Insights: Week of August 21, 2023
Insights: Week of August 21, 2023
Sanctions Compliance, Fraud, AML, and other Illicit Finance News
Despite the rapid increase in western sanctions imposed on Russia since February 2022, there are still many loopholes in the system decreasing sanctions effectiveness, which pose challenges to firms and could soon be targeted by more stringent compliance regulations, which FiveBy reported about in an alert earlier this year.
Among these loopholes are banking channels that remain open to pay for energy imports. Transactions ostensibly for energy imports can be difficult to police and can mask purchases for banned items such as military equipment. Humanitarian companies, such as for food and pharmaceuticals also face similar challenges of their exports being used to mask illegal goods. The diamond industry is not sanctioned at all, filling Kremlin pockets. Finally, third countries are not sufficiently covered by the current sanctions regime, enabling Russia to route money and goods through countries such as Turkey, Kazakhstan, and India.
Companies in energy and humanitarian sectors, as well as those transacting with risky third countries could see stricter requirements in the coming months as western regulators aim to tighten the existing sanctions regime.
To speak with our expert analysts, who are fluent in Russian and are informed about the risks of transacting with Russian businesses and identifying deals in third countries that could be used for evasion, click below.
Compliance and Due Diligence
OFAC this week sanctioned 13 entities for supporting forced deportation of Ukrainian children. Kyiv estimates that Russian authorities have forcibly deported more than 19,500 children from Ukraine since February 2022. The kidnapped children are placed in "patriotic re-education programmes" and prohibited from returning to their families. Russia kidnaps the children from families they have deemed as threats to Russia’s occupation as well as from state institutions.
OFAC this week also expanded Burma sanctions, designating jet fuel suppliers in Burma. The agency also issued a determination that allows sanctions to be imposed on any foreign individual or entity that operates in the jet fuel sector of the Burmese economy.
Russia is increasingly using third countries to route aircraft parts. Russian airlines imported $1.2 billion in spare parts from May 2022 and June 2023, despite Western sanctions. The value of the imports is likely higher as the number only reflects direct shipments to Russian airlines and their maintenance units, and not third-party companies. Suppliers were located in China, Turkey, the United Arab Emirates, Moldova, Tajikistan and Kyrgyzstan, and some spare parts were manufactured by US firm Northrop Grumman.
In the past eighteen months, Russians have established more than 2,000 new companies in Turkey. The companies mainly operate in the food, energy, and real estate industries, and analysts predict further investment in construction and tourism. The report further enforces Turkey’s reputation as a Russian sanctions evasion hub.
Despite Western sanctions, EU and NATO countries are re-exporting dual-use goods to Russia for use in weapons. Third-party companies in Germany, Lithuania, the Netherlands, Estonia, and Finland have re-exported Texas Instruments and Analog Devices microchips to Russia. The microchips were integrated into Russian missiles and satellite communications used in the Kremlin’s war on Ukraine. Russia’s semiconductor imports have doubled since the war started, showing major gaps in Western export controls.
German authorities arrested a former German executive for exporting weapons manufacturing parts to Russian arms producer. The man, named only as Ulli S, is suspected of signing three contracts with a Russian arms manufacturer in 2015 to deliver six machine tools that were used by the Russian company in the production of sniper rifles. The products were delivered using third-party companies in Switzerland and Lithuania, building a case for more regulatory enforcement of third-party due diligence.
China has provided Russia with tens of thousands of military-related shipments supporting its attack on Ukraine. These shipments include helicopters, drones, optical sights, and key defense industry metals to Russian defense manufacturers. Chinese toy wholesaler Shantou Honghu Plastics sent 1,000 drones to Russian entity Samson two months before the war’s start. Optical sights came from Chinese company Yiwu Wojie Optics Instrument disguised as hunting equipment. Without due diligence including analysis of company contracts, third-party associates, and activities, Western firms could unknowingly engage with risky China entities supporting Russia’s military.
China is expanding its weapon sales in Africa, which it could use to prop up authoritarian regimes and fuel conflicts. Chinese weapons supplier Norinco opened a new office in Senegal in its latest expansion, and has expanded sales in countries which have had recent military coups, including Niger. We could see more US enforcement actions on China’s weapons sector as it expands and props up conflicts and regimes condemned by the United States.
Bureau of Industry and Security (BIS) has increased export controls on nuclear power exports to China. The US government said no specific occurrence prompted the tightening of export controls, rather that it is part of a larger national security strategy to decrease China’s ability to stockpile nuclear warheads. Some analysts are saying that the tightening indicates that the US government no longer sees China’s nuclear power plants as used for peaceful, energy production purposes.
China is aiming to capitalize on US sanctions by lending to developing countries with economic ties to heavily sanctioned jurisdictions, such as Russia. In one instance, China lent its renminbi to Bangladesh, which needed to make a payment to Russia for its nuclear power plant. Analysts report that the dollar is losing its international reserve status much faster than generally accepted, but note that Beijing has years to go before breaking the US dollar’s dominance.
China has been cracking down on Western due diligence firm the Mintz Group, imposing $1.5 million in fines for the company’s “foreign-related investigations.” The company conducts sanctions due diligence and has published reports on complying with forced labor regulations in Xinjiang. In March, police raided Mintz’s Beijing office and detained five of its Chinese national employees.
The United States is scrutinizing solar companies that show signs of evading tariffs on Chinese solar panel equipment. Last week, the US Commerce Department announced that it would impose import duties on solar panel manufacturers who send their products to Southeast Asia for completion after it found that manufacturers were circumventing US tariffs on Chinese products by routing products through Cambodia, Malaysia, Thailand, and Vietnam.
Germany’s government is considering tightening regulations on Chinese investment into semiconductor and AI technology industries, similar to regulations already implemented in the United States. Germany is China’s largest European trading partner and Europe’s largest economy.
The Biden administration is reportedly discussing sanctions relief with Venezuela, if the country agrees to hold a free election in 2024. The administration has not confirmed the talks, but has said such sanctions relief would be a possibility, but that the current regime of Venezuela’s President Nicolas Maduro is not currently taking the necessary steps to hold a free election.
Despite western sanctions, cryptocurrency exchange Binance is accepting funds from at least five sanctioned Russian lenders. Russian users can use funds from sanctioned entities and directly exchange them on the Binance platform for digital currencies and stablecoins pegged to the US dollar. In some cases, users get funds to Binance via Belize-registered firm Advanced Cash (Advcash). Advcash and Binance face a high risk of enforcement for these activities, which could be seen as providing material assistance to those institutions.
Fraud and Abuse
UK crypto firms have just days to comply with new anti-money laundering requirements, including a travel rule required by FATF. However, the travel rule is inconsistently implemented between jurisdictions, making compliance difficult for crypto firms to navigate, particularly with unique crypto features such as self-custodied wallets that are not hosted by any regulated provider. While thirty-five other jurisdictions have passed similar laws, the laws have not taken effect, including in the neighboring EU. These gaps enable criminal behavior and have led UK lobby groups to call for a standardized approach to the travel rule across jurisdictions.
The FBI has identified the bitcoin addresses holding $40 million in bitcoin stolen by North Korean hacking groups Lazarus Group and APT38. The agency issued a warning to private sector entities to examine blockchain data associated with the identified addresses.
Tornado Cash founders have been charged with money laundering and sanctions violations. Roman Storm, of Auburn, Washington, and Roman Semenov, of Russia, were charged with operating a $1 billion scheme enabling other criminals to launder and conceal funds using cryptocurrency, including North Korean cybercrime group the Lazarus Group.
Spanish authorities are dismantling an organized crime scheme dubbed “Rip Deal,” a scam in which fraudsters trick victims into exchanging genuine currency for counterfeit. Eight have been arrested so far, with at least $272,000 stolen from victims so far and $6.5 million in counterfeit currency seized. The “Rip Deal” scam consists of three stages: build trust with the victim, execut of deception, and trick victim into accepting the exchange of genuine currency for counterfeit.
Bulgaria’s government created a new anti-money laundering unit to improve enforcement of gambling controls to improve collaboration and information sharing with other countries. The new group will address the threat of enhanced monitoring from the FATF, which identified deficiencies across several sectors during its money laundering risk assessment in 2020.
A Nigerian ex-minister was charged by the UK government with bribery linked to $53.1 million funds recovered by the US Department of Justice. During her time as petroleum resources minister, UK resident Alison-Madueke accepted more than $100K in bribes, as well as other luxurious gifts and benefits, in exchange for lucrative oil and gas contracts.
India’s government has proposed legislation improve evidence reporting in bribery cases. The proposed changes replace some laws that have been in place for nearly a century, and aim to improve documentation for the court and simplify bribery reporting procedures.
A bribery trial in Indonesia’s Riau province highlights a larger bribery issue in various agricultural industries throughout the country, including palm oil. Lack of transparency in right-to-cultivate permits (HGU permits) drive corrupt officials to extract bribes from companies purchasing permits. Indonesia lost four points on the Corruption Perceptions Index last year, and bribery is a driver of its lower score.
Kazakhstan shut down Russian internet giant Yandex’s local domain, Yandex.kz, citing concerns about citizens’ data privacy. The move precludes Russian FSB access to Yandex data, set to start on September 1, which will give the security service access to Yandex’s data in Kazakhstan at fifteen other countries.
Russian communications giant Rostelecom is asking its employees to test a YouTube filtering service to “softly” block YouTube. The service could possibly pirate approved content from YouTube or be an alternative frontend. The Kremlin has discussed blocking YouTube from the start of the war and it has not fully happened yet, though Gazprom Media has been banned from posting onto its YouTube channel.
A study of disinformation during the July 2023 NATO summit found that Russia-linked actors drove influence operations during the event. One campaign spread fake NATO press releases through web pages mimicking the alliance’s website and through fake social media accounts. Another posted info about the summit’s internal security measures, claiming it was obtained from the Lithuanian government. Despite the campaigns, the operations had limited influence on the online conversation about the summit.
Deepfake imposter scams are behind a new wave of fraud, with AI being used to “turbocharge” fraud. Voice cloning is particularly a problem as voices are easy to reproduce. Social engineering scams using voice cloning include parents getting phone calls with their child’s voice on the other line. Banks are expanding anti-fraud and investigations teams in an effort to combat the fraud. Banks are also working to develop software to detect voice cloning and deepfake videos, but it is a challenge to keep up with criminal methodologies.
The Federal Trade Commission (FTC) charged two scammer gurus with defrauding more than $22 million from their clients. Brothers John and Roman Cresto ran a business claiming to teach clients to use ChatGPT to create customer service scripts. The case is another example of the FTC cracking down on e-commerce consultative scams that target consumers and online businesses.
The Commodity Futures Trading Commission (CFTC) charged a Texas man with fraud and misappropriation. Walter Dunning Larrick, III used his company Cambridge Financial Advisors, LLC to get seventy people to invest over $3.6 million in a fraudulent commodity pool. Larrick then took the funds to offshore bank accounts in Costa Rica and to make Ponzi-like payments to pool participants.
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