On April 14, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued an advisory on kleptocracy and foreign public corruption. At a high level, the advisory stresses the importance of financial institutions focusing their efforts on detecting and targeting the proceeds of foreign public corruption. This advisory aligns with President Biden’s establishment of the fight against corruption as a core national security interest, as well as FinCEN’s identification of corruption as a national priority for anti-money laundering and countering the financing of terrorism. The advisory seeks to provide financial institutions with typologies and potential indicators associated with kleptocracy and other forms of foreign public corruption, such as bribery, embezzlement, extortion, and the misappropriation of public assets. The advisory further identifies 10 financial red flag indicators to assist financial institutions in detecting, preventing, and reporting suspicious transactions associated with kleptocracy and foreign public corruption.
Spotlight on Russia
The advisory defines a kleptocracy as a “government controlled by officials who use political power to appropriate the wealth of their nation for personal gain, usually at the expense of the governed population.” Additionally, the advisory defines a kleptocrat as an individual who “uses their position and influence to enrich themselves and their networks of corrupt actors.”
Of timely concern, the advisory largely focuses on Russia as a kleptocratic regime. According to the advisory, corruption is widespread throughout the Russian government. This corruption manifests itself in various ways: bribery of public officials, misuse of funds, theft of governmental property, and, more generally, “improper use of official positions to secure personal profits.” Russia’s invasion of Ukraine, for example, is enabled by Russian elites and oligarchs, who happen to control a majority of Russia’s economic interests. Because these elites have a mutually beneficial relationship with Russian President Vladimir Putin, this allows them to misappropriate assets from Russian citizens while strengthening Putin’s power. The emphasis on Russia is consistent with very recent guidance issued by FinCEN regarding attempts to evade Russian sanctions through transactions involving high value assets, and related red flags.
With this example as a backdrop, the advisory describes different typologies and manifestations of kleptocracy and foreign public corruption in the form of wealth extraction. These include: bribery and extortion, and misappropriation or embezzlement of public assets. The advisory also explains how kleptocracies launder illicit proceeds, which is mainly through shell companies, offshore financial accounts, and the purchase of high-value assets.
Wealth Extraction – Bribery and Extortion
According to the advisory, bribery schemes usually involve payments to foreign government officials in exchange for obtaining or receiving business, or some other benefit. While some bribery schemes can benefit both parties, other schemes involve extortion. In these situations, parties can be coerced by public officials to pay bribes in order to gain access to or continue certain operations in the country of concern.
Certain foreign bribery schemes with a U.S. nexus can be prosecuted in the United States. For example, in November 2019, the former president of Transportation Logistics Inc. (“TLI”), a Maryland transportation company, was found guilty for participating in a bribery scheme with a Russian official at a subsidiary of Russia’s State Atomic Energy Corporation. The defendant, Mark Lambert, allegedly paid bribes via offshore bank accounts and shell companies to Vadim Mikerin, a Russian official at the Russian subsidiary to secure supplier contracts.
Wealth Extraction – Misappropriation of Public Assets
The misappropriation or embezzlement of public assets usually encompasses the diversion, theft, or misuse of public funds for personal enrichment. These assets can involve government funds, contracts, services, or publicly owned natural resources. In this way, public officials can exploit or deceive corporations that seek to do business with the government into redirecting government resources for their own pecuniary gain.
Laundering Illicit Proceeds – Shell Companies and Offshore Financial Accounts
To conceal origins of illicit funds, kleptocrats typically use shell companies. They also utilize family members and close friends to create their own shell companies and to open personal accounts on the kleptocrat’s behalf while retaining ultimate control of the account. In addition, these shell companies are often used as a conduit to facilitate bribe payments.
Moreover, these shell companies are generally established in foreign jurisdictions whose financial sectors and laws guarantee limited transparency. From these offshore financial centers, the funds are later integrated into the broader financial system through various acquisitions and investments.
As the advisory notes, FinCEN has taken steps to stop the use of shell companies in the United States. In 2018, Customer Due Diligence regulations took effect, which require certain financial institutions to collect beneficial ownership information of legal entity customers at the time of the account’s creation. Other endeavors include the ongoing implementation of the Corporate Transparency Act, which requires defined entities – including most domestic corporations and foreign entities registered to do business in the U.S. – to report beneficial owner information and company applicant information to a database which will be created and run by FinCEN upon the entities’ creation or registration within the U.S.
Laundering Illicit Proceeds – Purchase of Real Estate, Luxury Goods, and other High-Value Assets
In addition to offshore accounts, kleptocrats typically purchase various U.S. assets, like luxury real estate, artwork, and overpriced designer bags to launder illicit proceeds. Kleptocratic regimes use anonymous companies to acquire these assets that remain stable in value.
Recently, the United States government announced that it would work with certain allies and partners to block President Putin and certain Russian elites’ assets in the United States, including real estate, private jets, and yachts. For example, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) recently sanctioned the family of Dmitriy Sergeevich Peskov, an ally of President Putin. Peskov’s family is reported to own real estate in Russia and elsewhere valued at more than $10 million, and to have access to various luxury vehicles like private aircrafts and yachts.
Kleptocracy and Foreign Public Corruption Red Flags
FinCEN has identified ten “red flag indicators” to assist financial institutions in detecting, preventing, and reporting suspicious transactions associated with foreign public corruption and kleptocracy. Some of these red flags that financial institutions should look for include transactions involving long-term government contracts that are consistently awarded; transactions involving services provided to state-owned companies registered in high-risk jurisdictions; transactions involving official foreign government business conducted through personal accounts; and transactions involving public official related to high-value assets described above.
Above all, the advisory reminds financial institutions to consider the relevant facts and circumstances of each transaction, and to remember that not one red flag is determinative of kleptocratic or corrupt conduct.
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.