The United States Government’s View of Kleptocracy
As described in the Advisory, a kleptocracy is as a government controlled by officials who use political power to appropriate the wealth of their nation for personal gain, thereby enriching their corrupt networks and eroding public trust and harming the most vulnerable in societies. This corruption manifests through bribery of government officials, misuse of resources, theft of government property, kickbacks, extortion, and improper use of official title for personal gain.
The Advisory highlights the particular concern of Russia as a kleptocracy, noting the nexus between corruption, money laundering, malign influence and armed interventions abroad, and sanctions evasion. The Advisory’s purpose is both to provide financial institutions with a reminder of their obligations relating to the prevention, detection, and reporting of kleptocracy and other forms of foreign public corruption and to serve as a toolkit for identifying potential indicators of illicit funds stemming from such activity.
Forms of Kleptocracy and Foreign Public Corruption
The Advisory describes typical forms of kleptocracy that financial institutions should keep in mind. These forms are presented under two main categories:
- wealth extraction, which can be accomplished via bribery, extortion, embezzlement, or misappropriation of public funds and assets
- laundering illicit proceeds, including by use of shell companies and offshore financial accounts as well as by purchase of real estate, luxury goods, and other high-value assets
The U.S. has laws and policies in place to prevent, detect, and prosecute corruption taking these forms. For example, bribery is prosecuted under the Foreign Corrupt Practices Act (FCPA), often with the assistance of information provided by financial institutions via reporting through Suspicious Activity Reports (SARs). With respect to laundering, the Advisory notes recent steps taken to curb the use of shell companies, including but not limited to the passage of the Corporate Transparency Act (CTA), which requires the Treasury to create a “beneficial ownership information database.” These requirements work in conjunction with obligations of private actors, especially financial institutions, to diligence and monitor their customers in efforts to help track and stop kleptocrats.
Red Flag Indicators of Kleptocracy and Foreign Public Corruption
The Advisory describes 10 potential red flags indicating potential kleptocracy and foreign public corruption. While FinCEN identified these red flags with financial institutions in mind, they can be equally relevant for any businesses or organizations conducting financial transactions with foreign parties, including but not limited to those organizations providing real estate, legal, or accounting services. To be sure, no individual red flag listed below should be considered per se indicative of improper activity, and each indicator should be evaluated taking into account the totality of facts and circumstances at play.
- transactions involving long-term government contracts consistently awarded, through an opaque selection process, to the same legal entity or entities that share similar beneficial ownership structures
- transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions
- transactions involving official embassy or foreign government business conducted through personal accounts
- transactions involving public officials related to high-value assets, such as real estate or luxury goods, that are not commensurate with the reported source of wealth for the public official or that fall outside that individual’s normal pattern of activity or lifestyle
- transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties
- use of third parties to shield the identity of foreign public officials seeking to hide the origin or ownership of funds, for example to hide the purchase or sale of real estate
- documents corroborating transactions involving government contracts (e.g., invoices) that include charges at substantially higher prices than market rates or that include overly simple documentation or lack traditional details (e.g., valuations for good and services)
- transactions involving payments that do not match the total amounts set out in the underlying documentation or that involve vague payment details or the use of old or fraudulent documentation to justify transfer of funds
- transactions involving fictitious email addresses and false invoices to justify payments, particularly for international transactions
- assets held in the name of intermediate legal entities whose beneficial owner or owners are tied to a kleptocrat or his or her family member
As with all compliance efforts, an organization’s transaction monitoring and surveillance efforts should be proportional to the level of risk presented by the nature of the transaction and the parties involved, and all investigations into potentially suspicious activity should be thoroughly documented.
Reminder of Relevant Bank Secrecy Act Obligations
The Alert also reminds financial institutions of their many reporting obligations under the Bank Secrecy Act (BSA) related to potential instances of suspicious activity. Financial institutions should expect regulators to assess the adequacy of its compliance programs in large part by the program’s ability to facilitate the timely identification and reporting of suspicious activity relating to kleptocracy and foreign corruption as described in this guidance.
Pursuant to the BSA, a financial institution must file a SAR if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution (1) involves funds derived from illegal activity or attempts to disguise funds derived from illegal activity; (2) is designed to evade regulations promulgated under the BSA; (3) lacks a business or apparent lawful purpose; or (4) involves the use of the financial institution to facilitate criminal activity, including the evasion of BSA and sanctions regulations. The financial institution need not establish that a transaction is in fact illicit prior to filing a SAR, and indeed a SAR is required to be filed even if the institution merely has “reason to suspect” that the transaction may be illicit. The Alert also includes guidance for when a financial institution should file a SAR with the Office of Foreign Assets Control (OFAC), including transactions involving an individual identified by OFAC as a Specially Designated National and transactions with a potential nexus to a ransomware attack or payment. Financial institutions should evaluate their protocols and procedures to ensure that red flag indicators are escalated promptly within the organization and investigated thoroughly for reporting consideration.
The Advisory also highlights certain due diligence requirements. Among them, financial institutions must establish risk-based due diligence controls and procedures that include reasonable steps to identify senior foreign political figures (along with their families and associates) and to scrutinize assets held by such individuals. FinCEN’s Customer Due Diligence Rule requires banks, brokers, or dealers in securities and mutual funds as well as futures commission merchants and introducing brokers in commodities to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions. In addition, certain U.S. financial institutions must implement an enhanced due diligence program for private banking accounts held for non-U.S. persons that is designed to detect and report any known or suspected money laundering or other suspicious activity. Money Service Businesses have parallel requirements with respect to foreign agents or counterparties and are required to establish adequate and appropriate risk-based policies, procedures, and controls.
Finally, FinCEN emphasized that it strongly encourages voluntary information sharing among financial institutions concerning individuals, entities, organizations, and countries suspected of possible terrorist financing or money laundering pursuant to the safe harbor authorized by Section 314(b) of the PATRIOT Act.
Enforcement Targeting Kleptocracy and Foreign Public Corruption Is Here to Stay
The federal government has made clear its ongoing priority in ensuring the integrity of the U.S. financial system by waging an affirmative attack on kleptocracy and foreign corruption, including through President Joe Biden’s declaration of the fight against corruption as a core national security interest and subsequent rollout of a comprehensive U.S. Strategy on Countering Corruption, Congress’s recent passage of the CTA and Anti-Money Laundering Act of 2020, and the ongoing efforts of the Kleptocracy Team within the International Unit of the Justice Department’s Money Laundering and Asset Recovery Section.
Kleptocracy has been an increasingly important enforcement priority in light of Russia’s military invasion of Ukraine, as evidenced by the March 2022 launch of the interagency Task Force KleptoCapture dedicated to enforcing the sweeping sanctions, export restrictions, and economic countermeasures that the United States has imposed on Russia, and the U.S. Treasury Department’s Kleptocracy Asset Recovery Awards Program, which pays rewards to qualified individuals for information leading to the seizure or recovery of stolen assets linked to foreign corruption. And on April 28, 2022, U.S. Attorney General Merrick Garland announced that the Biden administration will send legislative proposals to Congress to “enhance the Justice Department’s ability to hold the Kremlin and Russian oligarchs accountable for the ongoing invasion in Ukraine.” Among the proposals is an extension of the statute of limitations from five years to 10 years for seeking forfeitures based on foreign offenses, allowing more time for investigators to “follow the money” and “deprive criminals of their ill-gotten gains.”
Given this uptick in enforcement priority, financial institutions and organizations should be vigilant in helping to prevent and detect abuses of the U.S. financial system by kleptocrats and other criminals who obfuscate illicit funds by proactively developing and maintaining robust compliance and reporting programs sufficient to detect suspicious activity potentially implicating foreign public corruption.