Suspicious Activity Report (SAR)

Report Previews Potential Implications for the United States

The European Commission (“Commission”) recently released its 2022 Supranational Risk Assessment Report (“SNRA Report”) to the European Parliament and Counsel regarding the “risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities.”  The SNRA Report analyzes, on a broad scale, money laundering and terrorism financing risks and proposes a plan of action to address them.  The Report also examines more specifically “sectors or products where relevant changes have been detected.” 

The SNRA Report flags the “Gambling Sector” as a “high risk” area of Anti-Money Laundering (“AML”) and Countering the Financing of Terrorism (“CFT”) concern, with a particular focus on online gambling.  According to the Commission, online gambling presents a particularly high AML/CFT risk due to factors such as “the non-face-to face element, [and] huge and complex volumes of transactions and financial flows.”  The potential use of e-money and virtual currencies, as well as the emergence of unlicensed online gambling sites, exacerbates this risk.

As the European Union (“EU”) considers how to tackle the potential risks of online gambling, the United States is simultaneously grappling with the rapid expansion of online gambling and online sports betting in particular.  Before May 2018, when the Supreme Court struck down a 1992 federal law that effectively banned commercial sports betting in most states, Nevada was the only state with legalized sports betting in the United States.  Although California ballot Proposition 27, which would have legalized online and mobile sports betting in California, failed to pass during last week’s national and state elections, more than 30 states still have legalized some form of sports betting, and there is politial pressure to continue to expand online gambling and other forms of gaming.  As Americans jockey for the immense potential receipts that the expansion of online gambling can bring, it may be worth taking a page out of the EU’s book in order to consider the potential money laundering and terrorist financing risks that can accompany it.

Continue Reading  European Commission Highlights Online Gambling’s Money Laundering Risks

The “Highlights” — To Russia, With Crypto

The Financial Crimes Enforcement Network (“FinCEN”) issued on November 1 a Financial Trend Analysis regarding ransomware-related Bank Secrecy Act (“BSA”) filings during the second half of 2021 (the “Report”).  This publication follows up on a similar ransomware trend analysis issued by FinCEN regarding the first half of 2021, on which we blogged here.  

In the most recent analysis, FinCEN found that both the number of ransomware-related Suspicious Activity Reports (“SAR”) filed, and the dollar amounts at issue, nearly tripled from 2020 to 2021.  The notable takeaways from the Report include:

  • Ransomware-related SARs were the highest ever in 2021 (both in number of SARs and in dollar amounts of activity reported).
  • Ransomware-related SARs reported amounts totaling almost $1.2 billion in 2021.
  • Approximately 75% of ransomware-related incidents between June 2021 and December 2021 were connected to Russia-related ransomware variants.

The Report, which stated that the majority of these ransomware payments were made in Bitcoin, serves as a particular reminder to cryptocurrency exchanges of their role in both identifying and reporting ransomware-related transactions facilitated through their platforms.  The Report stresses that SAR filings play an essential role in helping FinCEN identify ransomware trends.

Continue Reading  FinCEN Reports Staggering Increase in Reported Ransomware Attacks

Actions Highlight Risky Mix of Sanctions Law, Inadequate Transaction Monitoring and Dealing with Anonymity-Enhanced Cryptocurrencies

The Office of Foreign Assets Control (“OFAC”) and the Financial Crimes Enforcement Network (“FinCEN”) announced on October 11 simultaneous settlements with Bittrex, Inc. (“Bittrex”), a virtual currency exchange and hosted wallet provider. Under the OFAC settlement, Bittrex has agreed to pay $24,280,829.20 to settle its potential civil liability for 116,421 alleged violations of multiple sanctions programs. Under the FinCEN consent order, Bittrex agreed to pay a civil penalty of $29,280,829.20 for alleged anti-money laundering (“AML”) violations under the Bank Secrecy Act (“BSA”). FinCEN has agreed to credit Bittrex’s payment to OFAC against its penalty because it found that the alleged BSA violations “stem from some of the same underlying conduct”; thus, Bittrex’s total payments to the two regulators come to $29,280,829.20. 

According to the Department of the Treasury dual press release, the two settlements represent the first parallel enforcement actions by FinCEN and OFAC in the virtual currency and sanctions space. Also, it is OFAC’s largest virtual currency enforcement action to date. To further highlight the importance of the settlements, the press release quotes the OFAC Director Andrea Gacki and FinCEN Acting Director Himamauli Das, both sternly warning operators in the same environment as Bittrex to implement effective AML compliance and sanction screening programs.

It is conceivable that Bittrex, for years now, has been on notice that federal and state regulators are closely watching and expecting more comprehensive risk assessment programs and procedures from businesses transacting with virtual currency. As we previously blogged here, in 2019 the New York Department of Financial Services (“NYDFS”) denied Bittrex’s application for a Bitlicense, citing: “deficiencies in Bittrex’s BSA/AML/OFAC compliance program; a deficiency in meeting the Department’s capital requirement; and deficient due diligence and control over Bittrex’s token and product launches.”  In its letter denying Bittrex’s application, NYDFS set forth in detail the deficiencies it found in Bittrex’s BSA/AML/OFAC compliance program, noting that Bittrex’s compliance policies and procedures “are either non-existent or inadequate.”

As we will discuss, the FinCEN consent order highlights Bittrex’s alleged failure to address adequately the overall risk environment in which it operated, including transactions involving anonymity-enhanced cryptocurrencies, or AECs.  The consent order also highlights two repeated themes in enforcement actions: lack of adequate compliance staff, and a seemingly robust written compliance policy that was not matched by an effective day-to-day transaction monitoring system.

Continue Reading  OFAC and FinCEN Settle with Bittrex in Parallel Virtual Currency Enforcements

With Guest Speaker Matthew Haslinger of M&T Bank

We are extremely pleased to offer a podcast (here) on the legal and logistical issues facing financial institutions as they implement the regulations issued by the Financial Crimes Enforcement Network (FinCEN) pursuant to the Anti-Money Laundering Act of 2020 (AMLA) and the Corporate Transparency Act

Indictment Focuses on “High Risk” Transactions Involving Mexico, Bulk Cash, and Zero SAR Filings

On September 13, the United States Attorney’s Office for the Eastern District of New York announced that defendant Hanan Ofer pleaded guilty to “failing to maintain an effective anti-money laundering program.”  Ofer and his co-defendant, Gyanendra Asre, were named in a March 2021 indictment (the “Indictment”) alleging they funneled “hundreds of millions of dollars from high-risk foreign jurisdictions” – primarily, Mexico – from 2014 to 2016, through “small, unsophisticated financial institutions” without implementing an anti-money laundering program as required by the Bank Secrecy Act (“BSA”).  Ofer and Asre were charged with failure to maintain an effective anti-money laundering (“AML”) program, failure to file (any) Suspicious Activity Reports (“SARs”), and the operation of an unlicensed money transmitting business.

As we discuss, it is a little difficult to draw clear lessons from the Indictment.  Although the DOJ press release emphasizes the eye-catching number of $1 billion, neither the press release nor the Indictment actually describe these transactions as “suspicious,” much less as involving specific illicit proceeds.  Rather, and as we discuss, the transactions are described merely as “high risk.” Thus, and although it is entirely possible that the government has access to evidence which it did not reference in the charges, the Indictment appears to rely heavily on a very process-oriented theory of prosecution:  the defendants failed to implement adequate processes to monitor and/or prevent transfers that were “high risk,” but not demonstrably related to illicit funds involving specific underlying criminality.

It is also important to acknowledge the Indictment’s allegations against both defendants for operating, apparently “on the side,” a separate unlicensed money transmitter business of their own.  Here, the allegations are more concretely severe:  the unlicensed money transmitter business “involved the transportation and transmission of funds that were known to the defendants to have been derived from a criminal offense or were intended to be used to promote and support unlawful activity.”  Although it is impossible to know, this charge presumably pressured in part Mr. Ofer to plead guilty to more process-oriented BSA charges involving the $1 billion in “high risk” transfers at other financial institutions.

Continue Reading  AML Compliance “Expert” Pleads Guilty to Failure to Maintain Effective AML Program for Over $1 Billion in High-Risk Transactions

How effective is the current framework for filing Suspicious Activity Reports, or SARs?  The AML Act mandates that federal law enforcement agencies provide statistics to assist Congress, regulators, and financial institutions answer this question.  Specifically, it requires the Department of Justice (“DOJ”) to annually produce a report to the Secretary of the Treasury containing statistics, metrics and other information on the use of Bank Secrecy Act (“BSA”) reports.  It further requires the Financial Crimes Enforcement Network (“FinCEN”), to the extent possible, to periodically disclose to financial institutions summary information on SARs that proved useful to law enforcement; it also requires FinCEN to review SARs and publish information on threat patterns and trends.

Yet, on August 25, 2022, the United States Government Accountability Office (“GAO”) published a report, Action Needed to Improve DOJ Statistics on Use of Reports on Suspicious Financial Transactions, describing how the DOJ has not fulfilled that statutory mandate.  The GAO’s report sets forth two recommendations: (1) the DOJ should include data on the use of BSA reports in its ongoing agency-wide efforts to improve data collection; and (2) involve its Chief Information Officer and Statistical Official in the design of its annual BSA statistical report. 

Arguably, the most eye-catching observation of the report is that FinCEN itself “cannot currently provide comprehensive feedback on the impact of BSA reports [to the DOJ] because agencies do not provide FinCEN with comprehensive data on their use of those reports or the effect they had.”  Accordingly, and despite ongoing calls for FinCEN to provide meaningful feedback (now, a statutory requirement under the AML Act), FinCEN “cannot connect their data on report searches to the impact of those reports on case outcomes.”

Continue Reading  GAO Report: DOJ Cannot Provide Meaningful Feedback on SAR Use

Case Involves Familiar But Instructive Regulatory Findings

The New York Department of Financial Services (“NYDFS”) made clear last week that crypto companies can be held accountable for allegedly failing to comply with anti-money laundering (“AML”) / Bank Secrecy Act (“BSA”) regulations.  Federal and certain State laws require crypto companies like Robinhood Crypto, LLC (“RHC”) to maintain effective AML programs, and to implement systems to identify suspicious activity and block illegal transactions on their platforms (which we have previously discussed, including here and here).  On August 2, 2022, NYDFS announced that it entered a Consent Order penalizing RHC $30 million for alleged AML, cybersecurity and consumer protection violations.  RHC also is required to retain an independent consultant to perform compliance assessments evaluating the Company’s remediation efforts. 

This enforcement action is entirely consistent with the recent Guidance on Use of Blockchain Analytics issued by the NYDFS, directed to all virtual currency business entities that either have a NYDFS Bitlicense or are chartered as a limited purpose trust company under the New York Banking Law.  As we have blogged, the Guidance emphasizes “the importance of blockchain analytics to effective [AML] policies, processes, and procedures, including, for example, those relating to customer due diligence, transaction monitoring, and sanctions screening.”

The Consent Order contains a litany of alleged AML deficiencies, many of which have figured prominently in other enforcement actions.  We detail them below.  From a BSA/AML perspective, the key focus – not surprisingly – was on the adequacy of RHC’s transaction monitoring systems.  Again, the message is:  written policies and programs may look great on their face, but actual execution is key.  The adequate funding and staffing of compliance functions is also critical.

Continue Reading  Crypto Compliance Matters: NYDFS Fines Robinhood $30M for Alleged AML, Cybersecurity, and Consumer Protection Violations

The Financial Crimes Enforcement Network (FinCEN) and the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a joint alert on June 28, 2022, warning of evasion attempts by individuals or entities to circumvent BIS export controls implemented in response to the Russian Federation’s renewed invasion of Ukraine. Both agencies urged financial institutions to remain vigilant against bad actors’ attempts to evade BIS export controls. The alert provided an overview of current BIS export restrictions, listed particular commodities of concern for export control evasion, and outlined transactional and behavioral red flags that could indicate attempts to avoid sanctions.

This is FinCEN’s third alert in relation to sanctions imposed on Russian in response to the war in Ukraine.  As we previously blogged, on March 7, 2022, FinCEN urged vigilance by financial institutions against potential Russian Federation attempts to evade sanctions. On March 16, 2022, FinCEN reiterated the need for increased vigilance by financial institutions in detecting suspicious transactions involving real estate, luxury goods, and other high-value assets.

The joint alert comes on the heels of the June 27, 2022 announcement by the United States and the other G7 nations to intensify their coordinated sanction measures in response to Russia’s war of aggression.  A day later, on June 28, 2022, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued determinations pursuant to prior Executive Orders implementing the new measures.  These include prohibiting the importation of Russian gold (EO 14068), as well as new sanctions and export restrictions on entities like Rostec, a key Russian state owned conglomerate, which forms the foundation of Russia’s defense industry (EO 14024).

Continue Reading  FinCEN and BIS Issue Joint Alert on Potential Russian and Belarusian Export Control Evasion

On June 15, FinCEN issued an Advisory on Elder Financial Exploitation (“Advisory”) to warn financial institutions about the rising trend of elder financial exploitation (“EFE”), which FinCEN defines as “the illegal or improper use of an older adult’s funds, property, or assets, and is often perpetrated either through theft or scams.”  The Advisory is detailed.  It highlights new EFE typologies and potential red flags and builds upon a related advisory issued in 2011.  It also offers tips on Suspicious Activity Report (“SAR”) filings and describes other resources available to fight EFE.

Continue Reading  FinCEN Warns Against Elder Financial Exploitation

Enforcement Trends, Crypto, the AML Act — and More

We are very pleased to be moderating, once again, the Practising Law Institute’s 2022 Anti-Money Laundering Conference on May 17, 2022, starting at 9 a.m. This year’s conference will be both live and virtual — and it will be as informative, interesting and timely as always.