Suspicious Activity Report (SAR)

Federal Register Notice Implicates Debate Over BSA Reporting Burden

As we have blogged (here, here, and here), the Financial Crimes Enforcement Network (“FinCEN”) consistently has stressed the importance of Suspicious Activity Reports (“SARs”) and other Bank Secrecy Act (“BSA”) filing requirements to anti-money laundering (“AML”), counter-terrorism and law enforcement efforts. These vigorous pronouncements can be contrasted with certain critiques by industry groups and some commentators regarding the true operational value (or lack thereof) of BSA reporting requirements to law enforcement and financial institutions’ AML programs, particularly when compared to the overall costs associated with the current and rigorous regulatory regime. Lurking behind this debate is the possibility that some requirements of the BSA maybe reduced – or “reformed,” depending upon one’s perspective – through legislation. A recent regulatory filing by FinCEN illustrates this tension and ongoing debate.

On May 26, 2020, FinCEN issued a notice in the Federal Register (“Notice”) to renew the Office of Management and Budget (“OMB”) control numbers assigned to the SAR reporting regulations. The Notice is required in order to give the financial industry and affected stakeholders an opportunity to comment on existing regulatory requirements, as well as associated burdens. Although FinCEN has encouraged the industry to review the Notice and comment, it likely will not be surprised if at least some industry groups push back and criticize the associated estimates regarding burden. Regardless, the Notice provides interesting insights and statistics into current SAR reporting.
Continue Reading FinCEN Seeks Industry Comments on SAR Reporting Burden and Provides Plentiful SAR Stats

Travel These Days

Kenneth Blanco, Director of the Financial Crimes Enforcement Network (“FinCEN”), recently provided remarks about FinCEN’s “Travel Rule” at the first truly-virtual Consensus Blockchain Conference. The Travel Rule, which became effective in 1996, requires money services businesses (“MSBs”) – including cryptocurrency exchanges – to maintain identifying information on all parties in fund transfers of over $3,000 between financial institutions. As we discuss below, this principle creates real-world practical problems in the digital currency industry, in which it is not necessarily easy to obtain such information, unlike the traditional banking industry.

During his remarks, Director Blanco applauded the Financial Action Task Force’s (“FATF”) guidance issued last June, about which we have blogged here, instructing its 180 international member governments to similarly demand that virtual asset service providers (“VASPs”) collect “accurate originator information and required beneficiary information” on transactions of $1,000 or more. FATF’s pronouncement sent some shockwaves through the digital currency industry.

Notably, Director Blanco also lauded the efforts of cross-sector organizations and working groups to develop international standards and solutions to aid compliance with the Travel Rule. He urged for continued cooperation between FinCEN and the virtual currency industry to effectively implement Anti-Money Laundering (“AML”) measures consistent with the Travel Rule.
Continue Reading FinCEN Director Blanco Urges Collaboration Across Virtual Currency Industry to Comply with Travel Rule

On May 18, the Financial Crimes Enforcement Network (“FinCEN”) issued an Advisory “to alert financial institutions to rising medical scams related to the COVID-19 pandemic. This [A]dvisory contains red flags, descriptions of COVID-19 related medical scams, and information on reporting suspicious activity.” According to FinCEN, “[t]his is the first of several advisories FinCEN intends to issue concerning financial crimes related to the COVID-19 pandemic.” FinCEN also issued a companion Notice to the Advisory that “provides detailed filing instructions for financial institutions, which will serve as a reference for future COVID-19 advisories.”

Although FinCEN has made clear that future advisories will follow, the May 18 Advisory and Notice are themselves the latest in a string of prior pronouncements by FinCEN relating to the global pandemic. As we have blogged, FinCEN updated its March 16, 2020 COVID-19 Notice for the stated reason of assisting “financial institutions in complying with their Bank Secrecy Act (“BSA”) obligations during the COVID-19 pandemic, and announc[ing] a direct contact mechanism for urgent COVID-19-related issues.” FinCEN, of course, is not the only regulatory body addressing Anti-Money Laundering (“AML”) issues implicated by COVID-19. As we also have blogged, the Financial Action Task Force (“FATF”) recently issued a paper entitled “Covid-19-Related Money Laundering and Terrorist Financing – Risk and Policy Responses” This FATF Paper follows up on the April 1, 2020 statement issued by FATF’s President on COVID-19 and measures to combat illicit financing.

The Advisory is surprisingly specific when describing the possible scams and potential red flags that FinCEN believes that financial institutions should be monitoring for in order to detect, prevent, and report such suspicious activity. In addition to providing a list of red flags, the Advisory provides specific case studies demonstrating the real-world concerns surrounding these scams. Although this level of detail is helpful to financial institutions when integrating the Advisory into their own programs, it also seems to impose potential heightened due diligence requirements on financial institutions when dealing with companies engaged in providing medical services and supplies.
Continue Reading FinCEN Issues Advisory on Medical Scams Relating to COVID-19

Regulatory Examination and Related Enforcement Also Highlights Perceived Risks of Banking Crypto Clients

The Department of the Treasury’s Office of the Comptroller of the Currency (“OCC”) recently issued a Consent Order against M.Y. Safra Bank arising from the bank’s decision to accept a variety of high-risk, Digital Asset Customers (“DACs”), allegedly without implementing the necessary Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) controls. Although the OCC did not impose a monetary penalty against the bank, it demanded that the bank implement and maintain a remarkably broad array of potentially costly and extremely detailed measures to strengthen its AML program. And, notably, the OCC specifically tasked the bank’s Board of Directors with implementing, overseeing, and reporting on these measures.

We describe here the OCC’s examination into and requirements imposed on M.Y. Safra Bank. The Consent Order is a reminder to the boards and management of all financial institutions that if they pursue novel and higher-risk customers – certainly, a potentially defensible business plan in our increasingly competitive business environment – then they absolutely have to adjust accordingly their AML compliance program and accompanying transaction monitoring to compensate for such increased risk. This is particularly true when those new customers employ novel technologies or business products which require a particularized ability to understand and address from an AML perspective. New, creative business lines are not necessarily bad – so long as the implementation of the AML compliance program is adjusted appropriately to identify and manage the new risk.

The Consent Order also is a reminder that, as the BSA/AML Examination Manual of the Federal Financial Institutions Examination Council states, “[t]he board of directors, acting through senior management, is ultimately responsible for ensuring that the bank maintains an effective BSA/AML internal control structure,” and otherwise must create a culture of compliance.

This Consent Order and related OCC AML exam and enforcement issues – including the liability of not just institutions, but also the potential individual liability of AML in-house professionals – will be the topic of a forthcoming installment in Ballard Spahr’s Consumer Finance Monitor Podcast by the firm’s AML Team. Please stay tuned our podcast, and read on here.
Continue Reading OCC Action Highlights Increased Accountability Facing Boards of Directors

Report Focuses on Anonymity, Real Estate Transactions and Complicit Lawyers

Report Also Signals Upcoming AML Regulation for Certain Niche Institutions

Second Post in a Two-Post Series

In its 2020 National Strategy for Combating Terrorist and Other Illicit Financing (“2020 Strategy”), the U.S. Department of Treasury (“Treasury”) has laid out its AML and money laundering enforcement priorities. Last week, we blogged about the 2020 Strategy and focused on the document’s findings and recommendations for increased transparency into beneficial ownership; strengthening international regulation and coordination, and modernization of the BSA/AML regime in regards to technological innovation.

Here, we focus on the 2020 Strategy as it relates to combating money laundering relating to real estate transactions and gatekeeper professions in general, such as lawyers, real estate professionals and other financial professionals, including broker dealers. Importantly, the 2020 Strategy also notes that the Financial Crimes Enforcement Network (“FinCEN”) is working on a proposed regulation which would extend AML obligations for banks and other financial institutions not subject to a federal functional regulator; there are an estimated 669 such institutions in the U.S.
Continue Reading Treasury Report Targets Money Laundering Risks in Real Estate and Gatekeeper Professions

Plaintiffs Failed to Sufficiently Allege Knowledge or Recklessness by Company Concerning AML Compliance Problems, Despite Admissions Made by Company When Responding to Major Government Enforcement Actions 

On February 25, 2020, the Tenth Circuit Court of Appeals upheld the dismissal of shareholders’ securities-fraud class action against the Western Union Company (“Western Union”) and several of its current and former executive officers based on the company’s alleged anti-money laundering (“AML”) compliance failings.

The suit was filed in February 2017 following the announcement of a deferred prosecution agreement (“DPA”) between Western Union and the U.S. Department of Justice. The DPA was based upon Western Union’s alleged willful failure to maintain an effective AML program and aiding and abetting of wire fraud between 2004 and 2012. The DPA, about which we have previously blogged, charged Western Union with filing Suspicious Activity Reports (“SARs”) regarding activity by its customers but failing to file SARs regarding the actions of its own agents who were likely complicit. The DPA and related civil enforcement actions from the Federal Trade Commission and FinCEN required Western Union to pay a combined penalty of $586 million.

As we also have blogged, shareholder derivative suits based on alleged AML failures are proliferating, for both U.S.-based and foreign-based financial institutions – as well as their executives. Primary examples include Danske Bank and some of its former executives, as well as Westpac, Australia’s second-largest retail bank, which currently face such lawsuits in the U.S. Such lawsuits now represent predictable collateral consequences flowing from AML-related scandals. Here, Western Union obtained dismissal because the plaintiffs failed to allege sufficient facts regarding the key issue of mental state – that is, facts that would support a strong inference of actual knowledge or reckless disregard that the public statements regarding Western Union’s actual state of AML compliance were false. The detailed Tenth Circuit opinion illuminates the practical contours of the scienter standard regarding AML compliance, or alleged lack thereof. Ultimately, plaintiffs’ arguments based upon a “fraud by hindsight” theory will fail.
Continue Reading Tenth Circuit Rejects Shareholders’ Fraud Claims Against Western Union Based on Alleged AML Failings

Last Thursday, FinCEN Deputy Director Jamal El-Hindi appeared at the 20th annual Anti-Money Laundering (AML) and Financial Crimes Conference hosted by the Securities Industry and Financial Markets Association (SIFMA) in New York City. His prepared remarks covered three main topics at the intersection of the securities industry and FinCEN’s enforcement goals: (i) AML compliance trends and current challenges; (ii) the value of Bank Secrecy Act (BSA) filing data; and (iii) the current regulatory landscape.

El-Hindi not surprisingly stressed transparency and information sharing, the value of BSA reporting data, and the need for legislation regarding the collection of beneficial ownership at the corporate formation stage. El-Hindi also suggested – perhaps without the complete agreement of his audience – that regulators tend to under-regulate, rather than over-regulate. He stated: “But in an area such as ours where we have developed a strong partnership with industry and where we believe that you are just as vested in our mission to thwart bad actors as we are, it is important for us to use our authorities fully.”

His remarks are particularly relevant given the 2020 Examination Priorities recently issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE), which states that the OCIE will prioritize examining broker-dealers and investment companies “for compliance with their AML obligations in order to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs.”
Continue Reading FinCEN Stresses Transparency, BSA Filing Data, and Perils of “Under- Regulating” to Securities Industry

Note to Government Personnel: Don’t Disclose SARs

This week, major developments unfolded in the cases against two former federal government employees for their respective roles in disclosing Suspicious Activity Reports (“SARs”) in violation of the Bank Secrecy Act (“BSA”).

Historically, prosecutions pertaining to improper SAR disclosures have been supremely rare, so the fact that two court hearings involving this issue occurred in a single week is particularly notable. Both involve defendants allegedly acting on their own perceived sense of duty – perceptions which ran afoul of the law.

First, Natalie Mayflower Sours Edwards, a former senior advisor at the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), pleaded guilty to one felony count of conspiring to unlawfully disclose SARs related to Paul Manafort, Richard Gates, Maria Butina, Prevezon Alexander, and the Russian Embassy to a reporter. Second, John C. Fry, a former employee of the Internal Revenue Service (“IRS”), was sentenced to five years of supervised probation and ordered to pay a $5,000 fine after similarly pleading guilty to his role in disclosing SARs to embattled attorney Michael Avenatti that related to likewise-embattled attorney Michael Cohen. Both prosecutions underscore the seriousness with which federal authorities view such disclosures. Likewise, they reflect that potentially subjective good intentions – of course – still don’t excuse violations of the carefully-crafted prohibitions in the BSA against the disclosure of SARs.


Continue Reading Key Developments in the Prosecutions for Leaks by Government Personnel of SARs Related to Michael Cohen, Paul Manafort, Richard Gates, and Others

AMA Details Components of a Strong AML/BSA Program for the Gaming Industry

Earlier this month, the American Gaming Association (“AGA”) released an updated Best Practices for Anti-Money Laundering (“AML”) Compliance (“Best Practices Guidance”) reflecting a heightened focus on risk assessment as well as Know Your Customer/Customer Due Diligence measures for the gaming industry.  This update amends the industry’s first set of comprehensive best practices for AML compliance, issued in 2014.  At the time, the best practices were well-received by the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).  These updated Best Practices have drawn from recent FinCEN guidance and enforcement actions, the Treasury Department’s National Money Laundering Risk Assessment, and the Office of Foreign Assets Control’s (“OFAC”) updated compliance guidelines and provide detailed guidance regarding how the industry can continue to be “a leader in compliance.”


Continue Reading AMA Updates AML Best Practices for AML Compliance

Hudson Valley, New York: Rows of hemp plants in a cultivated field.

On December 3, 2019, four federal agencies – the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (“FDIC”), the Financial Crimes Enforcement Network (“FinCEN”), and the Office of the Comptroller of the Currency (“OCC”) – along with the Conference of State Bank Supervisors, released a statement (the “Statement”) “to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act and its implementing regulations.” The Statement represents the next step in the normalization of hemp growth and cultivation following its legalization under the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) and was, predictably, applauded by those in the banking community, including the American Banking Association.
Continue Reading Banking Regulators Ease SAR Reporting Requirements Applied to Hemp-Related Businesses