Financial Action Task Force (FATF)

On November 12, 2019, FinCEN issued its latest Advisory on the Financial Action Task Force-Identified Jurisdictions with Anti-Money Laundering and Combatting the Financing of Terrorism Deficiencies and Relevant Actions by the United States Government. The Financial Action Task Force (FATF) is a 39-member intergovernmental body, including the United States, that establishes international standards to combat money laundering, the financing of terrorism and proliferation of weapons of mass destruction (WMDs). As part of its listing and monitoring process to ensure compliance with its international Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) standards, the FATF identifies certain jurisdictions as having “strategic deficiencies” in their AML/CFT regimes.

In its latest Advisory, FinCEN notes the changes in the FATF-named jurisdictions and directs financial institutions to consider these changes when reviewing their obligations and risk-based policies, procedures and practices relating to the named jurisdictions. We will discuss these changes and suggest some practical takeaways for U.S. financial institutions seeking to ensure compliance with these changes in their AML programs.
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Second Post in a Two-Post Series

As we blogged yesterday, the issue of the beneficial ownership of entities and the potentially pernicious role of shell companies in perpetuating money laundering is the primary anti-money laundering (“AML”) concern across the globe for both enforcement officials and the financial industry.  Consistent with this concern, the Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, has issued a document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities, and sets forth some high-level recommendations.  Meanwhile, and as we just blogged, the U.S. House passed H.R. 2513, a two-part Act which sets forth in its initial section the Corporate Transparency Act, or CTA. If enacted, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties.

However, it has been difficult to implement in practice beneficial ownership requirements in countries that already create repositiories of such information for law enforcement to access — as envisioned by the CTA.  The FAFT Best Practices Guidance represents an evaluation of historical efforts by the member countries’ approaches to the collection and maintenance of beneficial ownership information, followed by certain recommendations for going forward.
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U.S. House Passes Corporate Transparency Act; FATF Issues Guidance on Identifying Entities’ Beneficial Owners

First Post in a Two-Post Series on Beneficial Ownership

As we often blog, the issue of the beneficial ownership of entities and the potentially pernicious role of shell companies in perpetuating money laundering is the primary anti-money laundering (“AML”) concern across the globe for both enforcement officials and the financial industry.

Consistent with this concern, and within a single week, both the U.S. House of Representatives and the Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, recently took notable steps in the fight against the misuse of shell companies. Specifically, on October 23 the House passed H.R. 2513, a two-part Act which sets forth in its initial section the Corporate Transparency Act, or CTA. If passed into legislation, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties. Meanwhile, FATF has issued a detailed document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities, and sets forth some high-level recommendations.

Today, we will discuss the CTA. Tomorrow, we will discuss FATF’s Best Practices Guidance, which approaches the problem of beneficial ownership from a different angle – the Guidance and its recommendations represent an evaluation of historical efforts by the member countries’ approaches to the collection and maintenance of beneficial ownership information in countries that already create repositiories of such information for law enforcement, as envisioned by the CTA.
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The Pink Mosque in Shiraz, Iran

On October 25, 2019, FinCEN issued a final rule imposing the Fifth Special Measure against the Islamic Republic of Iran as a “jurisdiction of primary money laundering concern” (“Final Rule”) under Section 311 of the USA PATRIOT ACT.  The Final Rule will prohibit the opening or maintaining of a correspondent bank account in the U.S. for, or on behalf of, an Iranian financial institution.  It also will prohibit the correspondent accounts of foreign financial institutions at covered U.S. financial institutions from processing transactions involving Iranian financial institutions.
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A Modest Proposal

The European Union (“EU”) recently has grappled with a series of massive money laundering scandals and strategized about how to more effectively combat international money laundering and corruption. Generally, the EU has continued to issue a series of reports identifying systemic vulnerabilities to money laundering and suggest process-based recommendations for how to address future threats. These recommendations typically mirror the same range of process-based improvements set forth in earlier reports: from enhancing cross-border information sharing to increasing resources for adequate implementation and enforcement of anti-money laundering (“AML”) and counter financing of terrorism (“CFT”) policies implemented by EU member states and financial institutions. Noticeably absent from these recommendations is one of the most powerful deterrents available – and a distinctly American approach – prosecuting the bad actors.

Although many of the recent EU money laundering scandals rest on conduct occurring years ago, the recurring waves of scandals strongly suggest that the EU – like the U.S. – has a serious problem with money laundering that is not going away any time soon. They likewise indicate that the EU’s financial system will continue to be abused by bad actors who appear to be unfazed by any potential consequences. The EU therefore should consider emulating – at least in part – the American approach of more aggressively investigating and prosecuting individuals, including the corrupt politicians, kleptocrats, drug dealers, fraudsters, and other criminals from around the globe who are laundering sometimes massive amounts of funds through European financial institutions.

Very recently, in a different but related context, the Chairman of the U.S. Securities and Exchange Commission (“SEC”), Jay Clayton, delivered a speech during which he bemoaned his perception that his foreign counterparts failed to rigorously enforce their own anti-corruption laws. Specifically, Chairman Clayton asserted the following:

Corruption is corrosive. We see examples where corruption leads to poverty, exploitation and conflict. Yet, we must face the fact that, in many areas of the world, our work may not be having the desired effect. Why? In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.

Granted, the above comments pertained specifically to enforcement of the Foreign Corrupt Practices Act (“FCPA”), and arguably the comments were in furtherance of a pro-American message regarding international competition between countries. The comments nonetheless exemplifies a certain American perception: the U.S. aggressively prosecutes individuals, whereas Europe does not. Obviously, this issue entails a lot of cultural baggage on both sides.

Although there are viable criticisms of the U.S. approach (both in theory and in practice), and although the EU’s strong focus on process and institutions’ AML and CFT systems is critical, any government’s enforcement “tool bag” must include targeted prosecutions of the people responsible for the laundering violations. Otherwise, few bad actors around the world will think twice about continuing to turn to EU institutions for their laundering needs. This blog post explores this idea.
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Today we are very pleased to welcome 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 2019. As they explain below, this data-rich and fascinating Index, on which we blogged last year, 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 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 2019. We hope you enjoy this discussion of global money laundering risks — which addresses AML compliance vs. actual effectiveness, kleptocracy, transparency, de-risking, and more. –Peter Hardy
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On June 21, 2019, the Financial Action Task Force (“FATF”), a multi-national, inter-governmental body established in 1989 “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system,” issued its Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (the “Guidance”), i.e. virtual currency and virtual currency platforms.

Although the standards adopted by FAFT and recommended to member countries were telegraphed months prior to issuance of the Guidance, it nevertheless sent shockwaves through the virtual currency market due to FAFT’s adoption of standards many call onerous and others call impossible to meet. Notwithstanding this backlash, at a meeting of members of the Group of Twenty (“G20”) held in Osaka, Japan on June 28-29, 2019, the G20 nations declared they “reaffirm [their] commitment to applying the recently amended FAFT Standards to virtual assets and related providers for anti-money laundering and countering the financing of terrorism.” Thus, member nations will begin the process of crafting regulations intended to carry out the FAFT recommendations.
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Testimony Supports Bill Requiring States to Collect Beneficial Ownership Information at Entity Formation

As we have blogged, the proposed Corporate Transparency Act of 2019 (the “Act”) seeks to ensure that persons who form legal entities in the U.S. disclose the beneficial owners of those entities. Specifically, the Act would amend the Bank Secrecy Act (“BSA”) to compel the Secretary of Treasury to set minimum standards for state incorporation practices. Thus, applicants forming a corporation or LLC would be required to report beneficial ownership information directly to FinCEN, and to continuously update such information.

If passed, the Act would build significantly upon FinCEN’s May 11, 2018 regulation regarding beneficial ownership (“the BO Rule,” about which we blog frequently and have provided practical tips for compliance here and here). Very generally, the BO Rule requires covered financial institutions to identify and verify the identities of the beneficial owners of legal entity customers at account opening. The issue of beneficial ownership is at the heart of current global anti-money laundering efforts to enhance the transparency of financial transactions.

On May 21, the U.S. Senate Committee on Banking, Housing and Urban Affairs, held a hearing entitled: “Combating Illicit Financing by Anonymous Shell Companies Through the Collection of Beneficial Ownership Information.” This hearing, which provided fuel for passage of the Act, featured the exact same trio of speakers who had appeared before the Committee during a November 2018 hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform,” which pertained to a broader set of potential changes to the BSA. The speakers were:

  • Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy and Community Affairs at the Office of the Comptroller of the Currency (“OCC”) (written remarks here)
  • Kenneth A. Blanco, Director of FinCEN (written remarks here); and
  • Steven D’Antuono, Acting Deputy Assistant Director of the FBI (written remarks here).

Unlike the broader November 2018 hearing, which featured some distinct tensions between certain positions of the OCC and those of FinCEN and the FBI, this hearing reflected close alignment amongst the speakers. Every speaker stressed the advantages to be reaped by law enforcement, regulators and the public if a national database of beneficial owners was required and created. Only the OCC acknowledged the need to consider the issue and sometimes competing concern of the regulatory burden imposed on financial institutions by the current BSA/AML regime, and even the OCC seemed to assume that a national database on beneficial ownership would represent only a boon to financial institutions, as opposed to yet more data – however helpful – to be absorbed and acted upon to the satisfaction of regulators. None of the speakers addressed some of the potential ambiguities and problems inherent in the current language of the Act, such as the fact that the Act lacks precision and fails to define the critical terms “exercises substantial control” or “substantial interest,” both of which drive the determination of who represents a beneficial owner.
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As we have blogged (here and here), the United States – despite its self-perception as a global financial cop and “good guy” – is often regarded by the world as a haven for money laundering and tax evasion. The U.S. just took another black eye in the arena of global perception: the European Commission (“EC”) has placed the U.S. Virgin Islands, Puerto Rico, Guam and American Samoa on a list of 23 high-risk jurisdictions which it says are “posing significant threats” to the European Union’s financial system as a result of deficiencies in their Anti-Money Laundering (“AML”) and Countering the Financing of Terror (“CFT”) systems. Specifically, the EC perceives these jurisdictions as being attractive to money laundering and tax crimes. The listed United States’ territories and Commonwealths are not alone; they dubiously share space on the EC’s blacklist with Saudia Arabia and Panama.

Not surprisingly, the U.S. reaction was swift and angry: the U.S. Department of Treasury released a statement declaring that the list was flawed; the list was created without any meaningful input from the United States; and that the list contradicted the more careful analysis conducted by the Financial Action Task Force. Further, the Treasury Department stated that U.S. financial institutions should ignore this blacklisting, and did not need to apply any greater scrutiny to implicated transactions.
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On December 7 and 10, 2018, the Financial Action Task Force (“FATF”) released two reports evaluating the United Kingdom’s (“UK”) and Israel’s anti-money laundering (“AML”) and counter-terror financing (“CTF”) programs and welcomed Israel as the 38th member of the task force. The FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”). When releasing both reports, the FATF described the UK and Israel as key leaders and innovators in the fight against ML/TF and provided several recommendations on how both programs can be strengthened.

Because both reports total over 250 pages, this blog post focuses on only the key findings in each report.  The FATF Evaluation of the United Kingdom (the “UK Report”) concluded that, although the UK has effective and robust AML policies addressing both current and future threats, it needs to improve its AML oversight by increasing the resources dedicated to its financial intelligence unit. Meanwhile, the Joint FATF/MONEYVAL Evaluation of Israel (the “Israel Report”) praised the country’s effective use of financial intelligence but found that Israel needs to strengthen its preventative measures to address future ML/TF risks.


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