Office of Foreign Assets Control (OFAC)

Subscribe to Office of Foreign Assets Control (OFAC)

The Federal Reserve Bank of Philadelphia (the “Philly Fed”) recently executed an agreement (the “Agreement”) with Pennsylvania-based Customers Bank (and its Customers Bancorp, Inc. holding entity) (collectively, “Customers”).  According to the Agreement, “the most recent examinations and inspections” of Customers by the Philly Fed identified “significant deficiencies” related to the bank’s risk management practices, Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance, and regulations issued by the Office of Foreign Assets Control (“OFAC”).  

The source of these alleged deficiencies is alluded to by the Agreement, which immediately highlights two “digital assets-friendly” elements of Customers’ business model:

  • Customers’ “digital asset strategy”, i.e., “offering banking services to digital asset customers”; and, relatedly,
  • Customers’ facilitation of “dollar token activities,” which refers to the bank’s operation of an “instant payments platform” that allows the bank’s commercial clients “to make tokenized payments over a distributed ledger technology system” – though only to other Customers’ commercial clients.

The Agreement calls for Customers to submit a number of plans to the Philly Fed by October 5, 2024, several of which explicitly require the Philly Fed’s approval.

Continue Reading  Bank’s Digital Assets Business Strategy Draws Federal Reserve Scrutiny

Advisory is Accompanied by Related OFAC and DOJ Actions

On June 20, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a supplemental advisory to alert U.S. financial institutions about emerging trends in the illicit fentanyl supply chain. The supplemental advisory emphasized the increasing involvement of Mexico-based transnational criminal organizations (“TCOs”) in the procurement of fentanyl precursor chemicals and manufacturing equipment from suppliers in the People’s Republic of China (“PRC”).

The detailed supplemental advisory builds upon FinCEN’s 2019 advisory (see our blog post here) by introducing new typologies and red flags for financial institutions to try to identify and report suspicious transactions.  As we discuss, the supplemental advisory was accompanied by related actions by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of Justice (“DOJ”) as part of an apparently coordinated effort by the federal government to combat this pernicious illicit industry.

Continue Reading  FinCEN Issues Supplemental Advisory on Fentanyl Distribution and Growing Role of Transnational Criminal Organizations

On May 13th, the Financial Crimes Enforcement Network (FinCEN) and the Securities Exchange Commission (SEC) issued a joint notice of proposed rulemaking (NPRM) that would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish a customer identification program (CIP). This joint NPRM is the second recent rulemaking effort aimed at investment advisers. In February, FinCEN issued a separate NPRM amending the definition in the Code of Federal Regulations of “financial institution” under the Bank Secrecy Act (BSA) to include investment advisers, which would require implementation of an anti-money laundering/countering terrorist financing (AML/CFT) compliance program. In this earlier NPRM, FinCEN alluded to a future joint rulemaking regarding CIP requirements for investment advisers.

The NPRM highlights that CIPs are long-standing, foundational components of an AML program. The NPRM requires a CIP similar to existing CIP requirements for other financial institutions, as FinCEN and the SEC want to ensure “effectiveness and efficiency” for investment advisers that are affiliated with other financial institutions, including banks, broker-dealers, or open-end investment companies that are already subject to CIP requirements.  

Background

Investment advisers have not been previously subject to CIP requirements, unless they were also a registered broker-dealer, a bank, or an operating subsidiary of a bank, and therefore already covered separately by the BSA. In many cases, investment advisers already voluntarily comply with CIP requirements, or their functional equivalent.

This joint NPRM implements section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”). Section 326 requires the Secretary of the Treasury to promulgate regulations setting forth the minimum standards for “financial institutions” regarding the identity of their customers in connection with the opening of an account at a financial institution. More specifically, and as the NPRM notes, the BSA defines “financial institution” to include, in a catch-all provision, “any business or agency which engages in any activity which the Secretary of the Treasury determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described in this paragraph is authorized to engage[.]”  That is the statutory authority upon which this NPRM and the earlier NPRM rest.  If FinCEN’s proposed amendment to the regulatory definition of “financial institution” is finalized and survives any legal challenges, investment advisers will be required to implement and maintain a CIP, as well as AML programs.

Continue Reading  FinCEN and SEC Propose Rulemaking Requiring CIP for Investment Advisers

We previously have blogged on actions taken by the DOJ’s “Task Force KleptoCapture,” an interagency law enforcement task force with a mandate to target sanctioned Russian and pro-Russian oligarchs. While explicitly launched in May 2022 as a direct response to Russia’s full-scale invasion of Ukraine, the task force’s mission is consistent with the U.S. government’s characterization of Russia as a kleptocratic regime (see our post here) and the Biden Administration’s promotion of anti-corruption as a “core United States national security interest” (see our posts here and here).

This week, DOJ announced (via both a press release and a filmed podium announcement by Attorney General Merrick Garland) a series of enforcement actions in five separate federal cases in districts up and down the East Coast, dealing with money laundering and evasion of sanctions, in several cases centered on quintessentially oligarchic luxury goods: high-end real estate and superyachts.  The enforcement actions also emphasize the continuing themes in these cases of the use of shell companies, proxies and lawyers to allegedly evade sanctions.

Continue Reading  The American Front in Russia’s War on Ukraine: DOJ’s “Task Force KleptoCapture” Continues Focus on Operations of Sanctioned Oligarchs

Farewell to 2023, and welcome 2024.  As we do every year, let’s look back.

We highlight 10 of our most-read blog posts from 2023, which address many of the key issues we’ve examined during the past year: criminal money laundering enforcement; compliance risks with third-party fintech relationships; the scope of authority of bank regulators; sanctions…

A Huge Monetary Penalty for Sprawling Allegations – But Will Zhao Receive a Prison Sentence?

As the world now knows, Binance Holdings Limited, doing business as Binance.com (“Binance” or the “Company”), has entered into a plea agreement with the U.S. Department of Justice (“DOJ”).  

Binance is registered in the Cayman Islands and regarded as the world’s largest virtual currency exchange. It agreed to plead guilty to conspiring to willfully violating the Bank Secrecy Act (“BSA”) by failing to implement and maintain an effective anti-money laundering (“AML”) program; knowingly failing to register as a money services business (“MSB”); and willfully causing violations of U.S. economic sanctions issued pursuant to the International Emergency Economic Powers Act (“IEEPA”). Despite the plea agreement, Binance will continue to operate.

Changpeng Zhao, also known as “CZ,” also pleaded guilty to violating the BSA by failing to implement and maintain an effective AML program. Zhao is Binance’s primary founder, majority owner, and – until now – CEO. As part of his plea agreement, Zhao has stepped down as the CEO, although he apparently will keep his shares in Binance.

As part of its plea agreement, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total criminal penalty of $4,316,126,163. Binance also entered into related civil consent orders with the Financial Crimes Enforcement Network (“FinCEN”), the Commodity Futures Trading Commission (“CFTC”), and the Office of Foreign Assets Controls (“OFAC”). Zhao also entered into a consent order with the CFTC.

The allegations are vast and detailed, and much digital ink already has been spilled regarding this matter. Our discussion therefore will be relatively high-level. Distilled, the government alleges that Binance – under the direction of Zhao – tried to hide the fact that it operated in the U.S., purposefully avoided any meaningful AML compliance, and consequently laundered many millions of dollars’ worth of cryptocurrency involving extremely serious criminal conduct, including terrorism, child pornography, and U.S. sanctions evasion.

As for Zhao, and as we will discuss, whether he will go to prison – and if so, for how long – is an open and very interesting question. His sentencing currently is scheduled for February 23, 2024.

Continue Reading  Binance Settles Criminal and Civil AML and Sanctions Enforcement Actions for Multiple Billions – While its Founder, Owner and Former CEO Zhao Pleads Guilty to Single AML Crime

Earlier this month, John Can Unsalan, the president of a steel-making company with ties to Russian oligarchs, pled guilty to one count of conspiracy to commit money laundering, based on financial transactions committed with the alleged intent to promote U.S. sanctions violations.

Unsalan’s company, known as Metalhouse LLC, was formed in Florida in 2014. According to the plea agreement, between 2018 and 2021 Unsalan facilitated transactions through Metalhouse with companies controlled by Sergey Kurchenko, a Russian oligarch who has been on OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List since 2015 (Kurchenko was initially put on the SDN List for allegedly misappropriating state funds belonging to Ukraine). It is generally illegal for U.S. persons to directly or indirectly conduct business with individuals or entities on the SDN List – although the U.S. government is able to grant exceptions on a case-by-case basis.

According to the factual basis supporting the plea agreement, Unsalan knowingly participated in a scheme with Kurchenko to evade sanctions through Metalhouse transactions, which totaled around $157 million over the relevant three-year period. The scheme involved two shell companies – one formed in Hong Kong and one in Cyprus – controlled by Kurchenko. Unsalan and his associate at Metalhouse met with Kurchenko in person and subsequently contracted with Kurchenko’s companies to order steel and other raw materials and to pay for the materials using offshore bank accounts. Ultimately, Unsalan and Metalhouse received a total of over $160 million from reselling those materials to third parties – and although most of that money went to Kurchenko to pay for additional raw materials, the factual basis supporting the plea agreement alleged that Unsalan kept millions in profits for his own personal use.

Continue Reading  Steel Company President with Ties to Russian Oligarch Pleads Guilty to Money Laundering Conspiracy Involving Alleged Sanctions Violations

Following Russia’s invasion of Ukraine, the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a joint alert and a supplemental alert (the “Joint Alerts”) urging U.S. financial institutions (“FIs”) to be attentive to attempts by Russia to evade U.S. sanctions and export controls. The Joint Alerts also reminded FIs of their obligations to file suspicious activity reports (“SAR”s) detailing suspected export control evasion.  We blogged on the Joint Alerts here and here.

FIs complied, and on September 8, 2023, FinCEN published a Financial Trend Analysis (“FTA”) describing insight it gained from those SARs into Russian procurement activities potentially in violation of the Export Administration Regulations. FinCEN issued the FTA right before the Office of Foreign Asset Control (“OFAC”) announced on September 14, 2023 another wave of related sanctions by adding to the list of Specially Designated Nationals more than 150 foreign companies and individuals accused of aiding Russia, including by shipping American or other Western technology.

The FTA is based on 333 SARs filed between June 28, 2022 and July 12, 2023. The SARs—96% of which were filed by U.S.-based depository institutions—detailed nearly 1 billion dollars in suspicious activity. 

Continue Reading  FinCEN Analysis Reveals Patterns and Trends in Suspected Evasion of Russia-Related Export Controls

Complex Civil and Criminal Cases Converge

On August 17, 2023, Judge Robert Pitman of the federal district court for the Western District of Texas issued an Order granting summary judgment for the U.S. Treasury Department (“Treasury”) in a lawsuit brought by six individuals, and denying the cross-motion for summary judgment filed by the individuals. The lawsuit alleged that Treasury overstepped its authority by imposing sanctions on the coin mixing service Tornado Cash.  Deciding for the government, Judge Pitman determined that Tornado Cash is a “person” that may be designated by OFAC sanctions.  Specifically, the regulatory definition of “person” includes an “association,” and Tornado Cash is an “association” within its ordinary meaning.

Shortly thereafter, on August 23, 2023, the U.S. Department of Justice (“DOJ”) unsealed an indictment returned in the Southern District of New York against the alleged developers of Tornado Cash, Roman Storm (“Storm”), a naturalized citizen residing in the U.S., and Roman Semenov (“Semenov”), a Russian citizen.  The indictment charges them with conspiring to commit money laundering, operate an unlicensed money transmitting business, and commit sanctions violations involving the International Emergency Economic Powers Act, or IEEPA.  When the indictment was unsealed, Storm was arrested and then released pending trial.  Treasury simultaneously sanctioned Semenov, who remains outside of the U.S., adding him to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List.

These are very complicated cases raising complicated issues.  They are separate but obviously related.  As we will discuss, the factual and legal issues tend to blend together, and how a party characterizes an issue says a lot about their desired outcome:  has the government taken incoherent action against a technology, or has it pursued a group of people attempting to hide behind tech?

Continue Reading  All Roads Lead to Roman: Alleged Tornado Cash Co-Founders Roman Storm Arrested and Roman Semenov Sanctioned, Days After Treasury Defeats Lawsuit Challenging OFAC

On July 31, 2023, the United States Securities and Exchange Commission (“SEC”) published an alert outlining deficiencies the Division of Examinations has observed in broker-dealers’ (“BD”) compliance with anti-money laundering (“AML”) and countering terrorism financing (“CTF”) requirements.  While the alert addresses overarching compliance requirements for BDs, it focuses on deficiencies the Division of Examinations has observed with regard to independent testing of BDs’ AML programs, personnel training and identification and verification of customers and their beneficial owners.

The alert makes two over-arching observations.  First, BDs “did not appear to devote sufficient resources, including staffing, to AML compliance given the volume and risks of their business.”  Second, the “effectiveness of policies, procedures, and internal controls was reduced when firms did not implement those measures consistently.”  Emphasizing the key elements of an adequate AML program BDs must implement, the Alert then shifts its focus to independent testing and training and customer identification and customer due diligence.

Continue Reading  SEC Issues Alert Outlining Deficiencies in Broker-Dealers’ AML Compliance