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Switzerland has recently proposed a new series of reforms to strengthen its legal infrastructure related to anti-money laundering (AML) amidst extensive criticism. A criticism that stems from the country’s controversial application of sanctions against Russia, which has led observers to question its overall lack of transparency. And as we all know, without transparency, the effectiveness of sanctions becomes severely compromised.

This move involves two primary measures that aim to enhance compliance and risk management across both private and public organizations.

Beneficial Owner Register: A Key Component in AML Frameworks

Akin to some of the directives of the Corporate Transparency Act in the USA, the first measure involves the establishment of a register for beneficial owners, to which only authorized institutions will have access.

Switzerland, as a non-EU member, is not subject to EU regulations, including the 4AMLD, which mandates the establishment of ultimate beneficial owner (UBO) registries. Therefore, Switzerland was the last country in Europe without such a register.

Maintaining a record of beneficial ownership is crucial to strengthening AML frameworks, but there is a need for further guidance to bolster its effectiveness, namely on the following aspects :

Data quality: Being able to cross-verify the information found in beneficial owner registers with shareholder data is critical to the overall quality and reliability of the data.
Access: Given the growing diversity of the financial ecosystem, it is imperative to acknowledge the roles fintech firms and technology service providers play in combating financial crime. Therefore, granting them a level of access to these registers that supports their efforts in this direction, could prove beneficial.

Strengthening KYC Requirements for Service Providers

The second measure of Switzerland’s proposed legal reforms, driven by international pressure, aims to solidify the obligation of specific groups of service providers, including lawyers and accountants, to execute Know Your Customer (KYC) procedures and comply with suspicious activity reporting regulations.

These reforms not only signal Switzerland’s responsiveness to evolving AML frameworks but also underscore the prevailing trends in the global AML landscape.

Square Facts: A Partner in Navigating Regulatory Compliance

Rigorous KYC procedures are essential for all customers, given their mandatory nature, but they prove crucial for high-risk accounts.

As per FATF’s 40 recommendations, KYC measures should be proportional to the risks, entailing Enhanced Due Diligence (EDD) for high-risk third parties and at least simplified KYC procedures for low to medium risk customers. The interpretative note to FATF’s recommendation number 10 (Customer Due Diligence) outlines various measures, including gathering additional customer information or checking the customer’s source of funds.

The risk level depends on many factors, some of which are quite objective. For instance, dealing with a (former) politically exposed person (PEP) or someone residing in a high-risk jurisdiction, will automatically make them a high-risk third party.

When handling such high-risk clients, it becomes imperative to conduct detailed customer identification, verification checks, and third-party screening.

Square Facts uses advanced technology to streamline compliance processes and make them more efficient, covering the entire risk spectrum.

For quick and efficient entry-level due diligence, our Simplified Compliance utilizes artificial intelligence and machine learning to eliminate errors and provide real-time monitoring and updates. But when it comes to high and critical-risk clients, Enhanced Due Diligence (EDD) requires thorough human review. Our team of experts seamlessly complements our cutting-edge technology, enabling us to provide this service on a global scale, accessible through either our Enhanced Compliance service or our Investigative Compliance.

To learn more about how we can support your organization in its journey towards effective risk and compliance management, feel free to contact me directly at dshepherd@icover-services.com.

Note: The information in this blog post is based on the proposed reforms in Switzerland’s laws against financial crimes. Final implementation may be subject to further consultation and approval.

Source: Switzerland proposes new reforms to laws against financial crime

Diane Shepherd, Director of Strategy and Partnerships at Square Facts.

Diane Shepherd is the Director of Strategy and Partnerships at Square Facts.
She recently rejoined the world of Risk-Management and Compliance after a year and a half working in the finance sector in London, UK, where she lives.
Her versatile career allowed her to explore various industries and geographies, imparting her with a unique and refreshing perspective on all things ESG, Compliance and Risk Management. Diane is also responsible for business development strategies in EMEA and APAC at iCOVER, thanks to her extensive experience in Investigative Intelligence and Background Screening.

The potential threat to your anti-bribery and corruption policies

Middlemen are important and they feature in all supply chains. The supermarket is the middleman bringing producers’ goods to consumers. Ultimately, middlemen bring together buyers and sellers. They provide access to markets and on the other side raw materials. Amazon is perhaps the biggest middleman of all which draws together businesses seeking to expand into new markets and consumers seeking easy access and quick delivery of goods.

Not all middlemen are performing logical or legitimate functions. In some instances, synthetic middlemen are created in order to misappropriate value from a transaction. Within the securities industry, traders, salespeople, and brokers have falsely proposed a customer was introduced by a third party, sometimes referred to as an introducing broker. The introducing broker is paid a fee and/or a commission upon transactions. Of course, there are legitimate introducing brokers, but it is an area that is vulnerable to exploitation and manipulation.

Corrupt public officials engage with third-party middlemen who act as a gateway, through which access is provided to raw materials, such as coal, iron ore, and oil. This practice is prevalent within countries with natural resources for sale and corrupt politicians. Often there are multiple risk factors that should put compliance professionals on notice. These include high-risk countries, high-risk industries, politically exposed persons (PEPs), and an offshore corporate entity facilitating transactions for substantial fees.

Stimler Case

Earlier in September 2021, details were released of a cooperation deal between Anthony Stimler and the U.S. attorney’s office in Manhattan. Stimler is a former oil trader who worked for Glencore Plc. In extracts of testimony before a court in New York, he described how he bribed government officials in African nations in order to secure access to millions of barrels of oil. Having pleaded guilty to charges of bribery, the London-based trader said: “Your honour, I knew what I was doing was wrong and unlawful”, before adding, “I am extremely remorseful for my conduct.”

So, what did Stimler do; how did he operate, and did he act alone? His testimony before a federal judge, reveals that he pursued a policy of bribery, which he asserts was adopted and applied by fellow Glencore traders. Bluntly, Stimler stated: “When I made requests for payments to intermediaries, I was aware that other Glencore traders who worked with me were doing the same thing by directing our intermediaries to make bribe payments to government officials.” Adding details, he further stated: “I intended that a proportion of the payment to intermediaries operating in Nigeria were to be passed on to Nigerian state-owned oil company officials. The purpose of the payment was to influence those officials’ decisions regarding the Nigerian government’s allocations of crude oil cargo.”

This unambiguous testimony proposes Glencore permitted payments to be made to government officials in order to facilitate business. This causes people to ponder how such payments were presented within the company’s accounts? Beyond this, there will be questions as to who authorised the payments and who signed off on the accounts?

A spokesperson for Glencore stated that every person mentioned in Stimler’s case has been disciplined or left the firm. Of course, this does not mean the Department of Justice will not charge them with serious criminal offences.

Intermediaries

Middlemen and women operate throughout the world, bringing together partners, companies, and third parties in pursuit of legitimate business objectives. In this case the intermediaries, middlemen were operating in a supply chain of bribery and corruption. At one end of the chain was oil and at the other end, there was money. Government officials influenced or controlled the flow and distribution of the oil, whereas traders and managers at Glencore controlled the money, how it was spent, where it was spent, and who was to benefit.

Stimler testified payments were made to intermediaries/middlemen for onward payment to Nigerian officials. Whilst the testimony proposes nothing was hidden, the reality is everything was hidden behind the intermediaries who protected the identity of Glencore when making the payments to the Nigerian officials.

Within the criminal business of bribery and corruption, it is common practice for parties to use and hide behind third parties, intermediaries, offshore companies, and even lawyers. The objective is to distance the party paying the bribe from the party receiving the bribe.

Onshore, offshore, no one can be sure anymore

Whilst the cooperation of Stimler is unusual, companies paying bribes to secure lucrative access to raw materials in Africa is nothing new. Likewise, instances of government officials in Africa misappropriating funds have happened far too frequently. Other companies in the oil business in Africa have made payments to companies registered in Central America. Such payments need to be challenged, given the oil is commonly owned by an African government, why should payments be made to an offshore company registered in Central America?

In the case against James Ibori, the former Governor of Delta state in Nigeria, he used a number of intermediaries, including his UK-based lawyer Bhadresh Gohil, to syphon stolen funds out of Nigeria. Both men were subsequently sentenced to substantial prison sentences in the UK. It follows, the UK is offshore to Nigeria.

Red flags

There are no new startling revelations within Stimler’s testimony, indeed, on the contrary, paying intermediaries/middlemen is a known “red flag” and in this instance, it sits adjacent to a number of all of the red flags referenced above:

High-risk business – viz oil
High-risk countries – Nigeria, Angola, Panama
Politically exposed persons (PEPs)
Offshore companies/entities
The US Treasury and UK Government do not operate through companies registered in Panama, Delaware, the Isle of Man, or the British Virgin Islands

The long arm of US law enforcement

It is important to take note of and simultaneously respect the actions of the Department of Justice and the FBI. In this instance the perpetrator, Stimler was working in London and on behalf of his employer in London, Glencore Plc, a publicly-traded company, with a head office in Switzerland. Stimler paid bribes to government officials in Africa, so how and where does the US fit into this? Well, the bribes were paid in USD, all USD transactions are cleared through banks in the state of New York and each transaction is therefore subject to US Federal laws and New York state laws. In addition, Glencore operates a trading business in New York, and importantly the Foreign & Corrupt Practices Act (FCPA) was put in place to protect American interests.

The FCPA seeks to maintain a level playing field for corporate entities to tender for business, in a fair and transparent way. As such companies such as Glencore paying bribes to foreign government officials harms legitimate US businesses. By taking action, the Department of Justice and FBI demonstrate that they will apply the FCPA and hold people accountable for their criminal conduct.

Change

Pursuant to the above, Glencore has changed and the CEO, Gary Nagle has stated, the company no longer deals through intermediaries/middlemen and has simultaneously reduced the level of business undertaken in high-risk countries. Glencore continues to make a significant profit on its trading activity and no longer features as a trading partner of the Nigerian government.

The kleptocracy unit of the Department of Justice and FBI is on the front foot and demonstrating, yesterday’s operating procedures may have been acceptable to some, but nonetheless, they were criminal, and culprits will be pursued.

Combined with information leaks published through media outlets, the actions of law enforcement agencies show that yesterday’s secrets will become tomorrow’s news/evidence and/or newspaper headlines. Consequently, companies are changing their operations, old, bad habits are being replaced by improved governance, compliance, and due diligence. Short-term, quick profit thinking has been replaced by long-term strategic planning which safeguards profits, staff, and even the communities where companies operate.

New thinking

New laws such as the UK Bribery Act as well as anti-human trafficking laws have caused businesses to enhance compliance processes and change working practices. Counterparties, intermediaries/ introducers, and middlemen are treated as though they were clients and subject to an equivalent level of due diligence. This does not prohibit business with such parties, albeit some companies, such as Glencore in 2021 have determined to no longer deal with or through intermediaries in order to counter the risks, which have previously arisen.

Payments requested or made to third parties need to be supported by due diligence which clearly establishes a firm knows who they are undertaking business with/through and equally importantly, why. Commentary related to the Stimler case suggests public officials solicited/demanded the payment of bribes to facilities business, such as the purchase of oil. Thus, even though firms may not be seeking to transact through middlemen, others may request or demand they do so. Absent to a logical, reasonable, and acceptable explanation for the involvement of a middleman, firms should consider rejecting such business or refusing to act through an intermediary.

Payments for African natural resources should not be made to Central American or Caribbean registered companies. Sometimes, it really is as simple as that, because playing with and paying a middleman can be as risky as playing with fire, in both instances you can get burnt, badly.

Martin Woods – October 2021

Martin Woods, Director of AMLWoods

Martin Woods is a seasoned anti-money laundering practitioner, financial crime fighter and strategist. He has been fighting money launderers and financial criminals for over thirty years, as both a detective and a leader within a diverse range of financial service businesses in the UK and overseas. He is internationally recognized as a leader, outstanding speaker and first-class trainer, who has previously worked with and provided training to regulators, central banks, law enforcement agencies and the United Nations.

He is an innovator who thinks like a money launderer and in doing so he seeks to deter, detect, frustrate and ultimately stop money launderers. He joins the dots between dirty money, crime and the suffering inflicted upon communities where criminals operate and intimidate those who oppose them. He has played an active role in a number of major international money laundering investigations, which allows him to provide advice and guidance based upon unique, hands on, real life, real crime insights and case studies.

He asserts financial crime is a major component of a firm’s ESG policy, strategy and business development. Arguing environmental crime impacts all of us and unchecked will have a devasting impact upon our children and our grandchildren. Thus, he believes our collective actions can and will make a difference. Along with many others he has lobbied for more transparency in the ownership of corporate entities, behind which too many criminals seek to hide.

Within the discipline of ESG, there are many people who assert corruption is one of the biggest risks and threats. Our economies rely upon raw materials, in particular fuels, timber, metals and of course foods. All of these are extracted from land, often with a significant cost to the environment. In many countries there are laws and regulations which seek to protect the environment and restrict/limit the negative impact of extraction projects. All too often these are breached and compromised, because corrupt payments are made to politicians and public officials.

Politics, money, commodities and corruption

The Nigerian government is currently litigating JP Morgan in London, alleging the bank facilitated corrupt payments, made by oil companies to Nigerian Officials. The government alleges the money, circa $900 million should have been paid to them (the government). The bank denies the allegation, but at the time of the transactions did file suspicious activity reports (SARs) to the UK authorities. The SARs articulated the bank’s own suspicions about the money and the government officials. A trial date has been set for February next year, when the Nigerian government seek to prove JP Morgan was negligent and therefore liable to repay the $900 million, plus interest.

The case highlights the risks presented when dealing with politically exposed persons (PEPs) and commodities such as oil. Add to this, a high-risk country, high value transactions and offshore companies, there is an incredibly high risk of corruption. All of which requires a lot of data, due diligence and analysis. These high value transactions also bring pressure upon anti-money laundering (AML) and anti-bribery/corruption (ABC) practitioners, who need to stay strong and act with confidence. When staff at JP Morgan agreed to execute these transactions in 2013, they could never have imagined their thinking would subsequently be cross-examined in the courts in London nine years later.

License to spill

In other instances, corrupt politicians provide permits and licences to parties with inadequate or no policies and procedures to comply with requirements to protect the environment and dispose of waste safely. All of this contributes to further erosion of forests, degradation of local landscapes and yet more global warming.

Politicians and public officials are targeted and corrupted in order to ensure rogue companies can operate at reduced costs, absent to environmental concerns. Chemicals used in extraction are dumped illegally, killing local wildlife and contaminating local water supplies. These chemical catastrophes harm communities and threaten lives, which is why their disposal is regulated.

The ingredients of corruption

Added to the above, are bank accounts, from which bribes are sent and into which bribes are paid. Central to all of this is the bank account for the overseas PEP. Sometimes this is in the form of an offshore company and funds are paid for consultancy services. Funds may originate from major, established international companies, but this does not mean the funds are clean and the status of the major company can be relied upon. There have been multiple instances of major international companies paying penalties within prosecutions and deferred prosecutions related to allegations of bribery with politicians and public officials.

There has to be logic, to all transactions, as well as; an overseas PEP opening a bank account in a foreign country; the incorporation of an offshore company; the provision of legitimate consultancy services, without any apparent or obvious conflict of interests; the payment of funds to the PEP/offshore company and the relationship between the PEP and a major international company.

SBM Offshore and corruption

All of the above ingredients of corruption came together when Anthony Mace, the former CEO of SBM Offshore N.V. (a publicly traded Dutch company with American Depository Receipts (ADRs) listed upon the New York stock exchange) was sent t prison for breaches of the Foreign Corrupt Practices Act. Prosecutors allege Mae was at the centre of an international bribery scheme. Mace pleaded guilty to a single charge of conspiring to bribe government officials in Brazil, Angola and Equatorial Guinea. He was sentenced to 36 months in prison and SBM Offshore subsequently paid a penalty of $238 million within a deferred prosecution agreement. The investigation established SBM Offshore employees paid as much as $180 million in bribes over a fifteen year period.

The case references a total failure in governance and the pursuit of policies which simultaneously showed no regard for the environment and the social impact of systemically paying bribes to government officials. Importantly the prosecutors prosecuted the individual with accountability and responsibility, the CEO. It serves as a lesson to all executives and managers who contemplate or engage in paying bribes to government officials.

Other corruption cases

Earlier this year the former President of France, Nicolas Sarkozy was sentenced to prison for offences of corruption. Meanwhile in China, a former executive of an asset management company was sentenced to death for taking bribes. All of this highlights the dangers and risks when undertaking business with PEPs and within supply chains where other businesses undertake business with and may pay bribes to PEPs.

In 2020, Airbus reached a global settlement with multiple law enforcement agencies and agreed to pay penalties totalling US$4 bullion. It was alleged the company systemically bribed foreign officials over a number of years, to gain lucrative contracts to supply aircraft to governments and national airline carriers.

Take Note

There are other areas of business which draw suppliers into contact and engagement with government officials, one such area is security printing for bank notes and official documents, such as passports. In 2016 the Serious Fraud office in the UK convicted the security printer Smith and Ouzman Limited for making corrupt payments to government officials in Kenya and Mauritania in order to secure lucrative contracts.

Presently the Belgium security printing company Semlex is being investigated in relation to allegations of bribery and money laundering in a number of African countries, including Democratic Republic of Congo and Madagascar, The bottom line is, security printing involves undertaking business with PEPs, often in high risk jurisdictions and it presents a high level of risk. Always beware of payments made to third party consultants and offshore entities when undertaking business with or facilitating business for security printing companies.

Hide and seek

Commonly, corrupt PEPs seek to hide their identity as well as the ownership and controls of accounts, funds and companies, behind proxies, nominees and even layers of other corporate entities. When faced with such issues and challenges, firms/banks may need to engage external third parties to undertake due diligence and establish the authenticity of offshore corporate entities, their owners, controllers addresses and connected parties.

Third party due diligence providers develop familiarity with corporate service providers, accommodation addresses, company management agents and nominee/proxy parties. They develop a sixth sense for the structure, ownership and management of offshore corporate entities. They recognise addresses, they understand and also recognise the difference between a company operating as an authentic business and others merely existing to receive fictitious payments.

In 2021, with client change at the very top of the agenda for the United Nations, national governments, multi-national corporations and many citizens all of whom expect and demand better from companies and executives. Now is not the time to undertake business blind to risks, including PEP ownership of offshore companies. Firms and banks need to know answers to know customers.

Absence can be a red flag

In 2021, how do international businesses, including consultancies operate without a website and an internet presence. A website is used to showcase a business, thus does an international business without a website have something to hide or no story to tell? There is a distinction between a personal investment company and a company that purports to be providing consultancy services to others, including multinational businesses.

Conversely, a consultancy company without an office, an operating address is likely to struggle to meet with and correspond with customers and prospective customers. Combine the two, no website and no operating address, how does such a business function?

The presence of a nominee owner, suggests the real owner is absent, hidden and he/she could be a PEP. Nominees seldom provide services to only one corporate entity, they commonly act as owners, directors or partners for multiple entities, often in more than one jurisdiction. Whenever a firm/bank identifies a nominee within a corporate customer, they must establish upon behalf of whom they are acting, after all, it is necessary to know customers and this extends to ownership

Qualifications

What qualifies a PEP or an offshore company to provide consultancy services? It is a vague business, but when processing funds for the provision of such services, banks/firms needs to establish the validity of such payments. It is necessary for bank/firms to determine whether a PEP is qualified to provide specific consultancy services and in doing so they should remove any vagueness.

Where necessary firms/banks should seek consent from their customer to discuss the consultancy services with the paying party. Correspondence should be used to confirm the precise nature and value of any services provided. All the while keeping upper most in mind, PEPs, money, commodities, offshore companies, consultancy services and nominee parties are very high risk and often form the base ingredients for corrupt payments to be made.

Spending the proceeds of corruption

Earlier this year it was reported that politicians from an African country owned 800 properties in London and Dubai with a value in excess of $400 million. One has to assume the same politicians simultaneously work and live in the African country, where many will also own properties. The salary and allowances for cabinet ministers in this African country is equal to approximately $37,000/annum.

Of course, in all countries, many politicians are wealthy people and enter politics to serve their countries and constituents, thus there are additional and often substantial sources of funding. Nonetheless there have been many instances of foreign PEPs seeking to launder money outside of the country where they reside and work. Moreover, some PEPs seek to hide their wealth and privacy, hence they use offshore corporate entities when purchasing property overseas.

Real estate in major cities, such as London, Dubai and Paris is seen as both a good investment and a stable asset for parties seeking to hedge risks and invest money. Hence, the flow of foreign funds into the property sector within these cities.

Source of funds, wealth and corruption

None of this operates in isolation, as referenced in a prior article there are supply chains, one of which is the source of funds/wealth a PEP seeks to spend with or through a firm/bank, when purchasing properties, goods, services and legal advice. Whilst this information can be provided by a customer, a PEP or parties acting on behalf of a PEP, it is often difficult to independently verify such information. Here once again, it is wise and may sometimes be necessary to engage the expert services of a third-party due diligence provider.

Using extensive international networks in conjunction with substantial data sets which track PEPs, their businesses, their wealth, their families associates and salaries, they are often better equipped to help firms/banks to make a determination as to the true origins of a PEPs source or wealth/funds. These due diligence providers can provide evidence of the salaries of politicians and public workers within countries, in articular high risk countries.

Conclusion

Within the recent United Nations climate change report, emphasis was put upon the need for immediate action to save the planet from a climate change disaster and that we could all make a difference. Well AML and ABC practitioners need to identify this as a rallying call. We have a role to play here, we can make a difference. We need to deal in certainty and sometimes this will mean we say no to customers, transactions, colleagues and even managers. It is easier to say no and remain steadfast when we have obtained the data which proposes a PEP may be trying to launder the proceeds of bribery through our firm/bank.

We can stop bribes being paid and connected environmental damage when we demonstrate that suspicious funds from PEPs are not welcome in our firms/banks. All of this supports our ESG policies, whilst simultaneously complying with applicable laws, protecting shareholders, meeting regulatory expectations and maybe, just maybe, fighting climate change. We can make a difference, but we need to act now.

Martin Woods, Director of AMLWoods

The International Compliance Association (ICA) is the leading professional body for the global regulatory and financial crime compliance community.

This two-day conference was held on 17-18 May 2022 at The Oval, London, bringing together the largest gathering of regulatory and financial crime compliance professionals in the UK and Europe, to hear subject matter experts and international thought leaders debate the issues most critical to the compliance sector and the latest global challenges.

Nadia A.Ziani, our Head of Risk & Compliance, was one of the speakers at the session: Transparency & Consent Framework (TCF) to Environmental, Social, and Governance (ESG) – The ever-expanding importance of social purpose in regulation and compliance.

Nadia shared her unique perspective and key takeaways on ESG and sustainability in particular. She uses the supply chain due diligence context and the new Square Facts multi-dimensional risk methodology to illustrate her outlook. Adopting a holistic risk approach, beyond the AML-related information, is key to a sharp and acute risk framework where ESG and more particularly sustainability is a key components.

For more information about Square Facts, please contact us at contact@square-facts.com.

The current and the future AML framework: what’s in it for you?

In the last 20 years, financial institutions have disbursed several billions of dollars in anti-money laundering (“AML”) related fines, which shows that while efforts to contain money laundering have been significant, especially with the enactments of the various Anti Money Laundering and Combatting the Financing of Terrorism (“AML-CFT”) directives from 1991 onwards, the initiatives still seem insufficient to deter the scourge.

The Directive (EU) 2018/1673 of the European Parliament and of the Council of 23 October 2018 on combating money laundering with criminal law[1], commonly referred to as the 6th Anti Money Laundering Directive (“6AMLD”), is the continuation of the European Union’s increasing willingness to strengthen AML related actions, by complementing the application and widening the scope of the 4th Anti Money Laundering Directive (EU) 2015/849 as amended by the 5th Anti Money Laundering Directive.

The 6AMLD’s aim is to further enhance the criminalization of AML offenses by harmonizing their definitions, transposing them into each Member State’s criminal legislation. Entities within the scope of the directive must be compliant since June 3rd, 2021.

What are the key takeaways from the newly applicable 6AMLD?

The 6AMLD imposes stricter requirements on organizations to address financial crime and maximize penalties through stronger criminal liability. The directive’s main provisions include the following:

Harmonized definitions of money laundering and its 22 predicate offenses (i.e., an extended list of “prior” crimes that generate the funds which are then laundered), ranging from corruption, human trafficking, to terrorism, environmental crimes, and cybercrime, which is a newly included offense, due to its growing financial impact and the nature of the schemes involving not only information systems but also payments via cryptocurrencies.

Extension of criminal liability from natural persons to legal persons. A company can be held responsible for the actions of its subordinates and for the lack of supervision or control demonstrated by the legal entity. Furthermore, third-party facilitators such as accountants, lawyers, consultants who may assist money launderers in their criminal activity are liable as well, given that aiding and abetting money laundering, as well as inciting and attempting such crimes are now also a punishable offense.

Greater penalties for individuals (e.g., a minimum prison term of 4 years instead of 1 year as set out in the 4th AML directive) and severe sanctions applied to corporations on top of the fines (from the confiscation of assets to the temporary or permanent closure of business), are a few indicators of how far the European Union is willing to go in order to strengthen AML tools and fill previous gaps in the existing framework.

Criteria such as the location where the offense took place, the nationality or residency of the offender, shall be taken into consideration in order to determine which EU Member will have jurisdiction in case of cross-border investigations. Member States must ensure efficient cooperation and coordination between each other to centralize proceedings in one country, especially if the offense is of multinational reach.

What is coming up next in the AML-CFT landscape?

Although the effectiveness and impact of the latest AML-CFT installments remain to be evaluated within the next couple of years, the fight against money laundering and terrorist financing is far from over and continues to be a major concern at the EU Commission, which is currently reinforcing its arsenal via a number of regulatory efforts.

To consolidate and reinforce the AML-CFT existing measures, as of July 20, 2021, the Commission has issued an AML-CFT legislative framework containing 4 proposals[2]:

The creation of an EU centralized AML Authority (“AMLA”) which should:

o Be operational in 2024;

o Help optimize supervision on financial institutions presenting the highest risk;

o Enhance coordination between national supervisory authorities responsible for overseeing financial and non-financial organizations;

o Ensure better cooperation among Financial Intelligence Units in Member States, to monitor potentially illegal cross-border financial flows.

The provisions on the AMLA will be embedded in a new regulation – the “AMLA Regulation”

A new regulation on AML-CFT (“on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing”) imposing clearer requirements directly applicable to “obliged entities”, which:

o From now on include additional types of organizations subject to the EU AML-CFT rules, such as, all crypto-asset and some crowdfunding services providers, mortgage credit and consumer credit providers and intermediaries, which are not financial institutions, as well as operators working on behalf of nationals of third countries;

o Must adopt a risk-based approach when establishing internal processes and controls, with a risk management procedure focusing on the risks of money laundering and terrorist financing;

o Must appoint a Compliance/AML officer and adopt a series of policies at management level to ensure proper control;

o Must understand and comply with the more granular measures provided in the regulation around customer due diligence, taking into account risk factors to help evaluate whether a simplified or enhanced customer due diligence is more appropriate. A customer due diligence should be conducted whenever a business relationship is established; when an occasional transaction of more than EUR 10 000 is carried out; when a suspicion of money laundering or terrorist financing arises; or when there are doubts about the veracity or adequacy of the provided data.

In addition to the customer due diligence measures, obliged entities must have in place appropriate risk management systems, including risk-based procedures, to determine whether the customer or the beneficial owner of the customer is a politically exposed person.

At the minimum, customer identification via a verification of the customer’s identity should be conducted, not to mention the verification of the identity of beneficial owners and understanding the customer’s control structure; albeit when the risk is higher, the enhanced diligence would require examining the origin and destination of funds involved in a transaction as well as obtaining further information on the business relationship, nature, and purpose of the transaction.

The Commission also introduces a Union-wide limit to large cash payments over EUR 10 000, although EU Members may adopt lower thresholds depending on the local specificities.

A new directive (“on the mechanisms to be put in place by the Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing directive (EU) 2015/849”) which shall be transposed into national law, imposing rules to national supervisors and financial intelligence units in each Member State and thus recognizing the need for flexibility for in the application of certain measures; for instance, currency exchange or cheque cashing offices as well as trust or company service providers or gambling service providers must be regulated (licensed or registration).

Moreover, to confirm the provisions within current AML frameworks, the directive highlights the probity, the “fit and proper” requirements to apply to senior managers of obliged entities, and the applicability of some rules to beneficial owners.

Persons convicted of money laundering, or of any of its predicate offenses, are prohibited to operate.

National supervisory authorities are granted certain powers to rule over certain obliged entities’ senior management or beneficial owners, where a conviction takes place.

A revision of the regulation 2015/847/EU on transfers of funds to include the traceability of transfers of crypto-assets made by crypto-assets service providers, whenever the transactions involve a standard wire transfer or a crypto-asset transfer between a crypto-asset service provider and another obliged entity.

For regulated entities who may need to take necessary steps to improve their AML-CFT program, time is of the essence as the new AML-CFT framework will be soon discussed by the European Parliament and the Council, the Commission aiming for an expedited legislative process to get the AMLA up and running.

What obliged entities need to do?

Financial and non-financial institutions need to show proactivity and effective action to review their AML compliance, to avoid criminal and non-criminal fines they could face. These prevention measures may include:

Conducting a widened risk assessment in light of the new expanded list of predicate offenses and the criminal liability for legal persons, and review current risk scoring methodologies applies within the organization;
Reviewing and implementing robust due diligence, automated KYC/KYB processes (including ID verifications with MRZ and OCR technology), adverse media screenings, third party monitoring and machine learning tools, tailored to the fast regulatory changes;
Providing updated training of staff with respect to the new AML rules, to educate on the identification and reporting of suspicious activities relating to the predicate offenses;
Insufflating an ethical mindset by promoting a culture of accountability and transparency at senior management level. Establishing integrity screenings (i.e., “fit and proper”) towards decision-making staff can go a long way;
Updating AML policies and procedures to adapt to the new risk environment;
Keeping an audit trail of the conducted due diligence processes to demonstrate your compliance and mitigate risks in the event of a regulator’s investigation.

“Square Facts” refers to one or more entities of the iCOVER Group, a French limited private company, and its network of subsidiaries, each of which is a legally separate and independent entity. This publication has been written in general terms and, therefore, cannot be relied on to cover specific situations. Application of the principles set out in the publication will depend on the circumstances of a situation, and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Square Facts would be pleased to advise you on how to apply the principles set out in this publication to your specific circumstances. Square Facts accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

Conclusion

Les régimes de contrôle à l’exportation et de sanctions décrits ci-dessus sont complexes, avec une variété de considérations qui se chevauchent et des aléas juridictionnels qui peuvent varier d’un pays à l’autre, d’une transaction à l’autre, et qui sont sujets à des modifications périodiques.

Les sanctions internationales étant en constant changement, la due diligence raisonnable ne doit être ni un processus statique ni un processus générique. Au contraire, elle doit être menée de manière adaptée et flexible, et devra tenir compte des considérations locales et internationales, y compris des lois et des cadres réglementaires des pays tiers, et par rapport aux développements géopolitiques contemporains.

Les entreprises qui espèrent les utiliser avec succès doivent avoir une bonne compréhension des produits et de la technologie avec lesquels elles traitent, ainsi que des chaînes d’approvisionnement et clients avec lesquelles elles opèrent à travers une due diligence raisonnable et un filtrage adéquat des parties tierces.

Un des services de conformité que nous fournissons à nos clients consiste à effectuer une due diligence raisonnable et globale et à filtrer notamment les parties tierces sur plus de 1,400 listes de sanctions et surveillance afin que la décision d’effectuer des transactions avec ces personnes ou entités soit une décision informée.

Square Facts propose des solutions dédiées à la conformité vous permettant de passer en revue grâce à une externalisation, à un expert métier, l’ensemble de vos relations d’affaires et ainsi faciliter votre mission de due diligence en France et à l’international.

Nos packages de conformité simplifiés, renforcées et d’investigation améliorés sont adoptés par les responsables juridiques, responsables de la conformité, responsables de la sécurité, conseillers juridiques, directeurs généraux et conseils d’administration.

Nous tirons parti de toute notre expertise, de notre réseau et de nos capacités technologiques pour améliorer votre compréhension de votre exposition aux risques. Nous préparons des rapports consolidés et analysés dans un format clair et concis, livrés au sein d’une plateforme SaaS sécurisée et centralisée pour permettre une traçabilité et un audit complet.

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Katia Lyubimova / Square Facts Compliance Manager – August 2021

We are very pleased to announce our brand-new collaboration with Martin Woods, Director of AMLWoods, widely recognized as Expert in Risk and Compliance industry, who has previously worked with and provided training to regulators, central banks, law enforcement agencies and the United Nations. Square Facts and Martin Woods will be writing a series of articles in order to emphasis the increasing importance of environmental, governance and social (ESG) policies and practices and overall key and topical compliance and risk topics.

The ESG supply chain

There is nothing which connects all of us more than the environment we live in and our collective actions which impact upon the same, negatively or positively. There are parallel environmental supply chains which joins all of us together, directly and indirectly. What happens in the Brazilian part of the Amazon rain forest influences the decisions made by executives of supermarket chains in Europe, Australian and America. Activists are providing access to information which was hitherto withheld or hidden from consumers and this information has the potential to damage the brand reputation of corporate enterprises.

The information supply chain

The supply chains which join all of us together have, in recent years grown and expanded, now touching every area of our lives. Major information leaks, managed by the International Consortium of Investigative Journalists (ICIJ) and provided by courageous whistleblowers, have exposed criminal conduct within institutions and led to the collapse of governments. Other whistleblowers have brought public and regulatory attention to deceptive, environmentally damaging practices within the automotive industry and consequently, corporate enterprises have changed their conduct, their executive management and their culture.

There is a sense that what the public do not know today, they will learn about tomorrow and nowadays, getting caught is becoming increasingly expensive. All of which is causing shareholders to demand accountability and the implementation of policies which adopt a long-term approach to ESG and sustainability. Executives are coming under pressure to protect not only shareholders, but the communities where they operate. Consequently, financial service firms now need to know where and how their money is being spent in the same way they have for a long time, needed to know where a customer’s funds originate from.

Environmental crime

As human beings in many ways we are superficial. We react to our primary senses of sight, hearing, taste, touch and smell. We repulse at foul smells and are often disgusted by things we see. Graffiti irritates people and often the costs associated with cleaning the impacted areas can be substantial, but in general graffiti does not present a significant risk. Whereas the residue and waste from illegal drug laboratories can and does cause significant environment damage and in some instances has contaminated water supplies.

People are angered by those who illegally dispose of general rubbish in the countryside, in the road and other public areas, but they seldom see the toxic waste from illegal drug laboratories, dumped into streams, buried, and even flushed down toilets, all of which causes significant environmental damage. Increasingly, there is a need for firms, in particular financial service businesses to undertake due diligence upon chemical companies they provide services to. Within the supply chain of precursor chemicals used to produce illegal drugs, there is a need for suppliers to know their customers and by extension, a need for financial service businesses to validate such know your customer processes.

In seeking to protect communities and the environment, it is necessary to go beyond the illegal drug dealer and penetrate or dismantle his/her supply chain. We all have a role to play here and it is far more than a legal or regulatory requirement.

The moral obligation

All of this was recently recognised by the CEO of ABN Amro bank, Robert Swaak, who stated the bank had a moral obligation to fight financial crime, in order to make a meaningful contribution towards a safer society. It follows, that if you cannot see this connection, you are probably not looking at it properly, or perhaps you are looking the other way.

Previously, banking executives were not held to be accountable or liable for anti-money laundering failures within their banks, whereas now CEOs are the subject of criminal investigations. In the past CEOs were either not informed or denied being informed of AML problems. There were breaks and gaps in the information supply chains, which protected the CEOs. Not now, there is an intolerance of failure and not knowing is not an acceptable excuse.

The moral proposition from ABN Amro suggests the bank is changing its culture and application to both ESG and fighting financial crime. Mr. Swaak has determined the bank’s actions must benefit society. In doing so he has embedded the fight against financial crime into the bank’s ESG policies, processes and strategy. It must be envisaged, ABN Amro bank will become a more hostile environment for financial criminals whilst simultaneously pursuing strategies which benefit society, within a wider ESG context. Furthermore, Mr. Swaak will be driving the changes, there will be no information gaps as he accepts accountability to both shareholders and the communities where the bank and the bank’s clients operate.

Confidence

Firms and businesses must always supply confidence, not only in the quality of service, product or raw material provided, but also within the controls applied to their own supply chains. This includes controls to ensure there is no child labour or slave labour; raw materials are ethically sourced; production processes align with the ESG statement and policies of your firm and all of this meets with the expectations of shareholders, customers and where applicable, regulators.

Such confidence is secured from due diligence and sometimes on the ground assessments of processes, testing of materials and even interviews with staff. After all, reputation is everything, both at a corporate and personal level.

Risk

There is always risk within any supply chain, once again it is through the application of due diligence, risks are identified and thereafter can be managed or mitigated. Absent to due diligence and an understanding of the participants in a supply chain, which extends to the ownership and control of corporate entities, it is not possible to identify risks. In October 2020, the FinCEN Leaks revealed an instance within which one of the biggest banks in the world, failed to establish a corporate customer relationship was ultimately owned by a man who has featured upon the FBI’s top ten most wanted list for in excess of 25 years. Semion Mogilevich[1] channelled almost $1billion through accounts with the bank.

In this instance, the internal data supply chain failed and this breakdown presented significant risk to the bank. Ultimately the bank conceded they did not know their customer and behold, their customer was a man on the FBIs top ten most wanted list.

All of this has a severe negative impact upon the reputation of the bank and simultaneously causes anxiety within all of the supply chains the bank participates in, this extends to the bank’s relationship with regulators.

Tolerance

The reverse supply chain is that of the tolerance of the wider public and the society Mr. Swaak refers to. After all, society has the ultimate say over whether, a bank or any other corporate enterprise can stay in business. What customers think matters more now than ever before, because the information supply chain gives them far more to think about. Parents are conscious of the impact of their actions upon a world they will leave to their children. Consequently, many make consumer decisions based upon long-term sustainability. They have expectations of corporate enterprises and will not tolerate a disregard for ESG.

This tolerance can change and will change when firms and banks fail to adhere to laws, rules and policies which have a negative impact upon the environment and the safety of societies. Try as they may, executives can no longer exert total control and restrictions upon the information supply chain, but they can influence ESG and financial crime fighting strategies, which is what society wants.

(1) Semion Mogilevich is described by some as the most dangerous and most sort after gangster in the world.

Martin Woods, Director of AMLWoods

It is often stated no one knows the sanctions lists as well as those who feature upon the same. Whilst financial crime professionals seek to find links between clients, prospective clients, and counterparties, there are enablers who seek to help sanctioned parties, including sanctioned countries.

Sanctions are political tools used to punish, restrict, and influence parties, including governments. They have been used successfully to prevent some governments from developing nuclear weapons and to deter others who sponsor or support terrorism. At an entity level, they restrict business, and at an individual level, they limit or deny access to assets, funds, and international financial services.

Evidence

The impact of reduced supply, set against an unchanged level of demand presents opportunities for those prepared to break laws and take risks. To stop these enablers and their sanctioned clients it is necessary to think like them and understand where as well as how they are likely to hide. As stated in a recent publication from the World Bank, Signatures for Sale, there are professionals who will provide nominee parties to act as owners, directors, and general front people of companies. These companies can be used to camouflage and hide third parties, including sanctioned individuals.

On 11 April 2022, the International Consortium of Investigative Journalists (ICIJ) published an update to the Paradise Papers, which focused upon Russian nationals in which they identified 800 Russians behind hundreds of offshore shell companies. The updated report drew information leaked from a professional enabler in Seychelles. More than 800,000 files were leaked to the ICIJ from a company called Alpha Consulting Ltd. The model and method used by the Russians were typical of those provided by offshore enablers and highlights the risks within offshore companies.

Gathering and using the data

Financial crime professionals can draw the data from the ICIJ leaks and use the same when screening existing client relationships, transactions, and prospective clients. It does not mean all companies from Seychelles are in any way criminal, but these leaks indicate there are increased levels of risk. Using a Covid-19 analogy, and the measurement of the R rate on a regional basis, some financial crime professionals may determine the addresses of some professional enablers have a very high infection risk, R rate, for money laundering and sanctions breaches.

Other financial crime professionals will not have resources available to undertake the research and identify the addresses, professional enablers, and nominees who have featured in the ICIJ leaks and papers, as well as the names and addresses presented within the Laundromat investigations published by the Organised Crime & Corruption Reporting Project (OCCRP). This is where third-party due diligence providers should be engaged to provide such lists and/or undertake specific due diligence for individual clients or prospective clients. There is reduced regulatory and public tolerance of firms turning a blind eye to client relationships and transactions or not actually knowing who they are undertaking business with.

Not in their name

The ICIJ leaks and papers have helped investigators to identify real estate transactions worth billions of dollars that have been undertaken on behalf of foreign nationals, oligarchs, and politicians. None of the superyachts owned by oligarchs are registered in their personal names, likewise most of their real estate holdings. The yachts and most of the real estate are registered in the names of offshore companies and the names of the politicians, oligarchs and other Russian beneficial owners are nowhere to be seen.

Offshore companies are potentially tax-efficient, but they have been abused and this has led to governments legislating for beneficial ownership declarations for real estate acquisitions undertaken by offshore companies.

These laws will take time to pass and longer still to embed. In the meantime, regulated firms need to know their clients and the third parties their clients are buying or selling real estate from/to. Once again, this is an area where firms may need to engage third-party due diligence providers because it is more difficult to obtain identity data for corporate entities that are not clients of a bank or firm.

Beneficiaries virtually invisible (BVI)

The British Virgin Islands (BVI) features more prominently within ICIJ leaks and papers than any other jurisdiction and on Friday 29 April the President of the BVI, Andrew Fahie, and his son were arrested in the U.S. within an undercover operation. It is alleged both men believed they were collecting a substantial cash payment from the Sinaloa cartel, but instead they were met by U.S federal agents and duly arrested. Of course, everyone is innocent until proven to be guilty, but this case does little to help the reputation of the BVI and undoubtedly increases the money laundering, corruption, and sanctions breach risk ratings for this country.

All the world is a stage

Regulated firms in any jurisdiction are not compelled to undertake business with or open accounts for a BVI corporate entity or a Limited Liability Partnership (LLP) from the UK. In the event a financial crime professional determines a UK LLP operating a bank account in Russia seeks to pay funds into or through a UK/U.S. bank presents an unacceptable level of risk, such a transaction can be rejected. It is adequate, some would assert, abundant intelligence which demonstrates offshore companies from numerous jurisdictions are provided by enablers to help politicians, money launderers, and criminals to hide, logically the same enablers can provide companies to sanctioned parties.

The war in Ukraine and the sanctions subsequently applied to Russians demand new thinking and an increased level of due diligence to ensure the sanctions achieve their objectives. For some firms, this will require a change of approach and an acknowledgment that offshore presents a higher risk than onshore, because offshore is where Russian sanctioned parties are likely to hide. Using data and screening third-party due diligence providers can provide intelligence that can be used to identify nominee parties.

Related to the payment of funds, a number of Russian banks have been directly sanctioned and denied access to the SWIFT (Society for Worldwide International Financial Transactions) system in order to ensure they cannot make or receive international payments routed through SWIFT member/user banks.

Nominee policy

As with the BVI companies and UK LLP entities, regulated firms are not compelled to undertake business with or execute transactions for nominees and the unknown parties hiding behind them. From a governance perspective, financial crime professionals may conclude, that now is a good time to update policies and prohibit business with any parties using nominee shareholders, because the risks are not known, and may be too high. Those seeking to breach sanctions and their enablers will be looking for the banks/firms with weak controls and policies which accommodate their nominees and consequently give them an opportunity to breach the sanctions designed to restrict them.

Success

Financial crime professionals who think like sanctioned parties and understand how they seek to breach sanctions will be better equipped to frustrate and block such parties from using their firms/banks to breach the sanctions imposed.

Martin Woods – May 2022

Contributor to Square Facts, Martin Woods, industry expert.

Opinion piece, Nadia A. Ziani, Head of Compliance and Risk Business EMEA at Square Facts

Mergers and acquisitions (M&A) can be crucial investment opportunities and a path to business growth. The stakes are high and corporate governance plays a key role. More than a preliminary audit focusing on purely financial and accounting data, due diligence in M&A must be a more robust and holistic process designed to probe compliance and integrity risk. This type of comprehensive approach to due diligence is becoming the norm for two main reasons: how a company manages overall risk is increasingly factored into target company valuations and tighter national anti-corruption laws are impacting the M&A due diligence requirements.

The term due diligence is closely linked to mergers and acquisitions through the preliminary audit. And yet – paradoxically – there is no law that makes due diligence mandatory or defines what exactly the checks should cover, before or after the deal. Until recently, many investors unfortunately fail to see the value of widening the scope of due diligence beyond the strictly legal and financial considerations and often questioned why compliance and integrity due diligence was needed at all.

Compliance and integrity due diligence: what’s at stake for your business?

While compliance and integrity due diligence certainly meets basic compliance needs, such as identifying ultimate beneficial owners or ferreting out individuals or entities on international sanctions lists, it also, and most importantly, addresses the protean – and long under-estimated – risk of reputation. In M&A, the due diligence process will be shaped by the type of deal: is it a hostile takeover or a friendly one? Competitive or bilateral? Is the acquirer aiming for a minority or majority stake, or taking outright control over the targeted company? Is the targeted company a national or a transnational business, with operations in different jurisdictions?

Indeed, the type of M&A deal will also influence the conditions for obtaining information for the compliance and integrity due diligence on the acquiree. Regulatory wise and besides the Anti-Bribery Act, the UK global Anti-Corruption Sanctions Regime could be an even more crucial step forward in the fight against corruption and kleptocracy. Merger and Acquisition falls under those core principles where it is recommended that anti-corruption checks form an integral part of any M&A workstream. All aspects of reputation and analysis of reputation risk are slowly but surely becoming a crucial component of the M&A process, pointing to the value of deep business knowledge, expertise and rigorous methodology when considering mergers and acquisitions of all kinds.

Over and above what the regulations require, when systematically and granularly done well, due diligence has an added value to the overall investment process, bringing new business opportunities and insights to make more informed investment decisions.

Due diligence can be conducted at different stages of the M&A process, right at the start, during the preliminary screening of the potential target, and at a later stage, in the form of an additional post-closing audit.

What are the benefits of a multidirectional approach to risk?

A due diligence report aims to:

Confirm the target is legally established, verify its shareholder and management structure and identify subsidiaries and related entities;
Meet legal obligations to check sanctions lists and watchlists for companies and its shareholders, set up to combat money laundering, terrorist financing or trade with embargoed countries;
Screen senior executives and shareholders to check if they are classed as Politically Exposed Persons (PEPs) or related to PEPs; establish whether the target entity is a state owned enterprise ;
Consolidate data on reputation and integrity from different origins: open source, KYC databases and information gleaned from 360 degrees interviews;
Analyse and substantiate the corruption, money-laundering or terrorist financing uncovered risks.

We recommend a multidirectional approach to risk so that due diligence is as comprehensive as possible and takes all forms of risk into account. This sweeping risk assessment covers five major risk categories: compliance, reputation, jurisdiction, operations and supply chain, and ESG (environment, social and governance).

We have developed a four-level risk index (low, average, critical and very high) that we apply to all our due diligence reports. 25 risk categories are included, making sure we cover all five key types of risk in M&A due diligence.

It is critical to assess the integrity of the target entity. The risk of contagion to the acquirer’s reputation cannot be underestimated, as we have seen from two recent cases, which illustrate the value of this multidirectional approach.

In the first example, a close look at the shareholder structure during the compliance due diligence process for a proposed deal uncovered a myriad of shareholders in different jurisdictions – all with family or former business consolidated shares – ties to a majority shareholder, a Russian national PEP and the ultimate beneficial owner. Since this contravened the 50% rule by the US Treasury’s Office of Foreign Assets Control (OFAC), the M&A transaction was reassessed. In the second case – a perfect example of the importance of extending due diligence across the entire entity, including its subsidiaries’ practices – a review of the business environment of the top managers of a company based in Africa (a French company subsidiary) revealed conflicts of interest and malfeasance that would have threatened the acquirer’s viability post-acquisition. If the target entity had been investigated for corruption after the deal was closed, it could have faced criminal sanctions for the new acquirer.

Interviews and digging deep into the business environment: two critical components of due diligence

Holding compliance and integrity interviews in the target’s environment rounds off the open-source data research and anti-corruption checks to confirm or refute the information obtained from these sources. The deeper the due diligence process through a cross-source approach that combines data from open source, KYC information and interviews, the fuller and more detailed the information on the reputation of the target is. Conducting compliance and integrity interviews involve identifying and selecting legitimate sources that are sufficiently diverse to reduce the risk of partial feedback, making contacts and consolidating information, and writing and editing. We recommend holding interviews to ensure a holistic approach.

Mapping the business environment of the target company, its key executives and shareholders is the final stage in the due diligence process. It shows the main external stakeholders (customers, partners, suppliers, intermediaries and government bodies) whose power to make decisions or exert influence could have a positive or negative impact on the target’s business and its potential exposure to corrupt practices.

The law: another argument in favour of compliance and integrity due diligence

Due diligence is not just an opportunity in the UK. In France, to grasp a European example, the recent Sapin II law on transparency and anti-corruption makes assessing the integrity of third parties a key measure in the country’s anti-corruption legislation. As the AFA recently pointed out in its “Practical Guide: Anti-corruption due diligence for mergers and acquisitions”, incomplete – or non-existent – checks expose the parties to criminal liability and the risk of sanctions. It could not be clearer: in the UK and in many other jurisdictions, it is essential to uncover the corruption and compliance red flags as early and as clearly as possible to protect the acquirer or the newly-formed entity. Post-deal, the acquiring company could be held criminally liable for breaches or practices by the target that predate the acquisition. Or, when a new legal entity is formed between the companies, the universal transfer of their respective assets to the new entity also effectively transfers any civil liability they may have incurred for acts of corruption committed before the merger.

In conclusion, due diligence cannot be narrowed down to an isolated legal or regulatory compliance ticking exercise. Compliance and integrity due diligence must be part of the M&A process to allow for more informed, safer and more ethical investments that meet the standards of a good corporate governance. It is a factor in valuations and so can also be a significant negotiating tool.

Over the years, this type of due diligence process has become firmly established in the UK. The emergence of new structural rules in Europe more recently will also see a shift as practices converge towards this standard. General and widespread adoption of compliance and integrity due diligence will be a major differentiator and key success driver for M&A.

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Nadia A.Ziani

Directrice Risque et Conformité EMEA

+44(0)7933314791

nziani@square-facts.com

Ces dernières semaines, les États-Unis, l’Union Européenne et leurs alliés ont adopté la plus vaste salve de sanctions et de contrôles à l’exportation contre la Russie, la Biélorussie et deux régions indépendantes d’Ukraine (Donetsk et Lougansk) dans le but d’arrêter l’invasion de l’Ukraine par la Russie.

Le Japon, l’Australie, le Canada, la Nouvelle-Zélande et la Corée du Sud ont également imposé des restrictions. Différents gouvernements, dont Singapour et Taïwan, ont indiqué qu’ils soutiendraient ces nouvelles sanctions.

Combinées, ces restrictions plurilatérales sont peut-être les mesures les plus strictes jamais vues dans l’histoire des sanctions.

Dans ce contexte sans précédent, nous vous offrons cinq explications essentielles afin de répondre avec succès à vos obligations de conformité.

1- Les Sanctions, qu’est-ce que c’est ?

De l’interdiction de voyager, au gel des avoirs, en passant par des restrictions d’importation/exportation, les sanctions contribuent à protéger la sécurité nationale, les services financiers et nationaux, ainsi que l’économie d’un pays.

Les sanctions visent généralement des pays et des régimes étrangers spécifiques, des terroristes, des trafiquants internationaux de stupéfiants et ceux qui se livrent à des activités liées à la prolifération des armes de destruction massive, ainsi que d’autres menaces. Elles interdisent les transactions et, dans certains cas, les services financiers, en lien avec une personne ou une organisation (appelée « cible »).

Par exemple, les États-Unis, conjointement avec leurs alliés et partenaires, ont ciblé les élites et oligarques russes, ainsi que des membres de leur famille, en raison de leur soutien à Vladimir Poutine et de leur enrichissement personnel, aux dépens du peuple russe. D’autres siègent au sommet des plus grandes entreprises russes et sont chargés de fournir les ressources nécessaires pour soutenir l’invasion de l’Ukraine par Vladimir Poutine.

Par le biais de ces sanctions, les Etats-Unis et leurs alliés entendent couper ces personnes et les membres de leur famille des principaux systèmes financiers, de geler leurs avoirs, d’interdire l’utilisation de leurs biens, et de contrôler leur exportation de produits et services.

Les sanctions et les contrôles à l’exportation peuvent être rapidement mis en œuvre et ajustés. Par conséquent, les entreprises opérant avec des chaînes d’approvisionnement internationales doivent être disposées à une telle flexibilité. Cependant, il existe des stratégies relativement simples et évolutives pouvant être déployées par les entreprises pour s’assurer qu’elles disposent d’un cadre de conformité stable et efficace duquel opérer, comme détaillé ci-dessous.

2- Stratégie de filtrage

Le filtrage est une stratégie de conformité souvent négligée mais essentielle dans le contexte des sanctions et de la conformité des contrôles des exportations. Non seulement il est nécessaire de déterminer si une entreprise pourrait avoir affaire à une cible de sanctions désignée ou à une entité soumise à des restrictions à l’exportation, mais si elle peut également être facilement automatisée et intégrée à l’infrastructure commerciale existante (exemple : plateformes de planification des ressources d’entreprise, systèmes de paiement, plateformes conformité etc.)

Le principe de base du filtrage des sanctions lui-même est assez simple : comparer toutes les données relatives au client, au fournisseur, à l’employé ou à la transaction avec les données contenues dans les listes de sanctions externes, telles que celles de l’Office of Foreign Assets Control Américain (OFAC), Les Nations Unies, ou le Bureau de mise en œuvre des sanctions financières Britannique (OFSI).

L’UE maintient une liste consolidée des personnes, groupes et entités faisant l’objet de sanctions financières de l’UE. L’UE tient également à jour une liste et une carte des pays soumis à des sanctions de l’UE, de l’ONU ou des deux à la fois.

Ces listes de sanctions visent à aider les entreprises à déterminer si les sanctions s’appliquent à leurs exportations, importations et affaires avec entités ou individus sanctionnés.

Il existe des milliers de listes disponibles pour aider les organisations à gérer efficacement leurs risques et à se conformer à la réglementation à laquelle l’entreprise est assujettie. Il peut s’agir de listes de sanctions internationales (telles que l’OFAC) ou de listes de surveillance telles, des personnes recherchées par le FBI ou Interpol, ou des personnes reconnues coupables d’un crime, ou encore des directeurs disqualifiés du HMRC (Her Majesty’s Revenue and Customs). Utilisées efficacement et de manière appropriée, elles permettent aux organisations de s’assurer que des contrôles adaptés sont en place.

Ces listes sont conçues à la fois comme un premier point de référence pour les entreprises à un stade précoce de leur engagement commercial, mais aussi tout au long de la relation commerciale.

3- Qui dois-je filtrer ?

L’évaluation des risques est un élément fondamental d’un programme de conformité lié aux sanctions. Le but de l’évaluation des risques consiste à identifier les risques inhérents de l’entreprise de manière fréquente afin d’éclairer les décisions et les contrôles fondés sur les risques.

Les risques peuvent varier en fonction de divers facteurs, notamment la taille et la sophistication de l’entreprise, produits et services, les pays où l’entreprise opère etc.

Par exemple, selon l’OFAC , de tels risques pourraient être posés par les clients, produits, services, chaîne d’approvisionnement, intermédiaires, contreparties, transactions et emplacements géographiques, dépendant de la nature de l’organisation.

L’OFAC recommande aussi l’évaluation des risques a des stades différents d’une relation d’affaire ou d’une transaction tels qu’au début d’une nouvelle relation d’affaire, lors de l’ouverture d’un nouveau compte client (via un processus « Connais ton client », Know Your Customer– KYC) mais aussi avant d’entrer dans un processus de fusion et acquisition (M&A).

4- Contrôle des exportations

Il est impératif que les entreprises qui transfèrent des biens et des technologies au-delà des frontières comprennent parfaitement les restrictions potentielles qui peuvent s’appliquer à ces transactions. Cette compréhension commence par une connaissance précise des marchandises, technologies, et des régimes de contrôle des exportations applicables (classification).

Une entreprise se doit de comprendre ses biens et sa technologie grâce à la classification, mais elle doit également comprendre ses contreparties et ses parties tierces grâce à un niveau de due diligence raisonnable et adaptée.

Dès lors que les classifications applicables sont bien comprises, les entreprises doivent effectuer une évaluation des risques de la chaîne d’approvisionnement pour déterminer si elles pourraient rencontrer des difficultés pour obtenir des licences ou d’autres autorisations d’exportation, et être confrontées à un risque accru de sanctions affectant leurs chaînes d’approvisionnement.

La due diligence raisonnable est une vérification des plus importantes lorsqu’il s’agit de marchés à haut risque (par exemple la Russie).

Entre autres, les entreprises doivent connaître la source de leurs matières premières et autres produits et avoir une certaine compréhension de la façon dont leurs fournisseurs mènent leurs affaires.

Une due diligence raisonnable dans ce cadre comprend la connaissance des rôles des tiers et de l’intermédiaire dans les transactions. Il n’est jamais suffisant de simplement effectuer votre due diligence raisonnable concernant l’utilisateur final d’une exportation.

La due diligence raisonnable est généralement effectuée sur divers acteurs impliqués dans la transaction, qui peuvent inclure les personnes qui s’occupent de l’expédition, les transitaires, les institutions financières intermédiaires, les institutions financières bénéficiaires et les institutions financières d’origine.

Il est également fondamental de connaître les entrepreneurs et sous-traitants auxquels ces différentes parties font appel, notamment lorsqu’il s’agit de transactions importantes ou sur des marchés où le profil de risque est très élevé. Les normes de due diligence raisonnable seront ajustées de manière appropriée.

La due diligence raisonnable pour les transactions avec des parties notables comprend plusieurs étapes nuancées, qui doivent être effectuées conformément à des politiques stables de conformité en matière de sanctions et de contrôle d’exportations en interne.

5- Considérations pratiques

En outre, un programme efficace de due diligence raisonnable des tiers peut protéger une entreprise non seulement contre les sanctions et le risque de contrôle des exportations, mais également comme mentionné dans nos articles précédents, contre les risques de pots-de-vin et de corruption, les risques de blanchiment d’argent, les risques commerciaux, y compris l’exposition potentielle à des risques financiers ou de réputation.

Les sanctions, les contrôles à l’exportation, les contrôles anticorruptions ou anti-blanchiment fonctionnent généralement séparément les uns des autres, mais peuvent être déployés de manière coordonnée et complémentaire.

En effectuant une due diligence raisonnable de ces individus ou entités, les entreprises doivent garder à l’esprit que lorsqu’elles ciblent une conduite particulière, il y a de fortes chances qu’un autre risque y soit associé.

Conclusion

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La loi Sapin II, précédemment citée dans notre dernier article, a été adoptée en France en décembre 2016. En premier lieu, nous pouvons penser qu’il s’agit d’un texte de loi parmi tant d’autres dans la jungle législative de l’anticorruption internationale ; cependant, il en est tout autre. Il s’agit en effet de la première loi française en vigueur, en réponse au Foreign Corrupt Practices Act (FCPA) américain.

Dans un contexte de guerre économique où les Américains sont parvenus à appliquer leurs lois transnationales au service de leur intérêts économiques propres, et au-delà de l’exercice de transposition de directives européennes, la France s’est donc armée de la loi Sapin II pour le territoire national. Son objectif : redonner à la France le pouvoir juridique de sanctionner et de réglementer les entreprises françaises.

Dans cet article nous étudierons l’histoire d’une des plus grandes lois extraterritoriales américaines, à l’instar de FACTA – le FCPA, son impact sur les entreprises françaises, ainsi que les outils nécessaires pour s’en protéger.

Contexte

Le FCPA est une loi qui a été votée en 1977 avec pour principale mission la lutte contre la corruption d’agents publics à l’étranger. Des enquêtes menées par la Securities and Exchange Commission (SEC) américaine au milieu des années 1970 ont révélé que plus de 400 entreprises américaines ont admis avoir effectué des paiements douteux ou illégaux de plus de 300 millions de dollars à des représentants de gouvernements étrangers, des politiciens et des partis politiques.

Les abus allaient de la corruption de hauts fonctionnaires étrangers pour obtenir un certain type d’action favorable par un gouvernement étranger, à de prétendus paiements de facilitation qui ont été effectués pour s’assurer que les fonctionnaires du gouvernement s’acquittent de certaines fonctions ministérielles ou cléricales.

Parmi les principaux exemples de telles pratiques figurent les scandales de corruption de la société aérospatiale Lockheed Martin, dans lesquels des responsables de Lockheed ont payé des fonctionnaires étrangers dans plusieurs pays afin que ces derniers favorisent les produits de leur entreprise, ou encore le scandale du « Bananagate » dans les années 70, dans lequel Chiquita Brands a soudoyé le président du Honduras pour des politiques gouvernementales qui les favoriseraient.

En réponse à ces révélations très médiatisées, le Congrès a promulgué le FCPA en 1977 pour mettre un terme à la corruption de fonctionnaires étrangers et pour restaurer la confiance du public dans l’intégrité de l’écosystème commercial américain.

En quoi consiste-elle ?

Le FCPA de 1977 (15 U.S.C. § 78dd-1, et suivants) est une loi fédérale qui interdit aux citoyens et entités américaines de corrompre des fonctionnaires étrangers au profit de leurs intérêts commerciaux.

Le FCPA est applicable dans le monde entier et s’applique spécifiquement aux sociétés cotées en bourse et à leur personnel, y compris leurs dirigeants, administrateurs, employés, actionnaires, intermédiaires et agents.

Suite aux modifications apportées en 1998, la loi s’applique également aux entreprises et aux personnes étrangères qui, directement ou par intermédiaires, contribuent à faciliter ou à effectuer des paiements corrompus sur le territoire américain.

Conformément à son objectif anti-corruption, le FCPA modifie le Securities Exchange Act de 1934 pour obliger toutes les sociétés dont les titres sont cotés aux États-Unis à respecter certaines dispositions comptables, telles que la garantie de registres financiers exacts et transparents et le maintien de contrôles comptables internes.

Le FCPA est appliqué conjointement par le ministère de la Justice (DOJ) et la Securities and Exchange Commission (SEC), qui appliquent respectivement des sanctions pénales et civiles.

Quel enjeu pour les entreprises étrangères et françaises ?

L’extraterritorialité des lois américaines est appréhendée par tous. Son arsenal : les lourdes sanctions et le dommage réputationnel qu’elle cause à des entreprises françaises et étrangères menaçant ainsi leur activité.

Au nom de la lutte anti-corruption, les Américains se sont appropriés le droit de sanctionner toutes les activités de corruption des sociétés étrangères opérant aux États-Unis, ou effectuant des transactions en dollars, même hors sol américain, communiquant à travers des réseaux hébergés sur le territoire américain.

Consolidée en 1998 par l’ « International Bribery Act », cette loi est aujourd’hui une des plus strictes. Au travers de celle-ci, les Américains peuvent exercer une pression sur les entreprises étrangères. Elle leur permet à la fois de superviser leurs activités à travers des « monitoring programs » et de les sanctionner en conséquence.

Quelques exemples :

La Société Générale S.A. : Le 04 juin 2018, la Société Générale et sa filiale à 100%, SGA Société Générale Acceptance NV, ont accepté de payer une amende totale combinée de plus de 585 millions de dollars en réponse aux accusations des autorités américaines portant sur le versement supposé de pots-de-vin à des fonctionnaires libyens.

Selon les aveux des sociétés, entre 2004 et 2009, la Société Générale a versé des pots-de-vin par l’intermédiaire d’un courtier libyen dans le cadre de 14 investissements réalisés par des institutions financières publiques libyennes. Pour chaque transaction, la Société Générale versait au broker libyen une commission comprise entre 1,5 et 3 % du montant nominal des investissements réalisés par les institutions étatiques libyennes.

Au total, la Société Générale a versé à l’intermédiaire libyen plus de 90 millions de dollars, dont une partie que le broker libyen a reversée à des hauts fonctionnaires libyens afin de sécuriser les investissements de diverses institutions publiques libyennes au bénéfice de la Société Générale.

La filiale de Société Générale, SGA Société Générale Acceptance N.V., a plaidé coupable à New York pour complot en vue de violer les dispositions anti-corruption du FCPA.

Alstom S.A., la société française d’électricité et de transport, a été condamnée le 13 novembre 2015 par les autorités américaines à payer une amende de près de 772 millions de dollars suite à des accusations criminelles, liées à un système de corruption généralisé d’une valeur de plus de 75 millions de dollars de pots-de-vin secrets versés à des responsables gouvernementaux dans des pays dont l’Indonésie, l’Arabie saoudite, l’Égypte, les Bahamas et Taïwan.

De plus, cinq dirigeants d’Alstom ont été poursuivis aux Etats Unis pour des actes de corruption impliquant Alstom.

En 2013, le géant pétrolier français Total S.A. a accepté de payer 398 millions de dollars d’amendes et de dégorgement aux autorités américaines pour avoir soudoyé un responsable iranien afin d’avoir accès aux champs de pétrole et de gaz. Total a reçu un accord de poursuite différée de trois ans (« Deferred Prosecution Agreement », l’équivalent du CJIP français- (convention judiciaire d’intérêt public) qui nécessite la nomination d’un contrôleur externe de conformité indépendant. Dans son règlement avec les autorités américaines, Total a dû aussi restituer des bénéfices à hauteur de 153 millions de dollars.

Technip S.A., Alcatel, Airbus, BNP Paribas ont de même tous accepté de payer des amendes significatives aux pouvoirs publics américains pour des actes présumés de corruption.

Parties Tierces et Corruption

Ces différents exemples au sein d’entreprises françaises, ont en commun d’avoir engagé des intermédiaires pour représenter leur entreprise dans des marchés étrangers et d’avoir été impliqués dans des affaires de corruption.

Que ce soit dans le cadre d’une interaction avec le gouvernement local : demande de permis, dédouanement des expéditions, commercialisation clients gouvernementaux ou répondant à des appels d’offres gouvernementaux, la loi Sapin II, le FCPA, mais aussi d’autres lois similaires dans d’autres pays (comme le Bribery Act Britannique) interdisent aux entreprises et aux particuliers d’offrir ou verser des pots-de-vin à des fonctionnaires étrangers, directement ou par le biais d’intermédiaires.

Comme pour la loi Sapin II, en vertu du FCPA, une entreprise peut être tenue responsable des actes de corruption de tiers agissant en son nom ou à son profit. En raison de ces risques, une due diligence raisonnable évaluant les potentiels cas de corruption est essentielle avant de s’engager avec des partenaires commerciaux, y compris les agents, revendeurs, distributeurs, consultants et autres prestataires de services.

La due diligence est un processus crucial d’appréhension et de compréhension de vos partenaires commerciaux. Dans le contexte de la lutte contre la corruption, il signifie rassembler suffisamment de preuves, dans les limites légales, pour pouvoir déterminer si un partenaire est apte à commencer une potentielle collaboration et permet d’évaluer l’éthique et l’honorabilité de ce dernier, et conformément à la loi applicable et à toutes les politiques que vous exigerez de lui.

Une protection viable pour les entreprises françaises

Au-delà des solutions proposées par la loi Sapin II, les entreprises françaises, à leur échelle, ont commencé à réfléchir aux moyens à adopter pour éviter les sanctions américaines. Premièrement, pour tout ce qui se rapporte à la due diligence, les entreprises ont pensé à adopter des audits renforcés de leurs parties tierces.

La simple utilisation de cet audit ne leur permettrait pas de contourner les régulations américaines. Cependant, si les entreprises françaises requièrent le besoin de prouver qu’elles ont mis en place tous les efforts nécessaires pour contrôler les risques de corruption, l’audit pourra démontrer aux autorités américaines, une volonté réelle de l’entreprise d’adopter un programme anticorruption fondé sur les risques.

Pour les multinationales, le coût d’un programme de due diligence sera toujours moindre que le coût d’une amende imposée à l’entreprise par les autorités américaines : les coûts d’investigation, les coûts de représentation légale, les dommages réputationnels ou criminels, l’exclusion de certains marchés, ou même les poursuites en justice par des parties civiles, suite aux affaires de corruption.

Sources :

https://www.justice.gov/opa/pr/soci-t-g-n-rale-sa-agrees-pay-860-million-criminal-penalties-bribing-gaddafi-era-libyan

https://www.justice.gov/opa/pr/alstom-pleads-guilty-and-agrees-pay-772-million-criminal-penalty-resolve-foreign-bribery

https://www.justice.gov/opa/pr/french-oil-and-gas-company-total-sa-charged-united-states-and-france-connection-international

https://www.justice.gov/opa/pr/technipfmc-plc-and-us-based-subsidiary-agree-pay-over-296-million-global-penalties-resolve

https://www.justice.gov/opa/pr/alcatel-lucent-sa-and-three-subsidiaries-agree-pay-92-million-resolve-foreign-corrupt

https://www.justice.gov/opa/pr/airbus-agrees-pay-over-39-billion-global-penalties-resolve-foreign-bribery-and-itar-case

Retrouvez-nous sur LinkedIn

Profitez dès à présent d’une démonstration de la solution Risk & Compliance ! contact@square-facts.com

Nadia A.Ziani

Directrice Risque et Conformité EMEA