On January 19, FinCEN issued an advisory, FIN-2016-A001, to provide financial institutions with guidance on reviewing their obligations and risk-based approaches with respect to certain jurisdictions. According to the advisory, on October 23, the Financial Action Task Force (FATF) updated two documents identifying the following: (i) jurisdictions that are either subject to the FATF’s call to apply countermeasures, or to Enhanced Due Diligence (EDD) due to their AML/CFT deficiencies; and (ii) jurisdictions with AML/CFT deficiencies. FinCEN’s recently issued advisory summarizes the changes made to the respective lists and reiterates that a financial institution must file a Suspicious Activity Report if it “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.”
On February 2, the European Commission issued a fact sheet regarding its plan to strengthen the fight against terrorist financing, posing and answering questions on topic areas including, but not limited to: (i) the measures the EU has already taken to combat the financing of terrorism; (ii) how the EU addresses terrorist financing risks linked to high-risk third countries; (iii) the possibility of defining a legal framework for freezing the assets of terrorists posing a threat to EU internal security; (iv) the risks associated with prepaid cards as used by terrorists; and (v) how the EU tackles the movement of large volumes of cash across borders. The fact sheet frequently refers to the Fourth Anti-Money Laundering package, which was adopted in May 2015 and, among other things, seeks to protect credit and financial institutions against the risks associated with money laundering and terrorist financing.
U.S. FinCEN Issues Geographical Targeting Orders Requiring Reporting of High-End Cash Purchases and Buyers of Residential Real Estate in Manhattan and Miami
On January 13, FinCEN issued two Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to provide identification for certain “all-cash” buyers of high end real estate, and to report such transactions. One GTO focuses on the Borough of Manhattan in New York City, New York and the other focuses on Miami-Dade County, Florida.
According to FinCEN, natural persons may be purchasing real estate without bank financing and through LLCs or “other opaque structures” in an attempt to hide their assets and identity. FinCEN commented: “Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with money laundering vulnerabilities associated with all-cash real estate transactions.” The two GTOS will be effective from March 1, 2016 through August 27, 2016, and will require certain title insurance companies to “record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing.” Read more…
District Court Denies Motion to Dismiss, Rules Compliance Officers Responsible for AML Program Failures
On January 8, the U.S. District Court of Minnesota ruled that individual officers of financial institutions may be held responsible for ensuring compliance with anti-money laundering laws under the Bank Secrecy Act (BSA). U.S. Dep’t of Treasury v. Haider, No. 15-cv-01518, WL 107940 (Dist. Ct. Minn. Jan. 8, 2016). In May 2015, defendant Thomas Haider filed a motion to dismiss the U.S. Department of the Treasury’s December 2014 complaint against him. The Treasury’s complaint alleged that Haider failed in his responsibility as the Chief Compliance Officer for an international money transfer company to ensure that “the Company implemented and maintained an effective AML program and complied with its SAR-filing obligations.” The complaint sought a $1 million judgment against Haider and enjoined him from working for, either directly or indirectly, any “financial institution” as defined in the BSA. In his motion to dismiss, Haider contended that the Treasury’s complaint should be dismissed because, among other reasons, 31 U.S.C. § 5318(a) permits the imposition of a penalty for AML program failures against an entity, not an individual. However, the District Court of Minnesota dismissed Haider’s motion, ruling that the BSA’s more general civil penalty provision, § 5321(a)(1), could subject a partner, director, officer, or employee of a domestic financial institution to civil penalties for violations “of any provision of the BSA or its regulations, excluding the specifically excepted provisions.” Read more…
On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.
On December 30, FinCEN announced a civil money penalty of $200,000 against a Los Angeles-based precious metals business – a financial institution as defined by the BSA – and its owner and compliance officer. The company and the two individuals admitted to willfully violating federal AML laws by (i) failing to adequately asses its own risk; and (ii) failing to conduct due diligence on its highest-risk customers. Specifically, the business did not have an AML program in place until 2011, five years after the IRS instructed it to establish one. In 2013, IRS examiners found that the company’s recently-established AML program did not ensure compliance with the BSA and, as a result, the company “failed to appropriately assess its money laundering to terrorist financing risks, conducted almost no due diligence on money laundering and terrorist financing, conducted almost no due diligence on many of its highest risk customers, and failed to implement effective procedures to identify red flags or to conduct inquiries when such red flags were present, among other things.” In addition to the civil money penalty, the company and the two individuals agreed that, until 2020, they would: (i) retain an auditor; (ii) provide a comprehensive annual report to FinCEN detailing the implementation of the company’s improved AML program; and (iii) annually provide FinCEN with a copy of the company’s AML training program, certifying attendance and testing results of the program.
On December 16, the OCC released its Semiannual Risk Perspective report to provide an overview of supervisory concerns for the federal banking system, including operational and compliance risks. According to the report, which covers data through June 30, 2015, risks relating to strategic, compliance, and interest rates remain unchanged, but risks connected to underwriting and cybersecurity continue to grow. Notable findings in the report reveal that (i) the low interest rate environment has led banks to reevaluate risk tolerance and extend their reach for yield; and (ii) banks are responding to competitive pressures and growth objectives by adopting a more relaxed approach toward credit underwriting standards and practices, particularly in high-growth loan segments, such as indirect auto, commercial and industrial, and multifamily.
On December 17, FinCEN announced a $650,000 settlement with a “card club” gaming establishment in California for willfully violating the program and reporting requirements of the Bank Secrecy Act (BSA). The gaming establishment allegedly trained its staff using misleading and inaccurate AML policy, which either failed to provide instructions at all, or provided incorrect instructions regarding the establishment’s obligations and reporting requirements under the BSA. As an example, the establishment “encouraged employees to provide notice to patrons if they were about to conduct a cash transaction that would put them over the $10,000 threshold for the filing of a Currency Transaction Report, thereby possibly encouraging structured transactions.” In addition, since the establishment’s policy did not contain instructions regarding when an employee should file a Suspicious Activity Report (“SAR”), it failed to file SARs in 2009 and 2010. Card clubs are gaming facilities that generally host only games involving cards; like casinos, card clubs are defined as financial institutions under the BSA, rendering them subject to FinCEN’s rules and regulatory authority.
On December 11, FinCEN announced that Director Jennifer Shasky Calvery and the China Anti-Money Laundering Monitoring and Analysis Center (CAMLMAC) Director-General Luo Yang of the People’s Republic of China signed an MOU “to create a framework to facilitate expanded U.S.-China collaboration, communication, and cooperation between both nations’ financial intelligence units.” As the financial intelligence unit (FIU) for the United States, FinCEN is responsible for combating money laundering and the financing of terrorism by collecting, analyzing, and disseminating financial intelligence to law enforcement and other relevant authorities; as the Chinese counterpart to FinCEN, the CAMLMAC has comparable responsibilities to the Chinese government. The recently announced MOU is intended to provide a “mechanism for sharing information on money laundering and the financing of terrorism in order to prevent illicit actors from abusing either country’s financial systems.”
On December 17, the New York DFS announced an enforcement action against a New York branch of a Pakistan-based bank. The Federal Reserve Bank of New York (FRBNY) and the DFS recently conducted an examination of the branch and found significant risk management and compliance failures with regard to state and federal laws, rules, and regulations relating to anti-money laundering (AML) compliance. Under the terms of the DFS’s order, the branch agreed to reform its policies and procedures to ensure compliance with AML laws. Per the order, the bank must submit to the DFS, within 60 days of the order, a number of written programs regarding its (i) corporate governance and management oversight; (ii) BSA/AML compliance review; (iii) customer due diligence; and (iv) suspicious activity monitoring and reporting. The branch must also hire an independent third-party approved by the DFS and the FRBNY to review the effectiveness of the bank’s compliance program, and to prepare a written report of its findings, conclusions, and recommendations for the program. Because the branch’s compliance with OFAC regulations was insufficient, the order also mandates that the bank retain an independent third-party to examine its U.S. dollar-clearing transactions between October 2014 and March 2015. Significantly, the order does not require the branch to pay a civil money penalty.
OFAC Authorizes Certain Transactions and Activities to Liquidate Honduras-Based Bank, Replaces Previously Issued General License
On December 8, OFAC announced that it issued a revised General License replacing a previously issued license to a Honduras-based bank, which OFAC designated as a Specially Designated Narcotics Trafficker. The General License authorizes certain transactions and activities to assist with the liquidation and winding down of the bank. The revised General License permits liquidation-related transactions and activities that are otherwise prohibited by the Foreign Narcotics Kingpin Sanctions Regulations through 12:01 a.m. on June 12, 2016, with the following exceptions: (i) the unblocking of any blocked property pursuant the Foreign Narcotics Kingpin Sanctions Regulations; or (ii) transactions or dealings that are limited by Executive Order or are with another individual or entity on OFAC’s List of Specially Designated Nationals or Blocked Persons. U.S. persons involved in the bank’s liquidation process must file a report with OFAC’s Licensing Division to include the parties involved, and the type, scope, and dates of the activities conducted.
On December 9, FinCEN Director Calvery highlighted at a joint FBIIC-FSSCC meeting the role of FinCEN in gathering and analyzing financial intelligence and the value of Suspicious Activity Reports (SARs) in curtailing malicious cyber activity. Calvery noted the importance of attribution information, such as IP addresses, timestamps, e-mail addresses, and the nature of the suspicious activity, when included in SAR filings, in helping FinCEN and law enforcement agencies deflect cyber-attacks, detect the source of such attacks, and identify members of money laundering networks. “For example, SARs filed by several different financial institutions played a vital role in furthering an investigation where a regional Florida bank had nearly $7 million fraudulently wired out of one of its accounts,” Calvery explained. Calvery emphasized the importance of including cyber-derived information (such as IP addresses and bitcoin wallet addresses) in SAR filings, noting that while less than two percent of filed SARs contain IP addresses, the information is “incredibly important to FinCEN analysts and law enforcement investigators working to combat cyber-crimes.”
On December 7, FinCEN announced the selection of Andrea Sharrin as Associate Director for its Policy Division, the division responsible for drafting BSA rules as well as addressing strategic policy issues surrounding anti-money laundering and countering terrorist financing. Sharrin currently serves as the Director of the Office of Compliance and Enforcement in FinCEN’s Enforcement Division with responsibility for FinCEN’s BSA compliance and enforcement program. In her new role, Sharrin will lead the team that “defines the framework for protecting the U.S. financial system from money laundering, terrorist financing, and other illicit finance,” and will oversee FinCEN’s regulatory functions, which include drafting guidance and issuing regulatory rulings related to BSA. Sharrin replaces Jamal El-Hindi who was named FinCEN’s Deputy Director earlier this year.
On December 1, the New York DFS announced a proposed anti-terrorism and anti-money laundering regulation, Transaction Monitoring and Filtering Program Requirements and Certifications. Key requirements of the proposed regulation include maintaining programs (i) to monitor transactions after they’ve been executed for potential BSA/AML violations and Suspicious Activity Reporting; and (ii) to ban certain transactions that are prohibited by applicable sanctions, politically exposed persons lists, and internal watch lists. The proposed regulation outlines the programs’ respective minimum requirements, including ensuring that they are based on the Risk Assessment of the institution. Critically, the proposal also requires a Certifying Senior Officer of the regulated financial institutions to file with the Department executed certifications ensuring compliance with the requirements by April 15 of each year.
On November 27, FinCEN published in the Federal Register a Notice to re-open the comment period for its previously issued Final Rule imposing the fifth special measure against FBME Bank Ltd. (FBME). On August 27, the day before the Rule was scheduled to take effect, the United States Court for the District of Columbia Court granted FBME’s motion for a preliminary injunction and enjoined the Final Rule from taking effect. On November 6, the Court granted the Government’s motion for voluntary remand to allow for further rulemaking proceedings. FinCEN’s most recent Federal Register Notice to re-open the comment period for the Final Rule solicits additional comments “particularly with respect to the unclassified, non-protected documents that support the rulemaking and whether any alternatives to the prohibition of the opening or maintaining of correspondent accounts with FBME would effectively mitigate the risk to domestic financial institutions.” Comments are due by January 26, 2016.