Some UK banks, are failing to collect customer information such as income and occupation details. In some cases, customer risk assessment frameworks are underdeveloped or non-existent, which translates into poor initial due diligence and weak enhanced due diligence for high-risk customers and politically exposed persons, UK regulators said.

Inadequate customer due diligence will make transaction monitoring systems less effective, the UK Financial Conduct Authority (FCA) noted in April.

“One of the problems is not being aware, habitually, of the actual risk they are managing,” says Gabriel Cozma, head of Lysis Financial and Fintech at the Lysis Group in the UK, adding that too often banks ignore the risk. “And once you don’t understand the risk, you cannot apply controls. How would you create scenarios and rules when you don’t really understand the risks you have to manage?”

Deficiencies highlighted

Business-wide risk assessments that the FCA reviewed were “generally poor”, with insufficient detail on the financial crime risks to which the business was exposed. The FCA observed a lack of consistency in customer risk assessment.

“We also see instances where there are significant discrepancies in how the rationale for specific risk-ratings are arrived at and recorded by firms. There is often a lack of documentation recording the key risks and the methodology in place to assess the aggregate inherent risk profile of individual customers,” the FCA said in 2021.

The FCA has had a particular focus on failures observed at UK retail banks and challenger banks. UK enforcement action against NatWest and HSBC, together with Credit Suisse’s 2022 guilty verdict in a Swiss court for laundering Bulgarian drug dealers’ cash, and Deutsche Bank’s continuing AML/KYC failures, are just a handful of examples which demonstrate that global systemically important banks are experiencing similar challenges in the battle against dirty money.

Spending billions

Big banks have reported that they spend billions on financial crime prevention and employ thousands of experts to run transaction-monitoring programs. NatWest Group, for example, has said it is investing about £1 billion on financial crime controls over the next five years and has more than 5,000 staff working in specialist financial crime roles.

NatWest has paid out £279 million in three UK fines for financial crime control failures since 2010. The bank’s latest set of interim results from August 2022, however, stated that Royal Bank of Scotland International was referred to the Isle of Man’s Financial Services Authority’s enforcement division after an inspection of AML/CFT controls and procedures relating to specific customers.

Indeed, banks’ continued reliance on spreadsheets and other manual processes means their approach to financial crime compliance and detection lacks coherence and consistency. “We often identify instances where CDD [customer due diligence] measures are not adequately performed or recorded. This includes seeking information on the purpose and intended nature of a customer relationship (where appropriate) and assessments of that information,” the FCA said in 2021.

Firms are unable to track clients effectively in a spreadsheet for AML and KYC purposes, and spreadsheets are not conducive to tracking changes in client behavior or bringing any consistency to continuing due diligence. Yet few banks have invested in workflow technology that could bring more consistency and assurance to client on-boarding, continuing due diligence and client management, particularly when it comes to high-risk clients.

Managing financial crime policies through spreadsheets and static documents such as PDFs posted on an intranet portal means policies and guidance are difficult to access or may not be current, which makes taking a consistent approach to financial crime risk assessment and client onboarding difficult.

“Of course, firms use some technology in places, but some of the challenges and what we’re seeing now is the risk of workflow type solutions that provide some level of consistency across the board,” says Henry Balani, head of industry and regulatory affairs at regtech firm Encompass Corporation in London.

Manual processes

When regulators mention manual processes, most of the time that means firms are using a spreadsheet to manage financial crime risk across a range of activities, such as onboarding or transaction monitoring. For example, the FCA’s 2017 final notice fining Deutsche Bank £163 million for the mirror trading-related control failures notes that the bank lacked automated AML systems for detecting suspicious trades.

“When it was informed by Deutsche Bank’s operations team that ‘providing a spreadsheet will not be possible as this is done manually by a team member and capturing so many records will be painful’, the AML team did not persist with its enquiries,” the FCA wrote in its 2017 enforcement notice.

Deutsche Bank says it has since “beefed up” resources to combat money laundering, spending 2 billion euros between 2019 and 2020 and employing 1,600 members of staff worldwide “to fight financial crime”. In April 2021, however, the German financial markets regulator BaFin ordered Deutsche Bank to further improve its AML safeguards and comply with due diligence obligations. And in May 2022, prosecutors, federal police, and other officials searched the bank’s Frankfurt headquarters to investigate suspicions of money laundering it had reported to the authorities.

Manual processes also come up in relation to sanctions screening, which the FCA has been assessing following the introduction of sanctions on Russian individuals and companies. The FCA has found “varying levels of adequacy”, and much of that hinges on whether firms are using manual or automated screening systems. “Issues we have identified tend to be around the effectiveness of firms’ customers’ sanction-screening processes,” explains Nikhil Rathi, the FCA’s chief executive, in a letter to the Treasury Select Committee on July 4.

The FCA had written to firms that use manual sanctions-screening tools to remind them to have “well-established and well-maintained systems and controls to counter the risk of their business being used to further financial crime, including evading sanctions,” Rathi said.

For many, these sanctions have meant that they have had to expend considerable resources to know their customers better to keep doing business with unsanctioned parties in Russia. Some financial institutions have opted to “de-risk” and avoid the country entirely, exiting account relationships and disentangling themselves from funds transfers tied to Russia.

In the latest podcast available on the Thomson Reuters Institute channel, we speak to the Rachel Wolcott and Brett Wolf of Thomson Reuters Regulatory Intelligence and the co-authors of a new white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia.

In the podcast, we examine the evolving sanctions environment in several countries, including the United States, the United Kingdom, and the European Union. In addition, the authors also look at the bumpy road to cooperation among allies as they attempt to apply the sanctions that would arguably have the greatest impact.

You can access the latest Thomson Reuters Institute podcast, featuring a discussion about the “Fog of Sanctions” white paper, here.

The authors describe how today’s sanctions environment imposed on Russia is one of the most complex economic punishments ever meted out by the United States, EU, UK, and other nations. And while the U.S. Treasury has been pushing out reams of guidance, other governments have offered little clarity, leaving an information vacuum and major compliance challenges. Not surprisingly, legal, regulatory, and reputational risks faced by banks and businesses have skyrocketed, they explain.

In the podcast, Wolf and Wolcott examine the ways in which many countries are addressing gaps in their anti-money laundering and countering the financing of terrorism (AML/CFT) efforts exposed by the sanctions. The invasion and resulting sanctions have raised scrutiny of private fund managers such as hedge and private equity funds too. With some Russian oligarchs known to be prominent investors in such funds (and some oligarchs subject to sanctions for their ties to Russian President Vladimir Putin), the need to know who is investing in a fund and what it means for compliance are challenges that virtually all private funds face, they add.

The podcast delves into other complex challenges with which governments and global banks are dealing because of the Russian sanctions. These challenges — beyond the application and execution of the sanctions themselves — include everything from the rise of so-called reputation launderers who are working with Russian oligarchs to help them evade the sanctions or obscure their assets, and the problem of asset flight as more global players (both Russian and not) move their assets out of the oversight of regulatory agencies or sanction officers.

Finally, the podcast notes another significant complication stemming from this situation: Many financial services firms within the international finance and trade sectors are finding it difficult to hire financial crime compliance professionals to help meet added demands. In fact, the state firms’ financial crime compliance teams remain in worrisome condition as compliance teams find themselves lacking the resources and the talent to address fully the burdens that the new sanctions regime.

Indeed, those compliance professionals who find themselves short of desperately needed funding may have to make their case to their boards to provide additional resources to beef up compliance teams, the authors argue.

Episode transcript. 

You can access a full copy of the white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia, here.

The sanctions have meant that many of these banks and businesses have had to expend considerable resources on getting to know their customers better so they can keep doing business with unsanctioned parties in Russia; while other financial institutions have opted to “de-risk” and avoid the country entirely, exiting account relationships and disentangling themselves from funds transfers tied to Russia.

In a new white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia, the TRRI team examines the evolving sanctions environment in several countries, including the United States, the United Kingdom, and members of the European Union. In addition to examining what each country is doing by itself and in concert with others, this paper also looks at the troubling lack of clarity and cooperation among allies in properly applying sanctions against Russia on a global basis that would arguably have the most impact. (Besides Russia, Belarus and Russian-occupied areas of Ukraine also have been targeted for sanctions.)

You can access a full copy of the white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia, here.

Indeed, Western sanctions against Russia following its invasion of Ukraine are some of the most complex economic punishments ever meted out by the United States, EU, UK and other nations. While the US Treasury Department has been pushing out reams of guidance, other governments have offered little clarity, leaving an information vacuum and major compliance challenges. As the paper explains, varying expectations among nations and a widespread dearth of guidance are making compliance with the unprecedented complexity of Russia sanctions difficult and costly. Not surprisingly, legal, regulatory, and reputational risks faced by banks and businesses have skyrocketed.

Meanwhile, US bank regulators have publicly stated that their examiners will be looking into compliance with sanctions, with the US Treasury Department continuing to offer guidance aimed at helping financial institutions avoid compliance pitfalls. Further, the EU and UK have issued broad sanctions and prohibitions on corporate services, while drawing criticisms that they have failed to provide clarity regarding regulatory expectations.

The paper also looks at the ways in which many countries are addressing gaps in their anti-money laundering and countering the financing of terrorism efforts that have been exposed by the sanctions. The invasion and resulting sanctions have as well raised scrutiny of private fund managers such as hedge and private equity funds.

Varying expectations among nations and a widespread dearth of guidance are making compliance with the unprecedented complexity of Russia sanctions difficult and costly.

With some Russian oligarchs known to be prominent investors in such funds — and some oligarchs subject to sanctions for their ties to Russian President Vladimir Putin — the need to know who is investing in a fund and what it means for compliance are challenges that virtually all private funds face.

Other complex and steep challenges with which governments and global banks are dealing because of the Russian sanctions are also detailed in the paper. These challenges — beyond the application and execution of the sanctions themselves — include everything from the rise of so-called reputation launderers that are working with Russian oligarchs to help them evade the sanctions or obscure their assets, and the problem of asset flight as more global players (both Russian and not) move their assets out of the oversight of regulatory agencies or sanction officers.

Another significant complication is that many financial services firms within the international finance and trade sectors are finding it difficult to hire financial crime compliance professionals to help meet added demands. In fact, the state of financial services firms’ compliance teams remains in worrisome condition as compliance teams find themselves lacking the resources and the talent to fully address the burdens that the new sanctions regime has place upon them.

Indeed, compliance professionals who find themselves short of desperately needed funding may wish to share this reality, and this paper, with their boards as they push for additional resources.

In addition to the convergence of sustainability standards with the ISSB, the European Union also has moved quickly. Indeed, the ISSB and the EU are the two primary frameworks where stark variations exist. As with financial reporting, investors are intended to be the primary users of reports produced under ISSB standards, whereas the European standards seek reports aimed at both investors and a wider range of stakeholder groups.

Yet, both parties’ demand for uniform standards is high, and the drivers for convergence and divergence remain strong.

The conception for the ISSB is that it will form a common baseline of standards to ensure consistency and comparability around the world. Different regions could add standards according to this approach — including Europe — where they have different policy goals. The ISSB is seen to be very much driving the development of the new sustainability standards.

Forces of divergence

Drivers of divergences build out from the differences in the core purpose and audiences. ISSB is exclusively focusing on investors, while the EU is taking a broader approach. This difference runs through other factors driving divergence, such as:

• • • Definitions of materiality — The different definitions of determining the materiality in what should be reported by companies between the European and global standards have been seen by some as the biggest obstacle between the two. European standards are being developed based on the double materiality principle, where disclosure is required both from the point of view of financial impact on the company and on the impact of the company on society and the environment. To put it simply, the global standards are based on an enterprise value creation or financial materiality approach, in which sustainability impacts are measured in terms of the effects on the financial position and prospects of the company itself.

• • • Differences in standards — The Big Four accounting and consulting firm EY has said that it believes divergence to be inevitable, pointing to the stricter environmental and social standards which exist in Europe compared to the rest of the world. This perspective suggests that the European approach is needed to secure higher standards, whereas the need to secure acceptance across the world puts the global standards at risk of being drawn to the lowest common denominator.
    • Areas of initial focus — The ISSB has made an explicit commitment to starting with climate disclosures, whereas the EU is seeking a more comprehensive approach, putting emphasis on the interdependence between different environmental, social and governance (ESG) impacts from companies, while also providing a robust climate standard itself.

Forces of convergence

The accelerated pace towards standard-setting for corporate sustainability reporting is a result of both the urgency of sustainability challenges and in particular in a huge change in investor opinion in favor of making it happen. In a survey commissioned while I was at the former International Integrated Reporting Council, no fewer than 82% of investors supported standardized sustainability reporting backed by regulation.

This pressure is not simply for standardization as a process, but it will be exerted on both the ISSB and the European Union in finding consistency between each other in achieving it.

Moreover, by 2025, one-third of global investment assets and more than half of European-based assets are predicted to be in dedicated ESG funds, where understanding sustainability performance is key not simply for better risk assessment, but to a clear requirement for what beneficiaries need and expect. In addition, expect the science of measuring impact and of linking it back to financial performance to further develop at pace, which means old uncertainties about the reliability of sustainability information and overall information integrity are fast disappearing.

The apparent disparity between regulatory forces behind the two initiatives may also be smaller than first appears. The International Financial Reporting Standards Foundation was chosen as a home for international sustainability standards, precisely because its financial reporting standards are already adopted in 144 countries worldwide. Finance Ministers and Central Bank Governors from 40 countries — ten of which were from within Europe — welcomed the formation of the ISSB. Regulators as much as investors, may be a force for convergence.

Three models to convergence

Three models to secure greater consistency and collaboration between the European and global standard-setting initiatives exist to move forward. These include:

1. Cooperation model — Reasonable options to encourage cooperation between the ISSB and EU under a cooperation model include: common intellectual property; joint consultations to coordinate both the timing and some of the content of their respective consultations; or the negotiation of a high-level agreement to commit to collaboration, in order to clarify and agree to their respective roles.

2. Governance model — At the same time, the two bodies could take action to move to a governance model. This would involve developing respective conceptual frameworks for both initiatives in close collaboration, creating a joint technical coordination mechanism, or establishing an independent mechanism for assessing equivalence between the different sets of standards. This should also include the ability to resolve disputes between them.

3. Path to convergence model — The ISSB and EU could also put forward a path to convergence, and there are multiple ways to do so. First, both could agree to an explicit commitment to convergence. Another option is around the concept of interoperability, which simply means that standard-setters work for the two sets of standards to be as complementary as possible. Finally, they could commit to a principle of reciprocity, which would focus on mutual respect, the desire for complementarity at all levels, and a commitment to mutually self-supporting actions.

In conclusion, never forget that the benefit of standard processes comes only in that they are used. It is the acceptance of a standard, which is necessary for its existence.

You can learn more about sustainability standards in corporate reporting here.

These multilateral sanctions campaign took less than a month to develop and has been more complex and profound than similar campaigns that have been implemented against countries such as Syria, Iran, North Korea, or Venezuela. These restrictions seem to have been put in place in a well-coordinated manner, particularly in regard to the vast number of export restrictions on technology goods and services, as recently documented by the Atlantic Council.

As the war continues, almost every week a tightening of the international sanctions regime is announced as new measures and restrictions are introduced. The International Working Group on Russian Sanctions, for example, has outlined a variety of measures and provided guidance and research on how to improve their effectiveness and deterrence. It is not a surprise then — in a move that confirms the US government’s understanding of the effectiveness of the current measures — that on April 20, it included in its sanctions campaign penalties against facilitators of those seeking to evade sanctions. With these new sanctions, the US government is targeting those financial and operational support networks that have been put in place with the purpose of circumventing any primary blocking mechanism by Western countries. Just two weeks later, the EU Commission said it too would introduce similar legislation to target facilitator networks.

While these new sanctions against facilitators are still defined as a primary blocking mechanism, they nevertheless have a much more dynamic deterrence component: it is expected that the US Treasury will expand the number of entities whenever it is made aware of or has information that such facilitator networks exist.

Indeed, there are literally thousands of companies that have been formed with the purpose to circumvent sanctions and restrictive measures. For example, more than 10 years ago, Thomson Reuters conducted a research study on the sanctions program against Syrian war criminals and found that 24 Syrian sanctioned entities were connected to more than 1,000 entities across five jurisdictions, with a vast number of those entities being located in Cyprus.

The use of shell companies (due to their ease of formation) in certain jurisdictions and tax havens around the world is by far the most common technique and method of sanctions evasion, and one reason why the US has moved to target facilitator networks.

The Russian sanctions campaign is much larger in scope than anything that has been put in place before; hence, the potential for facilitator networks to be active is very large. In addition, because the Treasury’s Office of Foreign Assets Control (OFAC) considers entities blocked that are owned individually or in aggregate by a blocked person (50% rule), beneficial ownership information, particularly when gathered from jurisdictions outside of the US, can play a critical role.

As a result of the current sanctions environment and the elevated importance of efforts to combat corruption and money laundering since the beginning of 2021, market participants (companies and financial institutions) are in a reactive mode. They need to take ample measures to comply with new mandates and need to ensure that their compliance frameworks are robust enough to meet future regulations that are certain to come. This includes the discovery and reporting of sanctions evasion activities to corresponding financial intelligence units and law enforcement.

Market participants have a couple of possibilities for adapting their compliance and risk management programs to this new reality.

Implementing a data-driven compliance program

Three components can be used to minimize facilitator network sanctions evasions and thus ensure compliance. The first is the availability of continuously updated sanctions and blocked entity lists; the second is the enhancement of such lists with an adverse media capability; and the third is the additional use of global beneficial ownership information.

One of the challenges for compliance executives has been that the above-mentioned sources tend to be used in isolation — for example, using various heterogeneous data sources that are not connected to each other. The use of these three components separately may provide some insight, but since names need to be run individually, often through a manual process, such use is time- and resource-consuming as well as ineffective. For larger organizations that need to screen thousands of customers, it can be difficult to obtain a singular view on any one entity.

In contrast, being able to use these three data components in combination allows for the generation of unparalleled insight; and, at the same time, provides significant time-savings on the actual conducting of due diligence, which is often a cumbersome and time-consuming process. The combination of these data sources will also ensure that information previously hidden is uncovered and can be assessed through either sanctions or adverse media information.

For example, when Russian oligarch Alisher Usmanov was sanctioned by US and European authorities, it was difficult to freeze his vast fortune because his business conglomerate is held by dozens of offshore entities, as reported by the Organized Crime and Corruption Reporting Project. Usmanov alone owns a 49% stake in his main steel company, Metalloinvest. His yacht Dilbar, for example, is owned by Navis Marine Ltd. in the Cayman Islands, which in turn is owned by the Cyprus-based firm Almenor Holdings Ltd, which again in turn is owned by Swiss-based Pomerol Capital.

Screening these names only against a sanctions list would not reveal any significant findings. But when combined with additional sources such as an adverse media capability or a beneficial ownership registry, Usmanov’s evasion network would be uncovered much easier. In this case, research and investigative media organizations provide this insight. (The owner of the yacht Dilbar was ultimately discovered to be Usmanov’s sister, Gulbakhor Ismailova. The yacht was sanctioned by EU and UK authorities in April of this year, from the moment this information became public knowledge.)

Sanctions that target facilitator networks therefore rely to a large extent on external market participants and investigators, who have the resources to conduct due diligence and who are able to share this information with lawmakers. Also, market participants can play their part to increase the effectiveness of sanctions against facilitators by submitting designated Suspicious Activity Reports (SARs) to authorities.

It will be to everyone’s benefit when this information is shared and acted upon, making the current sanctions campaign against facilitator networks more effective.

Human traffickers are capitalizing on those feeling war, particularly women and children refugees at their most vulnerable moments. What is most stunning is that demand for trafficked victims in the West spiked just after the start of the war, according to data from Thomson Reuters Special Services, which identified a 200% to 600% increase in the use of internet search terms related to sex, pornography, and “Ukrainian women” in the days and weeks after the conflict started.

In the latest podcast available on the Thomson Reuters Institute Market Insights channel, Heather C. Fischer, a senior advisor for human rights crimes at Thomson Reuters Special Services, speaks with Valiant (Val) Richey, the Special Representative and Coordinator for Combating Trafficking in Human Beings at the Organization for Security and Cooperation in Europe and human trafficking expert.

During the podcast, the pair talk about what human trafficking is, the scale of it as a global issue, and what anti-trafficking strategies work, particularly in light of the conflict in the Ukraine.

Episode transcript. 

You can listen to the full podcast here.

“Geopolitical risks affecting banks or banks’ customers have expanded significantly in recent years,” according to a global survey report issued late last year from consulting firm EY. However, it added, “only a subset of chief risk officers (CROs) recognize this.”

Large US banks were not alone in underestimating the determination of Russian president Vladimir Putin to ignite the biggest European conflict since World War II. Many companies, both financial and non-financial, were caught off guard, despite Putin having telegraphed his intentions for months in advance. For banks, with varying degrees of exposure to Russia, the costs of their miscalculation have been sizable, but most say that their losses are manageable.

Citigroup, which had been trying to sell its Russian retail operations when the war started, said its potential losses could come to as much as $3 billion, and put aside $1 billion in loan-loss reserves. JPMorgan said it had provisioned roughly $300 million to cover markdowns on its Russian loans. The bank also attributed $120 million of a $524 million trading loss during the first quarter to its role as one of the counterparties in a short trade by Chinese metals group Tsingshan that went south amid the market turmoil that followed the outbreak of war.

Goldman Sachs, meanwhile, which in February disclosed that its Russian exposure was $650 million, said it had suffered a net loss of about $300 million on investments in Russia and Ukraine.

US banks’ complacency

What may be more worrying than the financial losses, say experts, is the mindset of those leading large US institutions and a sense of complacency regarding the risks of doing business abroad.

“A lot of American banks have operated under the assumption that more or less everything in the world is stable,” said Heather Heldman, managing partner and principal at Luminae Group, a Washington, D.C.-based geopolitical risk consulting firm.

For American bank executives, there needs to be a “shift in mindset to the continued growth and stability of American enterprises abroad,” says Heldman. Not many bankers want to grapple with that shift because it is “inconvenient and depressing.”

Geopolitical risks affecting banks or banks’ customers have expanded significantly in recent years… [yet] only a subset of chief risk officers recognize this.

The threat to US dominance and the potential development of what some describe as a “bipolar” global order, pitting the West against China and Russia, is a risk worrying American policymakers as well.

Speaking to the Atlantic Council recently, US Treasury Secretary Janet Yellen warned that it is imperative for the United States to work with China to avoid a bipolar monetary order emerging from the war in Ukraine and ongoing geo-political conflicts. “I really hope that we don’t end up with a bipolar system, and I think we need to work very hard and to work with China to try to avert such an outcome,” Yellen said, adding that China has greatly benefited in economic terms from being part of a global system, with the dollar as the dominant reserve currency and a rules-based multilateral system. “I would like to see us preserve the benefits of deep economic integration with China, not going to a bipolar world, but clearly that’s a danger that we need to address.”

Indeed, in its most recent “geopolitical risk dashboard,” the BlackRock Investment Institute put a technological decoupling between China and the United States as the third highest risk, with a widening of the conflict in Ukraine between NATO and Russia and major cyber-attacks causing significant damage to infrastructure and financial markets seen as the top two risks.

“The Ukraine war is likely to drive geopolitical fragmentation and the emergence of blocs, in our view,” BlackRock said in its report. “Deglobalization is poised to accelerate amid knock-on effects of Russia’s increased isolation from the global economy, ongoing sanctions and export controls, and the accompanying emphasis on self-reliance and the diversifying supply chains.”

How are large banks managing geopolitical risks?

Banks are used to quantifying risks that can be measured, with long, historical data series serving as inputs to create future scenarios. Geopolitical risk, however, is unlike credit, liquidity, or counterparty default risk. There are no reliable historical streams of data that one can easily plug into a model. Major geopolitical events can often arise quickly and unpredictably.

The EY survey last year on bank risk management noted that chief risk officers “may be underestimating the potency of political change… (with) only about half viewing (geo)political risks as among the most important emerging risks over a five-year horizon — this is down from 60% in our last survey in 2019. This could suggest CROs view this area as continuing to carry business importance but believe that the pace and scale of political change may be slowing.”

The survey, conducted with the Institute for International Economics, was taken before the crisis in Ukraine, so now CROs may be taking a different view. Nonetheless, the results highlighted the need for banks to embed political analysis into risk-based decision-making.

“The degree to which banks systematically analyze political risks varies across the industry. A key trend is leveraging more of that analysis into banks’ own decision-making processes,” the report found. “Nearly half of bank CROs (48%) plan to broaden methods for identifying new or emerging political risks and a quarter plan to build new tools for qualitative tracking and reporting on political risk measures.”

The White House specifically flags strategic corruption as a national security threat, noting that foreign adversaries weaponize corrupt practices as part of their foreign policy to advance their geopolitical goals. As part of its anticorruption efforts, on April 28, the White House proposed “making it unlawful for any person to knowingly or intentionally possess proceeds directly obtained from corrupt dealings with the Russian government.” The Financial Crimes Enforcement Network (FinCEN) is working to implement additional regulations, issuing guidance to help US firms and financial institutions identify and block corrupt actors’ access to the US dollar and continuing to make tackling strategic corruption a priority this year.

“Corruption threatens the United States’ national security, economic equity, global anti-poverty and development efforts, and democracy itself,” said President Biden, further stressing the urgency of this threat. “But by effectively preventing and countering corruption and demonstrating the advantages of transparent and accountable governance, we can secure a critical advantage for the United States and other democracies.”

What is strategic corruption?

Corruption largely means the abuse of public office for personal gain, and strategic corruption is a particular subset of that general definition in which adversarial governments use either the government or proxy actors to further their foreign policy objectives. Strategic corruption can include various tactics that can be used to influence foreign countries’ governments, democratic institutions, and foreign policies.

Strategic corruption often does not seek to gain personal or business advantages — although personal or business gain are often the result — but rather, it helps the corrupt government shape its foreign policy outcomes, making it a national security concern for the United States. Indeed, in a recent address to the American Bankers Association, FinCEN acting director Himamauli Das noted the proliferation of strategic corruption aimed at weakening US institutions.

Buying political influence — Oligarchs, especially those from Russia and Ukraine, are making real estate and other large asset purchases to evade sanctions, launder money through US and other western financial systems, and influence politicians. Corrupt regimes also exploit state-owned companies to influence foreign politics. For example, the Kremlin uses its energy and defense sectors and private business surrogates to launder money, funnel it to its preferred candidates, finance political campaigns, and influence foreign leaders. To counter their efforts, the United States is placing oligarchs’ assets under additional scrutiny through the Russian Elites, Proxies, and Oligarchs (REPO) Multilateral Task Force and the KleptoCapture Task Force.

US regulators could also increase reporting obligations for real estate cash transactions, enhance corporate transparency requirements, and bolster regulatory requirements for professional services members, such as attorneys and other gatekeepers.

• • • To advance Russia’s energy policy in Europe, the Kremlin gave former German Chancellor Gerhard Schröder “a highly-paid board position” on Gazprom’s Nord Stream project, which has sparked disputes in the European Union and in Germany about European energy security. Thus far, Schröder has refused to step down from his board positions. Russia also gave former Austrian Foreign Minister Karin Kneissl a position with its state-owned oil company, Rosneft; and former French Prime Minister Francois Fillon a position with energy company Zarubezhneft, co-opting elites in those countries to further Russia’s geopolitical goals.
    • In November 2017, US authorities arrested Patrick Ho, an executive from Chinese energy conglomerate CEFC China Energy, on bribery and money laundering charges after he paid off African leaders to open oil and gas markets on the continent to China. Ho also “arranged for illicit arms sales to Libya and Qatar,” and “offered to help Iran move sanctioned money out of China.” A CNN report in 2018 showed that CEFC China Energy aligned itself closely with the Chinese government, making distinguishing between the two difficult. Beijing took over CEFC after Ho’s arrest.

Military corruption — Transparency International assessed that in 2021, more than 60% of the countries in the world were at a high to critical risk of defense sector corruption, which can undermine military peacekeeping and homeland defense operations, as well as divert military materiel to corrupt or adversarial countries and terrorist and criminal groups. The White House counter-corruption strategy includes measures to address corruption in military structures, including using newly created anticorruption task forces at the Commerce Department and US Agency for International Development to press risky countries for accountability.

• • • Russian troops faced little resistance from Ukrainian forces when they invaded Crimea in 2014, facing a Ukrainian military weakened by decades of underfunding and outdated equipment, while more modern and effective equipment was sold by corrupt Ukrainian military officers to nations such as China and Pakistan for cash. Ukraine’s military was better able to withstand Russia’s invasion in February, likely in part because of the country’s anticorruption efforts and less cultural tolerance for corruption after the 2014 Crimea annexation.
    • Efforts to clamp down on strategic corruption will significantly impact military contractors, which will almost certainly need sound anticorruption programs to stay ahead of possible regulatory changes. The White House’s strategy mentions strengthening analysis of corruption risks in security cooperation and military operations and planning by developing training, assessing the political will of military partners, and conducting more frequent security cooperation evaluations to ensure transparency and accountability.

In the second part of this series, we will look at the increasing threat of the interplay between cybercrime and strategic corruption and some ways that US firms can stay proactive in their risk and compliance obligations.

Rem Korteweg is a senior research fellow and head of strategic initiatives at the Clingendael Institute in the Netherlands. Every year, he joins forces with other international trade experts to discuss trade issues in a series of podcasts sponsored by BritishAmerican Business (BAB) and financial and insurance giant AIG.

The theme of this year’s BAB/AIG Global Trade series is “global trade in a complex and contested world,” comprising 10 podcasts between now and November — and Korteweg is the first to admit that this year’s conversations will be less optimistic than expected. “We are generally in a rather gloomy phase of international trade policy,” Korteweg said during the first event of the series, the BAB/AIG Annual Trade and Geopolitics Update: Conflict, Climate, and Recovery, aired on April 5.

“This year, I think our conversations will be bookended by what is happening in Ukraine,” Korteweg says, “and the shockwaves it is sending across the global trade system.”

A new sense of urgency

In addition to disrupting energy markets and supply chains for everything from wheat and fertilizer to semiconductors and auto parts, sanctions against Russia have brought “a new sense of urgency” to energy security and geopolitics, Korteweg says, and have once again focused the attention of corporate leaders on issues of supply-chain risk.

China’s alliance with Russia is a looming concern for many manufacturers, of course, as is the refusal of most nations in Africa, Asia, and Latin America to participate in NATO’s efforts to confront Russian aggression with economic sanctions. When it comes to trade policy, however, “national security appears to be taking precedence over the pursuit of a level international playing field, at least in Western Europe,” Korteweg explains. “This is raising fundamental questions about the nature of globalization, which is leading to a conversation about how trade can or cannot — or should or should not — be a means to pursue national security.”

Further, framing the conflict as a larger global struggle between autocracies and democracies may not work in democracy’s favor, he warns, since so many of the West’s essential trading partners in Asia, Africa, Latin America, and the Middle East are not, in fact, democracies.

A few bright spots

Not everything is gloom and doom in the world of international trade, fortunately. The war in the Ukraine has clarified the need for more supply-chain cooperation between nations, for example, and the United States and the United Kingdom have begun a series of discussions on the “Future of Atlantic Trade,” following last year’s announcement by US President Joe Biden and the UK Prime Minister Boris Johnson of a new “Atlantic Charter.” The first of those “dialogues” took place in Baltimore in March, and another is scheduled for later in April.

According to Jennifer Hillman, Professor of Practice at the Georgetown University Law Center and a panelist on the podcast, the talks between the US and UK were intended to shore up relationships among the two countries and Europe, as well as reinforce an overall commitment to building more durable supply chains, protect worker’s rights, decarbonize the economy, and continue building the framework and infrastructure needed to support effective digital trade practices.

“There is nothing in these dialogues to suggest much likelihood that they’re going to be leading to a bilateral free-trade agreement between the US and the UK,” Hillman says. “That’s off the table,” she insists, in keeping with the Biden administration’s position that it will not be considering new free trade agreements anytime soon.

Uncertainty in the boardroom

In the private sector, however, there is a great deal of concern about the successive waves of uncertainty caused over the past few years by trade wars, the pandemic, the Suez Canal crisis, Brexit, climate change — and now, fallout from the war in Ukraine. And according to panelist Simon Evenett, a professor of International Trade and Economic Development at Switzerland’s University of St. Gallen, many senior executives he has talked to are “seriously overwhelmed by the uncertainty of the moment and are really looking for a way forward.”

Evenett explains that with any one of those events, you could tell corporate executives that it is a one-off and that normal service will be restored soon. “But after so many of these, boards are now going to be asking, What shoe is going to drop next? And where is the assurance of certainty in the operation of supply chains? This must begin to color how companies organize themselves regionally and globally,” says Evenett, adding that some companies are already “de-coupling” from China, restructuring their supply chains, and in some cases moving their manufacturing facilities closer to home.

In the midst of all this turmoil, there is also an ongoing discussion in trade circles about whether the World Trade Organization (WTO) should be saved or scrapped. The panelists for this BAB/AIG discussion say they favor keeping the WTO, but with significant reforms to make it more relevant for meeting today’s trade challenges. “The WTO isn’t over, but it needs to change what it does,” says Evenett.

Georgetown’s Hillman agrees. “There’s a huge role for the WTO to play as a leveler, as a source of transparency, as a base case for rules, and as a forum for dialogue around these issues,” she says. “My own view is let’s all pick up our oars and figure out how to save the WTO, because it is an institution that needs to be saved.”

More specifically, those European clients surveyed in Thomson Reuters’ Mainland Europe Law Firm Brand Index 2022, said they are seeking to work with outside law firms that have unrivalled technical acumen, deep-subject matter expertise, and an understanding of how these attributes can be applied to address clients’ strategic challenges. More specifically, European GCs stressed how important it was for their law departments to come to grips with the challenges of digitalization.

You can download the full Mainland Europe Law Firm Brand Index 2022 here.

In the minds of many clients, their outside law firms should be leveraging all their skills towards solving not just today’s legal challenges, but those that clients may not yet have anticipated. Indeed, clients are depending on their legal partners to identify and solve these yet-unseen problems. Those outside law firms — the ones that are truly proactive in their advice and innovative in their delivery — will continue to find themselves most favored by European corporate clients, the Index shows.

Clients looking for global reach

European GCs, also like those in other regions, are anticipating strong increases in their legal spend across the continent, with three times as many GCs saying they’re increasing their legal spend this year than said it last year. And fueling these spending increases in part is the steady growth in cross-border legal work, with portion of the market anticipating international legal spending to increase at its highest level in the last five years. And like in the United Kingdom and the Asia Pacific legal markets, managing cross-border regulatory changes are expected to be a heady challenge for clients in Mainland Europe.

This year’s top 10 in the Mainland Europe Index is dominated by the largest global law firms that can boast a meaningful presence in key European markets. Clients also cited these firms’ ability to combine that meaningful global network with a reputation for technical specialty and high-quality legal service delivery. Indeed, we have to move into the firms ranked 11^th to 20^th before we can see more of the region’s premium firms whose strength is anchored in their local market.

Atop the Index for Mainland Europe, Baker McKenzie takes the top spot for the fourth consecutive year as clients cited the firm’s strength across the region and its ability to connect them with the rest of the world.

Among other firms, Clifford Chance and Allen & Overy have stood out in this year’s Index for Mainland Europe. Both firms have grown their favorability in the eyes of their clients by leveraging their specialist expertise and ability to deliver on the high-stakes work consistently across the European continent, especially across the key markets of Germany, France, Italy, and Spain. Also, Paris-based CMS moved up to their highest position in the last three years, breaking into the Top 5 with a different proposition: offering high quality work through an investment in understanding clients’ business and a focus on creating cost efficiencies.

Thomson Reuters’ Regional Law Firm Brand Index 2022 illustrated how those law firms in Mainland Europe and around the world that saw the most growth in this year’s Index were the ones that were able to establish themselves in the minds of clients in areas of brand awareness and client favorability. The Regional Index covers the legal markets in five separate countries or regions — the United States, the United Kingdom, Mainland Europe, Canada, and the Asia-Pacific region. Each Index is based on data compiled in 2021 from Thomson Reuters Sharplegal study.

As the Index demonstrates, corporate clients and legal service buyers in Europe and elsewhere are seeking out those legal partners that can demonstrate a deeper focus on factors that will best position their clients to take advantage of coming opportunities and face future challenges.

You can watch Jennifer Dezso, Director of Client Relations at Thomson Reuters, breakdown not just the legal market in Mainland Europe, but also the markets in the US, UK, Canada, and the Asia-Pacific region.