Sanctions, corruption and money laundering

28th January 2018.

"Sanctions are a necessary middle ground between words and war." - Former UN Secretary General Kofi Annan.

"Sanctions are one of the EU's tools to promote the objectives of the Common Foreign and Security Policy (CFSP): peace, democracy and the respect for the rule of law, human rights and international law." - European Union website.

The National Crime Agency (NCA) states that money laundering is a critical enabler of serious and organised crime, costing the UK an estimated £24 billion a year.

There are two methods of money laundering:

1. Cash-based money laundering – involving the physical movement of currency over national borders and use of companies that use large cash amounts as cover, with payments broken into smaller amounts.

2. High-end money laundering – specialist transaction of substantial value, involves abuse of the financial sector using “professional enablers”. The NCA is mainly focused on this type of money laundering. Criminals need someone professional, capable and trustworthy to make the necessary arrangements.

According to the NCA, organised criminal gangs laundering money through street cash is relatively well understood and addressed, however there is no comprehensive response to high end money laundering. There is no agency with overall responsibility for leading the strategic response to high end money laundering.

A core objective of the NCA is to reduce the impact of high end money laundering in the UK economy.

What the NCA still needs to tackle

In respect to high end money laundering, the NCA have expressed their intelligence weaknesses, in which they need to know more about:

  • The scale of proceeds of corruption entering the UK.
  • The proportion of assets entering the UK illicitly.
  • The preferred processes and vehicles for high end laundering.
  • The scale of involvement and complicity of professional services in laundering illicit funds.
  • The role of private wealth banking.
  • Trade based money laundering and the criminal use of corporate vehicles.

The NCA take money laundering seriously, and part of their objectives to do this was establishing a Money Laundering Threat Desk within its Intelligence Hub by December 2014.

Not only is corruption a major problem for the UK, but proceeds of corruption affects states from all over the world, as former UK Prime Minister David Cameron said in Transparency International’s annual lecture in December 2017: "From officials taking backhanders, to leaders bleeding their nations dry, corruption has been described as a cancer. It takes a toll on countries’ prosperity and opportunities, it takes away people’s livelihoods and even their lives. It takes place in every country in every continent on earth.”

Examples of inadequate money laundering controls

In 2014, the UK's financial services regulator, the Financial Conduct Authority (FCA), fined Standard Bank PLC over £7 million for failing its anti-money laundering (AML) policies and procedures. When an entity is known to be linked to a Politically Exposed Person (PEP), appropriate Enhanced Due Diligence (EDD) measures should be applied due to its category of high risk. During the period of 2007 to 2011, the Bank had over 5,000 corporate companies, of which 282 were linked to PEPs.

Standard Bank PLC neglected their duties to fully investigate and monitor PEPs and entities that are owned by PEPs (by way of directorship or shareholding). In the words of the Financial Conduct Authority (FCA), the bank did not consistently “carry out adequate EDD measures before establishing business…and conduct appropriate level of ongoing monitoring…by keeping customer due diligence up to date.”

In 2012 the Financial Services Authority (FSA, now FCA) fined Coutts and Company just under £9 million for failing to establish and maintain effective AML systems, particularly to high risk customers such as PEPs.

The FSA (now FCA) identified in nearly 75% of their PEP and high risk customer files:

  • Staff failed to establish the source of wealth and source of funds of its PEP and high risk customers.
  • Failed to identify and assess adverse intelligence about new and current high risk customers, and failed to take appropriate steps on this intelligence.
  • Failed to keep information on existing PEP and high risk customers up to date.
  • Failed to scrutinise transactions appropriately that was made through PEP and other high risk customers.

In 2013, the FCA fined EFG Private Bank UK subsidiary £4.2 million for failing to effectively have AML controls in place. Information on their customers gained through customer due diligence exposed risks but EFG failed to inquire further/act upon them risks. For example EFG’s due diligence on a prospective customer showed that wealth was gained through the father. The father had allegations of links with organised crime, money-laundering and murder. There was no further information on how the bank concluded that the risk was acceptable, or how it was mitigating the risks.

Of the 99 PEP and other high risk customer files reviewed, 83 raised serious concerns about EFG’s monitoring of the relationship.

These three cases highlight:

  • Where there are suspicions, through any credible sources, even if they are allegations, investigate them and question the risk before proceeding.
  • Pay particular attention to high risk customers, including PEP. Ensure accounts are monitored proactively. Make sure EDD measures are thoroughly carried out.
  • Make sure information on the customer and account is up to date, and in particular PEP and high risk customers.

The Financial Action Task Force (FATF) is an integral part of tackling money laundering and terrorist financing in the UK and overseas, currently operating in 35 jurisdictions and two regional organisations (European Commission and Gulf Co-operation Council).

Saudi Arabia and terrorist financing

A particularly trending topic recently in the news concerns allegations of Saudi Arabia financing terrorism. This has been the subject of a BBC2 documentary on Saudi Arabia broadcasted in January 2018.

Saudi Arabia is not a member of FATF, but is an observer state. In name and religion they agree to tackle terrorist financing and anti-money laundering. Some key points here:

  • Saudi Arabia is an observer state of FATF, and member of Gulf Co-operation Council (of which the organisation is a member of FATF).
  • In the 2017 Riyadh summit, King Salman of Saudi Arabia unveiled a new “Global Center for Combating Extremism.”
  • The Qu’ran states: “the one who cleans the house of corrupted people is not an associate, but is one of them.” (source: FATF’s Mutual Evaluation Report on Saudi Arabia)
  • In 2010 it was reported that Saudi Arabia have ratified 13 out of 13 terrorism related UN Conventions.

The main concern of Saudi Arabia is this: in a 2010 FATF Mutual Evaluation Report, FATF states that although they have ratified terrorism related UN Conventions, “the authorities could not establish that the conventions have been implemented, especially with respect to the criminalisation of the criminal conduct.”

Let us be mindful of the report being published in 2010. This is now 8 years ago. What have Saudi Arabia done now to effectively combat terrorist financing?

Bulgaria and Saudi Arabia

In an article published in January 2016, Bulgarian Arsenal AR-M9 and AR-M9F rifles have been documented in the hands of Libyan, Yemeni and Sudanese armed forces (source: armamentresearch.com). All three countries are subject to an extensive number of sanctions and are embroiled in ongoing conflict:

  • Libya: Governance issues in a post-Gaddafi era and struggle for power of local militias.
  • Yemen: The Houthi rebels’ conquest against the legitimate Hadi government, and a mass hunger crisis (and Saudi’s air strikes).
  • Sudan: The President of Sudan Omar al-Bashir has an arrest warrant against him since 2009 by the International Criminal Court for five counts of crimes against humanity, two counts of war crimes and three counts of genocide, and the ongoing instability of the Darfur region.

All three countries have arms embargoes on them.

  • Libya: UN arms embargo – UNSC resolution 1970 (2011): “All Member States shall immediately take the necessary measures to prevent the direct or indirect supply, sale or transfer…of arms and related material of all types, including weapons and ammunition.”
  • Yemen: UN arms embargo – UNSC resolution 2216 (2015): “Member states shall immediately take the necessary measures to prevent the direct or indirect supply, sale or transfer to (certain Yemeni individuals and entities)…of arms and related materiel of all types.”
  • Sudan: UN arms embargo on the Darfur region of Sudan- UNSC resolution 1556 (2004): “All states shall take the necessary measures to prevent the sale or supply…of arms and related materiel of all types, including weapons and ammunition…operating in the states of North Darfur. South Darfur and West Darfur.” There is also a EU embargo on the whole of Sudan.

So how did arms allegedly get from Bulgaria to Libya, Yemen and Sudan? Armament research state that media reports note Bulgaria’s role as a supplier of arms to Saudi Arabia and UAE. A BIRN (Balkan Investigative Reporting Network) investigation revealed in December 2015 that “Saudi Arabia, the UAE, and the US have bought millions of dollars of Bulgarian weaponry, much of it likely destined for the war in Syria.”

In a separate article by Middle East Monitor, it states that a quarter of munitions used by Daesh are being manufactured in Bulgaria.

If Saudi Arabia has not taken necessary measures to prevent the direct or indirect supply of weapons to Libya, Yemen or Sudan, then they are in breach of UNSC Resolutions, and could be considered as high risk.

The largest arms manufacturer in Bulgaria in VMZ, a state owned company (vmz.bg). The website of Vazovski Mashjinostroitelni Zavodi (VMZ) EAD, says it is “the biggest enterprise of the military and industrial complex in Bulgaria.” There is no mention of who they supply to, or any articles giving assurances that they run due diligence checks on who they are supplying to, and what they intend to do with the arms they manufacture. This is a concern. A mitigating risk factor is the fact that they do have 4 licences on their website:

  • “Full Licence” – issued under Article 6 par. 1 of Arms and Dual-Use Items and Technologies Export Control Law, confirming their right to export, import and transfer arms.
  • “Certificate No. 11.00-733-3/27.01.2015” issued under Article 10 par. 2 of Arms and Dual-Use Items and Technologies Export Control Law, confirming their right to perform broker-dealer activities between two third parties.
  • “Certificate 11. No. 11.00-733-5/27.01.2015” issued under Article 6 par. 3,4 and 9 of Defence-Related Products, Double-Use Items and Technologies Export Control Act, giving them the right to transfer defence-related products.
  • “Licence No. 3039/07.10.2016” issued on the basis of Article 14 of the Private Security Act, for the performance of activities on protection of property of natural or legal persons.

In 2016, Deputy Economy Minister for Bulgaria Lyben Petrov said that Bulgarian defence industry enterprises had produced goods for markets including Afghanistan, Iraq, India, Saudi Arabia and the United States (source: Independent Balkan News Agency, balkaneu.com)

He named top defence export companies include: Apollo Engineering, Kintex, Arsenal, Emko ltd and VMZ.

Supplementary information on Bulgaria-Saudi Arabia arms deals can be supported by a veteran plane spotting enthusiast, who in 2014 spotted a Boeing 747 Saudi Arabian Cargo plane: “A Saudi cargo plane had never come here for the past 20 years” he said. He noted that the frequency of flights in the following months were so regular that he started a thread in an online plane spotting forum about them. Flight tracking shows the planes were filled up and headed to Tabuk, a Saudi city close to the border of Jordan. The Saudi authorities have not disclosed the content of the shipments, but all reports, including a statement from the Deputy Economy Minister for Bulgaria, point to arms shipments.

It is alleged that these arms shipments were to countries such as Syria through crossing Jordan. There is no arms embargo on Saudi Arabia, so Bulgaria’s actions are not in breach of sanctions. There is however, the question of what Saudi Arabia is doing with their newly acquired arms. If Saudi Arabia are re-exporting arms to countries such as Libya, Sudan and Yemen, it is in breach of UN sanctions. 

Syria and arms sanctions

The European Commission have a long range of sanctions on Syria, including the sale, supply and transfer of certain items, and sanctions against individuals and entities.

Council Decision 2013/255/CFSP (in which its validity was extended until 1st June 2018 by Council Decision (CFSP) 2017/917, Article 2 states:

“With regard to the possible export of arms to Syria, the Council took note of the commitment by Member States to proceed in their national policies in agreement with paragraph 2 of the Council Declaration adopted on 27th May 2013, including by assessing the export licence applications on a case-by-case basis, taking full account of the criteria set out in Council Common Position 2008/944/CFSP of 8th December 2008 defining common rules governing control of exports of military technology and equipment”

This is essentially saying that exporting arms to Syria is up to each individual country, and each country will assess it case by case. This means there is no blanket export arms embargo on Syria. This means that there is a danger of arms falling into the wrong hands, and countries have to be mindful of their position. They could unknowingly support terrorism, or unwittingly escalate violence.

The importing of arms to Syria is expressly prohibited, as mentioned under the aforementioned Council Decision:

Article 3.1: “To purchase, import or transport of arms and related material of all types, including weapons and ammunition, military vehicles and equipment, paramilitary equipment and spare parts for the aforementioned, from Syria or originating in Syria, shall be prohibited.”

So the importing of Syrian weapons or weapons in Syria is prohibited, but the export of weapons to Syria is assessed case by case.

A noteworthy mention on Syria is Article 13: “The sale, supply, transfer or export of luxury goods to Syria by nationals of Member States or from the territories of Member States or using their flag vessels or aircraft, shall be prohibited, whether originating or not in their territories.”

References:

National Crime Agency: “High end Money Laundering Strategy and Action Plan”, December 2014

Financial Action Task Force: “Mutual Evaluation Report of the Kingdom of Saudi Arabia”, June 2010.

Financial Conduct Authority, website guide: Money Laundering and Terrorist Fiancning

United Nations: Resources on resolutions

European Commission: Consolidated list of sanctions.

Her Majesty’s Treasury: Website guides on sanctions for each country

Transparency International: Transcript of David Cameron’s speech

Armament research service (armamentresearch.com)

Balkaninsight.com

balkaneu.com