On August 1, the U.S. Senate passed by unanimous consent H.R. 4386, which will permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs. The bill also covers other non-bank financial institutions such as gaming establishments and jewel merchants. The bill passed the House by voice vote in May. The President, who sought this authority for FinCEN in budget requests, is expected to sign the bill.
On August 20, FinCEN announced an action against a casino employee who admitted to violating the Bank Secrecy Act by willfully causing the casino to fail to file certain reports. FinCEN asserted based in part on information obtained from an undercover investigation that the employee helped high-end gamblers avoid detection of large cash transactions by agreeing not to file either Currency Transaction Reports or Suspicious Activity Reports as required under the BSA. FinCEN ordered the employee to pay a $5,000 civil money penalty, and immediately and permanently barred him from participating in the conduct of the affairs of any financial institution located in the U.S. or that does business within the U.S.
On August 5, FinCEN issued an advisory, FIN-2014-A006, which provides 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; and (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 including when Enhanced Due Diligence is required; 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 August 1, FinCEN and its Mexican counterpart announced a series of reporting initiatives designed to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement’s concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services (ACS) and other common carriers of currency, FinCEN issued a Geographic Targeting Order (GTO) that requires enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California. FinCEN also issued updated guidance concerning detailed and proper filing of Currency and Monetary Instruments Reports (CMIRs), which are filed when $10,000 or more in currency is moved across the U.S. border.
On July 30, FinCEN released a proposed rule that would amend BSA regulations to clarify and add customer due diligence (CDD) obligations for banks and other financial institutions, including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. The rule would not cover other entities subject to FinCEN regulations that are not already required to have a customer identification program (CIP)—e.g money services businesses—but FinCEN may extend CDD requirements in the future to these, and potentially other types of financial institutions. The proposed rule states that as part of the existing regulatory requirement to have a CIP, covered institutions are already obligated to identify and verify the identity of their customers. The proposed rule would add to that base CDD requirement, new requirements to: (i) understand the nature and purpose of customer relationships; and (ii) conduct ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions. The proposed rule also would add a so-called beneficial ownership requirement, which would require institutions to know and verify the identities of any individual who owns at least 25% of a legal entity, or who controls the legal entity.
FinCEN emphasizes that nothing in the proposal is intended to limit the due diligence expectations of the federal functional regulators or in any way limit their existing regulatory discretion. To that end, the rule would incorporate the CDD elements on nature and purpose and ongoing monitoring into FinCEN’s existing AML program requirements, which generally provide that an AML program is adequate if, among other things, the program complies with the regulation of its federal functional regulator governing such programs. FinCEN does not believe that the new CDD requirements will require covered institutions to perform any additional activities or operations, but acknowledges the rule may necessitate revisions to written policies and procedures. FinCEN also recognizes that financial institutions will be required to modify existing customer onboarding processes to incorporate the beneficial ownership requirement. As such, FinCEN proposes an effective date of one year from the date the final rule is issued. Comments on the proposal are due 60 days from publication of the proposal in the Federal Register.
On July 18, FinCEN published SAR Stats—formerly called By the Numbers—an annual compilation of numerical data gathered from the Suspicious Activity Reports (SARs) filed by financial institutions using FinCEN’s new unified SAR form and e-filing process. Among other things, the new form and process were designed to allow FinCEN to collect more detailed information on types of suspicious activity. As such, FinCEN describes the data presented in this first SAR Stats issue as “a new baseline for financial sector reporting on suspicious activity.” The primary purpose of the report is to provide a statistical overview of suspicious activity developments, including by presenting SAR data arranged by filing industry type for the more than 1.3 million unique SARs filed between March 1, 2012 and December 31, 2013. In addition, the redesigned annual publication includes a new SAR Narrative Spotlight, which focuses on “perceived key emerging activity trends derived from analysis of SAR narratives.” The inaugural Spotlight examines the emerging trend of Bitcoin related activities within SAR narrative data. It states that FinCEN is observing a rise in the number of SARs flagging virtual currencies as a component of suspicious activity, and provides for potential SAR filers an explanation of virtual currencies and the importance of SAR data in assessing virtual currency transactions.
On July 14, the OMB’s Office of Information and Regulatory Affairs (OIRA) concluded its review of a long-awaited FinCEN proposal to establish customer due diligence requirements for financial institutions, sending the rule back to FinCEN. In its spring 2014 rulemaking agenda, Treasury updated the timeline for the rule to indicate it could be proposed in July with a 60 day comment period. OIRA’s public records do not provide information about what, if any, changes OIRA sought or required prior to FinCEN finalizing the proposal. The public portion of the FinCEN rulemaking has been ongoing since February 2012 when FinCEN released an advance notice of proposed rulemaking to solicit comment on potential requirements for financial institutions to (i) conduct initial due diligence and verify customer identities at the time of account opening; (ii) understand the purpose and intended nature of the account; (iii) identify and verify all customers’ beneficial owners; and (iv) monitor the customer relationship and conduct additional due diligence as needed. FinCEN subsequently held a series of roundtable meetings, summaries of which it later published.
On July 17, FinCEN named FBME Bank Ltd., formerly known as the Federal Bank of the Middle East, as a foreign financial institution of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act. As detailed in a notice of finding, FinCEN asserts that the bank attracts illicit finance businesses by soliciting high-risk customers and promoting its weak AML controls. FinCEN explains that the bank changed its country of incorporation numerous times, partly due to its inability to adhere to regulatory requirements, and has established itself with a nominal headquarters in Tanzania. However, according to FinCEN, it transacts over 90 percent of its global banking business through branches in Cyprus and has taken active steps to evade oversight by the Cypriot regulatory authorities in the recent past. FinCEN is proposing a rule that, once final, will prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for FBME, and for other foreign banks being used to process transactions involving FBME. The proposal also would require covered financial institutions to apply special due diligence to their correspondent accounts maintained on behalf of foreign banks to guard against processing any transactions involving FBME. Comments on the proposed rule are due 60 days after publication in the Federal Register.
On May 28, FinCEN published Advisory FIN-2014-A005, which updates advice related to trade-based money laundering (TBML) to address the increased use of “funnel accounts.” FinCEN explains that individuals or businesses may establish an account in one geographic area that receives multiple cash deposits, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals. FinCEN states that criminal organizations may use wires and checks issued from those accounts to move illicit narcotics proceeds to the accounts of businesses offering trade goods and services. The Advisory details this TBML scheme and offers a number of red flags that could indicate a funnel account is being used as part of such a scheme. FinCEN cautions that because some red flag activities may be legitimate financial activities in appropriate circumstances, financial institutions should evaluate indicators of potential TBML activity in combination with other red flags and the expected transaction activity for the customer before making determinations of suspiciousness. The Advisory reminds institutions of their SAR reporting obligations in the event activities are determined to be suspicious.
On May 20, FinCEN issued Advisory FIN-2014-A004, warning financial institutions about the risk of illicit financial activity conducted by individuals with passports from St. Kitts and Nevis (SKN), which allows individuals to obtain passports through a citizenship-through-investment program. The program offers citizenship to any non-citizen who either invests in designated real estate with a value of at least $400,000, or contributes $250,000 to the SKN Sugar Industry Diversification Foundation. FinCEN believes that illicit actors are using the program to obtain SKN citizenship in order to mask their identity and geographic background for the purpose of evading U.S. or international sanctions or engaging in other financial crime. FinCEN advises financial institutions to conduct risk-based customer due diligence to mitigate the risk that a customer is disguising his or her identity for such an illicit purchase. FinCEN further reminds institutions of SAR filing obligations related to known or suspected illegal activity and potential OFAC obligations.
On May 6, the U.S. House of Representatives passed by voice vote three financial services bills: (i) H.R. 2672, which would require the CFPB to allow individuals and businesses to apply to have an area designated as “rural” for purposes of exemptions to the CFPB mortgage rules; (ii) H.R. 3329, which would require the Federal Reserve Board to allow bank holding companies and savings and loan holding companies with assets of less than $1 billion to incur higher amounts of debt when acquiring other banks than are allowed for larger holding companies—the current asset ceiling for that special allowance is $500 million and applies only to bank holding companies; and (iii) H.R. 4386, which would permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs that provide international remittance transfer services and other non-bank financial institutions such as gaming establishments and jewel merchants.
On April 29, FinCEN issued five rulings in response to companies who sought clarification regarding whether their company is a money service business under the BSA. In FIN-2014-R006, FinCEN determined that a company that operates an online real-time deposit, settlement, and payment services platform for banks, businesses, and consumers is considered a money transmitter, not a provider of prepaid access, and should be registered as a money services business under BSA regulations. In two other rulings—FIN-2014-R004 and FIN-2014-R005— FinCEN clarified the exemption from the money transmitter definition for persons that accept and transmit funds “only integral to the sale of goods or the provision of services, other than money transmission services.” FinCEN determined that the escrow services at issue in FIN-2014-R004 and the transaction management services at issue in FIN-2014-R005 fit within that exemption because the acceptance and transmission of funds in these cases is not a separate and discrete service in addition to the underlying service, but instead is a necessary and integral part of the service itself. Therefore, these companies are not considered to be money transmitters subject to registration. FinCEN determined in FIN-2014-R007 that a company that rents computer systems used to mine virtual currencies is not a money transmitter. Finally, in FIN-2014-R008, FinCEN determined that although the company, which uses armored cars to facilitate the exchange of coins and cash, does not qualify for the “armored car” exemption in the money transmitter definition, it is still not considered a money transmitter. FinCEN stated that the transportation of currency and/or coin of certain denominations from the company’s vault to the customer’s location and the return transportation of currency and/or coin in the exact amount of the change provided to the company’s own vault does not constitute the acceptance of value from one person and the transportation of such value to another person or location.
On April 24, FinCEN released an assessment of civil money penalty against a Florida money services business (MSB) and its owner for failing to comply with the Bank Secrecy Act’s program, reporting, and recordkeeping requirements. FinCEN determined that since at least 2008, the MSB, which operated as both an independent check casher and as a foreign currency exchange dealer, willfully violated the BSA by failing to register with FinCEN and failing to develop and implement an effective AML program. Specifically, FinCEN found that the MSB lacked adequate AML programs to verify the identities of persons conducting transactions, to monitor for suspicious activities, to identify currency transactions exceeding $10,000, and to ensure that the MSB filed the required currency transaction reports (CTRs) in a timely manner. According to FinCEN, the MSB also failed to implement internal controls sufficient for creating and retaining adequate BSA records related to currency exchange, and its owner and compliance officer failed to conduct a BSA/AML risk assessment. As a result of the compliance deficiencies, FinCEN determined the MSB failed to file, or failed to timely file CTRs on $4.5 million worth of transactions. The MSB and its owner admitted to these determinations and agreed to pay a $10,000 penalty.
On April 11, the Treasury Department submitted to the OMB’s Office of Information and Regulatory Affairs (OIRA) FinCEN’s long-awaited proposed rule to establish customer due diligence requirements for financial institutions. Under executive order, each agency is required to submit for regulatory review rules resulting from “significant regulatory actions,” and OIRA has 90 days to complete or waive the review. The public portion of the FinCEN rulemaking has been ongoing since February 2012 when FinCEN released an advance notice of proposed rulemaking to solicit comment on potential requirements for financial institutions to (i) conduct initial due diligence and verify customer identities at the time of account opening; (ii) understand the purpose and intended nature of the account; (iii) identify and verify all customers’ beneficial owners; and (iv) monitor the customer relationship and conduct additional due diligence as needed. FinCEN subsequently held a series of roundtable meetings, summaries of which it later published.
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.