The U.S. Federal Bureau of Investigation is examining whether Deutsche Bank complied with laws meant to stop money laundering, a person with knowledge of the matter said on Thursday.
The inquiry, first reported in the New York Times, follows a report by that newspaper last month about bank employees in its U.S. compliance division who had flagged suspicious financial transactions to their superiors who then opted not to escalate them to government authorities.
The transactions were notable because they were linked to companies controlled by U.S. President Donald Trump and his son-in-law and advisor Jared Kushner, according to the report.
Trump rejected the report last month, saying he had little need for banks because he had so much cash on hand and denying that the money came from Russia.
The resulting FBI investigation is viewed as routine following the report about the bank whistleblower, said the person, who spoke on condition of anonymity in order to talk about an ongoing investigation.
A Deutsche Bank spokesperson declined to comment on the Times report, but said: “We remain committed to cooperating with authorized investigations.”
Kushner Companies said allegations about its relationship with Deutsche involving money laundering are “completely made up and totally false”.
Transparency campaigners dismayed at clean bill of health for UK government
On Friday, 7 December the Financial Action Task Force (FATF), a G7 initiative to combat money laundering and terrorist financing awarded the UK the highest rating it has ever given. The move was greeted with stark disbelief by anti-corruption and transparency campaigners such as Global Witness, Transparency International and Corruption Watch. They have a point. Many would echo their view that while the UK has taken a number of initiatives to combat money laundering in recent years, the flow of dirty money continues unabated.
A Global Witness campaigner stated, “Hundreds of billions of dirty pounds are washing through our banks and property market every year, as the government openly admits. Giving it so much credit before we’ve seen real change makes a mockery of the whole process.” Transparency International has often expressed the view that the FATF approach is fundamentally flawed. It is all too cosy. According to its January 2017 position paper: “Policy discussions within the confines of a largely closed, expert-driven anti-money laundering (AML) space have not generated sufficiently effective AML policies. No country is yet compliant with the international FATF standards.” The paper calls for greater openness and the involvement of civil society. Let us, however, add some context. As FATF rightly stated in announcing its report, the UK is the largest financial services provider in the world and, as a result of the exceptionally large volume of funds flowing through its financial sector, the country also faces a significant risk that some of these funds have links to crime and terrorism.
The FATF report emphasizes that the UK government has a strong understanding of these risks and has implemented a raft of policies, strategies and proactive initiatives to address them. It states that the UK aggressively pursues money laundering and terrorist financing investigations and prosecutions, achieving 1400 convictions each year for money laundering. And it adds that the UK’s overall anti-money laundering and counter financing of terrorism (AML/CFT) regime is effective in many respects. Nevertheless, when it comes to the shortcomings, FATF’s criticisms of UK efforts are ultra-cautious. It says that “the intensity of supervision is not consistent across all [financial and non-financial] sectors and UK needs to ensure that supervision of all entities is fully in line with the significant risks the UK faces.” It adds that the UK “needs to address certain areas of weakness, such as supervision and the reporting and investigation of suspicious transactions. However, the country has demonstrated a robust level of understanding of its risks, a range of proactive measures and initiatives to counter the significant risks identified and plays a leading role in promoting global effective implementation of AML/CFT measures”
The Global Laundromat
So where are we to find the truth between these extremes? We believe that there is truth in both positions, but neither the optimism (some would say complacency) of FATF nor the “demands” for “tougher action” of the campaigners can offer a comprehensive answer. It is true that the United Kingdom has had some spectacular successes in recent months. An example was the clampdown on Scottish Limited Partnerships (SLPs).
According to the Wall Street Journal, these “are used by thousands of legitimate businesses, including the private-equity and pension industries, bringing more than £30 billion ($38 billion) a year in investment to the UK”. However, SLPs have also been an important conduit for dirty money and especially Russian dirty money, including $20 billion in a scandal known as the Global Laundromat. The UK responded with new laws in 2017 to make their ownership more transparent and claims that this has led to an 80% drop in the number of new registrants. In July of this year, the UK also laid out a broader set of proposals requiring foreign companies and other legal entities owning UK real estate to reveal the true beneficial owners.
But these measures received a lukewarm welcome by Global Witness and other campaigners who pointed to the lack of prosecutions, demanding that the authorities make better use of the information it receives from both financial institutions and non-financial institutions (e.g. legal practices).
Technology must be better employed
Sifting through information to identify the ultimate beneficial owners behind ghost companies is no easy matter. In the 2014 KPMG Global AML Survey, respondents stated that “identifying complex ownership structures is the most challenging area in the implementation of a risk-based approach to KYC collection”. Part of the problem is that thousands of offshore operations and others with a complex ownership structure are perfectly legitimate, so how does a bank or a lawyer identify those that are being used for fraudulent financial transactions, without scaring away business? They need to be extremely careful to distinguish between what’s legit and what isn’t. Many businesses use sophisticated legal structures for valid reasons such as asset protection, estate planning, privacy and confidentiality.
Technology has become essential to help financial institutions and their legal partners to better understand and document ultimate beneficial owners, identify suspect activities and decide the appropriate level of due diligence required. Basically, the whole industry is banking (no pun intended) on big data, machine learning (ML), and artificial intelligence (AI) to help simplify complex processes and automate repetitive tasks. Even though, these buzzwords have become a hot topic many don’t even know the difference between the two and use the terms interchangeably. ML refers to a computer system that has the ability to learn how to do specific tasks, in contrast, AI enables computer systems to perform tasks done by humans. While AI can replace some rudimentary tasks, I wouldn’t say that compliance analysts are one of them. Therefore, by applying these technologies, the compliance staff would have more time to deal with non-routine events and complex cases as well as having better information through a cleaner, more traceable process to make objective decisions.
Of course, machine learning models can process tremendous amounts of data, but ML systems still need to learn the difference between a false positive and a false negative and that in real-time. First, there simply isn’t enough well-structured data available at most financial institutions that can be used for teaching these ML / AI models. IBM’s Watson, named after a Sherlock Holmes character, has learned this hard way. As with every new technology wave CRM, Business Intelligence, and Predictive analytics, etc. tech companies can’t wait to sprinkle these terms on every bit of their software like fairy dust. Of course, consulting firms are the biggest advocates who can’t wait to implement such solutions!
As of June 2017, the Watson AI platform had been trained on six types of cancers which took years and thousands of medical doctors.
Second, bad actors are always adjusting and trying new schemas and third, the financial services landscape is continually changing leaving ML and AI platforms with a real-time knowledge gap. However, appealing this technology might sound to the people watching the bottom-line. The reality is that ML / AI platforms require months and in many cases years of laborious training, as experts must feed vast quantities of well-structured data into the platform for it to be able to draw meaningful conclusions and those conclusions are only based upon the data that it has been trained on.
- Learning transaction behaviour of similar customers
- Pinpointing customers with similar transactions behaviour
- Discovering transaction activity of customers with similar traits (business type, geographic location, age, etc.)
- Identifying outlier transactions and outlier customers
- Learning money laundering, fraud, and terrorist financing typologies and identify typology specific risks
- Dynamically learning correlations between alerts which produced verified suspicious activity reports and those that generate false positives
- Continuously analyzing false-positive alerts and learn common predictors
For the most part, financial crime will be driven by advances in technology and this marriage of regulation and technology is not new, in itself. However, with the continual increase in regulatory expectations, the staggering levels of cyber-attacks against financial institutions and the FinTech disruption makes RegTech the perfect partner.
In brief, RegTechs address many gaps in today’s financial crime program by improving automation in the detection of suspicious activity, which would be a significant move from monitoring to preventing financial crime while being more cost-effective and agile!
However, financial institutions have been done this path before putting their faith in technology but this time they would be wise to thoroughly start with small-scale pilot projects. Financial institutions need to invest in data quality as it is a key component of any successful financial crime program. High-quality data leads to better analytics and insights that are so important to accurately teaching ML and AI models but also drive better decisions. Therefore, transparency campaigners would do well to campaign for the adoption of such technological solutions. These will provide the infrastructure needed to meet their demands and enable the change they seek.
Go to the AML Knowledge Centre LinkedIn https://www.linkedin.com/groups/8196279/ to read more articles on AML and financial crime. Also, we look forward to your input!
“Top Misconceptions of Cryptocurrency as a Payment System”
Money laundering in Russia has its own characteristics. In the normal world money laundering is the transformation of “illicit money” into “clean money”: criminals selling drugs to invest in real estate, in Russia it is different. There money laundering mostly means turning “clean money” into “illicit money”, for example, by evading taxes or using illegal schemes to withdraw money from the country that could be both illicit and clean. Сompanies trying to transfer legal money abroad because investing in Russia is too dangerous: high political risks, weak legal infrastructure, criminalization and corruption of the economy. To withdraw money from the country companies need an approval from the Central Bank and an economic purpose like a financial or commercial transaction. Along with the money earned in Russia by legal means, there are also sources of illegally earned money:
Where the illegal money comes from?
Sources of legal funds in Russia can be divided into 4 major categories:
- Illegal sale of natural resources: oil, natural gas, metals, etc .;
- Smuggling of alcohol, tobacco, weapons, and drugs;
- Income derived from such “classic” types of illegal activities, like extortion (racketeering), prostitution, theft, fraud, theft of cars, etc .;
- Offenses “of white-collar workers”: the plunder of state property and funds, false declarations of income and profits, tax evasion, illegal “flight” of capital.
GAFI experts note that foreign sources of illegal funds entering Russia and the countries of the former USSR for laundering are little known.
How does the money laundering work in Russia?
The most common method of money laundering in Russia is the opening of individual accounts at financial institutions, placing there significant amounts in cash and then transferring them to the accounts of fake companies, which in turn transfer them to another location.
Other methods include the use of counterfeit accounts, double bookkeeping and contract fraud. A typical scenario involves the transfer of funds in foreign currency to the account of a fake company overseas, allegedly for the purpose of financing a commercial transaction. A false contract for the purchase of goods from a shell company is submitted to the bank as evidence of the commercial need for transfer of funds. Once the money is transferred, legalized funds can be freely transferred to another account or converted into cash. This method is also used to steal public funds.
To launder proceeds from illegal activities in the region, banks, exchange offices, non-bank financial institutions, casinos and real estate companies are also used. Most of the laundering operations are carried out using cash or wire transfers, as well as bank and traveler’s checks.
Global Laundry allowed to launder more than $ 80 billion
According to documents received by the international organization of investigative journalists OCCRP, for three years from Russia was withdrawn at least $ 20 billion, but the real amount can be $ 80 billion. Journalists believe that about 500 people were involved in the corruption scheme named Global Laundry, including oligarchs, bankers and individuals.
Money laundering usually took place according to the following scheme: participants registered, for example, in the UK, two fake companies, the real owners of which were hiding behind a chain of off-shores. The authors of the investigation assume that both enterprises actually had the same owners. Then both companies signed a loan agreement, according to which company “A” lends a large sum from company “B”. In reality, the deal was fictitious, and no money was given to company “A”.
The contract stipulated that commercial structures from Russia would act as guarantors of repayment of the loan, which in almost all cases was headed by a Moldovan citizen. The company “A” then declared itself insolvent, and obligations to repay the debt automatically passed to Russian companies.
As the Moldovan citizen was at the head of Russian companies, the lawsuits had to be considered in the Moldovan court. Corrupt judges confirmed the existence of the debt and issued an order to recover from the guarantors the required amount. According to the investigation, more than 20 Moldovan judges were involved in the scheme. Some of them are under investigation now, and the others have resigned.
After the court decision, the bailiffs, who were also involved in the scheme, opened accounts with Moldindconbank in Moldova. To these accounts, Russian companies had to transfer money, thus closing a fictitious debt.
n the end, the money was transferred to the account of the “creditor company”, for the opening of which the Latvian bank Trasta Komercbanka was always selected. Thus, the money legalized by the Moldovan court was on the territory of the EU: swindlers could now dispose of the money at their discretion and transfer them to accounts in other countries.
Mafia capital and money laundering
Criminal groups continue to make significant investments in real estate, hotels, restaurants and other businesses in some countries of Western Europe. Funds for these purposes often come through intermediary offshore companies. The establishment of links between organized Russian and foreign criminal gangs is noted.
In Russia today there are objective economic conditions for the active legalization of criminal capital. Illicit drug trafficking, the trade in arms and radioactive materials, prostitution, underground gambling, organized crime, illegal financial and banking activities, the plundering of public funds and funds, license-free video business, illegal use of copyright and trademark rights, illegal production of alcohol are all more than favorable conditions for the emergence of significant by the standards of even Western states of illegal capital.
The presence of such money in the country is recognized by the international community as a sufficient condition for large-scale criminal financial operations.
The situation is aggravated by the fact that a huge part of the economic turnover in Russia is served by cash. According to some estimates, “cash” provides up to 60 per cent of the economic turnover (compared to 20 – in the US, or 40 – in Germany). Cash turnover significantly reduces the possibility of introducing effective reporting by financial and other institutions (casinos, salons for the sale of expensive cars, etc.) for transactions with a certain “ceiling”.
In addition to objective circumstances (the “shadow” economic foundation) is not enough to carry out large-scale laundering operations. It is necessary to have well-developed connections with the main financial centres of the world: London, New York, Tokyo, Zurich, Frankfurt am Main, etc.
The facts show: such links are established and expanded by Russian criminals. Active counter-movement of money began. Simplified departure from Russia – there was a legal possibility of investing money in the foreign real estate, securities, luxury goods. Such operations are carried out even during tourist trips to foreign financial centres and “tax havens”.
On the other hand, Russia is rapidly becoming the sphere of application of foreign criminal capital. For example, the Association of Russian Banks believes that over the past two years about 16 billion dollars of Mafia capital have migrated to Russia. The “dollarization” of the domestic economy is growing, and according to various estimates, there are 12 billion of US dollars circulating in Russia in 2018. The currency in the country has long been freely convertible in thousands of exchange offices.
More than 3 thousand criminal groups specialize in the legalization of criminal proceeds, almost 1.5 thousand of these groups formed their own legal economic organizations for this purpose. Up to 80% of the economic facilities of the non-state sector of the economy are under the control of criminal communities that charge them, including more than 500 banks, about 50 exchanges, almost the entire wholesale and retail trade network. According to expert estimates, 2/3 of the legalized funds received in this way are invested in the development of criminal entrepreneurship, 1/5 of it is spent on the acquisition of real estate.
A characteristic feature of money laundering technologies in Russia is the illegal cashing out of funds in order to conceal traces of origin and subsequent involvement in illegal or legal economic circulation.
Picture: Lyudmila2509 – Shutterstock