By Rajat Gupta, 12 February 2024
Traditionally, financial crime compliance was composed of three distinct lines, each running parallel to one another: anti money laundering/counter financing of terrorism (AML/CFT), sanctions and anti-bribery and corruption. Though linked, each was clearly demarcated in the minds of compliance professionals and carried a unique set of responsibilities.
But today, with AML measures expanding and sanctions packages more widespread and complex than ever before, financial crime compliance has reached a point of inflection, with AML, sanctions and anti-bribery and corruption intersecting to form a nexus. This nexus demands a new approach to financial crime compliance adherence, requiring of compliance professionals greater ingenuity and understanding, as well as techniques to succeed.
How we got to this point, and why, will tell us how to deal with the demands that financial crime compliance now asks of us as compliance professionals.
Though AML/CFT has been around for decades, it was usually limited to the basics, like AML screening. But the global response to the 9/11 attacks gave AML/CFT a new impetus, and FATF now lists 22 predicate offences for money laundering. The same can be said of sanctions. Though they are a longstanding historic tool, sanctions were given a new breath of life following the West’s response to the 1979 Iranian Revolution. Later, and similar to AML/CFT, sanctions were ramped up in the early 2000s as part of the the Bush Administration’s War on Terror and the UN’s response to nation states that harboured terrorists.
Iran is worth looking at more closely. A multitude of sanctions are imposed on Iranian entities, many of whom make up the US government’s list of Specially Designated Nationals (SDN). Alongside the targeted financial sanctions programme of the UN, the US has comprehensively sanctioned Iran in an attempt to degrade its government’s influence in the Middle East. Iranian allies are also denied providing any financial help to the country thanks to secondary sanctions. Secondary sanctions are applied to foreign institutions dealing with Iran, and though they don’t have any US nexus, these institutions have seen their access to the US financial system blocked.
We know that sanctions are applied to bring about a behavioural change of the target. The result is that countries subject to sanctions will see their economies crippled to a greater or lesser degree, which in turn prompts sanctioned regimes to circumvent the sanctions imposed. Iran, Russia and other sanctioned countries have each discovered ways to evade sanctions to keep their economies running. In so doing, these sanctioned countries are now adopting the methods of money launderers to enable them to transact in international markets and make payments. This is where sanctions and AML/CFT crossover.
The following methods of circumvention are either growing or are well-established.
- Exploitation of unlicensed hawaldars to move funds across borders.
- The widespread use of cash, as evaders prefer dealing in cash.
- Methodology structuring, along with cash mules, is common.
- The use of fraudulent bills of lading or fake invoices.
- Transactions based on pro forma invoices.
- Transactions through automatic clearing houses (ACH), which are not generally screened.
- Over- and under-invoicing to pass the value for the shipment from the sanctioned country to its agent outside its borders.
- The use of multi-jurisdictional transactions without any apparent business rationale.
- Payment via gold and precious stones.
- The use of shell companies and complex web of companies, like front companies acting on behalf of handlers in sanctioned countries.
A new reality
Compliance has to wake up to the fact that the lines which were thought to be run parallel are now conjoined – special effort is thus required that is commensurate with the size of the threat. The blurring of the distinction between sanctions and AML/CFT in effect represents a paradigm shift. Financial institutions need to inculcate in their sanctions compliance programmes ‘sanctions investigation’, which has hitherto been an area for AML experts.
An instructive example of why is the Turkish state-owned Halkbank, which remains under investigation for circumventing US sanctions to pass value to Iran, to the tune of approximately $20 billion in cash and gold (though it is being given the chance to avoid charges). The funds involved were laundered through the US financial system, demonstrating that the bond between launderers and evaders is a firm one. Diligent screening and a robust sanction compliance programme are required of all financial institutions to protect themselves from prosecution.
The international compliance community and all international agencies must respond to this new point of inflection, where AML and sanctions intersect. A key part of this recognition is developing investigations programmes for sanctions – mere screening cannot thwart the risk sanctions evasion poses. Investigations are required to mitigate the risk of evasion, which has siphoned off the purpose of sanctions and exposed the limitations of screening. Sanction investigations must form an integral part of sanction compliance programmes across all financial institutions. If it isn’t, circumvention will continue to succeed. Recognising the strong link that has been forged between sanctions and money laundering/terrorist financing is the first step in fighting back.