The US government has issued a shot across the bows to financial institutions who may not realise they are harbouring transactions on behalf of a sanctioned entity, in this case the Commercial Bank of Syria. The bank’s counterpart in Beirut, the Syrian Lebanese Commercial Bank, has called the US allegations ‘unfair and unjustified’ and is urging clients to ignore the sanctions. There is a point worthy of further scrutiny in the US Treasury’s notice. It is warning institutions to be vigilant for ‘nested account’ activity, a sign that it is beginning to take investigations into transactions with sanctioned organisations one step further.
The US government believes that the Commercial Bank of Syria was used by a ‘provider of lethal support’ to Al–Qaeda in Iraq. As a result, the US designated the bank under the counter-proliferation sanctions. Although the Financial Crimes Enforcement Network states that the Commercial Bank of Syria maintains no direct correspondent accounts with US banks, there are concerns that the bank is indirectly using correspondent relationships to channel funds to terrorism and the arms trade.
Feathering a nest
One method of doing this is by using ‘nested account.’ Nested accounts involve a bank obtaining access to a financial system by anonymously channelling funds through the correspondent bank of another foreign institution, rather than having its own accounts.
For example, Bank Apples in Iran is a sanctioned entity. It cannot channel funds through its own correspondent bank accounts to Bank Pies in the USA directly. In order to get the funds to the Pies account, Apples must place the money under a different name in an account at the Bank of Ice Cream in Lebanon which is not the subject of sanctions, for example. It then instructs Bank of Ice Cream to transfer the funds via its correspondent account to Bank Pies.
According to FinCEN, there are a few red flags which should be raised when a nested account comes into view and which should be raised during due diligence checks.
- Does the foreign FI have a business interest in either the remitting or receiving jurisdiction? If not, then this could be an effort to conceal the source of funds.
- Does the transaction or series of transactions fit the FI’s expected behaviour given its asset size and customer base? This is a defining factor in nested account activity.
As a reminder to all banks, FinCEN provided a handy reminder of a suspicious transaction’s defining factors which stand for any financial system. A transaction worthy of further investigation exhibits the following properties:
(a) funds derived from illegal activity,
(b) signs of structuring, money laundering, terrorist financing, or any other violation of federal law or regulation, or
(c) no business or apparent lawful purpose, or is not the sort in which the customer is normally expected to engage
(d) the financial institution knows of no reasonable explanation for the transaction after examining the available facts.
The Commonwealth Bank Of Syria is the major shareholder of the SLCB. The bank has rejected the US Treasury’s sanctions outright and has denied all accusations of involvement with sanctioned activity. Previously, its clients have stood by the bank and continued to do business despite US allegations.
“Knowing the impossibility of providing any evidence against our clean activity, we are confident they will neglect those unfair sanctions again.”
Published by the author on Thu, August 18 2011 13:09