Kleptocracy, SARs and Sanctions – Practical Takeaways
The NCA in the UK and FinCEN in the US have been vocal recently regarding increased efforts – both their own and what they expect from financial institutions – to detect the proceeds of Russian corruption. Below we pull out some practical takeaways for firms to think about.
Don’t seek consent (DAML) regarding possible sanctions breaches
The NCA advised that it has had requests from firms seeking a money laundering defence in relation to possible breaches of sanctions. Sanctions are primarily a foreign policy tool, whereas POCA obligations relate to money laundering. Although often the two are intertwined – the recent designation of Daniel Kinahan for drugs and money laundering a good example – the NCA cannot provide a defence for breaching sanctions.
Increased focus on kleptocracy means even greater regulatory focus on PEP relationships
The term kleptocracy* has gathered significant pace since Russia’s abhorrent invasion of Ukraine. Both the UK and US have voiced their desire to seek out and punish kleptocrats. However kleptocracies have been around for many years and are certainly not confined to Russia. Tom Burgis’ excellent book ‘Kleptopia’ shines a light on the subject and highlights how countries such as the UK provide kleptocrats with the opportunity to legitimise their behaviour and spend their ill gotten gains. So, although the direct focus is on Russia – financial institutions should not be narrow when looking at potential kleptocrats.
Through SAMLP and PAMLP visits as well as REP-CRIM returns, the FCA has always been focused on PEPs. We expect this to increase further. Proactive steps to take include:
Ensuring your PEP definition in your policy is up to date in relation to the MLRs AND your automated solution replicates your policy definition.
Test the effectiveness of your PEP screening tool. Examine the quality of completeness of data feeds as well as the screening logic being applied.
Revisit your PEP risk assessment methodology and related controls to ensure it is still fit for purpose.
Analyse your TM coverage to understand whether behaviour associated with kleptocrats is covered. FinCEN provided a list of 10 red flags, some of which may be useful.
When conducting regular due diligence reviews of PEP customers ensure the documented source of wealth is robust, comprehensive and kept up to date.
Analysing transactional flow from respondent banks in central Asia – e.g. Uzbekistan to assess whether there are indicators of sanctioned individuals / entities looking to evade sanctions in this way.
* Kleptocracy Definition: A kleptocracy is a government controlled by officials who use political power to appropriate the wealth of their nation for personal gain, usually at the expense of the governed population
