The revolutions and political unrest in the Middle East and North Africa are a good reminder for financial institutions to review their compliance policies. Popular uprisings early this year in Tunisia and Egypt overthrew long-time rulers Zine El Abidine Ben Ali and Hosni Mubarak. Following the ouster of these leaders, the United States, the European Union and others sought to freeze assets belonging to them, their families and close associates. Soon after, violent protests in Libya against the regime of Col. Muammar Gaddafi also led the United States and others to freeze all assets of the government of Libya, as well as Gaddafi and his family and associates.
The magnitude of proceeds allegedly stemming from corruption that flow through the global financial system is staggering. Tunisia’s Ben Ali is rumored to have more than $5 billion stashed abroad, for example, while Egypt’s Mubarak is thought to control more than $3 billion in foreign accounts that allegedly represent proceeds from bribery or misappropriation of state assets. Gaddafi and others in Libya are thought to control at least $30 billion abroad.
These foreign developments coincide with a heightened era of regulatory scrutiny in the United States. Regulators in Washington have redoubled their efforts to enforce anti-money laundering rules, economic sanctions and anti-bribery laws. In addition to protecting the integrity of the banking system, the federal government believes that depriving corrupt foreign officials and sanctioned countries access to the U.S. financial system is an increasingly important instrument of its foreign policy. The message to domestic financial institutions is clear: know your customer and actively monitor transactions or face the consequences.
In February, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued reminders to financial institutions to take reasonable steps to guard against the flow of funds that might represent proceeds from bribery, corruption, misappropriated state assets or other illegal payments from — or intended for — Tunisia, Egypt and Libya. FinCEN’s guidance urged financial institutions to assess the impact of recent events in the region on patterns of financial activity when assessing the risks of particular customers and transactions.
Even before political turmoil erupted in the Middle East and North Africa, however, the Department of Justice announced two new enforcement initiatives that will impact financial institutions. First, the DOJ announced the Kleptocracy Asset Recovery Initiative, which will target the proceeds from foreign corruption laundered into or through the United States. The goal is to prevent foreign leaders from hiding illicit funds — whether from corruption or misappropriation of state assets — in the United States and to return funds to the victimized countries.
While bribe recipients cannot be prosecuted under the Foreign Corrupt Practices Act, the Justice Department has pursued asset forfeitures to recover the proceeds of foreign corruption. For example, the DOJ filed a forfeiture action against Singaporean accounts worth $3 million allegedly related to bribes paid in connection with public works projects in Bangladesh. The feds argue that the illicit proceeds are subject to U.S. jurisdiction because the improper payments were made in U.S. dollars and the funds flowed through U.S. financial institutions.
In another closely watched case, the Justice Department filed asset forfeiture complaints against a condominium in New York and a house in Virginia that allegedly were purchased with the proceeds of bribes paid to the former president of Taiwan and his wife. The former president and his wife were convicted in Taiwan of bribery, embezzlement and money laundering.
For its other major initiative, the DOJ created a new unit within the Criminal Division’s Asset Forfeiture and Money Laundering Section devoted to investigating complex, international financial crime, emphasizing financial institutions and their employees. This new Money Laundering and Bank Integrity Unit is consistent with the government’s new focus by investigating and prosecuting the financial institutions and gatekeepers (i.e., accountants, lawyers and advisors) who facilitate money flows in violation of money laundering, corruption or trade sanctions rules.
By virtue of their position and the influence that they may hold, senior foreign political figures generally present a higher risk for involvement in bribery and corruption. While corruption at all levels is harmful, corruption at the highest levels can be devastating because it can harm economic development, discourage foreign investment, undermine trust in public institutions and foster a climate of lawlessness. Countless corrupt leaders have set their nations back years for their own personal gain.
As a result, regulators have been ramping up enforcement of the Bank Secrecy Act, a mandate that requires U.S. financial institutions to conduct enhanced due diligence on foreign private banking accounts held by, or on behalf of, current or former “senior foreign political figures” (a label that regulators define broadly).
Financial institutions that knowingly engage in transactions that involve proceeds of foreign corruption may be liable for money laundering under U.S. law. Moreover, direct or indirect business relationships with senior foreign political figures may expose financial institutions to significant legal and reputational risks. This is especially true if the official comes from a country in which corruption and improper use of public office to obtain personal wealth is common, or from a country whose anti-money laundering regime does not meet international transparency standards.
As part of its overall anti-money laundering program, a financial institution should establish risk-based policies, procedures and processes to ensure that it is not being used as a conduit for laundering criminal proceeds. Just as important, the company must monitor, test and update these policies routinely. Financial institutions should take reasonable efforts to determine the identity of nominal and beneficial owners of any private banking accounts,
Over the last two years, five foreign financial institutions — notably Credit Suisse and Barclays — entered deferred prosecution agreements with the government related to charges of “stripping,” the practice of removing identifying information from wire transfers to conceal that the funds originated from countries subject to economic sanctions overseen by the Office of Foreign Assets Control. The foreign financial institutions were not charged with direct violations of U.S. laws, but instead were accused of causing U.S. persons to violate U.S. sanctions regulations and the Bank Secrecy Act.
The penalties have been steep: banks have agreed to forfeit almost $1.5 billion over the past three years. Banks have also wasted untold sums on investigations and legal defense, not to mention the reputational harm suffered by some of the financial firms that have made headlines for impropriety. And regulatory enforcement along these lines only expected to continue.
The pattern in these “stripping” cases demonstrates the extraterritorial reach of the U.S. laws, and the willingness of the Justice Department to expand the reach of U.S. laws to foreign institutions. Recent international events will only further spur the DOJ to enforce money laundering, corruption and sanctions laws to combat illicit activity and support U.S. foreign policy goals. This means that now more than ever, as much of the region undergoes major political transformation, financial firms need to ensure that they are not complacent in transferring illicit funds — both so as not to aid corrupt officials and to keep themselves out of hot water with regulators.