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Insights: Week of July 31, 2023
Sanctions Compliance, Fraud, AML, and other Illicit Finance News
We judge that US sanctions and other restrictions against Chinese companies and individuals will continue to increase, with a focus on human rights, support to Russia’s war in Ukraine, and opioid trafficking. Recent reports suggest that China is not only helping Russia’s military aggression in Ukraine, but providing a much-needed economic lifeline that helps mitigate the effects of western sanctions and continuing to engage in human rights violations. US companies should expect increased governmental oversight and possible changes to US designations and other restrictions against Chinese firms.
An unclassified US intelligence report released this week—“Support Provided by the People's Republic of China (PRC) to Russia”—finds that shell companies and small- and medium-sized firms in Hong Kong engage in secondary sales of restricted chips to Russia. Press reports that examined Russian customs records showed that PRC state-owned companies are also shipping navigation equipment, jamming technology, and jet-fighter parts to Russian defense companies.
The Department of Homeland Security this week added two companies to its Uyghur Forced Labor Prevention Act (UFLPA) Entity List. China-based Camel Group Co. Ltd., a battery manufacturer, and Chenguang Biotech Group Co. Ltd., a spice and extract manufacturer, have both been added to the list.
On the heels of last week’s media reports that China is demanding that the Chinese Ministry of Public Security’s Institute of Forensic Science be removed from the Bureau of Industry and Security (BIS) Entity List in exchange for renewed cooperation on opioids, Congressmen Michael McCaul, Young Kim, and Mike Gallagher have asked the state and commerce secretaries to investigate China's demands.
Our recent advisory assesses that US companies transacting with chemical and pharmaceutical firms in China must conduct thorough due diligence research on their Chinese counterparts to mitigate the risk of unknowingly engaging with an entity involved in the production of fentanyl or its precursor chemicals.
We also recommend engaging with cultural, linguistic, and financial crime experts to not only monitor rapid developments, but analyze their impact on your firm’s business and help identify risky entities. Click below for a free consultation.
Compliance and Due Diligence
The United States this week issued two sets of sanctions. The first was against ISIS and al-Qa‘ida facilitators and their entities located in the Maldives, and the second was against Bosnian Serb officials accused of undermining the Dayton Accords.
The UK this week sanctioned several Russian individuals involved in the trial of human rights activist Vladimir Kara-Murza after the appeal of his 25-year sentence was rejected in Russian court. Kara-Murza, a dual British-Russian citizen, was sentenced to 25 years in April on charges of knowingly disseminating “false information” about the Russian military and for being involved in activities of a foreign or international organization declared “undesirable” by Russia.
A group of Russian billionaires, allegedly led by sanctioned oligarch Oleg Deripaska, is reportedly using their companies—some of which have not yet been sanctioned—to send mercenaries to the battlefield in Ukraine.
Rusal—Russia’s largest aluminum producer—has a volunteer battalion called Sokol. Financing for the “volunteers” for this unit comes from both the Defense Ministry and an unnamed “sponsor,” whose phone numbers listed on recruitment posters belong to Rusal Management—a subsidiary of Rusal.
US-designated Novatek is also sending mercenaries to Ukraine via a private security company called Bastion.
Also involved is construction firm Mospromstroy, owned by EU-designated oligarch Mikhail Gutseriev, as well as Sergei Gordeev’s PIK Group.
A likely Iranian cloud service company has been providing internet services to state-sponsored hackers. Cloudzy had been leasing server space and reselling it to at least 17 different state-sponsored hacking groups from China, Russia, Iran, North Korea, India, Pakistan, and Vietnam. Researchers from cybersecurity firm Halcyon analyzed Cloudzy’s employees’ social media and found the firm is “almost certainly" a front for an internet hosting company called abrNOC, which CEO Hannan Nozari operates from Tehran.
The EU on Friday sanctioned seven individuals and five entities for spreading Russian disinformation about the war in Ukraine. The campaign called RRN—Recent Reliable News—relies on fake web pages that mimic national media outlets and websites, as well as fake social media accounts. The bloc imposed sanctions on Inforos—an online outlet which is closely linked to the GRU and is responsible for setting up more than 270 media proxy online outlets that disseminate propaganda in support of Russia’s war in Ukraine; non-profit ANO Dialog that was created by the Moscow Department of Information and Technology and is closely linked to the presidential administration; the Institute of the Russian Diaspora; and two Russian IT companies, Social Design Agency and Structura National Technologies.
The EU on Friday also sanctioned nine Congolese and Rwandan individuals responsible for acts that the bloc says constitute serious violations of human rights and abuses in the Democratic Republic of Congo (DRC) and that fuel armed conflict.
Japan last week expanded sanctions against Russia, banning the export of Japanese cars, including used vehicles. The ban includes vehicles with 1,900 cc engines or greater, as well as hybrid and electric cars.
The SEC this week found that broker-dealers are not devoting sufficient resources to their AML programs and are enforcing them inconsistently. The SEC warned that the increased pace of sanctions imposed by OFAC can exacerbate the problem, especially in firms where the same personnel perform both AML and sanctions compliance functions. The full report is here.
At an emergency meeting this week, the Economic Community of West African States (ECOWAS) imposed sanctions on Niger’s military leaders involved in the country’s recent coup. The regional bloc also threatened to use force if the country’s elected president was not released within a week. Burkina Faso and Mali—both led by military juntas—warned that military intervention in Niger would be a “declaration of war” against both regimes. Complicating the situation is the deep involvement of US-designated Wagner Group in both countries, which will probably increase the probability of additional US designations.
The House Agriculture Committee this week advanced the Financial Innovation Technology for the 21st Century Act that would create a federal regulatory framework for cryptocurrencies in the United States. The Committee referred the bill to the full House of Representatives by a voice vote.
The Senate last week passed the 2024 National Defense Authorization Act (NDAA), which included a provision that tightens oversight over financial institutions engaged in crypto trading and targets mixers and anonymity-enhancing crypto assets.
The Helsinki Commission in a letter on Friday asked for Magnitsky Act sanctions to be imposed on three Swiss officials involved in the release of frozen financial assets connected to Russian officials who were allegedly involved in the murder of Russian lawyer Sergey Magnitsky. Members of the Swiss Federal Police and Swiss Federal Prosecutor’s Office—Vinzenz Schnell, Patrick Lamon, and Michael Lauber—are accused of obstructing the investigation into Magnitsky’s murder in exchange for vacations funded by Russian oligarchs.
The UAE will create judicial bodies specifically to prosecute money laundering and other financial crimes more than a year after being included on the FATF grey list. The UAE hopes to enhance the confidence of international investors in the Emirates’ business environment.
Senator Elizabeth Warren has reintroduced the Digital Asset AML Act—this time with the backing of Wall Street banks. The proposal aims to mitigate the national security risks posed by cryptocurrencies and will impose Bank Secrecy Act (BSA) obligations on crypto wallet providers, miners, and validators, requiring them to meet know-your-customer requirements.
The Senate last week approved the Foreign Extortion Prevention Act (FEPA) as part of the Senate’s version of the annual NDAA. FEPA would criminalize demands for or acceptance of bribes by foreign officials from US persons or companies in connection with obtaining or retaining business. The text of the amendment is here.
The world’s largest accounting firms are fighting to block new rules from the Public Company Accounting Oversight Board (PCAOB) that would force them to take more responsibility for rooting out fraud at the companies they audit and are encouraging their clients to oppose the plan. The Center for Audit Quality, a group representing audit firms led by the Big Four of Deloitte, PwC, EY and KPMG, is asking corporate directors to sign on to a letter attacking the plan.
Kenya has become the first country to suspend the operations of identity crypto protocol, Worldcoin. The Interior Ministry is concerned about collection of biometric data (particularly of the eye). Worldcoin is attempting to create a global identification mechanism based on iris scans, which can be used to prove the authenticity of individuals.
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Fraud and Abuse
The United States this week began restricting access to its visa-waiver program for Hungarians amid concerns that foreign nationals have used fraudulently obtained passports to enter the country. A DHS document from 2018 showed that about 700 non-Hungarians had fraudulently obtained passports and assumed fake identities, and at least 65 entered the United States through the visa-waiver program. However, we assess that the restriction is also a way of putting pressure on Hungary for Prime Minister Orban’s continued support for Russian president Putin.
An international manhunt is underway for a suspect charged with stealing more than $30 million in donations meant for Christian outreach in China. Georgia resident Jason Shenk has been charged with multiple counts of wire fraud, international concealment money laundering, and other financial crimes. Instead of using the $30 million in donations he collected to produce and distribute religious literature in China, he gambled, bought shares in a privately held nuclear energy company, bought at least 16 life insurance policies in various individuals’ names, diamonds, gold, foreign stocks, real estate in Chile, and gave money to his family farm, directing donations to numerous shell companies.
Australian intelligence suspects Tom Doshi, a leading Albanian businessman and politician with ties to the prime minister, of leading a criminal group in the country that perpetrates immigration fraud, drug trafficking, and money laundering. The organization allegedly abused Australia’s immigration system to build an Albanian organized crime structure across South Australia.
Romanian thieves are using information illegally copied from government-issued electronic benefit transfer (EBT) cards to steal tens of millions of dollars, depriving intended recipients of rent, groceries, and funds for other bills. In some cases, thieves used stolen food benefits to buy hundreds of thousands of dollars’ worth of energy drinks that police suspect they resell on the black market. Los Angeles County has been among the hardest-hit communities.
Colombian President Gustavo Petro's son and his ex-wife have been indicted for money laundering. Nicolás Petro Burgos—a provincial deputy—was arrested in Barranquilla as part of an investigation following an interview in which his ex-wife, Daysuris Vásquez, told a magazine that a drug trafficker had contributed a large sum of money to President Petro's electoral campaign and that she kept that money. Petro Burgos pleaded not guilty, and although the president was apparently not aware of his son’s activities, the arrest could hamper his administration’s agenda.
Abraham Adeniyi on Friday was sentenced to three years in prison for operating a money laundering scheme that cleaned nearly $8 million in wire-fraud proceeds. Adeniyi provided accomplices with fraudulent identification information to open bank accounts and then transferred the proceeds of fraud into those accounts. Ultimately, after moving through multiple bank accounts, the funds were withdrawn as cash, transmitted overseas, or used for Adeniyi’s personal expenses. The speed with which the transfers moved between accounts prevented the banks and victims from recovering the funds.
A New Jersey man on Friday pleaded guilty to participating in an international scheme to sell pirated business telephone system software licenses, resulting in the sale of software licenses with a retail value of more than $88 million. Jason M. Hines (aka Joe Brown, aka Chad Johnson, aka Justin Albaum), conspired with co-defendants to commit wire fraud involving generating and then selling unauthorized Avaya Direct International (ADI) software licenses, which were used to unlock features of a popular telephone system used by thousands of companies around the globe.
A New Jersey tax preparer this week was arrested for filing more than 1,000 false tax forms claiming COVID-related employment tax credits for a total of more than $124 million in fraud. Haynes submitted forms to the IRS on behalf of his clients’ businesses without informing those clients, grossly overstating the number of employees and amount of paid wages. Haynes submitted similarly false forms for three of his own companies.
A federal judge this week ruled that the SEC fraud case against Terraform Labs and its founder, Do Kwon, can move forward. The SEC asserts that Terraform Labs and Kwon misrepresented the stability of its tokens to investors and falsely claimed that the company’s crypto tokens would appreciate in value.
The SEC has charged online entrepreneur Richard Heart with illegally raising more than $1 billion in three unregistered cryptocurrency offerings and defrauding investors out of $12.1 million. The SEC says that Heart (aka Richard Schueler) touted his Hex token, PulseX asset trading platform, and PulseChain asset network on YouTube and other websites and used the proceeds to enrich himself, including buying the world's largest black diamond.
Wells Fargo has once again been accused of a fake accounts scam in a new lawsuit alleging racketeering and identity fraud. The lawsuit alleges that Wells Fargo, working with Sacramento credit reporting agency, Early Warning Services—also named as a defendant—combined fake and real personal-identification information to open unauthorized accounts.
How can AI be used to spot and combat fraud more efficiently? AI models can flag suspicious activity based on all previous transactions, recognize patterns, and increase detection accuracy. Other types of AI models can flag transaction anomalies regardless of prior activity, enabling immediate fraud detection. Businesses can also adapt and learn from new fraud patterns and trends, improving detection over time.
Binance has reportedly conducted $90 billion worth of business in China in a single month, even though crypto trading is illegal there. The exchange’s investigations team also works closely with Chinese law enforcement to detect potential criminal activity among the more than 900,000 active users in the country. Binance denies the reports.
Binance CEO CZ is warning about a new scam in which fake digital wallet addresses are used to defraud users. The scammers generate addresses with the same starting and ending characters as the victim’s original address and then send the victim dust transactions that will reflect in their transaction history. If the victim copies and pastes an address from one of the dust transactions, funds will be sent to the scammer instead of the victim’s address.
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