Financial Crimes Enforcement Network (FinCEN)

We are pleased to offer the latest episode in Ballard Spahr’s Business Better podcast series, The Business of Cryptocurrency.  In this episode, we discuss the basics of money transmitter and Bank Secrecy Act registration and compliance program requirements. The episode also covers more complex regulatory issues confronting cryptocurrency exchanges, financial institutions, and other businesses

The U.S. Government Accountability Office (“GAO”) recently issued a public version of a more detailed and confidential report previously sent to Congress summarizing the GAO’s review of the use of virtual currencies to facilitate human and drug trafficking.  The GAO’s report, Additional Information Could Improve Federal Agency Efforts to Counter Human and Drug Trafficking, (“the Report”) is lengthy.  The GAO examined two issues:  (1) U.S. agencies’ collection of data on the use of virtual currencies for human and drug trafficking; and (2) the steps taken and challenges faced by U.S. agencies to counter human and drug trafficking facilitated by virtual currencies.  In this post, we will describe the Report at a high level, but will focus on the emerging trends identified in the Report and the GAO’s recommendations to counter the use of virtual currency in facilitating human and drug trafficking by amending BSA/AML regulation of virtual currency kiosks, otherwise known as virtual currency ATMs, so as to identify specific locations.
Continue Reading  GAO Publishes Report on Nexus Between Virtual Currencies and Human and Drug Trafficking Financing

Consent Order Stresses that Only Three AML Analysts Struggled to Review 100 “Alerts” Per Day, Each – and Notes in Passing that “Outside Examiners” Blessed the Bank’s AML Program for the Same Five Years that the Bank Allegedly Maintained a Willfully Deficient Program

On December 16, 2021, the Financial Crimes Enforcement Network (“FinCEN”) entered into a Consent Order with CommunityBank of Texas, N.A. (“CBOT”), in which CBOT admitted to major shortcomings with respect to the implementation and effectiveness of its anti-money laundering (“AML”) program. The monetary penalties imposed on CBOT are substantial: FinCEN assessed an $8 million penalty, although CBOT will receive credit for a separate $1 million penalty to be paid to the Office of the Comptroller of the Currency (“OCC”).

The Consent Order, available here, offers valuable insight into FinCEN’s reasoning for its enforcement actions.  According to the Consent Order, CBOT has a regional footprint and operates several branches in Texas.  It serves small and medium-sized businesses and professionals.  And, in the “back of the house,” CBOT established a typical AML system designed to detect and escalate alerts for suspicious activity for investigation and potential filing of Suspicious Activity Reports (“SARs”). However, FinCEN alleged that over a period of at least four years, CBOT “willfully” failed to effectively implement its AML, program, leading to a failure to file SARs and otherwise detect specific suspicious activity.  As detailed below, many of the alleged shortcomings of CBOT’s AML program flowed from a lack of compliance resources and personnel between 2015 and 2019: too few analysts were assigned to review and investigate potentially suspicious transactions, and as a result, downstream investigations and due diligence suffered, including an alleged failure to file at least 17 specific SARs.

Because the detailed Consent Order offers a somewhat rare opportunity to glean FinCEN’s reasoning behind its enforcement actions generally, we explore the alleged failures in some detail below.  Then, we summarize key details of the Consent Order, offer key takeaways, and note several questions that the Consent Order still leaves unresolved.
Continue Reading  FinCEN Assesses Civil Penalty Against CommunityBank of Texas for AML Program Weaknesses

Notice is First of Three Sets of Regulations for the CTA

Yesterday, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking (“NPRM”) regarding the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”), which requires defined entities – including foreign entities with a presence in the U.S. – to report their

Global environmental crime—the third largest illicit activity in the world, according to a report by the FATF—is estimated to generate hundreds of billions in illicit proceeds annually.  This criminal activity harms human health, the climate, and natural resources.  To help address the threat presented by environmental crimes, the Financial Crimes Enforcement Network (FinCEN) issued an environmental crimes and associated illicit financial activity notice (Notice) on November 18, 2021.  The FinCEN Notice states that environmental crime and related illicit financial activity are associated strongly with corruption and transnational criminal organizations, both of which FinCEN has identified as national anti-money laundering and countering the financing of terrorism (AML/CFT) priorities for financial institutions to detect and report.

We have blogged with increasing frequency (see here, here, here and here) on the nexus between environmental crime and illicit financial flows, and how these money laundering risks are often overlooked and are especially difficult for financial institutions to monitor.  Environmental offenses are also receiving more attention in the U.S., in part because of the growing interest by investors, companies and regulators in ESG (Environmental, Social and Governance) concerns.

The Notice includes an appendix that describes five categories of environmental crimes and the illicit financial activity related to them: wildlife trafficking, illegal logging, illegal fishing, illegal mining, and waste and hazardous substances trafficking.  The Notice also includes new suspicious activity report (SAR) filing instructions in order to enhance analysis and reporting of illicit financial flows related to environmental crime.
Continue Reading  FinCEN Issues Notice on Environmental Crimes and Illicit Financial Activity

The Financial Crimes Enforcement Network (“FinCEN”) has been busy during the last few weeks – and presumably will remain busy for the rest of 2021, as it attempts to satisfy numerous mandates imposed by the Anti-Money Laundering Act of 2020.  In October, in addition to issuing an analysis of Suspicious Activity Reports and ransomware, FinCEN extended its Geographic Targeting Order for real estate transactions; issued exceptive relief providing that a casino may use suitable non-documentary methods to verify the identity of online customers; and reminded U.S. financial institutions to account for the fact that the Financial Action Task Force added and removed countries from its list of jurisdictions with anti-money laundering (“AML”) deficiencies.  We discuss each of these developments in turn.
Continue Reading  FinCEN Round-Up:  Real Estate GTOs, Exceptive Relief for On-Line Gaming for Non-Documentary Customer Verification, and the FATF Grey and Black Lists

On October 15, 2021, the Financial Crimes Enforcement Network (“FinCEN”) issued a financial trend analysis on ransomware relating to Suspicious Activity Reports (“SARs”) filed in the first half of this year (“Analysis”).  According to the Analysis, U.S. banks and financial institutions reported $590 million in suspected ransomware payments in SARs filed between January and June 2021, more than the total for all of 2020.  FinCEN found that ransomware payments are often made using virtual currency, such as Bitcoin (“BTC”).  The Office of Foreign Assets Control (“OFAC”) also released guidance in tandem with the FinCEN Analysis, addressing how the virtual currency industry can address sanctions-related risks.

Ransomware appears to be top-of-mind at the U.S. Treasury, as we have blogged.  FinCEN’s Analysis and OFAC’s guidance came quickly on the heels of OFAC issuing on September 21 a six-page Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments, which states that OFAC will consider self-reporting, cooperation with the government and strong cybersecurity measures to be mitigating factors in any contemplated enforcement action against a ransomware victim that halts an attack by making the demanded payment to attackers who were sanctioned or otherwise had a sanctions nexus.  Also on September 21, 2021, OFAC issued its first sanctions designation against a virtual currency exchange by designating the virtual currency exchange “for its part in facilitating financial transactions for ransomware variants.”
Continue Reading  FinCEN Reports Spiraling SARs Relating to Ransomware

Terracotta Army near the city of Xian, China.

On September 23, the Financial Crimes Enforcement Network (“FinCEN”) issued an advance notice of proposed rulemaking (“ANPRM”) to solicit comment on questions related to the implementation of anti-money laundering (“AML”) rules in the antiquities market.

As we have previously blogged, the Anti-Money

Today, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice regarding online child sexual exploitation.  Given its brevity, its text is set forth below in its entirety, without the footnotes.  There is a final section to the Notice, not included below, which provides filing instructions regarding related Suspicious Activity Reports, or SARs.  We offer no

Amicus Briefs Urge that Only FinCEN, Not the SEC, Should Enforce the BSA in Regards to Broker-Dealers

In the next stage of the Alpine Securities saga (as we blogged about here, here and here), a petition for a writ of certiorari is pending before the Supreme Court, asking the Court to decide whether the Southern District of New York and the Second Circuit correctly decided that the Securities Exchange Commission (“SEC”) may bring suit directly to enforce compliance with the Bank Secrecy Act (“BSA”).  Distilled, the Second Circuit and the District Court ruled that by promulgating Rule 17a-8, which states in part that “[e]very registered broker or dealer who is subject to the requirements of the [BSA] shall comply with the reporting, recordkeeping and record retention requirements of [BSA regulations promulgated by FinCEN],” the SEC is properly exercising its own independent authority under Rule 17a-8 and Section 17(a) of the Exchange Act when it regulates broker-dealers for the record-keeping and reporting requirements of the BSA.

Alpine Securities’ petition (the “Petition”) has received support in the form of amicus briefs from former officials of the Financial Crimes Enforcement Network (“FinCEN”) and the Cato Institute (“CATO”), both of which argue the SEC does not have the power to enforce violations of the BSA.  As we will discuss, the amicus briefs argue that only FinCEN may enforce the BSA, and that a contrary system would undermine FinCEN and create unacceptably conflicting interpretations, standards, and penalties for BSA/anti-money laundering (“AML”) compliance.
Continue Reading  Circular Delegation: Amicus Support By Former FinCEN Officials and the Cato Institute in the Alpine Securities Saga