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Insights: Week of September 4, 2023
Sanctions Compliance, Fraud, AML, and other Illicit Finance News
The use of the art market in money laundering and sanctions evasion is not a new methodology. The US Treasury Department last year released a study on the use of the high-value art market in illicit finance, highlighting several qualities that make the high-value art market attractive to malign actors, including the high dollar value of transactions, transportability of works of art, a culture of privacy that is traditional in the art market, and the use of intermediaries such as shell companies to purchase art.
In a report last week about the use of the art market in money laundering and terrorist financing, the New York Times flagged Lebanese art collector and financier for designated foreign terrorist organization Hizballah, Nazem Ahmad, as an example of how illicit actors exploit the art world to obscure financial crimes. Ahmad in 2019 was designated for providing material support to Hizballah, and the State Department is offering up to $10 million for information about Ahmad or his financial network.
Ahmad earlier this year was accused of money laundering and violating terrorism-related sanctions for the benefit of Hizballah. Art galleries and artists—some unwittingly—helped Ahmad move assets, indicating that malign actors do use art to launder funds and evade sanctions.
Ukraine has created a searchable database that lists paintings and sculptures thought to have been bought and sold in recent years by Russian oligarchs accused by the west and Kyiv of aiding and abetting Vladimir Putin’s war in Ukraine.
A Senate report in 2020 detailed how companies linked to Russian oligarchs, the Rotenberg brothers, exploited the opaqueness of the art world to buy high-value art, circumventing US sanctions.
Federal agents in 2021 discovered that drug dealer, Ronald Belciano, used works of art to launder some of his illicit proceeds.
Understanding methodologies illicit actors use to launder criminal assets using high-value art works is critical to protecting art galleries, museums, financial institutions and other vulnerable entities. Complex ownership structures that include shell and front companies can be used to pay for art works and accept payments on behalf of sanctioned individuals or criminal actors. The subjective nature of high-value art means that prices can be manipulated to allow for the laundering of illicit funds, and art can be used as a means of exchange.
Expert analysts can help identify red flags that could result in regulatory trouble for unwitting firms and financial institutions. To engage expert help in ensuring compliance with US sanctions and anti-money laundering (AML) laws, please click below.
Compliance and Due Diligence
Some members of Congress are calling on additional export restrictions to China’s SMIC after Huawei Technologies introduced the Mate 60 Pro powered by an advanced chip believed to have made by SMIC. The release resulted in speculation about how SMIC, which is headquartered in Shanghai, would have the ability to manufacture the advanced chip without US technology, which has been restricted by the Commerce Department.
OFAC this week sanctioned Abdelrahim Hamdan Dagalo for his leadership of the Rapid Support Forces (RSF), an entity whose members have engaged in acts of violence and human rights abuses, including the massacre of civilians.
The United States and the UK this week sanctioned members of the Russia-based Trickbot cyber-criminal organization. The DOJ has concurrently unsealed indictments against nine individuals linked to Trickbot and Conti ransomware, including seven of the individuals OFAC designated yesterday. The targets, according to Treasury, are key actors involved in management and procurement for the Trickbot group, which—of course—has ties to the Russian intelligence services and has targeted US government and critical infrastructure.
Greek shipping company, Empire Navigation, has pleaded guilty to smuggling sanctioned Iranian crude oil and agreed to pay a $2.4 million fine. The plea agreement, which also includes three years’ probation for the company, marks the first public acknowledgement by the United States that it seized one million barrels of oil from the tanker Suez Rajan.
China is devising strategies to circumvent US restrictions in both semiconductor and electric vehicle (EV) battery sectors by establishing joint ventures, relocating production bases, and engaging in technological collaborations. Because batteries produced in North America or countries with Free Trade Agreements qualify for subsidies under the Inflation Reduction Act when assembled in American EVs, Chinese battery and material companies are seeking production bases in Korea through joint ventures with Korean firms.
The EU’s highest court this week ruled that sanctions against Alexander Shulgin, the former CEO of Russian e-commerce platform Ozon, should be rescinded. Shulgin, was sanctioned for participating in a meeting of business leaders called by Vladimir Putin on the first day of Russia’s invasion of Ukraine, argued that the participation in the meeting alone was not sufficient to designate him as a Putin insider. Sanctions against Shulgin will not be lifted immediately and the European Council could appeal or impose new sanctions as early as next week, when the measures are up for renewal.
The EU General Court this week denied sanctioned Russian oligarchs Gennady Timchenko and Dmitry Pumpyansky’s requests to revoke EU sanctions against them and their families. Lawyers for Timchenko and his wife attacked the EU’s designation of Gennady as a confidant of Putin as lacking evidence (multiple photos and reports suggest otherwise). Pumpyansky in a court hearing in April described himself, his wife, and son as “collateral damage” in the bloc’s foreign policy efforts against Putin.
The IRS and Treasury have released a draft proposal of crypto regulations, detailing reporting requirements for digital asset brokers, requiring them, trading platforms, payment processors, and certain hosted wallet providers, to report gross proceeds for all sales or exchanges of digital assets starting on January 1, 2025.
Sanctioned Russian oligarchs continue to enjoy lavish lifestyles in London, benefitting from their sanctioned property. The UK government grants pro-Kremlin oligarchs monthly allowances to maintain their posh lifestyles. The New York Times reported that by July, the UK Treasury had granted monthly allowances to 82 sanctioned oligarchs, with many applications still pending.
A Helsinki, Finland-registered company is suspected of violating EU sanctions legislation, possibly shipping restricted goods, including electronics, to Russia between 2016 and 2020. A US-designated individual plays a lead role in the company’s activities to ship dual-use and other restricted goods to Russia. Individuals linked to Russia appear to be increasingly engaging in transshipments of restricted goods to Russia. Recently, a Russian-born man in Sweden was arrested near Stockholm for transferring western technology with potential military use to Russia. Around the same time, a Russian-German national, Arthur Petrov, was arrested for participating in an illicit network that procure US-sourced microelectronics subject to export controls on behalf of a Russia-based supplier of critical electronics components for manufacturers supplying weaponry and other equipment to the Russian military.
The UK will be declaring the Wagner group a terrorist organization. Their property will be seized, and support for the organization will be punishable by up to 14 years in prison.
Russia plans to publish a list of businesses from “unfriendly countries” whose assets will be at risk of expropriation. Yale School of Management lists more than 200 companies that are still operating as normal in Russia. Barclays says that foreign-owned commodity groups will be most at risk, with technology companies less vulnerable because of their operational complexity.
The UK’s Financial Conduct Authority has launched a formal review into how banks conduct mandatory extra checks on politically exposed persons (PEPs) and their families. Although the FCA cannot change the law which requires extra due diligence checks on PEPs, its review will consider whether banks are being extra heavy-handed when closing accounts.
Ukraine’s security services say sanctioned Russian oligarch Mikhail Fridman has been engaged in “criminal activity” for allegedly helping Russia’s war against Ukraine. Fridman’s insurance company allegedly helped insure both military equipment and Russian troops, while his telecommunications firm cooperated with Russia’s FSB to provide services in illegally occupied Ukrainian territories.
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Fraud and Abuse
Criminal organizations in recent years have been using fake Spotify music service streams to launder money. These networks have been using criminal proceeds to pay for false Spotify streams of songs published by artists linked to the gangs and then receive payments from the platform for the high number of streams.
Hong Kong police have arrested 29 suspects who were selling their bank accounts to crime syndicates that used those accounts to collect and launder fraud proceeds. The bank accounts are linked to 23 online scams and five money-laundering cases that totaled nearly $6 million. The individuals were paid a few hundred to several thousand dollars to sell their bank accounts. Hong Kong police, in a separate case, last week arrested 19 members of a money laundering syndicate who moved more than $40 million gained from scams.
Sanctioned Ukrainian oligarch Ihor Kolomoisky has been arrested in Ukraine and charged with fraud and money laundering amid Kyiv’s crackdown on corruption. Earlier this year, security officials searched Kolomoisky’s home in connection with a separate investigation into embezzlement and tax evasion at the country’s two largest oil companies, partially owned by him. He has denied any wrongdoing in relation to the investigation.
The Commodity Futures Trading Commission (CFTC) has sued Murtuza Kazmi and his entities, collectively known as “My Forex Funds,” alleging that the defendants fraudulently marketed their services to customers, promising them the opportunity to become “professional traders” and share in trading profits. The CFTC asserts that more than 135,000 customers collectively paid more $310 million in fees. Kazmi purportedly used these proceeds to buy luxury properties and vehicles, and transfer tens of millions of dollars to his personal accounts.
Singapore police seized $92 million from a suspected money launderer’s accounts with Bank Julius Baer and Credit Suisse AG’s local unit as the investigation into the billion-dollar money-laundering scandal develops. Some of the funds were held by Turkish national Vang Shuiming in Credit Suisse Singapore. He held the other funds in his Julius Baer account. A judge this week denied a bail request from Vang’s lawyer .
Domain names ending in “.US”—some of the most prevalent in phishing scams—are overseen by the US government, which is frequently the target of phishing domains ending in “.us.” The National Telecommunications and Information Administration (NTIA), an executive branch agency of the Commerce Department oversees the domain, which is supposed to be only available to US citizens or those with a physical presence in the United States. However, NTIA contracts out the management of the .US domain to GoDaddy, which just requests .us applicants to provide an affirmative response confirming that they meet the requirements.
A fintech owner in London is facing allegations that he helped drug kingpin Sergio Roberto De Carvalho launder hundreds of millions of euros. Authorities in Belgium are seeking the extradition of Caio Marchesani from the UK as part of their effort to dismantle a transnational criminal organization. Marchesani owns Trans-Fast Remittance, a payments business regulated by the Financial Conduct Authority. He was arrested in May.
OpenAI and Microsoft are being sued over their alleged use of web scraping techniques to obtain supposedly private data for the use of training ChatGPT and other associated artificial intelligence (AI) models. Two unnamed engineers claim the companies engaged in “unlawful and harmful conduct in developing, marketing, and operating their AI products, using PII from “hundreds of millions of internet users, including children of all ages, without their informed consent or knowledge.”
The Justice Department has frozen the assets of former Celsius Network CEO, Alex Mashinsky, who is facing criminal charges related to cryptocurrency fraud. Mashinsky's bank accounts in various financial institutions, including Goldman Sachs, Merrill Lynch, First Republic Securities, SoFi Bank, and SoFi Securities, have been frozen, as well as a property located in Texas which Mashinsky owns with his wife. Mashinsky in July posted a $40 million bond and pleaded not guilty to the criminal charges.
An international human smuggler has been extradited from Mexico to the United States. Ofelia Hernandez-Salas facilitated the travel of large numbers of migrants into the United States from countries such as Bangladesh, Yemen, Pakistan, Eritrea, India, the United Arab Emirates, Uzbekistan, Russia, Egypt, as well as numerous countries in Latin America. Hernandez-Salas and her co-conspirator allegedly charged the migrants as much as tens of thousands of dollars to make the journey and directed them where to unlawfully cross the border into the United States, sometimes providing ladders for them to climb over the border fence. OFAC sanctioned her network in June.
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