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On November 22, 2023, the Financial Crimes Enforcement Network (“FinCEN”), in close coordination with the Internal Revenue Service (“IRS”) Criminal Investigation (“CI”), issued an alert (“Alert”) regarding the COVID-19 Employee Retention Credit (“ERC”). The Alert echoes the FinCEN’s previous Notice on payroll tax evasion and workers’ compensation fraud in the construction sector, which was similarly issued by FinCEN in coordination with IRS CI, which has established itself as one of the primary “consumers” of Bank Secrecy Act (“BSA”) reports filed with FinCEN.

Since 2020, IRS CI has investigated more than $2.8 billion of potentially fraudulent ERC claims. The Alert indicates that ERC fraud occurs when fraudulent claims are filed using shell companies or existing but ineligible businesses to pay for personal expenses upon receipt of the credit. The fraud also occurs when businesses are “duped” into filing for the ERC by a third-party, who often provides the business with misinformation about program qualifications and takes a fee to help the business file a claim for the ERC.

Continue Reading  FinCEN Issues Alert on COVID-19 Employee Retention Tax Credit Fraud

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…

The Financial Crimes Enforcement Network (“FinCEN”) issued on February 24, 2021 “an [A]dvisory to alert financial institutions to fraud and other financial crimes related to Economic Impact Payments (EIPs), authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.” The Advisory describes EIP…

Providing yet more proof that anything positive can be twisted into something negative, the Financial Crimes Enforcement Network (“FinCEN”) released a Notice yesterday “to alert financial institutions about the potential for fraud, ransomware attacks, or similar types of criminal activity related to COVID-19 vaccines and their distribution.”  This Notice comes on the heels of several…

In the wake of the ongoing pandemic, various charities have been created with mission statements specific to COVID-19. What seems like an opportunity for giving back may present yet another vehicle for fraud to money launderers and other fraudsters.

To try to help weed out the legitimate from the not so innocent, on November 19, 2020, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a press release announcing a joint fact sheet (Fact Sheet), prepared in coordination with Federal Banking Agencies (defined below), “to provide clarity to banks on how to apply a risk-based approach to charities and other non-profit organizations (NPOs).” The press release and Fact Sheet seek to strike a balance between recognizing “the important role played by the charitable sector, especially during the COVID-19 pandemic” while reminding financial institutions to utilize the risk-based approach when conducting due diligence and developing risk profiles for charities and other NPOs.

This not the first time that the Treasury Department has raised concerns about charities, albeit in a different context: according to the Treasury Department’s reports on the 2020 National Strategy for Combatting Terrorist and other Illicit Financing and the 2018 National Terrorist Financing Risk Assessment, some charities and non-profit organizations (NPOs) “have been misused to facilitate terrorist financing.” And it is certainly not the first time that FinCEN has raised concerns about specific types of fraud fueled by the global pandemic (see here, here and here).
Continue Reading  COVID-19 & Philanthropic Fraud

Advisory Suggests that COVID-19 Pandemic Exacerbates Conditions Contributing to Trafficking

The Financial Crimes Enforcement Network (“FinCEN”) recently issued an Advisory on Identifying and Reporting Human Trafficking and Related Activity (“Advisory”). This Advisory supplements FinCEN’s 2014 Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking – Financial Red Flags (“2014 Advisory”).

According to the Advisory, human trafficking is one of the most profitable and violent forms of international crime, generating an estimated $150 billion worldwide per year. A variety of industries within the United States are susceptible to human trafficking—hospitality, agricultural, janitorial services, construction, restaurants, care for persons with disabilities, salon services, massage parlors, retail, fairs and carnivals, peddling and begging, child care, domestic work, and drug smuggling and distribution.

FinCEN further indicates that “[t]he global COVID-19 pandemic can exacerbate the conditions that contribute to human trafficking, as the support structures for potential victims collapse, and traffickers target those most impacted and vulnerable.” In light of changing circumstances, the Advisory lists four additional typologies and 20 new red flags to help assist in identifying and reporting human trafficking – many of which pertain to the use of currency, an increasingly rare phenomenon in today’s digital economy. The Advisory urges financial institutions, including customer-facing staff that may be in contact with victims of human trafficking, to educate themselves on current methodologies used by traffickers and facilitators. The most practical aspects of the Advisory appear to be those that highlight the red flags which may arise with personal interactions between bank staff and customers who in fact are engaging in trafficking.
Continue Reading  FinCEN Issues Advisory on Human Trafficking

On October 13, the Financial Crimes Enforcement Network (“FinCEN”) issued a COVID-19-related Advisory “to alert financial institutions to unemployment insurance (“UI”) fraud observed during the COVID-19 pandemic.” It is the fourth in a series of Advisories related to financial crimes arising from the pandemic (we covered previous Advisories on medical scams, imposter and money…

Can BSA/AML Requirements Lead to Deemed Knowledge of Borrower Fraud?

The first two weeks of August brought a milestone of sorts in the ongoing recovery from the economic downturn brought on by the COVID-19 pandemic. The Paycheck Protection Program (“PPP”) ended its enrollment period on August 8, 2020 and the window for borrowers to apply to have their PPP loans forgiven opened on August 10, 2020.

The PPP was a centerpiece of the over $2 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that, according to a study by the Massachusetts Institute of Technology published on July 22, 2020 had to that point saved between 1.4 and 3.2 million jobs. Less formally observed but possibly more widely agreed, the PPP caused at least as many headaches with its rocky initial rollout and the ongoing uncertainty over applicable loan forgiveness standards. But, whereas implementing the PPP poses challenges to lenders now, due to the rampant fraud in the program (which, along with all COVID-19-related enforcement actions and policy statements, we track here) and its funding mechanics, it creates substantial downstream enforcement risk through the False Claims Act (“FCA”) for participating financial institutions.

Numerous districts already have charged borrowers with PPP-related fraud. To date, cases generally involve one of these scenarios:

  • Borrowers submitted fraudulent loan applications and supporting documents to seek PPP funds for businesses that either already had failed pre-pandemic or that they did not actually own.
  • Borrowers lied about amount, or even existence, of employees and payroll. These schemes involve inflated numbers of employees for companies, or even completely fake companies.
  • Borrowers certified that they would use loan funds to support payroll expenses or other allowable expenses, but in fact used all or most loan funds to pay personal and non-business expenses.

The prosecutions to date have all centered on relatively obvious fraud by borrowers, not lenders. But, wider-reaching investigations are occurring and though we are very much at the beginning of the enforcement phase, the magnitude of fraud in these programs is coming into focus. On September 1, 2020, the House Select Committee on the Coronavirus Crisis released a preliminary analysis finding, among other things, over $1 billion in fraudulent PPP loans were issued and identifying red flags with respect to an additional $2.98 billion in loans made to 11,000 borrowers.

And, as we discuss, the anti-money laundering (“AML”) requirements of lenders imposed under the Bank Secrecy Act (“BSA”) may expose lenders to greater risk under the FCA, which can impose civil liability for the reduced mental state of reckless disregard. Many lenders have extended PPP loans to previously-existing customers. This is a rational business decision, given typically lower business risks presented by existing customers and lower compliance costs, because existing customers do not need to provide beneficial ownership information under the Customer Due Diligence (“CDD”) rule of the BSA. However, because lenders also are required under the BSA to understand to a degree the historical and current activities of its customers, lenders may be deemed in future FCA actions to have “known” about red flags generated by fraudulent borrowers because of information obtained by the lenders properly executing their AML programs. That is, compliance with the BSA ironically may generate evidence for downstream FCA enforcement actions based on deemed “knowledge” by the lender of borrower malfeasance. This irony may be exacerbated by any disconnect in real time between the AML compliance staff at financial institutions and the front-line business people extending loans, particularly given the incredible speed with which institutions have extended PPP loans, at the government’s urging.

The point here is not that PPP lenders will face direct regulatory liability for alleged BSA/AML failures – although they may. Rather, the point is that PPP lenders may face enhanced FCA liability due to borrower information obtained through an entirely functional BSA/AML program. This phenomenon highlights the need for the “front” and “back” offices at lenders to communicate.
Continue Reading  PPP Lenders and Fraudulent Borrowers: False Claims Act Liability and AML Risk

AML Standards May Exist in Theory, But Often are Not Enforced in Practice

Today we are very pleased to welcome, once again, guest bloggers Gretta Fenner and Dr. Kateryna Boguslavska of the Basel Institute on Governance (“Basel Institute”). The Basel Institute recently issued its Basel AML Index for 2020. Ms. Fenner and Dr. Boguslavska guest blogged for Money Laundering Watch last year on this data-rich and fascinating annual Index, which is one of several online tools developed by the Basel Institute to help both public- and private-sector practitioners tackle financial crime. The Index is a research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing.

Established in 2003, 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 more.

Gretta Fenner is the Managing Director of the Basel Institute, where she also holds the position of Director of the Institute’s International Centre for Asset Recovery. She is a political scientist by training and holds bachelor’s and master’s degrees from the Otto-Suhr-Institute at the Free University Berlin, Germany, and the Paris Institute for Political Science (Sciences Po), France. She also holds an MBA from the Curtin University Graduate School of Business, Australia.

Dr. Kateryna Boguslavska is Project Manager for the Basel AML Index at the Basel Institute. A political scientist, she holds a PhD in Political Science from the National Academy of Science in Ukraine, a master’s degree in Comparative and International Studies from ETH Zurich as well as a master’s degree in Political Science from the National University of Kyiv-Mohyla Academy in Ukraine. Before joining the Basel Institute, Dr. Boguslavska worked at Chatham House in London as an Academy Fellow for the Russia and Eurasia program.

This blog post again takes the form of a Q & A session, in which Ms. Fenner and Dr. Boguslavska respond to several questions posed by Money Laundering Watch about the Basel AML Index 2020. We hope you enjoy this discussion of global money laundering risks — which addresses AML standards vs. their actual implementation, human trafficking, AML vulnerabilities in the U.S., the effects of covid-19, and more. –Peter Hardy
Continue Reading  The Basel AML Index 2020: Across the Globe, Weak Oversight and Dormant Enforcement Systems.  A Guest Blog.

The Financial Crimes Enforcement Network (“FinCEN”) just issued yet another Advisory regarding fraud threats faced by financial institutions, as exacerbated by the COVID-19 pandemic. This Advisory pertains to “Cybercrime and Cyber-Enabled Crime Exploiting the Coronavirus Disease (COVID-19) Pandemic.” We consistently have blogged on FinCEN’s pronouncements on the enhanced fraud risks created by COVID-19.…