As we have repeatedly blogged, concerns about perceived anti-money laundering (“AML”) risks in the real estate industry are rising globally.  Consistent with this concern, the Financial Action Task Force (“FATF”) has updated its AML guidance for the real estate sector in a document entitled “Guidance for a Risk-Based Approach: Real Estate Sector,” (“FATF Guidance” or “the Updated Guidance”).  The FATF Guidance urges a variety of players in the real estate industry to adopt a risk-based approach (“RBA”) to mitigate AML risks and sets forth some high-level recommendations.  The Updated Guidance notably coincides with FinCEN’s advanced notice of proposed rulemaking to impose reporting and perhaps other requirements under the Bank Secrecy Act (“BSA”) for persons involved in real estate transactions to collect, report, and retain information, and the  recent extension of Geographic Targeting Orders for U.S. title insurance companies.

The FATF Guidance appears to be driven, at least in part, by FATF assessments showing that the real estate sector has high AML risks, which industry players often fail to appreciate and/or mitigate.  The Updated Guidance explains how various industry players can use an RBA to mitigate those risks.  It identifies sector-specific risks, sets forth strategies for assessing and managing those risks, and describes challenges the industry faces in doing so.  The FATF also offers specific guidance for “private sector players” and “supervisors” (e.g., countries and self-regulatory boards) for going forward.  The Updated Guidance includes tools, case studies, and examples of both private sector and supervisory practices to show real estate supervisors and practitioners how to implement FATF standards in an adequate, risk-based and effective manner.

The FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”).  The FATF issued the Updated Guidance with input from the private sector, including from a public consultation with thirteen private-sector representatives (including from sector specific professional associations, the legal profession, FinTech providers, and non-profit organizations) in March and April 2022.  This consultation urged FinCEN, among other things, to provide greater clarity in the Updated Guidance regarding its applicability to the real estate sector and related professions (such as lawyers, notaries, and financial institutions) and extend FATF recommendations to broader real estate activities (such as property development and leasing).

Continue Reading FATF Updates Risk-Based Approach Guidance for the Real Estate Sector

Earlier this year, U.S. President Joe Biden requested an increase in spending for the Financial Crimes Enforcement Network (“FinCEN”) to $210 million.  Last week, the U.S. House of Representatives (the “House”) passed a bill fulfilling that request, increasing FinCEN’s budget by over 30% to $210,330,000.  This is the exact figure requested by FinCEN, which also seeks to supplement its budget by another $12.57 million from other sources.  On Tuesday, the bill was referred to the Committee on Appropriations in the U.S. Senate, which still needs to weigh in on FinCEN’s final budget.

FinCEN’s budget has been an important and ongoing issue.  Citing budgetary constraints, FinCEN has struggled to implement the huge array of tasks and deadlines imposed upon it by Congress through the Anti-Money Laundering Act (“AMLA”) and Corporate Transparency Act (“CTA”).  These tasks include approximately 40 rulemaking or other requirements, including periodic Congressional reporting on implementation efforts, assessments, and findings, including, but not limited to:

  1. Establishing a national database regarding beneficial owners of companies;
  2. Establishing priorities regarding national anti-money laundering and countering the financing of terrorism;
  3. Enhancing the whistleblower provisions; and
  4. Finalizing any rulemaking regarding the real estate industry.

FinCEN advocated for an increase in its budget, which would allow it to add oversight of the financial sector, strengthen corporate accountability, provide adequate support to law enforcement and investigative entities, and modernize the sanctions process.  Further, FinCEN could increase its staff to about 420 employees to meet the needs of the AMLA and CTA. 

The increased funding comes on the heels of this month’s amendment in the U.S. Congress to the 2023 National Defense Authorization Act (“NDAA”), which we previously blogged about here.  With an amendment that is arguably more sweeping than the AMLA, and the outstanding requirements under the AMLA and CTA, FinCEN needs the additional resources to be able to meet the needs and requirements of the recent legislation.

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Amendment Focuses on Professional “Gatekeepers” – Lawyers, Accountants, Payment Processors, and Those Providing Corporate Formation and Trust Services

On July 13, 2022, the House of Representatives (the “House”) adopted an amendment to the 2023 National Defense Authorization Act (“NDAA”) offered by Maxine Waters (D. CA), inserting into the NDAA a version of the “Establishing New Authorities for Business Laundering and Enabling Risks to Security Act,” otherwise more commonly known as the ENABLERS Act. If ultimately passed into statute, even a scaled-back version of this amendment could significantly alter the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulatory framework in the United States.  Of course, the sweeping AML Act of 2020 was passed because it also was tucked into the massive defense spending authorization bill for that year—so backers of BSA/AML expansion appear to be reverting to tactics which previously bore fruit.

Arguably, this amendment is even more sweeping than the AML Act. As we will discuss, it applies the BSA to persons providing corporate formation, trust, third-party payment, or similar legal or accounting services.  Although much digital ink will be spilled regarding the amendment’s application to lawyers—and we certainly emphasize here that potential sea change in AML regulation—the amendment’s application to third-party payment processors, depending upon how that term ultimately gets defined if the amendment becomes law, also could be a very significant development affecting many businesses and financial technology companies (“fintechs”).  Currently, and depending on the facts, the BSA often does not apply to payment processors, who often fit into an exemption under the BSA’s definition of a “money services business,” or MSBs, subject to AML requirements.  However, the amendment is “scaled back” from the original version of the ENABLERS Act, introduced last year, which had included investment advisors, art and antiquities dealers, and public relations firms.  Finally, the ambitious agenda of the amendment does not appear to acknowledge the current reality of actual government resources: the fact remains that the Financial Crimes Enforcement Network (“FinCEN”), which implements the BSA, has been struggling to implement the huge array of tasks and deadlines already foisted upon it by Congress through the AML Act and the recently-passed Corporate Transparency Act (“CTA”)—and FinCEN has been stating repeatedly that it needs increased funding.

Continue Reading Closing the Gate:  House Adopts ENABLERS Act Amendment to 2023 NDAA

Report Focuses on Travel Rule Implementation – or Lack Thereof

The Financial Action Task Force (“FATF”) recently issued an updated review of the implementation of its anti-money laundering (“AML”) and counter-terrorist financing (“CFT”) standards to financial activities involving Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), entitled Targeted Update On Implementation Of The FATF Standards On Virtual Assets And Virtual Asset Service Providers (“Report”). 

This post highlights the three main takeaways from the Report – with a focus on the FATF’s Travel Rule.  Condensed, the FATF Travel Rule requires the private sector to obtain and exchange beneficiary and originator information with VAs transfers valued at $1,000 or more. The Report also suggests that some DeFi arrangements are not truly “decentralized.”

Continue Reading FATF Issues Targeted Update Report on Implementation of AML/CFT Standards on Virtual Assets

On July 6, the Financial Crimes Enforcement Network (“FinCEN”), The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, “the Agencies”) issued a Joint Statement to “remind” banks that they, of course, should apply a risk-based approach to assessing customer relationships and conducting customer due diligence (“CDD”).

The Joint Statement appears to echo FinCEN’s June 22 Statement on Bank Secrecy Act Due Diligence for Independent ATM Owners or Operators (“ATM Statement”), in which FinCEN also “reminded” banks that “that not all independent ATM owner or operator customers pose the same level of money laundering, terrorist financing (ML/TF), or other illicit financial activity risk, and not all independent ATM owner or operator customers are automatically higher risk.”

Combined – and although generally worded – these publications appear to urge financial institutions (“FIs”) to not pursue broadly-applied “de-risking” strategies.  De-risking is the term for a FI’s decision to terminate a business relationship, or refuse to do business, with a type of customer because that type is associated with a perceived heightened risk of involvement in money laundering or terrorist financing.  Indeed, both new publications caution FIs against turning away potential customers, or closing the accounts of existing customers, on the basis of general customer types.  However, regulators themselves have been criticized for encouraging de-risking by driving highly risk-adverse decisions by FIs, who are unwilling to take the chance and assume the compliance costs of doing business with specific customers who may in fact be “legitimate,” but whose risk profile is deemed to be high due to their group affiliation.  Some front-line regulatory BSA/AML examiners arguably may review a FI’s compliance in a narrow and check-the-box manner versus a more holistic approach, and will not truly value broader societal and equity issues such as the need for equal access to the global financial system, particularly by certain industries and persons living in less-developed countries.  Accordingly, although these new publications are welcome, it might have been better if they had been more explicit – particularly because it is arguably ironic for regulators to be chiding FIs for conforming to de-risking behavior that regulators themselves have encouraged.

Continue Reading FinCEN and Federal Functional Regulators Issue Coded Warnings Against De-Risking

The Financial Crimes Enforcement Network (FinCEN) and the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a joint alert on June 28, 2022, warning of evasion attempts by individuals or entities to circumvent BIS export controls implemented in response to the Russian Federation’s renewed invasion of Ukraine. Both agencies urged financial institutions to remain vigilant against bad actors’ attempts to evade BIS export controls. The alert provided an overview of current BIS export restrictions, listed particular commodities of concern for export control evasion, and outlined transactional and behavioral red flags that could indicate attempts to avoid sanctions.

This is FinCEN’s third alert in relation to sanctions imposed on Russian in response to the war in Ukraine.  As we previously blogged, on March 7, 2022, FinCEN urged vigilance by financial institutions against potential Russian Federation attempts to evade sanctions. On March 16, 2022, FinCEN reiterated the need for increased vigilance by financial institutions in detecting suspicious transactions involving real estate, luxury goods, and other high-value assets.

The joint alert comes on the heels of the June 27, 2022 announcement by the United States and the other G7 nations to intensify their coordinated sanction measures in response to Russia’s war of aggression.  A day later, on June 28, 2022, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued determinations pursuant to prior Executive Orders implementing the new measures.  These include prohibiting the importation of Russian gold (EO 14068), as well as new sanctions and export restrictions on entities like Rostec, a key Russian state owned conglomerate, which forms the foundation of Russia’s defense industry (EO 14024).

Continue Reading FinCEN and BIS Issue Joint Alert on Potential Russian and Belarusian Export Control Evasion

On June 23, 2022, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective (SRP) for spring 2022.  In the SRP, the OCC opines on its current safety and soundness concerns for banks under its regulatory umbrella, focusing on Russia sanctions, climate-related risk, and rising inflation.  Despite these challenges, the OCC believes that “[b]anks’ financial condition remains strong and positioned to deal with the economic headwinds.”

Of special note, the OCC also believes compliance risk is “heightened” for Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC) compliance because of world events and compliance staffing concerns.  In addition, the OCC warns that banks face an “elevated” risk of cyber attacks and fraud or cybersecurity risks related to digital assets.

Continue Reading OCC Highlights Risks Associated with Compliance Staffing Concerns, Russia Sanctions, Environmental Crimes, Cyber Attacks and Digital Assets

Judge Jed Rakoff of the Southern District of New York issued an opinion last week on a motion to dismiss in a putative class action securities fraud case against Deutsche Bank (“DB”) and several current and former bank executives. The opinion, while technically a “split decision,” allows the bulk of plaintiffs’ claims to proceed to the class certification phase – dismissing claims only with regard to the bank’s current and former CFOs.

The case against DB and its current and former CEO now proceeds to the class certification phase – which, if the Court continues at its current pace, may culminate sooner rather than later. Aside from continuing to keep DB in the headlines for all the least desirable reasons, this case may continue to serve as an ongoing object lesson in the costs – legal, financial, reputational – of talking the talk, but potentially failing to walk the walk, with regards to anti-money laundering (“AML”) and “Know Your Customer” (“KYC”) compliance.

Continue Reading SDNY Allows Putative Class Action Securities Fraud Case Based on Alleged AML Deficiencies to (Mostly) Proceed

On June 15, FinCEN issued an Advisory on Elder Financial Exploitation (“Advisory”) to warn financial institutions about the rising trend of elder financial exploitation (“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 Advisory is detailed.  It highlights new EFE typologies and potential red flags and builds upon a related advisory issued in 2011.  It also offers tips on Suspicious Activity Report (“SAR”) filings and describes other resources available to fight EFE.

Continue Reading FinCEN Warns Against Elder Financial Exploitation