. These institutions include banks, payment and insurance companies, casinos, money exchange companies, and numerous others. It would be impossible for governments to catch all the criminals involved in money laundering independently, and the same can be said for business and financial institutions. But when both the private and public sectors work together in order to combat this ubiquitous crime, their success rate dramatically increases. 

If a company or financial institution inadvertently completes a transaction that pertains to money laundering, it can face extensive legal and financial repercussions. Even if the mistake is entirely accidental, it may still be prosecuted. If corrupt employees actively aid money launderers, the employees are dealt with very harshly on an individual level and the institution may still incur liability. Because of these risks, most institutions go to great lengths to make sure that they properly monitor clients and their accounts. For businesses and banks, it is simply not worth the risk to be negligent and accidentally wind up involved in money laundering.

In order to further mitigate the risk of money laundering, updated and enhanced AML regulations are due to continue throughout 2022.

The post What is money laundering? appeared first on ComplyAdvantage.

Supply chain integration and the third-party relationships that entails bring a degree of elevated risk: in relying on a supply chain for essential commercial goods or services, firms must be confident that third parties are not involved in criminal activities such as fraud, money laundering, or the financing of terrorism, and are operating in compliance with relevant AML/CFT regulations. While a firm may be able to deploy robust compliance measures internally, third-party firms may not implement the same level of AML scrutiny, or may even seek to exploit vulnerabilities in partners’ infrastructure to engage in illegal activities such as third party money laundering.  With potentially significant financial and reputational penalties at stake, firms must work to minimize their exposure to criminal risks by understanding their third-party compliance responsibilities and by performing appropriate supply chain due diligence.

Understanding supply chain due diligence

To fulfill their compliance obligations and avoid facilitating criminal activity, firms must be able to accurately assess the third party money laundering risks that they face on an individual basis. In practice this means investigating the conduct of partner firms up and down the supply chain and performing an appropriate level of due diligence prior to initiating a business relationship.

As a first step, firms should map their supply chain from end to end, listing persons involved in the chain individually. Since a third-party supply chain may comprise manufacturers, transporters, suppliers, distributors, consultants and more, firms must implement a due diligence process that reflects the diversity and unique challenges of their environment.

When conducting supply chain due diligence, firms should focus on acquiring third party information that can be used to inform third party money laundering risk assessments, including:

• Company names, addresses, taxpayer references, and incorporation documents
• Names of company owners and beneficial ownership
• Company Cash flow and asset expenditure data
• Debts, liabilities, and other contingencies  
• Employment status of company employees
• Historical financial data
• Internal business risk assessments and growth projections
• Historical AML compliance performance

Third-party money laundering risks

A lack of familiarity with third-party partner firms may expose firms to specific risks. These include:

• Industry: While a firm may operate in a relatively low-risk industry, partner firms up and down its supply chain may not. Relationships with firms in the shipping, art, or payment services industries, for example, may expose partner firms to higher degrees of AML risk than their native industries.
• Location: Firms may have business relationships with partners in countries that have lower AML/CFT controls than their operational jurisdiction and that exploit disparities in international legislation. 
• Sanctions: Partner firms may have business relationships with persons that are subject to international sanctions or similar restrictions, especially when those persons are located in foreign jurisdictions. 

Political risk: It may be difficult to track partners firms’ relationships with politically exposed persons (PEP). Elections in foreign countries may change a third-party’s PEP status and with that the level of money laundering risk that they present.

Supply chain compliance

Managing supply chain risk can be complicated and challenging especially since third-party AML/CFT threats are less visible than those captured by internal compliance controls. However, the principles of managing third party money laundering risk are broadly similar to the process of managing known risks, and require the implementation of monitoring and reporting controls. 

Under Financial Action Task Force (FATF) recommendations, firms must implement risk-based compliance solutions in order to manage the AML threats they face. In a supply chain context, this means conducting an effective risk assessment of supply chain relationships and then deploying enhanced due diligence measures for higher risk third-parties and simplified measures for lower risk third-parties. Risk-based AML allows firms to approach supply chain due diligence pragmatically, balancing their significant compliance responsibilities with their administrative and financial resources.

In addition to performing suitable supply chain due diligence (and acquiring the important information listed above), firms should perform a range of ongoing checks to ensure third-party risk profiles have not changed over the course of their business relationships. Ongoing supply chain checks should include:

• PEP screening: Firms should screen for elections and other governmental processes that may change the PEP status of third-party partners, and of their relatives and close associates. 
• Sanctions screening: Firms need to know if the third-parties they do business with have links to individuals and countries that are subject to economic sanctions. Accordingly, firms should screen third-parties against relevant sanctions lists, such as the OFAC list, the UK list, the EU list, and the UNSC Consolidated List. 
• Adverse media: Negative news reports often indicate that a person is involved in criminal activity and poses a greater risk of third party money laundering. Firms should screen for adverse media stories that involve third-parties in their supply chain, incorporating traditional screen and print sources and online sources. 

Audits: Effective supply chain due diligence may require firms to conduct an audit of third-party businesses to verify the information they provide and ensure that they have implemented appropriate internal AML/CFT controls. Audits may involve site-visits, investigations of clients, customers, and business relationships, and, in some cases, correspondence with authorities.

Penalties: Failure to implement suitable supply chain due diligence measures may result in significant AML compliance penalties for both firms and individuals – depending on the jurisdiction in which a violation takes place. In the United States for example, AML compliance failures under the Bank Secrecy Act (BSA) may result in fines of up to $1 million and prison sentences of up to 10 years.

Smart technology compliance solutions for third-party money laundering

Given the vast amounts of data required for supply chain due diligence, firms should seek to integrate smart technology tools as part of their AML solution. Smart technology brings automated benefits to the compliance process, helping firms process third-party risk data with greater speed and efficiency, while reducing potentially costly human errors. Firms may also seek to integrate artificial intelligence and machine learning systems in order to better capture unexpected changes in third-party behavior, and changes in regulation that might affect their compliance responsibilities.

The post Third-party money laundering risk appeared first on ComplyAdvantage.

Further, the list of industries involved in the fight against financial crime is growing. It’s less and less — as much as it ever was — a problem only banks confront. Securities, real estate, high-value commodities and other sectors are all exposed to money laundering risks. As a result, the regulators of these industries are publishing valuable data that shouldn’t be ignored. 

Using the example of Russia, a country where corruption permeates many levels of society, we explore below how that data can help identify risks to the financial system that might otherwise go undetected.

A Sneaky Securities Scheme in Russia

Securities have long been singled out as vulnerable to manipulation. Buy and sell orders can be executed quickly, in large volumes, and regardless of national borders. FATF, in a 2009 report, acknowledged this and said, “the securities sector is perhaps unique…in that it can be used both to launder illicit funds obtained elsewhere, and to generate illicit funds within the industry itself through fraudulent activities.”

Add corruption and lax adherence to AML/CFT controls, and securities become an extremely effective vehicle for the illicit movement of money.

The Russian “mirror trading” scheme, through which $10 billion was moved out of Russia between 2011 and 2015, provides an eloquent example. A company in Moscow would buy Russian blue-chip stocks using the local currency only to have a related company elsewhere sell the same stock at the same value for dollars. The trades were made possible by Deutsche Bank — specifically the broker-dealers and employees of the bank’s Moscow branch — and provided a way for Russian nationals to evade currency controls, taxes and possibly launder money made from illicit activities.

The beleaguered Deutsche Bank, which had already come under fire for its involvement in scandals such as the Russian Laundromat, was slapped with a $425 million fine and has suffered extreme reputational damage as a result of the scandal coming to light.

Casting a Wider Securities Net

While by some standards, Russian regulators gave merely symbolic punishments to those found to be involved with the mirror trades scandal, there’s a curious pattern concerning the number of licensed securities market participants after the scandal broke: in 2017, 614 license-holding participants in the securities market were to be found, almost 50% less than the 1149 license-holders in 2013. So, the corruption within this sector isn’t going unnoticed.

As the Russian Federation Central Bank is the main actor tackling issues related to the securities sector, lists such as the two below would serve to flag individuals operating with canceled or suspended licenses:

• Russian Federation Central Bank Stocks and Bonds Market Cancelled Licenses of Professional Securities Market Participants
• Russian Federation Central Bank Stocks and Bonds Market Suspended Licenses of Professional Securities Market Participants

Moreover, the below lists from the same entity serve to provide even more context and identify additional high-risk individuals that operate within the securities sector:

• Russian Federation Central Bank Stocks and Bonds Market Cancelled Certificates of financial market specialists
• Russian Federation Central Bank Administrative Proceedings
• Russian Federation Central Bank Revoked Insider Certificates

Designated Non-Financial Business and Professions (DNFBPs)

The securities sector may be unique in its ability to facilitate the generation of ill-gotten wealth. But the tendency for criminals to recruit industry professionals as conspirators is not. Nor is it confined to those professionals within the financial sector. Continuing with the example of Russia, it’s worth evaluating certain designated non-financial businesses and professions with an eye toward their susceptibility to money laundering. They include:

Tax evasion:

In Russia’s National Money Laundering Risk Assessment (NRA ML) for 2017–2018, tax crimes ranked high on the list of key areas of concern — specifically, VAT fraud and tax evasion. It’s worth noting that the country has taken significant steps to curb both in recent years. Yet when tax officials are complicit, bypassing those steps is still possible.

Lists such as the “Russian Federation Federal Tax Service Legal entities whose executive bodies include disqualified persons” can help to flag tax entities that may pose a higher than normal risk.

Precious stones and metals:

Russia’s export economy relies heavily on its mining industry, which includes oil and gas but also precious stones and metals. Unsurprisingly, high foreign demand makes smuggling and illegal extraction of these resources attractive to bad actors and is a major predicate offense for money laundering.

Further, as Russia’s NRA ML indicates, AML legislation has not been sufficiently implemented, and diligence in reporting suspicious transactions has been lacking: curiously, for instance, the number of STRs filed for precious stones and metals from 2014–2018 remained somehow constant, ranging between 3,500 and 4,700.

The Assay Chamber is responsible for overseeing this sector’s compliance with trade regulations. Therefore, lists such as the “Russian Federation State Assay Office Results of AML Supervision,” which covers entities found to be in breach of AML requirements, can help to flag high-risk entities.

Gambling

While gambling is mentioned in the NRA ML as low risk in comparison to other industries, this sector is still worth keeping an eye on. With casinos only officially permitted in four special zones and online gambling prohibited, illegal gambling and lotteries have sprung up to meet demand.

Indeed, one estimate calculates that Russians spent around $11.8 billion on sports betting in 2017 and that 65% of that went to unregulated providers. Further, the Federal Tax Service (FTS), which supervises this industry, discovered approximately 95,000 illegal online gambling providers in the space of two years (2016–2018).

Given its prevalence, monitoring those identified as offering illegal gambling or illegal lotteries would be beneficial for financial institutions when determining their risk exposure. Therefore, lists such as the Russian Federation Federal Tax Service’s “Entities Offering Illegal Gambling” and “Entities Offering Illegal Lotteries” can help to flag high-risk entities.

Flexibility and Variety Is Key

The global AML landscape remains complex and poses multiple challenges, which require a flexible approach in collecting and categorizing relevant lists to screen against. Russia is simply one example of how this flexible approach can be applied to provide further context. To ensure financial institutions benefit from the most up-to-date information for risk mitigation, they must look for providers that not only screen against the usual sanctions and watchlists but also against other relevant data from a variety of high-risk sectors.

This is something we at ComplyAdvantage strive to do. We continually monitor regulatory developments and expand our database offerings to provide information that tackles AML/CFT risks from a great variety of sectors, from the financial sector to DNFBPs and non-governmental organizations and charities.

The post Russian Risks: Valuable Watchlists to Monitor appeared first on ComplyAdvantage.

How Terrorists Use Social Media

A report published in 2014 found that 90% of internet-based terror activities are conducted using social media. That percentage has likely increased over the last six years, given the overall global growth in social media use.

As of late 2019, nearly half of the world’s population — 3.725 billion out of 7.734 billion — is active on social media. That amounts to over 83% of current internet users and an increase of nearly 10% from October of the previous year. What’s more, there are no signs that global social media usage is slowing as we move into 2020 and beyond.

Social media’s explosive growth has sparked serious concerns over its possible exploitation by terrorists, terrorist organizations and radicalized sympathizers looking to promote their ideas and fund attacks worldwide. Given the open nature of these platforms, their reach and the anonymity they provide, terrorist financing is often hidden in plain sight, with small-currency transactions the norm.

Recent terror attacks have also highlighted the role social media plays in radicalizing and recruiting individuals as well as showing the devastating results of their attacks. The Christchurch mosque attacks in March 2019 that killed 51 people were announced on 8chan, live-streamed on Facebook and then reposted repeatedly on various social media channels.

These attacks were “designed to go viral,” according to New Zealand’s prime minister, Jacinda Ardern. The attacks serve as propaganda material to garner support for additional attacks and create a campaign for the financing of terrorism.

Going viral requires a reach that’s instant and wide, something made possible by social media. This kind of reach also opens the door for sympathizers to donate to the cause little and often without disrupting their day-to-day finances. Further, terror financing methods vary widely. So while donations can be purposeful, they can also be made by unwitting pawns using videos and images that aren’t immediately linked to terrorism since calls for donations are often disguised as being for charitable causes.

Financiers then follow up those calls with instructions, communicated via encrypted platforms, on making payments. These often arrive in the terrorists’ hands by wire or, increasingly, social media platforms. Prepaid cards, virtual currencies and e-wallets are also encouraged as they fly under the radar of traditional AML/CFT controls — a shortcoming new legislation, such as the EU’s 5AMLD, is trying to address.

One Service Among Many

Government attempts to regulate speech on these platforms have been met with resistance and controversy, especially in the US, where free speech is a cherished, constitutionally protected right. Nor have they proven to be an effective deterrent. In addition, social media companies have been reluctant to toe that line themselves, with lackluster attempts to identify and regulate activity that could be seen as impinging on freedom of speech. But centering the debate around regulating the expression of ideas obscures other, possibly more effective ways to fight terrorism.

In many ways, social media companies have outgrown their original purpose. Sharing content is simply one service provided among many, with additional services aimed at facilitating money flow: Facebook introduced its own digital currency, Libra, for example, and Instagram launched an in-app checkout feature last year.

Yet creating an account on a social media platform is still relatively easy and requires little to no personal information. Moreover, when one account is shuttered, there’s nothing to prevent another from popping up, either on the same platform or on a different one.

In 2017, terror financier Hajjaj Fahd al-Ajmi called on his 1.7 million Instagram followers to donate funds to support terror activities. While Instagram shut down his account after being made aware of the plea, a slew of donations had likely already been made. What’s more, this occurred after al-Ajmi had been identified by the US and the UN as a terror financier, had conducted similar campaigns on Twitter and had populated his Instagram page with advertisements to support local businesses.

An Evolving Debate

So as social media companies evolve into online marketplaces and as in-app virtual currency use grows, it’s worth re-examining their role vis-à-vis the financial system. What responsibility do these companies have to screen their users or monitor transactions, when should those screening processes be performed, and to what extent should financial regulations apply to them?

These questions of liability may seem rather abstract, especially given the current regulatory landscape. But it’s undeniable that detecting terrorist financing requires a multi-pronged approach, and the complex relationship between social media companies, payment processors and other financial services companies will continue to evolve.

How regulators and global advisory bodies will decide to move forward in the future is something every social media platform and third-party payment processor should be aware of, especially as they continue to blur the lines between finance and social media.

Look out for our next blog on social media and terrorism financing where we’ll discuss the role that third-party payment processors have to play by signing up for our newsletter.

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