Some Questions about Financial Integrity

What is it?

Photo by FlyD on Unsplash

When I started my new job in September, I joined the Dedicated Online Financial Integrity Network (DOLFIN) in hopes of taking a lead role in protecting global financial integrity. Since then, we became the Institute for Financial Integrity—a much bigger, more comprehensive organization that helps empower financial integrity professionals to protect global financial integrity, with DOLFIN as our proprietary education, training and certification platform.

But what is financial integrity?

This is not a lengthy advertising for my firm, so don’t go away. Rather, what I hope to do here is explain why anti-money laundering, counterfinancing of terrorism, counterfinancing of proliferation of weapons of mass destruction (AML/CFT/CFP), sanctions, anti-fraud, anticorruption, and efforts to counter other types of financial abuses are and should be integrated.

They are all efforts that work together to protect the integrity of the global financial system, helping prevent access by criminals, kleptocrats, and other illicit actors.

Financial integrity describes a financial system that operates in a clean, transparent, and accountable way, according to Transparency International. It describes a system that prevents corruption by making hiding misapproppriated assets difficult to hide and transfer. It describes a system that prevents drug cartels, transnational organized criminal organizations, weapons smugglers and others from accessing resources to help them hide and move dirty money.

And as we grow as a company, our goal is to help cultivate and protect global financial integrity by protecting the financial system from illicit use and combating threats to collective security through cutting edge research, education, and training powered by the DOLFIN platform. We also want to promote the concept of “financial integrity,” not just AML, sanctions evasion, fraud, or other illicit financial activities as separate concepts, especially with Russia increasing its efforts to access and consequently sully the global financial system.

And please don’t tell me how my personal views on Russia are somehow influencing my perception of this corrupt, autocratic regime! There’s plenty of evidence to support the assessment about Russia, and plenty of international support for said assessment.

This is a regime that murders its opposition. The United States, the UK, Canada, New Zealand, and others have already sanctioned those involved in Navalny’s death.

This is a regime that invaded its neighbor and engaged in massive disinformation efforts to justify its behavior.

This is a country well-known for its corruption and continues to drop on the Transparency International Corruption Perceptions Index.

This is a country that even before its full-scale invasion of its neighbor was known for the links between its leaders and organized crime groups, who are engaged in everything from helping Russia evade sanctions and trade restrictions, to human smuggling and sex trafficking, to cyber attacks.

…as the Russian state began to reassert its authority under Putin, members of organized crime became less important than the oligarchs whom they had helped ascend to wealth and power. Today, Putin controls the oligarchs, and together they control and exploit the criminal world to their mutual advantage.

Yes, every country in the world has its own corruption problems, but spare me the false equivalency between the criminal state that Russia has become with Vladimir Putin’s ascent to the pinacle of power and countries that are actively fighting corruption instead of facilitating it for its leaders’ enrichment.

This is a country that FATF for the second year in a row has highlighted Russia as a risk for illicit finance, not just because it is an aggressor state that has invaded its neighbor and murdered thousands of Ukrainians, targeted civilian infrastructure, and kidnapped thousands of Ukrainian children, forcing them to live as “Russians” and resulting in an International Criminal Court warrant both for Putin and for his Commissioner for Childrens Rights, and I use that term very loosely. But also, Russia’s increased arms trade with Iran and North Korea—two comprehensively sanctioned jurisdictions—present additional risks that caused FATF to suspend Russia’s membership and the Egmont Group of Financial Intelligence Units to expel Russia.

The FATF strongly condemns the Russian Federation’s war of aggression against Ukraine. Over the past year, the Russian Federation has intensified its inhumane and brutal attacks targeting critical public infrastructure. The FATF is also deeply concerned by the reports of arms trade between the Russian Federation and United Nations sanctioned jurisdictions, and malicious cyber-activities emanating from Russia.

How do we protect the global financial system from abuse?

That’s where understanding the convergence of AML/CFT/CFP, sanctions enforcement, and other counter illicit finance (CIF) efforts is critical.

Threats to collective national security and global integrity standards hold hands. Methodologies used by organized crime, kleptocrats, human traffickers, and sanctions evaders are similar. All strive to obscure the origins of the funds, and all require money laundering as a way to do that.

OK, I don’t mean to bore you. I just wanted to lay down some basic concepts, because as the regulatory world becomes more complex, understanding the tools at your disposal is critical.

Gone are the days where AML, fraud, and sanctions compliance efforts are segregated from one another. Thanks in large part to Russia’s invasion of Ukraine, not only is crossborder collaboration between the United States and its allies at its highest, but so is the ability to use AML tools and resources to detect and prevent Russian sanctions evasion.

After President Biden signed EO 14114 authorizing secondary sanctions on foreign financial institutions that help Russia’s military conduct its slaughter in Ukraine, OFAC issued a guidance that demonstrated in spades how AML and efforts to counter sanctions evasion can act together to detect and hinder Russia’s efforts to enhance its military capabilities.

“Two areas of highest priority…sanctions…and the strengthening of the US’s own AML/CFT regime are deeply linked,” according to former Treasury Assistant Secretary for Terrorist Financing and Financial Crimes, Elizabeth Rosenberg. “The continued siloing of AML/CFT and sanctions departments at some financial institutions can lead to financial institutions unwittingly, or inadvertently, processing payments for controlled goods and involving designated entities.”

For example, financial institutions should use AML customer due diligence (CDD) strategies to ensure they’re not violating US sanctions. OFAC also recommended updating risk assessments to include sanctions evasion risk and enhancing trade finance controls related to specific restricted critical items that Russia is determined to procure through documentary fraud, transshipment through third countries, and other strategies.

Financial institutions can no longer rely on basic list screening and transaction filtering to remain in compliance. Most firms and financial institutions screen payments for direct links to sanctioned parties rather than for signs of evasion, so they might miss red flags such as restricted end-users, high-risk transshipment jurisdictions, and other indicators.

FinCEN and OFAC, as well as the Commerce Department’s Bureau of Industry and Security (BIS) have released various advisories and alerts, listing indicators of evasion, and they look pretty similar.

A joint OFAC, BIS, and Justice Department compliance note highlighted the importance of maintenance of risk-based compliance programs to detect and deter Russian use of third-party intermediaries and transshipment points to evade sanctions and export controls. These evasion schemes often involve the use of shell and front companies to obscure the involvement of sanctioned parties or those on the BIS Entity List in transactions. Sound familiar? Similar to sanctions evasion methodologies we have seen for years? Yes.

A BIS and FinCEN notice from November specifically says that “Financial institutions directly involved in providing trade financing for exporters also may have access to information relevant to identifying potentially suspicious activity.” So might creditors, insurance companies, and other stakeholders. Sharing this information can help deter Russian money laundering, trade control, and sanctions violations.

Lexis Nexis last year warned that financial crime compliance efforts are converging, although traditionally they have been siloed.

I see efforts to fight fraud, money laundering, sanctions and trade control evasion, kleptocracy, corruption, and other crimes as part of a big umbrella—efforts to protect the integrity of the global financial system. And as the global CIF mission has become more complex, these collaboration and convergence of these efforts are becoming more and more important.

Thanks, Russia, for making our compliance efforts more difficult!

On the other hand, if Moscow wasn’t desperate to gain access to money, resources, and components to conduct its war in Ukraine, and if our restrictions weren’t effective, Russian actors wouldn’t have to resort to more and more complicated (and expensive, I might add) strategies.

Their increased and ever-more-complicated efforts to evade sanctions and circumvent trade restrictions indicate that Russia still has not been able to substitute western technologies and considers access to the global financial system critical.

I’m more than happy to make those efforts more difficult and more expensive for the Kremlin.