On March 25, FinCEN issued an advisory notice, FIN-2014-A003, in which it provided guidance to financial institutions for reviewing their obligations and risk-based approaches with respect to certain jurisdictions. The Financial Action Task Force (FATF) recently updated its lists of jurisdictions that appear in two documents: (i) jurisdictions that are subject to the FATF’s call for countermeasures or Enhanced Due Diligence as a result of the jurisdictions’ Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) deficiencies, or (ii) jurisdictions identified by the FATF as having AML/CFT deficiencies. The advisory notice (i) summarizes the changes made by the FATF; (ii) provides specific guidance regarding jurisdictions listed in each category; and (iii) reiterates that if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution must file a Suspicious Activity Report.
On March 25, California Attorney General (AG) Kamala Harris announced that she and four other state AGs—Suthers (CO), Bondi (FL), Cortez Masto (NV), and King (NM)—signed a letter of intent with the President of the National Banking and Securities Commission of Mexico to establish a bi-national working group on money laundering enforcement. The working group will be tasked with (i) establishing the scope of coordination between Mexico and U.S. state AGs on money laundering enforcement issues; (ii) developing a plan for mutual technical assistance and training on combating money laundering; and (iii) sharing best practices on money laundering enforcement techniques and other enforcement issues of mutual concern, including the impact of money laundering on the border region of the U.S. and Mexico.
Recently, the DOJ issued its first opinion release of 2014 regarding application of the FCPA. In this instance, an investment bank and securities issuer who was a majority shareholder of a foreign financial services company sought the DOJ’s opinion with regard to the bank’s purchase of the remaining minority interest from a foreign businessman who now serves as a senior foreign official. The DOJ determined that based on the facts and representations described by the requestor, the only purpose of the payment to the official would be consideration for the minority interest. The DOJ explained that although the FCPA generally prohibits an issuer from corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing business to” the issuer, it does not “per se prohibit business relationships with, or payments to, foreign officials.” In this situation, the DOJ determined, based on numerous, fact-intensive considerations, that the transfer of value as proposed would not be prohibited under the FCPA. The DOJ found no indications of corrupt intent, citing, among other things, the proffered purpose to sever the parties’ existing financial relationship to avoid a conflict of interest, and the use of a reasonable alternative valuation model. The DOJ also determined the bank demonstrated that the parties would appropriately and meaningfully disclose their relationships before the sale closed, and that the bank would implement strict recusal and conflict-of-interest-avoidance measures to prevent the shareholder/foreign official from assisting the bank in obtaining or retaining business. As with all Opinion Releases under the FCPA, the DOJ cautioned that the opinion has no binding application to any other party.
On March 19, the DOJ announced that Marubeni Corporation, a Japanese trading company, agreed to plead guilty to violating the FCPA by participating in a seven-year scheme to bribe high-ranking government officials in Indonesia to help the company secure a contract for a power project. The DOJ charged that to conceal the bribes, the company and a consortium partner retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the project. The DOJ asserted, however, that the primary purpose for hiring the consultants was to use them to pay bribes to Indonesian officials.The eight-count criminal information against the company included one count of conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) and seven counts of violating the FCPA. As part of its plea, the company admitted its criminal conduct and agreed to pay a criminal fine of $88 million, subject to the district court’s approval. Sentencing is scheduled for May 15, 2014. Two years ago, the company entered a deferred prosecution agreement and agreed to pay $54.6 million to resolve allegations it acted as an agent for a joint venture in a scheme to bribe Nigerian officials.
New York Financial Services Regulator Urges More Enforcement Against Individuals, Reaffirms Focus On Nonbank Mortgage Servicers
On March 19, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky called on banking regulators to assess whether they are doing enough, particularly with regard to enforcement, to deter or prevent financial crime. In remarks delivered to the Exchequer Club, Mr. Lawsky asserted that true deterrence means focusing not only on corporate liability, but individual accountability. He called on banking regulators to “publicly expose – in great detail – the actual, specific misconduct that individual employees engaged in,” and, where appropriate, ensure individuals face “real, serious penalties and sanctions when they break the law.” Mr. Lawsky is the most recent of several regulators and policymakers to advocate for more individual accountability. Federal enforcement officials, including CFPB Director Richard Cordray and SEC Chair Mary Jo White, have similarly threatened an enhanced enforcement focus on individuals. Earlier this year, U.S. District Judge Jed Rakoff wrote critically of financial fraud enforcement, and suggested “that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.” In addition to his prepared statement on individual enforcement, Superintendent Lawsky devoted a substantial amount of his remarks and Q&A responses to his concerns about nonbank mortgage servicers. He specifically raised concerns about nonbank servicers’ staffing, especially in the context of the single point of contact requirements of the CFPB’s new servicing rules and the agreements certain servicers entered into with the DFS in 2011 and 2012.
On March 17, Senator Elizabeth Warren (D-MA) and Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA) sent a letter requesting a meeting with Attorney General Eric Holder to review the findings of a recent report on the DOJ’s mortgage fraud enforcement efforts. The lawmakers state that the report raises questions about the DOJ’s “commitment to investigate and prosecute crimes such as predatory lending, loan modification scams, and abusive mortgage servicing practices.” They are seeking information from the Attorney General about steps the DOJ will take to ensure that its efforts “to identify and prosecute those responsible for fraudulent mortgage practices are equal to the harms such crimes have caused [the members’] constituents.”
On March 13, the DOJ Office of Inspector General (OIG) issued a report on its audit of the DOJ’s efforts between 2009 and 2011 to pursue alleged mortgage fraud. Of particular note, the report reveals for the first time publicly that as part of a joint effort between HUD and the DOJ related to so-called “high default lenders,” the HUD OIG provided 84 U.S. Attorney Offices (USAOs) with lender default data for potential civil investigations and approximately 40 civil investigations were opened as a result. Much of the report focuses on the DOJ’s limited ability to track its mortgage fraud enforcement efforts. The audit revealed that, as a result of those limitations, the DOJ has repeatedly used inaccurate statistics in public statements about its mortgage enforcement results. Among a series of recommendations, the DOJ OIG suggests that DOJ (i) direct all USAOs to periodically assess any monetary thresholds applied to mortgage fraud cases to ensure they are reasonably based upon the threat within their respective jurisdictions and adequately allow for non-monetary harms that result from mortgage fraud schemes, as well as ensure that law enforcement agencies in their respective districts have a clear understanding of any limiting factors being applied to such cases; (ii) develop a method to capture additional data that will allow DOJ to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization; and (iii) develop a method to readily identify mortgage fraud criminal and civil enforcement efforts for reporting purposes.
On February 27, the Senate Permanent Subcommittee on Investigations (PSI) issued a report and held a hearing related to its multi-year investigation of offshore tax evasion and the DOJ’s efforts to pursue Swiss banks who allegedly aid U.S. citizens in evading taxes. The hearing and report focused on one Swiss bank alleged to have facilitated tax evasion and criticized the DOJ for its supposedly “lax enforcement” approach towards numerous Swiss banks. The report states that U.S. law enforcement authorities have failed to prosecute more than a dozen Swiss banks the PSI staff believes facilitated U.S. tax evasion, and failed to take action against the thousands of U.S. citizens who have been revealed as tax evaders. The report also criticizes Swiss officials who the PSI alleges have worked to preserve Swiss bank secrecy by intervening in U.S. criminal investigations and hampering progress. The PSI report urges the DOJ to “use all available U.S. legal means” to obtain the names of alleged tax evaders, and to hold accountable “tax haven banks that aided and abetted” in the alleged evasion. The report also states that U.S. banking regulators should “institute a probationary period of increased reporting requirements for, or to limit the opening of new accounts by, tax haven banks that enter into deferred prosecution agreements, non-prosecution agreements, settlements, or other concluding actions with law enforcement for facilitating U.S. tax evasion, taking into consideration repetitive or cumulative misconduct.” Finally, the subcommittee recommended that the Senate promptly ratify a pending U.S.-Switzerland tax treaty that would allow for increased sharing of information by the Swiss.
On February 20, in remarks to the Florida International Bankers Association Anti-Money Laundering Conference, FinCEN Director Jennifer Shasky Calvery reviewed FinCEN’s key initiatives over the past year and outlined priorities going forward. She discussed FinCEN’s efforts with regard to virtual currency risks and stated that it is important for financial institutions that deal in virtual currency to put effective AML/CFT controls in place. She noted that it is also important for all stakeholders to keep virtual currency concerns in perspective given the relatively small size of the market. FinCEN is growing increasingly concerned with third party money launderers who layer transactions, create or use shell or shelf corporations, use political influence to facilitate financial activity, or engage in other schemes to infiltrate financial institutions and circumvent AML controls. FinCEN intends to pursue such actors regardless of where they are located. Director Shasky Calvery also reiterated concerns about securities firms that offer services similar to banks, and promised continued focus on threats posed by trade-based money laundering. With regard to its policy initiatives, FinCEN intends to engage stakeholders in a discussion of “balancing the policy motivations behind data privacy and secrecy laws in different jurisdictions with the need for an appropriate level of transparency to combat money laundering and terrorist financing.” The Director noted that this issue is particularly critical in the area of correspondent banking.
On January 30, in remarks to SIFMA’s AML and Financial Crimes Conference, FinCEN Director Jennifer Shasky Calvery stressed the importance of establishing a “culture of compliance” at financial institutions to support effective AML safeguards. The Director’s comments reinforce similar remarks made in recent months by both the Deputy U.S. Attorney General and Comptroller Curry. And like Comptroller Curry, Ms. Shasky Calvery highlighted the need for better information sharing not only within institutions but between institutions. FinCEN agrees with industry feedback that the agency needs to improve its own ability to share information. Also part of a broader theme among enforcement authorities, the Director explained that financial institutions should take responsibility when their actions violate the BSA, not only by admitting to the facts alleged by FinCEN but also by acknowledging a violation of the law. She highlighted specific risks in the securities sector including those related to the use of cash, and explained that securities firms that provide bank-like services need to consider the vulnerabilities associated with engaging in such services and must ensure that their compliance programs are commensurate with those risks.
On January 30 the CFPB, the Department of Defense (DOD), the Department of Veterans Affairs (VA), the FTC, and other federal agencies announced the launch of a new online system designed to collect information from veterans, current servicemembers, and their families regarding negative experiences at education institutions and training programs administering the Post-9/11 GI Bill, DOD Military Tuition Assistance, and other military-related education benefit programs. The new system is modeled after the CFPB’s complaint system and is intended to help the government identify and address unfair, deceptive, and misleading practices. The complaint system, which is comprised of the DOD’s Postsecondary Education Complaint System and to the VA GI Bill Feedback System, was developed in accordance with the April 2012 Executive Order 13607, Establishing Principles of Excellence for Educational Institutions Serving Service Members, Veterans, Spouses, and Other Family Members. That order required, among other things, the Secretaries of Defense and Veterans Affairs to “create a centralized complaint system for students receiving Federal military and veterans educational benefits to register complaints that can be tracked and responded to by the Departments of Defense, Veterans Affairs, Justice, and Education, the CFPB” and other relevant agencies.
On January 27, the U.S. Attorney for the Southern District of New York announced the unsealing of criminal charges against an underground Bitcoin exchanger and the CEO of a Bitcoin exchange company registered as a money services business for allegedly engaging in a scheme to sell over $1 million in Bitcoins to users of “Silk Road,” the website that is said to have enabled its users to buy and sell illegal drugs anonymously and beyond the reach of law enforcement. Each defendant is charged with conspiring to commit money laundering and operating an unlicensed money transmitting business. The CEO of the exchange company is also charged with willfully failing to file any suspicious activity report regarding the exchanger’s illegal transactions, in violation of the Bank Secrecy Act. The U.S. Attorney stated that the charges demonstrate his office’s intention and ability to “aggressively pursue those who would coopt new forms of currency for illicit purposes.” The complaint alleges that over a nearly two-year period, the exchanger ran an underground Bitcoin exchange on the Silk Road website, selling Bitcoins to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he allegedly filled the orders through a company based in New York, which was designed to charge customers for exchanging cash for Bitcoins anonymously. The exchanger allegedly obtained Bitcoins with the company’s assistance, and then sold the Bitcoins to Silk Road users at a markup. The exchange company CEO, who was also its Compliance Officer, allegedly was aware that Silk Road was a drug-trafficking website, and also knew that the exchanger was operating a Bitcoin exchange service for Silk Road users. The government alleges that the CEO knowingly facilitated the exchanger’s business, personally processed orders, gave discounts on high-volume transactions, and failed to file a single suspicious activity report.
On January 17, New York Attorney General (AG) Eric Schneiderman announced that Gary Fishman will lead a new Criminal Enforcement and Financial Crimes Bureau. The bureau, which expands the Attorney General’s former Criminal Prosecutions Bureau, will focus on combating complex financial crimes in (i) bank and financial institution fraud; (ii) securities and investment fraud; (iii) money laundering; (iv) tax crimes; (v) mortgage fraud; (vi) investment schemes; and (vii) insurance fraud. The bureau also intends to form a Financial Intelligence Section that will review banking, regulatory, law enforcement, and open-source data to identify trends that will enhance the investigation and prosecution of financial crime schemes. Mr. Fishman has served as Senior Investigative Counsel since joining the AG’s office in 2012. Prior to joining the AG’s office, Mr. Fishman was the Managing Director of Investigative Group International and before that served as a New York County District Attorney’s Office prosecutor for more than 15 years, including as the Principal Deputy Chief of the Major Economic Crimes Bureau in the Investigation Division.
On January 7, the U.S. Attorney for the Southern District of New York, the OCC, and FinCEN announced the resolution of criminal and civil BSA/AML violations by a major financial institution in connection with the bank’s relationship with Bernard L. Madoff Investment Securities and Madoff Securities’ Ponzi scheme. The bank entered into a deferred prosecution agreement (DPA) to resolve two felony violations of the Bank Secrecy Act: (i) that the bank failed to enact adequate policies, procedures, and controls to ensure that information about the bank’s clients obtained through other lines of business – or outside the United States – was shared with compliance and AML personnel; and (ii) that the bank violated the BSA by failing to file a Suspicious Activity Report on Madoff Securities in October 2008. According to the U.S. Attorney, pursuant to the DPA the bank (i) agreed to waive indictment and to the filing of a Criminal Information; (ii) acknowledged responsibility for its conduct by, among other things, stipulating to the accuracy of a detailed Statement of Facts; (iii) agreed to pay a $1.7 billion non-tax deductible penalty in the form of a civil forfeiture (the largest ever financial penalty imposed by the DOJ for BSA violations); and (iv) agreed to various cooperation obligations and to continue reforming its BSA/AML compliance programs and procedures. In a separate action, the OCC levied a $350 million civil money penalty to resolve parallel BSA/AML allegations included in a January 2013 cease and desist order. Finally, the bank consented to a FinCEN assessment pursuant to which it must pay an additional $461 million.
On January 9, the SEC and the DOJ announced the resolution of parallel FCPA enforcement actions against a major U.S. extractive industries firm and one of its subsidiaries. The actions related to improper payments to officials of a foreign government, and to a “middle man” serving as an intermediary to secure contracts to supply a government controlled aluminum plant. The SEC’s cease and desist order asserts the parent firm lacked sufficient internal controls to prevent and detect bribes made through foreign subsidiaries, which were improperly recorded in the parent company’s books and records as legitimate commissions or sales. The order directs the parent firm to disgorge $175 million, $14 million of which would be satisfied by forfeiture required in the parallel DOJ action. As a result of that action, the parent company pleaded guilty to one count of violating the FCPA’s anti-bribery provisions and consented to entry of a judgment that requires the company to pay a criminal fine of $209 million and forfeit $14 million. The plea agreement also requires the parent firm to maintain and implement an enhanced global anti-corruption compliance program, and both the parent and subsidiary companies must cooperate with the DOJ in its continuing investigation of individuals and institutions that were involved in the subject activities.