FinCEN Files: Scale of challenge facing financial regulators revealed in leaked documents

In September 2015, Deutsche Bank Trust Company Americas, of Wall Street, New York, sent a Suspicious Activity Report (Sar) to the Financial Crimes Enforcement Network (FinCEN), in Virginia, about wire transfers totalling $18.2 billion (€15.5 billion) between a number of parties including two companies in the Irish Financial Services Centre (IFSC), in Dublin.

During anti-money laundering monitoring, the bank said, it was alerted to certain wire transfer activity in the second half of 2014. As a result, it said it conducted a search of its database and identified 442 transactions totalling $18.2 billion that had occurred between July 2014 and May 2015, all involving Moscow-based OAO NK Rosneft.

The Sar is among more than 2,700 leaked FinCEN documents that were shared with The Irish Times as part of the FinCEN Files project, organised by the International Consortium of Investigative Journalists.

The project was run in partnership with BuzzFeed News, the US media group to which the documents, which have a focus on Russia, were originally leaked.

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Rosneft is one of the largest companies in Russia and is involved in the extraction and sale of oil and gas.

Its chief executive, Igor Sechin, is a long-time associate of the Russian President Vladimir Putin, having served alongside him since the early 1990s when Putin was the deputy mayor of St Petersburg.

Sechin has served in various senior roles in the Russian government since Putin became president, and is widely reported to be a former member of the KGB, the Soviet precursor to what is now the Federal Security Services (FSB).

The banks cited in the leaked Sars included a number of Russian banks, as well as banks in Switzerland, Latvia, Cyprus, Kazakstan, Austria, Ukraine and elsewhere. There was no Irish bank mentioned.

As well as citing Rosneft and an oil trading operation based in Switzerland, the Sar said that, based on the volume of the transactions conducted, the two Irish companies “are also being named as additional suspects in this Sar”.

The report then gave some details about Ros-Gip Ltd, and Ros-Vit Ltd, both of 5 Harbourmaster Place in the IFSC.

In the period mid-November 2014 to late January 2015, there were 27 transactions between the two Dublin companies and the Moscow one, with the money going in both directions, and the total being $1.2 billion.

Because the transfers cited in the Sars were in dollars, they went through the Wall Street bank as part of its correspondent bank role.

In other words, the bank clients in the Sars were not clients of the Wall Street bank, but rather were clients of banks with which it had a correspondent banking relationship for the purposes of the dollar transactions.

The leaked Sar noted transfers between the Swiss operation and Moscow, as well as transfers by the Moscow company to accounts it had in the UK, the Netherlands, Luxembourg, and Switzerland.

Some of these were for large, round-figure amounts, the Wall Street bank noted.

In March 2014, the US imposed sanctions on Sechin arising from Russian acts of aggression in Ukraine. Later it and the EU imposed sanctions on Rosneft for the same reason.

The two Irish companies, in their subsequent accounts, said they did not believe the sanctions impacted on Rosneft’s ability to fund its obligations to them. They both went into voluntary liquidation in December of last year.

Arrangements

In a statement to The Irish Times, Rosneft said it was surprised to be asked about the payments outlined in the Sar.

It said they were part of arrangements publicly announced in 2013 between it and two of the world’s largest oil-trading companies, Glencore and Vitol.

These announcements state that the Dublin companies were part of a $10 bilion deal where Rosneft was paid up front and agreed in return to supply more than 67 tonnes of crude oil over a stated period to the trading companies.

“Information about this can be easily obtained from publicly available sources,” Rosneft said in its statement, and included links to a selection of these.

During the period covered by the report filed by the Deutsche Bank operation in New York, both the Dublin companies were being administered by Deutsche International Finance (Ireland) Ltd, of 5 Harbourmaster Place. The same company also provided secretarial services.

It is not known whether the Deutsche Bank subsidiary in Dublin supplied a Suspicious Transaction Report (STR) to the Irish authorities in relation to Ros-Gip and Ros-Vit, in the way its Deutsche Bank affiliate in New York did.

Deutsche Bank when asked to comment in relation to this matter, as well as to the Sar, said: "Legal restrictions prevent financial institutions from discussing potential Sars."

A Sar is not evidence of wrongdoing but rather an expression by a bank of a concern. Sars, and STRs, are reports filed under anti-money laundering and anti-terrorist financing obligations that exists in countries around the world.

The Sar on the Rosneft transactions does not contain much that explains the concerns that obviously arose in Deutsche Bank in New York.

Nevertheless it does give an insight into the challenges facing the Irish and international financial systems in trying to comply with anti-money-laundering obligations when such large and complicated financial international transactions are being considered, sometimes involving clients about whom banks are entitled to have legitimate concerns.

For Ireland, a particular aspect of the challenge arises from the size of the operations located in the IFSC.

In its most recent report on Ireland, the global money laundering and terrorist financing watchdog, the Financial Action Task Force (FATF), focused in on this point.

“While Ireland appears to have a strong understanding of ML [money-laundering] risks based on domestic crime, more could be done to clearly identify Ireland’s international ML risks, particularly considering that Ireland is a highly interconnected economy with a large financial sector in relation to” the size of its economy, it said in the summary of the 2017 report.

Banks and other specified actors have an obligation under the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 to report suspicious financial transactions to both An Garda Síochána and the Revenue Commissioners.

The Financial Intelligence Unit (FIU) in Ireland is part of the Garda National Economic Crime Unit and it analyses and disseminates the intelligence it receives by way of STRs.

Last year the then minister for justice and equality, Charlie Flanagan, told Joan Burton of the Labour Party that there had been 23,939 STRs filed to the FIU in 2018, a similar figure to the two previous years.

In its 2017 report, FATF said Ireland “has a strong legislative framework for pursuing money laundering. However, this has not translated to results at the trial stage”.

It said that Ireland “has not fully demonstrated an ability to identify, investigate and prosecute a wide range of money laundering activity including in relation to foreign predicate offences and third-party money laundering.

“Considering Ireland’s position as a regional and international financial centre, more analysis and action by authorities of complex, professionally-enabled money laundering schemes was expected.”

Predicate offences are crimes – such as corruption, human trafficking or fraud – the proceeds of which are then laundered, which is itself a crime.

When trying to spot suspicious activity in the modern financial system, a key problem is the huge amount of data that exists, according to Rachel Woolley, head of financial crime with Fenergo, an Irish multinational that provides software to help financial institutions deal with the regulatory and data challenges they face.

“There is just so much data. The question is how do you make sense of it in a meaningful way,” she says.

She notes the many hours that were expended by the more than 800 journalists around the world who worked for months on the 2,700 leaked Sars that were behind the FinCEN Files exposés.

“There is absolutely an obligation on the banks to do more. Nobody could question that. But the issue I think is bigger than that.”

There has long been a recognition that FIUs are being overwhelmed by the reports they are receiving, with the German FIU recently being called out in this regard, she says.

And while the filing of reports is an important aspect of trying to prevent money laundering, the prosecution of the crimes that led to the money flows is another matter.

Often these crimes have occurred in locations far away from the “sophisticated financial centres” where the money ends up.

“The very institutions that exist to uphold the integrity of the financial system, clearly aren’t effective,”Woolley says.

A particular problem arises with the huge Irish funds industry, which is by its nature cross-border.

Despite up to $40 billion in fines being imposed on financial institutions globally since 2008, the problem of compliance failures remains, she said.

“The question is, what to do next?”

Obligations

Peter Oakes, of Fintech Ireland, is a former director of enforcement and anti-money laundering in the Central Bank.

In a recent paper on money-laundering and the banks, Oakes said that financial institutions tend to view their obligations too narrowly.

“The failure to live and breathe regulatory requirements is driven by an unhealthy culture and a lack of senior manager accountability,”he wrote.

"Behaviour, which places business interests above both compliance obligations and the public interest [society] which the new governor of the Central Bank, Gabriel Makhlouf, is taking a particular interest.

In an interview with The Irish Times last week, he said his “gut” had told him of the so-called shadow banking sector that “there’s an issue here that you just need to focus on and concentrate on – and make sure you understand”.

The challenges that are facing banks, fund administrators, regulators and others operating in Ireland, are also being faced in other jurisdictions.

The current system for detecting dirty money flows was designed more than 20 years ago, when transactions took days to clear, according to Tom Keatinge, director of the Centre for Financial Crime and Security Studies, at the Royal United Services Institute, in London.

“Regulated entities know that reporting more Sars, regardless of quality, is better than reporting less Sars, and slipping down the filing league table, which gets you noticed,” he says.

The resulting level of reporting is “drowning the [UK’s] FIU in unmanageable amounts of data of dubious quality”.

Possible solutions might include the use of “big data” and the sharing of all financial information with the authorities, in real time.

“Every element of the current system from the collection of information by regulated entities, the way that information is reported, the way it is analysed, and the way it is acted on, needs to be revolutionised,” he said.