On November 5, 2020, the Council of the European Union approved a new action plan to strengthen anti-money laundering and combatting terrorism financing across the EU. The Action Plan, “an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing,” appears to be motivated by the perceived failures in preventing the Danske Bank scandal (which we’ve blogged about here, and more generally, here, here, here, here, here, and here). In light of “[m]ajor divergences” and “serious weaknesses” in enforcement, it appears the Council believes the EU’s “anti-money laundering and countering the financing of terrorism” framework (“AML/CFT framework”) “needs to be significantly improved.” As we have blogged, the EU historically has issued numerous reports identifying systemic vulnerabilities to money laundering and suggesting process-based recommendations for how to address such threats. These recommendations typically have not addressed a basic issue: the actual prosecution of bad actors.

This new Action Plan contains some teeth. If its legislative proposals are enacted and implemented, it would allow the EU to close cross-border loopholes, update its rulebook, and strengthen the implementation and enforcement of the AML/CFT framework through EU-level supervision. Even if the more ambitious proposals do not pass legislative scrutiny, the Action Plan shows the EU is keenly focused on combatting the threat of cross-border money laundering and that it has many tools available at its disposal, some of which it is already using. Unified and coordinated implementation of the AML/CFT framework coupled with increased information sharing between members and between public and private partners should aid detection and enforcement efforts across the EU. Continue Reading Council of the European Union Unveils Ambitious New AML Action Plan

On November 3rd, voters in Arizona, New Jersey, South Dakota, Montana, and Mississippi passed ballot measures to bring legal cannabis to each of their states. It’s not every year that we see states from opposite ends of the political spectrum agree on something with such vigor. In fact, loosening the laws surrounding cannabis—be it medical use, recreational use, or farming of hemp products—has consistently been one of the only areas receiving bipartisan support in a country divided on almost everything else.

The passage of these ballot measures means that the cannabis industry will generate even more revenue. Despite the massive dollar amounts currently associated with the cannabis industry, reliable banking services remain elusive, due to federal drug and money laundering laws and the Bank Secrecy Act (“BSA”). This post will summarize the recent cannabis legislation, and recap the main roadblocks facing the industry (and financial institutions) from a financial compliance perspective. Continue Reading The State of Cannabis Affairs: New Legislation and a Regulatory Recap

As we’ve blogged, high-end artwork can create an ideal vehicle for money laundering. And, as we’ve also blogged, the Permanent Subcommittee on Investigations for the U.S. Senate released in July 2020 a detailed report titled “The Art Industry and U.S. Policies That Undermine Sanctions,” focusing on the nexus between high-end art and U.S. sanctions law violations, potential money laundering schemes and anti-money laundering (“AML”) risks. The Senate report recommends in part that the Bank Secrecy Act (“BSA”) be amended to include art dealers as “financial institutions” subject to AML obligations under the BSA.

Indeed, recent legislation has included a proposal to (i) add to the list of “financial institutions” covered by the BSA “a person trading or acting as an intermediary in the trade of antiquities, including an advisor, consultant or any other person who engages as a business in the solicitation of the sale of antiquities;” and (ii) require a study by the Secretary of the Treasury “on the facilitation of money laundering and terror finance through the trade of works of art or antiquities,” including an evaluation of whether art industry markets should be regulated under the BSA.

This is a “hot” topic.  In the latest development in this area, and in what appears to be a response to — or affirmation of – the Senate report, the U.S. Department of the Treasury’s (“Treasury”) Office of Foreign Assets Control (“OFAC”) recently issued a new advisory (the “Advisory”) highlighting the related problem of individuals blocked by OFAC from entering the U.S. financial system trying to evade those restrictions through the commerce of art, and emphasizing sanctions for U.S. persons who engage in prohibited transactions. Continue Reading Art and OFAC

To the surprise of no one, FinCEN announced today that it is extending the Geographic Targeting Order, or GTO, regarding real estate transactions.

FinCEN’s press release is here.  The new GTO is here.  It is identical to the most recently issued GTO.  This is a topic on which we previously have blogged extensively.

Arguably, this is just another step in the government’s seemingly inevitable march towards the issuance of regulations under the Bank Secrecy Act regarding real estate transactions.

If you are generally interested in the convergence of real estate and money laundering issues, then please check out Ballard Spahr’s detailed chapter, The Intersection of Money Laundering and Real Estate, in Anti-Money Laundering Laws and Regulations 2020, a publication issued by International Comparative Legal Guides (ICLG).

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.

Stated Concern is that Terrorism is Funded Primarily Through Small International Transfers

Proposed Change Would Expand BSA Definition of “Money” to Include Virtual Currency

The Financial Crimes Enforcement Network (“FinCEN”) and the Federal Reserve Board (“Board”) have requested comment on an important proposed new rule that would amend the “Recordkeeping Rule” and “Travel Rule” under the Bank Secrecy Act (“BSA”) and expand them significantly. The proposed regulation would reduce the current $3,000 threshold to only $250 for international transfers, thereby substantially expanding the scope of these rules.

Even by FinCEN’s own estimates, the effect would be broad. According to FinCEN, the new regulation would affect an estimated 5,306 banks, 5,236 credit unions, and 12,692 money transmitters – including exchangers of digital assets, who arguably would be most impacted by the new regulation. Further, FinCEN estimates – likely conservatively – that compliance would require no less than 3.3 million additional hours, annually. FinCEN and the Board strongly suggest that such compliance burdens are worth the effort, given the perceived value to law enforcement in combatting terrorism, which tends to be funded by small international transfers. Continue Reading To Fight Terrorism, FinCEN and Federal Reserve Board Request Comment on Proposed Major Expansion of Recordkeeping and Travel Rules for International Transfers

Advisory Suggests that COVID-19 Pandemic Exacerbates Conditions Contributing to Trafficking

The Financial Crimes Enforcement Network (“FinCEN”) recently issued an Advisory on Identifying and Reporting Human Trafficking and Related Activity (“Advisory”). This Advisory supplements FinCEN’s 2014 Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking – Financial Red Flags (“2014 Advisory”).

According to the Advisory, human trafficking is one of the most profitable and violent forms of international crime, generating an estimated $150 billion worldwide per year. A variety of industries within the United States are susceptible to human trafficking—hospitality, agricultural, janitorial services, construction, restaurants, care for persons with disabilities, salon services, massage parlors, retail, fairs and carnivals, peddling and begging, child care, domestic work, and drug smuggling and distribution.

FinCEN further indicates that “[t]he global COVID-19 pandemic can exacerbate the conditions that contribute to human trafficking, as the support structures for potential victims collapse, and traffickers target those most impacted and vulnerable.” In light of changing circumstances, the Advisory lists four additional typologies and 20 new red flags to help assist in identifying and reporting human trafficking – many of which pertain to the use of currency, an increasingly rare phenomenon in today’s digital economy. The Advisory urges financial institutions, including customer-facing staff that may be in contact with victims of human trafficking, to educate themselves on current methodologies used by traffickers and facilitators. The most practical aspects of the Advisory appear to be those that highlight the red flags which may arise with personal interactions between bank staff and customers who in fact are engaging in trafficking. Continue Reading FinCEN Issues Advisory on Human Trafficking

Court Rejects Halkbank’s Claim That the Foreign Sovereign Immunities Act Shields the Bank From Prosecution

A motion to dismiss an indictment accusing Turkey’s majority state-owned Halkbank of money laundering, bank fraud and Iran-related sanctions offenses was denied by U.S. District Judge Richard M. Berman of the Southern District of New York in a recent 16-page decision.  The Court ruled that the Foreign Sovereign Immunities Act (“FSIA”) does not bestow immunity in U.S. criminal proceedings on financial institutions owned in whole or in part by foreign governments. Even if it did, the FSIA’s commercial activity exemptions would apply and support Halkbank’s prosecution. This development is the latest in the ongoing, complex battle between Halkbank the U.S. Department of Justice – a prosecution involving potential political battles as well.

As we have blogged, the U.S. Attorney for the Southern District of New York charged Halkbank on October 15, 2019 with a six count indictment for bank fraud, money laundering and conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”), stemming from the bank’s alleged involvement in a multi-billion dollar scheme to evade U.S. sanctions against Iran.  The Court later rejected an attempt by Halkbank to enter a “special appearance” contesting jurisdiction, making it clear that international financial institutions must appear for arraignment in criminal actions.  The decision served as a warning to foreign defendants brought into U.S. federal court: issues of jurisdiction in criminal cases must be litigated only after arraignment.

Judge Berman’s most recent ruling found that Halkbank is not immune from criminal prosecution in the United States under FSIA, and that the allegations in the indictment were plead sufficiently to avoid dismissal.  This ruling of course has a potentially broader application to any foreign majority state-owned entities which allegedly scheme to violate U.S. criminal law: given sufficient nexus between the scheme and the United States, FSIA will not shield the foreign entities, because the Act only applies to civil matters that do not fall under its “commercial activities” exceptions. Continue Reading Turkey’s Majority State-Owned Halkbank Is Not Immune from U.S. Prosecution in Iran Sanctions and Money Laundering Case

On October 13, the Financial Crimes Enforcement Network (“FinCEN”) issued a COVID-19-related Advisory “to alert financial institutions to unemployment insurance (“UI”) fraud observed during the COVID-19 pandemic.” It is the fourth in a series of Advisories related to financial crimes arising from the pandemic (we covered previous Advisories on medical scams, imposter and money mule schemes, and cyber-enabled crime). This latest Advisory “contains descriptions of COVID-19-related UI fraud, associated financial red flags indicators, and information on reporting suspicious activity.”

COVID-19-Related UI Fraud

Not surprisingly, as the level of UI claims has surged in light of the pandemic and the ensuing economic stress, FinCEN reports that it and financial institutions have detected “numerous instances” of UI fraud. The Advisory lists several representative types of UI fraud: UI applicants claiming to have worked for fictitious companies or creating fictitious work records, collusion between employers and employees to enable an employee to receive simultaneously a UI payment and a paycheck, and applicants inflating wages to receive a higher UI payment.

Two additional types of fraud described in the Advisory warrant mention. First, the Advisory warns that state employees may use their credentials to alter UI claims, approve otherwise unqualified UI applicants, direct UI payments to accounts not on the UI application, or increase the approved UI payment amount. However, the Advisory’s red flags provide little guidance to financial institutions on how to identify or distinguish “insider” UI fraud from its ilk.

Second, the Advisory warns that UI applicants may submit to the state stolen or forged identification documents in their UI application to take over an account eligible for UI payments. The Advisory’s reference to FinCEN’s July 30th Advisory on pandemic-enabled cybercrime complicates a financial institution’s obligations to detect these schemes. As we previously commented, detecting cybercrime perpetrated during COVID-19 is “perhaps easier said than done.” That is particularly true in the UI fraud setting, where the perpetrator has already fooled state authorities into making UI payments, which are only a portion of hundreds of thousands of weekly UI claims.

UI Fraud Red Flags

Nevertheless, the Advisory, in keeping with FinCEN’s risk-based approach towards BSA compliance, lists red flags for financial institutions to consider along with “all surrounding facts and circumstances before determining if a transaction is suspicious or otherwise indicative of potentially fraudulent activities related to COVID-19.”

  • Accounts held at the financial institution show suspicious UI payment and withdrawal signs, including: out-of-state UI payments; multiple UI payments within a single disbursement window; UI payments to someone other than the accountholder; UI payments collecting at the same time as regular work earnings; numerous deposits that indicate they are UI payments made to someone other than the accountholder; and UI payments made with greater frequency than similarly situated customers.
  • The customer withdraws UI funds in a lump sum by cashier’s checks, by purchasing a prepaid debit card, or by transferring the funds to out-of-state accounts.
  • The customer’s UI payments are quickly wired to foreign accounts, particularly to countries with weak anti-money laundering controls.
  • The customer receives or sends UI payments to a peer-to-peer (P2P) application or app. The funds are subsequently transferred to an overseas account in a manner inconsistent with the spending patterns of similarly situated customers.
  • Individuals quickly withdraw disbursed UI funds for “bill payments” to individuals instead of businesses, with some individual payees receiving multiple online bill paychecks over a short time period.
  • The IP address associated with logins for an account conducting suspected UI-fraud activities is geographically distant from the customer’s address or where the UI payment originated.
  • Individuals transfer UI funds into suspected shell/front company accounts.
  • A single, web-based email account is associated with multiple accounts receiving UI payments at one or more financial institutions.
  • A newly opened account, or an account that has been inactive for more than thirty days, starts to receive numerous UI deposits. After a financial institution requests documents to verify customer’s identity, the customer provides incorrect or forged documents.
  • A financial institution’s due diligence investigation reveals that the customer does not have a history of living at, or being associated with, the address to which the UI check or UI debit card is sent, or within the geographical area in which the UI debit card is being used.

SAR Reporting

Consistent with prior Advisories relating to fraud exacerbated by COVID-19, the Advisory provides specific instructions for filing a Suspicious Activity Report (“SAR”) when financial institutions suspect UI fraud.

  • SARs should include the key term “COVID19 UNEMPLOYMENT INSURANCE FRAUD FIN-2020-A007” in SAR field 2 and in the narrative.
  • Financial institutions should select SAR field 34(z) (Fraud-other) when reporting such fraud and specifically denote whether the same is an “unemployment fraud.”

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.

Final Post in a Three-Post Series Regarding Recent Regulatory Action by FinCEN

On September 29, 2020, the Financial Crimes Enforcement Network (“FinCEN”) published a request for comment on existing regulations regarding enhanced due diligence (“EDD”) for correspondent bank accounts. The notice seeks to give the public an opportunity to comment on the existing regulatory requirements and burden estimates. Written comments must be received on or before November 30, 2020.

Currently, Bank Secrecy Act (“BSA”) regulations for due diligence and EDD for correspondent bank accounts require certain covered entities (banks, brokers or dealers in securities, futures, commission merchants, introducing brokers in commodities, and mutual funds) to establish due diligence programs that include risk-based, and, where necessary, enhanced policies, procedures, and controls reasonably designed to detect and report money laundering conducted through or involving any correspondent accounts established or maintained for foreign financial institutions. The regulations also require that these same financial institutions establish anti-money laundering (“AML”) programs “designed to detect and report money laundering conducted through or involving any private banking accounts established by the financial institutions.”

In issuing the request, FinCEN has not proposed any changes to the current regulations for correspondent or private banking. Instead, the request is intended to cover “a future expansion of the scope of the annual hourly burden and cost estimate associated with these regulations.”

This is the third and final post in a series of blogs regarding a recent flurry of regulatory activity by FinCEN. In our prior posts, we discussed a final rule by FinCEN extending BSA/AML regulatory requirements to banks lacking a Federal functional regulator, and FinCEN’s advanced notice of proposed rulemaking as to potential regulatory amendments regarding “effective and reasonably designed” anti-money laundering (“AML”) programs. Unlike the first two regulatory actions discussed in our series, FinCEN’s request for comments on the burdens of correspondent bank account due diligence and EDD seems purely procedural: it simply asks covered institutions to report how much time and resources are spent on compliance. Nonetheless, it’s hard not to conclude that this request for comment is a prelude to some future, more substantive action regarding correspondent bank account regulation. The U.S. Department of Treasury identified correspondent banking as a “key vulnerability” for exploitation by illicit actors in its 2020 National Strategy for Combating Terrorist and Other Illicit Financing. Further, and as we will discuss, correspondent banking has long had a troubled status: such accounts are simultaneously necessary to the world economy but also regarded as higher risk from an AML perspective. As a real-world example, an alleged lack of diligence regarding the risks posed by correspondent bank accounts played a prominent role in the major alleged AML failures suffered by Westpac, Australia’s second-largest retail bank, which contributed to the bank recently agreeing to a whopping $1.3 billion penalty for violating Australia’s AML/CTF Act.

Continue Reading Regulatory Round Up: FinCEN Solicits Comments on Due Diligence for Correspondent and Private Bank Accounts