Detecting corruption & money laundering: 72 potential indicators, from the perspective of Financial Intelligence Units (FIUs)

Front page of public summary document released by the Egmont Group.

The Egmont Group (Twitter: @EGFIU) is a platform for exchange of expertise and financial intelligence that consists of 164 (!) Financial Intelligence Units (FIUs) worldwide. In mid-July 2019, it released a public summary (.pdf, 22 pages; mirror) of the “FIU Tools and Practices for Investigating Laundering of the Proceeds of Corruption”. The release stems from an initiative started by the FIUs of Israel (IMPA), the Netherlands (FIU-Nederland), Russia (Rosfinmonitoring) & Ukraine (SFMS).

The summary provides, notably, a list of 72 indicators (pp.16-22; a ‘checklist’, if you will) to identify possible cases of corruption and money laundering. Be reminded that the latter is also relevant to combat terrorist financing. The indicators are grouped as follows:

  • Indicators of Corruption in Public Procurement
  • Indicators of Unexplained Wealth or Income
  • General Indicators

They serve as potential triggers for FIU investigations and can be used by banks and accountancy firms — but investigative journalists (‘follow the money’) and others may also want to take note. For the latter and other purposes I (re)post the indicators below as quick reference.

NOTE #1: there is no substitute for reading original documents in full, so do read the original public summary in full. Context always matters.

NOTE #2: for some historic reading and background on FIUs, see the IMF publication Financial Intelligence Units: An Overview (.pdf, 2004, 149 pages; mirror).

Egmont Group Set of Indicators for Corruption Related Cases From the FIUs’ Perspective

Indicators of Corruption in Public Procurement

  1. Services provided to state-owned companies or public institutions by shell companies, offshore companies or formations, companies in registration offices or P.O. companies.
  2. Services provided to state-owned companies or public institutions by companies registered in high-risk jurisdictions.
  3. Long-term contracts are repeatedly awarded to the same subcontractor, or a certain legal entity or legal arrangement consistently winning a majority of the largest contracting authority tenders/public procurement bids.
  4. The issuance of unreasonable specifications for the performance of the contract (including restrictive conditions for the location of the contractor, restrictive conditions for the materials needed for the performance of the contract, particularly tight deadlines, etc.) by the procuring authority.
  5. Subcontractors have common director(s), beneficial owner(s) and/or are related with the management of the contractor.
  6. Subcontractors/intermediaries brought in on business deals once a contract has already been agreed and for no obvious reason.
  7. Contractors, subcontractors or their counterparties (within the timeframe for completion of the state contract) are linked by address, telephone number, IP-address, etc.
  8. Procurement projects which are funded through loan agreements by governing bodies such as development institutions but where the eventual tender price put out is significantly higher than the loan amount requested.
  9. Deposits in public officials’ accounts with checks issued by construction companies, individuals or non-governmental entities that previously benefited from public works contracts.
  10. Legal entities with little or limited experience receiving highly complex and technical government contracts/projects (not compatible with the size or experience of the entity) or receiving government contracts/projects that are not related to their field of business.
  11. A certain legal entity or arrangement, which is a contractor to a state-owned company, usually receives payments of higher amounts for goods or services which normally should cost less (when compared to the normal market prices for equivalent products or services).
  12. Funds received by a contractor of public procurements are not spent within a reasonable timeframe to fulfil the contract needs.
  13. Checks issued in favor of public officials and come from accounts of persons that benefited from public procurements/funds, without an evident justification.
  14. Checks issued by a public entity being cashed out and subsequently deposited to accounts of public officials or entities related to public officials.
  15. Public officials, especially those having a role in government contract management or public procurement of high-value assets, receive funds transfer instructions:
    • from business and/or personal accounts, where these funds appear to be excessive in value;
    • according to in-built distribution methods or contractors or intermediaries;
    • from distributors used at the request of the contracting party;
    • according to existence of rebate arrangements, particularly if agreed outside the contract;
    • under requirements to obtain licenses and other government permits as a pre-requisite of doing business.
  16. Use of third parties, such as contractors, consultants, vendors, suppliers and advisor/intermediaries, in order to facilitate procurement contracts fulfilment:
    • Requests for compensation not explicitly contemplated in the third party contract
    • Requests that payments be made to different third parties
    • Third party requests for charitable or political contributions
    • A third party is in a different line of business than that for which it is engaged
    • The third party has little or no experience in the relevant industry or activity
    • The third party does not have an office in the country where services will be performed
    • The third party was recently formed or incorporated
    • The third party has poor financial stability or credit record
    • The third party has a high level of reliance on subcontractors or intermediaries (so-called “fourth parties”)
    • The third party became part of a transaction at the express request or insistence of a public official
    • The third party is recommended or referred by a public official
    • Third party commissions are unreasonably large or based on inaccurate or incomplete invoices
  17. Contracting party issues commercial cards to individuals that are not employees of contracting party and are used to purchase luxury goods, make payments for high-cost services or other transactions that are not normal business expenses.
  18. Payments based on a public procurement contract are conducted at a price higher than originally contracted.
  19. Payments conducted according to public procurement contracts where there was only a single bid for a government procurement tender, which signals a lack of competition and closed access.
  20. Receipt of commission or fees before signing of agreement for services or carrying out a function or process in relation to public procurement contract.
  21. Commissions, interest or payments under commercial terms of public procurement contract are increased, reduced or restructured in a manner that is not commercially viable.
  22. Repeated or subsequent purchases of low-quality goods, works and services at market prices of goods of higher quality or purchases of goods, works and services at higher than market prices.
  23. Payments for goods according to public procurement contracts without delivery of such goods to customs territory of the country.
  24. Payments are conducted to accounts of providers of goods, works and services, which are opened in countries different from where such goods, works and services are originated or provided.

Indicators of Unexplained Wealth or Income

  1. The subjects in a transaction are domestic or foreign public officials and receive and/or send unusually large amounts of funds in different currencies.
  2. Funds received in accounts of persons, legal entities, or legal arrangements with no visible connection to public officials, but known to be controlled by such, or persons related to them (a frontman, a strawman, or legal entity established to conceal the beneficial ownership), where the funds have been sent by a shell company. The additional information provided with regard to the funds refers to “loans”, “investment purposes”, or “purchase of real estate property”, or otherwise reveal an irreconcilable conflict of interest involving commercial business between a private enterprise and a public official.
  3. Representative of a public official (i.e. lawyer, secretary, accountant) opens account and purchases expensive property or luxury goods with the express intent of bypassing Customer Due Diligence (CDD) process screening for public officials.
  4. “Straw men” (especially in the remittance sector) can be used to obfuscate the beneficial ownership of the assets by involving public officials’ employees i.e. cleaner/ gardener/driver. Usually, the funds received on the accounts of such straw men significantly exceed their legitimate employment income.
  5. Public officials receive or purchase shares (or the option to purchase shares):
    • In a company in exchange for services; or
    • In a company where the purchase is financed by the vendor; or
    • In a company where the purchase price is below the net asset value of the company; or
    • In a company and receives a dividend from the company which is disproportional to the purchase price; or
    • Which give the right to sell shares at a price which is higher than either the current market value or the price at which the shares were purchased; or
    • And profit from a share transaction where the purchase and selling dates of shares are within a short time period.
  6. Public officials receive loan guarantees from a public corporation or government body, or a loan under favorable conditions.
  7. Public officials receive large amounts of money for their attendance in workshops, conferences or as consultants to projects, in order to disguise the origin of the funds from being seen as a payment of corruption.
  8. Public officials receive debt forgiveness or repayment requirements are waived by the creditor.
  9. Public officials perform transactions with sovereign wealth funds or government-linked companies.
  10. Misrepresentation and/or inconsistency between the declared source of wealth of public officials through their sworn asset declarations, and those established during the due diligence process.
  11. Public officials have purchased virtual assets in a total amount higher than their legally declared income.
  12. The purchase of goods or services, or transfer of payments, or the receipt of any other benefits (i.e. rental payments, school fees, chauffeur fees, fees for private healthcare, funding of private jets, consultancy fees, high commissions, etc.) for or on behalf of a public official, from the contracting authority, or a contractor in the period of the execution of the state contract.
  13. Transactions that take place in accounts of public officials involving cash deposits or withdrawals in unusual frequency and amounts.
  14. Incoming transactions from foreign jurisdictions (specifically from high-risk jurisdictions) on accounts of public officials, which are intended for real estate purchases or purchases of high-value or luxury goods, typically contain no additional information about the transaction itself, and the necessary remittance information is vague (e.g. refers to ‘consultancy fees’). Such situations result in a lack of transparency with regard to the transaction and difficulty determining the source of funds.
  15. Purchases or leases of movable or immovable assets by public officials which do not coincide with the subject’s income.
  16. The use of hawala type mechanisms (especially through the remittance sector) by public officials to move money abroad.
  17. Fixed Term Deposit Certificates made by companies with the main purpose that the capital and interest generated from the investment should be transferred immediately to accounts of a political party.
  18. Cash deposits with no rationale:
    • Credit card/ home loan applications (even if declined) are useful to find out what the public official earns versus what is deposited into their account; or
    • Cash deposits made into the same public official’s account from different locations.
  19. The immediate transfer of funds from a private entity’s account to a personal account of a public official and the subsequent movement of the funds to third party accounts. These funds are eventually moved abroad, which indicates the use of the aforementioned accounts as a temporary node. Some of the persons in the described chain may deduct a percentage of the amount before transferring it further, which indicates that these persons have received a commission for their services.
  20. Incoming cash or electronic transfers from different external sources on accounts of public officials are later spent at online gambling sites – credit from the same site or different online gambling sites can then be seen.
  21. Transferring of funds from accounts of public officials to high-risk vehicles abroad, such as corporate trusts.
  22. Public officials establish legal entities or legal arrangements, which have purchased land and buildings of significant value (as is evident from their accounting documents), despite the absence of any other commercial activity, or without a justifiable source of funds.
  23. Public officials have made cash transactions involving large amounts (e.g. currency exchange, use of cash to purchase high value goods, etc.).
  24. Transaction payments of unusual amounts or frequency from public officials to lawyers, accountants, or other professional intermediaries.
  25. Payments in favor of public officials are made to facilitate or expedite a government service.
  26. Use of state funds to purchase shares in private companies or private companies belonging to public officials, at prices above market value.
  27. Issuance of sovereign debt to public officials or entities known to be controlled by them, at interest rates above the prevailing market rate.
  28. Use of Joint Venture (JV) structures for government contracts in which public officials or a company belonging to them are silent partners. For example, in a JV between a state-owned company and a private company, a third silent shareholder owned or controlled by a public official is inserted in order to allow the public official to take a share of the profit.
  29. Payments by entities to NPOs that public officials are known to be associated with.
  30. A transaction or financial activity, which involves foreign nationals with no significant link (apart from the financial) to the country where the transactions took place. These foreign nationals are known to be active consultants or employees of lobbying organizations and are sometimes reluctant to explain the source of wealth/funds or give unsatisfactory explanations.
  31. Financial flows, which reveal complex financial mechanisms and intervention by foreign legal entities or arrangements, are received in an account in another jurisdiction, where the account is related to a public official.
  32. International transfer from the Treasury of a foreign country to shell companies, to entities with no public profile, or no physical or online presence, or to individuals who are not known employees of the government.
  33. The stated source of wealth of funds received to an account of a public official may be inconsistent with the client’s stated career history, expertise, or age. In this regard a mismatch may exist between the applicant’s stated career history and their total net worth.
  34. Transactional activity usually characterized by first party payments to and from accounts in the same name or between offshore company and trust structures (linked or known to be linked to public officials).
  35. Customer, especially when it is a public official, transferring funds to/from other public officials, including law enforcement officers.

General Indicators

  1. Open source information, which can relate specific financial activity to ongoing investigations into individuals, and concerns about corruption.
  2. An entity that receives public contracts and its legal representative/s appear in media reports, which link/s him/her/them to corruption or other financial crimes.
  3. Payments made by contractors for consultancy services, particularly in industries with a higher risk to corruption, such as arms, mineral extraction, telecoms, public infrastructures, where the amount paid appears to be outside the normal price range for consultancy services.
  4. A fiduciary service company which set up the structure for the applicant may be the subject of negative press reporting.
  5. Close family members or associates of public officials are appointed as senior management officials in private companies without meeting the necessary requirements for taking up the position or the hire’s salary or compensation package is not commensurate with market conditions.
  6. Applicant wants to open an account with an unnecessarily complex structure of economic and beneficial ownership possibly involving eclectic wealth planning arrangements or bearer share companies (known to be linked to a public official).
  7. Applicant (who is a public official) expresses urgency on an application (e.g. completion on a mortgage or other time critical transaction).
  8. Explanations for transactions may include the use of words and phrases often used as euphemisms for bribes (for example commission, marketing fees, surcharge, etc.).
  9. Public officials increase their standard of living after the expiration of the officials’ mandate without any legally justifiable reasons. Another possibility would be an inability or refusal by these persons to provide a credible account regarding how the wealth was generated or to provide corroborative support for the source of wealth. In other cases, the corroborative documentation provided raises concerns about authenticity or is otherwise inconsistent with the source of wealth statement.
  10. Opaqueness of government business schemes used to encourage diversity, which should be overtly transparent.
  11. Companies which pay other firms to perform logistical roles in countries where there is a high degree of perceived corruption and which they could perform themselves, in order to transfer the risk to the other firm.
  12. Companies changing the terms of agreements and definitions of intermediaries to avoid registration and regulatory oversight in other countries.
  13. Company wins a public tender with short submission period (i.e. number of days between publication of a call for tenders and the deadline for submission of the bid).