Meaningful Overlap or Superficial Similarities?

On October 3, the release of the Pandora Papers flooded the global media, as millions of documents detailed incidents of wealthy and powerful people allegedly using so-called offshore accounts and other structures to shield wealth from taxation and other asset reporting. Data gathered by the International Consortium of Investigative Journalists, the architect of the Pandora Papers release, suggests that governments collectively lose $427 billion each year to tax evasion and tax avoidance. These figures and the identification of high-profile politicians and oligarchs involved in the scandal (Tony Blair, Vladimir Putin, and King Abdullah II of Jordan, to name a few) have grabbed headlines and spurred conversations about fairness in the international financial system – particularly as COVID-19 has highlighted and exacerbated economic disparities.

Much of the conduct revealed by the Pandora Papers appears to involve entirely legal structures used by the wealthy to – not surprisingly – maintain or enhance wealth.  Thus, the core debate implicated by the Pandora Papers is arguably one of social equity and related reputational risk for financial institutions (“FIs”), rather than “just” crime and anti-money laundering (“AML”). Media treatment of the Pandora Papers often blurs the distinction between AML and social concerns – and traditionally, there has been a distinction.

This focus on social concerns made us consider the current interest by the U.S. government, corporations and investors in ESG, and how ESG might begin to inform – perhaps only implicitly – aspects of AML compliance and examination.  ESG, which stands for Environmental, Social, and Governance, are criteria that set the foundation for socially-conscious investing that attempts to identify related business risks.  At first blush, the two are separate fields.  But as we discuss, there are ESG-related issues that link concretely to discrete AML issues: for example, transaction monitoring by FIs of potential environmental crime by customers for the purposes of filing a Suspicious Activity Report, or SAR, under the Bank Secrecy Act (“BSA”).  Moreover, there is a bigger picture consideration regarding BSA/AML relating to ESG:  will regulators and examiners of FIs covered by the BSA now consider – consciously or unconsciously – whether FIs are providing financial services to customers that are not necessarily breaking the law or engaging in suspicious activity, but whose conduct is inconsistent with ESG principles?

If so, then ESG concerns may fuel the phenomenon of de-risking, which is when FIs limit, restrict or close the accounts of clients perceived as being a high risk for money laundering or terrorist financing.  Arguably, and as we discuss, there also would be a historical and controversial analog – Operation Chokepoint, which involved a push by the government (not investors) for FIs to de-risk certain types of customers.  Regardless, interest in ESG means that FIs have to be even more aware of potential reputational risk with certain clients.  Even if the money in the accounts is perfectly legal, the next data breach can mean unwanted publicity for servicing certain clients.

These concepts are slippery, involve emerging trends that have yet to play out fully, and the similarities between AML and ESG can be overstated.  Nonetheless, it is possible that these two fields, both of which are subject to increasing global interest, may converge in important respects.  A preliminary discussion seems merited, however caveated or subject to debate. Continue Reading ESG, AML Compliance and the Convergence of Social Concerns

Lawmakers Targeted “Gatekeeper” Professions Following the Pandora Papers Leak

Motivated by revelations contained in the recently-released Pandora Papers, on October 6, 2021, four U.S. Representatives – Tom Malinowski (D-NJ), Maria Elvira Salazar (R-FL), Steve Cohen (D-TN), and Joe Wilson (R-SC) – introduced House Resolution 5525, named the Establishing New Authorities for Business Laundering and Enabling Risks to Security (“Enablers”) Act.  Generally, the Pandora Papers are an 11.9 million document stockpile published by the International Consortium of Investigative Journalists (“ICIJ”) that revealed the offshore accounts of dozens of world leaders and more than one hundred billionaires, celebrities, and business leaders.  Analysis of the leaks unveiled how the wealthy allegedly used offshore accounts, hidden trusts, and shell companies to hide trillions of dollars, evade tax collectors, and launder money.

The Enablers Act targets the so-called “middlemen” in the United States who allegedly assist with those bad acts.  In a press release, Representative Wilson stated bluntly who he believed to be the “U.S. enablers of kleptocracy”: “unscrupulous lawyers, accountants, and others” that allegedly fail to conduct adequate due diligence in international transactions.

The Act, if passed, would amend the Bank Secrecy Act (“BSA”) to require the Treasury Department to promulgate due diligence requirements for the “middlemen,” which include investment advisors, art dealers, attorneys involved in financial activity, accountants, third-party payment providers, and others.

The Act is nascent proposed legislation that is still subject to refinement as it winds its way through the House Financial Services Committee.  Suffice to say, however, there are some initial questions about the bill’s scope and function that give us pause.  The details are catalogued below. Continue Reading The ENABLERS Act Seeks to Impose BSA/AML Requirements on an Array of “Middlemen” Professionals

On October 6, the Department of Justice (“DOJ”) announced the creation of a National Cryptocurrency Enforcement Team (“NCET”).  The DOJ press release is set forth in part below, without further commentary, other than to observe that the NCET’s stated goals are to address issues on which we repeatedly have blogged:  crypto exchangers and their AML obligations; the process of tracing digital asset transactions; ransomware; so-called “professional” money launderers; and the use of crypto to launder serious crimes such as drug trafficking and human trafficking.  This government attempt at a coordinated approach is consistent with the announcement earlier this year by FinCEN of appointing its first-ever Chief Digital Currency Advisor.  The DOJ press release states in part:

[In order to] tackle complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors. Under the supervision of Assistant Attorney General Kenneth A. Polite Jr., the NCET will combine the expertise of the Department of Justice Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), Computer Crime and Intellectual Property Section (CCIPS) and other sections in the division, with experts detailed from U.S. Attorneys’ Offices. The team will also assist in tracing and recovery of assets lost to fraud and extortion, including cryptocurrency payments to ransomware groups.

. . . .

Importantly, the NCET will draw and build upon the established expertise across the Criminal Division to deter, disrupt, investigate, and prosecute criminal misuse of cryptocurrency, as well as to recover the illicit proceeds of those crimes whenever possible. Because cryptocurrency is used in a wide variety of criminal activity, from being the primary demand mechanism for ransomware payments, to money laundering and the operation of illegal or unregistered money services businesses, to being the preferred means of exchange of value on “dark markets” for illegal drugs, weapons, malware and other hacking tools, the NCET will foster the development of expertise in cryptocurrency and blockchain technologies across all aspects of the Department’s work. The NCET will also play a critical support role for international, federal, state, local, tribal, and territorial law enforcement authorities grappling with these new technologies and new forms of criminal tradecraft.

. . . ,

NCET team members will be drawn from three initial sources: MLARS, CCIPS, and detailees to the Criminal Division from U.S. Attorneys’ Offices across the country. Team members will draw upon the expertise of their home offices while working collaboratively under the Team Leader to combine their expertise in financial systems, blockchain technology, tracing transactions, and applicable criminal statutes to address illegal activity involving cryptocurrency in a structured way. The NCET will:

  • Investigate and prosecute cryptocurrency cases, comprising a central part of a nationwide enforcement effort to combat the use of cryptocurrency as an illicit tool.
  • Develop strategic priorities for investigations and prosecutions involving cryptocurrency, in consultation with the USAOs, Department components, and investigative agencies involved in cryptocurrency investigations.
  • Identify areas for increased investigative and prosecutorial focus, including professional money launderers, ransomware schemes, human traffickers, narcotics traffickers, and financial institutions working with cryptocurrency.
  • Build and enhance relationships with cryptocurrency focused AUSAs and prosecutors with other Department litigating components and offices to pursue cryptocurrency investigations and prosecutions.
  • Develop and maintain relationships with federal, state, local, and international law enforcement agencies that investigate and prosecute cryptocurrency cases.
  • Train and advise federal prosecutors and law enforcement agencies in developing investigative and prosecutorial strategies. Such training and advice will include providing guidance concerning search and seizure warrants, restraining orders, criminal and civil forfeiture allegations, indictments, and other pleadings.
  • Support the coordination and sharing of information and evidence among law enforcement offices to maximize the effectiveness of the Department’s investigations, prosecutions, and forfeitures involving cryptocurrency.
  • Collaborate and build relationships with private sector actors with expertise in cryptocurrency matters to further the criminal enforcement mission.

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.

Global AML Compliance Faces Challenges Relating to Regulator Expertise, the Travel Rule, Decentralized Finance, and “Regulator Shopping”

Today we are very pleased to welcome guest blogger Federico Paesano from the Basel Institute on Governance (“Basel Institute”). The Basel Institute recently issued its Basel AML Index for 2021 (“Basel AML Index”). This data-rich and fascinating annual publication, one of several online tools developed by the Basel Institute to help both public- and private-sector practitioners tackle financial crime, is a research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing. This year, we will focus on the section of the Basel AML Index which analyzes data from the Financial Action Task Force (“FATF”) on how jurisdictions are responding to money laundering and terrorist financing threats related to virtual assets.  The Basel AML Index concludes: “not well at all.”

Federico Paesano is a Senior Financial Investigation Specialist at the Basel Institute’s International Centre for Asset Recovery, and leads its Cryptocurrencies and Anti-Money Laundering Compliance Training.  For 14 years, Federico worked for the Italian Financial Police, ending his career as Chief Investigator, leading and conducting judicial and financial investigations, focusing in particular on economic crimes such as corruption and money laundering.  In July 2009, he was seconded by the Italian Government to the European Union Police Mission in Afghanistan (“EUPOL”) as Mentor to the Minister of Interior on Anticorruption.  Along with Europol and Interpol, Federico and the Basel Institute are co-organizing on December 7–8, 2021 the 5th Global Conference on Criminal Finances and Cryptocurrencies, which focuses on the emerging threat posed by criminals using new payment methods to conceal the proceeds of their crimes. His Quick Guide to Cryptocurrencies and Money Laundering Investigations may be found here.

The Basel Institute is a not-for-profit Swiss foundation dedicated to working with public and private partners around the world to prevent and combat corruption, and is an Associated Institute of the University of Basel. The Basel Institute’s work involves action, advice, and research on issues including anti-corruption collective action, asset recovery, corporate governance and compliance, and green corruption.  Money Laundering Watch was pleased to have Gretta Fenner and Dr. Kateryna Boguslavska of the Basel Institute guest blog on the Basel AML Indices for 2020 and 2019.

This blog post again takes the form of a Q & A session, in which Federico responds to questions posed by Money Laundering Watch about the Basel AML Index 2021 and wider debates on the topic. We hope you enjoy this discussion of money laundering risks and virtual assets — which addresses regulators’ frequent lack of expertise, tracing of cryptocurrency transactions, the Travel Rule, the challenges posed by decentralized finance, “regulator shopping,” and more.  —Peter Hardy and Andrew D’Aversa Continue Reading The Basel AML Index 2021: Virtual Assets and Money Laundering. A Guest Blog.

Terracotta Army near the city of Xian, China.

On September 23, the Financial Crimes Enforcement Network (“FinCEN”) issued an advance notice of proposed rulemaking (“ANPRM”) to solicit comment on questions related to the implementation of anti-money laundering (“AML”) rules in the antiquities market.

As we have previously blogged, the Anti-Money Laundering Act of 2020 amended the Bank Secrecy Act’s (“BSA”) definition of “financial institution” to include individuals “engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities, subject to regulations prescribed by the [Treasury] Secretary.” FinCEN must propose rules no later than December 27, 2021.

As part of the ANPRM, FinCEN included a discussion of the potential for money laundering, terrorist financing, and other illicit financial activity in the antiquities market, including certain features that make the trade of antiquities appealing to bad actors (FinCEN an advisory notice in March of 2021 alerting financial institutions with existing BSA obligations about illicit activity associated with the antiquities and art markets). According to FinCEN, the ANPRM “is an important step in strengthening U.S. national security by protecting the U.S. financial system from money launderers and terrorist financiers that seek to exploit the antiquities trade.”

Several notable questions in the ANPRM include:

  • How should “antiquities” be defined for the purposes of FinCEN’s regulations? Should jurisdictional or territorial considerations be taken into account when determining how antiquities should be defined (e.g., foreign cultural heritage laws)? How is an antiquity distinct from a work of art?
  • Identify and describe the roles, responsibilities, and activities of persons engaged in the trade in antiquities, including, but not limited to, advisors, consultants, dealers, agents, intermediaries, or any other person who engages as a business in the solicitation or the sale of antiquities. Are there commonly understood definitions of particular roles within the industry? Who would be considered within or outside such definitions?
  • How are transactions related to the trade in antiquities typically financed and facilitated? What, if any, information does a buyer typically learn about the seller, consigner, or intermediary involved in the sale of antiquities?
  • Should FinCEN establish a monetary threshold for activities involving the trade in antiquities that would subject persons involved in such activities above that threshold to FinCEN’s regulations, but exempt persons whose activities fall below that threshold?
  • What, if any, difficulties are associated with requiring the disclosure of or otherwise obtaining beneficial ownership information for legal entities engaged in the trade of antiquities, including foreign legal entities that may be outside the scope of current or future U.S. beneficial ownership reporting requirements?

The importance of the proposed regulation is dependent, in part, on the breadth of its reach.  Based upon the ANPRM’s use of phrases like “the solicitation or the sale of antiquities” and “financed and facilitated,” one might suspect that FinCEN is contemplating rules that would apply to a wide range of people, businesses and institutions. Comments are due October 25.

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.

Second Post in a Two-Part Series on Recent OFAC Designations

As we blogged yesterday, OFAC has been busy.  Right before OFAC designated the virtual currency exchange SUEX for allegedly facilitating ransomware payments,  OFAC announced another significant but more traditional action on September 17, 2021 by designating members of a network of Lebanon and Kuwait-based financial conduits that fund Hizballah, as well as members of a network of financial facilitators and front companies that operate in support of Hizballah and Iran’s Islamic Revolutionary Guard Corps-Qods Force (“IRGC-QF”).  The designated persons are prohibited from transacting with U.S. persons or transacting within the United States, and financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action.

In its press release announcing the designation, OFAC noted that “Hizballah continues to exploit the legitimate commercial sector for financial and material support, which enables the group to carry out acts of terrorism and degrade Lebanon’s political institutions.”  What stands out here is the designated individuals’ alleged use of gold as a vehicle to move illicit funds through shell companies (for more on the use of gold as a vehicle for money laundering, see here and here).

Two individuals included in OFAC’s recent designations, Meghdad Amini and Ali Qasir, allegedly led a network of “nearly 20 individuals and front companies, located in multiple countries and jurisdictions, that facilitates the movement and sale of tens of millions of dollars worth of gold, electronics, and foreign currency in support of Hizballah and the IRFC-QF.”  Further, Omid Yazdanparast, Mohammad Ali DAmirchilu, and Samaneh Damirchilu allegedly smuggled gold and currency from Iran to Turkey on commercial flights operated by U.S.-designated Iranian airline Mahan Air.  Once the gold was sold, the proceeds were returned to Iran through the same process and the proceeds were then transferred to Amini and Qasir.  Other members of the network – Mostafa Puriya and Hossein Asadollah – allegedly accumulated funds by selling electronics through the Dubai-based company Hemera Infotech FZCO.  Finally, China-based Morteza Minaye Hasemi allegedly laundered tens of millions of dollars for the IRGC-QF through foreign currency conversions and gold sales.

The list of newly-sanctioned individuals also includes Hasib Muhammad Hadwan, who is a senior official in Hizballah’s General Secretariat responsible for raising funds from donors outside Lebanon.  Hadwan’s superior, Hassan Nasrallah, was designed by OFAC on May 16, 2018 as the leader of Hizballah.  Hadwan’s office manager, Ali al-Sha’ir also was designed for accepting financial contributions on behalf of Hizballah since 2000.

OFAC made these designations pursuant to Executive Order (E.O.) 13224, which was initially signed by President George W. Bush in 2001, shortly after September 11.  Hizballah was designated pursuant to E.O. 13224 on October 31, 2001 and the IRGC-QF was designated in 2007 for its support of terrorist groups.

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.

OFAC Updates Advisory on Enforcement Risks Relating to Agreeing to Pay Ransomware

First Post in a Two-Part Series on Recent OFAC Designations

On September 21, 2021 OFAC issued its first sanctions designation against a virtual currency exchange by designating the virtual currency exchange, SUEX OTC, S.R.O. (SUEX) “for its part in facilitating financial transactions for ransomware variants.”  Although this is a unique development, the broader and more important issue for any financial institution or company facing a ransomware attack is the continuing problem encapsulated in OFAC’s six-page Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments, which OFAC released in conjunction with the announcement of the SUEX designation.  The Updated Advisory illustrates a “Catch 22” scenario, in which a victim that halts a ransomware attack by making the demanded payment then may find itself under scrutiny from OFAC on a strict-liability basis if it turns out that the attackers were sanctioned or otherwise had a sanctions nexus.  The Updated Advisory states that OFAC will consider self-reporting, cooperation with the government and strong cybersecurity measures to be mitigating factors in any contemplated enforcement action.

OFAC has been busy.  Tomorrow, we will blog on a more traditional action announced by OFAC right before the SUEX designation:  OFAC’s designation of members of a network of financial conduits funding Hizballah and Iran’s Islamic Revolutionary Guard Corps-Qods Force.  This designation is notable for the targets’ alleged use of gold as a vehicle to launder illicit funds through front companies. Continue Reading OFAC Targets Virtual Currency Exchange For Ransomware Attack

Today, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice regarding online child sexual exploitation.  Given its brevity, its text is set forth below in its entirety, without the footnotes.  There is a final section to the Notice, not included below, which provides filing instructions regarding related Suspicious Activity Reports, or SARs.  We offer no commentary, other than to reiterate FinCEN’s claims that child sexual exploitation has increased during COVID-19, and that virtual currency and payment processors play a role in such offenses.

[FinCEN] is issuing this Notice to call attention to an increase in online child sexual exploitation (OCSE). This Notice provides financial institutions with specific suspicious activity report (SAR) filing instructions, and highlights some financial trends related to OCSE.

Crimes related to OCSE, including the funding, production, and distribution of child sexual  abuse materials (CSAM), have increased during the COVID-19 pandemic, according to multiple  law enforcement authorities. This increase in activity is likely due to a confluence of factors, including: (1) increased internet usage by children who are spending more time online, both unsupervised and during traditional school hours; (2) restricted travel during the COVID-19 pandemic resulting in more sex offenders being online; and (3) increased access to and use of technology, including encrypted communications, bulk data transfer, cloud storage, live streaming, and anonymized transactions.

Another trend is the rise in sextortion of minors, who are coerced or exploited into exchanging sexual images via the internet, mobile devices, and social media platforms. OCSE offenders often groom minors to share or post self-generated content online in exchange for money.

FinCEN performed a review of OCSE-related SARs and observed the following trends. Between 2017 and 2020, there was a 147 percent increase in OCSE-related SAR filings, including a 17 percent year-over-year increase in 2020. FinCEN also observed that OCSE offenders are increasingly using convertible virtual currency (CVC) (some of which provide anonymity), peer-to-peer mobile applications, the darknet, and anonymization and encryption services to try to avoid detection. CVC in particular is increasingly the payment method of choice for OCSE offenders who make payments to websites that host CSAM.

Finally, FinCEN found that OCSE facilitators attempt to conceal their illicit file sharing and streaming activities by transferring funds via third-party payment processors.

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.

Copenhagen, Denmark

Danske Bank (Danske) recently secured a big victory in the United States Court of Appeals for the Second Circuit.  On August 25, 2021, the appellate court unanimously affirmed the Southern District of New York’s dismissal of an investor lawsuit brought by purchasers of DB American Depository Receipts (ADR) against Danske and its former officers and board members over alleged misrepresentations about Danske’s financial condition.  We previously blogged about the lower court’s decision here.  As we have blogged about hereherehere, and here, Danske Bank has been the subject of significant regulatory oversight due to its alleged AML failures of historical proportions, which has resulted in a foreseeable onslaught of investor lawsuits.

Although much of the Second Circuit’s opinion is focused on timing issues relevant to almost any investor lawsuit based on material misstatements and omissions, portions of the opinion are particularly relevant to investor claims resting on alleged AML failures and money laundering by financial institution customers.  Importantly, neither knowledge of potential misconduct by customers gained by an institution from either its AML-related monitoring or whistleblower reporting, nor generalized claims to investors by an institution of robust AML compliance, will – standing alone – result in liability. Continue Reading Danske Bank Secures a Big Victory in Investor Suit Based on Alleged AML Violations

Amicus Briefs Urge that Only FinCEN, Not the SEC, Should Enforce the BSA in Regards to Broker-Dealers

In the next stage of the Alpine Securities saga (as we blogged about here, here and here), a petition for a writ of certiorari is pending before the Supreme Court, asking the Court to decide whether the Southern District of New York and the Second Circuit correctly decided that the Securities Exchange Commission (“SEC”) may bring suit directly to enforce compliance with the Bank Secrecy Act (“BSA”).  Distilled, the Second Circuit and the District Court ruled that by promulgating Rule 17a-8, which states in part that “[e]very registered broker or dealer who is subject to the requirements of the [BSA] shall comply with the reporting, recordkeeping and record retention requirements of [BSA regulations promulgated by FinCEN],” the SEC is properly exercising its own independent authority under Rule 17a-8 and Section 17(a) of the Exchange Act when it regulates broker-dealers for the record-keeping and reporting requirements of the BSA.

Alpine Securities’ petition (the “Petition”) has received support in the form of amicus briefs from former officials of the Financial Crimes Enforcement Network (“FinCEN”) and the Cato Institute (“CATO”), both of which argue the SEC does not have the power to enforce violations of the BSA.  As we will discuss, the amicus briefs argue that only FinCEN may enforce the BSA, and that a contrary system would undermine FinCEN and create unacceptably conflicting interpretations, standards, and penalties for BSA/anti-money laundering (“AML”) compliance. Continue Reading Circular Delegation: Amicus Support By Former FinCEN Officials and the Cato Institute in the Alpine Securities Saga