Customer Due Diligence

Subscribe to Customer Due Diligence

First of Three Posts in a Related Series on Recent AML and Money Laundering Prosecutions

The Department of Justice (“DOJ”) has been very active in the Bank Secrecy Act (“BSA”) / Anti-Money Laundering (“AML”) space, as reflected by a recent series of individual prosecutions and corporate non-prosecution agreements (“NPAs”). 

In this first blog post, we will discuss a significant prosecution of an individual, and two related corporate NPAs, involving the gaming industry. 

In the next related post, we will discuss two unusual prosecutions involving, respectively, an individual executive of a bank and an alleged AML specialist working with small financial institutions.  

In our final post, we will discuss the prosecution and sentencing of a lawyer who allegedly became part of the fraud and money laundering scheme perpetrated by his crypto client.

Although these cases are all unique and interesting in their own way, they are also all united in certain ways – particularly in regards to the need for institutions to perform sufficient due diligence regarding the conduct and source of funds of high- or higher-risk customers, and the related need for institutions to ensure that their own employees are not undermining the institutions’ AML compliance programs.

Continue Reading  Criminal Case Round-Up: Recent Prosecutions Involving Casinos

The beneficial ownership information (“BOI”) registry under the Corporate Transparency Act (“CTA”) is now up and running at the Financial Crimes Enforcement Network (“FinCEN”).  This post will follow up on a previous blog regarding the recently-published CTA BOI access regulations (the “Access Rule”).  As we will discuss, the Access Rule leaves open many important questions for financial institutions (“FIs”) covered by the CTA, as they await further proposed regulations from FinCEN regarding alignment of the CTA with the Customer Due Diligence (“CDD”) Rule.

The full federal register publication for the Access Rule is here.  It is 82 pages long.  We therefore have created this separate 13-page document, which is slightly more user-friendly, setting forth only the actual regulations (now published at 31 C.F.R. § 1010.955).

Continue Reading  Final CTA Access Rule Answers Some Questions, and Leaves Open Others

This morning, the Financial Crimes Enforcement Network (“FinCEN”) issued the much-anticipated final rule (“Final Rule”) under the Corporate Transparency Act (“CTA”) regarding access to beneficial ownership information (“BOI”) reported to FinCEN.  These regulations could hardly have arrived any later than they did – the CTA becomes effective on January 1, 2024, although FinCEN recently extended the reporting deadline for companies created in 2024 to a period of 90 days from the date of creation. 

The access regulations initially proposed in December 2022 (see our blog post here) were complex; the Final Rule is as well, or more so.  Indeed, it is over 247 pages long, prior to its final publication version in the Federal Register.  Given the Final Rule’s length, we will analyze it in more detail in a future blog post. 

Today, we will describe the YouTube video contemporaneously released by FinCEN, which describes the Final Rule at a high level, and notes certain differences between it and the initially proposed regulations.  The headline here is that FinCEN has attempted to address certain criticisms raised by financial institutions regarding the initially proposed regulations and their access to BOI.  In the video, FinCEN Director Andrea Gacki observed that FinCEN still needs to propose regulations aligning the CTA with the existing Customer Due Diligence (“CDD”) Rule for banks and other financial institutions (“FIs”), which requires covered FIs to obtain BOI from designated entity customers.

This blog post is high-level and focuses only on the statements made during the video.  The details of the Final Rule still need to be parsed.  Also, FinCEN continued the information onslaught today by issuing an accompanying news release, fact sheet, statement for banks, and statement for non-bank financial institutions.

Continue Reading  FinCEN Issues Final CTA BOI Access Rules, Heralded by YouTube Video

A Huge Monetary Penalty for Sprawling Allegations – But Will Zhao Receive a Prison Sentence?

As the world now knows, Binance Holdings Limited, doing business as Binance.com (“Binance” or the “Company”), has entered into a plea agreement with the U.S. Department of Justice (“DOJ”).  

Binance is registered in the Cayman Islands and regarded as the world’s largest virtual currency exchange. It agreed to plead guilty to conspiring to willfully violating the Bank Secrecy Act (“BSA”) by failing to implement and maintain an effective anti-money laundering (“AML”) program; knowingly failing to register as a money services business (“MSB”); and willfully causing violations of U.S. economic sanctions issued pursuant to the International Emergency Economic Powers Act (“IEEPA”). Despite the plea agreement, Binance will continue to operate.

Changpeng Zhao, also known as “CZ,” also pleaded guilty to violating the BSA by failing to implement and maintain an effective AML program. Zhao is Binance’s primary founder, majority owner, and – until now – CEO. As part of his plea agreement, Zhao has stepped down as the CEO, although he apparently will keep his shares in Binance.

As part of its plea agreement, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total criminal penalty of $4,316,126,163. Binance also entered into related civil consent orders with the Financial Crimes Enforcement Network (“FinCEN”), the Commodity Futures Trading Commission (“CFTC”), and the Office of Foreign Assets Controls (“OFAC”). Zhao also entered into a consent order with the CFTC.

The allegations are vast and detailed, and much digital ink already has been spilled regarding this matter. Our discussion therefore will be relatively high-level. Distilled, the government alleges that Binance – under the direction of Zhao – tried to hide the fact that it operated in the U.S., purposefully avoided any meaningful AML compliance, and consequently laundered many millions of dollars’ worth of cryptocurrency involving extremely serious criminal conduct, including terrorism, child pornography, and U.S. sanctions evasion.

As for Zhao, and as we will discuss, whether he will go to prison – and if so, for how long – is an open and very interesting question. His sentencing currently is scheduled for February 23, 2024.

Continue Reading  Binance Settles Criminal and Civil AML and Sanctions Enforcement Actions for Multiple Billions – While its Founder, Owner and Former CEO Zhao Pleads Guilty to Single AML Crime

The Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) recently issued Joint Notice FIN-2023-NTC2, “Announnc[ing] New Reporting Key Term and Highlight[ing] Red Flags Relating to Global Evasion of U.S. Export Controls” (the “Joint Notice”). As we have blogged (here and here), these agencies issued two prior joint alerts warning financial institutions (“FIs”) about efforts by individuals or entities to evade Russia-related export controls administered by BIS.

The practical import of the Joint Notice – which re-emphasizes the focus of the U.S. government on fighting sanctions evasion – is that many customers involved in international trade should be subject to some degree of enhanced due diligence by FIs, simply because they participate in international trade.  FIs should review and adjust their risk assessments accordingly.

Continue Reading  FinCEN and BIS Issue Joint Notice on SAR Filings for Evasion of U.S. Export Controls

On August 8, 2023, the American Bar Association (“ABA”) House of Delegates voted overwhelmingly (216–102) to pass Revised Resolution 100 (the “Resolution”), which in turn revised ABA Model Rule of Professional Conduct 1.16 and its Comments (the “Rule”) to explicitly recognize a lawyer’s duty to assess the facts and circumstances of a representation at the time the lawyer is engaged and throughout the representation to ensure that the lawyer’s services are not used to “commit or further a crime or fraud.”

The Comments to the Rule clearly illustrate that the ABA is concerned with the use of a lawyer’s services to—wittingly or unwittingly—assist clients in laundering money.  The Resolution itself acknowledges this, stating “the impetus for these proposed amendments was lawyers’ unwitting involvement in or failure to pay appropriate attention to signs or warnings of danger . . . relating to a client’s use of a lawyer’s services to facilitate possible money laundering and terrorist financing activities.”  And the ABA’s press release echoes this concern, noting the Rule was revised “because of concern that lawyers’ services can be used for money laundering and other criminal and fraudulent activity.”

Continue Reading  American Bar Association Revises Model Rule of Professional Conduct to Combat Money Laundering

The Financial Crimes Enforcement Network (“FinCEN”) has issued a notice entitled “FinCEN Calls Attention to Payroll Tax Evasion and Workers’ Compensation Fraud in the Construction Sector” (the “Notice”).  According to the Notice, “state and federal tax authorities [annually] lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers.”

The Notice describes these combined schemes as follows.  Individuals create a shell company whose sole purpose is to allow construction contractors to avoid paying workers’ compensation premiums as well as state and federal payroll taxes.  The operators of the shell company will take out a minimal workers’ compensation policy and “rent” or sell the policy to construction contractors that employ a much larger number of workers than the policy is designed to cover.  The insurance policy enables the shell company to apply for and receive official business registration status.  The shell company operators will include the business license and tax documents in the package “rented” to the contractors.  This is the insurance fraud aspect.  Although insurance fraud is a state and local crime, it easily can be charged federally through use of the mail and wire fraud statutes.  Mail and wire fraud also can serve as predicate offenses – more precisely, “Specified Unlawful Activities” – underlying federal money laundering charges.

Continue Reading  FinCEN Issues Notice on Payroll Tax Evasion and Workers’ Compensation Fraud in the Construction Industry

On July 31, 2023, the United States Securities and Exchange Commission (“SEC”) published an alert outlining deficiencies the Division 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 Division 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

As we have blogged repeatedly, there is a close nexus between money laundering and tax crimes.  The frequent connection between the two sets of offenses – and the potentially related methods of combatting them – is a topic that is receiving growing attention.  It is important for many reasons, including the increase in international cooperation and information sharing across countries and law enforcement agencies in regard to both sets of offenses.

We therefore are very pleased to welcome to Money Laundering Watch guest bloggers Emmanuel Mathias and Adrian Wardzynski, who have authored a well-received Working Paper, Leveraging Anti-Money Laundering Measures to Improve Tax Compliance and Help Mobilize Domestic Revenues as part of the International Monetary Fund (“IMF”) publication series (“Working Paper”).

As we will discuss, the Working Paper advocates leveraging anti-money laundering (“AML”) measures to enhance tax compliance, tackle tax crimes, and help mobilize domestic revenues.

Emmanuel Mathias heads the Governance and Anti-Corruption division in the IMF’s Legal Department, where he oversees the IMF’s work on anti-corruption and the rule of law. He also worked extensively on AML issues. Prior to joining the IMF in 2005, Emmanuel served as a researcher in economics, was trained as a customs special agent, and worked for the French Financial Intelligence Unit. Emmanuel holds a Ph.D. in Economics from the University of Paris – Pantheon Sorbonne. He graduated from the Institute of political studies of Strasbourg, and was admitted to the French national school of administration.

Adrian Wardzynski works in the Financial Integrity division in the IMF’s Legal Department. In his role as a Counsel he focuses on financial integrity issues relating to money laundering, tax crimes, and corruption. Before joining the IMF in 2021, Adrian was a Tax Policy Advisor at the Organization for Economic Cooperation and Development. He also worked on taxation of multinational enterprises and financial institutions in the private sector and Switzerland’s State Secretariat for International Finance. Adrian holds an LL.M. in Taxation from the London School of Economics and Political Sciences.

The IMF is a global organization which works to achieve sustainable growth and prosperity for all of its 190 member countries. It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being To fulfill these missions, IMF member countries work collaboratively with each other and with other international bodies.

This blog post again takes the form of a Q & A session, in which Mr. Mathias and Mr. Wardzynski, in their personal capacities, respond to questions posed by Money Laundering Watch about the Report. We hope you enjoy this discussion of this important topic. – Peter Hardy and Siana Danch.

Continue Reading  Leveraging AML Measures to Combat Tax Crimes. A Guest Blog.

Without much fanfare, the Financial Crimes Enforcement Network (FinCEN) published in June its Spring 2023 Rulemaking Agenda, which provides proposed timelines for upcoming key rulemakings projected throughout the rest of 2023.  FinCEN continues to focus on issuing rulemakings required by the Anti-Money Laundering Act of 2020 (the “AML Act”) and the Corporate Transparency Act (“CTA”).  FinCEN has been criticized for being slow in issuing regulations under the AML Act and the CTA, but Congress has imposed many obligations upon FinCEN, which still is a relatively small organization with a limited budget.

Continue Reading  FinCEN Provides Key Updates on Rulemaking Agenda Timeline