ANNUAL FINANCIAL CRIME REVIEW - Aperio Intelligence · PDF fileWelcome to the 2016 Aperio Intelligence annual financial crime review, ... In the case of Prime Minister ... aggravated

FINANCIAL CRIME REVIEW

2016

ANNUAL

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ANNUAL FINANCIAL CRIME REVIEW - 2016

Financial crime issues have continued to dominate headlines throughout 2016. In late April, the International Consortium of Investigative Journalists broke the story around the Panama Papers which immediately received significant worldwide media attention. The leaks shone a light into the affairs of the wealthy and influential in offshore tax havens and spurred action by governments and regulators.

The Panama Papers came hot on the heels of revelations of alleged wrongdoing concerning Monaco-based Unaoil and its clients, which continue to be subject to criminal investigations in multiple jurisdictions. France, previously criticised for its lack of progress in implementing OECD anti-bribery and corruption initiatives, implemented its own version of the UK Bribery Act and US Foreign Corruption Practices Act, known as the Sapin II law. Meanwhile, regulatory authorities in Singapore and Switzerland took action against banks associated with the long-running 1 Malaysia Development Berhad scandal, with further investigations ongoing. 2016 was also notable for the implementation of the Joint Comprehensive Plan of Action (JCPOA) relating to the Iran nuclear deal.

In its immediate aftermath, many companies have sought to establish or re-establish business relationships in Iran, but have met reluctance from banks, concerned by the persisting legal and regulatory risks of ongoing sanctions. Political support for the continuation of sanctions against Russia, and sanctions relief on Iran, is uncertain going into 2017 with changes in the US leadership and pending elections in Europe.

At Aperio Intelligence, we provide corporate intelligence solutions designed to help our clients to manage a wide range of financial crime risks including money laundering, sanctions, bribery and corruption. We support our clients manage integrity and reputation risks, and to maximise the benefit of their investments.

For further information on how we can help you, please contact us at [email protected] or by calling us in London at +44 (0)20 7073 0430 or in Paris at +33 (0)1 46 37 85 14. in the meantime, we wish you every success and prosperity in 2017.

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IN THIS ISSUE:PANAMA PAPERS: THE FALLOUT CONTINUES 04

ALLEGATIONS OF INDUSTRIAL-SCALE CORRUPTION IN THE OIL INDUSTRY: THE UNAOIL CASE 08

1MDB: A TOUGH RESPONSE 10

IRAN SANCTIONS 14

RUSSIA SANCTIONS 16

FROM FOURTH TO FIFTH: DEVELOPMENTS IN THE NEW EU ANTI-MONEY LAUNDERING DIRECTIVE 18

2016: TECHNICAL DEVELOPMENTS ROUND-UP 22

3

Welcome to the 2016 Aperio Intelligence annual financial crime review, which provides a look back at some of the key financial crime developments over the course of the last year.

FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2016

aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2016aperio-intelligence.comFINANCIAL CRIME DIGEST | ANNUAL REVIEW 2016

is not considered a global financial centre, the willingness of the Danish Government to purchase leaked data (with dubious judicial merit) may serve as an indication that other countries will be gaining access to the raw data from the Panama Papers leak. Her Majesty’s Revenue and Customs (HMRC), has thus far refused to comment on whether or not it has acquired the raw data from the Panama Papers leaks.

Investigations into tax evasion as a result of the Panama Papers leak have continued across several jurisdictions. In November the UK Chancellor of the Exchequer Phillip Hammond announced that 22 individuals faced civil and criminal investigations for aggravated tax evasion. Mr Hammond told UK Members of Parliament that 43 “wealthy individuals” were subject to further review, with a view to prosecution. The UK investigations were initiated following the establishment of a cross-agency taskforce in April 2016, comprising the Serious Fraud Office (SFO), the National Crime Agency, Her Majesty’s Revenue and Customs and the Financial Conduct Authority. As a result of the establishment of the taskforce, the SFO is reported to have linked at least 26 companies named in the Panama Papers leaks to major ongoing investigations. The taskforce is reported to have played a key role in the November 2016 arrest of three employees of major banks in connection with a significant

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Panama Papers: the fallout continues

In April 2016 the German daily newspaper Süddeutsche Zeitung, in collaboration with the International Consortium of Investigative Journalists (ICIJ), published data relating to the offshore dealings of the Panama-based corporate services firm Mossack Fonseca.

The data is comprised of 2.6 terabytes of leaked emails and records from Mossack Fonseca, including 11.5 million filings relating to approximately 214,000 offshore legal entities with links to over 200 jurisdictions which were serviced by the company. It is the single largest data leak in history, implicating known criminals, terrorist organisations, high-

profile business figures and heads of state.

Ukrainian President Petro Poroshenko, the so-called “confectionary-king”, features heavily in the Panama Papers, ironically having been responsible for implementing reforms on corporate crime in his country. Members of the Saudi royal family, likewise having engaged in legislative movements to crack-down on corporate malfeasance, are also implicated in the leak. The data leak further implicated then-UK Prime Minister David Cameron over shareholdings he held in trusts set up by his father Ian Cameron. In April, the Panama Papers claimed its first political victim - Sigmundur Davíð Gunnlaugsson – the Icelandic Prime Minister, who was forced to resign over alleged conflicts of interest relating to the restructuring of Icelandic bank bonds, of which he and his wife held an interest through the offshore-registered company Wintris.

The Panama Papers have highlighted the controversy surrounding the role of the

offshore financial sector in handling the affairs of wealthy individuals, particularly when contrasted with the austerity policies pursued by governments of many countries. In the case of Prime Minister Gunnlaugsson, a reformist who campaigned on a platform to curb corporate greed, the Panama Papers reveal that he and his wife were major bondholders of the failed Icelandic banks, negotiating debt relief with the Icelandic Government. Despite not being accused of any actual wrongdoing, the Gunnlaugsson case demonstrated an added element of risk to offshore financial structures outside of heightened risks of money-laundering, terrorist financing, tax evasion, fraud and sanctions evasion – the reputational risk associated with corporate greed in a time of austerity and rising populist movements.

Financial Secrecy

Among the named individuals and companies with accounts serviced by Mossack Fonseca, several convicted felons and subjects of active investigations appeared to be clients of the firm. The data leak revealed how criminal conspiracies involving narcotics trafficking, convicted fraudsters, terrorist organisations and sanctioned entities have used complex networks of anonymous bank accounts, anonymous trust arrangements and offshore-registered shell companies to obscure the ultimate beneficial owners of assets.

According to the European transnational law enforcement agency Europol, 3,469 probable matches were identified against the Panama Papers, which related to ongoing criminal investigations into tax fraud, organised crime groups, narcotics trafficking and various other criminal offences. Europol furthermore stated that 116 probable matches were identified relating to Project Hydra – Europol’s project on Islamic terrorism. This has led to high levels of negative press commentary on the issue

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of financial secrecy, particularly in relation to offshore tax havens, such as the British Virgin Islands.

Aside from the major risks related to money laundering offences vis-à-vis maintaining financial relationships with criminal conspiracies, the public commentary on the Panama Papers scandal has highlighted the controversy arising from corporate secrecy and aggressive tax avoidance. The

Panama Papers revelations have blurred the distinction between legal tax optimisation and criminal tax evasion. Using complex webs of anonymous shell companies, bank accounts in secretive jurisdictions, and utilising convoluted corporate structures spanning several low-disclosure jurisdictions, the ICIJ has alleged that wealthy individuals have used Mossack Fonseca to evade taxes. According to the New York Times, USD 40-70 billion is lost in federal revenue every year due to unpaid taxes

on foreign accounts. According to the ICIJ website, the Panama Papers revelations have sparked at least 150 formal actions across 79 jurisdictions, including investigations, audits, inquiries and formal prosecutions. In September 2016 Denmark became the first country to officially purchase the raw data from the leaks, with a view to allowing the Danish tax agency SKAT to investigate potential instances of tax evasion relating to 500-600 Danish tax residents. While Denmark

In November the UK Chancellor of the Exchequer Phillip Hammond announced that 22 individuals faced civil and criminal investigations for aggravated tax evasion

aperio-intelligence.com FINANCIAL CRIME DIGEST | ANNUAL REVIEW 2016


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PANAMA PAPERS: THE FALLOUT CONTINUES

(FSC) served a fine to the local offices of Mossack Fonseca USD 440,000 for breaches of the territory’s anti-money laundering regulations. BVI FSC’s fine of Mossack Fonseca was criticised by anti-corruption NGO Transparency International, which has stated that: “The scale of these fines imposed on Mossack Fonseca is embarrassingly inadequate”.

However the BVI’s actions against Mossack Fonseca, regardless of the scale of fines imposed, should serve as an indication that further financial penalties will be levied on the company by foreign jurisdictions.


Regulatory change

In addition to the ongoing investigations into offences revealed by the release of the Panama Papers, several jurisdictions have announced enhanced regulation, which will directly affect financial services providers. In May 2016 the US Government announced several regulatory measures and proposed several congressional bills to strengthen the transparency of the US financial system. Key among these steps is requirements for financial institutions to conduct appropriate due diligence and maintain the records of natural beneficial owners of companies that utilize financial services in the US.

This legislation is supplemented by a final ruling from the Treasury Department’s Financial Crime Enforcement Network (FinCEN), which will circumvent banking secrecy laws in order to make available to law enforcement agencies financial information relating to suspected illicit financial networks under the “Customer Due Diligence” Rules. This will effectively create a national registry of beneficial ownership under the supervisory authority of the Treasury Department. The US has also responded to the Panama Papers revelations by initiating a Treasury Department and Internal Revenue Service (IRS) proposal to initiate legislation relating to foreign shareholdings in anonymous entities in the US.

This proposal relates to “disregard entities”, which will now be required to obtain employer identification numbers and report information to the IRS under a given tax code. The purpose of this is to curb aggressive evasion of US Federal taxes. The US is by no means the only jurisdiction to impose serious regulatory change in light of the Panama Papers scandal. In June 2016 the European Parliament established a committee charged with conducting an inquiry into the Panama Papers leak, including allegations of contravention on EU laws regarding money laundering, tax avoidance and tax evasion. In addition to this, the EU announced increased measures against money laundering and

terrorist financing in February 2016.

These tightened measures, initially in the backdrop of terrorist financing of the so-called Islamic State terrorist organisation, added a number of addendums to the EU’s Fourth Money Laundering Directive (4MLD), and has been widely dubbed the Fifth Money Laundering Directive (5MLD). In addition to the “risk-based approach” set out in 4MLD, 5MLD contains a number of points relevant to all financial institutions with EU operations. Among these, 5MLD proposes full public access to beneficial ownership registers across EU member states, a direct interconnectedness of ownership registers (to allow for cross-border law enforcement cooperation), and extending the initial due diligence information held by financial institutions to law enforcement agencies.

More importantly, 5MLD will lower the threshold for due diligence requirements on high-risk third-party countries. The Commission has proposed harmonizing EU member states’ lists of EDD measures relating to high-risk countries, and bringing these in line with those of the Financial Action Task Force (FATF)12. In addition to regulatory measures announced by the US and EU, the G20 was also weighed in with potential heavy sanctions against tax havens. In April 2016 the G20 Group announced that it was considering “defensive measures” against financial jurisdictions which do not commit to sharing basic account holder information with overseas authorities. The G20 further announced that it would initiate cooperation with the Organisation for Economic Cooperation and Development in order to identify non-compliant jurisdictions by July 2017. This brought the G20 in line with the global standard on the sharing of information between tax jurisdictions, as set out by the OECD. The main goal of this is to increase transparency in the offshore financial world. In October the Financial Action Task Force (FATF) published its report to the Finance Ministers and Central Bank Governors of the G20, in which it reiterated the shortcomings

of global financial transparency regimes. FATF has been campaigning for increased financial transparency via information sharing on beneficial ownership since 2003, based on the international standards of beneficial ownership. The Panama Papers leak and subsequent proposed and actualised regulatory change has shown that there are

concerted efforts going into curbing financial secrecy. However, the high volume of leaked data, and the public outcry this has caused, represents a Rubicon moment for financial regulators, law enforcement agencies and, ultimately, financial institutions in improving transparency regimes relating to offshore financial services.

insider trading case, the details of which have not yet been reported.

The UK Government has shown a willingness to investigate and prosecute suspected tax offenders, as well as other perpetrators of financial crime; these actions are being replicated across the world. According to the Centre for Public Integrity 6,500 natural persons and entities are under investigation for tax offences, from Canada to the Cook Islands. Even financial secrecy hotspots have shown a readiness to prosecute Mossack Fonseca. In November the British Virgin Islands (BVI) Financial Services Commission

ConclusionThe Panama Papers leak has proved to be a major event in exposing the financial dealings of offshore-registered entities and their beneficiaries. The 2.6 terabytes of data has sparked numerous criminal and civil investigations and caused governments and super-national organisations worldwide to increase regulatory measures to cut down on tax evasion and other financial crime. This has been particularly pertinent in an age of austerity, which has blurred the lines between aggressive tax avoidance or optimisation and criminal tax evasion in an unprecedented fashion. Despite the size and scope of the Panama Papers leaks, it is highly likely that further leaks relating to offshore activity will occur.

In September 2016 the ICIJ published the Bahamas Leaks, relating to information held by the corporate registry in the Bahamas. This implicated the former EU Competition Commissioner Neelie Kroes and UK Home Secretary Amber Rudd in potential wrongdoing, as they appear as beneficiaries in offshore registered companies.

With the prevalence of leaked data in the information age as well as the potential reputational fallout from tax offences and regulatory changes arising from leaked data, no aspect of the financial services industry will be left untouched by the Panama Papers leaks.

According to the European transnational law enforcement agency Europol, 3,469 probable matches were identified against the Panama Papers, which related to ongoing criminal investigations into tax fraud, organised crime groups, narcotics trafficking and various other criminal offences 2,6 6,520

terabytes individuals of leaked data and entities under investigation

214,000legal entitiesover 200 jurisdiction

USD 40-70 billion

USD 110,000,000

An estimated

Over

lost in US federal revenue due to tax evasion

in recovered funds to date

11.5 millionfilings

150 Cross-agencyannounced responses taskforces

to the Panama Papers leaks established in the US, UK and the EU


7


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Allegations of industrial-scale corruption in the oil industry: the Unaoil case

This year saw the unfolding of one the most extensive cases of alleged corruption in the history of the oil and gas industry.

In March, Fairfax Media of Australia exposed an extensive global web of alleged bribery and corruption relating to Unaoil, a Monaco-based oil and gas industry services firm owned by the wealthy Ahsani family. According to Fairfax Media, a leaked cache containing thousands of emails and documents revealed that between 2002 and 2012 the company had paid bribes to win contracts in high-risk jurisdictions on behalf of dozens of multinationals including Rolls Royce, Halliburton, Leighton Holdings, Samsung Hyundai, Eni, Siemens, Ranhill, and Petrofac, among others.

The Unaoil leak, arriving in quick succession to the Panama Paper scandal, has prompted a response by law enforcement agencies worldwide. The US Federal Bureau of Investigation and Department of Justice as well as law enforcement agencies in Australia and the United Kingdom have launched a joint investigation into what has been termed the “bribes-for-contracts” scandal. Unaoil’s headquarters in Monaco were raided in April at the request of the UK Serious Fraud Office (SFO) in connection with a criminal investigation into the allegations, which is reported to be the largest of its type the SFO has ever undertaken.

Unaoil has denied all allegations against it and has vowed to defend itself vigorously.

The company has said it will sue Fairfax Media over the leak and has filed a court order against the SFO questioning the legality of the raid, requesting all seized material be returned and copies destroyed. The SFO has rejected Unaoil’s legal challenges on the basis that the company is deliberately delaying and disrupting an ongoing criminal investigation that is likely to last for years and affect a number of the entities involved. Rolls-Royce is reportedly being investigated by the SFO in connection with the Unaoil scandal, while KBR, FMC Technologies and Core Laboratories have indicated that they received questions from the US Department of Justice about their dealings with the company. Others such as Petrofac proceeded to investigate the allegations internally and found no evidence that the company was implicated in the alleged payment of bribes.

The scope of the leak

Unaoil allegedly used a number of mechanisms to illicitly obtain lucrative oil contracts via government officials in the Middle East, Asia and Africa. These mechanisms allegedly ranged from directly bribing the related official/company, to ensuring that the company’s clients would win a tender process through the procurement of confidential and highly sensitive insider information.

In the Middle East, Unaoil is accused of having bribed two Iraqi oil ministers, a fixer linked to Syrian dictator Bashar al-Assad, senior officials from Libya’s Gaddafi regime, Iranian oil figures, powerful officials in the United


Arab Emirates and a Kuwaiti operator. To win contracts for its clients in the Caspian States, Unaoil is alleged to have paid multiple bribes to officials from Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan.

While much of the information exposed in the leak is vague, insofar as it does not specify amounts and names on repeated occasions, some of Unaoil’s alleged practices in Middle Eastern countries have been reported on in more detail. These allegations remain unproven and are denied by the parties reported to have been involved, some of which have conducted their own detailed internal investigations in response to the information leaks. In Iraq, Unaoil is alleged to have paid at least USD 25 million in bribes to secure the support of officials responsible for granting oil contracts to companies that subcontracted Unaoil, such as Petrofac, while an agent allegedly representing Rolls-Royce is reported to have been arrested by the SFO in possession of two cheques worth GBP 950,000 and GBP 925,000, apparently from Unaoil. These were made payable to a company believed to be owned by a suspected Iraqi agent that remains unknown, but it is likely to be linked to one of the Iraqi officials revealed in the leak. Some of these include the Deputy Prime Minister of Iraq turned education minister Hussain al-Shahristani; Oil Minister Abdul Kareem Luaibi (who was replaced in 2014); the Director General of the South Oil Company, Dhia Jaffar al-Mousawi, who in 2015 became a deputy minister; and top oil official Oday al-Quraishi.

In Iraq, Unaoil is alleged to have paid at least USD 25 million in bribes to secure the support of officials responsible for granting oil contracts

ConclusionWhether proven or not, the Unaoil scandal, like the Panama Papers revelations, again illustrates the severe legal, compliance and reputation risks arising from uncontrolled data leaks. Unaoil and its business partners have come under intense and ongoing investigations and have responded in different ways to the allegations. Unaoil was independently certified for anti-bribery and corruption, had excellent references, and provided explanations behind the Ahsani’s vast network of contacts in the Middle East, Africa and Asia. So far, Unaoil appears to have resisted attempts to probe

its affairs in more detail and has denied the allegations made against it. The company has attacked the legality of the SFO’s raid on its Monaco offices, and the Ashanis are reported to have refused an interview with the SFO in June. The SFO on the other hand, has rejected Unaoil’s claims and is reported to be progressing its investigations.

The judges involved in hearing the arguments of both parties announced in early December that they would return with a written ruling in “a few weeks”.

53terabytes

are reported to have been seized by the SFO during Unaoil’s office raid

USD 25 millionin bribes

are alleged to have been paid by Unaoil to secure contracts in Iraq

9middlemen

allegedly hired by Unaoil to influence decision makers and funnel bribes

17countriesinvolved throughout the Middle East, Africa, and Asia

6 month-longinvestigation that lead to the leak exposed by Fairfax Media and the Huffington Post

13executivesfrom multinational companies exposed in the leak


level contacts in the oil industry to facilitate investment opportunities. The September 2009 deal between PetroSaudi is at the core of the allegations against 1MDB. In return for 1MDB investing in the USD 2.5 billion joint venture, PetroSaudi allegedly facilitated the signing of mineral extraction concessions in Turkmenistan and Argentina to the benefit of the fund. However the US Department of Justice (DoJ), based on leaked material from the former PetroSaudi principal Xavier Justo, has alleged that 1MDB’s share of this investment was fraudulently transferred to officials connected with 1MDB and third-parties.

A further USD 3.5 billion was raised by 1MDB in order to finance the purchase of Malaysian power plants. As part of the deal, 1MDB was supposed to pay USD 1.37 billion in guarantees to a unit of International Petroleum Investment Company. However these funds were channelled through a series of British Virgin Islands (BVI) and Curaçao-registered entities, before USD 170 million was transferred to accounts controlled by Mr Najib in 2012. A similar case involving the financing of an Abu Dhabi real estate deal was also believed to have involved the transfer of USD 680 million to accounts belonging to Mr Najib.

The central figure in this scheme is alleged to have been Jho Low, a Malaysian financier with a penchant for Hollywood parties and an opulent lifestyle. In connection with 1MDB’s joint venture with PetroSaudi, 1MDB reportedly paid USD 1 billion into the accounts of the Seychelles-registered entity Good Star Ltd. Through a series of intermediaries, including Prince Turki, USD 20 million of this was transferred to Mr Najib’s accounts at AmBank Private.

Mr Low was reported to have been the beneficiary to the Good Star company by Reuters in June 2016. He is further reported to be a close associate of Mr Najib through Riza Aziz (the prime minister’s step-son). This association has led to one of the more curious revelations of the 1MDB scandal – that the award-winning motion picture Wolf of Wall Street was financed by embezzled funds from 1MDB. Mr Aziz is reported as the co-founder of Red Granite Pictures, which was one of the production companies behind, among other films, Wolf of Wall Street.

Despite the more colourful stories emanating from the 1MDB scandal, such as the lifestyle of Mr Low, and the scandal’s association

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1MDB: A tough response

Events of 2016 demonstrated a willingness of regulators and law enforcement agencies to take robust measures in relation to the unfolding 1 Malaysia Development Berhad (1MDB) scandal.

I1MDB was founded as a sovereign investment fund for the Malaysian state of Terengganu in 2008. By 2016 the fund had transferred to Malaysian Federal Government control and had become the subject of multiple judicial proceedings. Through the course of these highly publicised investigations, prosecutors have detailed improper relationships between the fund and senior Malaysian officials, including Prime Minister Najib Tun Razak. According to The Wall Street Journal, at least USD 3.5 billion has been misappropriated from 1MDB.

1MDB was a controversial project prior to the current allegations of corruption and money laundering. Since May 2009 the fund has issued several bonds guaranteed by the Malaysian Federal Government. Using the proceeds from bond issues, the fund made several high-profile acquisitions, such as the purchase of Tanjong Energy Holdings in March 2012. Following the acquisition of Tanjong, 1MDB’s annual report indicated that the company held outstanding debt of USD 2.4 billion. The fund subsequently issued a

new 10-year note, raising USD 1.75 billion. In October 2012 and March 2013 the fund issued two further sets of 10-year bonds, raising an additional USD 1.75 billion and USD 3 billion in the process. These bond issues have themselves attracted controversy in the US and Malaysia. In April 2014 the fund’s annual report stated that it had accumulated total debts of USD 11.1 billion.

The fund’s high levels of debt were the cause of controversy in the Malaysian Parliament, leading parliamentarians to dub the fund “1 Malaysia’s Debt of Billions”. Despite claiming in 2014 that it would only guarantee 14% of the fund’s liabilities, the high levels of debt in the fund led to a substantial downgrading of Malaysian sovereign credit ratings. In addition to the general confusion surrounding

the position of the Malaysian government regarding the loan guarantees, 1MDB was forced to roll over two debt payments in 2014. It was against the backdrop of the fund’s flagging financial performance that allegations of fraud, money laundering and corruption were levelled at 1MDB, its backers and Mr Najib.

In September 2009 1MDB had established a joint venture with PetroSaudi International. PetroSaudi was established in 2005 with backing from Tarek Obaid – a Saudi former banker – and Prince Turki bin Abdullah bin Abdel Aziz. The company reportedly used high-

1MDB’s annual report indicated that the company held outstanding debt of USD 2.4 billion.

USD 3.5bn Alleged

misappropriated



with Hollywood pictures, the systematic embezzlement from 1MDB has led to serious recriminations in Malaysia and abroad. This has taken the shape of investigations into not only the key principals behind the theft, but the financial institutions which are alleged to have enabled it.

In December 2015 Mr Najib was interviewed by Malaysian anti-corruption prosecutors over his role in the 1MDB scandal, amid allegations he received USD 681 million from the Saudi Royal Family. In January Mr Najib was cleared of wrongdoing by the Malaysian Attorney General. However the investigation of Mr Najib was in itself controversial, as several media outlets have speculated that the Malaysian Anti-Corruption Commission had recommended Mr Najib be charged with corruption offences. Following the investigation into Mr Najib,

The Wall Street Journal alleged that it had been fundamentally flawed, with key documents having gone unscrutinised, findings having been withheld under the Malaysian Official Secrets Act, and Mr Najib having not been interviewed. Abdul Gani Patail – the former Attorney General of Malaysia – was suddenly relieved of his position after recommending criminal charges against Mr Najib. He was subsequently replaced by Mohamed Apandi Ali, who proceeded to close multiple concurrent investigations into Mr Najib and 1MDB. While Mr Najib has so far escaped prosecution, likely due to his personal influence in Malaysia, financial institutions which have provided banking services to 1MDB, Mr Najib, Mr Low and other alleged accomplices have not escaped public scrutiny or punishment.

In May, the Swiss financial regulator FINMA concluded enforcement proceedings against the Swiss bank BSI SA. These proceedings took place simultaneously with investigations in Singapore. The charges against BSI were that it ignored the warning signs of high-risk transactions associated with 1MDB. As a result of the Swiss proceedings, BSI was

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1MDB: A TOUGH RESPONSE

fined USD 100 million by FINMA – a decision which was immediately appealed in June. In addition to the Swiss prosecution, BSI was ordered to shut down its Singapore operations by the Monetary Authority of Singapore (MAS) over its dealings with 1MDB-linked funds. BSI did not dispute the authority’s allegations. The MAS also filed charges against Yak Yew Chee and Seah Yew Foong, who were linked to accounts held by Mr Low.

BSI was not the only bank to have its activities wound-up in Singapore in relation to the 1MDB scandal. In October the MAS ordered Falcon Private Bank to immediately cease its Singaporean operations due to severe deficiencies in its anti-money laundering controls. The MAS arrested the Singapore branch manager of Falcon in October. Concurrent to the Singaporean investigation, Falcon was fined USD 2.56 million by FINMA. In addition to the reprisals taken against Falcon by the MAS and FINMA, UBS and DBS were fined SGD 1.3 million and SGD 1 million respectively. MAS has also initiated an investigation into Standard Chartered in relation to the scandal.

The allegations against Mr Low, Mr Aziz and Mr Najib have been subject to intense legal and media scrutiny since the US Department of Justice’s (DoJ) announcement that it was investigating suspicious transactions involving 1MDB and a number of Malaysian officials. In July 2016, federal prosecutors announced one of the largest asset seizures relating to 1MDB funds. The DoJ was reported to be seeking to seize over USD 1.3 billion in assets, including real estate and other assets purchased with 1MDB funds under the Kleptocracy Asset Recovery Initiative. Simultaneously, the Federal Bureau of Investigation’s international corruption unit conducted a criminal investigation in connection with the fund. The DoJ’s complaint lists a number of 1MDB officials and Malaysian political figures.

The first is 1MDB Officer 1 – widely believed to be Casey Tang Keng Chee – the executive director at 1MDB. The second is believed to

be Shahrol Azral Ibrahim Halmi, the former CEO of 1MDB, who is referenced as 1MDB Officer 2. The list includes other non-named officials. However, the DoJ’s complaint lists five individuals by name – Mohammed Ahmed Badawy al-Husseiny, Khadem Abdulla al-Qubaisi, Eric Tan Kim Loong, Riza Aziz and Jho Low. The complaint further cites the involvement of “Malaysian Official 1”, who is referenced as a high-ranking official in the Malaysian government with a position of authority at 1MDB. He is reported to have been the recipient of a USD 681 million transfer to an AmBank account and as a close relative of Riza Aziz. The description of Malaysian Official 1 has led numerous international and Malaysian press outlets to allege that the individual in question is Najib tun Razak. This legal complaint is still ongoing, and may lead to the prosecution of these individuals in the US.

Following the high-profile DoJ and FBI investigations into 1MDB, the DoJ also named US investment bank Goldman Sachs as party to the case. Goldman Sachs arranged a USD 3 billion bond issue. The bank is alleged to have received an unusually large commission for the bond issuance, estimated at approximately USD 300 million. The proceeds from the bond sale are reported to have been transferred to an account held with BSI SA in Switzerland, which investigators have claimed represented a red-flag as a transfer of that size would normally be channelled to a larger bank as opposed to a smaller private bank. Following the transfer of USD 3 billion to BSI, approximately half of these funds were channelled to offshore investment funds which are alleged to have served as a front for the beneficiaries of the scandal. Goldman Sachs is not alleged to have constituted part

of the scheme to defraud 1MDB, however it has been accused of violating the US Bank Secrecy Act in relation to the scandal (having allegedly not reported suspicious transactions). The investigation into Goldman Sachs’ role in the 1MDB scandal has implicated the bank’s former South-East Asian Chairman, who left the bank in February 2016 after it emerged he had forged a reference letter in relation to 1MDB. The investigations into the bank in relation to the scandal are ongoing.

Even if the perpetrators of the alleged 1MDB fraud escape prosecution in Malaysia, the scandal has sparked investigations into the fund’s banking arrangements in at least seven jurisdictions since allegations of fraud and money laundering against the fund were made in 2015. Financial regulators and law enforcement agencies have demonstrated a willingness to investigate, prosecute and penalise individuals and companies across multiple jurisdictions.

The revocation of the local banking licences of BSA Private Bank and Falcon Bank in relation to reported failures in their anti-money laundering controls was an unprecedented move for the Singapore financial regulator, demonstrating a desire by the country to take robust measures to tackle financial crime risks.

Moreover, the DoJ’s seizure of USD 1.3 billion in assets and legal complaints under the Kleptocracy Recovery Initiative serves to demonstrate the serious action being taken against the perpetrators of the alleged multi-billion-dollar fraud against a state-backed sovereign wealth fund.

The DoJ was reported to be seeking to seize over USD 1.3 billion in assets, including real estate and other assets purchased with 1MDB funds, under the Kleptocracy Asset Recovery Initiative



The election of Donald Trump in November 2016 and his criticism of the nuclear deal during his election campaign resulted in much speculation in regards to whether the US

would continue to commit to the multilateral agreement. While it was expected that the mixed signals may put foreign investments on hold in Iran, provisional deals with oil majors such as Total and Royal Dutch Shell to develop energy fields indicates that European firms remain keen to engage with the country.

The recent appointment of oil executive Rex Tillerson as US Secretary of State has initially been welcomed as one of the less-hawkish options on Iran, with Tillerson previously commenting on potential opportunities in the country, albeit in a business context.

Iran too will have presidential elections in May 2017, with Hassan Rouhani running for re-election. Rouhani will be keen to show the Iranian electorate the tangible benefits of the nuclear deal, such as the recent purchase of aircraft from Airbus and Boeing, for which first deliveries from Airbus may arrive as early as mid-January 2017.

US Congress last month signed a bill to extend the Iran Sanctions Act for 10 years, although President Obama has not signed the bill, stating that the Administration believes it to be unnecessary, whilst the extension of the Act remains consistent with US obligations under the JCPOA.

In the coming year, the ability of European companies to trade with Iran will be highly contingent on the efforts of European banks to re-engage their correspondent relationships in Iran and support compliant business, while the current Iranian administration actively seeks to regain access to international capital markets.

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Iran sanctions

In the Middle East, 2016 was the much anticipated year in which the Iranian nuclear deal (the Joint Comprehensive Plan of Action - JCPOA) would be implemented.

On 16 January 2016, after the International Atomic Energy Agency confirmed that Iran met the relevant requirements under the JCPOA, all nuclear-related sanctions were lifted by the UN, the EU and the United States. Since the agreement was implemented, opportunities have arisen for foreign businesses to trade with Iran, particularly in relation to the energy, infrastructure, hospitality and technology sectors.

While foreign direct investment in Iran is estimated at around USD 8 billion for the current calendar year, many deals with foreign parties have hit roadblocks as a result of the hesitancy of major European banks to transact with Iran or finance Iran-related deals, leading to consequent difficulties of translating memorandums of understanding to finalised agreements. These delays largely derive from concerns of exposure to enduring non-nuclear US and EU sanctions against Iran.

In recent months, mid-tier European banks have resumed transactions with Iran, and

some have suggested the establishment of local branches in the Iranian capital. Meanwhile, Asian banks were much quicker to resume relations with Iranian banks.

In October, the US Department of the Treasury’s Office of Foreign Assets Control issued an update to its FAQs on Iran, removing some of the ambiguity around processing US dollar transactions. The guidance indicated that foreign financial institutions,

including foreign-incorporated subsidiaries of US financial institutions “may process transactions denominated in U.S. dollars or maintain U.S. dollar-denominated accounts that involve Iran or persons ordinarily resident in Iran…provided that such transactions or account activities do not involve, directly or indirectly, the United States financial system or any United States person, and do not involve any person on the SDN List”.

What remains uncertain is the attitude of US banks to foreign banks which may decide to process US dollar transactions with Iranian counterparts.

US Congress last month signed a bill to extend the Iran Sanctions Act for 10 years, although President Obama has not signed the bill


In October, the US Department of the Treasury’s Office of Foreign Assets Control issued an update to its FAQs on Iran, removing some of the ambiguity around processing US dollar transactions


Russia in 2014 specifically in relation to the Ukraine crisis, caused largely by a fight for control at the edges of Europe. In 2016 the continuation of sanctions has come to depend less on the resolution of this conflict and more on the appraisal by the US and EU of Russia’s global geopolitical activities.

The current crop of Western leaders has been opposed to showing any leniency to Putin in 2016 as a result of Russia’s backing of the Assad regime in Syria. However, a change in leadership in the US, and potentially France, increases the likelihood that the sanctions regime against Russia will be amended in 2017.

SPECIAL FEATURE

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Russia sanctions

EU and US sanctions on Russia have remained in force over the course of 2016, despite increasing disagreement over their merits and a global political landscape that is becoming more and more favourable to the geopolitical ambitions of Russian President Vladimir Putin.

The US and EU originally imposed a wide range of sectoral and targeted sanctions in 2014 following Russia’s annexation of Crimea and the downing of Malaysian Airlines Flight 17 in eastern Ukraine. The EU has continually voted to renew sanctions while the US has kept sanctions in place owing to Russia’s perceived failure to comply with the Minsk Protocols of September 2014 and February 2015, which sought to bring a peaceful end to the conflict between Ukraine and Russian-backed separatists in the far eastern regions of the country.

The EU renewed sanctions over doing business with or in Crimea and Sevastopol in June 2016 for one year. In addition, the EU voted to extend sectoral sanctions in July and targeted sanctions against Russian individuals and entities in September. In October, Germany, France and Britain were pushing for the implementation of a wider range of sanctions in response to Russia’s continued bombing of Aleppo in Syria. This proposal was blocked by Italy’s then Prime Minister, Matteo Renzi. In January 2016 US Secretary of State John Kerry suggested that sanctions against Russia could be lifted within months. However, this failed to materialise with increased antagonism between Russia and the US, in particular with regard to the conflict in Syria. In July 2016 Secretary Kerry reassured Ukrainian President Petro

Poroshenko that the US would remain firm on Russian sanctions and in October warned that sanctions against Russia could be expanded if the bombing of Aleppo continued.

In mid-November, US President Barack Obama and senior EU leaders agreed at an informal summit in Berlin that sanctions against Russia should be rolled over for another six months. The decision was rubber stamped at a meeting of the EU Council in mid-December, meaning that European sanctions will be extended for an additional six months from their current expiry date of 31 January 2017. There is more uncertainty about the continuation of US sanctions with US President-elect Donald Trump due to be inaugurated in January 2017. Trump has made a series of conciliatory remarks regarding President Putin.

Throughout his election campaign, Trump frequently indicated a view of Putin that is at odds with that of President Obama’s administration and elements of his own party (including senior US Senator John McCain). Trump and his supporters look on Putin as a guardian of traditionalist values amidst a greater global battle against radical Islam. The president-elect also shocked many in summer 2016 when he suggested he might recognise

Russia’s claim to Crimea. In December 2016, Trump nominated Rex Tillerson, the CEO of ExxonMobil, as his incoming administration’s chief diplomat. Tillerson has been a vocal opponent of sanctions on Russia, with his company (of which he owns a sizeable stake) standing to benefit more than any other US oil and gas firm if they were to be lifted. In 2011 Exxon signed a landmark deal with Russia’s Rosneft to explore oil resources in the Russian artic.

The deal had to be put on hold following the imposition of Russian sanctions and caused Exxon losses in excess of USD 1 billion. Although the appointment of Trump and

Tillerson undoubtedly makes it more likely that the US will ease sanctions in the coming year, it seems unlikely that the new administration will do so without the agreement of a majority of its European partners.

There are however a growing number of voices within the EU calling for the discontinuation of sanctions against Russia. Greece, Hungary, Italy, Cyprus, parts of the German political establishment, Slovakia and Bulgaria have all expressed support for ending sanctions on Russia. The increasingly popular populist and anti-immigrant politicians such as the UK’s Nigel Farage and France’s Marine Le Pen see Putin, in a similar way to Trump, as

a champion of traditional, Christian values. What may finally shift the balance in the favour of pro-Putin voices are the French elections in April 2017. The current front-runner, Francois Fillon, has consistently backed Russia in Syria since 2012. He has also expressed support for the abolishment of short-term visas for Russia in the EU.Fillon has consistently spoken out against economic sanctions on Russia following the annexation of Crimea in 2014. He has called the sanctions economically damaging to French farmers and counter-productive, as he views Russia as being one of France’s main allies in the fight against the Islamic State. Sanctions were imposed against

Exxon signed a landmark deal with Russia’s Rosneft to explore oil resources in the Russian artic. The deal had to be put on hold following the imposition of Russian sanctions and caused Exxon losses in excess of USD 1 billion.



adjustments is scheduled to be voted on by the European Parliament’s Economic and Monetary Affairs Committee on 25 January 2017, before being put to a wider vote at the European Parliament.

SPECIAL FEATURE

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From Fourth to Fifth: Developments in the new EU Anti-Money Laundering Directive

The combined effects of the terrorist attacks in Brussels and Paris, as well as revelations about hidden offshore interests exposed by the Panama Papers leaks have led the European Commission to redouble its efforts to tackle terrorist financing, money laundering practices and the identification of beneficial ownership.

On 5 July 2016, the Commission adopted proposed amendments to the text of the Fourth Money Laundering Directive (4MLD, and incorporating the proposed amendments, now also referenced as 5MLD), intended to develop and amend the directive on the coordination of safeguards.

In light of heightened security threats across Europe and the need for urgent action to combat growing terrorist financing and

money laundering risks, it was originally envisaged that the transposition of 4MLD, and the proposed text amending 4MLD, would be brought forward from 26 June 2017 to 1 January 2017. However, in November 2016 the Commission reinstated a transposition date of June 2017 owing to a series of “significant adjustments to the legislation” and advice from the European Banking Authority warning that it would be “unhelpful” for banks to have to comply in such a short space of time. These adjustments have not been made available to the public at present.

5MLD will establish a number of new due diligence requirements for obliged entities. Firstly, all new and existing transactions with high-risk third countries will automatically require application of enhanced customer due diligence. Secondly, virtual currency exchange platforms and custodian wallet providers will fall within the scope of the directive and be considered as obliged entities for the purposes of the due diligence measures. As such, anonymity for the online use of prepaid cards will be removed and the threshold for mandatory identification reduced from EUR 250 to EUR 150 when used face to face.

Under 5MLD, access to the beneficial ownership register will be made public under certain conditions. For instance, the centralised national automated registries will include information on all trust and foundations, as well as beneficial owners who have 10% ownership in certain companies that present a financial crime risk.

Amongst the measures designed to increase transparency, which have attracted significant

debate, 5MLD proposes to enhance the powers of EU Financial Intelligence Units (FIUs) and facilitate their cooperation by widening the scope of information accessible to these parties. Not only will FIUs have access to information in centralised bank and payment account registers and central data retrieval systems, but Member States will also have to establish such registers to identify the holders of bank and payment accounts.

While the changes proposed by the 4/5MLD introduce a number of significant changes,

in some areas their practical implementation may be limited. Commentators have noted that the enhanced due diligence measures applicable to obliged entities run the risk of being undermined given that the EU’s list of high-risk third countries does not (at this stage) include any of the jurisdictions mentioned in the Panama Papers leaks, which are considered to be particularly prone to money laundering and financing of terrorism risks. On the EU list of high-risk countries, the only country listed as non-cooperating in the FATF Action Plan is North

Korea; the other ten countries listed are either taking measures to implement the FATF Action Plan (Iran) or are working towards being removed from the list (Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Syria, Uganda, Vanuatu, and Yemen).

In light of this, commentators have pointed out that the requirements for EU obliged entities under the 5AMLD proposal to identify the beneficial owners of bank accounts, companies, trusts and transactions would be more efficient if they were to be extended

to all territories whose sovereignty lies with Member States, including those with special tax regimes. While some of the money that finances terrorism passes through the high-risk countries featured on the EU’s list, tackling money laundering and terrorist financing requires a comprehensive and all-encompassing approach that depicts the realities inherent in the lifecycle of illicit financial flows.

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While the changes proposed by the 4/5MLD introduce a number of significant changes, in some areas their practical implementation may be limited.



SPECIAL FEATURE

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2016: technical developments round-up

JANUARY• The landmark Joint Comprehensive Plan of Action, an

international agreement concerning Iran’s nuclear programme between Iran, the P5+1 (China, France, Russia, UK, US plus Germany) and the European Union, is implemented

• The Financial Action Task Force holds a three-day meeting to discuss an accelerated implementation of efforts to combat terrorist financing, citing numerous terrorist attacks linked with the so-called Islamic State

• The US Financial Crimes Enforcement Network issues orders temporarily requiring certain US title insurance companies to identify ultimate beneficial owners of shell companies involved in all-cash purchases of high-end residential properties

APRIL• The governments of the UK, Germany, France, Spain and Italy

call on the G20 to take firm collective action on increasing beneficial ownership transparency following the Panama Papers leak

• The UK Government announces a new taskforce to review possible cases of tax evasion in the wake of the Panama Papers scandal

• The US Department of Justice opens a criminal investigation into possible tax avoidance schemes revealed by the Panama Papers

• Germany and France propose a blacklist of jurisdictions that breach transparency standards following the Panama Papers revelations

MARCH• The European Union renews its existing asset freezes and

travel bans on Russians and pro-Russian separatists and entities in relation to “undermining the territorial integrity or stability of Ukraine” until September 2016

• The United Nations, European Union and US impose new sanctions on North Korea in response to the reclusive state’s nuclear test in January 2016 in violation of previous UN resolutions

• The US Treasury and Department of Commerce announce significant amendments to the Cuban Assets Control Regulations and Export Administration Regulations allowing US citizens to travel to Cuba and directly engage with Cubans

FEBRUARY• The Bank of England reactivates the licenses of three Iranian

banks following the Joint Comprehensive Plan of Action

• The Secretary of State publishes draft guidance on the definition of “Significant Influence or Control” over companies within the context of the “Register of People with Significant Control”

• The UK’s National Crime Agency is given direction over the Serious Fraud Office and authority over the latter on when to take-up bribery cases



SPECIAL FEATURE

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2016: TECHNICAL DEVELOPMENTS ROUND-UP


MAY• In the wake of the Panama Papers scandal, London hosts an

international anti-corruption summit issuing a communiqué agreed to by participating counties and international organisations emphasising the harm done by corruption internationally

• In advance of the UK Anti-Corruption Summit, the UK Government issues an Action Plan representing one of the most significant changes to the UK anti-money laundering and terrorist finance regime in over a decade

• The US Department of the Treasury announces several actions to strengthen financial transparency and combat the misuse of companies to engage in illicit activities, including a Customer Due Diligence Final Rule and proposed Beneficial Ownership legislation

• An International Monetary Fund staff paper estimates that approximately USD 2 trillion of projects, permits and other transactions representing 2% of global economic output were affected by bribery in 2015

AUGUST• The US Financial Crimes Enforcement Network announces geographic targeting

orders and proposes extending anti-money laundering requirements to lenders not subject to federal regulation

• The European Banking Authority issues an opinion welcoming the European Commission’s proposal to bring virtual currency exchange platforms and custodian wallet providers within the scope of the Fourth Money Laundering Directive

JUNE• HM Treasury publishes its fifth annual

report on anti-money laundering and countering the financing of terrorism

• The Financial Action Task Force hosts its Plenary week focusing on terrorist financing, transparency and beneficial ownership

• The UK Financial Conduct Authority issues its research report on the drivers and impacts of de-risking

NOVEMBER• HM Treasury publishes its fifth annual

report on anti-money laundering and countering the financing of terrorism

• The Financial Action Task Force hosts its Plenary week focusing on terrorist financing, transparency and beneficial ownership

• The UK Financial Conduct Authority issues its research report on the drivers and impacts of de-risking

SEPTEMBER• HM Treasury issues a consultation on

the transposition of the Fourth Money Laundering Directive

• The Council of Europe prolongs the application of restrictive measures targeting actions against Ukraine’s territorial integrity, sovereignty and independence until March 2017

JULY• The European Commission calls on member states to bring forward the

transposition of the Fourth Money Laundering Directive to 1 January 2017

• The UK Serious Fraud Office secures a second deferred prosecution agreement

• The Financial Conduct Authority issues its third annual anti-money laundering report

• The UK House of Commons’ Home Affairs Committee issues a report on its inquiry into the proceeds of crime

• The European Commission issues a list of high-risk third countries, jurisdictions which have strategic deficiencies in their AML/CFT regimes that pose significant threats to the EU’s financial system

DECEMBER• EU leaders agree to extend sanctions against Russia

by a further six months relating to its activities in Crimea and Eastern Ukraine

• US Congress votes to extend Iran sanctions by 10 years, but does not affect the Joint Comprehensive Plan of Action

• The Financial Action Task Force issues mutual evaluation reports of the United States and Switzerland

• EU Council adopts directive on access to beneficial ownership information.

• UK issues bribery and corruption assessment template intended for all Central Government Departments

OCTOBER• The UK Government introduces the Criminal Financial Bill to Parliament to make

legislative changes to tackle money laundering and corruption

• US Treasury issues an update to FAQs on Iran, including guidance on due diligence requirements for non-US persons engaged in transactions with Iran

• US President Obama ends sanctions first imposed on Myanmar in 1997

• The Monetary Authority of Singapore announces the withdrawal of Falcon Private Bank Limited’s merchant bank status in the country for serious anti-money laundering failure


aperio-intelligence.comFINANCIAL CRIME DIGEST | ANNUAL REVIEW 2016

24

UK Treasury lifts sanctions on Bank Saderat

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A copy of the UK Treasury notice can be found HERE

Ten individuals added to EU sanctions list

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The European Union Council has added 10 individuals to its sanctions on Syria in relation to their involvement in repression against the civilian population and support for the Syrian regime.

The individuals include high-ranking military officials and senior figures linked to the Syrian regime. The decision brings to 217 persons the total number of

persons targeted by a travel ban and an asset freeze for violent repression against the civilian population in Syria.

The designation follows an announcement by the EU Council that it would seek to impose further sanctions against supporters of the Syrian regime.

The European Union has de-listed Bank Saderat and its UK subsidiary Bank Saderat PLC from its sanctions on Iran following a decision that the bank’s listing should apply only until 22 October 2016.

Previously under the JCPOA, Bank Saderat was not due to be de-listed until transition day, which is 20 October 2023. The UK Treasury has published a notice confirming these entities have been removed from the consolidated list of sanctioned entities and are no longer subject to an asset freeze.

The EU Council press release can be found HERE

Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper PRESS AND MEDIA

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https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/562184/Notice_Bank_Saderat_Delisting.pdf

http://www.consilium.europa.eu/en/press/press-releases/2016/10/27-syria-persons-added-to-sanctions-list/?utm_source=dsms-auto&utm_medium=email&utm_campaign=Syria%3a+EU+adds+10+persons+to+list+of+those+under+sanctions+against+the+regime

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ANNUAL FINANCIAL CRIME REVIEW - Aperio Intelligence · PDF fileWelcome to the 2016 Aperio Intelligence annual financial crime review, ... In the case of Prime Minister ... aggravated