Due to the far-reaching impact of money laundering on the property sector – including consequences of a social and economic nature – it’s critical for compliance professionals to understand how the typology works and what tools are needs to better mitigate the risk it presents. 

How Does Money Laundering Through Real Estate Work?

Money laundering through real estate integrates illicit funds into the legitimate financial system while also providing the criminal with a relatively “safe” property investment. This can include the purchase of houses, apartments, office space, factories, hotels, vineyards, etc.

Criminals can further enrich themselves by:

• Renting out a property they have purchased  
• Renovating a new property and re-selling it 
• Cashing in on property appreciation over time

In addition, the price of real estate is fairly easy to manipulate and, with collusion, property can be over- or undervalued. In fact, gatekeepers in the sector – realtors, property developers, mortgage advisors, brokers, etc. – have sometimes been found to be complicit and accept financial compensation to turn a blind eye to real estate money laundering.

Some other techniques that criminals use to launder money through real estate include:

• Setting up shell companies or front companies to purchase a property. In the US, for example, anonymous shell companies can be set up in places like Delaware, Nevada, Wyoming, and North Dakota.
• Using cash or other non-transparent financing schemes.
• Selling properties to co-conspirators
• Using opaque trusts or third parties to to act as the property’s legal owner 

Examples of Money Laundering in Real Estate

Countries including the US, the UK, Australia, Canada, and Germany are known as money laundering real estate hubs with hotspots in London, Toronto, Vancouver, and New York. 

The US Department of Justice and its Kleptocracy Asset Recovery Initiative have worked on many cases involving both residential and commercial property. In one case, a Honduran man pleaded guilty to receiving over $1m in bribes. Being a government official, the defendant worked with his brother to launder money through international wire transfers and used the proceeds to purchase properties in New Orleans, including office spaces.

In February 2022, a private bank was alleged to have turned a blind eye to several illegal real estate transactions, including allowing an account owned by the Vatican to spend $350m investing in London property. The Vatican was also found to have lost millions of euros to mortgage brokers – much of it donated by the Catholic community. Another allegation against the bank involved drug traffickers investing millions of funds, which they used to buy property in Bulgaria. 

Additionally, a report by Transparency International found that £1.5bn of UK property – mostly in London – was bought by Russians who had been accused of corruption and/or sanctioned. The nonprofit also found that 2,189 firms registered in the UK and its overseas territories were used in 48 Russian money laundering and corruption cases. Combined, these cases involved more than £82 billion worth of funds disguised by rigged procurement, embezzlement, and bribery.

Money Laundering Red Flags in Real Estate

Money laundering real estate red flags, include:

• Investors using multiple banks to stay under reporting thresholds 
• Sales conducted in cash with no mortgage lenders involved – in places like Miami and Manhattan, over 60 percent of real estate transactions of $2m+ made by international investors are cash transactions 
• A large disparity between the buyer’s income and the value of the property 
• Purchases where the ultimate beneficial owner is not clear 
• A third party making the property purchase (known as a nominee purchaser)
• A large geographical distance between where the investor is currently located and where they are buying property
• Properties purchased using “loan back” – money is deposited in an offshore bank account and borrowed back by a shell company, the owner of which happens to be the person who controls the offshore bank account
• If the property is used as a physical base for other criminal activity, including if the property is being sublet – according to a webinar hosted by the Financial Action Task Force (FATF) on real estate money laundering

Other suspicious signs include sales between known criminals, ex-criminals, family members of criminals and/or politically exposed persons (PEPs).  

What is the Impact of Money Laundering on the Real Estate Markets?

Money laundering can have serious consequences on real estate markets, the economy, and communities. 

A few examples of the impact of real estate money laundering include:

• Property prices being artificially distorted, making it impossible for many people to afford housing (including rental) or commercial premises 
• Corruption
• Unfair competition
• Instability in the sector 
• Continuation of drug trafficking, human trafficking, terrorism, and other forms of organized crime 

Regulations That Help Mitigate Money Laundering Risks in Real Estate

The FATF’s 40 recommendations on money laundering statethat all designated non-financial businesses and professions (DNFBPs) be subject to risk-based AML supervision, including real estate. 

However, in the US, professionals involved in real estate closing and settlements are not currently required to adhere to AML and CTF programs and regulations. The US Treasury stated that the FATF found a low level of obligation implementation across jurisdictions as well as minimal suspicious activity reporting. They concluded that greater education is needed to successfully implement a risk-based approach to AML in real estate.

In line with these findings, the Biden administration announced it would be focusing on real estate embezzlement and corruption, with more scrutiny on all-cash transactions. This is one key loophole that real estate money laundering criminals continue to exploit. 

“Gatekeeper professions” in Australia, including real estate companies, are not currently subject to the country’s AML regime either. The CEO of the Australian Transaction Reports and Analysis Centre (AUSTRAC) has repeatedly voiced her concerns regarding this, singling out real estate as posing “a particular danger.” Transparency International’s 2022 report echoed Rose’s concerns, highlighting the role of Australian real estate in the fight against Russian dirty money. The report noted that with no centralized real estate ownership register, it is exceedingly difficult to identify the ultimate beneficiaries of transactions and stop Russian kleptocrats from investing in the country’s real estate market. As of March 2023, no amendments concerning gatekeeper professions have been announced.

Regulatory Focus Areas: Beneficial Ownership and Reporting

Criminals know that if they transact purely in cash, property professionals and gatekeepers are not obliged to obtain proof of identity or report suspicious behavior. With an estimated third of US property sales financed purely with cash  in October 2022, FinCEN expanded its Geographic Targeting Orders (GTOs) to try to close this loophole. Many believe that GTOs are preferable to a “one size fits all” approach across the whole of the US. With these restrictions in place, it should be more difficult for criminals to purchase real estate in all-cash deals via shell companies. 

Regarding AML measures in real estate, regulators have two key areas of focus:

• The importance of identifying the ultimate beneficial owner (UBO) of any companies buying luxury property – the UK introduced the unexplained wealth order (UWO) legislation in 2018 and launched a public Register of Overseas Entities in 2022, which applies retrospectively and carries strict penalties.
• The importance of filing suspicious activity reports (SARs) – with the expectation on real estate professionals, legal advisers, and lenders to prioritize compliance.

How Can Real Estate Companies Detect and Prevent Money Laundering?

Property companies need robust AML compliance policies and real estate professionals need regular up-to-date training. Experts from the FATF recommend that real estate professionals educate their clients about the importance of due diligence in the sector.

Important steps include:

• Robust customer screening and transaction monitoring
• Thorough sanctions screening
• Understanding the difference between, and identifying, source of wealth (SoW) and source of funds (SoF)
• Reporting suspicious transactions
• Carrying out due diligence and now your customer checks
• Verifying the UBO
• Adverse media monitoring for PEPs 

Technology is a key tool in the battle to spot real estate money laundering red flags, for example, smart software can be used to identify relationships and possible collusion between brokers and realtors. 

The post Understanding Money Laundering in Real Estate appeared first on ComplyAdvantage.

In July 2022, the FBI infiltrated the criminal group’s computer networks and captured its decryption keys. Since then, over 300 decryption keys have been shared with Hive victims to prevent them from having to pay ransom demands. The FBI also distributed over 1,000 keys to previous victims. In total, the FBI’s infiltration has thwarted over $130 million being paid in demands. 

In coordination with German law enforcement and the Netherlands National High Tech Crime Unit, the DOJ announced that Hive’s servers and websites have finally been seized, preventing communication between Hive members and disrupting its ability to attack victims. 

Hive ransomware group

According to a joint Cybersecurity Advisory (CSA) issued by the FBI, the Cybersecurity and Infrastructure Security Agency (CISA), and the Department of Health and Human Services (HHS), Hive threat actors have extorted over $100 million since June 2021. 

Since the network’s takedown, the State Department announced via Twitter that it is offering a $10 million bounty for any information about Hive’s possible involvement with foreign governments.

FBI disrupts the Dark Web site of the Hive ransomware group.

If you have information that links Hive or any other malicious cyber actors targeting U.S. critical infrastructure to a foreign government, send us your tip via our Tor tip line. You could be eligible for a reward. https://t.co/7Bqz0DUSCf pic.twitter.com/n8U3TNC7lh

— Rewards for Justice (@RFJ_USA) January 26, 2023

Over the last two years, the State Department also offered rewards of up to $15 million for information that could help locate members of the Sodinokibi (REvil), Conti, and DarkSide ransomware networks. The State Department offers these rewards through its Transnational Organized Crime Rewards Program (TOCRP), which has paid out over $135 million in rewards since 1986.

The International Counter Ransomware Initiative (CRI)

As reflected in our 2023 global compliance report, ransomware increased in scale and variety throughout 2022. According to FinCEN, compared to 2020, ransomware incidents in the second half of 2021 increased by more than 50 percent, with ransomware-related Bank Secrecy Act (BSA) filings hitting $1.2 billion.  

To enhance international cooperation to combat the growth of ransomware, the International Counter Ransomware Initiative (CRI) was formed in October 2021. The initiative unites over 30 partners to tackle ransomware through a coordinated and comprehensive approach to ransomware resilience, illicit finance, and public-private partnerships. 

The most recent summit of the CRI took place from October 31 to November 1, 2022, with discussions centering on the prevention of large-scale cyber attacks and money laundering via digital currencies. At the summit, the CRI’s goals for 2023 were established, one of which was to establish an International Counter Ransomware Task Force (ICRTF) to translate research, findings, and policy discussions into:

• Cyber threat intelligence exchanges
• Cross-sectoral tools
• Collective best practice guidance for countering ransomware

On January 23, the ICRTF was formally established and will henceforth be chaired by the Australian government.

Key takeaways

To combat the rising threat of ransomware, financial institutions must practice good cyber hygiene and boost their cyber defenses. Digital-native firms not yet operating Bug Bounty programs would do well to consider implementing them, alongside regularly-scheduled pen testing exercises.

Strong cybersecurity controls should be in place alongside business resiliency and continuity plans. Compliance staff should also ensure they are familiar with the ransomware trends and typologies identified by the Financial Crimes Enforcement Network (FinCEN) in its 2021 advisory, including:

• Extortion schemes
• Use of “fileless” ransomware
• Use of anonymity-enhanced cryptocurrencies (AECs)
• Unregistered convertible virtual currency (CVC) mixing services
• Ransomware criminals forming partnerships and sharing resources

The typologies identified by FinCEN should be built into firms’ anti-money laundering and combatting the financing of terrorism (AML/CFT) controls. Furthermore, when submitting a suspicious activity report (SAR) stemming from a potential ransomware threat, FinCEN requests that firms reference its 2021 advisory by including the key term “CYBERFIN-2021-A004” and selecting SAR field 42 (Cyber Event). 

The post FBI Dismantles Hive Ransomware Network From the Inside, Thwarting Over $130m in Ransom Demands appeared first on ComplyAdvantage.

Despite the sharp increase in reports, the police suspect the scale of online child sexual exploitation far outweighs what is being reported. Acting Assistant Commissioner Hilda Sirec said, “We are seeing offshore criminal syndicates targeting a victim’s entire friend list.”

Financial indicators of child sexual exploitation

In December 2022, the Australian Transaction Reports and Analysis Centre (AUSTRAC) announced its partnership with the AFP to educate financial institutions to recognize risk indicators associated with purchasing child sexual exploitation material.

As a result of the partnership, the regulator issued a financial crime guide highlighting risk indicators according to different types of exploitation. Some risk indicators include:

• Multiple payments being made by an offender to a facilitator on a single day or over several consecutive days
• Facilitators can receive payments from different offenders at the same time
• Offenders can establish long-term relationships with facilitators and their financial history can extend many years
• Offenders often hold multiple bank accounts at different institutions with accounts held for a short period of time
• Common payment methods include the use of remittance service providers, prepaid debit or credit cards, bank transfers, and digital currency

While no single financial indicator will reveal if an account is being used for child sexual exploitation purposes, firms should consider each transaction’s relevant facts and circumstances in line with a risk-based approach to compliance. 

Analyzing online footprints

According to AUSTRAC, payments for child sexual exploitation can be difficult to detect because offenders take considered steps to hide their crimes from friends, family, financial institutions, and law enforcement. As a result, offenders generally utilize websites and online services that offer increased privacy or encryption tools, virtual private network services, software to clear online footprints, or other tools or services for online privacy and anonymity. 

New and emerging technologies are also being taken advantage of, such as blockchain technology. In light of this, firms should consider implementing blockchain analysis technology into their anti-money laundering and counter-terrorism financing (AML/CTF) programs, enabling them to assess risk and identify illicit activity proactively.

High-risk jurisdictions

According to the report, common transit countries for Australian offenders may include:

• Singapore
• Hong Kong
• Malaysia
• Thailand
  

The Philippines has also traditionally been the primary country for Australian offenders to visit and source child sexual exploitation material. 

Compliance staff reviewing suspicious transaction details should be careful to note payment patterns that link to any of the above high-risk jurisdictions. To aid the reviewal process, AUSTRAC notes that payment amounts linked to child sexual exploitation are often rounded in the native currency of the high-risk jurisdiction or offender’s country. Further, when offenders travel to other countries to engage in child sexual exploitation activity, the regulator highlights that the frequency of transactions often escalates before travel-related expenses are purchased.

Source: AUSTRAC

Key takeaways

In light of the guide provided by AUSTRAC, financial service providers should use the indicators and behaviors to review their profiling and transaction monitoring programs, recalibrating where necessary to identify and stop transactions associated with child sexual exploitation.

Compliance staff should also ensure they are up-to-date on reporting obligations regarding possible child sexual exploitation, abuse, or other criminal activity through financial transactions. If a firm determines a suspicious matter report (SMR) should be submitted to AUSTRAC, the report should include clear transactional, behavioral, and non-financial indicators.

For more information, firms should review the available resources provided by AUSTRAC regarding effective suspicious matter reporting.

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Environmental Crime

In our 2023 State of Financial Crime report, nearly 1 in 3 firms surveyed reported concerns about environmental crime, making it one of the top-selected typologies. Illicit supply chains are now more efficient and anonymous than ever thanks to the digitalization of finance and communication – from social media and the darknet to crowdfunding and blockchain payments. Globally, two areas stand out:

Illegal Timber Exports

A 2022 study by Chatham House found that 15 percent of all timber exports from 37 exporting countries were illegal, with the majority coming from China, Brazil, Indonesia, and Russia. 

The Financial Action Task Force (FATF) has noted several characteristics of financial flows from illegal logging and mining that firms should consider when establishing red flags. In one use case, a company established in a source country mixes legal and illegal sourcing, often enabled by corrupt politically exposed persons (PEPs), who may serve as beneficial owners or be connected to them. The sourcing company belongs to a parent company in a lower-risk jurisdiction and trafficks through third-party jurisdictions, adding further distance from the parent company. When the parent company receives the profits, they appear to come from elsewhere, creating multiple steps of removal between the illicit proceeds and the true beneficial owners.

Wildlife Trafficking 

Pandemic-related economic downturns have reduced wildlife protection resources in key African regions. Meanwhile, China has eased wildlife trade restrictions introduced in June 2020 to curb COVID. United for Wildlife estimates illegal wildlife traders will “return to full profitability within 2-3 years.” 

In a 2020 report, the FATF highlighted numerous red flags indicating the possible laundering of illegal wildlife trade proceeds. Examples include:

• Legal wildlife shipments whose CITES certificates appear incomplete or suspicious
• Transactions naming medical ingredients that reference CITES-listed species
• Transactions where legal pet merchants interface with overseas suppliers or established wildlife traffickers
• Large transfers from a known trafficker to a relative

Alia Mahmud, Regulatory Affairs Practice Lead at ComplyAdvantage, makes three recommendations for curbing the laundering of environmental crime proceeds:

1. Implement frequent enterprise-wide risk assessments.
2. Provide regularly-updated training in typologies and risk indicators for environmental crimes and related activity. 
3. Ensure existing controls are sophisticated enough to dynamically detect these risks. This includes enhancing transaction monitoring rules and scenarios, which can be done with minimal upheaval through an artificial intelligence overlay that works with existing systems. 

Tax Evasion

Our survey also highlighted tax evasion as the predicate offense firms are most focused on screening for, selected by 36 percent of respondents. Globally, there continues to be a push for more transparency in corporate tax arrangements. It is estimated that corporate tax abuse leads to losses of at least $483 billion annually. The G20 agreed to a minimum global tax of 15 percent for multinational corporations in 2021, and countries around the world continue to develop domestic frameworks to implement this. 

In 2021, Malta’s Financial Intelligence Analysis Unit (FIAU) released a guide to risk indicators for tax evasion and money laundering. Among other things, it recommended firms monitor for:

• Firms declaring zero income revealed as doing business by third-party reports
• Customers that try to discover whether their earnings will be reported to regulators
• Organizations with incomplete documentation that would affect tax evaluations 
• Accounts that appear to mingle business and personal income

However, as no single red flag conclusively identifies tax evasion, firms should ensure they are weighting risks contextually, following an up-to-date and tailored risk assessment.

Sanctions Evasion

As international sanctions continue to develop, the risk of violations is high. Unsurprisingly, following the invasion of Ukraine, Russia rose to first place in the 2023 list of geopolitical hotspots firms are most concerned about – cited by 46 percent of respondents.

Responding to comprehensive sanctions, Russian individuals, businesses, and other entities have demonstrated a sophisticated capacity to exploit weaknesses in western sanctions. As firms seek to shore up their risk management, they should bear in mind key emerging sanctions evasion methods. These include:

• Procuring goods through proxies – The Russian military and intelligence services have continued to procure dual-use technology through fronts and proxies in a number of countries. 
• Obfuscating the origins of banned commodities – Russia is using methods perfected by long-term sanctions targets such as Iran and North Korea. To hide oil sales, Russia has re-registered oil tankers to other jurisdictions, blended its oil with other nations’ supplies, and used ship-to-ship transfers at sea. Russia also appears to be exploiting neutral countries to ‘origin launder’ commodities.
• Changing ownership and corporate structures – The International Consortium of Investigative Journalists (ICIJ) has revealed, for example, that in the wake of the invasion, oligarch Alexei Mordashov, one of Russia’s richest men, quickly transferred his shares in the German travel group TUI to a Caribbean shell company that his personal partner owned.

Mahmud points out that “in our survey, 96 percent of firms told us real-time AML risk data would improve their response to sudden sanctions regime changes, like those seen in the case of Russia.” She urges firms to outsource to vendors when necessary to stay ahead of these changes. “Firms must ensure they do not take a minimalistic approach to detecting potential Russian sanctions exposure, especially since western government agencies will be increasingly focused on improving private sector implementation and reducing evasion.”

Crypto and Ransomware

2022 saw an acceleration in the convergence of ransomware and cryptocurrencies, most notably through Deadbolt, a group attacking network-attached storage (NAS) devices and vendors. Deadbolt infections soared by 674 percent between June and September 2022 alone, with most infections found in the US, Germany, and Italy.

State-sponsored ransomware actors in Russia, North Korea, and Iran have also become more critical. In April, the US Office of Foreign Asset Control (OFAC) expanded its sanctions regime covering alleged North Korean wallets following the hack of blockchain game Axie Infinity’s Ronin bridge, which saw $600 million in cryptocurrency stolen. In September 2022, three Iranian nationals were charged with scheming to hack the US computer networks of government agencies, nonprofits, and healthcare facilities.

Regulators have taken action to advise firms about how they can best tackle ransomware risks. In March 2022, FinCEN issued an advisory that – among other things – highlighted key risk indicators of a possible ransomware attack involving convertible virtual currency (CVC). In April 2022, the Australian Transaction Reports and Analysis Centre (AUSTRAC) also issued a report highlighting indicators of ransomware. Red flags include:

• A customer talks about someone assisting them in a cryptocurrency purchase.
• Immediately after a digital wallet receives funds from an external wallet, the owner quickly makes numerous hard-to-explain trades with other wallets and then moves funds outside the platform.
• A prospective customer submits a photograph of data on a computer screen as part of the onboarding customer verification process.

Iain Armstrong, Regulatory Affairs Practice Lead at ComplyAdvantage, recommends that firms continually review “their cyber defenses, data hygiene, and training programs so they’re able to rapidly adapt to the shifting ransomware landscape. Familiarity with the latest behaviors, and any specific forms of ransomware targeting their sector, will be critical. It’s also important to review the latest guidance from regulators in relevant jurisdictions, as they will continue to issue practical information on the risks firms face and any actions they should take.”

Investment Scams

Our survey data showed tax and investment fraud as the joint top concerns for compliance professionals in 2023. While both are likely fuelled by the economic downturn, investment fraud, in particular, often runs countercyclically to the economy. 

As easier methods of accessing finance dry up, the temptation increases to resort to bogus schemes offering apparently “market-beating” returns. US Sentencing Commission statistics show that while the number of securities and investment fraud offenders has declined over the last five years, the median loss incurred has soared to more than $2,880,000. In August 2022, the Securities and Exchange Commission (SEC) also issued guidance on the growing use of social media platforms to seek investment guidance. 

It states that “fraudsters may set up an account name, profile, or handle designed to mimic a particular individual or firm. …[They] may also direct investors to an imposter website by posting comments in the social media accounts of brokers, investment advisers, or other sources of market information.”

The North American Securities Administrators Association (NASAA) encourages investment advisers and broker-dealers to establish reliable processes to protect clients from investment exploitation. Alongside advice on necessary components of an effective risk program, it lists key risk indicators, including anomalous behavior such as:

• Atypical transaction patterns for the client profile (such as unusual transfers or withdrawals)
• A client who appears unaware of their financial situation
• Apparently reckless transactions that ignore penalties
• Agitation, such as nervousness or unusual excitement about new financial opportunities – especially when combined with a reluctance to share details or consistent interference from a third party

Key Takeaways

Ultimately, the effectiveness of measures designed to screen against each of these five typologies will depend on a sound underlying fraud and AML risk management system. As Armstrong explains: “More than ever, compliance officers will need to keep their businesses focused on good outcomes by emphasizing the human, as opposed to financial, cost of financial crime. Indeed, firms should not be complacent about the longer-term reputational effects of widely-publicized fines and enforcement actions, particularly with the oldest of the millennial generation starting to enter middle age.”

To detect complex, deliberately-obscured activity, firms must establish robust supply chain risk management and know your business (KYB) as part of a comprehensive customer due diligence (CDD) process. Rather than treating various typologies in isolation, firms should ensure their framework effectively traces ultimate beneficial owners (UBOs), screens PEPs, and enables robust enhanced due diligence (EDD) practices. Technologies such as artificial intelligence overlays, which firms can add to existing processes through a third-party vendor, can help ease the transition.

The post Red Flag Indicators of 2023’s Top Financial Crime Typologies appeared first on ComplyAdvantage.

With global executives attributing 63 percent of their company’s market value to its reputation, according to KRC Research, this is perhaps unsurprising. But an awareness of the potential for fraud and money laundering to impact a firm’s reputational risk is one thing – mapping out a proactive strategy to mitigate those risks and identify emerging threats is a different proposition. So what specific anti-money laundering (AML) reputational risk considerations should firms be aware of throughout 2023?

1. Economic volatility  

According to the World Bank Group, growth in advanced economies is projected to slow from 2.5 percent in 2022 to 0.5 percent in 2023. Over the past two decades, economic downturns – most notably the Great Recession from 2007-9 – have foreshadowed a rise in financial crime. Our survey indicates firms expect this to happen again, with 59 percent preparing for an increase in financial crime. Economic volatility and pressure could even drive a broader increase in risk-taking behavior from previously legitimate actors, some of which will cross the line into financial crimes.

The challenge for compliance teams here is twofold. If firms over-adjust their risk management policies, they risk frustrating existing customers and impacting growth, making it hard to onboard new customers. At the same time, if firms don’t adapt, they may face regulatory enforcement action and the negative media coverage that results from this. 

To effectively balance and manage reputational risks associated with economic volatility, firms should be proactive in enhancing their ability to risk-assess customers to reduce the probability that they will inadvertently onboard a criminal. This will also improve compliance teams’ ability to detect unusual behavioral patterns in existing customers. According to our Regulatory Affairs Practice Lead, Iain Armstrong, this could involve more firms adopting unified platforms for initial and perpetual know your customer (KYC), complemented by more effective identity and verification (ID&V) tools. 

2. Ransomware

Ransomware has become the biggest cybersecurity threat facing financial institutions across the globe today. An analysis published by the Financial Crimes Enforcement Network (FinCEN) showed that, compared to 2020, reported ransomware incidents in the second half of 2021 increased by more than 50 percent. 

According to research company Gartner, ransomware will have infected 75 percent of all firms by 2025, with annual damage costs expected to reach $265 billion by 2031. In our survey, firms have selected cyber security as their biggest compliance-related pain point for the last three years, with 53 percent saying so in 2022. This suggests that many firms are aware of the need to ensure their cyber defenses, data hygiene, and training programs are kept under continuous review so they can rapidly adapt to the shifting threats as effectively as possible. 

Familiarity with the latest behaviors, and any specific forms of ransomware targeting their sector, will be critical to protecting a firm’s customers and reputation. Given the intersection of ransomware with crypto, firms should take extra care with their training and risk management practices relating to crypto-ransomware attacks.

2. Environmental crime

International concern about environmental crimes and wildlife trafficking soared in 2022, reflecting the threat posed to food security, political stability, conflict, and forced migration. In our survey, when asked which predicate offenses were most important to their organizations, more than one in four selected environmental crime, making it one of the top selected offenses.

Some of the growth in demand driving environmental and wildlife crimes can be attributed to the easing of pandemic restrictions, which has made activities like poaching easier. These types of crime are seen by criminals as having an attractive risk-reward ratio in that the penalties tend to be lower than many other predicate offenses, while the rewards can be just as high if not higher. Policymakers and regulators globally are taking note. In November 2022, the European Commission adopted a revised EU Action Plan to end the illegal wildlife trade. Its goals include tackling the root causes of wildlife trafficking, strengthening legal frameworks, more effective regulatory enforcement, and improving partnerships.

Coinciding with these factors is a growing public consciousness about the importance of conserving the environment and the desire to work with ethical brands that match their values. Combined, this creates a significant reputational risk for firms on multiple fronts if they are not proactive in 2023. To mitigate this risk, firms should consider enhancing their transaction monitoring scenarios and rules in light of their growing understanding of how environmental crime intersects with other types of financial crime. Developing an  Environmental, Social, and Governance (ESG) program and establishing internal controls for ESG data and reporting will also be essential for firms seeking to minimize the risk of greenwashing claims. 

3. Crowdfunding 

This year our survey asked about using decentralized finance (DeFi) platforms to support extremist political groups for the first time. 87 percent of respondents said they’d seen an increase in the use of these platforms to fund extremism, with 31 percent believing the growth to be “significant.” 

Events such as the 2022 protests across Ottawa and US-Canada border crossings fuelled this growing concern. On February 4th, 2022, GoFundMe closed a campaign supporting the “Freedom Convoy” due to concern it had become an “occupation” and amidst widespread reports of violence. Crowdfunding has also supported Islamic State (IS) operatives in Syria. Reporting indicates family members of young men trapped in Syrian camps have attempted to use the Telegram messenger service to “bring them to safety.” 

Pertinent to crowdfunding platforms, banks, and other financial institutions that support them, the risk factors associated with DeFi platforms should be managed through robust KYC measures, such as enhanced due diligence (EDD). Compliance teams should also ensure they are aware of emerging regulations in the cryptocurrency and crowdfunding space to ensure they have adequate, effective, scalable financial crime control solutions. Failure to keep up with regulations exposes firms to financial crime risks. 

4. Data 

Amidst challenges related to managing customer data, increasing regulatory expectations, and competitive pressure, our survey showed that firms are increasingly focused on data and organizational transformations. 

39 percent of firms said digitally transforming legacy systems was their most significant compliance-related pain point, a two percentage point increase on 2021 and 6 percentage points higher than in 2020. Furthermore, firms also cited “relevancy” as a critical challenge concerning data. Specifically referring to data being stored in the correct categories, 38 percent of firms said this was their organization’s most significant pain point alongside compiling global data. Not only does this represent a seven percentage point increase from 2020, but it also correlates with the growing concerns about legacy systems – as good data hygiene is only feasible when systems can support it.

Considering the high percentage of firms focusing on legacy system updates, firms that have not yet made a similar commitment to transformation risk building up a backlog of alerts that could impede their ability to act quickly in the event of any suspicious activity. This, in turn, could lead to enforcement action by regulators. On a day-to-day basis, firms also risk slowing customer onboarding and impeding the ability of customers to process transactions and manage their accounts effectively. 

The post 5 AML Reputational Risk Considerations for 2023 appeared first on ComplyAdvantage.

This year, 87 percent of survey respondents said they’d seen an increase in the use of these platforms to fund extremism, with 31 percent believing the growth to be “significant.” In a report issued on March 1, 2022, the US Treasury explained how domestic extremists have used legal fundraising methods to support their activities, making them harder to detect. The Treasury also highlighted the pandemic’s role in making these platforms “a necessity rather than a convenience.” 

3 Ways Firms Can Manage Crowdfunding Risks

Alia Mahmud, Regulatory Affairs Specialist at ComplyAdvantage, pointed out that “many crowdfunding platforms have been caught short by the surging demand for their services. Crowdfunding, in conjunction with cryptocurrencies and social media, increases the risks of terrorist financing by allowing bad actors to utilize the reach of crowdfunding platforms and crypto asset technologies to gain support from followers and receive funds.”

Mahmud emphasized three practical areas firms can consider in response to this trend.

1. Study Global Crowdfunding Regulations

Mahmud urges “compliance officers in firms offering decentralized finance services” to educate themselves regarding “emerging regulations in the cryptocurrency and crowdfunding space.” The goal, she says, is to “ensure they have adequate, effective, scalable financial crime control solutions in place.”

What might this look like in practice? Firms should become familiar with global regulatory trends such as Canada’s crowdfunding AML legislation and responses to crypto from governments in Singapore, the United Kingdom, the United States, France, and other key players. And Mahmud recommends a particular focus on the European Union’s new crowdfunding regulations. The EU updated that legislation in 2022, requiring firms to assess business continuity risks for outsourced services. This is especially relevant in a risk-management context, as financial crime controls are considered critical and are often provided by third-party vendors. 

In light of this amendment, firms should develop a robust business continuity plan to mitigate the risk of critical failures by third-party providers, ensuring, for example, the continuity of payment services. 

2. Align Crowdfunding Transaction Monitoring with Financial Crime Trends

As firms ground their risk assessments in sound regulatory knowledge, Mahmud urges them to focus especially on transaction monitoring. Crowdfunding service providers (CSPs) should tailor their “rules to the unique typologies and behaviors” associated with high-risk crowdfunding activity. A report funded by the Internal Security Fund of the European Union highlighted several key risks CSPs should be aware of, including:

• Donation-based services – Terrorist financers tend to prefer these over commercial crowdfunding platforms.
• Money-pooling schemes – Higher risks are present when users were able to pool money over an indefinite period of time for vague purposes.
• Lack of sufficient controls – Services that did not closely supervise accountholder activity were also deemed to be at higher risk.

When it comes to risk-based transaction monitoring, many firms’ hard-coded rules cannot identify dynamic risks. To address this challenge, firms might consider an artificial intelligence (AI)-based overlay, which can learn to identify risks through behavioral analysis. 

To ensure AI is applied efficiently, CSPs’ AML/CFT departments should start with a gap analysis. What areas in their current process struggle most to meet robust AML/CFT standards? Once the most pressing inefficiencies are identified, firms can consider how best to address them with machine learning or artificial intelligence. 

For example, our survey showed firms believe improved alert prioritization, the flexible tuning of alert thresholds, and the ability to identify new connections between individuals/entities to be the use cases that could add the most value to their organization. In one example, prioritization reduced false positives by a third (33 percent). Firms can also use AI to uncover hidden risks by seamlessly layering advanced techniques like behavioral analysis and anomaly detection.

3. Boost Enhanced CSP Due Diligence

“Banks and other providers working with crowdfunding organizations should perform enhanced due diligence before agreeing to a partnership,” Mahmud concludes. Such comprehensive due diligence is necessary to avoid “being exposed to financial crime risks by facilitating the movement of illicit funds and the bad publicity that comes with these.”

While the exact processes involved in enhanced due diligence can vary, firms should expect to be held accountable for successfully screening out noncompliant CSPs and should ensure EDD is an extension of holistic due diligence practices. 

The European Banking Authority (EBA) recommends firms consider several red flags for high-risk crowdfunding service providers. These may indicate the need for EDD before onboarding and include:

• CSPs allowing delayed contributions to unspecified projects
• CSPs that do not impose transaction or total funds limits
• CSPs permitting individuals or unregulated entities to withdraw cash
• CSPs that allow virtual currency payments
• CSPs that permit account holders to transfer funds to each other

In their customer screening processes, firms should also verify that prospective client firms have sound customer screening, onboarding, and monitoring practices that align with or surpass AML/CFT regulations and best industry practices.

The post Why Crowdfunding is a Top AML Risk for 2023 appeared first on ComplyAdvantage.

Three Steps to Supply Chain Risk Management 

Iain Armstrong, Global Regulatory Affairs Practice Lead at ComplyAdvantage, shared three key risk management insights in light of the evolving supply chain landscape.

1. Comprehensive Due Diligence

As international sanctions continue to develop, the risk of violations is high. Even early on, Russian sanctions hit the global supply chain hard, and the program’s global effects will continue as enforcement becomes more stringent. 

However, Armstrong argues that tensions with Russia are the tip of the iceberg. “With tensions still high with China – a much bigger part of global supply chains than Russia – firms will need to consider a blanket approach to enhanced due diligence for relationships with even a tangential nexus to those jurisdictions.” With sanctions evaders taking ever more creative steps to try and stay ahead of regulators, firms should take a structured and comprehensive view of their supply chain risks.

Enhanced due diligence (EDD) processes can help firms to achieve this. Therefore, firms seeking to establish a robust supply chain EDD framework should integrate it into a comprehensive, risk-based due diligence program. Requirements may include:

• Supply chain risk assessment – Ensure risk assessments and risk appetite evaluations are up-to-date. Assessments should consider evolving customer relationships, important new sectors or activities, and particular risks they may pose.

• Ultimate beneficial ownership (UBO) – High-risk individuals associated with a business account can indicate a need for EDD. Processes must be able to efficiently identify UBOs and key decision-makers.

• Adverse media – A prospect’s association with sanctions, negative news, and other adverse media can trigger additional due diligence. Screening suppliers and third parties against this data can also alert firms to modern slavery risks such as human trafficking. For accuracy, sync screening processes with live negative news data.

• Up-to-date sanctions data – Coordinate know your business (KYB) processes with live sanctions information. Even a proximate association with sanctioned activity, entities, or locations may call for EDD.

• Identifying at-risk customers – Supply chain customers associated with high-risk locations and activity – even tangentially – may require enhanced due diligence. 

2. Sharpened Focus on Know Your Business

A robust approach to supply chain EDD involves an enhanced focus on know your business (KYB). Firms must pay special attention to at-risk business partners – including how they relate to the whole chain. A business partner appearing to be low-risk in isolation may have ties to risky entities. 

In December 2022, for example, the Biden administration announced plans to blacklist Yangtze Memory Technologies (YMTC) and 30 other Chinese technology companies after months of pressure from lawmakers. The US also seeks to enter an accord with the Netherlands and Japan, preventing companies under all three jurisdictions from exporting chipmaking supplies to China.

“To refer again to the significance of KYB,” Armstrong notes, “firms with corporate customers will need to pay attention to any potential ties those customers may have to supply chains involving the fabrication of semiconductors, silicon wafers, and related technologies.” In our compliance survey, 34 percent of respondents said they planned to replace or upgrade their KYB solutions in 2023. And in 2021, Fatpos Global projected a market increase in electronic KYB from around $150 million in 2020 to over $533 million by 2030. 

To strengthen KYB processes, firms should evaluate whether existing CDD procedures include tailored processes for business customers. Key considerations may include:

• Business-specific supply chain risks will depend on up-to-date risk assessments that recognize key differences between individual and business entity risks.
• Compliance vendor risks – Even vendors offering compliance and KYB solutions should be thoroughly vetted. Though they help firms mitigate supply chain risk, they are also supply chain members and should be screened accordingly. 

3. Robust Process Resilience

“In addition to understanding the current nature of supply chains,” Armstrong concludes, “firms also need to assess the potential impact of sudden changes and ensure they have as much resilience built into their processes as possible.” Indeed, disruptions can generate ripple effects across multiple industries in sectors where the supply chain is complex. These effects come from economic pressures, rising financial crime trends, and evolving regulatory requirements.

To support supply chain resilience in a rapidly changing ecosystem, firms should establish transparent collaboration with customers. In light of disruptions exacerbated by the pandemic, there has been an international push for collaboration and transparency in the supply chain. When countries and suppliers collaborate internationally, sharing critical data on possible risks and disruptions, greater resilience is built into supply chains, making upheavals and adjustments less disruptive for everyone. Collaborative data can also boost effective supply chain AML/CFT risk management.

Using Technology to Mitigate Supply Chain Risk

Firms seeking to improve their supply chain risk management must balance this with natural business constraints. For example, the need to make KYB more risk-effective stands in tension with the need to streamline onboarding for legitimate customers. But a rise in tailored vendor offerings powered by next-generation tech can help address many of these pressing industry problems. 

How might firms leverage this technology to enhance their solutions? Technologies such as artificial intelligence, biometrics, and REST APIs allow businesses to streamline and integrate risk management services. APIs, in particular, enable firms to layer approaches like ID verification, digital forensics, behavioral analytics, and identity clustering to ensure powerful, specific risk management. New and evolving technologies such as those offered by machine learning, through an ability to ingest and manipulate a greater volume of data in more sophisticated ways, are rapidly changing the ability to detect trade-based money laundering.

Known as orchestration, this multifaceted approach allows firms to target bad actors more effectively while making processes smoother for legitimate customers. These high-tech solutions’ flexibility and scalability also allow for greater agility, supporting more resilient supply chain relationships. Partnered with newer, more affordable, and robust solutions, firms are in a position to tackle supply chain risks more efficiently.

The post How to Manage AML Supply Chain Risk in 2023 appeared first on ComplyAdvantage.

Our annual global compliance survey doesn’t just look at the anti-money laundering (AML) implications of hot topics like the uncertain global economy and Russia’s war in Ukraine, important though those are. It also takes an extended view, exploring the longer-term trends that shape how compliance professionals go about their work. 

This year, our third survey identified several key trends. One was that firms increasingly align technological transformations with structural reforms within their organizations, focusing on legacy system updates and better cross-team collaboration. Technologies such as artificial intelligence (AI) are also becoming increasingly popular as more firms adopt an integrated mindset regarding fraud and anti-money laundering (‘FRAML’). 

We explore all these themes and more in our industry trends report, but here are a few of the top takeaways: 

1. Firms are focused on aligning technological and organizational transformation

Amidst challenges related to managing customer data, ever-increasing regulatory expectations, and competitive pressure, firms increasingly recognize that they need to ‘get the fundamentals right’ – i.e., ensuring they have a fit-for-purpose underlying framework to facilitate future success. For the compliance function, this means how their data and teams are structured. 

More firms than ever told us that digitally transforming legacy systems – alongside integrating teams and cohesion – are key pain points. 39 percent of firms said digitally transforming legacy systems was their most significant compliance-related pain point, a two percentage point increase on 2021 and 6 percentage points higher than in 2020. This trend is likely self-reinforcing, with compliance officers moving between different financial institutions able to compare newer, more sophisticated tech stacks with older ones. As a result, they become more aware of legacy technologies’ limitations and more determined to implement modernization initiatives where they are needed. Indeed, when asked which area of the compliance function would be ‘at risk’ in an audit, 46 percent cited ‘data management,’ with 42 percent saying the suitability of the tech stack and 41 percent the effectiveness of procedures. 

2. Firms are moving from exploration to implementation with AI for financial crime risk detection

Efficient and accurate data analysis is vital for effective AML/CFT programs. As global financial crime trends continue to rise, compliance teams face growing datasets that outpace traditional tools even while budgetary and staffing pressures increase. 

But with artificial intelligence, vendors have begun to offer solutions with far superior capabilities that seamlessly address this dilemma. In a recent interview, PwC Luxembourg’s Andreas Braun highlighted how FinTech companies now leverage artificial intelligence in AML and know-your-customer (KYC) processes. In particular, he emphasized the tremendous data processing and analysis possible through AI, which helps solve traditional risk management efficiency and cost dilemmas. Artificial intelligence is quickly becoming a staple in financial compliance, thanks to its power and elegance.

The survey data bears this out. 99 percent of surveyed firms expect AI to impact financial crime risk detection positively. They anticipate specific gains in transaction monitoring. When asked which transaction monitoring use case AI could best help them with, firms overwhelmingly identified three:

• Alert Prioritization – 31 percent of respondents expected AI to help rank transaction alerts by risk. This enables transaction monitoring teams to catch more risky activity and do it faster.
• Flexible Tuning – 26 percent thought they’d use AI to improve their alert system – helping to adjust thresholds and fine-tune alerts responsively.
• Relationship Identification – 24 percent anticipated artificial intelligence would uncover new relationships between monitored entities and individuals. 

Only one percent of the respondents didn’t expect AI to benefit their transaction monitoring. 

3. PEP screening sophistication is increasing 

With politically exposed person (PEP) regulations varying globally, discerning global trends in how compliance teams approach PEP screening can be complex. This year’s survey, however, showed a clear shift toward a greater focus on mid-level government officials. When asked which area their firm most valued in a PEP screening solution, 39 percent said mid-level government officials, a ten percentage point increase on 2021 that made it the highest ranking factor. 

The data shows that firms increasingly recognize that there is no “one size fits all” classification when it comes to PEPs. In particular, there is a recognition that middle-ranking and even more junior officials could act on behalf of a PEP, circumventing AML/CFT controls. As a result, it’s entirely appropriate for firms to cover these less prominent public functions as customer risk factors as part of their enterprise-wide risk assessments. 

4. KYB solutions evolve to meet market expectations 

As AML regulations expand and business relationships grow more complex, firms are seeking to bolster an essential aspect of customer due diligence: know your business or KYB. KYC has often been the natural primary focus when considering global CDD requirements. But equally important are business-to-business relationships, which also fall under the CDD legislative scope. The UK’s Financial Conduct Authority (FCA) and the European Banking Authority (EBA), for example, leave their definitions broad, calling for due diligence on “business relationships.” 

In this year’s survey, more than a third of respondents – 34 percent – said they planned to replace or upgrade their KYB solutions. In 2021, Fatpos Global projected a market increase in electronic KYB from around $150 million in 2020 to over $533 million by 2030. Alongside global regulatory trends, this interest is partly thanks to a rise in tailored vendor offerings powered by next-generation tech. 

KYB solutions solve pressing industry problems. A 2022 PYMNTS study tied inadequate KYB to substantial fraud-related losses – including resources wasted on false positives. In contrast, firms using “proactive and automated solutions” experienced losses lower by roughly 34 percent. Nearly half of the surveyed organizations struggled significantly with digital business identity verification. PYMNTS identified an over-dependence on legacy solutions and limited resources among key factors holding firms back.

To find out more, download our Industry Trends spotlight report today

The post From AI to PEP Screening, These Trends Will Shape the Compliance Industry in 2023 appeared first on ComplyAdvantage.

2023 was supposed to be the year we escaped the shockwaves of the COVID-19 pandemic. 

Unfortunately, the results of our annual survey of 800 C-suite and senior compliance decision-makers across the US, Canada, UK, France, Germany, Netherlands, Singapore, Hong Kong, and Australia suggest otherwise. 

Here are four top trends we’ve identified from the financial institutions in our survey: 

1. Economic volatility is reshaping attitudes to risk

99 percent of organizations globally told us they’re re-evaluating their risk appetite due to the economic environment. 57 percent are doing so “to a great extent.” This more conservative approach, and the additional customer due diligence it will require, is set to pile further pressure on the expectation that access to financial services is slick and frictionless. 

Underlying industry caution is an expectation that, as in previous economic downturns, levels of financial crime will increase. This may not entirely come from hardened professional criminals, either. Economic pressure is likely to drive a wider increase in risk-taking behavior from previously legitimate actors, some of which will cross the line into financial crimes. 

While the economic outlook is bleak, compliance professionals are realistic. 59 percent are braced for increased financial crime, with 58 percent planning to hire more staff. Despite expectations that unemployment rates will rise – and double in the US by the end of 2023 – just 11 percent of organizations anticipate reducing the size of their compliance staff.

2. Fraud and scams continue to evolve

Our survey data showed tax and investment fraud as the joint top concerns for compliance professionals in 2023. While both are likely fuelled by the economic downturn, investment fraud, in particular, often runs counter-cyclically to the economy. As easier methods of accessing finance dry up, the temptation to resort to bogus schemes offering apparently “market-beating” returns increases. 

Credit and debit card fraud remained a major concern, cited by 39 percent of respondents. Much of this is driven by e-commerce, with purchases made via phone, internet, or mail-order using stolen cards estimated to surpass $10bn by 2024. The popularity of credit cards for online purchases means they are involved in a significant amount of this fraud.  

Emerging typologies such as synthetic identity fraud also featured significantly, surpassing concern about crimes such as elder and romance fraud. KPMG cites synthetic ID fraud as the fastest-growing financial crime in the United States, costing banks more than $6bn. 2023 is likely to see synthetic ID fraud grow further, with criminals identifying new ways to exploit consumers aligned with ongoing economic pressures. One example of this is mortgage fraud. As rising interest rates push up mortgage costs in many countries, those desperate to attain financing may seek to use more advanced but increasingly accessible technologies to bypass lender requirements that are becoming progressively more stringent. 

3. Environmental crime surges as enforcement lags

International concern about environmental crimes and wildlife trafficking soared in 2022, reflecting the threat posed to food security, political stability, conflict, and forced migration. When asked which predicate offenses were most important to their organizations, more than one in four selected environmental crime, making it one of the top selected offenses. This is despite its inclusion in our survey for the first time in 2022. Environmental crime was also the second highest typology of concern for firms when submitting suspicious activity reports (SARs), behind only tax evasion.

Some of the growth in demand driving environmental and wildlife crimes can be attributed to the easing of pandemic restrictions, which has made activities like poaching easier. In June 2022, China also suspended a wildlife trade ban introduced in January 2020 to tackle potential sources of COVID spread. The global downturn has already led to scaled-back resources, resulting in less capacity to train rangers and investigators in source countries, including Botswana, South Africa, Kenya, Namibia, and Tanzania. Against this backdrop, United for Wildlife estimates illegal wildlife traders will “return to full profitability within 2-3 years.”

4. Crowdfunding is fueling political extremism

This year our global survey asked about the use of decentralized finance platforms to support extremist political groups for the first time. 87 percent of respondents said they’d seen an increase in the use of these platforms to fund extremism, with 31 percent believing the growth to be “significant.” 

Protests across Ottawa and US-Canada border crossings have elevated global concern about the use of crowdfunding platforms for extremist groups. On February 4th, 2022, GoFundMe closed a campaign supporting the “Freedom Convoy” due to concern it had become an “occupation” and amidst widespread reports of violence. The group then pivoted to GiveSendGo, a platform which, according to The Washington Post, describes itself as “the leader in Christian fundraising,” where it raised over $9m. 

Crowdfunding has also supported Islamic State (IS) operatives in Syria. Reporting indicates family members of young men trapped in Syrian camps have attempted to use the Telegram messenger service to “bring them to safety.” It’s believed some of those looking to escape are doing so to fight for IS. In a report issued on March 1, 2022, the US Treasury explained how domestic extremists have used legal fundraising methods to support their activities, making them harder to detect. The Treasury also highlighted the pandemic’s role in making these platforms “a necessity rather than a convenience.”

To find out more, download our Spotlight on Financial Crime report today

The post Four Trends Shaping the State of Financial Crime in 2023 appeared first on ComplyAdvantage.

Unsurprisingly, due to the war in Ukraine, Russia topped this year’s list of geopolitical hotspots firms are most concerned about.

The development of sanctions against Russia in 2023 is likely to hinge on developments on the battlefield in Ukraine itself. So far, the Russians have been unable to either topple the Ukrainian government of President Volodomyr Zelenskyy or occupy the country. Moreover, although the Russian military has made territorial gains in the east and south of Ukraine – illegally annexing the Ukrainian regions of Donetsk, Luhansk, Kherson, and Zaporizhzhia on September 30, 2022 – Ukrainian forces made several successful counter-offensives. In early November, Russian soldiers were forced to evacuate the city of Kherson in the face of Ukrainian attacks, despite its supposed annexation. At year-end, fighting continued across the east and south of the country, with Russia facing gradual losses of previously gained territory. Its response so far has been to mount drone attacks on energy infrastructure and civilians in the rest of Ukraine, seeking to undermine Ukrainian morale. With Russia unlikely to unambiguously ‘win’ or quit, the conflict will continue into 2023.

How will this affect western sanctions? It seems improbable that there will be any further EU move on natural gas supplies or an attempt to remove all Russian financial institutions from the international financial architecture unless prompted by a major escalation in Russian violence. New sectoral categories will probably be added in successive packages. More generally, we can expect to see new sanctions focuses, especially:

• Extending designation lists for pre-existing types of targets,
• Shortening timetables for implementing some existing bans
• Tackling sanctions evasion, particularly through new designations and law enforcement and judicial action
• Practically implementing ‘freeze to seize’ measures

But ‘freeze to seize’ will take time to bear fruit, given that the legal basis for sustainable rather than ad hoc action does not yet exist in the US, Canada, the UK, or the EU, and the process of democratic legislation is typically slow. 

Paradoxically, western sanctions in some areas will probably be scaled back to a limited extent, even as the number of designations overall continues to rise. Any oligarch’s successful legal action to remove their name from sanction lists will set a precedent, causing significant problems for the western approach. If talks develop, Russia is also likely to seek concessions on sanctions in exchange for good behavior. There are already indications of this. In November, Russia requested that western countries remove its state agriculture lender, Rosselkhozbank, from designation lists to facilitate exporting Russian foodstuffs deemed critical to easing global food supply chain problems. Such seemingly innocuous ‘goodwill’ quid pro quos are likely to grow, especially around energy supplies, and some will almost certainly be accepted. It remains to be seen how many and how significant they will be, but citizens’ levels of cold and hunger by spring 2023 are the most likely variables to influence western governments’ calculations. 

Other 2023 Hotspots: China

2023 will probably see an expanding range of technology and related sanctions against China by the US. It seems unlikely that other western countries will join the US in imposing blanket measures. However, the UK and other ‘Five Eyes’ countries, which have expressed concerns about Chinese industrial espionage, may do so in the future. In parallel, Chinese sanctions against the democratic coalition will likely focus on explicit political and material support for Taiwan. More wide-ranging counter-sanctions using Chinese sanctions laws against US technology businesses seem doubtful in the current environment. 

The key factors which could cause a change in this situation in 2023 are China’s position on Ukraine and Taiwan. If China were to begin providing significant material support to Russia, then the US, EU, UK, Canada, and others would begin targeting Chinese firms, government bodies, and officials suspected of being directly involved in providing support. Although targeted sanctions on senior Chinese figures or major government departments seem highly improbable. Such western sanctions would be extensively calibrated, carefully chosen, and intended to be consequential but not provocative. However, Taiwan would present a different challenge, with the democratic coalition’s response varying alongside the nature of Chinese action. 

Other 2023 Hotspots: North Korea

North Korea is highly likely to carry on its current path in 2023, with further missile tests and proliferation activities. Having built up a significant cybercrime capability in recent years, it will also continue to launch cryptocurrency heists. However, a prolonged fall in the value of cryptocurrencies might lead to a switch in tactics and a return to focus on stealing fiat currencies, along similar lines to the North Korean attempt to steal $1 billion of the Federal Reserve Bank of New York’s accounts with Bangladesh Bank in February 2016.  

There is little prospect for any improvement in the standoff between western countries and North Korea. The most probable development will be a further worsening of the situation, triggered by any one of a number of North Korean acts – from the testing of a nuclear device to further missile launches close to South Korea and Japan or more open and extensive support for Russia in Ukraine. With the possible exception of a new nuclear test, none of these events will lead to a new resolution at the UNSC because of the block now placed by China and Russia. Consequently, further measures will probably come from western national regimes alone. For the US, with its pre-existing package of comprehensive North Korea sanctions, new additions will probably focus on the expanding area of North Korean cybercrime and cryptocurrency theft. The US can also be expected to look ever more closely at third-country support for North Korean evasion efforts, especially in China and Russia. The EU, UK, Australia, and Japan will also augment their own lists in 2023, with a North Korean nuclear test likely to stimulate the widest range of action.

Other 2023 Hotspots: Iran

Overall, the prospects for Iranian relations with the US and other western countries in 2023 look poor. Positive developments in the Vienna talks remain possible, but the relative gloom of optimists such as EU foreign affairs lead Josep Borrell suggests that they are unlikely. There is considerable distance still between the US and Iran, and in light of the wider political context, the EU and UK seem unlikely to encourage the US to take a risk. The Biden administration will also be increasingly cautious about doing so as of 2023, with Congress finely balanced between the parties and a presidential election coming in November 2024. President Biden will not wish to give his potential opponents a stick with which to beat him or encourage a newly installed and hawkish Israeli government under Binyamin Netanyahu to consider using military force against Iranian reactors. It is doubtful that the JCPOA will be revived in 2023.  

On the contrary, it seems more probable that 2023 will lead to the West hardening its position against Iran, with the EU, Canada, and the UK moving progressively towards a more unyielding stance. The Iranian government’s crackdown on its people and its support for Russia are two areas of significant concern that will probably lead it to continue coordinating further new designations in these areas with the US. It is also possible that some western countries will take more action in areas where the US has previously acted alone, such as Iranian support for terrorism. The UK is the likeliest case for future action in 2023, given comments in November 2022 by Ken McCallum, Director General of the UK’s domestic intelligence agency MI5, that Iran had been behind ten plots to kill or kidnap individuals in the UK. 

Explore more by downloading our Geopolitics and Sanctions report today

The post Russia, Ukraine, and the Torrid 2023 Sanctions Landscape appeared first on ComplyAdvantage.