Strategy Touts Regulations on Beneficial Ownership, Real Estate and Investment Advisers, but Bemoans Lack of Supervisory Resources for Non-Bank Financial Institutions

The U.S. Department of the Treasury has issued its 2024 National Strategy for Combatting Terrorist and Other Illicit Financing (“Strategy”).  It is a 55-page document which, according to the government’s press release, “addresses the key risks from the 2024 National Money Laundering, Terrorist Financing, and Proliferation Financing Risk Assessments. . . and details how the United States will build on recent historic efforts to modernize the U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) regime, enhance operational effectiveness in combating illicit actors, and embrace technological innovation to mitigate risks.”

The Strategy discusses an enormous list of topics.  Given the breadth of its scope, the Strategy generally makes only very high-level comments regarding any particular topic.  This post accordingly is extremely high level as well, and offers only a few select comments. 

Continue Reading Treasury Issues Broad National Strategy for Combatting Illicit Financing

But Five Justices Express Deep Concern as to Civil Forfeiture Regimes

On May 9, in Culley et al. v. Marshall, the Supreme Court ruled that the U.S. Constitution does not require a preliminary hearing in civil forfeiture cases involving personal property for claimants to raise the “innocent owner” defense. Rather, the Court ruled that a “timely” forfeiture hearing affords claimants due process and that no separate preliminary hearing is constitutionally required. Although Culley arose under Alabama law, it has direct consequences for the forfeiture laws of many states, as well as federal civil forfeiture proceedings, in which claimants can raise the innocent owner defense.

It is important to remember that Culley involves personal property: as the Court noted, existing Supreme Court law allows States to immediately seize personal property (i.e., cars, currency, art, jewelry, etc.) subject to civil forfeiture if the property otherwise could be removed, destroyed, or concealed before a forfeiture hearing. Calero-Toledo v. Pearson Yacht Leasing Co., 416 U. S. 663, 679–680 (1974). In contrast, existing Supreme Court law provides that States ordinarily may not seize real property (i.e., land and structures) before providing notice and a hearing. United States v. James Daniel Good Real Property, 510 U. S. 43, 62 (1993). Moreover, States and Congress of course still can craft statutes which afford protections beyond the bare minimum required by the Constitution.

Finally, and more importantly, the dissenting and concurring opinions make clear that the legal and social debates over civil forfeiture practices, and their potential abuse, are far from over.

Continue Reading Supreme Court:  Innocent Owners of Forfeited Personal Property Must Wait

On April 20, 2024, the Pennsylvania Department of Banking and Securities (“DoBS”) issued a policy statement (“Policy Statement”) to “clarify” that the Department’s interpretation of the term “money” in the Pennsylvania Money Transmitter Act (“MTA”) includes “virtual currency, such as Bitcoin.”  The MTA provides in part that “[n]o person shall engage in the business of transmitting money by means of a transmittal instrument for a fee or other consideration with or on behalf of an individual without first having obtained a license from the department.’”

Thus, the Policy Statement means that virtual currency exchangers and related businesses doing business in Pennsylvania must become licensed as money transmitters.  The effective date of the Policy Statement is October 15, 2024.  Neither the DoBS nor the MTA define “virtual currency.”

Continue Reading PA Department of Banking and Securities: Virtual Currency is “Money”

Enforcement Trends, Gaming, Crypto — and More

I am very pleased to co-chair again the Practicing Law Institute’s 2024 Anti-Money Laundering Conference on May 23, 2024, starting at 9 a.m. in New York City (the event also will be virtual). 

I am also really fortunate to be working with my fabulous co-chair Elizabeth (Liz) Boison, a partner at Hogan Lovells.

We have another fantastic line-up of experienced and knowledgeable panelists:

  • Alma M. Angotti, Guidehouse, Partner, Financial Crime, Fraud, and Investigative Services
  • Michael Grady, U.S. Department of Justice, MLARS, Chief, Bank Integrity Unit
  • Carole House, Terranet Ventures, Inc., Executive in Residence
  • Kevin Mosley, U.S. Department of Justice, MLARS, Deputy Chief, Bank Integrity Unit
  • Ron Schmidt, Internal Revenue Service, BSA Group Manager
  • Christopher Soriano, Penn National Gaming, VP, Chief Compliance Officer

The conference will tackle critical issues in BSA/AML/OFAC compliance and money laundering enforcement.  The three panels will be:

1.         Recent Trends in Money Laundering and Enforcement

The Department of Justice continues to bring major money laundering indictments and civil forfeiture actions.  The panel will discuss:

  • Enforcement actions against individuals: key cases and emerging trends.
  • Enforcement actions against organizations: key cases and emerging trends.
  • The implications for U.S. financial institutions and their AML programs, including risks and the red flags for potentially problematic customers and business lines.

2.         The Gaming Industry: Unique AML Challenges and Emerging Issues

The unique services and products offered by the gaming industry present unique AML issues and risks. Further, the dramatic growth in online wagering has created particular challenges, as the volume of transactions and customers increase and bad actors develop more advanced and complicated measures to circumvent existing AML controls.

Topics discussed by the panel will include:

  • What does it mean in today’s environment for a casino to have an effective, risk-based BSA/AML program? 
  • The IRS examines gaming institutions for BSA/AML compliance. What do examiners want to see, and how should institutions prepare? 
  • Online gaming presents emerging AML and money laundering risks. What controls are appropriate, and how should the relationships between casinos and online gaming providers best be managed? 
  • How could the current BSA/AML regulatory and enforcement regime be improved in regards to the gaming industry? 

3.         Anti-Money Laundering: Blockchain, Cryptocurrency, and Digital Assets

One of blockchain’s most compelling and adopted use cases is to make the cross-border movement of money faster, cheaper, and decentralized. The panel will discuss:

  • The (near) future of crypto: what is the likely regulatory, law enforcement, and case law landscape going forward?
  • What do regulators expect a recipient to know about the source of digital asset funds? (Travel rule, mixers/tumblers, hosted vs. unhosted wallets and FinCEN’s special measures requiring reporting on mixers);
  • Transaction tracing and investigations of illicit crypto schemes: illicit funds, hacking, ransomware, and more. What are financial institutions’ responsibilities to monitor and trace crypto transactions, identify wrongdoers, and, potentially re-screen transactions once new attributions have been made?

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

On May 3, 2024, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) jointly released the “Third-Party Risk Management: A Guide for Community Banks” (the “Guide”), presenting it as a resource for community banks to bolster their third-party risk management programs, policies, and practices.

The Guide serves as a companion to the Interagency Guidance on Third-Party Relationship: Risk Management issued in June 2023 (on which we blogged, here).  It also relates to the OCC’s Fall 2023 Semiannual Risk Perspective, which emphasizes the need for banks to maintain prudent risk management practices – including practices tailored to address Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) compliance risks with respect to fintech relationships.

The Guide acknowledges the widespread collaborations between community banks and third-party entities, and recognizes the strategic importance for such partnerships to improve competitiveness and adaptability. These collaborations provide community banks with access to a diverse array of resources, such as new technologies, risk management tools, skilled personnel, delivery channels, products, services, and market opportunities.

However, the Guide underscores that reliance on third parties entails a loss of direct operational control, thereby exposing community banks to a spectrum of risks.  Banks are still accountable for executing all activities in compliance with applicable laws and regulations.  “These laws and regulations include . . . those designed to protect consumers (such as fair lending laws and prohibitions against unfair, deceptive, or abusive acts or practices) and those addressing financial crimes (such as fraud and money laundering).”  Accordingly, the Guide emphasizes that the engagement of third parties does not absolve a bank of its responsibility to operate in a safe and sound manner and to comply with regulatory requirements, “just as if the bank were to perform the service or activity itself.”  The Guide sets forth this concept in bold, on the first page. 

The Guide’s emphasis on governance practices highlights the critical role of oversight, accountability, and documentation in ensuring regulatory compliance and safeguarding the interests of both banks and their customers.   Although the Guide styles itself as offering a framework tailored to the specific needs and challenges faced by community banks, it also offers direction to all financial institutions in regards to effective third-party risk management. 

Continue Reading Federal Banking Agencies Issue Guide to Third-Party Risk Management Practices for Community Banks

The Financial Crimes Enforcement Network (“FinCEN”) recently issued a Financial Trend Analysis (“Analysis”) focusing on patterns and trends identified in Bank Secrecy Act (“BSA”) data linked to Elder Financial Exploitation (“EFE”) involving scams or theft perpetrated against older adults.

The Analysis is a follow up to FinCEN’s June 2022 EFE Advisory (“2022 Advisory”). The Analysis reviews BSA reports filed between June 15, 2022 and June 15, 2023 that either used the key term referenced in the 2022 Advisory (“EFE FIN-2022-A002”) or checked “Elder Financial Exploitation” as a suspicious activity type.  In its 2022 Advisory, FinCEN warned financial institutions (“FIs”) about the rising trend of EFE, which FinCEN defines as “the illegal or improper use of an older adult’s funds, property, or assets, and is often perpetrated either through theft or scams.” The 2022 Advisory identified 12 “behavioral” and 12 “financial” red flags to help FIs detect, prevent, and report suspicious activity connected to EFE. Additionally, FinCEN recommended EFE victims file incident reports to the FBI’s Internet Crime Complaint Center (IC3) and the Federal Trade Commission. Consistent with a risk-based approach to BSA compliance, FinCEN encouraged FIs to perform additional due diligence where appropriate.

Continue Reading FinCEN Issues Analysis of Increasing Elder Financial Exploitation

On April 18, the Financial Crimes Enforcement Network (“FinCEN”) released updated FAQs related to the Corporate Transparency Act (“CTA”) and Beneficial Ownership Information (“BOI”) Rule. The last round of updates occurred in January 2024. As we previously have reported, the FAQs do not create any new requirements and are intended to clarify the regulation. In total, there are 16 new FAQs and 2 updated FAQs. We have included brief summaries below.

One of the main take-aways is that FinCEN does not expect to provide access to CTA BOI to financial institutions (“FIs”) until 2025.  In the interim, FinCEN will issue the long-awaited proposed regulations seeking to align the CTA with the Customer Due Diligence (“CDD”) Rule already applicable to certain FIs, including banks, which requires FIs to obtain BOI from covered entity customers opening accounts.  This delay is likely very frustrating for FIs seeking to comply with the CTA and adjust their existing systems for complying with the CDD Rule.

Continue Reading FinCEN Releases Updated BOI FAQs

Components of the U.S. Federal Reserve System recently prevailed in two lawsuits in which both plaintiffs – Custodia Bank and PayServices Bank – alleged the defendants were required to grant the plaintiffs’ master account requests and wrongfully denied them master accounts.  Both the United States District Court for the District of Wyoming and the United States District Court for the District of Idaho rejected these claims and instead ruled as a matter of law that the respective regional Federal Reserve Banks had discretion to deny the plaintiffs’ requests for a master account. 

Putting aside very extreme instances, these recent decisions further confirm that the Federal Reserve System appears to have near unfettered discretion in determining which banks can receive a master account.  Although these court rulings turn primarily on statutory interpretation issues and broad legal principles, these rulings will have particular practical consequences for financial institutions looking to serve niche industries – such as cryptocurrency and cannabis – which regulators perceive as presenting higher risks in regard to anti-money laundering, sanctions, safety and soundness and other regulatory concerns.

Continue Reading Districts of Wyoming and Idaho Affirm Broad Fed Powers over Master Accounts

We previously blogged on the lawsuit filed by the National Small Business Association (“NSBA”) and one of its individual members, which sought to challenge the constitutionality of the Corporate Transparency Act (“CTA”). Most recently, we analyzed the March 1 decision in that case by the Northern District of Alabama court, finding the CTA to be unconstitutional and enjoining the United States government from enforcing it against the plaintiffs.

The government sought an appeal before the Eleventh Circuit, and last Monday the Treasury Department filed its appellate brief. Before the District Court, the government argued that Congress had authority to enact the CTA under three distinct enumerated powers: (1) oversight of foreign affairs and national security; (2) its Commerce Clause-derived regulatory authority; and (3) its power to tax. The government’s brief on appeal focuses primarily on regulation of commercial activity, and its value as a component of the federal focus on combatting financial crime.

Continue Reading Treasury Asks the Eleventh Circuit to Uphold the CTA and Congressional Authority

Form Would Impose De Facto KYC Obligations Relating to Unhosted Wallets

On April 18, the Internal Revenue Service (“IRS”) issued a draft version of Form 1099-DA, a proposed information reporting form regarding certain digital asset sales and exchanges that “digital asset brokers” will need to file with the IRS and provide to the individuals involved in the sales and exchanges (“Draft Form”). The detailed and complicated Draft Form would be the first of its kind. 

If ultimately promulgated, the Draft Form and its supporting regulations would impose customer identification obligations upon a potentially broad swath of digital industry participants, including those who currently take the position that they do not need to collect customer identification information because they provide only decentralized finance (“DeFi”) services and/or provide only “unhosted” digital wallet services. Such customer identification obligations would be imposed under the Internal Revenue Code (the “Code”), rather than – as has been discussed for years – anti-money laundering (“AML”) and Know Your Customer (“KYC”) requirements under the Bank Secrecy Act (“BSA”). From the perspective of the digital asset industry, the precise source of the obligations would not matter much, because the practical consequences would be similar: they will need to collect tax identification information from sellers and buyers of digital assets.   

Continue Reading IRS Unveils Broad Draft Information Reporting Form for Digital Asset Transactions