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Senate investigation finds that oligarchs use art industry to avoid sanctions
Last month, the U.S. Senate Permanent Subcommittee on Investigations issued a bipartisan report titled “The Art Industry and U.S. Policies that Undermine Sanctions,” which details findings from a two-year investigation related to how Russian oligarchs appear to have used the art industry to evade U.S. sanctions. According to the Subcommittee, the investigation—which focused on major auction houses, private New York art dealers, and seven financial institutions—revealed that the “secretive nature” of the art industry “allowed art intermediaries to purchase more than $18 million in high-value art in the United States through shell companies linked to Russian oligarchs after they were sanctioned by the United States in March 2014,” and that, moreover, “the shell companies linked to the Russian oligarchs were not limited to just art and engaged in a total of $91 million in post-sanctions transactions.” The report claims that the art industry is largely unregulated, and, unlike financial institutions, is not subject to the Bank Secrecy Act (BSA) and is not required to maintain anti-money laundering (AML) and anti-terrorism financing controls. However, the report notes that sanctions imposed by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) do apply to the industry, emphasizing that U.S. persons are not allowed to conduct business with sanctioned individuals or entities.
The Subcommittee’s key findings include that while four of the major auction houses have established voluntary AML controls, they treat an art agent or advisor as the principal purchaser of the art, which allows the auction house to perform due diligence on the art agent or advisor instead of identifying and evaluating a potentially undisclosed client. The auction houses also reportedly rely on financial institutions to identify the source of funds used to purchase the art. Because of these practices, the report concludes that these shell companies continue to have access to the U.S. financial system despite the imposition of sanctions.
The report makes several recommendations including: (i) the BSA should be amended to include businesses that handle transactions involving high-value art; (ii) Treasury should be required to collect beneficial ownership information for companies formed or registered to do business in the U.S., making the information available to law enforcement; (iii) Treasury should consider imposing sanctions on a sanctioned individual’s immediate family members; (iv) Treasury should announce and implement sanctions concurrently “to avoid creating a window of opportunity for individuals to avoid sanctions”; (v) the ownership threshold for blocking companies owned by sanctioned individuals should be lowered or removed; (vi) Treasury should maximize its use of suspicious activity reports filed by financial institutions to, among other things, alert other financial institutions of the risks of transacting with sanctioned entities; (vii) OFAC should issue comprehensive guidance for auction houses and art dealers on steps for determining “whether a person is the principal seller or purchaser of art or is acting on behalf of an undisclosed client, and which person should be subject to a due diligence review”; and (viii) OFAC should issue guidance on “the informational exception to the International Emergency Economic Powers Act related to ‘artworks.’”
Additionally, in June, a bipartisan group of senators introduced the Anti-Money Laundering Act of 2020 (AMLA) as an amendment (S.Amdt 2198 to S.4049) to the National Defense Authorization Act (NDAA), which would, among many other things, require federal agencies to study “the facilitation of money laundering and the financing of terrorism through the trade of works of art or antiquities” and, if appropriate, propose rulemaking to implement the study’s findings within 180 days of the AMLA’s enactment.
Agencies clarify BSA/AML due diligence requirements for “politically exposed persons”
On August 21, the FDIC, Federal Reserve Board, FinCEN, NCUA, and OCC issued a joint statement clarifying that banks should ensure customers who may be considered “politically exposed persons” (PEPs) be subject to customer due diligence matching the risk levels posed by the relationships. In general, while PEPs are not defined within the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulations, they commonly refer to “foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates.” U.S. public officials are not included. Specifically, the agencies emphasized that not all individuals who might qualify as PEPs “are high risk solely by virtue of their status.” While FinCEN’s customer due diligence rule (CDD rule), requires banks to identify and verify the identities of new account holders, assess the riskiness of these customer relationships, and conduct ongoing monitoring (see InfoBytes coverage of the CDD Rule here), the agencies note that “the CDD rule does not create a regulatory requirement, and there is no supervisory expectation, for banks to have unique, additional due diligence steps for customers who are considered PEPs. Instead, the level and type of CDD should be appropriate for the customer risk.”
The joint statement also outlines a number of considerations for banks to take into account when evaluating a PEP’s risk level, including the type of products and services used, the volume and nature of transactions, the nature of the customer’s authority or influence over government activities or officials, and the customer’s access to significant government assets or funds. Among other impacts, the agencies note that the customer risk profile may effect “how the bank complies with other regulatory requirements, such as suspicious activity monitoring, since the bank structures its BSA/AML compliance program to address its risk profile, based on the bank’s assessment of risks.” The joint statement also rescinds the 2001 Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of Foreign Corruption related to foreign PEPs.
The agencies emphasized, however, that the joint statement does not change existing BSA/AML legal or regulatory requirements, nor does it “require banks to cease existing risk management practices if the bank considers them necessary to effectively manage risk.”
OFAC sanctions Syrian government officials
On August 20, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13573 against two senior members of the Syrian government. OFAC noted that, among other things, the designated individuals allegedly contributed to “the oppression of the Assad regime” in Syria. As a result, all property and interests in property belonging to the designated individuals and subject to U.S. jurisdiction are blocked and must be reported to OFAC. OFAC further noted that its regulations “generally prohibit all dealings by U.S. persons or within (or transiting) the United States that involve any property or interests in property of blocked or designated persons,” and warned that non-U.S. persons that engage in transactions with the designated persons may expose themselves to designation.
OFAC sanctions persons for providing support to Iranian airline, DOJ files concurrent criminal charges
On August 19, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) designated two companies, as well as the owner of one of the companies, pursuant to Executive Order 13224 for allegedly providing material support to an Iranian airline previously “designated under counterterrorism authorities for support to Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF), as well as under a counter proliferation authority that targets weapons of mass destruction proliferators and their supporters.” According to OFAC, the designated persons allegedly provided services to assist the airline sustain its fleet of aircraft and allow it to support the IRGC-QF, as well as transport Iranian technicians and technical equipment to Venezuela to support the Maduro regime. The designations follow a recent OFAC action that targeted a China-based company for allegedly acting as a general sales agent for or on behalf of the Iranian airline (covered by InfoBytes here), and serves as “another warning to the international aviation community of the sanctions risk for individuals and entities that choose to maintain commercial relationships with [the Iranian airline] and other designated airlines.” As a result of the sanctions, all property and interests in property of the designated persons that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC. OFAC further noted that its regulations “generally prohibit all dealings by U.S. persons or within (or transiting) the United States that involve any property or interests in property of blocked or designated persons, unless licensed or exempt,” and warned foreign financial institutions that knowingly facilitating significant transactions or providing significant financial services to the designated persons may subject them to U.S. correspondent account or payable-through sanctions.
On the same day, the DOJ announced criminal charges against the designated individual and one of the companies for allegedly conspiring to violate U.S. export laws, defraud the U.S., and violate the International Emergency Economic Powers Act (IEEPA) and the Iranian Transactions and Sanctions Regulations (ITSRs).
OFAC sanctions additional persons for human rights violations in China’s Xinjiang region
On July 31, the U.S. Treasury Department’s Office of Foreign Assets Control announced sanctions pursuant to Executive Order 13818 against a Chinese government entity and two current or former government officials for alleged corruption violations of the Global Magnitsky Human Rights Accountability Act. According to OFAC, the sanctioned persons are connected to serious human rights abuse against ethnic monitories, including Uyghurs, in the Xinjiang region. Earlier in July, OFAC sanctioned another Chinese government entity and several current or former government officials for similar corruption violations (covered by InfoBytes here). As a result of the sanctions, all property and interests in property of the designated persons within U.S. jurisdiction must be blocked and reported to OFAC. OFAC notes that its regulations generally prohibit U.S. persons from participating in transactions with these individuals and entities, which includes “the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person.”
Concurrent with the sanctions, OFAC also issued General License No. 2, which authorizes certain wind down and divestment transactions and activities related to blocked subsidiaries of the Chinese entity through September 30.
OFAC settles Iranian sanctions violations
On July 28, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $824,314 settlement with a Pennsylvania-based cookware coating manufacturer for 74 apparent violations of the Iranian Transactions and Sanctions Regulations. According to OFAC, between November 2012 and December 2015, two of the company’s foreign subsidiaries allegedly sold coatings intended for customers in Iran and engaged in trade-related transactions with Iran, despite changes to OFAC’s Iran sanctions program, which prohibited such transactions. In addition, OFAC stated that in 2013, once the company realized that these sales may be problematic, some of its U.S. employees devised and facilitated a plan to continue sales from the two subsidiaries by using third-party distributers and avoiding referencing Iran on documentation.
In arriving at the settlement amount, OFAC considered various mitigating factors, including that the apparent violations were non-egregious and (i) the company voluntarily disclosed the violations and cooperated with the investigation; and (ii) the company has undertaken significant remedial efforts to address the deficiencies and minimize the risk of similar violations from occurring in the future, including appointing compliance monitors and outside counsel, making changes to its leadership, and adopting compliance and training policies.
OFAC also considered various aggravating factors, including that the company (i) failed to implement appropriate compliance policies “commensurate with selling to a high-risk jurisdiction such as Iran”; (ii) took “affirmative steps” to help the foreign subsidiaries continue to sell to Iran through indirect channels even though it knew the sales were problematic; and (iii) senior management, including U.S. employees, had actual knowledge of the conduct leading to the alleged violations and continued to facilitate transactions with Iran.
OFAC sanctions ISIS financial facilitators
On July 28, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13224 against two Islamic State of Iraq and Syria (ISIS) financial facilitators based in Syria and Turkey for allegedly providing financial and logistical support to ISIS. OFAC noted that these sanctions coincide with the thirteenth meeting of the Counter ISIS Finance Group, which coordinates efforts to isolate ISIS from the international financial system and eliminate revenue sources. As a result of the sanctions, all property and interests in property of the designated individuals within U.S. jurisdiction must be blocked and reported to OFAC. OFAC further noted that its regulations “generally prohibit” U.S. persons from participating in transactions with the designated persons, and warned foreign financial institutions that if they knowingly facilitated significant transactions for any of the designated individuals, they may be subject to U.S. correspondent account or payable-through account sanctions.
OFAC sanctions investors supporting Syrian government
On July 29, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against one individual and nine entities for providing significant investment support to the Syrian government. OFAC noted that, among other things, the designated individual and his companies knowingly provided “significant financial, material, or technological support to, or knowingly engag[ed] in a significant transaction with, the Government of Syria (including any entity owned or controlled by the Government of Syria) or a senior political figure of the Government of Syria.” As a result, all property and interests in property belonging to the designated persons and subject to U.S. jurisdiction are blocked and must be reported to OFAC. OFAC further noted that its regulations “generally prohibit all dealings by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated persons,” and warned that non-U.S. persons that engage in transactions with the designated persons may expose themselves to designation. OFAC also referenced a previously published Fact Sheet (covered by InfoBytes here), which highlights the most pertinent exemptions, exceptions, and authorizations for humanitarian assistance and trade under the Syria, Iran, Venezuela, North Korea, Cuba, and Ukraine/Russia-related sanctions programs to ensure humanitarian-related trade and assistance reaches at-risk populations through legitimate and transparent channels during the global Covid-19 pandemic.
DOJ sues companies for laundering funds for North Korean banks
On July 23, the DOJ announced it filed a complaint in the U.S. District Court for the District of Columbia, alleging that four companies engaged in a scheme to launder U.S. dollars on behalf of sanctioned North Korean banks and seeking forfeiture of $2,372,793. The DOJ claims that the North Korean banks illegally accessed the U.S. financial market and used the companies to make and receive U.S. dollar payments to and from North Korean front companies. According to the DOJ, the complaint “illuminates how a global money laundering network coordinates with front companies to move North Korean money through the [U.S.] and violate the sanctions imposed by [the] government on North Korea.” The DOJ further refers to a United Nations Panel of Experts statement that North Korean networks access formal banking channels by, among other things, maintaining correspondent bank accounts and representative offices abroad staffed by foreign nationals that make use of front companies, which permit North Korean banks “to conduct illicit procurement and banking activity.”
OFAC sanctions individuals for supporting Maduro regime
On July 23, the U.S. Treasury Department’s Office of Foreign Assets Control announced sanctions against two individuals for allegedly assisting, sponsoring, or providing “financial, material, or technological support for, or goods or services to or in support of” either the previously designated son of Nicolás Maduro Moros, or to Venezuelan government senior officials. The individuals, sanctioned pursuant to Executive Order 13692, are allegedly central figures in Venezuela’s gold industry and “oversee the financial mechanism of [an] illicit gold scheme.” As a result, all property and interests in property belonging to the identified individuals subject to U.S. jurisdiction are blocked, and “any entities that are owned, directly or indirectly, 50 percent or more by the designated individuals, are also blocked.” U.S. persons are generally prohibited from dealing with any property or interests in property of blocked or designated persons.