FinCEN advises financial institutions to focus efforts on combatting kleptocracy and foreign public corruption
On April 14, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”) issued an advisory and press release on kleptocracy and foreign public corruption, citing the establishment of the fight against corruption as a core national security interest last June and Russia’s continued invasion of Ukraine as a prime example of the danger kleptocracies pose through their “corruption, money laundering, malign influence, sanctions evasions and armed interventions abroad.”
The advisory highlights the critical role financial institutions play in identifying corruption and money laundering; identifies typologies and key red flag indicators associated with kleptocracy and other forms of public corruption; and reminds financial institutions of their obligations to file suspicious activity reports (“SARs”) and comply with reporting and other requirements of the Bank Secrecy Act (“BSA”).
Typologies of Kleptocracy and Foreign Public Corruption
FinCEN’s advisory identifies various types of activity corrupt officials regularly engage in to advance kleptocracy and foreign public corruption, including:
The advisory notes that the following types of corruption can take place at all levels of government, including through state-owned entities, and are often associated with other types of criminal behavior.
Bribery and Extortion
FinCEN describes bribery as payments to government officials to obtain or retain business or other benefits, which can include contracts, political outcomes, access to resources, or fraudulent documents. In contrast, extortion may involve coercive requests for payment in exchange for access or to continue operations in a country. Such schemes often involve payments made through third parties or legal entities controlled by associates, with payments laundered through shell companies and foreign accounts to evade detection. FinCEN notes that SARs assist U.S. law enforcement authorities in identifying and prosecuting these schemes under a range of potentially applicable U.S. laws.
Misappropriation or Embezzlement of Public Assets
The advisory notes that misappropriation and embezzlement include theft, diversion, or misuse of public funds for personal gains. The public assets involved can include government funds, services, contracts, and natural resources. Such schemes may involve officials exploiting or deceiving corporations or financial institutions into redirecting government resources for illicit profit. FinCEN mentions the defense, health, infrastructure, and development assistance sectors as posing a particularly high risk for these schemes.
Laundering Illicit Proceeds
The advisory observes that kleptocrats and corrupt officials often use the same means of laundering illicit assets as other criminal actors.
Shell Companies and Offshore Financial Accounts
Corrupt actors often conceal the ownership and origin of illicit profits by using shell companies or accounts created by family members and close associates, including in jurisdictions where the corporate and financial sectors offer limited transparency. Funds may be subsequently incorporated into the legitimate financial system through investments and acquisitions. The advisory reminds financial institutions of the Customer Due Diligence Requirements that took effect in 2018 and the impending Corporate Transparency Act.
Purchase of Real Estate, Luxury Goods, and other High-Value Assets
Illicit actors may also seek to purchase various high-value U.S. assets, including luxury real estate, hotels, private jets, artwork, and film companies, due to their relatively stable value, potential for appreciation, and use of layered purchasing arrangements that may obscure the ultimate beneficial owner. FinCEN notes the U.S. government’s recent efforts to work with allies and partners to block the high-value assets of certain Russian elites.
Financial Red Flag Indicators
FinCEN identifies the following as indicators to assist financial institutions in detecting and reporting suspicious transactions:
- Long-term government contracts that are repeatedly awarded to the same entities through an opaque process.
- Services provided to state-owned entities or public institutions by companies registered in high-risk jurisdictions.
- Foreign government or embassy business transacted through personal accounts.
- Public officials transacting in high-value assets that are disproportionate to their reported wealth.
- Transactions concerning public officials with funds flowing to or from countries where they do not normally have ties.
- Use of third parties to hide the identity of foreign public officials and their ownership of funds.
- Documentation for transactions involving government contracts that charge significantly above market rates or that lack important details.
- Payment totals that do not align with underlying documentation, or that include ambiguous payment details or use of fraudulent documentation to validate funds transfers.
- Fake email addresses and false invoices to validate payments, especially for international transactions.
- Assets held by intermediate legal entities whose beneficial owners are tied to a kleptocrat or their family.
FinCEN’s advisory reminds financial institutions of their legal obligations to file SARs if they “know, suspect, or [have] reason to suspect” that transactions involve funds that are derived from, attempt to disguise, or are designed to facilitate illegal activity, including the evasion of BSA regulations or sanctions.
It also instructs financial institutions to reference this advisory in their SAR reporting and provide specific information regarding the transaction and entities involved. The advisory also describes the additional reporting and due diligence requirements that may apply.
Although few of these are new requirements, their timing and detailed nature indicate the enhanced attention that FinCEN is paying to kleptocracy and foreign corruption, and the corresponding scrutiny it will likely apply to the associated obligations of financial institutions tasked with implementing this guidance.