November 27, 2021

Volume XI, Number 331


November 24, 2021

Subscribe to Latest Legal News and Analysis

FinCEN Issues Advisory on Human Rights Abuses Enabled by Corrupt PEPs and Their Financial Facilitators

On June 12, 2018, FinCEN issued an “Advisory on Human Rights Abuses Enabled by Corrupt Senior Foreign Political Figures and their Financial Facilitators” to highlight the connection between corrupt senior foreign political figures and their enabling of human rights abuses.  The Advisory provides examples of potential red flags to aid financial institutions in identifying the means by which corrupt political figures and their facilitators may move and hide proceeds from their corrupt activities – activities which, directly or indirectly, contribute to human rights abuses and other illegal activity.

The Financial Action Task Force (FATF) issued Recommendation 12 in June 2013 to address the risks posed by politically exposed persons (PEPs), and that Recommendation has been implemented through FinCEN rules and guidance.  Thus, U.S. banks already are expected to have in place risk-based policies, procedures and processes regarding PEPs, including conducting enhanced due diligence.  Nonetheless, FinCEN issued this Advisory to “further assist” U.S. financial institutions’ efforts to detect and report foreign PEP facilitators’ use of the U.S. financial system to “obscure and launder the illicit proceeds of high-level political corruption.”

The Advisory highlights the following three key “typologies” financial facilitators of PEPs often use: (i) the misappropriation of state assets (such as through offshore leasing companies to sell oil – a topic on which we repeatedly have blogged, including here; (ii) the use of shell companies to conceal ownership and disguise the true source of illegal proceeds (again, a topic on which we repeatedly have blogged; and (iii) the exploitation of the real estate sector to launder “ill-gotten gains” (a topic on which we repeatedly have blogged.  More importantly, the Advisory identifies the following red flags associated with corrupt foreign PEPs and their facilitators:

  1. Use of third parties in situations where that is unusual;
  2. Use of third parties to mask the identity of a PEP;
  3. Use of a PEP’s family member or colleague as a legal owner;
  4. Use of shell companies and legal arrangements to mask ownership, industries, or countries related to the transaction;
  5. The PEP or facilitator provides information that appears to be untrue;
  6. The PEP or facilitator attempts engage a financial institution or a designated non-financial business or profession (DNFBP), such as a real estate agent, dealer in precious metals, attorney, accountant or company formation agent, that would normally not provide services to a PEP;
  7. The PEP or facilitator repeatedly moves money to and from countries other than his or her own;
  8. The PEP or facilitator has access to state funds;
  9. The PEP or facilitator has control over the financial institution or DNFBP that is a party or a correspondent in a transaction;
  10. The transaction involves government contracts that do not appear to make sense, such as “payments for construction projects directed to textile merchants;”
  11. Transactions involving government contracts that are coming from or going to shell companies;
  12. Suspicious documentation, such as invoices with inflated prices or that lack pricing information;
  13. Payments for government contracts that originate from non-governmental entities; and
  14. “Transactions involving property or assets expropriated or otherwise taken over by corrupt regimes, including individual senior foreign officials or their cronies.”

Of course, one red flag does not necessarily indicate suspicious activity. It should be viewed in the context of other facts, including the customer’s transactional history and whether other red flags are present. If suspicious activity is detected, a financial institution must file a SAR. FinCEN previously issued Guidance (in 2008) on filing SARs regarding the proceeds of foreign corruption. And a related SAR Activity Review discusses what transactions may involve the proceeds of corruption.

If a SAR is filed, FinCEN expects that financial institutions will select SAR filed 35(l) (Suspected Public/Private Corruption (Foreign)) and reference this Advisory by including the key term: “Financial Facilitator FIN-2018-A003” in the SAR narrative and SAR field 35(z) (Other Suspicious Activity – Other) to indicate a connection between the suspicious activity being reported and the persons and activities highlighted in this Advisory.

Although some of the red flags provided in FinCEN’s latest Advisory require an analysis no different than what a financial institution already conducts for activity outside the political realm (e.g., the use of shell companies), many of the red flags relate to information that is at least somewhat unique to PEPs. For example, to identify all of the red flags above, financial institutions would need an understanding of:

  • The identity of the PEP’s senior officials, family members, close associates and “cronies”;
  • What is (and is not) an “official government entity”;
  • The level of authority the PEP has over state assets, and his or her ability to access those assets; and
  • What property and assets have been expropriated by the PEP or those close to him or her.

The expectation that the financial institution understands all of these complicated issues raises the stakes for any entity involved in transactions with a PEP.

William J. Burton contributed to this article. 

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 170

About this Author

Moskow, Delaware, Partner, litigation

Beth Moskow-Schnoll is Managing Partner of the firm's Delaware office and concentrates her practice on white-collar litigation, regulatory enforcement and compliance, and complex civil litigation, with an emphasis on banking and other financial services litigation.

She has tried to verdict dozens of cases in federal district court. She also has successfully briefed and argued multiple cases before the Third Circuit Court of Appeals. Ms. Moskow-Schnoll has convinced the government to decline prosecution of clients in matters involving allegations...

Evan W Krick, white collar defense, civil litigation, Delaware, lawyer, Ballard Spahr, Law Firm

Evan W. Krick focuses on white collar criminal defense and complex civil litigation, with an emphasis on the banking and health care industries.