May 2018

On May 16, 2018, the Securities Exchange Commission (“SEC”) announced it had settled charges against a registered broker-dealer, its clearing firm, and its chief compliance and anti-money laundering (“AML”) officer brought over the firm’s failure to file Suspicious Activity Reports (“SARs”) related to customers’ liquidation of billions of penny stocks over an eight month period.  In a companion action, the Financial Industry Regulatory Authority (“FINRA”) imposed a monetary penalty against the clearing firm for various AML compliance failures.

Chardan Capital Markets, LLC (“Chardan”) was a registered broker-dealer primarily engaged in underwriting private investment in public equity (“PIPEs”), private placements and initial public offerings (“IPOs”). In 2013, Chardan allegedly began actively engaging in the liquidation of thinly-traded penny stocks of microcap issuers.  Industrial and Commercial Bank of China Financial Services, LLC (“ICBCFS”) is a registered broker-dealer that, in late 2012, began clearing equity securities and, from October 2013 through June 2014, cleared Chardan’s customers’ penny-stock transactions.

We previously have blogged about the SEC and FINRA stepping up their AML-related enforcement, as well as the issue of AML-related individual liability for compliance officers and executives (see here, here, here, here and here).  Aside from reaffirming the dubious nature of penny stock trading, this case once again reflects the need to actually act on identified red flags and file related SARs.
Continue Reading  SEC Sanctions Broker-Dealer, Clearing Firm and Chief Compliance Officer for AML Violations

Incorporation Solidifies Customer Due Diligence as “Fifth Pillar” to BSA/AML Compliance Program

May 11, 2018 was the much anticipated effective date for the Customer Due Diligence (“CDD”) Requirements for Financial Institutions Rule (the “Beneficial Ownership Rule”) issued by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). On the same day, the Federal Financial Institutions Examination Council (“FFIEC”) released two updates to the Bank Secretary Act/Anti-Money Laundering (“BSA/AML”) examination manual that incorporate and clarify the CDD Requirements and Beneficial Ownership Rule.  The FFIEC is an interagency body that is “empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions.”  The FFIEC examination manual drives the principles and obligations of covered financial instructions in creating BSA/AML compliance programs.  The new updates further clarify the FinCEN rules and solidify CDD as the fifth pillar of the BSA/AML compliance regime.

As we previously blogged here, when FinCEN announced its final rule on CDD requirements it established two important requirements for covered financial institutions.  First, the covered financial institutions were required to establish procedures to identify and verify the beneficial owners of all legal entity customers. Second, the rule required covered financial institutions to adopt ongoing risk-based CDD procedures as part of their AML compliance programs – including developing and updating customer risk profiles and conducting ongoing AML monitoring.  We previously provided practical guidance to aid covered financial institutions in preparing for implementation of these two requirements.  Now we will highlight the key considerations of FFIEC examination manual addressing these topics.  Of particular interest, the new FFIEC examination manual provisions state in part that regulatory examiners are not supposed to engage in second-guessing specific decisions; rather, during an examination “the bank should not be criticized for individual customer decisions unless it impacts the effectiveness of the overall CDD program, or is accompanied to evidence of bad faith or other aggravating factors.”
Continue Reading  FFIEC Manual Incorporates Beneficial Ownership Rule and CDD Requirements

Relief is Narrow, but FinCEN’s Explanation of Low Money Laundering Risk Posed by Lending Products is Instructive

On May 11, the Financial Crimes Enforcement Network (“FinCEN”) issued a ruling to provide exceptive relief from the application of the new Beneficial Ownership rule (the “BO Rule,” about which we repeatedly have blogged: see here, here and here) to premium finance lending products that allow for cash refunds.

Very generally, the BO Rule — effective as of May 11, 2018 — requires covered financial institutions to identify and verify the identity of the beneficial owner of legal entity customers at account opening. One exemption provided by the BO Rule from its requirements is when a legal entity customer opens a new account for the purpose of financing insurance premiums and the payments are remitted directly by the financial institution to the insurance provider or broker.  However, this exemption does not apply when there is a possibility of cash refunds.

In its May 11th ruling, FinCEN granted exceptive relief from the BO Rule to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund.  Although this exception is narrow when compared to the many other financial institutions covered by the broad BO Rule, FinCEN’s explanation for why the excepted entities present a low risk for money laundering is potentially instructive in other contexts, such as risk assessments undertaken by financial institutions for the purposes of their anti-money laundering (“AML”) compliance programs.
Continue Reading  FinCEN Provides Exceptive Relief from New Beneficial Ownership Rule

Exterior of the Robert F. Kennedy U.S. Department of Justice Building in Washington, D.C.

In a highly anticipated speech to the New York City Bar White Collar Crime Institute this morning, Deputy Attorney General Rod Rosenstein announced two new Department of Justice (“DOJ”) policies: first, a directive encouraging “coordination among Department…

On April 19, 2018, the European Parliament (“EP”) adopted the European Commission’s (the “Commission”) proposal for a Fifth Anti-Money Laundering Directive (“AMLD5”) to prevent terrorist financing and money laundering through the European Union’s (“EU”) financial system. The Commission proposed this directive on July 26, 2016 to build upon and amend the Fourth Anti-Money Laundering Directive (“AMLD4”) – before all 28 member states even implemented AMLD4.

Under AMLD4, the EU sought to combat money laundering and terrorist financing by imposing registration and customer due diligence requirements on “obliged entities,” which it defined as banks and other financial and credit institutions. It also called for the creation of central registers comprised of information about who owns companies operating in the EU and directed that these registers be accessible to national authorities and obliged entities.  However, the European Central Bank warned that AMLD4 failed to effectively address recent trends in money laundering and terrorist financing, which have spanned multiple jurisdictions and fallen both within and outside of the traditional financial sector.  As a result, and in response to recent terrorist attacks in Europe and to the Panama Papers, the EP has adopted AMLD5 to more effectively keep pace with these recent trends.

Although AMLD5 contains several important provisions, including a proposed public registry of beneficial owners of legal entities, we focus here on how AMLD5 addresses, for the first time, the potential money laundering and terrorist financing risks posed by virtual currencies.
Continue Reading  The Fifth Anti-Money Laundering Directive:  Extending the Scope of the European Union’s Regulatory Authority to Virtual Currency Transactions

I had the pleasure of being interviewed by Isaac Chotiner of Slate, the daily on-line magazine, regarding the mechanics of the federal money laundering statutes.   Isaac was particularly interested in how those statutes might apply to real estate transactions – a topic of definite interest these days.  Please see the interview here.

If…

FinCEN announced on May 3, 2018 that Artichoke Joe’s, a card club and casino located in San Bruno, California and founded in 1916, has entered into a revised civil money penalty assessment regarding alleged deficiencies under the Bank Secrecy Act (“BSA”).  The most interesting aspect of this revised assessment is that it allows the casino to reduce its original $8 million penalty by $3 million if it successfully completes certain compliance undertakings.

No press release has been issued to date by FinCEN regarding this revised assessment, so its specific genesis is unclear.  Nonetheless, the revised assessment illustrates that financial institutions facing Anti-Money Laundering (“AML”)/BSA enforcement actions might be able to mitigate the financial consequences — not only when negotiating the initial penalty assessment, but even after it has been imposed — by undertaking steps towards enhanced compliance and monitoring.  It is also unclear whether the onerous nature of the original assessment, when compared to the available financial resources of the assessed institution, may have played a role in the revision.
Continue Reading  FinCEN Extends $3 Million Carrot to Card Club and Casino: Reduce Assessed Civil Penalty by Completing Compliance Undertakings