On February 27, FinCEN announced a $1.5 million civil money penalty against a Pennsylvania-based community bank for violating the BSA. Of that amount, $500,000 will go to the OCC, the bank’s primary regulator, for BSA violations. According to FinCEN, the bank admitted failing to file suspicious activity reports on transactions involving a former state judge who received over $2.6 million in personal payments in connection with a judicial scheme involving the construction, operation, and expansion of juvenile detention centers.
FinCEN Assesses $75,000 Penalty Against Check Casher Business for Violating Anti-Money Laundering Laws
On March 18, the Financial Crimes Enforcement Network (FinCEN) assessed a $75,000 civil money penalty against a Colorado check casher and its general manager and ordered it to cease all business activities for “willfully violating” registration, reporting, and anti-money laundering provisions of the Bank Secrecy Act (BSA). The Colorado-based check casher had been the subject of three BSA compliance examinations by the Internal Revenue Service, “all of which found significant and repeated violations.” Under the BSA, money services business are required to implement anti-money laundering controls, conduct internal compliance reviews, and provide compliance training for all staff in an effort to prevent the facilitation of money laundering and the financing of terrorist activities. The Colorado check casher failed to employ such programs, which resulted in a significant amount of untimely and inaccurate currency transaction reports.
Earlier this month, an Atlantic City-based casino was fined $10 million for violating the BSA – more specifically, for failing to (i) create and implement an adequate anti-money laundering program; (ii) establish an effective system of internal controls; and (iii) adequately file currency transaction reports or maintain other required records. Many of the violations that occurred in 2010 through 2012 were previously identified by regulators and brought to the attention of the casino. The federal government will not collect the $10 million civil penalty, but will receive an unsecured claim in the casino’s bankruptcy, pending approval from the bankruptcy judge.
On January 27, FinCEN fined a New York securities broker-dealer firm $20 million for violating the BSA. According to the press release, the firm failed to (i) establish an adequate anti-money laundering program; (ii) conduct proper due diligence on a foreign correspondent account; and (iii) comply with Section 311 of the USA Patriot Act. These failures resulted in customers engaging in suspicious trading, including prohibited third-party activity and illegal penny stock trading, without it being detected or reported. The firm must pay $10 million of the $20 million penalty to the US Department of the Treasury. The remaining $10 million will be paid to the SEC to settle a parallel enforcement action.
On January 6, FinCEN released a fact sheet highlighting its Section 314(a) Program of the USA PATRIOT Act. Under the Section 314(a) Program, federal, state, local and foreign law enforcement are able to contact, through FinCEN, over 43,000 points of contact at more than 22,000 financial institutions to locate accounts and transactions of individuals or organizations engaged in, or reasonably suspected of, terrorism or money laundering. According to FinCEN, since its inception, the 314 Program has aided in 1,909 money laundering and 459 terrorism/terrorist financing criminal investigations. In addition, based on feedback from law enforcement, the Program has contributed to 95 percent of 314(a) requests lead to an arrest or indictment.
Recently, FinCEN announced a $1 million civil money penalty against the former Chief Compliance Officer (CCO) of a large financial services company for allegedly violating the Bank Secrecy Act (BSA) and its implementing regulations. In its complaint, FinCEN alleges that the CCO, from 2003 through 2008, failed to implement and maintain an effective AML program and file timely Suspicious Activity Reports as required by the BSA. As a result, the company’s money transfer system was used to carry out fraudulent activities causing customers to incur substantial losses. In addition to the penalty, FinCEN is seeking to prohibit the former CCO from participating, directly or indirectly, in the affairs of any financial institution.
On November 25, FinCEN fined a small Florida-based credit union $300,000 in civil monetary penalties for violating the Bank Secrecy Act (BSA). From 2009 through 2014, FinCEN charged that, among other deficiencies within its anti-money laundering program, the credit union lacked proper internal controls and failed to designate a BSA compliance officer to monitor suspicious transactions. The credit union admitted that it violated Section 314(a) of the USA PATRIOT ACT, which requires financial institutions to search their records of accounts and transactions of individuals who may be involved in money laundering or terrorist financing activities. The credit union, with assets of $4 million and five employees, contracted with a third party vendor to provide services and subaccounts to 56 money services businesses located in Central America, Middle East, and Mexico. FinCEN stated that 90% of the credit union’s annual revenue was generated from these accounts.
On November 10, FinCEN released a statement to reiterate that banking organizations can serve Money Services Businesses (MSB) while meeting obligations under the Bank Secrecy Act. FinCEN noted that there is concern that banks may be terminating the accounts of MSBs on a wholesale basis because of potential regulatory scrutiny and that as a result MSBs are losing access to banking services. FinCEN stated that they do “not support the wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk.” Rather, the risks presented by a given MSB can vary and, therefore, financial institutions should assess the risks on a case-by-case basis. FinCEN expects that banking organizations will manage the risks associated with MSB accounts and are committed to addressing the “wholesale de-banking of an important part of the financial system.”
On November 2, New York Superintendent Lawsky delivered remarks at the Money 20/20 Conference on the state’s virtual currency and Bitcoin regulation. In October, Lawsky publicly stated that, as a result of the comments received on New York’s proposed BitLicense framework, there would be important changes made to the July 17 proposal. This week, on behalf of the NYDFS, Lawsky announced that additional changes are being considered to address “concern about the compliance costs of regulation on new or fledging virtual currency enterprises.” Specifically, Lawsky introduced the concept of a Transitional BitLicense, which would allow certain small, money transmitting startups to begin operating without huge compliance costs. Lawsky noted four main factors the NYDFS would consider when deciding whether or not to grant a Transitional BitLicense: (i) the nature and scope of the business and the associated risks for consumers; (ii) projected transactional and business volume; (iii) registration status as a Money Services Business with FinCEN; and (iv) previously established mitigating risk controls.
On October 27, FinCEN issued two administrative rulings to companies seeking guidance on whether they must register as MSBs and be subject to the required reporting, recordkeeping, and monitoring obligations. In its first letter, a company queried whether its plans to set up a virtual currency trading and booking platform, similar to a traditional securities or commodities exchange, would make it subject to FinCEN regulations. FinCEN responded that the proposed virtual trading platform would be classified as an MSB. As a result, the company would have to register as an MSB as defined under the BSA. In its second ruling, a company asked whether a bitcoin payment system would be subject to the agency’s regulations. The payment system would accept customers’ credit card payments and transfer the payments to merchants in the form of bitcoin. FinCEN ruled that if the company sets up the payment system, the company would be classified as a money transmitter, and subject to BSA regulations, because “it engages as a business in accepting and converting the customers’ real currency into virtual currency for transmission to the merchant.”
BuckleySandler hosted a webinar entitled “FinCEN’s Proposed Rule Amending Customer Due Diligence Obligations,” on September 18, 2014, as part of the ongoing FinCrimes Webinar Series. Panelists included James Cummans, Vice President of BSA/AML Operations at TCF Bank; Jacqueline Seeman, Managing Director and Global Head of KYC at Citigroup, Inc.; Sarah K. Runge, Director, Office of Strategic Policy at the U.S. Department of Treasury; and, Amy Davine Kim, Counsel at BuckleySandler LLP. The following is a summary of the guided conversation moderated by Jamie Parkinson, partner at BuckleySandler, and key take-aways to prepare for comments to the proposed rule and implementation of the new rule, once final, at your financial institution.
Key Tips and Take-Aways:
- Assess and prepare your organization’s financial and personnel resources to make sure that the appropriate resources are in place to comply with the proposed rule once it is finalized. Certain technical aspects of implementation may be complicated depending on the financial institutions’ existing processes.
- Boards of Directors should participate in and be informed of the process.
- Institutions that are exempt from the rule, including money services businesses (“MSBs”), should also consider how this rule would affect their operations. FinCEN has announced that this is an incremental rule making, meaning the rule could extend to additional entities in the future.
- Covered financial institutions should consider the implications and compliance issues associated with the proposed rule and actively engage in the comment period. It is clear that FinCEN took certain industry concerns into account from the earlier Advance Notice of Proposed Rulemaking (“ANPRM”), so any potential issues should again be raised.
On September 11, in FIN-2014-A008, FinCEN advised financial institutions on how to detect and report suspicious financial activity that may be related to human smuggling and/or trafficking. The advisory describes the differences between human smuggling and trafficking, and describes how each is conducted. FinCEN suggests that financial institutions consider evaluating indicators of potential human smuggling or trafficking activity in combination with other red flags and factors, such as expected transaction activity, before making determinations of suspiciousness. Additionally, FinCEN states that in making a determination of suspiciousness, financial institutions are encouraged to use previous FinCEN advisories and guidance as a reference when evaluating potential suspicious activity, including a May 2014 advisory on the use and structure of funnel accounts. The advisory also attached two appendices that provide examples of human smuggling and trafficking red flags. FinCEN advises institutions that in evaluating whether certain transactions are suspicious and/or related to human smuggling or trafficking, they should share information with one another as appropriate, under Section 314(b) of the USA PATRIOT Act. If a financial institution knows, suspects, or has reason to suspect that a transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction, the financial institution should file a SAR with the terms “Advisory Human Smuggling” and/or Advisory Human Trafficking” in the narrative and the Suspicious Activity Information. The narrative should also include an explanation of why the institution knows, suspects, or has reason to suspect that the activity is suspicious. The advisory further notes that a potential victim of human smuggling or trafficking should not be reported as the subject of the SAR, but rather to provide all available information on the victim in the narrative portion of the SAR.
On August 4, 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published a Notice of Proposed Rulemaking (“NPRM”) that would amend existing Bank Secrecy Act (“BSA”) regulations intended to clarify and strengthen customer due diligence (“CDD”) obligations for banks, securities broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities (collectively, “covered financial institutions”).
In drafting the modifications, FinCEN clearly took into consideration comments responding to its February 2012 Advance Notice of Proposed Rulemaking (“ANPRM”), as the current proposal appears narrower and somewhat less burdensome on financial institutions. Comments on the proposed rulemaking are due October 3, 2014.
Overview: Under the NPRM, covered financial institutions would be obligated to collect information on the natural persons behind legal entity customers (beneficial owners) and the proposed rule would make CDD an explicit requirement. If adopted the NPRM would amend FinCEN’s AML program rule (the four pillars) by making CDD a fifth pillar.
FinCEN Rules Regulations on Money Services Businesses Do Not Apply to ISOs and Exempt Payment Processors
On August 27, FinCEN issued FIN-2014-R009, an administrative ruling clarifying that Independent Sales Organizations (“ISOs”) and exempt payment processors are not money transmitters subject to Bank Secrecy Act (“BSA”) regulations applicable to Money Services Businesses (“MSBs”). Under BSA MSB regulations, the term “money transmitter” applies to any person that provides money transmission services or otherwise engages in the transfer of funds. The term “money transmission services” includes the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. Applying these standards, FinCEN determined that BSA MSB regulations do not apply to an ISO, so long as it: (i) merely solicits merchants to offer them the credit and debit card processing services of two counterparties; and (ii) does not take possession or control of merchant funds at any point. However, FinCEN concluded that BSA MSB regulations will apply to a payment processor unless the payment processor qualifies for the payment processor exemption established by 31 CFR § 1010.100(ff)(5)(ii)(B) and clarified by FIN-2013-R002. Under this exemption, BSA MSB regulations do not apply to a payment processor, so long as it: (i) facilitates the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself); (ii) operates through clearance and settlement systems that admit only BSA-regulated financial institutions; (iii) provides its services pursuant to a formal agreement; and (iv) the agreement itself is at a minimum with the seller or creditor that provides the goods or services and receives the funds. For a copy of the ruling, please see: Application of Money Services Business Regulations to a Company Acting as an Independent Sales Organization and Payment Processor.
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.