Introduction

Last week, U.S. Treasury Secretary Janet Yellen spoke at the second Summit for Democracy about the launch of a commitment with more than 20 foreign governments and authorities to tackle corruption. She noted that the U.S. has a unique obligation in this fight as corrupt actors worldwide attempt to exploit vulnerabilities in the U.S.’ framework for countering illicit finance.

To patch any weaknesses, the Treasury Department has been working to unmask shell corporations, which Yellen called “the single most significant thing that can be done to make the U.S. financial system inhospitable to corrupt actors.” This topic deserves our collective attention for numerous reasons, and we can assist in identifying and reporting this type of illicit activity to FinCEN.

Check out the info below to see why it’s important, the signs that could indicate corruption, and the unique Suspicious Activity Report (SAR) considerations.

Why It Matters

• The U.S. is a great place to launder money — Yellen stated, “there’s a good argument that, right now, the best place to hide and launder ill-gotten gains is actually the United States.”
• It’s a core national security priority — Corruption is a core national security interest of the Biden-Harris administration and is included in FinCEN’s list of national priorities. This means it was chosen as one of the eight most significant illicit finance issues facing the U.S.
• Proceeds integrated into real estate — Real estate was noted as a particularly vulnerable sector for integrating illicit funds related to corruption and was referenced five times in her speech. Roughly $2.3 billion was laundered through the U.S. real estate sector from 2015 to 2020.
• It hinders vital services for citizens — Corruption prevents essential government services from reaching the citizens who need them most. This leads to a shortage of resources to fund critical services like healthcare, education, and social welfare.
• It erodes trust — Corruption can create a culture of impunity that allows officials to engage in illegal activities without fear of consequences. This can lead to a breakdown in trust between the government and its citizens, further eroding the effectiveness of government services.

Red Flags

• Connections to a Politically Exposed Person (PEP) — Investigators must apply additional scrutiny to financial activity tied to PEPs. It’s not just about the person who works for the government but also those who are linked to them and the nature of their relationship.
• Shell company transactions — Shell companies are incorporated with no independent operations, significant assets, ongoing business activities, or employees. Places like Panama and the British Virgin Islands are commonly labeled as privacy havens for shell companies, but states like South Dakota and Wyoming have increasingly become known for involvement in establishing shell companies.
• Involvement with DNFBPs — Designated Non-Financial Businesses and Professions include casinos, lawyers, accountants, real estate agents, and trust and company service providers. If you see transactions with a DNFBP, conduct additional research to ensure the purpose of the activity and the relationship between the entities make sense.
• Higher-risk industries — Corruption can occur in any industry, but there are a handful of sectors that are known for being more susceptible because of the value of contracts and the potential for government involvement. Infrastructure, energy, healthcare, financial services, and entertainment will all be considered higher risk for corruption.
• Mid-level management or officials — These individuals are commonly employed by state-owned enterprises and are responsible for decisions regarding the provision of licenses or permits to conduct business in their jurisdiction, which increases the corruption risk.
• Luxury goods or high-value purchases — In addition to real estate, other assets such as luxury consumer goods, art, vehicles, or high-value assets with unclear ownership records can indicate the integration phase of money laundering.

How to Report on the SAR

• Fill in box 38 (M) — Select box 38 (M) for suspected foreign corruption (public or private).
• Fill in box 38 (L) — Select box 38 (L) for suspected domestic corruption (public or private).
• Select the right advisory tag — Include the appropriate corruption-related FinCEN advisory tag based on their latest guidance.
• Present the facts — Explain the facts of the analysis in the SAR Narrative (Part V). Be sure to detail each party’s involvement in the suspected corruption, connection to PEPs, the flow of funds, negative news on the suspects, or any misalignment in expected activity.

Summary

Secretary Yellen captured the compelling reasons to combat corruption, so we’ll use her words to close out this post. “Fighting corruption is not just the right thing to do. It is an essential piece of the puzzle as we work to build an economy that upholds a consistent set of rules for everyone — from government officials to business owners to working-class families. When those in power are able to pursue kickbacks, rig contracts, or enrich their friends, all of us suffer. Democracy suffers.”