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On July 31, 2023, the United States Securities and Exchange Commission (“SEC”) published an alert outlining deficiencies the Department of Examinations has observed in broker-dealers’ (“BD”) compliance with anti-money laundering (“AML”) and countering terrorism financing (“CTF”) requirements.  While the alert addresses overarching compliance requirements for BDs, it focuses on deficiencies the Department of Examinations has observed with regard to independent testing of BDs’ AML programs, personnel training and identification and verification of customers and their beneficial owners.

The alert makes two over-arching observations.  First, BDs “did not appear to devote sufficient resources, including staffing, to AML compliance given the volume and risks of their business.”  Second, the “effectiveness of policies, procedures, and internal controls was reduced when firms did not implement those measures consistently.”  Emphasizing the key elements of an adequate AML program BDs must implement, the Alert then shifts its focus to independent testing and training and customer identification and customer due diligence.…

Continue Reading  SEC Issues Alert Outlining Deficiencies in Broker-Dealers’ AML Compliance

In an unusual move, Laura Akahoshi, former Rabobank (the “Bank”) Chief Compliance Officer (“CCO”), filed on July 6, 2023 an opposition to the Office of the Comptroller of the Currency’s (“OCC”) dismissal of its own administrative enforcement proceeding against her.  Akahoshi filed her petition in the U.S. Ninth Circuit Court of Appeals, arguing in part that the Administrative Procedures Act and 18 U.S.C. § 1818 provide the court with jurisdiction to review the OCC’s dismissal.

The OCC’s initial enforcement proceeding stemmed from allegations that Akahoshi participated in an effort to withhold information from an OCC examiner in connection with an examination of the Bank’s Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) program.  Specifically, the OCC alleged that Akahoshi had committed misconduct by failing to provide a report created by a third-party consulting firm regarding the adequacy of the Bank’s BSA/AML program.

The case against Akahoshi was one of several administrative enforcement actions that the OCC pursued after Rabobank NA agreed in February 2018 to pay more than $360 million in AML-related settlements reached with the U.S. Department of Justice (“DOJ”) and the OCC. As we previously blogged, the Bank’s former general counsel Daniel Weiss entered into a 2019 Consent Order in which he agreed to be barred from the banking industry and to pay a $50,000 fine.  Many of the allegations contained within the Notice of Charges against Akahoshi mirrored those contained within the Notice of Charges against Weiss.

Akahoshi’s efforts face significant legal challenges, as exemplified by the fact that, as we discuss, an ALJ recently denied her application for the $4.2 million in attorney fees and costs that she expended defending herself against the OCC enforcement action.  Nonetheless, the matter highlights several important and inter-related issues:  the potential liability of individuals for alleged AML compliance failures, and the related powers of regulators; the potential tensions between the interests of individual AML compliance personnel and the financial institution; the role of whistleblowers; and how regulators and the government can use AML compliance audits and reviews by third-party consultants – which can vary greatly in quality, and sometimes can double as stealth business pitches by the consultants – as a sword against the institution.…

Continue Reading  Former Bank Compliance Chief Seeks Appellate Review of OCC Administrative Enforcement Proceeding Dismissal

Last week, FinCEN “communicated,” so to speak, to private industry, law enforcement, regulators, and legislators in three very different ways:  through a FY 2022 Year In Review infographic; a first-of-its kind enforcement action against a trust company; and in statements before the U.S. House of Representatives.  This post summarizes each of these developments, which are unified by the motif of FinCEN asserting that it has an increasing role in protecting the U.S. financial system against money laundering, terrorist financing and other illicit activity; providing critical data and analytical support to law enforcement agencies pursuing these goals; and simultaneously policing and trying to collaborate with private industry regarding these goals.…

Continue Reading  FinCEN Round Up:  FY 2022 in Review; First AML Enforcement Against a Trust Company; and Comments to Congress

On October 19, 2022, the U.S. Attorney’s Office for D.C., on behalf of the Financial Crimes Enforcement Network (“FinCEN”), filed a civil complaint against Larry Dean Harmon (“Harmon”), seeking $60 million in civil penalties for alleged violations of the Bank Secrecy Act (“BSA”) in connection with Harmon’s involvement in now-defunct cryptocurrency services Helix and Coin Ninja LLC.  The complaint seeks to obtain a judgment on FinCEN’s 2020 Assessment of Civil Money Penalty against Harmon (“Assessment”), which is attached to the complaint and includes a detailed statement of facts.

As we have blogged, Harmon previously pled guilty to operating an unlicensed money transmitter business.  Harmon’s sentencing hearing in the criminal case has been continued, and he reportedly has been attempting to cooperate with the government.  It appears that the civil complaint may represent something of a formality:  it seeks to reduce the assessment against Harmon to an actual civil judgment, upon which the government can collect in theory, in anticipation of Harmon’s criminal sentencing and any potential additional matters in which he may attempt to cooperate.

According to the complaint, starting in 2014, Harmon operated Helix, a bitcoin “mixing” service, which Harmon allegedly advertised explicitly as a way for customers to conceal their identities from the government.  The statement of facts attached to the Assessment alleged that Harmon “publicly advertised Helix on Reddit forums dedicated to darknet marketplaces, actively seeking out and facilitating high-risk transactions directly through customer service and feedback.”  Such “mixing” services – designed to maximize anonymity – increasingly have drawn the ire of the government, as reflected by the recent and controversial action by the Office of Foreign Assets Control to sanction virtual currency “mixer” – or passive technology – Tornado Cash.  …

Continue Reading  DOJ Files Lawsuit for $60 Million in Civil Penalties for Alleged BSA Violations by Crypto “Mixer”

Actions Highlight Risky Mix of Sanctions Law, Inadequate Transaction Monitoring and Dealing with Anonymity-Enhanced Cryptocurrencies

The Office of Foreign Assets Control (“OFAC”) and the Financial Crimes Enforcement Network (“FinCEN”) announced on October 11 simultaneous settlements with Bittrex, Inc. (“Bittrex”), a virtual currency exchange and hosted wallet provider. Under the OFAC settlement, Bittrex has agreed to pay $24,280,829.20 to settle its potential civil liability for 116,421 alleged violations of multiple sanctions programs. Under the FinCEN consent order, Bittrex agreed to pay a civil penalty of $29,280,829.20 for alleged anti-money laundering (“AML”) violations under the Bank Secrecy Act (“BSA”). FinCEN has agreed to credit Bittrex’s payment to OFAC against its penalty because it found that the alleged BSA violations “stem from some of the same underlying conduct”; thus, Bittrex’s total payments to the two regulators come to $29,280,829.20. 

According to the Department of the Treasury dual press release, the two settlements represent the first parallel enforcement actions by FinCEN and OFAC in the virtual currency and sanctions space. Also, it is OFAC’s largest virtual currency enforcement action to date. To further highlight the importance of the settlements, the press release quotes the OFAC Director Andrea Gacki and FinCEN Acting Director Himamauli Das, both sternly warning operators in the same environment as Bittrex to implement effective AML compliance and sanction screening programs.

It is conceivable that Bittrex, for years now, has been on notice that federal and state regulators are closely watching and expecting more comprehensive risk assessment programs and procedures from businesses transacting with virtual currency. As we previously blogged here, in 2019 the New York Department of Financial Services (“NYDFS”) denied Bittrex’s application for a Bitlicense, citing: “deficiencies in Bittrex’s BSA/AML/OFAC compliance program; a deficiency in meeting the Department’s capital requirement; and deficient due diligence and control over Bittrex’s token and product launches.”  In its letter denying Bittrex’s application, NYDFS set forth in detail the deficiencies it found in Bittrex’s BSA/AML/OFAC compliance program, noting that Bittrex’s compliance policies and procedures “are either non-existent or inadequate.”

As we will discuss, the FinCEN consent order highlights Bittrex’s alleged failure to address adequately the overall risk environment in which it operated, including transactions involving anonymity-enhanced cryptocurrencies, or AECs.  The consent order also highlights two repeated themes in enforcement actions: lack of adequate compliance staff, and a seemingly robust written compliance policy that was not matched by an effective day-to-day transaction monitoring system.…

Continue Reading  OFAC and FinCEN Settle with Bittrex in Parallel Virtual Currency Enforcements

Consent Order Stresses that Only Three AML Analysts Struggled to Review 100 “Alerts” Per Day, Each – and Notes in Passing that “Outside Examiners” Blessed the Bank’s AML Program for the Same Five Years that the Bank Allegedly Maintained a Willfully Deficient Program

On December 16, 2021, the Financial Crimes Enforcement Network (“FinCEN”) entered into a Consent Order with CommunityBank of Texas, N.A. (“CBOT”), in which CBOT admitted to major shortcomings with respect to the implementation and effectiveness of its anti-money laundering (“AML”) program. The monetary penalties imposed on CBOT are substantial: FinCEN assessed an $8 million penalty, although CBOT will receive credit for a separate $1 million penalty to be paid to the Office of the Comptroller of the Currency (“OCC”).

The Consent Order, available here, offers valuable insight into FinCEN’s reasoning for its enforcement actions.  According to the Consent Order, CBOT has a regional footprint and operates several branches in Texas.  It serves small and medium-sized businesses and professionals.  And, in the “back of the house,” CBOT established a typical AML system designed to detect and escalate alerts for suspicious activity for investigation and potential filing of Suspicious Activity Reports (“SARs”). However, FinCEN alleged that over a period of at least four years, CBOT “willfully” failed to effectively implement its AML, program, leading to a failure to file SARs and otherwise detect specific suspicious activity.  As detailed below, many of the alleged shortcomings of CBOT’s AML program flowed from a lack of compliance resources and personnel between 2015 and 2019: too few analysts were assigned to review and investigate potentially suspicious transactions, and as a result, downstream investigations and due diligence suffered, including an alleged failure to file at least 17 specific SARs.

Because the detailed Consent Order offers a somewhat rare opportunity to glean FinCEN’s reasoning behind its enforcement actions generally, we explore the alleged failures in some detail below.  Then, we summarize key details of the Consent Order, offer key takeaways, and note several questions that the Consent Order still leaves unresolved.
Continue Reading  FinCEN Assesses Civil Penalty Against CommunityBank of Texas for AML Program Weaknesses

Government Alleges Systemic and Deliberate AML Failures

Filings Describe Tools for CVC Exchanges to Use for Customer Due Diligence and Transaction Monitoring

The Financial Crimes Enforcement Network (“FinCEN”) and the Commodity Futures Trading Commission (“CFTC”) announced on August 10 (here and here) settlements with the operators of the BitMEX cryptocurrency trading platform for alleged anti-money laundering (“AML”) violations under the Bank Secrecy Act (“BSA”), and for allegedly failing to register with the CFTC.  More specifically, FinCEN’s assessment of a civil monetary penalty and the CFTC’s consent order both involved the five companies operating the BitMEX platform: HDR Global Trading Limited, 100x Holding Limited, ABS Global Trading Limited, Shine Effort Inc Limited, and HDR Global Services (Bermuda) Limited (collectively, “BitMEX”).

BitMEX will pay regulators up to a combined $100 million civil monetary penalty; perform a “lookback” regarding the potential need to file additional Suspicious Activity Reports (“SARs”); and hire an independent consultant to conduct two reviews of BitMEX’s operations, policies, procedures, and controls, in order to confirm that BitMEX is not operating in the U.S., and that no U.S. customers are able to trade with the BitMEX platform.

According to the government filings, BitMEX is one of the oldest cryptocurrency derivative exchanges, with 1.3 million user accounts and a collection of annual fees in excess of $1 billion.  Combined, the government filings allege that for a period of six years between November 2014 and October 1, 2020, BitMEX offered trading of cryptocurrency derivatives to retail and institutional customers in the U.S. and worldwide through BitMEX’s website. Customers in the U.S. placed orders to buy or sell contracts directly through the website and BitMEX was aware that U.S. customers could access the BitMEX platform via virtual private network (“VPN”).

The civil penalty will be split between FinCEN and the CFTC.  However, the settlement involves an interesting “carrot” offered by the regulators:  $20 million of the penalty is suspended pending the successful completion of the SAR lookback and the two independent consultant reviews.

According to the government’s allegations, BitMEX deliberately ignored for years the most basic AML requirements, resulting in multitudinous violations and inviting – and even encouraging – its customers to launder illicit funds.  As we will describe, the government has alleged that BitMEX operated on the announced pretext that it was not subject to the BSA or U.S. commodities laws because it had no U.S. customers or operations, when senior management knew otherwise.
Continue Reading  FinCEN and CFTC Reach Groundbreaking $100 Million AML Settlement with BitMEX

Case Presages Mandatory BSA Obligations for Antiquities Dealers under the AML Act

Exhibit A to the Amended Forfeiture Complaint: The Dream Tablet

In the midst of the invasion of Iraq and the subsequent civil instability, thousands of cultural artifacts were stolen from the National Museum of Iraq.  Among them: the Dream Tablet of Gilgamesh (the “Dream Tablet”), a clay tablet at least 3,000 years old, inscribed with part of the oldest works of narrative poetry in the world, the Epic of Gilgamesh.

The Dream Tablet illegally wound its way to the United States in 2003, and Hobby Lobby purchased it in 2014 for $1.67 million.  Now, it is returning to Iraq.  Per a July 27, 2021 Department of Justice (“DOJ”) press release, the Eastern District of New York ordered Hobby Lobby to forfeit the Dream Tablet because its importation violated the United States’ ban on the importation of Iraqi archaeological and ethnological materials.

Although this is not a pure money laundering case, this forfeiture action implicates the intersection of the antiquities and art trades and anti-money laundering (“AML”) concerns, a subject we cover frequently, including in a recent guest post by on potential AML regulations for the antiquities and art market.  Of course, the Anti-Money Laundering Act of 2020 (“AML Act”) in part imposes Bank Secrecy Act (“BSA”) obligations on antiquities dealers by defining a “person 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” as a “financial institution” covered by the BSA.  The Dream Tablet case illustrates the issues that antiquities dealers will have to face under a mandatory BSA/AML regime, including the filing of Suspicious Activity Reports (“SARs”).
Continue Reading  DOJ Obtains Forfeiture of the Dream Tablet of Gilgamesh

Covered Companies Must Report Beneficial Ownership to National Database Upon Incorporation

First Blog Post in an Extended Series on Legislative Changes to BSA/AML Regulatory Regime

Change is upon us.  The U.S. House and Senate have passed – over a Presidential veto – the National Defense Authorization Act (“NDAA”), a massive annual defense spending bill.  As we have blogged, this bill, now law, contains historic changes to the Bank Secrecy Act (“BSA”), coupled with other changes relating to money laundering, anti-money laundering (“AML”), counter-terrorism financing (“CTF”) and protecting the U.S. financial system against illicit foreign actors. This sweeping legislation will affect financial institutions, their clients, and law enforcement and regulators for many years.  This will be the first post of many on these important legislative changes, which should produce related regulatory pronouncements throughout 2021.

Today, we will focus on the enactment that has received the most attention:  the NDAA’s adoption of the Corporate Transparency Act (“CTA”) and its requirements for covered legal entities to report their beneficial owners at the time of their creation to a database accessible by U.S. and foreign law enforcement and regulators, and to U.S. financial institutions seeking to comply with their own AML compliance obligations.  The issue of beneficial ownership and the misuse of shell corporations has been at the heart of global AML regulation and enforcement for many years.  This legislation will be held out as a partial but important response to the continuing critiques by the international community of the United States as a haven for money laundering and tax evasion, often due to the perception that U.S. and state laws on beneficial ownership reporting are lax.

Beyond “just” the CTA, the breadth of the BSA/AML legislation is substantial. We have discussed BSA/AML reform for years, and many of the reforms (acknowledging that the word “reform” often involves a value judgment, and whether a particular change represents “reform” is typically in the eye of the beholder) that have been repeatedly bandied about by Congress, industry, think tanks and law enforcement are incorporated into this legislation, or at least referenced as topics for further study and follow-up.  We therefore will be blogging repeatedly on the many and various components of this legislation, which implicates a broad array of key issues: BSA/AML examination priorities; attempting to modernize the BSA regulatory regime, including by improving feedback by the government on the usefulness of SAR reporting; potential “no action” letters by FinCEN; requiring process-related studies tied to the effectiveness and costs of certain BSA requirements, including current SAR and CTR reporting; increased penalties under the BSA for repeat offenders; greater information sharing among industry and the government; enhancing the ability of the government to investigate the use of correspondent bank accounts; cyber security issues; focusing on trade-based money laundering; adding a whistleblower provision to the BSA; and including dealers in antiquities to the definition of “financial institutions” covered by the BSA.
Continue Reading  U.S. Passes Historic BSA/AML Legislative Change

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series — a weekly podcast focusing on the consumer finance issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.  Following up on a recent blog post,…