Financial Crimes Enforcement Network (FinCEN)

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 August 21, 2019, FinCEN issued an advisory (the “Advisory”) alerting financial institutions to various financial schemes and mechanisms employed by fentanyl and synthetic opioid traffickers to facilitate the illegal fentanyl trade and launder its proceeds.

As defined by the Centers for Disease Control and Prevention (“CDC”), “fentanyl is a synthetic (man-made) opioid 50 times more potent than heroin and 100 times more potent that morphine.” In 2017, more than 28,000 deaths involving fentanyl and other synthetic opioid occurred in the United States. As noted in the Advisory, fentanyl traffics in the United States from two principal sources: from China by U.S. individuals for personal consumption or domestic distribution or from Mexico by transnational criminal organizations (“TCOs”) and other criminal networks. In turn, these trades are funded through a number of mechanisms, including: purchases from a foreign source made using money servICES businesses (“MSBs”), bank transfers or online payment processors; purchases from a foreign source made using convertible virtual currency (“CVC”); purchases from a domestic source made using MSBs, online payment processors, CVC or person-to-person cash sales.

Recognizing fentanyl traffickers’ modus operandi is critical to detecting and preventing these illicit transactions. Thus, the Advisory provides detailed illustrations of each of the above-identified forms of transaction in order to assist financial institutions to detect and prevent facilitating fentanyl trafficking.
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The Financial Crimes Enforcement Network (FinCEN) issued a press release today, entitled “New FinCEN Division Focuses on Identifying Primary Foreign Money Laundering Threats.”

The announcement states that this new Division will focus on topics about which we have blogged repeatedly:  Section 311 of the USA Patriot Act and threats posed to the financial system by

FinCEN Director Kenneth A. Blanco delivered prepared remarks on August 13 at the 12th Annual Las Vegas Anti-Money Laundering Conference.  We previously have blogged repeatedly on the anti-money laundering (“AML”) and Bank Secrecy Act (“BSA”) challenges facing the gaming industry.  This post will discuss Director Blanco’s comments at a high level only, consistent with the generality of his prepared speech.
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The Federal Reserve and the Financial Crimes Enforcement Network, or FinCEN, both recently issued reports addressing worrisome trends in technology-assisted financial fraud.  The reports seek to engage the financial services industry in partnering more closely to reduce associated losses.

Specifically, the Federal Reserve issued a report entitled Synthetic Identity Fraud in the U.S. Payment System. FinCEN issued a report entitled Manufacturing and Construction Top Targets for Business Email Compromise. Collectively, the reports reflect how techonology-driven fraud and identity theft schemes can target financial institutions, businesses and consumers alike, thereby impacting the Anti-Money Laundering and related anti-fraud programs of the financial institutions implicated by such schemes.
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On July 22, 2019, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) (collectively the federal banking agencies), issued a joint statement entitled Joint Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision (the “statement”).

The specific emphasis of the statement is to reiterate that the federal agencies will take a risk-focused approach to examinations. The statement itself does not purport to create new requirements but rather is a tool to enhance transparency in the approach used by the federal banking agencies in planning and performing BSA/AML examinations. As the statement notes, it “aligns with the federal banking agencies’ long-standing practices for risk-focused safety and soundness examinations.”

Risk Profiles

At the outset, the federal banking agencies urge banks to conduct a comprehensive risk assessment, which are deemed “a critical part of sound risk management.” Specifically, banks themselves have unique risk profiles given each bank’s focus (i.e., “a bank with a localized community focus likely has a stable, known customer base”) and complexity, which must be assessed at the outset when developing and implementing an adequate BSA/AML program.

Of particular note, the federal banking agencies state that banks that “operate in compliance with applicable law, properly manage customer relationships and effectively mitigate risk by implementing controls commensurate with those risk are neither prohibited nor discouraged from providing banking services.”  The statement goes on to assert that “banks are encouraged to manage customer relationships and mitigate risks based on customer relationships rather than declining to provide banking services to entire categories of customers.”
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Foreign Banks Reliant on U.S. Correspondent Services Should Take Note of New Rules

We are pleased to present this guest blog by Hdeel Abdelhady, who is a Washington, D.C.-based attorney and Principal at MassPoint Legal and Strategy Advisory PLLC, her boutique law and strategy firm. Ms. Abdelhady focuses on regulatory compliance and transactional matters, including cross-border trade and finance transactions and regulation.

As Ms. Abdelhady discusses, the Office of Foreign Assets Control (OFAC) issued on June 21, 2019 an interim final rule (the “IFR”) amending provisions of the Reporting, Procedures, and Penalties Regulations applicable to OFAC-administered sanctions programs at 31 C.F.R. Part 501. The IFR became effective upon publication in the Federal Register on June 21. OFAC has requested public comments, which are due by July 22, 2019. The IFR has many important potential consequences, including for foreign banks that rely on U.S. correspondent banking services, as well as U.S. financial institutions facing additional compliance burdens.

As legal counsel to U.S. and foreign banks, other financial services providers, and businesses, Ms. Abdelhady has advised on sanctions, anti-money laundering, anti-corruption, and counter-terrorism finance regulation and compliance under U.S. law and international standards, including the FATF Recommendations and Wolfsberg Standards. She has served as in-house counsel on secondment to banks in the United States and abroad, including in connection with the first major USA Patriot Act enforcement by the Comptroller of the Currency and Financial Crimes Enforcement Network (FinCEN). In addition, Ms. Abdelhady has advised on the establishment of money services businesses and Foreign Banking Organizations in the United States.

Ms. Abdelhady serves on the board of the Washington, D.C. Chapter of the Association of Certified Financial Crime Specialists (ACFCS), is a Fellow of the American Bar Foundation, and is an Adjunct Professor at The George Washington University Law School. Ms. Abdelhady writes frequently on banking, finance, and regulatory compliance matters. Among other publications, Reuters, the World Bank Legal Review, and Law360 has published her work.  We hope that you enjoy this discussion by Ms. Abdelhady of this important development.  –Peter Hardy

In addition to effectuating technical and conforming amendments, the IFR revises Trading With the Enemy Act (TWEA) penalties and amends reporting requirements and procedures applicable to initial and annual blocked property reports, unblocked property reports, and the unblocking of funds due to mistaken identity. Additionally, the IFR revises reporting requirements applicable to “rejected transactions.” The rejected transactions amendment is the most substantial of the revisions, and is the focus of this update.
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On June 12, 2019, Kenneth A. Blanco, Director of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), provided remarks at the NYU Law Program on Corporate Compliance and Enforcement that underscored the agency’s evolving approach to emerging threats in money laundering and terrorist financing.

His remarks specifically focused on:

  • FinCEN’s approach to addressing a number of emerging money-laundering threats, including the crisis in Venezuela and the rise in business email compromise (“BEC”) fraud schemes;
  • The agency’s collaboration with Congress to address the need to collect beneficial ownership information at a company’s formation; and
  • FinCEN’s ongoing efforts to strengthen and modernize the anti-money laundering (“AML”) and counter terrorism financing (“CFT”) system.


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The Issue of Who Truly Runs and Owns Entities Contines to Gnaw at Congress and Law Enforcement

First Post in a Two-Post Series on the ILLICIT CASH Act

On June 10, a bipartisan group of lawmakers in the U.S. Senate released a discussion draft of legislation proposing to overhaul the nation’s anti-money laundering (“AML”) laws. The discussion draft, titled The Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act (“the Act”), is very detailed and sets forth many proposed changes to the Bank Secrecy Act (“BSA”) over the course of 102 pages.

In this post, we will focus on a key provision of the Act, which sets forth a version of the now-familiar requirement aimed directly at tracking the beneficial ownership (“BO”) of U.S. entities. In our next post on the Act, we will summarize its many other provisions.
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Second Post in a Two-Part Series

Some Answers — Producing Even More Questions

On May 9, 2019, the Financial Crimes Enforcement Network (“FinCEN”) published a comprehensive “interpretive guidance” (the “Guidance”) to “remind” businesses and individuals operating in a subset of the cryptocurrency markets involving “convertible virtual currencies” (“CVCs”) of the potential applicability of the Bank Secrecy Act (“BSA”) to their operations. At the outset, FinCEN explains that “[t]his guidance does not establish any new regulatory expectations or requirements.” Instead, “it consolidates current FinCEN regulations, and related administrative rulings and guidance issued since 2011” and provides illustrations of those regulations, rulings and guidance to common business models involving CVCs.

The principal purposes of the Guidance are threefold: (1) to set forth relevant FinCEN rules and requirements in a single source; (2) to demonstrate how the BSA may and does apply to innovations in the CVC markets occurring since 2011; and (3) to illustrate how these rules and requirements will be applied to future innovations in the CVC markets.

In our first post in this series, posted on the day that FinCEN issued the Guidance, we addressed recent major developments across a spectrum of regulatory, civil, and criminal enforcement cases involving cryptocurrencies, AML and money laundering – courtesy of the combined efforts of FinCEN, the New York Department of Financial Services, and the U.S. Department of Justice.  These enforcement cases underscored the need for more clear rules regarding how the BSA and other statutes can apply to cryptocurrencies.  The Guidance attempts to do just that, with partial success. It presents as a treatise on FinCEN regulation of CVCs, organized to:

  • provide definitions of key relevant concepts;
  • outline and explain current FinCEN regulations, ruling and guidance;
  • summarize the development and content of FinCEN’s money transmission regulations to CVCs and CVC businesses;
  • provide illustrations of “FinCEN’s existing regulatory approach to current and emerging business models using patterns of activities involving CVC”; and
  • localize resources to further explain applicable FinCEN rules and regulations.

The Guidance, although not exactly offering anything new, still contains a lot to unpack. It provides some significant clarity to application of FinCEN’s rules and regulations to CVC businesses and a thorough resource to address many questions involving FinCEN regulation of CVC. But, at the same time, and somewhat paradoxically, in its comprehensiveness, it reveals how almost limitless possibilities exist for individuals and entities to transact in CVC and how difficult questions of whether those activities will be regulated by FinCEN can be to answer.
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