Financial Action Task Force (FATF)

On April 19, 2018, the European Parliament (“EP”) adopted the European Commission’s (the “Commission”) proposal for a Fifth Anti-Money Laundering Directive (“AMLD5”) to prevent terrorist financing and money laundering through the European Union’s (“EU”) financial system. The Commission proposed this directive on July 26, 2016 to build upon and amend the Fourth Anti-Money Laundering Directive (“AMLD4”) – before all 28 member states even implemented AMLD4.

Under AMLD4, the EU sought to combat money laundering and terrorist financing by imposing registration and customer due diligence requirements on “obliged entities,” which it defined as banks and other financial and credit institutions. It also called for the creation of central registers comprised of information about who owns companies operating in the EU and directed that these registers be accessible to national authorities and obliged entities.  However, the European Central Bank warned that AMLD4 failed to effectively address recent trends in money laundering and terrorist financing, which have spanned multiple jurisdictions and fallen both within and outside of the traditional financial sector.  As a result, and in response to recent terrorist attacks in Europe and to the Panama Papers, the EP has adopted AMLD5 to more effectively keep pace with these recent trends.

Although AMLD5 contains several important provisions, including a proposed public registry of beneficial owners of legal entities, we focus here on how AMLD5 addresses, for the first time, the potential money laundering and terrorist financing risks posed by virtual currencies.
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On February 23, the Financial Action Task Force (“FATF”) signaled that the inter-governmental body “will step up its efforts in monitoring the use of cryptocurrencies in money laundering.”  While the 37-member international body remains without an official policy for implementation, the pronouncement nonetheless demonstrates the heightened Anti-Money Laundering (“AML”) concern from regulators across the globe concerning illicit uses of cryptocurrency.

Notably, the FATF’s pronouncement comes on the heels of recent enforcement-related measures taken in various countries.  As we previously have blogged, the European Parliament and its executive arm, the European Council, recently agreed to an amendment to the Fourth Anti-Money Laundering Directive to include measures targeting exchange platforms for virtual currencies, such as Bitcoin, as well as prepaid cards.  More recently, France’s top financial markets regulator issued a statement that online trading platforms for cryptocurrency derivatives fall under the European Union’s central legislation regulating financial markets.  In the U.K., the Parliament’s Treasury Committee announced on February 22 that it has launched a probe to examine both the impact of cryptocurrencies on financial institutions and how best to police the new technology.  Meanwhile, South Korea’s ban on anonymous trading of cryptocurrencies—part of the country’s new policies which represent the first AML guidelines for cryptocurrencies among the nations of the FATF—took effect on January 30.
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I am honored to be part of a panel on March 1, 2018 at the Florida Tax Institute in Tampa, Florida regarding potential money laundering risks, reporting obligations and related ethical issues facing U.S. tax professionals with foreign clients bringing money and assets into the United States.  The panel, entitled Working with Inbound Investors &

Alleged Illicit Activity Included Transactions Promoting North Korea’s Missile Program and an Institutional Commitment to Laundering Money

On February 13, 2018, FinCEN announced that it had proposed a special measure naming ABLV Bank, AS (“ABLV”) an institution of primary money laundering concern pursuant to Section 311 of the USA Patriot Act.  We previously have blogged about FinCEN’s powers pursuant to Section 311 of the U.S. Patriot Act to designate institution “of primary money laundering concern” and impose a special measure which effectively cuts off the bank’s access to the U.S. financial system by requiring U.S. institutions as well as foreign institutions that create an indirect link between the foreign institution and the U.S. to sever ties with the designated bank.

Finding that ABLV was a foreign financial institution of primary money laundering concern, FinCEN proposed a prohibition under the fifth special measure restricting domestic financial institutions from opening or maintaining correspondent accounts with or on behalf of ABLV. FinCEN stated that ABLV executives, shareholders, and employees have institutionalized money laundering as a pillar of the bank’s business practices by orchestrating money laundering schemes, soliciting high-risk shell company activity that enables the bank and its customers to launder funds, maintaining inadequate controls over high-risk shell company accounts, and seeking to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.  Indeed, included in the illicit financial activity were transactions for parties connected to the U.S. and U.N.-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles.

ABLV shot back last Thursday stating that the allegations were based “on assumptions and information that is currently unavailable to the bank,” but that they were “continuing check into these allegations” and were open to cooperation with U.S. authorities.  As a result of FinCEN’s finding, Monday morning, the European Central Bank (“ECB”) halted all payments by ABLV pending further investigation into the allegations set forth in FinCEN’s Notice of Proposed Rulemaking (“NPRM”).
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This week, the U.S. Senate Committee on the Judiciary and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings focused in part on Anti-Money Laundering  (“AML”) and the Bank Secrecy Act (“BSA”).  We discuss highlights of the testimony of the Chairpersons of the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”), as well as testimony from a senior official at the Justice Department and a representative of the U.S. Chamber of Commerce, concerning upcoming changes to beneficial ownership requirements and the current regulatory landscape of the cryptocurrency industry.
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Mexico City’s downtown and Palacio de Bellas Artes building at twilight

Last week, the Financial Action Task Force (“FATF”) issued a report concluding that Mexico needs to “step up efforts in pursuing money launderers.” The report, which summarized the FATF’s findings from its on-site assessment in early 2017, identified three particularly weak areas in Mexico’s AML regime:  preventative measures; investigation and prosecution; and confiscation.  This post summarizes the report’s findings, and observes that Mexico is not the only nation needing to “step up” its efforts.  Further, given the strong financial and geographic ties between Mexico and the U.S., the AML challenges of Mexico can be the challenges of the U.S.
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In its “Risk Outlook, Autumn Update” (“Update”) released last week, the Solicitor Regulation Authority (“SRA”), a regulator of solicitors and law firms in England and Wales, found that although the legal sector remains at “high risk of exploitation for money laundering,” reports made by legal practitioners to law enforcement of suspicious, money laundering-related activities dropped by nearly 10% last year. The Update then explores the AML risks associated with legal services.See the source image

As we will discuss below, many of the issues addressed by the SRA Update resonate with similar Anti-Money Laundering (“AML”) issues which have been brewing recently in the United States — such as the issues of beneficial ownership, the potential use of real estate in money laundering, and lawyers as “gate keepers.”  Of course, however, the very notion of legal practitioners reporting their clients to law enforcement for suspicious activity — a practice which represents a given to the SRA Update in light of U.K. law reporting requirements — remains deeply antithetical to basic notions of client confidentiality and loyalty held by the U.S. legal profession and courts.  We will discuss here this unique convergence of (i) very similar AML issues and concerns confronting the U.K. and the U.S., and (ii) drastically different approaches — at least to date — as to the appropriate duty of lawyers to report the conduct of their own clients to the government.
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Second of a Two-Part Blog: Anti-Money Laundering Programs Coming to the Legal Profession?

Yesterday, we began our discussion of the proposed Corporate Transparency Act of 2017 (the “Act”), and observed that, if passed, the Act would represent another chapter in the domestic and global campaign to increase transparency in financial transactions through information gathering by private parties and expanded requirements for Anti-Money Laundering (“AML”) reporting. Today, we summarize the details of this complex legislation, focusing in particular on two significant ways in which the Act would amend the Bank Secrecy Act (“BSA”):

  • Requiring regulations to establish minimum standards for State procedures regarding the formation of legal entities such as corporations and limited liability companies (“LLCs”) and the identification of the beneficial owners of such entities when they are formed.
  • Adding “formation agents” – i.e., those who assist in the creation of legal entities – to the BSA’s definition of a “financial institution” which is subject to the BSA’s reporting and AML obligations. This new definition potentially applies to a broad swath of businesses and individuals previously not regulated directly by the BSA, including certain attorneys.


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First of a Two-Part Blog

In late June, Representatives Carolyn Maloney and Peter King of New York introduced The Corporate Transparency Act of 2017 (the “Act”). In August, Senators Ron Wyden and Marco Rubio introduced companion legislation in the Senate. A Fact Sheet issued by Senator Wyden is here. Representative King previously has introduced several versions of this proposed bipartisan legislation; the most recent earlier version, entitled the Incorporation Transparency and Law Enforcement Assistance Act, was introduced in February 2016.  Although it is far from clear that this latest version will be passed, the Act is worthy of attention and discussion because it represents a potentially significant expansion of the Bank Secrecy Act (“BSA”) to a whole new category of businesses.

The Act is relatively complex.  In part, it would amend the BSA in order to compel the Secretary of the Treasury to issue regulations that would require corporations and limited liability companies (“LLCs”) formed in States which lack a formation system requiring robust identification of beneficial ownership (as defined in the Act) to themselves file reports to the Financial Crimes Enforcement Network (“FinCEN”) that provide the same information about beneficial ownership that the entities would have to provide, if they were in a State with a sufficiently robust formation system.  More colloquially, entities formed in States which don’t require much information about beneficial ownership now would have to report that information directly to FinCEN – scrutiny which presumably is designed to both motivate States to enact more demanding formation systems, and demotivate persons from forming entities in States which require little information about beneficial ownership. However, there is another facet to the Act which to date has not seemed to garner much attention, but which potentially could have a significant impact. Under the Act, formation agents – i.e., those who assist in the creation of legal entities such as corporations or LLCs – would be swept up in the BSA’s definition of a “financial institution” and therefore subject to the BSA’s AML and reporting obligations.  This expanded definition potentially applies to a broad swath of businesses and individuals previously not regulated directly by the BSA, including certain attorneys.
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On September 15th, FinCEN issued its latest “Advisory on FATF-Identified Jurisdictions with AML/CTF Deficiencies.”  The FATF, or the Financial Action Task Force, is a 37-member intergovernmental body, including the United States, that establishes international standards to combat money laundering and the financing of terrorism.  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 some practical takeaways for U.S. financial institutions seeking to ensure compliance with these changes in their AML programs.
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