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Insights: Week of August 14, 2023
Sanctions Compliance, Fraud, AML, and other Illicit Finance News
The US government says that more than 4,600 shipments, valued at $1.64 billion, have been stopped as of this month for inspection under the Uyghur Forced Labor Prevention Act (UFLPA). Implementation of the act is challenging and sometimes dangerous for firms, because Chinese authorities have raided companies in China that conduct due diligence research to determine whether their supply chains are linked to forced labor or sanctioned entities.
Due diligence research is also difficult in China because auditors and researchers have reportedly been harassed and detained, or provided translators sometimes intentionally misinterpret information, according to a US government Xinjiang advisory from 2021.
In addition, UFLPA implementation is also difficult stateside, because imports that are linked to sanctioned entities can enter the United States undetected either by passing through third countries or in packages valued below the minimum reporting and inspection thresholds.
FiveBy last year published an advisory, noting that a thorough examination of supply chains, transit countries, and risky goods, such as apparel, footwear, textile, electronics, solar panels, and automotive parts from entities with ties to China, Malaysia, and Vietnam, is necessary to protect profits and avoid having goods confiscated.
To speak with our expert analysts, who are fluent in Chinese and informed about the business environment in China, about the challenging research and cultural, geographic, and linguistic knowledge required for compliance with the UFLPA, click below.
Compliance and Due Diligence
We judge that Alabuga Polytechnic University could be included either on the SDN list for using underage labor, the Bureau of Industry and Security (BIS) Entity List for assembling Iranian attack drones, or both. Alabuga is a polytechnic school in Russia’s Tatarstan that exploits its students by promising them good pay and learning opportunities, but instead, forces them to work long shifts with inadequate sleep and little food.
Short seller Hindenburg Research this week published research about Kazakhstan-based retail brokerage, Freedom Holding Corp., alleging that the company facilitates Russian sanctions evasion, fabricates revenues through related party transactions, and manipulates its own shares through two small brokerages. Hindenburg also says that Freedom is the subject of an undisclosed SEC investigation. The company’s 2022 annual statement, filed earlier this month, disclosed that Freedom provided brokerage services to sanctioned individuals and entities through March of this year.
OFAC on Friday sanctioned Russian billionaires Mikhail Fridman, German Khan, Alexey Kuzmichev, and Petr Aven, as well as a Russian business association involved in the country’s technology sector. The Russian Association of Employers the Russian Union of Industrialists and Entrepreneurs helps promote import substitution, technology independence, and tech development. It has also been involved in activities related to Russia’s responses to sanctions. The four oligarchs are linked to Alfa Group and to the above business association. The four have been sanctioned by the EU and the UK for more than a year. Fridman last year offered to pay $1 billion into the Ukrainian banking system in exchange for sanctions relief.
OFAC this week sanctioned four entities and one individual under counterterrorism authorities and for links to the North Korean regime. The individual is a Lebanese national linked to Hizballah, and Green Without Borders (aka National Association for the Protect and development of Forest, Environmental, and Animal Wealth) is a Lebanon-based charity that has also been designated for links to the terrorist group. The other three entities are located in Slovakia, Russia, and Kazakhstan and have been designated for links to arms deals between Russia and North Korea.
OFAC this morning added three entities and three individuals to the SDN list pursuant to the Syria Executive Order (13894). Al-Safir Otto is a car dealership located in Turkey that is owned by Mohammad Al-Jasim, one of the militia leaders sanctioned today. Two Syrian militias were also sanctioned – the Suleiman Shah Brigade and the Hamza division, both of which have been involved in extortion, torture, and abductions.
Treasury also sanctioned four individuals involved in the poisoning of opposition leader Alexey Navalny pursuant to the Magnitsky Act. The individuals were either involved in the poisoning or were on the FSB team that tailed Navalny. One of the individuals is an FSB agent who was also involved in the surveillance of jailed Russian opposition politician Vladimir Kara-Murza. All four were already sanctioned under Nonproliferation/WMD authorities.
The State Department this week sanctioned the former head of the Democratic Republic of the Congo’s (DRC) wildlife agency and two ex-colleagues for trafficking in gorillas, chimpanzees, and other protected species. The three have all been deemed ineligible for entry into the United States for involvement in significant corruption.
Switzerland this week implemented new sanctions against Russia, aligning with the EU’s 11th sanctions tranche from June. The latest EU sanctions targeted individuals and groups that support the forced deportation of Ukrainian children to Russia.
Czechia this week sanctioned Russian oligarch Boris Obnosov, the head of Tactical Missiles Corporation (KTRV)—one of Russia’s key missile manufacturers—as well as his daughter and son-in-law, who live in Prague. Alexei Navalny's Anti-Corruption Foundation last month reported that Rostislav Zorikov—the son-in-law—drives luxury cars and owns property worth more than $4.5 million in the city, including a luxury penthouse. The daughter, Olga, received 20 percent of her father’s company at the age of 23. The family joins other prominent Russians on the Czech sanctions list, such as the head of the Russian Orthodox Church, Patriarch Kirill, and oligarch Vladimir Yevtushenko, who has significant assets in the country. Obnosov and KTRV are both sanctioned by OFAC.
A recent survey has revealed that generative AI tools and related technologies have surpassed regulation, cryptocurrency, and blockchain as the top challenge for AML officers, with 46 percent of respondents worried about the increasingly sophisticated money laundering methodologies that use AI. Although AI can potentially streamline AML processes, the technology can also help create fake companies, invoices, records, and financial statements, helping criminals conceal funds more efficiently.
FinCEN and IRS-CI this week issued a notice to financial institutions calling attention to an increase in state and federal tax evasion and workers compensation fraud in the US residential and commercial real estate construction sectors. Payroll tax evasion and workers’ compensation fraud schemes may involve networks of individuals and the use of shell companies and fraudulent documents.
The Senate Homeland Security and Governmental Affairs Committee this week voted to pass a bipartisan bill to crack down on ships disabling and spoofing their transponder equipment to evade export controls and sanctions. The Vessel Tracking for Sanctions Enforcement Act will create a pilot program within the US Customs and Border Protection’s National Targeting Center, to use advanced data analysis to identify ships that are propping up foreign adversaries.
The Caspian sea has become “sanctions-busting central.” The world’s largest lake is bordered by all the countries that are known to be transit points for restricted goods to and from Russia, including Kazakhstan, Turkmenistan, Azerbaijan, Iran, and Russia itself. During the past three months, more than 600 automatic identification system (AIS) gaps—periods of time when a vessel’s AIS stops transmitting, cloaking its location—were detected. Russian and Iranian vessels traveling between the two countries are also conducting dark port calls—calling at ports with their AIS switched off—and some are spoofing their locations. The Vessel Tracking for Sanctions Enforcement Act mentioned above aims to address these issues.
Ukraine and Moldova have joined EU sanctions against Iran. Other candidate countries—North Macedonia, Montenegro, Albania, and Bosnia and Herzegovina, as well as Iceland and Liechtenstein—aligned themselves with EU’s sanctions prohibiting the exports of components used in the development of unmanned aerial systems (UAS) to Iran.
Russian companies are using inflated shipping costs to make more money from oil sales to India, earning more than $1 billion in a single quarter. Although Russia’s oil producers have been selling crude to India for below the $60 per barrel price cap, the freight costs are inflating the costs, resulting in much higher profits for Moscow.
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Fraud and Abuse
Former FBI agent Charles McGonigal this week pleaded guilty to conspiring to violate the International Emergency Economic Powers Act (IEEPA) and money laundering for providing services to sanctioned Russian oligarch Oleg Deripaska. Deripaska paid McGonigal to investigate a rival Russian oligarch, and the payments were concealed by using shell companies as counterparties in the contract that outlined the services to be performed, using a forged signature on that contract, and using the same shell companies to send and receive payments from Deripaska.
A key international money launderer working for the Black Axe organized crime group this week was arrested in Ireland, suspected of recruiting other individuals to be money mules for the organization and managing bank accounts for scams in the United States, Germany, Ireland, and Norway. Black Axe is a Nigerian transnational criminal organization, created in 1977 and responsible for the Obafemi Awolowo University massacre in 1999, among other crimes.
Police in Singapore have arrested at least 10 foreign nationals on suspicion of money laundering, confiscating assets worth roughly $734 million, including cryptocurrencies. Most of the individuals had Chinese passports, but also Cambodian, Cypriot, and Vanuatu, and are accused of involvement in forgery, money laundering, and resisting arrest. Police seized 94 properties, bundles of cash, jewelry, gold bars, and 50 vehicles, as well as 11 documents with information on virtual assets.
Lebanon’s interim central bank governor this week froze the accounts of the bank's former head and his close relatives and associates after the United States, the UK, and Canada sanctioned them for corruption last week.
A Malaysian court this week threw out charges of abuse of power against former Prime Minister Muhyiddin Yassin, describing them as "vague, flawed and unfounded.” Muhyiddin, who led Malaysia for 17 months between 2020 and 2021, in March was charged with four counts of abuse of power. He is also charged with two counts of money laundering in the same case for taking more than $50 million in bribes—allegations he denies.
AI-powered technologies can detect problems such as IP fraud and wash trading (market manipulation in which an entity simultaneously sells and buys the same financial instruments, creating a false impression of market activity). AI may be used for deep fakes and misinformation, but the same technology can also provide the means to counteract IP theft.
Cambodian authorities this week arrested seven Japanese nationals who were allegedly involved in fraud. The seven men were using a hotel in Cambodia as their hub, and had no passports, indicating that they may have been forced to engage in fraud operations by a larger criminal organization.
John Clifton Davies, a convicted fraudster who scammed dozens of technology startups out of more than $30 million through phony investment schemes, has established two new scam companies: Equity-Invest[.]ch, and Diligere[.]co.uk. Davies in 2015 was convicted on multiple counts of fraud in the UK and was accused of murdering his third wife on their honeymoon in India. He appears to still be active, has changed his last name to Bernard, remarried, and moved to his wife’s hometown in Ukraine.
Scammers are engaging in new fraud in which they find a recent obituary, call the family of the deceased pretending to be working for the funeral home, and demand immediate payment for random fees, insurance, etc. The scammers exploit family members’ grief when they are at their most vulnerable. The FTC recommends resisting pressure to make an immediate payment (there’s no such thing as a funeral emergency) and calling the funeral home directly to confirm.
Brushing scams are on the rise. These scams involve sending unsolicited products to unwitting recipients to generate fake positive reviews and inflate a seller’s reputation on eCommerce platforms. These scams also expose the victim’s address, telephone number, and other information to misuse. Recent legislation—the INFORM Act—targets the sale of counterfeit goods on eCommerce platforms, mandating that third-party sellers that conduct more than 200 sales per year with a cumulative value exceeding $5000 on eCommerce platforms provide their identification and contact details to those platforms.
The CFTC has charged Fundsz and several individuals connected to the organization for involvement in a deceptive cryptocurrency and precious metals trading scheme. The individuals allegedly enticed more than 14,000 investors with implausible returns based on a purported “proprietary algorithm” and by creating false weekly returns.
Crypto exchange Bittrex, that last year paid millions of dollars for sanctions and AML violations, will also pay $24 million in penalties to the SEC, which has accused the platform of offering services to US clients without obtaining the necessary registration. The exchange shut down its US operations and filed for bankruptcy protection shortly after being targeted by the SEC.
A former fundraiser for disgraced congressman George Santos this week was indicted on federal charges that he impersonated a high-ranking congressional aide while soliciting contributions for the New York Republican’s campaign. Sam Miele was charged with four counts of wire fraud and aggravated identity theft. Prosecutors say Miele used a fake name and email address to impersonate a high-ranking congressional aide.
Tequisha Solomon this week was sentenced to 7 1/2 years in prison for defrauding federal pandemic programs. As part of the fraud scheme, Solomon sought unemployment benefits from numerous states in which she did not live, getting more than $7 million in fraudulent funds. She also helped others get pandemic-related funds for thousands in fees and submitted more than 200 fraudulent applications to that end on behalf of others.
One of the UK’s largest banks, TSB, says that Instagram is ignoring its calls to shut down profiles run by scammers. A TSB fraud official in April reported to Instagram 10 advertisements believed to be fraudulent on the site, but after a month eight of the profiles remained on the platform and continued to promote fraud.
FiveBy provides a weekly roundup of relevant news and insights to help readers keep abreast of regulatory developments and reputational risks. We hope you find these insights useful. Please feel free to contact us at firstname.lastname@example.org if you have any questions or suggestions.
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