Alleged Illicit Activity Included Transactions Promoting North Korea’s Missile Program and an Institutional Commitment to Laundering Money
On February 13, 2018, FinCEN announced that it had proposed a special measure naming ABLV Bank, AS (“ABLV”) an institution of primary money laundering concern pursuant to Section 311 of the USA Patriot Act. We previously have blogged about FinCEN’s powers pursuant to Section 311 of the U.S. Patriot Act to designate institution “of primary money laundering concern” and impose a special measure which effectively cuts off the bank’s access to the U.S. financial system by requiring U.S. institutions as well as foreign institutions that create an indirect link between the foreign institution and the U.S. to sever ties with the designated bank.
Finding that ABLV was a foreign financial institution of primary money laundering concern, FinCEN proposed a prohibition under the fifth special measure restricting domestic financial institutions from opening or maintaining correspondent accounts with or on behalf of ABLV. FinCEN stated that ABLV executives, shareholders, and employees have institutionalized money laundering as a pillar of the bank’s business practices by orchestrating money laundering schemes, soliciting high-risk shell company activity that enables the bank and its customers to launder funds, maintaining inadequate controls over high-risk shell company accounts, and seeking to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices. Indeed, included in the illicit financial activity were transactions for parties connected to the U.S. and U.N.-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles.
ABLV shot back last Thursday stating that the allegations were based “on assumptions and information that is currently unavailable to the bank,” but that they were “continuing check into these allegations” and were open to cooperation with U.S. authorities. As a result of FinCEN’s finding, Monday morning, the European Central Bank (“ECB”) halted all payments by ABLV pending further investigation into the allegations set forth in FinCEN’s Notice of Proposed Rulemaking (“NPRM”).
As we have previously blogged, the Administrative Procedure Act requires FinCEN to set forth an adequate factual foundation and support for the imposition of the fifth special measure. In its NPRM, FinCEN first noted that Latvia has a large and intricate non-resident deposit banking sector, which allows offshore companies to hold accounts and conduct transactions “to reduce scrutiny of transactions and lower transactions’ risk rating.” ABLV is the second largest bank in Latvia with a primary customer base of high-risk shell companies registered outside Latvia. Latvia does not maintain correspondent banking relationship directly with the U.S., but does maintain relationships with foreign financial institutions, which, themselves, hold direct correspondent accounts in the U.S.
FinCEN concluded that ABLV was of primary money laundering concern because it found that ABLV, due to its lax and non-existent risk mitigation and AML policies, have allowed actors to transact with North Korea, used bribery to influence Latvian officials when challenged with enforcement actions, and was complicit in a complicated theft of $1 billion in assets from three Moldovan banks (by developing a scheme to assist customers in circumventing foreign currency controls and disguise illegal currency trades using fraudulent documentation). Despite the fact that ABLV is the largest non-resident banking institution in Latvia, it allegedly failed to implement adequate AML controls commensurate with the high risk of providing banking services to shell companies and illicit actors using such means to conceal organized crime, corruption, and evade sanctions. For instance, FinCEN found that ABLV “facilitated public corruption through the provision of shell company accounts for “corrupt CIS -based politically exposed persons (PEPs)”, including Serhiy Kurchenko, a Ukrainian tycoon, designated by the Treasury’s Office of Foreign Assets Control (“OFAC”) as complicit in the misappropriation of state assets of Ukraine. ABLV allegedly maintain at least nine shell companies linked to Kurchenko through which he funneled billions of dollars.
In additional support of its fifth special measure finding, FinCEN found that ABLV was not likely to implement meaningful changes to its AML/CFT programs, conducted little legitimate business, and failed to heed warnings of both FinCEN and the Financial Action Task Force (“FATF”), relating to the application of “countermeasures to protect against money laundering, terrorist financing, and proliferation financing emanating from DPRK.” For instance, FinCEN found that ABLV facilitated transactions for parties connected with shell companies involved in North Korea’s procurement or export of ballistic missiles. FinCEN noted that the public nature of FATF and FinCEN’s advisories regarding North Korea and organizations transacting with it should have put ABLV on notice. Moreover, 90 percent of ABLV’s customers are high-risk per ABLV’s own risk rating and are primarily high-risk shell companies registered in secrecy jurisdictions; thus, FinCEN found that while there may be legitimate business conducted at ABLV, the vast majority of its business was used for illicit purposes.
FinCEN also justified its use of the fifth special measure given the national security threat posed by ABLV’s disregard of its AML/CFT responsibilities. It noted that while no other nation has prohibited correspondent banking relationships with ABLV, Latvia’s Financial Capital and Market Commission had conducted an examination and issued a fine. These threats were not outweighed by the burdens to the U.S. financial institutions affected by the fifth measure, because FinCEN found that the fifth special measure will not create a competitive disadvantage or place a burden or cost on U.S. financial institutions. Although ABLV is not a major player in the international payment system, FinCEN noted that there may be some increased burden on U.S. financial institutions to determine the indirect foreign correspondent relationships with Latvia, given that ABLV does not currently hold any direct U.S. correspondent bank accounts. FinCEN also found that severing ties with ABLV, specifically given ABLV’s inclination to facilitate illicit financial activity, strongly outweighed any impact on the legitimate business activity of ABLV. Moreover, ABLV could continue to transact in other foreign currency so long as such activity does not involved correspondent accounts in the U.S.
FinCEN’s NPRM comes amid other actions throughout Europe involving ABLV: this weekend, Central bank governor and ECB Governing Council member Ilmars Rimsevics was detained in Latvia for questioning by Latvia’s anti-corruption authority, and the Central Bank of Latvia has stepped in to address ABLV’s significantly deteriorated liquidity position. FinCEN noted that ABLV continued to maintain euro, Japanese yen, Hong Kong dollar, pound sterling, and Australian dollar correspondent accounts. We will no doubt see a series of de-risking moves by financial institutions to cut ties with ABLV.