On June 12, 2018, FinCEN issued an “Advisory on Human Rights Abuses Enabled by Corrupt Senior Foreign Political Figures and their Financial Facilitators” to highlight the connection between corrupt senior foreign political figures and their enabling of human rights abuses.  The Advisory provides examples of potential red flags to aid financial institutions in identifying the means by which corrupt political figures and their facilitators may move and hide proceeds from their corrupt activities – activities which, directly or indirectly, contribute to human rights abuses and other illegal activity.

The Financial Action Task Force (FATF) issued Recommendation 12 in June 2013 to address the risks posed by politically exposed persons (PEPs), and that Recommendation has been implemented through FinCEN rules and guidance.  Thus, U.S. banks already are expected to have in place risk-based policies, procedures and processes regarding PEPs, including conducting enhanced due diligence.  Nonetheless, FinCEN issued this Advisory to “further assist” U.S. financial institutions’ efforts to detect and report foreign PEP facilitators’ use of the U.S. financial system to “obscure and launder the illicit proceeds of high-level political corruption.”

The Advisory highlights the following three key “typologies” financial facilitators of PEPs often use: (i) the misappropriation of state assets (such as through offshore leasing companies to sell oil – a topic on which we repeatedly have blogged, including here and here); (ii) the use of shell companies to conceal ownership and disguise the true source of illegal proceeds (again, a topic on which we repeatedly have blogged, including here); and (iii) the exploitation of the real estate sector to launder “ill-gotten gains” (a topic on which we repeatedly have blogged, including here and here).  More importantly, the Advisory identifies the following red flags associated with corrupt foreign PEPs and their facilitators:

  1. Use of third parties in situations where that is unusual;
  2. Use of third parties to mask the identity of a PEP;
  3. Use of a PEP’s family member or colleague as a legal owner;
  4. Use of shell companies and legal arrangements to mask ownership, industries, or countries related to the transaction;
  5. The PEP or facilitator provides information that appears to be untrue;
  6. The PEP or facilitator attempts engage a financial institution or a designated non-financial business or profession (DNFBP), such as a real estate agent, dealer in precious metals, attorney, accountant or company formation agent, that would normally not provide services to a PEP;
  7. The PEP or facilitator repeatedly moves money to and from countries other than his or her own;
  8. The PEP or facilitator has access to state funds;
  9. The PEP or facilitator has control over the financial institution or DNFBP that is a party or a correspondent in a transaction;
  10. The transaction involves government contracts that do not appear to make sense, such as “payments for construction projects directed to textile merchants;”
  11. Transactions involving government contracts that are coming from or going to shell companies;
  12. Suspicious documentation, such as invoices with inflated prices or that lack pricing information;
  13. Payments for government contracts that originate from non-governmental entities; and
  14. “Transactions involving property or assets expropriated or otherwise taken over by corrupt regimes, including individual senior foreign officials or their cronies.”

Of course, one red flag does not necessarily indicate suspicious activity. It should be viewed in the context of other facts, including the customer’s transactional history and whether other red flags are present. If suspicious activity is detected, a financial institution must file a SAR. FinCEN previously issued Guidance (in 2008) on filing SARs regarding the proceeds of foreign corruption. And a related SAR Activity Review discusses what transactions may involve the proceeds of corruption.

If a SAR is filed, FinCEN expects that financial institutions will select SAR filed 35(l) (Suspected Public/Private Corruption (Foreign)) and reference this Advisory by including the key term: “Financial Facilitator FIN-2018-A003” in the SAR narrative and SAR field 35(z) (Other Suspicious Activity – Other) to indicate a connection between the suspicious activity being reported and the persons and activities highlighted in this Advisory.

Although some of the red flags provided in FinCEN’s latest Advisory require an analysis no different than what a financial institution already conducts for activity outside the political realm (e.g., the use of shell companies), many of the red flags relate to information that is at least somewhat unique to PEPs. For example, to identify all of the red flags above, financial institutions would need an understanding of:

  • The identity of the PEP’s senior officials, family members, close associates and “cronies”;
  • What is (and is not) an “official government entity”;
  • The level of authority the PEP has over state assets, and his or her ability to access those assets; and
  • What property and assets have been expropriated by the PEP or those close to him or her.

The expectation that the financial institution understands all of these complicated issues raises the stakes for any entity involved in transactions with a PEP.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

Beth Moskow-Schnoll

moskowb@ballardspahr.com | 302.252.4447 | view full bio

Beth is the Managing Partner of the firm’s Delaware office. She is a litigator focused on white collar crime, regulatory enforcement and compliance, and complex civil litigation, with an emphasis on banking and other financial services…

moskowb@ballardspahr.com | 302.252.4447 | view full bio

Beth is the Managing Partner of the firm’s Delaware office. She is a litigator focused on white collar crime, regulatory enforcement and compliance, and complex civil litigation, with an emphasis on banking and other financial services litigation. She represents major financial institutions, bringing actions against fraudulent debt relief companies, and defending against consumer financial services lawsuits.

Before joining Ballard Spahr, Beth was a federal prosecutor with the U.S. Attorney’s Office for the District of Delaware for more than a decade. She investigated and prosecuted financial fraud, including money laundering, bank and credit card fraud, asset forfeiture, and tax offenses.

Evan W. Krick

kricke@ballardspahr.com | 302.252.4463 | view full bio

Evan focuses on white collar criminal defense and complex civil litigation, with an emphasis on the banking and health care industries. He has defended clients in federal and state investigations. Evan represented a bank facing money…

kricke@ballardspahr.com | 302.252.4463 | view full bio

Evan focuses on white collar criminal defense and complex civil litigation, with an emphasis on the banking and health care industries. He has defended clients in federal and state investigations. Evan represented a bank facing money laundering and BSA allegations, a maker of pharmaceutical products investigated for “off-label” marketing, and an individual charged with insider trading.

Before joining Ballard Spahr, Evan was an attorney at the Defenders Association of Philadelphia, where he represented indigent criminal defendants in both felony preliminary hearings and misdemeanor trials.