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Most Read Contributor in United States, January 2019
The U.S. Treasury Department Financial Crimes Enforcement
Network ("FinCEN") issued an advisory describing how corrupt
foreign "politically exposed persons" ("PEPs")
access the U.S. financial system. The advisory provides guidance on
the (i) risks that U.S. financial institutions face when providing
banking services to PEPs and their financial facilitators and (ii)
types of suspicious transactions that may trigger reporting
obligations under the Bank Secrecy Act.
The advisory includes the following non-exclusive
list of red flags that may help identify methods used to hide the
proceeds of human rights abuses and other illicit international
activities:
using third parties when it is not normal business
practice;
using third parties to shield the identity of a PEP;
using family members or close associates as legal owners;
using corporate vehicles such as limited liability companies
(LLCs) to hide ownership, involved industries or countries;
receiving information from PEPs that is inconsistent with
publicly available information;
transactions involving government contracts that (i) are
awarded to companies in a seemingly unrelated line of business, or
(ii) originate from or are going to shell companies that appear to
lack a general business purpose;
documents supporting transactions regarding government
contracts that include (i) charges that are higher than market
rates, (ii) overly simplistic information or (iii) insufficient
detail;
payments connected to government contracts that come from third
parties that are not official government entities; and
transactions involving property or assets expropriated or
otherwise taken over by corrupt regimes, including senior foreign
officials or their cronies.
The advisory also provides examples of suspicious activities by
PEPs and their financial facilitators, such as:
moving funds repeatedly to and from countries with which the
PEP does not have ties;
requesting to use services of a financial institution or a
designated non-financial business or profession ("DNFBP")
not normally associated with foreign or high-value clients;
holding substantial authority over or access to state assets
and funds, policies and operations; and
controlling the financial institution or DNFBP that is a
counterparty or correspondent in a transaction.
The advisory indicated that FinCEN would update these red flags
and typologies in the future, and reminded financial institutions
of their obligation to identify suspicious transactions and file
suspicious activity reports (SARs) under the Bank Secrecy Act.
Commentary / Joseph V. Moreno
This advisory provides insight into FinCEN's emphasis on
preventing facilitators of international corruption and human
rights abuses from accessing the U.S. banking system. Each of the
case studies appended to the advisory describes instances in which
millions of dollars of proceeds from various illicit activities
– including embezzlement of government funds, corrupt
government contracts, drug trafficking, and the illicit trade of
natural resources – were laundered into the international
financial system via shell companies, real estate purchases, and
other complex financial transactions. While most of the red flags
and typologies described are well known to industry insiders who
are accustomed to identifying suspicious transactions, U.S.
financial institutions are nonetheless strongly advised to review
this FinCEN advisory and ensure that these red flags are
incorporated in their suspicious activity identification and
reporting process. The advisory also serves as a reminder that
FinCEN's Customer Due Diligence (CDD) Rule that recently went
into effect on May 11, 2018, was implemented for the purpose of
identifying shell companies that may be owned or controlled by
PEPs, international criminals, and others looking to launder
illicit funds through the U.S. financial system.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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