Month: April 2020

On April 24, the Financial Times reported that only two months after a massive locust swarm devastated crops in six East African nations, a second, far larger swarm is projected to blight east Africa in the near future.

Traveling locust swarms are reportedly common in Africa, southern Asia, and the Middle East.  In 2018 and 2019, however, cyclones in the Indian Ocean that deposited large volumes of rain in the deserts of Oman created “perfect breeding conditions” for desert locusts.  Starting in December 2019, hundreds of millions of locusts swept across Kenya, destroying approximately 173,000 acres of cropland.

Subsequently, locust swarms expanded their reach to 10 African countries.  By February 2020, the United Nations stated that the swarms, which had expanded to billions of locusts, were “of a magnitude not seen in decades . . . and placing millions at risk of hunger in the Horn of Africa.”

What makes these swarms so devastating is both their numbers and their voracity.  According to the United Nations’ Food and Agriculture Organization (FAO), an adult desert locust “can consume roughly its own weight in fresh food, that is about two grams every day. A very small part of an average swarm (or about one tonne of locusts) eats the same amount of food in one day as about 10 elephants or 25 camels or 2,500 people.”  Each square kilometer of swarm may contain between 40 million and 80 million adult locusts.  In addition, swarms destroy not only crops, but also vegetation on cattle-grazing land, expanding the risks to regional food supplies.

Moreover, just this week, the FAO reported that “[s]pring breeding will cause a further increase in locust infestations in East Africa, eastern Yemen and southern Iran in the coming months.”  The FAO report expressed particular concern about east Africa, where the current situation

remains extremely alarming as more swarms form and mature in northern and central Kenya, southern Ethiopia. This represents an unprecedented threat to food security and livelihoods because it coincides with the early beginning of the long rains and the current growing season.

By June, the swarms could grow by 500 times and expand their reach beyond the Horn of Africa.

While authorities in the region are working to combat the swarms with measures that include ground and aerial spraying of pesticides, the Financial Times noted that “the Covid-19 pandemic has competed for funding, hampered movement and delayed the import of some inputs, including insecticides.”  As a consequence, African Development Bank President Akinwumi Adesina commented that “[i]t appears that those who escape Covid-19 will soon face Locust-19.”

Note: Strategic-risk and food security-risk analysts should take note of this report and track further developments with the swarms between now and June.  As the Financial Times put it, this latest infestation, combined with coronavirus-related impediments to combating it, “risks exacerbating an already precarious food situation in the Horn of Africa,” where approximately 40 percent of the 160 million people in the region are undernourished.  Because the coronavirus pandemic is far from over in Africa, the risks to food and feed insecurity could be severe for several months to come.

On April 17, a panel of the U.S. Court of Appeals for the Ninth Circuit, in United States v. Costanzo, unanimously affirmed the federal money-laundering conviction of a Bitcoin seller for multiple cash-for-Bitcoin transactions.  Around 2014, Thomas Costanzo made a living as a Bitcoin seller through peer-to-peer transactions.  After Internal Revenue Service agents read Costanzo’s profile – which, in part, stated that he “was willing to exchange between $15,000 to $50,000 cash for bitcoin” – undercover agents conducted a series of cash-for-Bitcoin transactions over a two-year period.

In each case, the agents either intimated or stated specifically that they were engaged in illegal activity:

• In April 2015, an undercover IRS agent “intimated that the bitcoin he purchased would facilitate illicit activity.” He explained to Costanzo

that “discretion” was important, the government could have issues with the product he imported, the bitcoin he purchased would be going “south of the border,” and his business involved picking up product in Arizona and shipping it to New York in a concealed manner.

Costanzo then accepted $2,000 in cash from the agent and transferred bitcoin to the agent’s cell phone.

• In a subsequent transaction, the undercover IRS agent “explicitly told Costanzo that he was trafficking black tar heroin. Costanzo laughed and replied, ‘I know nothing’,” then accepted $3,000 in cash and transferred bitcoin to the agent’s cell phone.
• In October and November 2015, undercover IRS agents “made clear to Costanzo that the purpose of the transaction was to conceal illegal activities.” In the October transaction, one undercover agent “again discussed the illicit nature of their business, and Costanzo stated that he ‘knew, but [didn’t] want to know’.”  That agent then gave Costanzo $13,000 in cash, and Costanzo transferred bitcoin to that agent’s cell phone.  In the November transaction, another agent met with Costanzo and exchanged $11,700 in cash for Bitcoin.
• From 2016 to 2017, an undercover Scottsdale Police detective met on four occasions to exchange cash for Bitcoin, in substantially increasing amounts ($2,000, $12,000, $30,000, and $107,000). In the last transaction, the detective “expressly told Costanzo that the cash came from drug operations, but Costanzo replied that he did not need to know.”

Costanzo was then arrested, and convicted at trial on five counts of money laundering.

On appeal, Costanzo sought to challenge his conviction on the basis that the government had failed to prove one of the essential elements of the money laundering offense in question (18 U.S.C. §1956(a)(3)(B)). That offense requires proof that the defendant engaged in a “financial transaction,” which the statute defines in part as “a transaction which in any way or degree affects interstate or foreign commerce [] involving the movement of funds by wire or other means or [] involving one or more monetary instruments.”  Constanzo contended that the charged transfers “did not have the requisite effect on interstate commerce.”

The opinion, however, made short work of that argument.  It first stated that the connection between the transaction and interstate commerce “need not be extensive,” as the stature requires proof only that the transaction affected commerce “in any way or degree.”  It then reviewed the evidence presented at trial:

Here, the government presented evidence regarding Costanzo’s business; his use of global platforms; and the transfer of bitcoin through a digital wallet, which by its nature invokes a wide and international network. Costanzo advertised his business through localbitcoins.com—a website based outside of the United States. He encouraged the undercover agents to download applications from the Apple Store or other similar platforms to facilitate their communications and transactions. He then utilized those applications to engage in encrypted communications with the agents to arrange the transfers. Then, in each transaction, Costanzo and the agent used those applications on their smartphones to transfer bitcoin from one digital wallet to another. Each transaction was complete only after it was verified on the blockchain.

Viewing all of that evidence in the light most favorable to the government (the standard on appeal from a criminal conviction), the opinion found that evidence sufficient to prove “the ‘minimal’ interstate commerce nexus required under § 1956.”

Note: This decision affirms that Bitcoin transactions, like funds transactions in more traditional forms such as cash, checks, and wire transfers, can constitute “financial transactions” for purposes of the federal money laundering offenses.  Anti-money laundering (AML) compliance officers should inform their AML compliance team members about this decision, and incorporate it into ongoing AML training within their institutions.

On April 17, the U.S. Securities and Exchange Commission issued a cease-and-desist order against Italian multinational oil and gas company Eni S.p.A. (“Eni”) in which it imposed a $24.5 million financial penalty for Eni’s violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”).

According to the order, in 2006 the management of an Eni-controlled subsidiary, Saipem S.p.A. (“Saipem”),

came to understand from the Algerian owner of [an unnamed] intermediary, who was well-connected in Algerian politics, that, in order to obtain business in Algeria, Saipem would need to hire the intermediary. In meetings with Saipem’s management, the Algerian energy minister at the time referred to the owner of the intermediary as his personal secretary and someone he considered like a “son.”

Thereafter, between 2007 and 2010, Eni “entered into four sham contracts with an intermediary to assist in obtaining contracts awarded by Algeria’s state owned oil company.”  Saipem conducted little or no due diligence before entering into the contracts, yet the executive who served as Saipem’s CFO from 1996 to 2008 (identified only as “Executive A” in the order), “participated in Saipem’s approval of the intermediary contracts, despite being aware of Saipem’s lack of due diligence.”

Under the sham contracts, the intermediary would purportedly “help Saipem identify and evaluate business opportunities, assist with bidding processes, develop strategies for procuring contracts, and provide advice and assistance in connection with the performance of such contracts.”  In fact, the intermediary not only “never rendered any legitimate services to Saipem,” but “was wholly unequipped to provide the contemplated consulting services in the technically complex energy design sector, having no employees or offices in Algeria and only a “virtual office” in Geneva, Switzerland staffed by one individual.”

Even so, “Saipem paid approximately €198 million to the intermediary and was awarded at least seven contracts from the Algerian state-owned oil company.”  Executive A “facilitated the payments to the intermediary, despite being aware of the lack of services rendered by the intermediary.  Executive A was later hired to be the CFO of Eni in August 2008, and continued to facilitate Saipem’s payments to the intermediary while at Eni.”

Saipem received no legitimate services from the intermediary, but was awarded at least seven contracts from the Algerian state-owned oil company.  It indicated in its filings with the SEC that its payments to the intermediary were lawful “brokerage fees.”  In addition, “because Eni’s CFO was aware of and participated in Saipem’s conduct, Eni failed to proceed in good faith to use its influence to cause Saipem to devise and maintain a system of internal accounting controls consistent with [the FCPA].”  As the order stated,

[a]s the principal finance officer of Eni, Executive A could not have been proceeding in good faith to cause Saipem to devise and maintain sufficient internal accounting controls while simultaneously being aware of, and participating in, conduct at Saipem that undermined those controls.

Based on Eni’s Offer of Settlement, the SEC imposed a financial penalty of $24.5 million, consisting of disgorgement of $19.75 million and prejudgment interest of $4.75 million.  The SEC acknowledged that it “considered remedial acts promptly undertaken by Eni and cooperation afforded the Commission staff.” That cooperation included “compiling financial data and analysis relating to the transactions at issue, making substantive presentations on key topics, and providing translations of key documents and foreign proceedings.”

Note:  This SEC settlement with Eni is noteworthy for a unique reason.  In contrast with other SEC FCPA resolutions, which often involve coordinated settlements with the Justice Department or foreign enforcement authorities, the Eni settlement occurred after Italian courts acquitted Eni, Saipem, Executive A, and others of charges of international corruption for the Saipem payments “through an intermediary to Algerian officials.”

Despite this unusual situation, which could still change if Italian authorities appeal the case to the Italian Supreme Court, this settlement still merits the attention of anti-bribery and corruption (ABC) compliance officers.  Compliance teams should brief their companies’ senior leadership about the settlement, particularly because the involvement of “Executive A” shows the risks to a company when one of its senior executives directly participates in condoning and furthering FCPA violations.

In recent days, the never-ending flood tide of reporting on the coronavirus pandemic has included a spate of articles detailing the indirect effects of the pandemic on food supply.  With drastically reduced demand by restaurants and schools, and challenges in supply-chain realignment, large quantities of fresh foods and beverages with short shelf life such as milk, eggs, and produce (as well as beer, ale, lager, and cider in the United Kingdom) are being destroyed because they cannot be timely delivered to retail customers before they spoil.

When it comes to key characteristics of the coronavirus itself, it may be that – as Professor Erik Angner recently wrote – “knowledge is in short supply.”  At the same time, the sheer volume of information about this virus’s effects is so pervasive that it may tend to dominate the thinking of risk analysts, to the exclusion of other potential viral risks to food supplies that also deserve monitoring.

Here are two recent examples of such additional potential risks:

• On April 9, the U.S. Department of Agriculture (USDA) “confirmed the presence of highly pathogenic H7N3 avian influenza (HPAI) in a commercial turkey flock in Chesterfield County, South Carolina.” Although the USDA assured the public that the affected premises were quarantined and birds on the property “depopulated [i.e., destroyed] to prevent the spread of the disease,” it has separately stated that HPAI “is a very contagious and deadly disease for poultry . . . [that] can spread from flock to flock within a matter of days.”  The theoretical risk to the general chicken and turkey population in the United States could be substantial.  When the last HPAI outbreak occurred in 2014-15, according to Quartz, “[m]ore than 50 million chickens and turkeys across 15 states were killed” between December 2014 and June 2015 in an attempt to stop the HPAI spread.
• On April 12, the South China Morning Post reported that a virus known as Decapod iridescent virus 1 (Div1) has infected about a quarter of the shrimp farms in Guangdong Province, China. Div-1 reportedly is not harmful to humans, but could have devastating effects in Guangdong, “the heart of production in China,” and more generally on Chinese shrimp production because of its “terrifying” infection rate and lethality to shrimp.

To be clear, neither of these reports indicates any direct risks from these viruses to the human populations in their respective areas.  Taken together, however, they indicate that strategic-risk and food-supply risk assessment teams must continue to cast their nets broadly in identifying and tracking virus-related challenges to national and international food production and distribution.  As Hamlet might have said lately, “There are more viruses in heaven and earth, Horatio,/Than are dreamt of in your philosophy.”

On April 7, LexisNexis© Risk Solutions issued a report on the true cost of anti-money laundering (AML) compliance for financial services firms.  The report (available here) is based on a survey of 898 decision-makers across four regions who oversee financial crime compliance and compliance operations at their companies.

Key findings in the report include the following:

• The projected total cost of financial crime compliance for countries in four regions and South Africa is $180.9 billion. The breakdown of that total is as follows:
  • Europe – $136.5 billion (United Kingdom – $49.5 billion, Germany – $47.5 billion, France – $21.0 billion, Italy – $15.8 billion, Netherlands – $2.7 billion);
  • North America – $31.5 billion (United States – $26.4 billion, Canada – $5.1 billion);
  • Asia-Pacific (APAC) (Indonesia, Malaysia, Philippines, and Singapore) – $6.1 billion;
  • Latin America (LATAM) (Brazil, Mexico, Argentina, Chile, and Colombia) – $4.5 billion; and
  • South Africa – $2.3 billion.
• Average annual financial crime compliance costs are highest for midsize/large United Kingdom and European financial institutions. These costs “are 3–4 times the level for mid/large financial firms in North America and APAC, and up to nearly 7 times for those in LATAM.”  A number of factors – “including increasingly complex regulations, data privacy limitations, sanctions violations and labor costs” — make financial crime compliance more costly in Europe.
• While regulatory compliance and minimizing reputational risk “are common financial crime compliance drivers across regions,” each global region “has its own unique risks and challenges with money laundering and financial crime compliance.” For example, in LATAM the report cites risks associated with the TriBorder Area (TBA) between Argentina, Brazil, and Paraguay, which “presents high risk for narcotics trafficking,” and therefore to financial firms; transnational criminal organizations operating throughout Brazil and laundering proceeds from drug trafficking operations and human smuggling; and Mexico’s concern “with crime and money laundering methods that hide beneficial ownership and cash smuggling across the U.S.-Mexican border.”  In contrast, in Europe the General Data Protection Regulation, high-profile sanctions violations, and increased compliance regulations, “including stricter focus on ultimate beneficial ownership, have contributed to added pressure and workloads experienced by compliance teams.”
• Non-bank payment providers create additional compliance headaches and risks for financial firms across regions, particularly in LATAM and Canada. The negative impact of non-bank payment providers “is broad, including increases with alert volumes, correspondent banking risk, compliance team stress, and technology/labor costs.”  Among other concerns, more than half of APAC, EMEA, LATAM, and North American firms “indicate that non-bank payment providers are impeding the speed of conducting transactions, which slows onboarding new customers.”
• “Financial crime compliance challenges and issues are having a negative impact on financial institutions,” particularly in EMEA, LATAM, and the United States. The report notes that financial crime compliance costs overall “have risen by double-digit percentages during the past two years,” and that EMEA, APAC, and North America expected to see financial crime compliance costs double by the end of 2019.  Survey responses also indicated concerns about stress on compliance teams; 67 percent overall indicated concerned with job satisfaction in compliance department

The report concluded that a multi-layered approach to financial crime compliance technology “is crucial to facilitating a more cost-effective, efficient compliance approach.”  Such a multi-layered approach, according to Lexis-Nexis, should accomplish four key compliance functions: (1) investigate both the physical and digital identity attributes;; (2) assess both the individual and the transaction; (3) incorporate both KYC (individual) and KYB (business) processes; and (4) leverage data analytics for real-time assessment of risks and behaviors.

Note:  AML compliance teams, particularly if they cover multiple global regions, should review this report closely, with particular regard to regional differences in risk factors and compliance costs.  Particularly because financial institutions of all sizes will face increasing pressures to reduce compliance costs as they recover from the economic effects of the  coronavirus pandemic, AML and other financial-crimes compliance officers will need to be prepared with specific data to argue against drastic cuts in compliance funding and to offer possible ways to maintain the effectiveness of their compliance programs at lower cost.