Insights: Week of July 3, 2023
Sanctions compliance, Fraud, AML, and Other Illicit Finance News
The West's chip "war" with China is almost certainly presenting additional challenges for compliance officers. The United States is planning new restrictions, which sources say may be published this month, that will require licenses to export equipment to about a half dozen Chinese facilities, including an entity operated by SMIC, China's largest chipmaker. Licenses to ship the equipment to those facilities will likely be denied, and compliance officers at US entities must ensure that their business partners and clients are not linked to restricted Chinese entities.
China is retaliating with planned export restrictions on two metals considered vital to the semiconductor sector—gallium and germanium—as well as various items related to these materials. These materials are used for chips that go into various electronic products, such as smartphones and advanced military equipment. China notes that these export controls are “just a start” in advance of a visit from US Treasury Secretary Yellen.
The Netherlands is implementing new export controls, and companies that produce machines that make advanced processor chips will be required to obtain an export license before they can be sold overseas beginning in September. The requirement will notably affect Dutch company ASML, the world’s only producer of machines that use extreme ultraviolet lithography to make advanced semiconductor chips.
German industry this week warned that Europe must become more self-reliant in the hunt for raw materials needed for cleaner, more digital economies.
In addition, compliance officers must be wary of other restrictions, such as a black list of mostly Chinese and Russian research institutes that the Pentagon says have engaged in “problematic activity,” including trying to infiltrate sensitive defense research at US colleges and universities, and lists of entities allegedly engaged in helping Russia evade sanctions and access restricted goods and technologies.
US officials last month visited Hong Kong to urge the central bank, financial institutions, law firms, consultancies, and industry groups to do more to curb the flow of advanced US-made technology from the city into Russia. Three Treasury officials asked banks and regulators to help identify US high-tech items from being shipped to Russia via Hong Kong.
Compliance officers must keep abreast of new developments, additional restrictions, and the myriad of entity lists that can limit their transactions with various entities in China, including the SDN list, the Bureau of Industry and Security's Entity List, the Department of Homeland Security's Uyghur Forced Labor Prevention Act (UFLPA) Entity List, and others. Increased monitoring and enhanced due diligence research into potential clients, business partners, resellers, and end-users of US goods and technologies can help US firms navigate these risky waters.
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Compliance and Due Diligence
The UK this week sanctioned 13 Iranian individuals and entities, warning that Tehran has stepped up efforts to kill or kidnap UK individuals. OFSI also targeted IRGC cyber operations, including the US-designated Ravin academy that trains MOIS and other hackers in cyber operations.
The EU Sanctions Envoy David O’Sullivan this week said that outreach to third countries encouraging them to make restricted goods more difficult for Russia to import is working. Teams from the United States, EU, and the UK have visited the UAE, Kyrgyzstan, Turkey, Kazakhstan, Uzbekistan, Armenia, and Serbia in recent months to enlist their support in tackling sanctions evasion. The EU for several months telegraphed its intent to target third countries and companies that help Russia evade sanctions in its 11th sanctions package, and we judge that offenders have already altered their evasion methodologies in anticipation of its passage.
The EU Civil Liberties Committee this week adopted a draft negotiating mandate on violating and circumventing EU sanctions, introducing a common definition of violations and minimum penalties, standardizing them across the bloc.
Leading European MEPs are calling on the EU to impose sanctions on Bosnia’s Milorad Dodik, calling his recent actions secessionist and "a direct attack on Bosnia and Herzegovina’s constitutional order and a blatant violation of the Dayton Peace Agreement." Dodik is already sanctioned by the United States and the EU.
Ukraine this week imposed sanctions against Georgian Airways because the company has resumed direct flights to Russia. President Zelensky signed the order that also sanctions the company’s founder Tamaz Gaiashvili. The United States last month warned Georgia of possible sanctions if it resumes direct flights to Russia, and we assess that US designations could be imposed now that this has happened.
President Zelensky this week signed a decree sanctioning 18 companies linked to sanctioned Russian oligarchs Mikhail Fridman, German Khan, and Petr Aven. The sanctions include the oligarchs’ firms in Cyprus, Luxembourg, Moscow, and the British Virgin Islands.
British MPs have been warned about the possibility of genocide in the Darfur region of Sudan. Advocacy groups are calling for sanctions against the commercial interests of the Rapid Support Forces (RSF) paramilitary group, which has been accused of murder and arson attacks on minority groups in the area, to mirror sanctions recently imposed by the United States.
The Pentagon has rejected Chinese demands to lift sanctions—probably against Defense Minister Li Shangfu—in order to open military communications channels. China also may be angling at restrictions being removed against some of its companies responsible for the technology inside the surveillance balloon the United States shot down in February. High-level military communications have been frozen since that incident.
The EU Court of Justice has rejected a request by Serbian businessmen, the Karic brothers, to remove sanctions from their Belarussian company Dana Astra—a division of Belarussian company Dana Holdings, whose owners are considered close to Belarussian president Lukashenko and whose daughter-in-law, Lilia, holds a high position in the company. But the Karic brothers claim they are not close to the regime, and the company’s economic success is based on smart business moves.
Hungary will ask the EU for a one-year extension of a Russia sanctions waiver that allows refiner Slovnaft—part of Hungarian energy group, MOL—to export products refined from Russian oil to Czechia. Budapest claims it needs another year to complete investment at its Slovak refinery, Slovnaft, that would allow it to shift to non-Russian crude. Slovakia receives nearly all of its crude oil from Russia via the Druzhba pipeline but plans to cut the amount this year.
Sanctioned Russian vessels have made more than 100 stops at Turkish ports since Russia invaded Ukraine last year. Some of the vessels have undergone repair work or received other sanctioned services, raising the risk that Washington could sanction Turkish businesses.
A bill in the UK applying the same rules to cryptocurrencies as traditional assets is awaiting King Charles’ royal assent before becoming law. The Financial Services and Markets Bill has been discussed in the British Parliament since July 2022.
The EU will not lift political and economic sanctions on Kosovo that suspend some economic aid and block Kosovo officials from visiting the EU unless the government de-escalates tensions with ethnic Serbs. The restrictive measures were imposed in late May after violence erupted in northern Kosovo in the aftermath of a contested election in which ethnic Albanian mayors took office despite a boycott by the Serb majority demanding more autonomy.
Swiss authorities are investigating Geneva-based oil trader Paramount's legal arrangements to circumvent Russia sanctions. Although Switzerland has implemented sanctions to mirror those of the EU, imposing a $60 cap per barrel for trade in Russian crude, under Swiss rules, overseas subsidiaries of local firms are largely exempt from the rules if they are considered independent. Paramount transferred its Russian oil trading activity to a company with a near-identical name in the UAE last year.
The UK’s Economic Crime and Corporate Transparency Bill, which will help law-enforcement agencies seize and freeze crypto used for crime, is a step closer to becoming law after being passed by the House of Lords this week. The bill will return to the House of Commons for a final read before King Charles signs it into law.
Belarus may ban peer-to-peer crypto transactions in an effort to reduce fraud. The legislation will allow citizens to conduct crypto transactions only through exchanges based in the Belarus Hi-Tech Park (HTP) "for the sake of transparency and control."
The UN Security Council (UNSC) has designated 16 individuals from North Korea involved in running, supporting, and financing the country's nuclear development program. The latest action supports the UNSC Resolution (2006), which imposes economic and commercial sanctions on the North Korean government.
The Commodity Futures Trading Commission (CFTC) has created two new task forces to combat environmental fraud and cyber crimes. The Environmental Fraud Task Force will address environmental fraud and derivatives and spot markets misconduct, and the Cybersecurity and Emerging Technologies Task Force will focus on cybersecurity issues and other emerging related concerns.
Fraud and Abuse
A US District Judge this week sentenced Rachael Winslow to more than 11 years in prison for conspiracy to launder money generated through boiler room fraud. The scheme convinced foreign victims to invest in what they believed to be legitimate ventures—mostly stocks or shares in reputable companies like Facebook, Chesapeake Energy, or Toys R Us—but the investments were worthless, and the boiler houses defrauded victims of more than $14 million during the time Winslow was involved. Winslow would create shell companies in various states and open bank accounts in their names to collect the proceeds of the fraud, and at least $4.7 million went through accounts she controlled.
Transparency International has issued a report that indicates real estate in France allows the flow of illicit funds into the country. Analysis shows that more than 1.53 million legal entities registered in France have not declared an ultimate beneficial owner, despite being required to do so since 2017.
A federal grand jury in Puerto Rico has charged several US residents with laundering funds from a variety of schemes during the Covid pandemic by purchasing cars they subsequently shipped to Nigeria. The indictment alleges that Oluwaseun Adelekan and Temitope Omotayo of Staten Island, New York; Ifeoluwa Dudubo of Austin, Texas; and Temitope Suleiman and Oluwasegun Baiyewu of Richmond, Texas. conspired to launder funds generated from romance scams, pandemic relief, unemployment insurance fraud, and business email compromise (BEC).
French prosecutors have filed money laundering and criminal conspiracy charges against Marianne Hoayek, a senior adviser at the Central Bank of Lebanon and a former assistant to Governor Riad Salameh. Prosecutors allege that Hoayek received funds embezzled from Lebanon's central bank through Forry Associates, a company owned by Riad Salameh's brother, Raja Salameh. The money was used to acquire luxurious properties in Europe for the bank governor and his relatives.
The Securities and Exchange Commission (SEC) has charged two Oregon residents and several of their companies with operating a $10 million Ponzi scheme. Robert Christensen and Anthony Matic used Foresee, The Commission PDX, The Policy PDX, and Innings 150 to raise money supposedly for real estate investments, promising investors high returns. They instead used the money to pay earlier investors and for other unauthorized purposes.
A German court has sentenced three Israeli nationals to prison for their involvement in an online investment scam that allegedly defrauded victims of roughly $84 million. Nadav Gover, Yaakov Gover, and Yuri Dashevsky pleaded guilty to masterminding the so-called GetFinancial Ring's call center operations, pressuring victims in Israel and Europe into various investments and using the proceeds to finance their illicit operations and enrich themselves.
Crypto exchange Bittrex Inc., which was fined roughly $53 million last year by the Treasury Department for sanctions and AML violations, was accused of violating multiple Florida laws by that state’s financial regulator ahead of the platform's bankruptcy filing in May. The platform was accused, among other things, of failing to segregate customer assets from the company’s operating capital and "failure to maintain a surety bond in the correct amount at all times."
Investigators at the Commodity Futures Trading Commission (CFTC) have concluded that bankrupt crypto lender Celsius Network and its former chief executive officer broke US rules before the firm’s crash. If a majority of the CFTC’s commissioners agree with that conclusion, the agency could file a case in federal court as soon as this month. Attorneys in the enforcement unit determined that Celsius misled investors and should have registered with the regulator, and that former CEO Alex Mashinsky also violated regulations.
More trouble for Binance? Australia's financial markets regulator this week searched the offices of the crypto exchange’s now-defunct local derivatives business. The company in April said that it would wind down the local derivatives exchange and previously stated that it had closed the derivatives positions of some Australian users because they were incorrectly classified as wholesale investors. Binance’s license for its derivatives operation was revoked in April.
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