US FinCEN Warns Financial Institutions About Activities of Kleptocracies and Foreign Corruption

On April 14, 2022, the US Financial Crimes Enforcement Network (“FinCEN”) urged financial institutions to focus on detecting, reporting, and blocking funds associated with kleptocracies and other forms of foreign public corruption.¹ FinCEN emphasized how the laundering of proceeds of foreign public corruption harms the competitive landscape of financial markets and has long-term corrosive effects on democratic institutions. While FinCEN repeatedly mentions Russia as a jurisdiction of particular concern, the guidance is part of the broader US Strategy on Countering Corruption that was released in December 2021 and is targeted at all instances of foreign public corruption.² This Legal Update summarizes some of the key points that FinCEN highlighted to help financial institutions identify potential indicators of kleptocracies and corrupt foreign public officials.

Background

The Currency and Foreign Transactions Reporting Act, commonly known as the “Bank Secrecy Act” (“BSA”), established record-keeping and reporting requirements for private individuals and certain financial institutions.³ Some of the financial institutions covered by the BSA include banks, broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities.⁴ Under FinCEN’s regulations implementing the BSA, financial institutions must implement anti-money laundering/countering the financing of terrorism (“AML/CFT”) monitoring and compliance procedures.⁵ They also must file Suspicious Activity Reports (“SARs”) if they know, suspect or have reason to suspect that transactions conducted or attempted by, at or through the financial institution involves money laundering, corruption, BSA violations, terrorist financing or certain other crimes, including sanctions evasion.⁶ Additionally, FinCEN requires financial institutions to adopt risk-based procedures for conducting ongoing customer due diligence and to comply with beneficial ownership requirements for legal entity customers.⁷ Financial institutions subject to the BSA also must comply with generally applicable Office of Foreign Asset Control’s (“OFAC”) regulations regarding economic and trade sanctions.⁸ In its recent guidance issued on April 14, 2022, FinCEN reminds financial institutions about their BSA and OFAC obligations so that they may continue to be vigilant about detecting and reporting instances of foreign public corruption.

FinCEN Guidance

The FinCEN guidance defines “corruption” as including the abuse of authority or official position to extract personal gain and highlights kleptocracies as governments that are controlled by officials who use political power to appropriate the wealth of their nation for personal gain. It explains that kleptocratic regimes and corrupt public officials may exploit the US and international financial systems to advance their goals by laundering the proceeds of their illicit activities.

The FinCEN guidance describes typologies and potential indicators associated with kleptocracy and other forms of foreign public corruption that financial institutions should be aware of as they monitor for suspicious activity. These include:

• Bribery and Extortion: FinCEN explains that bribes and extortion payments can be made through third-party facilitators (including legal entities controlled by family members and close associates) to conceal the ultimate beneficiary of the payment. Payments can also be laundered through a network of shell companies, offshore financial centers, or professional service providers. In particular, FinCEN mentions that assets held in the name of intermediate legal entities whose beneficial owners are tied to a kleptocrat or their family member may be an indication of foreign public corruption. Bribes may also be deposited or withdrawn from financial accounts established outside of a public official’s country of residence to evade financial institutions’ sanctions screening and AML/CFT controls.
• Misappropriation or Embezzlement of Public Assets: FinCEN emphasizes how public officials or their associates may exploit or deceive corporations who seek to do business with the government into redirecting government resources for their own profit. FinCEN also highlights how several types of procurement, particularly in the defense and health sectors, large infrastructure projects, development, and other types of assistance, appear to pose a particularly high risk of being associated with money laundering related to corruption.
• Use of Shell Companies and Offshore Financial Accounts: FinCEN explains how shell companies and offshore accounts are frequently established in foreign jurisdictions whose corporate formation regimes and financial sector offer limited transparency to regulators and others so that corrupt actors can obscure the origin of illicit funds. These actors often try to integrate illicit funds from offshore financial centers into the broader financial system through investments and acquisitions.
• Purchase of Real Estate, Luxury Goods and Other High-Value Assets: FinCEN draws attention to the fact that corrupt officials often purchase US assets such as luxury real estate and hotels, private jets, artwork, and motion picture companies to launder the proceeds of their corruption.⁹ FinCEN emphasizes how real estate in particular may offer an attractive vehicle for concealing wealth or laundering illicit gains due to its high value, potential for appreciation, and potential for layering transactions that can hide a property’s ultimate beneficial owner.

Several of these typologies are not inherently unlawful or suspicious, and FinCEN emphasizes that financial institutions should consider the relevant facts and circumstances of each transaction. To help financial institutions identify transactions that may warrant such further scrutiny, FinCEN included 10 “red flags” in the guidance, such as if a transaction involves a government official conducting government business through a personal account.¹⁰

AML Compliance Measures

The FinCEN guidance does not impose new compliance obligations on financial institutions but explains how certain existing compliance obligations may be triggered by foreign public corruption. In particular, it highlights the following obligations:

• Customer Due Diligence: Financial institutions should establish controls and procedures to ascertain the status of foreign political figures, their families, and associates (otherwise known as “politically exposed persons” or “PEPs”) and scrutinize their assets. FinCEN also reminds financial institutions that the Customer Due Diligence Rule requires them to identify beneficial owners of certain legal entity customers and that such information can help FinCEN identify legal entities that may be owned or controlled by foreign PEPs.¹¹
• Suspicious Activity Reporting: When filing a SAR, financial institutions should include any and all available information related to the account, locations, legal entities or arrangements, associated beneficial owners, related persons, and other financial institutions involved in the reported activity. If financial institutions detect suspicious activity related to kleptocracies and other foreign public corruption, FinCEN requests that financial institutions include the key term “CORRUPTION FIN-2022-A001” in SAR field 2 (Filing Institution Note to FinCEN) and the narrative.
• Cash Transactions Reporting: Financial institutions engaged in a trade or business must also report cash payments over $10,000 (in one transaction or two or more related transactions) on the Form 8300.¹² When filing a Form 8300 for a corruption-related transaction, FinCEN requests that the filer select Box 1b (“suspicious transaction”) and include the key term “CORRUPTION FIN-2022-A001” in the “Comments” section of the report.
• Sanctions Interdiction: FinCEN also reminds financial institutions that they may be obligated to file a SAR on a transaction involving a sanctioned individual when filing a blocking report with OFAC.¹³
• Enhanced Due Diligence: In addition to complying with general risk-based due diligence obligations, financial institutions must implement a due diligence program to detect and report any money laundering or suspicious activity for private banking accounts held for non-US persons and correspondent accounts for foreign financial institutions.¹⁴ FinCEN requires financial institutions to comply with these enhanced due diligence obligations because accounts holders of private banking accounts and correspondent accounts are considered to be engaging in higher-risk activities.
• Other BSA Reporting Requirements: Financial institutions may also have other relevant BSA reporting requirements such as obligations related to the Currency Transaction Report,¹⁵ Report of Foreign Bank and Financial Accounts,¹⁶ and Report of International Transportation of Currency or Monetary Instruments.¹⁷ While these do not relate specifically to detecting and reporting corruption, FinCEN reminds financial institutions that these reports may be helpful in the general sense that they provide additional information to law enforcement.

The FinCEN guidance also reminds financial institutions of the information sharing arrangements authorized by Section 314(b) of the USA PATRIOT Act. While this sharing is not legally required, FinCEN strongly encourages it as a way to combat sanctions evasion, ransomware/cyberattacks, and the laundering of the proceeds of corruption.

Takeaways

FinCEN’s guidance on kleptocracies and foreign public corruption highlights the importance of AML compliance obligations in light of FinCEN’s heightened concerns regarding foreign corruption risk. FinCEN continues to emphasize how identifying the source of funds and wealth is a key step in identifying the laundering of proceeds related to foreign public corruption.

While FinCEN addresses Russia’s invasion of Ukraine throughout its guidance and mentions how Russia is of particular concern as a kleptocracy, this FinCEN guidance is part of a broader US initiative to combat foreign public corruption. Relatedly, a critical feature of the first-ever US Strategy on Countering Corruption is its “follow-the-money” pillar, focused on curbing illicit finance and money laundering by creating greater transparency, targeting gatekeepers to the financial system and encouraging greater coordination between the United States and foreign jurisdictions on anti-money laundering issues. At the heart of this pillar is the expectation of increased US enforcement in the area of corruption-related money laundering, including via providing FinCEN with expanded regulatory responsibilities and additional resources. It also highlights areas of crossover and coordination between US agencies on these topics, including FinCEN, the Department of Justice’s Foreign Corrupt Practices Unit, and the Securities and Exchange Commission, among others, as increased transparency in financial transactions is expected to translate to greater information to law enforcement that can be harnessed to investigate and root out bad actors’ and kleptocrats’ efforts to hide their illicit gains. In addition to the US Strategy on Countering Corruption, a whistleblower pilot program the Treasury Department recently implemented called the Kleptocracy Asset Recovery Rewards Program, which rewards efforts to identify and recover proceeds of corruption held by US persons or US financial institutions, will further aid US efforts to combat corruption.

Thus, financial institutions should consider the issues that FinCEN raised with respect to all of their activities, not just in connection with Russia. Financial institutions should ensure that they have robust financial crimes compliance programs to facilitate rapid identification and mitigation of threats involving kleptocrats and corrupt, foreign public officials.

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FinCEN’s Red Flags

Financial Red Flag Indicators of Kleptocracy and Foreign Public Corruption:

1. 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.

2. Transactions involving services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.

3. Transactions involving official embassy or foreign government business conducted through personal accounts.

4. Transactions involving public officials related to high-value assets, such as real estate or other 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.

5. Transactions involving public officials and funds moving to and from countries with which the public officials do not appear to have ties.

6. 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.

7. 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).

8. 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.

9. Transactions involving fictitious email addresses and false invoices to justify payments, particularly for international transactions.

10. 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.

¹ FinCEN, FIN-2022-A001 (Apr. 14, 2022), https://www.fincen.gov/sites/default/files/advisory/2022-04-14/FinCEN Advisory Corruption FINAL 508.pdf.

² Please see our earlier legal update on key takeaways from the US Strategy announcement in December 2021: Jason Linder, Gina M. Parlovecchio, Kelly B. Kramer, Daniel Stein, and Juliet Gunev, First –Ever US Strategy on Countering Corruption Globally: Key Takeaways for Corporations to Match Enforcement’s Increasingly Global, Integrated, and Holistic Approach (Dec. 10, 2021), https://www.mayerbrown.com/en/perspectives-events/publications/2021/12/first-ever-us-strategy-on-countering-corruption-globally-key-takeaways-for-corporations-to-match-enforcements-increasingly-global-integrated-and-holistic-approach.

³ 31 U.S.C. §§ 5311 et seq.

⁴ See 31 U.S.C. § 5312(a)(2). The term “financial institutions” covers a broad range of entities under the BSA and corresponding FinCEN regulations. We use the term “financial institutions” generally in this Legal Update, but readers should refer to the underlying regulations to determine if a specific obligation applies to them.

⁵ See 31 C.F.R. §§ 1010.210, 1020.210, 1021.210, 1022.210, 1023.210, 1024.210, 1025.210, 1026.210, 1027.210, 1028.210, 1029.210, and 1030.210.

⁶ See 31 C.F.R. §§ 1020.320, 1021.320, 1022.320, 1023.320, 1024.320, 1025.320, 1026.320, 1029.320, and 1030.320.

⁷ 31 C.F.R. § 1010.230.

⁸ 31 C.F.R. ch. V. OFAC’s regulations generally apply to all US persons but are of particular importance for financial institutions given their role as financial intermediaries. FinCEN has also issued an alert advising all financial institutions to be vigilant against efforts to evade US sanctions and other restrictions in response to the Russian invasion of Ukraine. For more information regarding FinCEN’s alert and the interplay with OFAC sanctions in light of the Ukraine Crisis, please refer to Mayer Brown’s previous Legal Update: FinCEN Identifies Red Flags Following Russia Sanctions (Mar. 24, 2022), https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/fincen-identifies-red-flags-following-russia-sanctions.

⁹ Please see our earlier article on FinCEN’s concerns with real estate transactions: FinCEN Tightens The Net On Illicit Real Estate Deals (Nov. 29, 2018), https://www.mayerbrown.com/en/perspectives-events/publications/2018/11/fincen-tightens-the-net-on-illicit-real-estate-dea.

¹⁰ Please refer to the end of this Legal Update for the list of FinCEN’s red flags.

¹¹ See 31 C.F.R. § 1010.230.

¹² See 31 C.F.R. §§ 1010.330, 1010.331. The Cash Transactions Reporting requirement applies broadly to any entity engaged in a trade or business. This requirement is different from the Currency Transaction Reporting requirement under 31 C.F.R. § 1010.310, which applies to financial institutions as defined in 31 U.S.C. § 5312.

¹³ See FinCEN, Suspicious Activity Report Supporting Documentation (June 13, 2007), https://www.fincen.gov/resources/statutes-regulations/guidance/suspicious-activity-report-supporting-documentation.

¹⁴ See 31 C.F.R. § 1010.620; 31 C.F.R. § 1010.610(a).

¹⁵ A report of each deposit, withdrawal, exchange of currency, or other payment or transfer by, through, or to the reporting financial institution that involves a transaction in currency of more than $10,000 in aggregate per business day. 31 C.F.R. §§ 1010.310-313, 1020.310-313, 1021.310-313, 1022.310-313, 1023.310-313, 1024.310-313, and 1026.310-313.

¹⁶ A US person that has a financial interest in or signature authority over foreign financial accounts must file a Report of Foreign Bank and Financial Accounts if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year, as specified in 31 C.F.R. § 1010.350 and FinCEN Form 114.

¹⁷ Each person (i.e., an individual or legal entity), as defined in 31 C.F.R. § 1010.100(mm), that transports, ships, or mails more than $10,000 of currency or other monetary instruments into or out of the United States must file a Report of International Transportation of Currency or Monetary Instruments. 31 C.F.R. § 1010.340.