CW Compliance Financial Crime Review

What's In This Edition

• Industry Press and News
• Regulatory Updates: HMT Guidance Update for High Risk Third Countries
• Think Piece: Is the curtain closing on Russian Diamonds? by Salvatore Vitiello

Industry Press and News

🔎🔎Transparency International Releases 2023 Corruptions Perceptions Index🔍🔍

Transparency International have released their 2023 Corruption Perceptions Index (CPI). The CPI ranks 180 countries and territories by their perceived level of public-sector corruption according to experts and businesspeople.

Top three remain unchanged:

🥇 Denmark 🥈 Finland 🥉 New Zealand

and at the other end of the index are:

❌ Somalia, Venezuela, Syria and South Sudan

Source: Transparency International

⚠️🎯🎨Amber Alert for UK Art Storage sector⚠️🎯🎨

The JMLIT, which includes the NCA and OFSI, have issued an Amber Alert concerning sanctions evasion, money laundering and cultural property trafficking via the art storage sector. The Amber Alert reiterates that the movement of artwork between jurisdictions, making it less noticeable, can be undertaken to evade sanctions. It also emphasises how the investment in artwork, antiques, antiquities and collectibles can be used for launder the proceeds of criminal activity.

Source: NCA

🎰💰Online gambling business Gamesys fined £6m💰🎰

Gamesys, which operates websites including ballycasino.co.uk and doublebubblebingo.com, has been fined £6m for AML failing and will undergo a third-party audit to ensure it effectively implements AML and safer gambling policies, procedures and controls. The AML control failings include some customers being able to evade AML threshold triggers, conducting inadequate CDD and over-reliance on third-party information.

Source: Gambling Commission

Regulatory Updates: HMT Guidance Update for High Risk Third Countries

On the 22nd of January, HM Treasury issued an advisory notice for high-risk third countries (HRTCs), which necessitates enhanced due diligence and enhanced ongoing monitoring for the UK regulated sector.

The new classification for HRTCs will be driven by “a country named on either of the following lists published by the Financial Action Task Force (FATF) as they have effect from time to time —

(i) High-Risk Jurisdictions subject to a Call for Action;

(ii) Jurisdictions under Increased Monitoring” 

The FAFT lists are updated three times a year on the final day of each FATF Plenary meetings held in February, June and October. No new countries are added to the list as a result of the new guidance.

Source: GOV.UK

💎Think Piece: Is the curtain closing on Russian Diamonds💎?

By: Salvatore Vitiello

On January 1st, the European Union (EU) initiated the initial phase of a comprehensive sanctions program poised to result in a complete ban on diamonds of Russian origin, which constitute one-third of global production.

This endeavour is not an isolated one and coincides with a nearly simultaneous initiative from the G7 and its member countries. Canada, the UK, and Japan released concise statements on the matter, while U.S. President, Joe Biden, signed an executive order granting authority to prohibit Russian diamonds, even if they have undergone transformation in a third country.

The EU legislation provides a detailed perspective on how the Western Bloc intends to enforce the ban, likely serving as a blueprint for other countries' frameworks.

The scheme unfolds in three main phases:

1. From January 1st, the purchase, import, or transfer of rough or polished diamonds, whether natural or lab-grown, from Russia is prohibited. Additionally, on January 3rd, the EU added the Russian state mining company, Alrosa, and its CEO, Pavel Alekseevich Marinychev, to its sanctions list.
2. From March 1st, the ban extends to 1-carat or larger natural diamonds that have been processed (i.e., polished) in a country other than Russia.
3. From September 1st, the ban expands to include 0.50-carat diamonds, including lab-grown ones, as well as jewellery and watches containing any of these.

Implementing all three phases requires a system to track the gem's origin and its journey to consumers. However, the diamond industry's complex supply chains and practices make effective tracking challenging.

The current standard, the United Nations Kimberley Process, established in 2003 to prevent the trade in "blood diamonds," cannot fulfil this role and its reform is hindered by an inevitable Russian veto.

Alrosa, the Russian state mining company sanctioned by the US and UK in 2022, reiterated these limitations. The company accounts for almost all of the $4.5 billion in revenue generated by the Russian mining industry and recorded robust sales in 2023, despite the US and Britain banning imports of Russian rough diamonds shortly after the war began in 2022.

Limiting the ban to rough diamonds rendered it ineffectual, as Russian firms could send gems abroad for cutting and polishing, making them legally exportable to the US or Britain. Approximately 90% of the global supply is currently processed in India.

While the new sanctions scheme will eventually close this loophole, significant challenges persist, particularly in implementing effective tracking systems for gems. Tracing a diamond's journey from its original mine to the jeweller's windows is no easy feat.

Challenges stem from industry practices that combine rough diamonds from various mines, involve numerous intermediaries in transforming raw stones into polished gems, and, not least, the lack of emphasis on origin in the jewellery industry, with consumer preferences for size and quality ("Four C's": cut, colour, clarity, and carat weight) over source.

The system's rough outline has been established, with potential insights coming from the private sector. Several private tracking systems, relying on classic audit and guarantee frameworks or innovative solutions such as microscopically inscribed serial numbers on cut diamonds or 3D scanning to create digital models of gems, have emerged.

Regardless of the solution adopted, it will undoubtedly be costly for Western miners and traders. While the sanctions will impact Russia, they are unlikely to completely cripple its industry. A scenario akin to oil sanctions is plausible, with Russian providers shifting away from Western markets toward Chinese and Indian ones.

Dmitry Peskov, Kremlin spokesman, seems to share this view, labelling the scheme as "predictable" saying "I do not think that there are no options to circumvent these sanctions. They exist and will be implemented."

The effectiveness of these sanctions on the Russian mining industry remains uncertain, but unquestionably, increased transparency as the side effect will benefit the overall diamond trade.

Need help with financial crime compliance? Please contact CW Compliance or our newsletter editor Caleb Hogg and we'll be happy to help.