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Data detective work: An anti-money laundering example

Data detective work: An anti-money laundering example

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I’ve been studying the effects of sanctions lately, which has led to a better understanding of how governments are collaborating and sharing data in more substantial ways. 

In May 2024 Daleep Singh, US Deputy National Security Advisor, International Economics, gave a keynote at a Brookings Institution event titled “Sanctions on Russia: What’s working? What’s not?” Singh’s main point was that sanctions should be seen as one tool in a toolbox. But he does make clear that sanctions against Russia have had a significant impact over the past two years. 

Sanctions on Russia are currently in place against 4,500 individuals and entities. Many of these entities are shell companies that didn’t exist before Russia’s February 2022 invasion of Ukraine. 

The overall sanctions effort of the US and its partners has immobilized more than $300 billion in assets, according to Singh. Singh and others propose to invest those assets in government bonds and use the interest earned to support Ukraine in its war efforts against Russia. 

Money laundering and the Magnitsky Act

Sergei Magnitsky was a Russian lawyer, tax advisor and whistleblower for whom the Magnitsky Act was named. Some of the people Magnitsky blew the whistle on managed to have him arrested and sent to Butyrka prison in Moscow, where he was beaten. Magnitsky ended up dying in prison after refusing to seek treatment in 2009. 

Before his death, Magnitsky was investigating criminals who’d stolen the corporate identities of Hermitage Capital’s Russian investment fund units. Those criminals used the identities to create fake contracts and then secure fraudulent court judgments to obtain a $230 tax refund — the largest refund in Russian history. The criminals then laundered money from that refund.

One of Magnitsky’s clients, Founder and CEO of Hermitage Capital Bill Browder, envisioned and has been the lead advocate for the passage of the Magnitsky Act.

Sanctions and the Magnitsky Act

The Magnitsky Act makes it possible to sanction foreign government officials who’ve violated human rights by freezing their assets. Anti-money laundering investigations support the efforts to freeze assets by collecting evidence that the assets are associated with human rights violations.

The Magnitsky Act first became law in the US in 2012. Since then, 35 countries have passed laws modeled after the US law, including 25 countries who are members of the European Union. Those same 35 countries make up most of the 39 US partners who are enforcing sanctions against Russia imposed after that country’s invasion of Ukraine.

Tracking and tracing money laundering activities

Central to the investigative work of anti-money laundering is the methodical construction of a schematic depicting a flow of transactions from money illegally obtained as a result of criminal activity. The Magnitsky case, explained in Browder’s 2022 book Freezing Order, is a prime example. 

Key to creating a full anti-money laundering schematic is investigating suspect entities across many different kinds of data sources in different countries.

While independently investigating transactions associated with the Magnitsky case, Barron’s reporter Bill Alpert found a database of wire transfers from Banca di Economii in Moldova. Using that database, he traced money from two Moldovan entities through countries such as Cyprus, Lithuania, Latvia and Estonia. 

Alpert found that one of the entities, Prevezon Holdings, sent $857,764 from the fraudulent $230 million tax payment mentioned above. A Russian named Denis Katsyv owned Prevezon Holdings.

Alpert then had the idea to search New York property records for that same entity. “In total,” Browder notes in the book, “Denis Katsyv had used Prevezon to purchase roughly $17 million worth of real estate in New York,” including a posh apartment in the financial district of Manhattan.

Reducing the AML compliance burden with a knowledge graph approach

Financial institution spending on AML technology and operations neared $60 billion in 2023, according to FI technology research firm Celent. Some of the biggest banks may be spending $1 billion a year just on AML.

Imagine the challenge of an AML investigator, someone who needs to locate and scrutinize many different separate sources to be able to piece together a money trail.

One obvious way to simplify the work AML investigators do would be to desilo the data needed, making at least the most commonly reused databases into a virtual, unified, contextualized knowledge graph resource, rather than leaving the data in thousands of different databases. 

Here in the US, counties maintain property records. There are 3,143 counties in the US. With a unified approach, AML investigators would be able to search once, rather than county by county. The likelihood of initial success would be far greater.

Now imagine a global Magnitsky Act and what it would take to unify the resources globally. It’s clear the major challenge would be to request permission and gain access to tens of thousands of databases maintained by local government agencies.  Doing so would still be far cheaper than paying for all the labor needed to turn over rocks one at a time across an unnecessarily fragmented data landscape.