On October 23rd, the Financial Crimes Enforcement Network (“FinCEN”) issued a supplementary alert regarding countering financing of the U.S.-designated foreign terrorist organization Hizballah (the “Alert”). In May 2024, FinCEN published an initial alert that focused on the countering of financing Iran-backed terrorist organizations, including Hizaballah. This Alert focuses solely on Hizballah and indicates that as part of the U.S. Department of the Treasury’s (“Treasury”) campaign against Hizballah for the past two decades, financial institutions (“FIs”) must remain vigilant in identifying suspicious activity of the terrorist organization.

According to the Alert, is it estimated that Iran has provided $700 million per year in support of Hizballah. Hizballah is known to generate revenue through various illicit activities including oil smuggling, money laundering, black market money exchange, counterfeiting, and illegal weapons procurement. Funds are laundered through businesses in West Africa, Europe, and South America.

In an accompanying press release, FinCEN Director Gacki noted that the Alert was released in part due to Hizaballah’s recent attacks against Israel. In addition, the Alert is consistent with FinCEN’s National Priorities, which include domestic and foreign terrorism.

Continue Reading FinCEN Issues Alert on Countering Financing of Hizballah and Terrorist Activities

New State Laws Create Tension with Federal AML Requirements

An increasing number of states have either enacted or are considering enacting legislation requiring financial institutions to provide persons (both existing customers and prospective customers) who are not ordinarily protected by the federal anti-discrimination statutes with “fair access” to financial services.

For example, and as we have blogged, a new Florida law (Fla. Stat. § 655.0323, entitled “Unsafe and unsound practices”) prohibits federal and state depository institutions conducting business in the state from denying services based on religion or political beliefs and activities.  As we also have blogged, this Florida law prohibits a financial institution acting on the basis of “any factor if it is not a quantitative, impartial, and risk-based standard, including any such factor related to the person’s business sector[.]” This prohibition creates a clear challenge for implementing an anti-money laundering/countering the financing of terrorism (“AML/CFT”) compliance program, which inherently involves subjective judgments and an assessment of the risk presented by a customer based on its line of business.

This podcast provides an in-depth exploration of these state laws and the challenges they present.  Alan Kaplinsky, Senior Counsel and former chair for 25 years of the firm’s Consumer Financial Services Group, moderates this podcast.  We are grateful to be joined by Brian Knight, Senior Research Fellow at the Mercatus Center of George Mason University, and Professor Peter Conti-Brown of the Wharton School of the University of Pennsylvania.

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.  

Card Club Will Pay $900,000 and Undertake AML Program Review

The Financial Crimes Enforcement Network (“FinCEN”) has entered into a Consent Order with the Sahara Dunes Casino, doing business as the Lake Elsinore Hotel and Casino (“Lake Elsinore”).  The Consent Order describes Lake Elsinore, located in California, as a “medium-sized card club” with 22 tables offering card games such as poker.

In the Consent Order, Lake Elsinore has admitted to willful violations of the Bank Secrecy Act (“BSA”), including failing to implement and maintain an effective Anti-Money Laundering (“AML”) compliance program, failing to file Currency Transaction Reports (“CTRs”) and Suspicious Activity Reports (“SARs”), and recordkeeping failures involving a negotiable instruments log, which is supposed to list each transaction between a casino or card club and its customers involving certain monetary instruments with a face value of $3,000 or more. Lake Elsinore has agreed to pay a $900,000 penalty and be subject to an AML program review. 

The conduct at issue in the Consent Order is old:  it occurred from about September 2014 through February 2019.  The enforcement action arose from a 2017 examination of Lake Elsinore by the California Bureau of Gambling Control (“CABGC”).  The Consent Order illustrates how a federal enforcement action can flow from a state regulatory agency working with FinCEN – as well as just how long that process can take.  The Consent Order further illustrates that some BSA-covered institutions will operate with little to no day-to-day AML compliance until an exam occurs.

Continue Reading FinCEN Issues Consent Order Against Card Club for “Fundamentally Unsound” AML Program

On October 22, 2024, the U.S. Court of Appeals for the Second Circuit ruled that Türkiye Halk Bankası A.Ş. (“Halkbank”), owned by the Republic of Turkey, can be prosecuted for allegedly helping Iran evade U.S. sanctions and committing related money laundering and bank fraud.

The court rejected Halkbank’s claim of immunity, stating that foreign state-owned companies are not protected from prosecution for commercial, non-governmental activities under U.S. common law. This decision allows U.S. prosecutors to pursue charges against Halkbank for allegedly laundering $20 billion of restricted funds through the use of money services businesses and front companies, coupled with the making of false statements to the U.S. Department of the Treasury regarding transactions with Iran to conceal the scheme.

The Second Circuit’s ruling underscores a pivotal point: foreign state-owned corporations cannot claim blanket immunity from prosecution in the U.S. for commercial activities under either the common law or the Foreign Sovereign Immunities Act (“FSIA”).  This will be particularly true in cases involving charges of money laundering, which necessarily involve financial transactions.  Further, the alleged involvement of foreign government officials in the charged schemes will not bestow, standing alone, immunity from prosecution.

Continue Reading Halkbank Faces Prosecution: U.S. Court of Appeals Denies Sovereign Immunity

The Bank Policy Institute (“BPI”) has issued its comment on the Federal Functional Regulators’ (the OCC, the Board of Governors of the Federal Reserve System, the FDIC, and the National Credit Union Administration) notice of proposed rulemaking (“NPRM”) to modernize financial institutions’ anti-money laundering and countering terrorist financing (“AML/CFT”) programs (“Comment”). The agencies’ NPRM, on which we blogged here, is consistent with FinCEN’s similar and earlier AML/CFT modernization proposal (“FinCEN’s NPRM”), on which we blogged here (please also see our podcast on these regulatory proposals here). 

The Comment, which generally tracks BPI’s earlier comment on FinCEN’s NPRM, is detailed and 23-pages long.  We only summarize it here.  The Comment is not a positive proponent of the NPRM and suggests significant changes.

Broadly, the Comment initially asserts that “[t]he proposed rule will neither implement the intent of Congress in enacting the AML Act nor facilitate a risk-based approach to identifying and disrupting financial crime.”  Likewise, the Comment asserts that “[i]n practice, [bank] examiners are exactingly focused on technical compliance . . . rather than effectiveness.  This approach is utterly divorced from a focus on management of true risk.”  According to BPI, “the status quo examination oversight of [the AML/CFT] regime does not expressly instruct institutions to dedicate efforts to detecting suspected crime or engaging in innovation to this end—efforts that are surely foundational to the integrity of the banking and financial system.” 

The Comment also fires a shot across the bow by suggesting the possibility of future litigation by stating – albeit in a footnote – that “BPI has significant concerns that the proposed rule does not align with the letter and spirit of the AML Act and provides for arbitrary procedural requirements that could render the rule vulnerable to challenge [under the Administrative Procedures Act].”

The Comment then dives into the details. 

Continue Reading Bank Policy Institute Critiques Notice of Proposed Rulemaking to Modernize AML/CFT Programs

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