In part one of our Q&A with Hdeel Abdelhady, we asked her about the top priorities in sanctions compliance, the role of lawyers in the fight against financial crime, and the most notable recent sanctions enforcements. In part two, she discusses the impact of the COVID-19 pandemic across the financial crime landscape.
It is too early to gauge the scope of the COVID-related financial crime problem, but the danger is clear and present.
The pandemic creates a number of opportunities for financial crime, from fraudulent schemes for “investment” in fake or non-existent COVID-19 cures, to corruption in commercial and humanitarian transactions in medical and other supplies, to fraud in economic relief programs, such as U.S. individual and business relief programs under the CARES Act of March 2020.
With companies, banks, and governments operating largely remotely, perpetrators of financial crime will exploit real and perceived weaknesses in public and private financial crime detection, deterrence, and reporting systems — some successfully and others not so much.
How have regulators responded to the pandemic?
Domestic and international enforcement authorities, regulators, and standard setters have all responded.
For example, the U.S. Department of Justice recently announced two Paycheck Protection Program-related fraud prosecutions.
OFAC has advised financial institutions, businesses, and other parties with sanctions compliance obligations to promptly communicate any expected reporting delays related to the pandemic.
The OECD has highlighted the risk of COVID-related bribery and other corruption and has committed to examine its impact and consequences.
The IMF has asked countries receiving COVID emergency assistance to publish information about the beneficial ownership of firms awarded related procurement contracts.
FATF’s President issued a statement identifying some financial crime risks posed by the pandemic and calling on countries to maintain vigilance while social distancing, urging regulators to provide guidance to the private sector and encouraging the effective use of technology like digital identity verification. FATF also published a guide on COVID-19-related Money Laundering and Terrorist Financing Risks and Policy Responses, that includes helpful information about money laundering, terrorism financing, cybercrime, and other financial crime risks gathered from FATF members, observers, and open sources.
For financial institutions and others with anti-financial crime obligations, it is worth emphasizing that the statements of OFAC and FATF recognize COVID disruptions and expect that financial institutions and other obligated entities will continue to detect, block, and report financial crime.
More specifically, OFAC stated that in cases of apparent violations occurring during the COVID crisis, the agency will consider pandemic-related circumstances (such as reallocations of sanctions compliance resources) “as a factor in determining the appropriate administrative response” on a case-by-case basis. In other words, the existence of the COVID-19 pandemic will not, by itself, be a defense in future sanctions enforcement actions.
Do you think the pandemic will have a long-term impact on global supply chains?
It is too early to tell. We are in the fog of the crisis and some official and private sector statements about global supply chains appear to be ‘heat of the moment’.
The pandemic has put into focus the centrality of China to pharmaceutical and medical supply chains, and there have been calls by some in the United States and elsewhere to reduce dependence on China for essential supplies.
In considering what might come next, it is important to remember that the current configuration of global supply chains did not come into existence overnight or as a result of the actions of two countries. Today’s global supply chains were shaped by many years, multilateral trade agreements, domestic policies, and business calculations.
It remains to be seen whether and how the crisis will affect global supply chains. That said, I would not be surprised to see nearer term modifications pinpointed in specific industries or at the margins, such as relocating some operations from China or supplementing Chinese operations with new or enlarged capabilities in third countries.
What about sanctions? Will the pandemic have a long-term impact on the sanctions landscape?
It does not appear at this time that the COVID-19 crisis will lead to any curtailment of U.S. sanctions.
There have been calls on the United States to ease sanctions on Iran and Venezuela during the pandemic to facilitate transactions in medical supplies and humanitarian aid. U.S. authorities have responded by clarifying that current sanctions regulations generally permit humanitarian transactions and that specific licenses will be promptly considered if sought.
In October 2019, before the global pandemic was declared, the U.S. Departments of the Treasury and State announced a humanitarian mechanism that permits the establishment of financial channels for commercial exports of agricultural commodities, medicine and medical devices, and food to Iran. This mechanism, which is available to foreign governments and financial institutions, as well as to U.S. persons and foreign entities owned or controlled by U.S. persons, comes with significant compliance obligations to conduct enhanced due diligence, collect and maintain detailed information, and submit detailed information and reports to the Treasury Department on a monthly basis.
Importantly, the mechanism does not alter U.S. sanctions. Parties that utilize the mechanism receive, in exchange for their compliance with its terms, written confirmation that the financial channel will not be exposed to U.S. sanctions.
Notably, the INSTEX (Instrument in Support of Trade Exchanges) mechanism was used during the COVID crisis for the first time to facilitate the export of medical goods from Europe to Iran.
INSTEX was announced in 2018 by the United Kingdom, France, and Germany as a mechanism to facilitate certain Europe-Iran transactions while shielding them from U.S. sanctions. Six additional European countries joined INSTEX as shareholders in late 2019.
Although INSTEX is not now expected to facilitate an appreciable level of trade and transactions, its establishment and use are nevertheless significant as INSTEX is a challenge to the concept of U.S. sanctions dominance, particularly U.S. sanctions extraterritoriality.
On the other end of the continuum, the COVID crisis might spur an expansion of U.S. sanctions, in the form of new or enlarged sanctions programs, regulations, or enforcement, if sanctions are enlisted to advance new or previously existing policy objectives made more pressing (politically or practically) by the pandemic.
Those who are interested in the potential direction of U.S. trade or other foreign policy, and in sanctions in particular, would be well-served to watch whether and how sanctions might be deployed to advance objectives that have largely or entirely been served by laws such as those governing export controls, tariffs, and industrial espionage.