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European Commission Proposes EU-Level Supervisory Authority and Cryptocurrency Travel Rule

European Banking Authority Offers New Guidelines on AML Compliance Officers

Just as the United States has expanded significantly its anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) regulatory and enforcement regime through recent passage of the AML Act of 2020, the European Union (“EU”) has taken significant steps this summer towards implementing a rigorous new transnational AML enforcement framework.  Recent legislative proposals by the European Commission (the EU’s executive branch) aim to combat cross-border crime by ensuring uniform implementation and enforcement of AML/CFT principles, rules, and regulations, and by creating new recordkeeping requirement for certain cryptocurrency transactions.  Following the announcement of these legislative proposals, the European Banking Authority proposed in late July new EU-wide guidelines for AML/CFT compliance officers.  We examine each of these in turn.
Continue Reading  European Union Round-Up:  A Summer of AML Enforcement and Compliance Proposals

Fourth and Final Post in a Series on the FATF Plenary Outcomes

As we have previously blogged (here, here and here), the Financial Action Task Force (“FATF”) held its fourth Plenary on June 21-25, inviting delegates from around the world to meet (virtually) and discuss a wide range of global financial crimes and ongoing risk areas. Following the Plenary, FATF issued reports to detail their findings on specific topics. This post highlights three takeaways from the report entitled Second 12-Month Review of the Revised FATF Standards on Virtual Assets (“Report”).

Background

In June 2019, the FATF issued guidance instructing its 180 international member governments to demand that virtual asset service providers (“VASPs), such as cryptocurrency exchanges and digital wallet providers, collect “accurate originator information and required beneficiary information” on transactions totaling $1,000 or more (see here for our detailed blog post on this subject).

The FATF also agreed to undertake a yearlong review documenting the progress that its member countries have made towards implementing its guidance on regulation of VASPs. It released the findings of that review in July 2020 and committed to a second 12-month review by June 2021. The Report, based on the findings of a self-assessment questionnaire provided to 128 jurisdictions, sets out the findings of the second 12-month review.
Continue Reading  FATF Continues to Stress AML Risks From Virtual Asset Service Providers

Third Post in a Series on the FATF Plenary Outcomes

This blog is the third post on the Financial Action Task Force (“FATF”) fourth Plenary, an event where delegates were invited from around the world to (virtually) meet and discuss a wide range of global financial crimes and ongoing risk areas.  Among the several strategic initiatives identified by FATF was Ethnic or Race Motivated Terrorist Financing (“EoRMTF”), on which FATF issued a report detailing its implications for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) (the “Report”).

Similar to FATF’s first-time report regarding environmental crime and money laundering, the Report marks the first time FATF has looked at the financing of ethnically or racially motivated terrorism. The Report highlights how very difficult it can be to identify and trace EoRMTF, including because of the following factors: the major role of so-called “lone wolf” actors; competing legal regimes in different countries; growing transnational links between extreme right wing (“ERW”) groups; limited information on ERW groups; and the fact that some ERW groups are not considered illegal or have not been listed as groups to monitor.  The Report also notes the irony that ERW groups often use legal – not illicit – funds to promote their efforts, and that “ERW groups appear to be less concerned with concealing their transactions than in other forms of [terrorist financing]” – but that “many jurisdictions also reported that ERW actors are becoming increasing operationally sophisticated in how they move [and conceal] their funds.”…
Continue Reading  FATF Report Stresses Challenges in Combatting Ethnically- and Racially-Motivated Terrorism

Second Post in a Series on the FATF Plenary Outcomes

As we blogged, last month the Financial Action Task Force (“FATF”) held its fourth Plenary, inviting delegates from around the world to (virtually) meet and discuss a wide range of global financial crimes and ongoing risk areas. Following the Plenary, FATF identified a number of strategic initiatives for future research and publication, and issued six reports to detail their findings on specific topics. One such report, Money Laundering from Environmental Crime (the “Report”), and its implications for anti-money laundering (“AML”) and countering the financing of terrorist (“CFT”), will be the focus of this post.

The 66-page Report is compiled from case studies and best practices submitted by over 40 countries, as well as input from international organizations like the International Monetary Fund and World Bank. While this Report is the first deep dive into environmental crimes and recommendations for members of the FATF Global Network, it is not the first time FATF has addressed environmental issues. The current Report aims to build upon FATF’s previous study on money laundering and the illegal wildlife trade, on which we also blogged. The current Report is also connected to earlier FATF studies on money laundering risks from the gold trade and the diamond trade.  Indeed, the Report references U.S. enforcement cases involving money laundering and gold or diamonds on which we previously have blogged (see here, here and here).

As this post will discuss, these areas of money laundering risk are often overlooked and are especially difficult to monitor. Further, the Report finds that “[l]imited cooperation between AML/CFT authorities and environmental crime and protection agencies in most countries presents a major barrier to effectively tackle [money laundering] from environmental crimes.”  Stated otherwise, government AML/financial flow experts and government environmental law experts don’t understand or even consider each other’s area of expertise, and often don’t communicate with each other, resulting in missed enforcement opportunities.  With global environmental crimes generating up to $281 billion per year, the Report suggests that government interventions are not proportionate to the severity of this issue. By issuing this Report, FATF hopes to raise awareness of the scope and scale of harm caused by environmental crimes and related money laundering, and enhance collaboration by financial crime and environmental crime enforcement officials.
Continue Reading  FATF Issues First-Ever Report on Environmental Crime and Money Laundering

FATF Issues White Paper Addressing Challenges Facing Beneficial Ownership Collection

First Post in a Series on the FATF Plenary Outcomes

 The Financial Action Task Force (“FATF”) held its fourth Plenary, virtually, on June 21-25.  Delegates representing 205 members of the Global Network and observer organizations, including the International Monetary Fund, the United Nations, and the World Bank attended.  They discussed numerous topics, including the financial flows linked to environmental crime; financing of ethnically or racially motivated terrorism; risks relating to the financing of proliferation of weapons of mass destruction; virtual assets and virtual asset service providers, or VASPs; technological innovations; and asset recovery outcomes.  Many of these topics will be the subject of forthcoming reports from FATF.  Significantly, the group also discussed transparency surrounding information on the beneficial ownership of entities, which of course is the focus of the Corporate Transparency Act (“CTA”) recently passed in the United States.

Here, we will focus on (i) the white paper on beneficial ownership issued by FATF as a result of the Plenary, and (ii) developments in FATF’s country-specific measures in place to combat money laundering.  Future blog posts will discuss other outcomes and related reports produced by this wide-ranging Plenary, such as the report regarding money laundering and environmental crime.

As we will discuss, the beneficial ownership white paper seeks to obtain guidance on numerous legal and logistical challenges to the collection of such information, such as verification and access.  Many of these same challenges exist for U.S. regulators and the regulated community in regards to the CTA.  As to the country-specific measures, FATF has subjected Haiti, Malta, the Philippines, and South Sudan to increased monitoring, whereas Ghana’s status has improved.
Continue Reading  FATF Concludes Fourth Plenary on Money Laundering and Terrorist Financing Risks

U.N. Report Focus on Improving Accountability, Transparency and Good Governance

On March 2, 2020 the United Nations released a Report on Financial Integrity For Sustainable Development (the “Report”). Although the Report is lengthy and wide-ranging, we will focus here on the portions of the Report which target the humanitarian toll of Illicit Financial Flows (IFFs) from money laundering, tax abuse, cross-border corruption, and transnational financial crime – all of which can drain resources from sustainable development, worsen inequality, fuel instability, undermine governance, and damage public trust.   We also will focus on the portions of the Report which make recommendations designed to expand anti-money laundering (“AML”) compliance.

First, the Report makes evidence-based recommendations focused on accountability, designed to close international enforcement and compliance gaps. Those recommendations include: (i) all countries enacting legislation providing for the widest range of legal tools to pursue cross-border financial crime; (ii) the international community developing an agreed-upon international standard for settlement of cross-border corruption cases, and (iii) businesses holding accountable all executives, staff, and board members who foster or tolerate IFFs in the name of the business.

Second, the Report makes other recommendations on several AML-related issues on which we have blogged: (i) each country creating a central registry of beneficial ownership information for legal entities; (ii) creating global standards for professionals, including lawyers, accountants, bankers and real estate agents; (iii) improving protections for human rights defenders, anti-corruption advocates, investigative journalists and whistleblowers; and (iv) promoting the exchange of information internationally among law enforcement officers and other authorities.

The Report clearly envisions that corporations can and should play a pivotal role in contributing resources in the fight against corruption, money laundering and cross-border financial crime. To start, Boards and management, particularly those of financial and professional service institutions, must engage in oversight to ensure that compensation, benefits, and employment itself are contingent upon financial integrity. Investors also should embrace financial integrity for sustainable development and be clear with the companies in which they invest that they expect effective anti-corruption policies and regulatory compliance. Integrity will be cultivated when organizational leadership hold board members, executives, and staff accountable if they foster or tolerate IFFs in the name of the business. Moreover, the Report observes that governments can foster financial integrity by imposing liability for failing to prevent bribery or corruption.
Continue Reading  United Nations Targets Corruption and Illicit Cross-Border Finance

On November 5, 2020, the Council of the European Union approved a new action plan to strengthen anti-money laundering and combatting terrorism financing across the EU. The Action Plan, “an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing,” appears to be motivated by the perceived failures in preventing the Danske Bank scandal (which we’ve blogged about here, and more generally, here, here, here, here, here, and here). In light of “[m]ajor divergences” and “serious weaknesses” in enforcement, it appears the Council believes the EU’s “anti-money laundering and countering the financing of terrorism” framework (“AML/CFT framework”) “needs to be significantly improved.” As we have blogged, the EU historically has issued numerous reports identifying systemic vulnerabilities to money laundering and suggesting process-based recommendations for how to address such threats. These recommendations typically have not addressed a basic issue: the actual prosecution of bad actors.

This new Action Plan contains some teeth. If its legislative proposals are enacted and implemented, it would allow the EU to close cross-border loopholes, update its rulebook, and strengthen the implementation and enforcement of the AML/CFT framework through EU-level supervision. Even if the more ambitious proposals do not pass legislative scrutiny, the Action Plan shows the EU is keenly focused on combatting the threat of cross-border money laundering and that it has many tools available at its disposal, some of which it is already using. Unified and coordinated implementation of the AML/CFT framework coupled with increased information sharing between members and between public and private partners should aid detection and enforcement efforts across the EU.
Continue Reading  Council of the European Union Unveils Ambitious New AML Action Plan

Stated Concern is that Terrorism is Funded Primarily Through Small International Transfers

Proposed Change Would Expand BSA Definition of “Money” to Include Virtual Currency

The Financial Crimes Enforcement Network (“FinCEN”) and the Federal Reserve Board (“Board”) have requested comment on an important proposed new rule that would amend the “Recordkeeping Rule” and “Travel Rule” under the Bank Secrecy Act (“BSA”) and expand them significantly. The proposed regulation would reduce the current $3,000 threshold to only $250 for international transfers, thereby substantially expanding the scope of these rules.

Even by FinCEN’s own estimates, the effect would be broad. According to FinCEN, the new regulation would affect an estimated 5,306 banks, 5,236 credit unions, and 12,692 money transmitters – including exchangers of digital assets, who arguably would be most impacted by the new regulation. Further, FinCEN estimates – likely conservatively – that compliance would require no less than 3.3 million additional hours, annually. FinCEN and the Board strongly suggest that such compliance burdens are worth the effort, given the perceived value to law enforcement in combatting terrorism, which tends to be funded by small international transfers.
Continue Reading  To Fight Terrorism, FinCEN and Federal Reserve Board Request Comment on Proposed Major Expansion of Recordkeeping and Travel Rules for International Transfers

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

The Financial Action Task Force (FATF) recently published a report titled Virtual Assets: Red Flag Indicators of Money Laundering and Terrorist Financing. The report discusses a number of red flag indicators of suspicious virtual asset (VA) activities identified “through more than one hundred case studies collected since 2017 from across the FATF Global Network, literature reviews, and open source research.” The purpose of the report is to help financial institutions (FIs), designated non-financial businesses and professions (DNFBPs), and virtual asset service providers (VASPs) to create a “risk-based approach to their Customer Due Diligence (CDD) requirements.”

The report focuses on the following six categories of red flag indicators: those (1) related to transactions, (2) related to transaction patterns, (3) related to anonymity, (4) about senders or recipients, (5) in the source of funds or wealth, and (6) related to geographical risks.

When discussing red flags relating to transactions, FATF suggests that the size and frequency of transactions can be a good indicator of suspicious activity. For example, making multiple high-value transactions in short succession (i.e. within a 24-hour period) or in a staggered and regular pattern, with no further transactions during a long period afterwards. With regard to transaction patterns, FATF notes that large initial deposits with new users or transactions involving multiple accounts should also raise suspicion.
Continue Reading  FATF Identifies Red Flags for Virtual Assets and Money Laundering