First in a Two-Part Series on the Utility of BSA Filings

Today we are very pleased to welcome guest blogger, Don Fort, who is the Director of Investigations at Kostelanetz LLP, and the past Chief of the Internal Revenue Service’s Criminal Investigation (CI) Division

As Chief of IRS-CI from 2017 to 2020, Don led the sixth largest U.S. law enforcement agency, managing a budget of over $625 million and a worldwide staff of approximately 3,000, including 2,100 special agents in 21 IRS field offices and 11 foreign countries. Don’s time in law enforcement included overseeing investigations of some of the most significant financial crimes involving tax evasion, sanctions evasion, money laundering, bribery, international corruption, bank malfeasance, cyber and cryptocurrency crimes, and terrorist financing.

We reached out to Don because we were interested in his perspective on the 2023 Year-in-Review (YIR) published by the Financial Crimes Enforcement Network (FinCEN), on which we previously blogged.  According to the YIR, there are about 294,000 financial institutions and other e-filers registered to file Bank Secrecy Act (BSA) reports with FinCEN.  Collectively, they filed during FY 2023 a total of 4.6 million Suspicious Activity Reports (SARs) and 20.8 million Currency Transaction Reports (CTRs), as well as 1.6 million Reports of Foreign Bank and Financial Accounts (FBARs), 421,500 Forms 8300 regarding cash payments over $10,000 received in a trade or business, and 143,200 Reports of International Transportation of Currency or Monetary Instruments (CMIRs) for certain cross-border transactions exceeding $10,000.  Although the YIR necessarily represents only a snapshot lacking full context, only a very small portion of those filings ever became relevant to actual federal criminal investigations.  But, the YIR makes clear that one of the most, or the most, important consumers of BSA filings is IRS-CI.

In our next related blog, we will discuss the utility of filings in the global anti-money laundering/countering the financing of terrorism compliance regime, from the perspective of industry – specifically, recent publications by the Wolfsberg Group, and the Bank Policy Institute, the Financial Technology Association, the Independent Community Bankers of America, the American Gaming Association, and the Securities Industry and Financial Markets Association.

This blog post again takes the form of a Q&A session, in which Don responds to questions posed by Money Laundering Watch about the impact of BSA filings, from the perspective of IRS-CI.  We hope you enjoy this discussion on this important topic. – Peter Hardy and Siana Danch

Continue Reading BSA Filings and Their Utility to Law Enforcement:  A Guest Blog

On July 3, the Financial Crimes Enforcement Network (FinCEN) published a notice of proposed rulemaking (NPRM) as part of a broader initiative to “strengthen, modernize, and improve” financial institutions’ anti-money laundering and countering the financing of terrorism (AML/CFT) programs. In addition, the NPRM seeks to promote effectiveness, efficiency, innovation, and flexibility with respect to AML/CFT programs; support the establishment, implementation, and maintenance of risk-based AML/CFT programs; and strengthen the cooperation between financial institutions (“FIs”) and the government.

This NPRM implements Section 6101 of the Anti-Money Laundering Act of 2020 (the “AML Act”).  It also follows up on FinCEN’s September 2020 advanced notice of proposed rulemaking soliciting public comment on what it described then as “a wide range of questions pertaining to potential regulatory amendments under the Bank Secrecy Act (‘BSA’) . . . . to re-examine the BSA regulatory framework and the broader AML regime[,]” to which FinCEN received 111 comments.

As we will discuss, the NPRM focuses on the need for all FIs to implement a risk assessment as part of an effective, risk-based, and reasonably designed AML/CFT program.  The NPRM also focuses on how consideration of FinCEN’s AML/CFT Priorities must be a part of any risk assessment.  However, in regards to addressing certain important issues, such providing comfort to FIs to pursue technological innovation, reducing the “de-risking” of certain FI customers and meaningful government feedback on BSA reporting, the NPRM provides nothing concrete.

FinCEN has published a five-page FAQ sheet which summarizes the NPRM.  We have created a 35-page PDF, here, which sets forth the proposed regulations themselves for all covered FIs.

The NPRM has a 60-day comment period, closing on September 3, 2024.  Particularly in light of the Supreme Court’s recent overruling of Chevron deference, giving the courts the power to interpret statutes without deferring to the agency’s interpretation, this rulemaking, once finalized, presumably will be the target of litigation challenging FinCEN’s interpretation of the AML Act. 

Continue Reading FinCEN Issues Proposed Rulemaking Aimed at Strengthening and Modernizing AML Programs Across Multiple Industries

Opinion Can Invite New Challenges to Long-Standing BSA/AML Regulations

On July 1, 2024, the Supreme Court issued its opinion in Corner Post, Inc. v Board of Governors of the Federal Reserve System in which the Court determined when a Section 702 claim under the Administrative Procedure Act (APA) to challenge a final agency action first accrues. In a 6-3 Opinion, the Supreme Court sided with Corner Post in holding that a right of action first accrues when the plaintiff has the right to assert it in court—and in the case of the APA, that is when the plaintiff is injured by final agency action.

This ruling could open the litigation floodgates for industry newcomers to challenge longstanding agency rules. These APA challenges will be further aided by the Supreme Court’s recent overruling of Chevron deference, giving the courts the power to interpret statutes without deferring to the agency’s interpretation.

This development is relevant to potential challenges to anti-money laundering (“AML”) regulations promulgated under the Bank Secrecy Act (“BSA”) or other statutory schemes by the Financial Crimes Enforcement Network, the federal functional regulators, the Securities Exchange Commission, and FINRA. Many BSA/AML regulations were promulgated many years ago. Historically, litigation challenges to BSA/AML regulations have been rare. Given the combined effect of recent rulings by the Supreme Court, that could change.

Continue Reading Supreme Court Opens Door to More APA Challenges by Ruling that Right of Action Accrues When Regulation First Causes Injury

Advisory is Accompanied by Related OFAC and DOJ Actions

On June 20, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a supplemental advisory to alert U.S. financial institutions about emerging trends in the illicit fentanyl supply chain. The supplemental advisory emphasized the increasing involvement of Mexico-based transnational criminal organizations (“TCOs”) in the procurement of fentanyl precursor chemicals and manufacturing equipment from suppliers in the People’s Republic of China (“PRC”).

The detailed supplemental advisory builds upon FinCEN’s 2019 advisory (see our blog post here) by introducing new typologies and red flags for financial institutions to try to identify and report suspicious transactions.  As we discuss, the supplemental advisory was accompanied by related actions by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of Justice (“DOJ”) as part of an apparently coordinated effort by the federal government to combat this pernicious illicit industry.

Continue Reading FinCEN Issues Supplemental Advisory on Fentanyl Distribution and Growing Role of Transnational Criminal Organizations

Case Involves “Right to Control” Theory on Illicit Access to Bank Accounts Through Evasion of Banks’ AML Controls.  These Cases Will Continue.

In United States v. An, et al., 22-cr-640 (KAM) (E.D.N.Y. May 7, 2024), the Eastern District of New York recently addressed and rejected an argument by defendants that Ciminelli v. United States required dismissal of money laundering charges against them because the government had failed to allege that they had deprived or attempted to deprive banks of “property”. In attempting to harmonize the government’s approach with Ciminelli, the court defined a property interest by the banks in their customers’ accounts that will likely require further refinement by the Second Circuit, and perhaps draw the attention of the Supreme Court.

We previously blogged on the Supreme Court’s decision in Ciminelli, in which Justice Thomas, writing for a unanimous Court, rejected the Second Circuit’s longstanding “right to control” theory of fraud as a basis of liability under the federal wire fraud statute. In that post, we articulated the possible ramifications for the Department of Justice (“DOJ”) and its prosecution of bank fraud cases, because the opinion did not limit itself to wire fraud but instead made frequent and more general reference to “the federal fraud statutes”.  We suggested that the DOJ may have to reconsider its tactic of charging bank fraud, rather than a violation of the Bank Secrecy Act (“BSA”), based upon a defendant’s alleged acts of concealment which impacted victim banks’ ability to comply with the BSA.

The An opinion is complicated, and we summarize here only.  Although the DOJ won the motion at issue, which turned on the face of the indictment, related factual issues remain for trial.  Further, the basic legal issue may produce different outcomes in different courts.

Continue Reading EDNY Upholds Money Laundering Charge Against Defense Attack Under Ciminelli

On June 14, 2024, President Biden declared June 15th World Elder Abuse Awareness Day.  In honor of the day, the Financial Crimes Enforcement Network (FinCEN) reminded financial institutions (FIs) to remain vigilant in identifying and reporting elder financial exploitation (EFE).

In issuing the reminder, FinCEN cited the Financial Trend Analysis (2024 Analysis) it recently performed which focused on patterns and trends identified in Bank Secrecy Act data linked to EFE, which we previously blogged on here.  In performing that analysis, FinCEN studied 155,415 suspicious activity reports (SARs) filed by FIs that referred to EFE.  Those SARs indicated approximately $27 billion in EFE-related suspicious activity occurred between June 15, 2022 and June 15, 2023.

In its reminder, FinCEN also recommended that FIs refer suspected victims of EFE to the Department of Justice’s National Elder Fraud Hotline and that victims file reports with the Federal Bureau of Investigation’s Internet Crime Complaint Center (IC3).

Although not cited in FinCEN’s reminder, on April 30, 2024, the IC3 issued its own Elder Fraud Report (the IC3 Report) based on complaints it received in 2023.  The IC3 Report showed that complaints of EFE to the IC3 increased by 14% in 2023, and associated losses increased by approximately 11%.  However, the FBI noted that many of these crimes go unreported, and it warned that the threat EFE poses is likely much greater.

There are several key takeaways from the IC3 report:

  • Elder fraud is a costly crime, with fraud against individuals aged 60 and over causing more than $3.4 billion in losses in 2023.  The average older victim reported losing nearly $34,000, while 5,920 older victims reported losing more than $100,000.
  • Older people are disproportionately impacted by scams and fraud, with more than 101,000 victims aged 60 and over reporting these types of crimes in 2023.  In contrast, the second most impacted demographic – individuals aged 30-39 years old – filed 88,138 reports with losses totaling over $1.1 billion – less than a third of the $3.4 billion in losses experienced by older victims.  
  • Tech support scams were by far the most widely reported type of EFE, with the next most common type of scam, personal data breaches, being reported less than half as often.
  • While tech support scams were reported most often, investment scams were the most costly type of EFE in 2023, costing older victims more than $1.2 billion.

While the numbers in the IC3 Report were lower than those in FinCEN’s 2024 Analysis, recall that FinCEN’s analysis studied SAR filings, while the IC3 Report studied complaints of actual fraud (and, as stated previously, most victims do not file reports). 

FinCEN’s reminder – especially as accentuated by its 2024 Analysis and the IC3 Report – underscores the costly and growing problem EFE poses.  In issuing the 2024 Analysis and its June 2022 EFE Advisory (which we blogged on here), FinCEN has made it abundantly clear that it not only expects FIs to report EFE, but also to protect the elderly against scams.  To that end, in addition to identifying and reporting EFE, FIs should develop, implement and maintain internal protocols and procedures for protecting elder account holders.

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 U.S. Department of the Treasury (“Treasury”) has released a Request for Information on the Uses, Opportunities, and Risks of Artificial Intelligence (“AI”) in the Financial Services Sector (“RFI”).  Written comments are due by August 12, 2024. 

AI is a broad topic and the term is sometimes used indiscriminately; as the RFI suggests, most AI systems being used or contemplated in the financial services sector involve machine learning, which is a subset of AI.  The RFI implicitly concedes that Treasury is playing “catch up” and quickly needs to learn more about AI and how industry is using it.  The RFI discusses a vast array of complex issues, including anti-money laundering (“AML”) and anti-fraud compliance, as well as fair lending and consumer protection concerns – particularly those pertaining to bias.

Continue Reading Treasury Issues Request for Information on Use of AI in Financial Services

The Financial Crimes Enforcement Network (“FinCEN”) has issued its Year in Review for FY 2023 (“YIR”).  It consists of five pages of infographics.  According to FinCEN’s press release:

The Year in Review is intended to help stakeholders gain insight into the collection and use of Bank Secrecy Act [(“BSA”)] data, including FinCEN’s efforts to support law enforcement and national security agencies. The Year in Review includes statistics from fiscal year 2023 on BSA reporting and how it is queried and used by law enforcement agencies. The Year in Review also includes information on how FinCEN uses and analyzes BSA reporting to fulfill its mission, including to support alerts, trend analyses, and regulatory actions. The publication of the Year in Review is in furtherance of FinCEN’s commitment to provide information and statistics on the usefulness of BSA reporting, consistent with Section 6201 of the Anti-Money Laundering Act of 2020.

According to the YIR, there are approximately 294,000 financial institutions and other e-filers registered to file BSA reports with FinCEN.  Collectively, they filed during FY 2023 a total of 4.6 million Suspicious Activity Reports (“SARs”) and 20.8 million Currency Transaction Reports (“CTRs”), as well as 1.6 million Reports of Foreign Bank and Financial Accounts (“FBARs”), 421,500 Forms 8300 regarding cash payments over $10,000 received in a trade or business, and 143,200 Reports of International Transportation of Currency or Monetary Instruments (“CMIRs”) for certain cross-border transactions exceeding $10,000.

As we will discuss, a massive amount of SARs and CTRs are filed every year.  Apparently – and the YIR necessarily represents only a snapshot lacking full context, so extrapolation is dangerous – only a very small portion of those filings ever become relevant to actual federal criminal investigations.  Further, the YIR suggests that information sharing under Section 314 of the Patriot Act between the government and financial institutions remains an under-utilized tool.

Continue Reading FinCEN Releases Year-in-Review for FY 2023: SARs, CTRs and Information Sharing

On May 13th, the Financial Crimes Enforcement Network (FinCEN) and the Securities Exchange Commission (SEC) issued a joint notice of proposed rulemaking (NPRM) that would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish a customer identification program (CIP). This joint NPRM is the second recent rulemaking effort aimed at investment advisers. In February, FinCEN issued a separate NPRM amending the definition in the Code of Federal Regulations of “financial institution” under the Bank Secrecy Act (BSA) to include investment advisers, which would require implementation of an anti-money laundering/countering terrorist financing (AML/CFT) compliance program. In this earlier NPRM, FinCEN alluded to a future joint rulemaking regarding CIP requirements for investment advisers.

The NPRM highlights that CIPs are long-standing, foundational components of an AML program. The NPRM requires a CIP similar to existing CIP requirements for other financial institutions, as FinCEN and the SEC want to ensure “effectiveness and efficiency” for investment advisers that are affiliated with other financial institutions, including banks, broker-dealers, or open-end investment companies that are already subject to CIP requirements.  

Background

Investment advisers have not been previously subject to CIP requirements, unless they were also a registered broker-dealer, a bank, or an operating subsidiary of a bank, and therefore already covered separately by the BSA. In many cases, investment advisers already voluntarily comply with CIP requirements, or their functional equivalent.

This joint NPRM implements section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”). Section 326 requires the Secretary of the Treasury to promulgate regulations setting forth the minimum standards for “financial institutions” regarding the identity of their customers in connection with the opening of an account at a financial institution. More specifically, and as the NPRM notes, the BSA defines “financial institution” to include, in a catch-all provision, “any business or agency which engages in any activity which the Secretary of the Treasury determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described in this paragraph is authorized to engage[.]”  That is the statutory authority upon which this NPRM and the earlier NPRM rest.  If FinCEN’s proposed amendment to the regulatory definition of “financial institution” is finalized and survives any legal challenges, investment advisers will be required to implement and maintain a CIP, as well as AML programs.

Continue Reading FinCEN and SEC Propose Rulemaking Requiring CIP for Investment Advisers

Strategy Touts Regulations on Beneficial Ownership, Real Estate and Investment Advisers, but Bemoans Lack of Supervisory Resources for Non-Bank Financial Institutions

The U.S. Department of the Treasury has issued its 2024 National Strategy for Combatting Terrorist and Other Illicit Financing (“Strategy”).  It is a 55-page document which, according to the government’s press release, “addresses the key risks from the 2024 National Money Laundering, Terrorist Financing, and Proliferation Financing Risk Assessments. . . and details how the United States will build on recent historic efforts to modernize the U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) regime, enhance operational effectiveness in combating illicit actors, and embrace technological innovation to mitigate risks.”

The Strategy discusses an enormous list of topics.  Given the breadth of its scope, the Strategy generally makes only very high-level comments regarding any particular topic.  This post accordingly is extremely high level as well, and offers only a few select comments. 

Continue Reading Treasury Issues Broad National Strategy for Combatting Illicit Financing