A Gesture Providing Limited Solace to a Now-Defunct Bank

Riga, Latvia

Six years ago, in early 2018, we blogged about the U.S. Department of the Treasury’s Financial Crimes Enforcement Network’s (“FinCEN’s”) designation of ABLV Bank, AS (“ABLV”), then the second-largest bank in Latvia, as a foreign financial institution “of primary money laundering concern” pursuant to Section 311 of the U.S.A. Patriot Act, on the stated grounds that ABLV had made money laundering a pillar of its business practices, had lax and non-existent risk mitigation and anti-money laundering (“AML”) policies, and facilitated, inter alia, transactions for individuals connected to entities involved in procurement or export of ballistic missiles by the North Korean regime. This designation effectively served to sever ABLV’s access to the U.S. financial system by restricting U.S. financial institutions from opening or maintaining correspondent accounts with or on behalf of ABLV.

Last month, in an action without recent precedent, FinCEN announced that it had submitted a notice to the Federal Register withdrawing that designation. As laid out in more detail in the Notice of Withdrawal, FinCEN ascribed this reversal to “material subsequent developments” which have served to “mitigate[] the money laundering risks associated with ABLV.” Most significantly, in the wake of FinCEN’s 2018 designation, ABLV had its banking license withdrawn by the European Central Bank (“ECB”) on the basis of the ECB’s determination that the bank was failing. As a result, ABLV no longer functions as a depository institution, thus depriving it of the bulk of its utility in a money laundering scheme. More fundamentally, the bank as it existed in 2018 has been, essentially, dismantled: the Latvian government is supervising its irrevocable liquidation, and the authorities have brought criminal charges against its owners and senior management in connection with the bank’s previous illicit activities.

This FinCEN action should not be seen as existing in a vacuum; in fact, it may be viewed as another in a series of steps by the U.S. to integrate the former Soviet republics more closely with the West’s financial system by promoting anti-corruption initiatives (a stated “core national security interest” of the Biden Administration) in the face of renewed efforts by Russia to expand its sphere of influence. FinCEN’s press release makes a point of “recogniz[ing] the notable progress made by the Government of Latvia to substantially strengthen its AML/CFT regime through a series of meaningful legal and regulatory reforms of its financial sector.” The message is clear – follow through on these reforms, clean up your problem institutions, and the U.S. will notice and respond accordingly.

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.

The Financial Crimes Enforcement Network (“FinCEN”) issued last month an in-depth report on check fraud stemming from mail theft (“Report”).  This is a pernicious and expanding problem.  The Report follows upon a joint alert issued by FinCEN and the U.S. Postal Service (“USPS”) in February 2023, on which we blogged.

Mail theft-related check fraud is the fraudulent negotiation of checks stolen from the U.S. mail. Check fraud refers to any use of paper or digital checks to fraudulently obtain funds, including alterations, counterfeiting, and fraudsters signing checks not belonging to them.

While mail theft often consists of mail being stolen from USPS mailboxes or personal mailboxes, the U.S. Postal Inspection Service reported that 412 mail carriers were robbed on duty between October 2021 to October 2022, and 305 were robbed in the first half of Fiscal Year 2023.

The Report analyzed data received from 15,417 Bank Secrecy Act (“BSA”) reports on mail theft-related check fraud received during the six month period from February 27, 2023 and August 31, 2023. FinCEN identified three primary outcomes after checks were stolen from the U.S. mail: (a) 44% of checks were altered and then deposited; (b) 26% of checks were used as templates to create counterfeit checks; and (c) 20% of checks were fraudulently signed and deposited. The check fraud was reported in every state, with large urban areas reporting more incidents.

Mail theft-related check fraud negatively impacts financial institutions because they typically have liability for check fraud losses as a paying bank for counterfeit checks and fraudulent signatures and the collecting bank for altered checks.

Check manipulation methodologies ranged in sophistication, and many perpetrators made mobile or ATM deposits to avoid interaction with bank personnel.

Unsophisticated methodologies included fraudulently endorsing a check without modifying any information on the check, altering the payee or dollar amount without washing the check, and negotiating a check with a pay to the order of the fraudster.

Moderately sophisticated methodologies included check washing, selling check information online, using compromised check information to create counterfeit checks, stealing newly ordered checks from the mail.

Sophisticated methodologies included opening new accounts in name of payee, romance and employment scams where victims act as mules to move the funds, and insiders at financial institutions or USPS.

According to the Report, BSA reports involved the following five “top” states, in regards to raw numbers and per population:

As the Report reminds:  when suspecting mail theft-related check fraud, in addition to filing a Suspicious Activity Report, financial institutions should refer their customers who may be victims to the U.S. Postal Inspection Service.

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.

Various industry groups have filed lawsuits in multiple federal districts challenging the constitutionality of the Corporate Transparency Act (“CTA”).  The first such suit, filed in the Northern District of Alabama, resulted in a ruling by the District Court that the CTA was unconstitutional because Congress lacked the authority to enact the CTA.  The government appealed this ruling, and the Eleventh Circuit heard oral argument on Friday, September 27.  As we discuss below, the tenor of the argument suggests, although hardly compels, the conclusion that the Eleventh Circuit will reverse the holding of the District Court.

Further, one week prior to the oral argument, on September 20, the District of Oregon rejected a motion for preliminary injunction to enjoin enforcement of the CTA, finding in part that plaintiffs had failed to show a likelihood of success on the merits in regards to a broad spectrum of constitutional claims.  Although the District of Oregon did not issue a dispositive ruling on the merits, given the particular procedural posture of the case, the tenor of the opinion strongly suggests that plaintiffs’ lawsuit faces an uphill battle, at best.

Given the importance of the CTA and the existence of several other similar lawsuits in other federal districts challenging the CTA, both of these developments have been watched closely.  FinCEN has estimated that over 30 million existing entities need to file reports regarding their beneficial owners (“BOs”) under the CTA by January 1, 2025.  FinCEN also has indicated that, to date, only a small percentage of covered entities have done so.  To the extent that entities may have been waiting to file their reports until a more clear picture of the CTA litigations materializes, they presumably should stop waiting.  Although it is possible that a circuit split could develop, and that the U.S. Supreme Court ultimately could address and resolve the constitutionality of the CTA, the CTA still remains in force—with the current exception of entities affected by the District of Alabama ruling—and presumably will remain in force past January 1, 2025.

Continue Reading Corporate Transparency Act Litigation Update:  Eleventh Circuit Hears Argument, and District of Oregon Rejects Preliminary Injunction Enjoining CTA Enforcement

On September 17, 2024, the FDIC board approved a notice of proposed rulemaking that would increase recordkeeping obligations for bank deposits received from third party, non-bank companies that accept those deposits on behalf of consumers and businesses.  The FDIC announcement is here; a related statement by FDIC Chairperson Gruenberg is here.

Agency officials said that non-banks often deposit funds together into a single custodial account. Those accounts may hold funds of several thousand consumers or businesses, and the bank may not be able to determine the individual owners of funds in the custodial accounts.

The FDIC said that recent events have underscored issues surrounding arrangements at Insured Depository Institutions (IDIs). The agency cited the bankruptcy of Synapse Financial Technologies Inc., whose collapse has affected the ability of consumers to access their funds held at IDIs in pooled accounts for several months.

Under the proposed rule, IDIs that hold custodial accounts with transactional features must maintain certain records related to the accounts.

Those records would identify the beneficial owners of the custodial deposit account, the balance that can be attributed to each beneficial owner, and the ownership category in which the beneficial owner holds the deposited funds.

In addition to an annual certification of compliance, an IDI would be required to prepare and submit to the FDIC and its primary federal regulator an annual report that contains:

  • Any material changes to the IDI’s information technology systems that are relevant to the requirements of the proposed rule;
  • A list of the account holders that maintain custodial deposit accounts with transactional features subject to the rule, as well as the total balance of those custodial deposit accounts, and the total number of beneficial owners;
  • The results of the IDI’s testing of its implementation of the recordkeeping requirements; and
  • The results of any independent validation of records maintained by third parties.

Comments on the proposed rule are due 60 days after its publication in the Federal Register.

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.

Following up on its Notice of Proposed Rulemaking (“NPR”), which we discussed back in March, the Financial Crimes Enforcement Network (FinCEN) released on August 28th a final rule extending Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) requirements to certain investment advisers (Final Rule).

The Final Rule adds “investment adviser” to the definition of “financial institution” at 31 C.F.R. 1010.100(t).  The Final Rule applies to registered investment advisers (RIAs), and investment advisers (IAs) that report information to the Securities Exchange Commission (SEC) as exempt reporting advisers (ERAs), subject to certain exceptions. IAs generally must register with the SEC if they have over $110 million in assets under management (AUM). ERAs are investment advisers that (1) advise only private funds and have less than $150 million in AUM in the United States or (2) advise only venture capital funds.  

The Final Rule requires certain IAs to: (1) develop and maintain an AML/CFT compliance program; (2) file Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs); (3) comply with the Recordkeeping and Travel Rules; (4) respond to Section 314(a) requests; and (5) implement special due diligence measures for correspondent and private banking accounts.

FinCEN released a Fact Sheet in conjunction with the Final Rule, which becomes effective January 1, 2026.  

Continue Reading FinCEN Finalizes Rule Subjecting Investment Advisers to AML/CFT Regulations

On August 29, the Financial Crimes Enforcement Center (“FinCEN”) published Anti-Money Laundering Regulations for Residential Real Estate Transfers (“Final Rule”) regarding residential real estate.  The Federal Register publication is 37 pages long.  We have created a separate document which sets forth only the provisions of the Final Rule, at 31 C.F.R. § 1031.320, here.

The Final Rule institutes a new BSA reporting form – the “Real Estate Report” (“Report”) –which imposes a nation-wide reporting requirement for the details of residential real estate transactions, subject to some exceptions, in which the buyer is a covered entity or trust.  As expected, FinCEN has adopted a “cascade” approach to who is responsible for filing a Report, specifically implicating – among others – title agencies, escrow companies, settlement agents, and lawyers. 

Importantly, the person filing the Report may reasonably rely on information provided by others.  Parties involved in a covered transaction also may agree as to who must file the Report.  However, the Final Rule does not allow for incomplete reports, which likely will create practical problems.

The Final Rule does not require covered businesses to implement and maintain comprehensive anti-money laundering (“AML”) compliance programs or file Suspicious Activity Reports (“SARs”), like many other institutions covered by the Bank Secrecy Act (“BSA”).  FinCEN has indicated that separate proposed rulemaking on commercial real estate transactions is forthcoming.  However, the existence of a commercial element with a property does not automatically except a transfer from the Final Rule.  For example, the transfer of a property that consists of a single-family residence that is located above a commercial enterprise is covered if all of the other reporting criteria are met.

FinCEN has published a Fact Sheet which summarizes the basics of the Final Rule.  FinCEN also has published an eight-page set of FAQs on the Final Rule.  The Final Rule will be effective on December 1, 2025.  FinCEN has not yet issued a proposed form of the Report.

Continue Reading FinCEN Issues Final BSA Reporting Requirements for Residential Real Estate Deals

On August 27, 2024, the New York State Department of Financial Services (“NYDFS”) announced a consent order involving a $35 million settlement with Nordea Bank Abp (“Nordea”) for alleged significant failures related to anti-money laundering (“AML”) compliance. Nordea, headquartered in Helsinki, Finland, operates globally, including through a licensed branch in New York, which has its own AML and transaction monitoring requirements.

The enforcement action, which followed revelations from the Panama Papers leak, found that Nordea allegedly failed to conduct proper due diligence on high-risk correspondent banking relationships and maintained inadequate AML controls.  According to the NYDFS, the Panama Papers implicated Nordea in aiding clients in establishing offshore shell companies in order to facilitate illicit activities.

The consent order alleges that Nordea violated New York law by allowing compliance failures in its AML program and procedures to persist.  Meanwhile, Danish officials recently charged Nordea with repeatedly violating Denmark’s anti-money laundering act between 2012 and 2015, thereby exposing Nordea, potentially, to extremely significant fines.  As we will discuss, although the consent order implicates many different issues, the NYDFS enforcement action represents, in part, the latest chapter in the continued fall-out from the massive AML scandal involving Dankse Bank.  The consent order also highlights, once again, the particular risks posed by correspondent banking relationships, on which we repeatedly have blogged (for example, here, here, and here).

Continue Reading NYDFS Imposes $35 Million Fine on Nordea Bank for Alleged AML Failures Following Panama Papers Revelations

With Guest Speaker Nick St. John

We are very fortunate to have Nick St. John, Director of Federal Compliance at America’s Credit Unions, as our guest speaker in this podcast on the Notice of Proposed Rulemaking issued by the Financial Crimes Enforcement Network and federal banking regulators regarding the enhancement and modernization of anti-money laundering/countering the financing of terrorism (“AML/CFT”) compliance programs under the Bank Secrecy Act (“BSA”).

Nick joined the credit union industry in 2020 and continues to serve the industry with America’s Credit Unions as the Director of Federal Compliance, where he helps credit unions with a variety of compliance issues. He is particularly passionate about BSA compliance. Previously, St. John managed banking and finance content for Bloomberg Law. He graduated from The University of Georgia School of Law and has a bachelor’s degree from CUNY John Jay College.

Our discussion focuses on a variety of issues, including: the risk assessment process, the NPRM’s impact on the industry, “de-risking” strategies, technological innovation, feedback from law enforcement on the utility of BSA filings, hiring qualified compliance officers, and what it means for an AML/CFT program to be “effective.”  We previously blogged on both NPRMs here and here.

We hope you enjoy the podcast.

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

The Nevada Gaming Control Board (“Board”) recently filed a complaint (“Complaint”) against Resorts World Las Vegas casino (“Resorts World”), alleging that, despite repeated red flags, Resorts World’s Anti-Money Laundering (“AML”) Committee, executives, and other employees failed to bar Matthew Bowyer and other individuals who were patrons of Resorts World while being suspected of engaging in illegal bookmaking and other illicit activities. 

The Board is seeking fines, actions against Resorts World’s licenses, and the appointment of a supervisor if the Nevada Gaming Commission (the “Commission”) revokes or suspends Resorts World’s gaming license.  The Complaint is the latest development in a series of recent high-profile enforcement actions implicating major gaming institutions and the alleged use of the institutions to launder illegal bookmaking funds by high-end clients, with the institutions’ alleged tacit consent.

Bowyer came to the attention of both the Nevada Gaming Control Board and the Department of Justice (“DOJ”) following the investigation and guilty plea of Ippei Mizuhara, the Japanese-language interpreter and de facto manager of baseball superstar Shohei Ohtani.  One of Bowyer’s clients was Mizuhara, who allegedly placed at least 19,000 bets with Bowyer’s illegal gambling business. Bowyer, in turn, allegedly took the proceeds of his bookmaking business and wagered millions of dollars at Resorts World.

Continue Reading Nevada Gaming Control Board Alleges Casino AML Failures Based on Wagering of Customers Involved in Illegal Bookmaking

The Federal Reserve Bank of Philadelphia (the “Philly Fed”) recently executed an agreement (the “Agreement”) with Pennsylvania-based Customers Bank (and its Customers Bancorp, Inc. holding entity) (collectively, “Customers”).  According to the Agreement, “the most recent examinations and inspections” of Customers by the Philly Fed identified “significant deficiencies” related to the bank’s risk management practices, Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance, and regulations issued by the Office of Foreign Assets Control (“OFAC”).  

The source of these alleged deficiencies is alluded to by the Agreement, which immediately highlights two “digital assets-friendly” elements of Customers’ business model:

  • Customers’ “digital asset strategy”, i.e., “offering banking services to digital asset customers”; and, relatedly,
  • Customers’ facilitation of “dollar token activities,” which refers to the bank’s operation of an “instant payments platform” that allows the bank’s commercial clients “to make tokenized payments over a distributed ledger technology system” – though only to other Customers’ commercial clients.

The Agreement calls for Customers to submit a number of plans to the Philly Fed by October 5, 2024, several of which explicitly require the Philly Fed’s approval.

Continue Reading Bank’s Digital Assets Business Strategy Draws Federal Reserve Scrutiny