As we near the end of one of the toughest years for people and businesses in decades, we take a look back at some of the biggest happenings in the world of financial crime, corruption and the laws in place to stop it.
Cryptocurrency: the way of the future
2020 has seen governments across the world tighten their grip on virtual assets. They were once seen as an easy pathway to launder money, but this year, the trend accelerates away from that.
This month, France announced sweeping new KYC measures for all crypto companies operating within its borders. Registration will now be required for crypto-to-crypto transactions, where previously they had only been required for crypto-to-fiat.
Meanwhile, virtual asset service providers are now – or will soon be – subject to stricter regulations in important financial centres like the Cayman Islands, Hong Kong and Singapore.
All these territories announced major overhauls in how they govern digital assets, stressing the importance of KYC and ensuring that crypto fraud carries the same criminal weight as any other financial channel.
The FinCEN Files
Perhaps the biggest financial crime story of the year – an information leak and data dump of global proportions.
Over 2,000 suspicious activity reports (SARs) obtained by Buzzfeed from the American financial crime watchdog FinCEN showed that some of the world’s biggest banks had flagged potential dirty money running through their channels to authorities. But beyond this, they did little else to stop it.
Deutsche, JPMorgan Chase, Standard Chartered, HSBC – all featured heavily in the information that was flagged to authorities.
This information also frequently received little follow-up. The sheer volume of reports was often cited as a reason why.
And the numbers speak for themselves: 2,100 SARs documenting $2 trillion in potentially fraudulent transactions over eighteen years. Around $1 billion in illicit funds was funnelled through financial institutions each month – investigated by over 400 journalists in 88 countries.
Now that some time passed financial crime risk and compliance expert Federica Taccogna said that the revelations didn’t “shatter the financial world” in the way we had imagined.
“The scandal was not so much in the wrongdoing on the part of one or the other individual firm,” she explained. “Rather, it shed light on fundamental weaknesses in the design of our international structures, In particular in relation to the lack of scrutiny of companies registrations and under-resourcing of FIUs.
The unprecedented pandemic caused the world to shut down by late March, and it has never truly started back since.
“How can we ignore it?” said Taccogna. “It certainly has heightened the financial crime risk levels in the environments in which we operate.”
As the world has adapted daily life tough restrictions and lockdowns, so too have many criminals. The Financial Action Task Force has already published details of hundreds of millions of dollars in scams and frauds related to the pandemic.
Medical equipment purchases have been falsified, benefit schemes have been exploited, in the EU Deutsche Welle recently warned that Italian crime cartels have set their sights on the multi-billion COVID rescue packages, leaving the bloc vulnerable.
But it isn’t all about scams and dire warnings, Taccogna advised. It’s also about learning the best way to adapt.
“More than anything else, however, I think it has proved how much flexibility of compliance operating model and dynamic risk assessment are needed as practical preventative tools, not just words on paper,” she said. “Think about the changes in the underlying predicate offences during the pandemic.”
The EU’s Anti Money Laundering Directives
It’s been almost a year since the EU’s 5th Anti-Money Laundering Directive (5AMLD) came into force on 10th January 2020.
Member states had until that date to implement the various new measures it proposed, including tightening controls on cryptocurrencies and high-value goods, expanding beneficial ownership frameworks, and enhancing due diligence on high-risk countries and politically exposed persons.
As with other MLDs, the responsibility fell on member states to transform directive into law, but not everybody’s performance fared well.
Spain only announced plans to implement the directive in June 2020, five months after the original deadline. Meanwhile, Ireland and Romania received fines in July for failures to implement the 4th Directive (4AMLD) on time.
€1.9 billion in ‘missing’ funds: this announcement in July was the focus of what, in hindsight, became a truly immense humiliation that engulfed the German online payments company Wirecard to the point of insolvency.
The company’s fortunes began to turn in 2019, when the Financial Times published reports of irregularities in the company’s books based on whistleblower evidence.
This year however, things came to a head. The company announced a massive €1.9 billion hole in their accounts, share prices nose-dived over 70%, CEO Markus Braun resigned and was soon arrested, and COO Jan Marselek became an international fugitive.
Meanwhile, the German Parliament launched a full inquiry, and the financial watchdog BaFin has faced extensive criticism for how it handled the scandal.
The case made it all the way through to the European Parliament, where German Minister of State for Europe Michael Roth admitted to MEPs that there were issues to be addressed urgently.
It also ignited a debate on ‘economic nationalism’: were countries’ regulators and watchdogs being too lenient on organisations headquartered within their borders?
Renew Europe vice president Luis Garciano certainly thought so, warning that “as long as we have national regulators overseeing their national champions, they will have the incentives to turn a blind eye.
The EU Human Rights Act
Several politicians have called it the ‘European Magnitsky Act’, although that is deliberately not its official name for fear of igniting disagreement between member states – an issue which may crop up from 2021.
The Act, given the final green light in December, allows the EU as a bloc to impose sanctions on individual violators of human rights anywhere in the world.
Its adoption is late compared to equivalents in the UK (2018) and the US (2012), but the fact that the EU can now sanction people as a single unit, rather than as 27 individual states, has been praised by leaders such as Commission President Ursula von der Leyen, who said it sends a “clear message.”
There was worry amongst the celebrations however: the new act deliberately excludes the offence of ‘corruption’ as grounds for sanctions, because the term means different things in different places.
Meanwhile, the fact that unanimity is required before sanctions are introduced has also been criticised, as it will grant every country a veto, likely limiting the act’s effects.
For example, Businessman and anti-corruption activist Bill Browder claimed that Hungarian PM Viktor Orban was already trying to make sure no Russian appeared on the new sanctions list.
He described Orban as “Putin’s Trojan Horse.”
The Financial Action Task Force allowed some respite this year for countries working to remove themselves from the ‘grey list,’ but there have still been developments right up to this week.
That ‘grey list’ – or more accurately, the ‘list of jurisdictions under increased monitoring’ – detailed the names of all countries which had acknowledged flaws in their AML frameworks, but which had also committed to working through FATF ‘actions plans’ to solve them.
Despite the pandemic, some nations have made it off the list:
Trinidad and Tobago was removed in late February. Iceland and Mongolia were removed in October after opting to continue with FATF assessments despite the global watchdog offering them delayed deadlines.
Then, just this week, the Bahamas was finally removed after COVID restrictions eased enough to conduct a thorough on-site inspection.
Still, FATF’s constant evaluations of the global state of play has led to warnings as well as praise.
“We continue to see vast amounts of dirty money funnelled through offshore shell companies or stashed away in real estate,” Executive Secretary David Lewis told AMLi. “Lawyers and accountants turn a blind-eye in exchange for a fast payday; corrupt officials play the system to hide their illicit gains.”
This year, FATF has doubled down on technology and public-private partnerships as ways for countries to overcome financial crime threats.
“The importance of countries developing public-private sector relationships cannot be overstated,” Lewis said, adding that the organisation is “actively exploring the effective and responsible use of technology so that it can be the game-changer we all need it to be.”
Brexit: the beginnings of an AML divorce
We are barely days from the end of the transition period and still no clear word on a Brexit deal. Nevertheless, attention this year has been turning to how UK-EU AML frameworks will begin to drift apart in future.
Criminal law experts in the UK described a deal as an ‘absolute priority’ at the FinCrime World Forum in November.
“Without one, we lose sight of so many mechanisms that are of huge benefit to us,” said the head of the Specialist Fraud Division at the Crown Prosecution Service Andrew Penhale.
That said, the notion that a no-deal Brexit will be the “apocalypse for AML compliance” has also been stressed.
Matthew Redhead of the Royal United Services Institute (RUSI) advised that as long as the UK and EU shared the same general principles, as long as they were both still aligned with the Financial Action Task Force (FATF), their frameworks would align.
The UK may have lost its presence in key organisations like Europol, EuroJust, the new European Prosecutor’s Office, but it has ensured a thorough implementation of EU rules (including 5AMLD) up to this point.
The Digital Euro
This year, the EU has moved closer to the adoption of its own digital currency – governed and backed by the European Central Bank (ECB) – to rival the more traditional private cryptocurrencies like Bitcoin.
In November, ECB President Christine Lagarde said it was her ‘hunch’ that it would be adopted early in the New Year – although it was acknowledged that any adoption of a digital euro would take many years to complete in full.
Meanwhile, ECB board member Fabio Panetta said that the proposal was key to “safeguarding the role of sovereign money,” as he criticised private cryptocurrencies’ influence on the global market.
Some of the biggest FinCrime busts of 2020 in brief
NOVEMBER: 45 arrested and two hundred properties raided to intercept a Brazil-Europe drug smuggling ring and laundering syndicate.
AUGUST: Former White House Advisor Steve Bannon was arrested for conspiracy to commit wire fraud and money laundering. He was accused of using the ‘We Build the Wall’ crowdfunding campaign to scam hundreds of thousands of dollars from donors.
DECEMBER: 23 arrests in an operation against a Russian-speaking criminal organisation accused of laundering, drug trafficking and attempting to infiltrate layers of government in Spain.
NOVEMBER: 18 arrests in an 18-month operation against a criminal network, responsible for laundering around €90 million per year from France to Morocco, through Spain.
OCTOBER: A operation across 16 countries against central European gang QQAAZZ led to 20 arrests of individuals accused of opening hundreds of bank accounts to process the proceeds of cybercriminals’ stolen money.
Some of the biggest fines of the year in brief
SEPTEMBER: Australian banking giant Westpac handed a AU$1.3 billion fine for money laundering breaches by the national financial watchdog AUSTRAC
OCTOBER: Cryptocurrency ‘mixer’ Larry Dean Harmon fined US$60 million in the United States for multiple AML law violations.
SEPTEMBER-NOVEMBER: JPMorgan Chase reached two separate penalty agreements with the US Treasury with a combined value of US$1.17 billion – in one case for ‘deficient risk management practices’, and in another for illegal trades made by bank employees.
OCTOBER: Deutsche Bank fined €13.5 million for late submission of Suspicious Activity Reports (SARs).
Over in the USA
In the US, perhaps the biggest AML legal development was the inclusion of sweeping new measures in the form of the National Defence Authorization Act for Fiscal Year 2021.
President Trump’s opposition to the act (albeit for non-AML reasons) counts for little against a Congress that strongly supports it.
So, after many years of lobbying, the US has finally agreed in 2020 to ban anonymous shell companies and establish a beneficial ownership register – in line with other jurisdictions like the EU and UK.
It will mean that financial criminals won’t be able to count on anonymity as they do business in the United States, and that authorities will be able to count on more thorough information in their probes.
13. Vatican AML Woes
The tiny European city-state hit the headlines big in 2020 with news of a total revamp of AML Unit.
An enhanced financial intelligence unit – the Supervisory and Financial Information Authority (ASIF) has been announced which will “supervise the prevention and countering of money laundering and the financing of terrorism.”
Also this year, the Vatican hosted supervisory from MONEYVAL for a thorough examination of the country’s AML frameworks. The visit came in the aftermath of revelations that a senior cardinal had invested €350 million of most donated money in a London-based property scheme.
1MDB Scandal – Goldman Sachs suffers the consequences
The long-running 1MDB scandal saw investment bank Goldman Sachs agree to a colossal $3.9 billion pay-out this year, with some being paid in cash directly to the Malaysian government, and the rest being released in assets worldwide.
The bank was found to have facilitated former Malaysian Prime Minister Najib Razak siphoning off billions of dollars from Malaysia strategic development company 1Malaysian Development Berhad.
The scandal began in 2015. Razak was sentenced to twelve years in prison in July of this year.
Curtains for Malta and Cyprus Passport Schemes
A scheme summed up by the phrase ‘golden passports’ has hit stumbling blocks this year which it likely won’t recover from.
‘Citizenship by investment’ is the practice of offering citizenship of a country to any high-net-worth induvial who invests significantly in that country – often in the millions.
If an EU member like Cyprus or Malta offers it, then they also offer EU citizenship by extension.
Following news reports that at least 60 high-risk individuals may have used it to buy access to the European market, in October, the European Commission finally signalled legal action if the schemes weren’t shut down.
Speaking of them in her State of the Union address in September, Ursula von der Leyen stressed that “European values are not for sale.”
As of December, Cyprus has suspended its programme entirely, but Malta has not. They instead published new regulations and requirements for applicants in late November. As we near the end of one of the toughest years for people and businesses in decades, we take a look back at some of the biggest happenings in the world of financial crime, corruption and the laws in place to stop it.
By Dan Byrne, December 22, 2020, published on AMLi