Financial crime in 2021: Year in review

The past 12 months have been eventful in the world of financial crime. From policy reforms to the Pandora Papers to pandemic fraud, compliance professionals, law enforcement and legislators have had plenty to chew on. Here, we summarise ten of the most important events of 2021, with a view to what we can expect in the coming year.

Pandora Papers and the ENABLERS Act

The International Consortium of Investigative Journalists (ICIJ) published in October a series of stories based on 11.9 million leaked documents from 14 offshore service providers. The offshore firms serve individuals and corporations seeking to incorporate shell companies, trusts, and other entities in jurisdictions with low or no tax.

The leaked records include information on so-called beneficial owners, shareholders, directors and officers of entities registered in the British Virgin Islands, Seychelles, Hong Kong, Belize, Panama, South Dakota?and other jurisdictions. Most of the documents date between 1996 and 2020, and include matters relating to incorporation; the use of shell companies to acquire real estate, jets and life insurance; investments and financial transfers; and tax avoidance. Some of the documents expose financial crimes like money laundering, according to the ICIJ.

Several hundred politicians were exposed by the leak according to the ICIJ, using entities in “secrecy” jurisdictions to acquire real estate, hold money in trust, and sometimes own companies anonymously. The stories showed that trust companies in Sioux Falls, South Dakota, established around 30 trusts in recent years connected to individuals and entities accused of corruption or human rights abuses.

In the months following the leak, a bipartisan group of US lawmakers proposed legislation that would force financial middlemen to investigate foreign clients seeking to move assets into the US financial system. The proposed legislation, the Establishing New Authorities for Business Laundering and Enabling Risks to Security (ENABLERs) Act, would amend the Bank Secrecy Act by requiring the US Treasury Department to create new due-diligence rules?for trust companies, accountants, lawyers and other professionals like art dealers.

If signed into law, the US secretary of the Treasury would be required to issue rules by 31 December 2023, so expect a push to debate the bill in Congress over the following year.

UK’s anticorruption strategy

In December the UK government published its third annual update to the UK Anti-Corruption Strategy 2017-2022. The update highlighted progress made against the government’s anti-corruption commitments in 2020, focusing on securing public commitment with Crown Dependencies and inhabited Overseas Territories to implement publicly accessible registers of company beneficial ownership information, extending the remit of the National Fraud Initiative, publishing a review of procurement risks in local government, and publishing the Green Paper on procurement reform.

The update also notes that the government published a response to a 2017 call for evidence on corporate criminal liability. The Law Commission has been asked to review current rules and its report is set to be published in the coming months.

The government’s Anti-Corruption Strategy features 134 commitments across six priority areas, including reducing corruption in public procurement and boosting international cooperation on corruption matters. An update on progress made in 2021 is set to be published within the next year, and the government has announced it is starting to develop a successor to the strategy which expires at the end of 2022.

At December’s Summit for Democracy hosted by the White House, Prime Minister Boris Johnson committed to move promises on anti-corruption matters forward in 2022. The commitment to table legislation on UK property ownership transparency is a commitment contained in the strategy that has been marked as off track, as well as measures to reform companies house and ensure accuracy of the UK beneficial ownership register.

Pandemic fraud and ransomware

The scale of fraud perpetrated during the pandemic began to emerge in 2021. In May the UK’s National Cyber Security Centre revealed that its takedown service had removed more than 700,000 scam campaigns from the internet in 2020 – a massive fifteenfold increase on the figure for 2019. While the NCSC largely put this increase down to an expansion of its takedown service, it noted the proliferation of online scams such as fake PPE sales and secret “cures” for coronavirus.

A proposed UK Online Safety Bill includes provisions requiring online companies to tackle financial fraud by individual accounts, but not for scams carried out through paid advertising. The bill captures “user-generated content” so that for instance if a member of an online forum incites others to invest in a scam, tech companies will have to take reasonable steps to remove the posts. But there is no provision for paid adverts encouraging investment in celebrity-endorsed trading or other forms of sham advertising. The bill is still in draft and is likely to be presented to Parliament by the Department for Digital Culture, Media and Sport (DCMS) around March 2022.

In the US, the FBI’s Internet Crime Complaint Center (IC3) has said it received a record number of complaints in 2020, with billions of dollars lost through business email compromise schemes, phishing and ransomware incidents.

A Financial Crimes Enforcement Network (FinCEN) report released in October 2021 found that the number of ransomware-related suspicious activity reports filed monthly grew “rapidly” in the first half of the year, with the total value of suspicious activity reported in ransomware-related SARs during the first six months of 2021 standing at $590 million, far outstripping the value reported for the entirety of 2020.

Fraud was also rampant in government schemes to protect the economy during the pandemic. The UK’s Department for Business (BEIS) estimates that the government’s Bounce Back Loan Scheme could cost the taxpayer ￡27 billion in fraud or credit losses. Universal Credit fraud and error rose to an all-time high of ￡5.5 billion between April 2020 and March 2021. In November the UK’s HM Revenue and Customs stated that nearly 9 percent of the government’s coronavirus assistance schemes was paid out to fraudsters or given out in error. This was largely from the ￡60 billion furlough scheme which paid 80% of the wages of 11.5 million workers who had been placed on leave at the start of the pandemic.

The US Secret Service stated in December that close to $100 billion in pandemic relief funds had been stolen by fraudsters from the Small Business Administration’s Paycheck Protection programme, the Economic Injury Disaster Loan programme and another programme. The agency said more than $2.3 billion in stolen funds have so far been recovered, resulting from the arrests of more than 100 suspects. In December the Secret Service had more than 900 open investigations related to pandemic fraud.

Myanmar and Belarus sanctions

Following a military coup in February, the US imposed sanctions on Myanmar. With Executive Order 14014 pursuant to the International Emergency Economic Powers Act (IEEPA), the US authorised asset freezes and travel bans on those involved in the coup, including members of the National Defence and Security Council.

In June, the UK and EU imposed additional sanctions against Myanmar’s State Administrative Council and certain companies, as well as senior leaders of the military junta. The UK and Canada announced further sanctions in December against a variety of entities for perpetrating “serious human rights violations.”

Also in June the UK, US, Canada and the European Union imposed sanctions against individuals and entities from the Belarusian regime in response to the detention of journalist Roman Protasevich and Sofia Sapega following the forced diversion of Ryanair flight FR4978 in May.

The group of countries also made designations over allegations of more broad human rights abuses in Belarus. They allege that presidential elections held in August 2020 were marred by irregularities, and that President Lukashenko led a systematic campaign of repression throughout the election period.

Crypto regulation

Cryptocurrencies reached a record capitalisation of around $3 trillion in November 2021, but oversight remains ambiguous in certain jurisdictions. For instance, decentralised finance (DeFi) is not officially regulated in the US. A November global survey of cryptocurrency regulation from the Law Library of Congress found that nine jurisdictions have imposed an outright ban on cryptocurrency, while 42 have an implicit ban – up from 8 absolute and 15 implicit in 2018.

The survey found that the application of the application of tax laws, AML/CFT laws, or both types of laws to cryptocurrencies has increased “exponentially”. As of November 2021, 103 jurisdictions are applying these laws to cryptocurrencies, with a majority applying both. These jurisdictions include the European Union Member States excepting Bulgaria. In 2018, only 33 jurisdictions were found to regulate cryptocurrencies in these areas.

Meanwhile cryptocurrency-based crime hit a record high in 2021, according to Chainalysis. The volume of cryptocurrency transactions grew to $15.8 trillion in 2021, up 567 percent from 2020, according to its research. Illicit transactions totalled $14 billion, up 79 percent from the previous year. The use of DeFi as a conduit to launder money increased 1964 percent between 2020 and 2021, Chainalysis also said.

In India, there are ongoing talks over a bill that would create a framework for creation of an official digital currency to be issued by the Reserve Bank of India. The bill would also prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

In September, China – once a key global hub for Bitcoin mining and trading – banned non-government-approved cryptocurrencies, with the People’s Bank of China warning that virtual currency-related business activities “seriously endanger the safety of people’s assets”. The central bank and its National Development and Reform Commission issued two documents, one outlawing cryptocurrency mining following a crackdown in May, and the other declaring cryptocurrency transactions illegal. Trading in cryptocurrency had been officially banned in China since 2019, but had continued through online exchanges.

In December, the state-run Economic Daily said despite efforts in 2021 to eliminate institutional mining, authorities must further crack down on rogue individuals who are capitalising on gaps between different authorities and regions.

Throughout the year the US Congress introduced a variety of bills focused on cryptocurrency and blockchain policy which will likely be debated further in 2022; including regulation, applications of blockchain technology, and central bank digital currency (CBDC). A survey from the Bank of International Settlements found that 86% of the world’s central banks are exploring the benefits and drawbacks of introducing CBDCs.

DeFi faced increasing scrutiny during the year. The Wall Street Journal reported in September that the US Securities and Exchange Commission opened an investigation into Uniswap Labs, the main developer behind one of the world’s largest cryptocurrency exchanges, Uniswap. Uniswap is a crypto marketplace for DeFi developers, traders and liquidity providers. In August, SEC Chair Gary Gensler called on Congress to give the agency more power to police the “Wild West” of cryptocurrency. Gensler said the asset class is “rife with fraud, scams and abuse in certain applications.”

The Bank of England (BoE) continued to warn consumers on the risks of private cryptocurrencies. In April 2021, the Bank and HMT initiated a taskforce to begin exploring a UK CBDC. HMT and the Bank have committed to launching a consultation in 2022 to set out an assessment of the case for such a CBDC.

Takedowns of encrypted communications

Law enforcement authorities in multiple jurisdictions continued tackling encrypted communications networks used by criminals in 2021. In March, US prosecutors in California unsealed a grand jury indictment charging Jean-Francois Eap, the CEO of encrypted communications network Sky Global, with facilitating money laundering among other crimes. Under court order, judicial and law enforcement authorities in Belgium, France and the Netherlands had collected “hundreds of millions” of messages from 70,000 Sky phone users. The announcement of the investigation followed the cracking of another encrypted platform, EncroChat. The investigation into the EncroChat service was launched by French authorities in 2017 and was announced publicly in 2020.

In June 2021, Europol, the US Federal Bureau of Investigation, and the Australian Federal Police announced the culmination of a three-year clandestine transnational investigation named Operation Trojan Shield. The sting operation involved the FBI running and observing an encrypted communications network, ANOM, used by criminals. It resulted in hundreds of arrests, the seizure of many tonnes of drugs, firearms, luxury vehicles and millions in cash and cryptocurrencies. Countless spin-off operations into money laundering and public corruption have been carried out subsequently.

EU AML reform

In July the European Commission presented a package of legislative to strengthen the EU's anti-money laundering and countering terrorism financing (AML/CFT) rules, including the proposal for a new EU authority to combat money laundering.

The package seeks to strengthen the detection of suspicious transactions and to close loopholes used by criminals and terrorists seeking to launder money through the financial system. The AML Authority (AMLA) will be the central authority coordinating national authorities to ensure the private sector applies rules consistently throughout the block. It is set to be operational by 2024 and will start direct supervision slightly later.

The proposed new AML/CFT regulation contains rules in the area of customer due diligence and beneficial ownership. It also sets an EU-wide limit of €10,000?on large cash payments. The EU is also seeking to replace its existing Directive 2015/849/EU (the fourth AML directive as amended by the fifth) with a sixth Directive on AML/CFT, containing provisions that will be transposed into national law such as rules on national supervisors and the Financial Intelligence Units in member states. The package also includes a revision of the 2015 regulation on transfers of funds to trace transfers of cryptoassets.

The outgoing Slovenian Presidency of the Council of the EU finished the first reading of the entire package, and it is likely there will be further legislative developments in 2022.

Expansion of “Magnitsky” sanctions programmes

In April 2021, the UK implemented a new sanctions regime targeting global bribery and corruption, initially subjecting 22 individuals to asset freezes. The new regulations complement the global human rights sanctions regime established in 2020, with sanctions now mirroring the scope of the US Magnitsky Act in allowing the UK to impose restrictions on individuals or entities solely for involvement in bribery.

The first wave of sanctions under the new regime targeted those allegedly involved in the diversion of $230 million of Russian state property through a fraudulent tax refund scheme uncovered by Sergei Magnitsky, as well as members of the Gupta family and individuals alleged to be involved in Latin American corruption.

In December Australia passed Magnitsky-style sanctions, making it easier to sanction accused human rights abusers and entities allegedly engaged in malicious cyberactivity and corruption. The bipartisan reforms include asset freezes and travel bans.

Countries are increasingly coordinating their targeting of human rights sanctions. In March the EU, UK, US and Canada imposed sanctions on officials in China, over alleged abuses against the Uighur minority group in Xinjiang.

Biden administration unveils anti-corruption plan

In December the White House published a government-wide strategy on countering corruption. The strategy followed President Biden’s national security memorandum from June, which declared international corruption to be a threat to US national security. The memorandum argued that corruption corrodes public trust, and the President directed the National Security Advisor to conduct an interagency review and prepare recommendations. The strategy is a product of the review.

The strategy looks at not just the ‘supply side’ of foreign bribery and corruption – for instance companies violating the Foreign Corrupt Practices Act (FCPA) – but also the ‘demand side’, namely the corrupt foreign officials who receive bribes. The strategy commits to holding the leaders accountable via US money laundering laws and other restrictions on travel and assets.

The strategy combines five pillars. Pillar one promises to modernise, coordinate and resource US government efforts to fight corruption. This includes funding FinCEN to build a new beneficial ownership data system, as well as boosting data gathering and inter-agency information sharing. Pillar two seeks to curb illicit finance, by promulgating regulations through the notice and comment process in the Federal Register. The administration is set to seek additional authority to tackle corruption by law firms, accountants, and other professional services.

Pillar three focuses on “vigorous” FCPA enforcement, the Treasury will establish a Kleptocracy Asset Recovery Rewards programme, and there will be boosted law enforcement cooperation with financial institutions on anti-money laundering and counter terrorism financing. Pillars four and five seek to strengthen international cooperation.

Taliban takeover in Afghanistan

In August the Taliban swiftly took over Afghanistan, leading the US to freeze over $9 billion in assets belonging to the country’s central bank. Central banks in Europe also froze Afghan assets. Financial institutions around the world were forced to consider their relationships with Afghanistan-based entities and individuals, and millions of dollars of international aid were also halted due to sanctions. Foreign grants spending previously financed as much as three quarters of public spending in the country.

Banks in the country were initially closed, and money services businesses suspended payments. Following a two-week suspension of its services, Western Union resumed money transfers into the country. In November, the Taliban outlawed the use of foreign currency in the country. The US dollar has been widely used in Afghanistan’s markets, and dollars are often used for trade with neighbouring countries like Pakistan.

The newly installed Taliban government includes numerous individuals subject to international sanctions. This includes Minister of Interior Sirajuddin Haqqani, who has been designated as a global terrorist by the US since 2008 and is wanted by the FBI for his alleged involvement in the 2008 Kabul Serena Hotel attack. Newly-appointed Taliban Prime Minister Mullah Mohammad Hasan Akhund was designated by the UN Security Council (UNSC) Sanctions Committee in January 2001 pursuant to Resolution 1267 (1999) and Resolution 1333 (2000), which expanded financial sanctions to include the freezing of funds of Osama bin Laden and his associates, and imposed arms embargos on Afghan territory controlled by the Taliban.

Roger Hamilton-Martin, Financial Services Journalist

[email protected]

This feature was published in the December issue of the Financial Crime Digest.?Read the full issue here for free.?

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