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 beneficial owners to FinCEN upon their creation/incorporation.  The CTA is a key piece of legislation designed to enhance transparency and combat the misuse of so-called “shell companies.”

The press release is here; the actual NPRM is here; and a summary “fact sheet” issued by FinCEN regarding the NPRM is here.  We have blogged on the CTA and these impending regulations many times (here, here, here, here and here).

The federal register version of the NPRM is 55 pages long and very detailed.  Accordingly, this blog post serves only to announce the issuance of the NPRM — we will follow up in the next few days with a detailed analysis of these long-anticipated proposed regulations.  The complexity of the CTA is highlighted by the fact that this NPRM only addresses beneficial ownership reporting.  FinCEN has stated that it will engage in two additional rulemakings under the CTA to (1) establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to protect such information; and (2) revise and conform the customer due diligence rule for financial institutions following the promulgation of the final version of this NPRM.

FinCEN’s summary fact sheet, linked above, is entitled “Key Elements of the Proposed Beneficial Ownership Information Reporting Regulation.”  It observes that the NPRM describes who must file a report on beneficial ownership, what information must be reported, and when a report is due. It further observes that the proposed rule “would require reporting companies to file reports with FinCEN that identify two categories of individuals: (1) the beneficial owners of the entity; and (2) individuals who have filed an application with specified governmental or tribal authorities to form the entity or register it to do business.”

Please stay tuned.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

As anticipated, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC recently approved and released the Final Rule Requiring Computer-Security Incident Notification (“Final Rule”).  The Final Rule is designed to promote early awareness and stop computer security incidents before they become systemic.  It places new reporting requirements on both U.S. banking organizations, as well as bank service providers.  We have blogged repeatedly on the pernicious issue of ransomware.

The Final Rule applies to “banking organizations” as defined in the Final Rule.  Covered banking organizations are required to provide notice to their relevant regulator in the event that a “Notification Incident” occurs.  A Notification Incident is a computer security event that results in actual harm to the confidentiality, integrity, or availability of information or an information system, when that occurrence has—or is reasonably likely to—materially disrupt or degrade:

  • a banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base;
  • business line(s), that upon failure would result in a material loss of revenue, profit, or franchise value; or
  • operations, including associated services, functions, and support, the failure or discontinuance of which would pose a threat to the financial stability of the United States.

The Final Rule specifically calls out ransomware and DDOS attacks as potential Notification Incident. Banking organizations that suffer a Notification Incident must provide notice to their respective regulator as soon as possible, but not later than 36 hours after the occurrence of the incident.  Despite the 36-hour notification window, covered banking organizations that offer “sector critical services” are encouraged to provide same day notification.  Finally, the required notice should be provided either by email, telephone, or any other similar methods later prescribed by regulators for providing notice.

The Final Rule also requires that bank service providers notify at least one bank-designated point of contact at each affected banking organization customer as soon as possible when the bank service provider determines that it has experienced a computer-security incident that has—or is likely to—materially disrupt or degrade covered services for more than four hours.  Banking organizations and service providers are required to work collaboratively to designate a method of communication that is feasible for both parties and reasonably designed to ensure that banking organizations actually receive the notice in a timely manner.  This requirement is designed to enable a banking organization to promptly respond to an incident, determine whether it must notify its primary federal regulator, and take any other measures that may be appropriate.

The Final Rule is likely to impact the operations of both banking organizations and bank service providers.  Banking entities should closely review the definitions in this Final Rule to determine whether they fall within its scope.  Moving forward, covered entities should expect to include relevant notification provisions in new and existing service contracts.  Covered entities will also want to ensure that they create internal policies and procedures for identifying when an incident requiring notification has occurred, and what steps must be taken by whom to provide notice to relevant parties in compliance with the Final Rule.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Sentencing is a critical stage in the federal criminal process, particularly given the incredibly high rate of guilty pleas in federal court.  There is a very strong argument that sentencing far eclipses the importance of the increasingly rare trial in the federal criminal system.  If a federal criminal investigation cannot be “killed,” then in many cases – particularly in “white collar” cases – the focus early on for both the defense and the prosecution is the sentencing hearing, and how to maximize one’s position, because a federal charge often produces a conviction via plea, or less often, via trial.  Stated otherwise, federal criminal defense is often all about sentencing.

At sentencing, sometimes defendants – and, less often, the prosecution – will make arguments regarding “similarly situated” defendants, and the sentences that they received.  Sometimes these arguments resonate with the sentencing court; sometimes not.  Regardless, these arguments can be tricky because reliable “statistics” are elusive, and it’s not always clear that justifiable comparisons are being drawn by either side.  We therefore were interested when the U.S. Sentencing Commission (“the Commission”) recently issued the Judiciary Sentencing Information (“JSIN”) platform.  Although it is difficult to draw clear conclusions from the JSIN platform, the data is nonetheless fascinating, and we discuss in this blog potential insights into sentences for money laundering and Bank Secrecy Act (“BSA”) offenses.

We have reviewed the data and created summary charts for your consideration.  Because the Commission has invited federal judges to use the JSIN platform when sentencing, it by definition is relevant to defense attorneys and prosecutors. Continue Reading U.S. Sentencing Commission Data on Money Laundering and BSA-Related Offenses Reveals:  Courts Often Sentence Below the Guidelines Range

Agencies Issue “Crypto Asset Roadmap” for 2022 Guidance, and OCC Confirms Prior Interpretive Letters on Crypto – So Long as Supervisory Regulators Do Not Object

The Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) (collectively, the “Agencies”) issued on November 23 a short Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (“Joint Statement”), which announced – without further concrete detail – that they had assembled a “crypto asset roadmap” in order to provide greater clarity in 2022 to banks on the permissibility of certain crypto-asset activities.  Only the week before, the Chief Counsel for the OCC issued Interpretive Letter #1179, which confirmed that a bank could engage in certain cryptocurrency, distributed ledger and stablecoin activities – consistent with prior OCC letters – so long as a bank shows that it has sufficient controls in place, and first obtains written notice of “non objection” by its supervisory office.  This post will discuss both publications.

There is great overlap between the bank activities referenced in the Joint Statement and Interpretive Letter #1179.  The 2022 clarity promised by the “roadmap” presumably will supersede, once issued, Interpretive Letter #1179, which appears to function as a general stop-gap until the 2022 publications hopefully provide more detail regarding exactly how banks can attain compliance.

Federal banking regulators have been busy in this space.  These pronouncements come closely on the heels of a Report on Stablecoins issued earlier in November by the Agencies and the U.S. President’s Working Group on Financial Markets, which delineated perceived risks associated with the increased use of stablecoins and highlighted three concerns: risks to rules governing anti-money laundering (“AML”) compliance, risks to market integrity, and general prudential risks. Continue Reading Federal Bank Regulators Focus on Crypto Assets and Blockchain Activities

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

Last week, the Southern District of California partially unsealed a superseding indictment (the “Indictment”) revealing allegations against 29 alleged members of an international money laundering organization (“MLO”) tied to some of the largest and most powerful drug trafficking organizations in Mexico, and who allegedly laundered over $32 million in drug proceeds from the United States to Mexico.  The Indictment sets forth a charge of conspiracy to commit money laundering and seeks forfeiture of $11,386,793.

The Indictment

According to the Department of Justice’s press release, the indicted MLO allegedly laundered drug money from the United States to Mexico for the Sinaloa Cartel and the Jalisco New Generation Cartel (known as CJNG, based on the acronym for its Spanish-language name Cártel de Jalisco Nueva Generación).  Both are notorious for their size, power, and brutality.

Specifically, the MLO allegedly laundered over $32 million in drug proceeds through an intricate network of contracts with Mexican drug trafficking organizations.  The MLO secured contracts with drug trafficking organizations in Mexico to pick up drug proceeds in cities throughout the United States, including Baltimore, Detroit, Los Angeles, Philadelphia, Boston, Denver, Chicago, New York City and numerous others.  The MLO relied on bulk cash transfers:

Once the MLO received a contract, it communicated with courier and bank account holders using burner phones and code phrases to coordinate bulk cash deposits into fictitious funnel business bank. . . . The defendants allegedly served as either couriers and/or funnel bank account holders. The couriers travelled from San Diego to cities throughout the country to receive the bulk cash after using photographs and codes to verify the meeting details. The bulk cash was typically concealed in trash bags, duffel bags, or shoeboxes.  After the illicit cash proceeds were deposited into the fictitious funnel bank accounts, the monies were wired to personal bank accounts in Mexico where the money was then dispersed to the drug trafficking organizations.

The prosecution is part of an Organized Crime Drug Enforcement Task Forces investigation, and was led by HSI Costa Pacifico Money Laundering Task Force, coordinated with the DEA, and the IRS-Criminal Investigation. Acting U.S. Attorney Randy Grossman analogized this takedown to cutting the Cartels’ legs out from under it, stating: “The key to dismantling Drug Trafficking Organizations is disrupting the flow of illicit funds and attacking the money laundering elements of the organizations.”  The operation leading to the Indictment is a stark reminder that the number one way end up on the wrong side of an indictment is to leave a money trail.

The Sinaloa & Jalisco New Generation Cartels: Who Are They?

The Sinaloa Cartel was once run by Joaquin “El Chapo” Guzman, who is currently serving a life sentence in U.S. federal prison for multiple crimes, including murder, kidnapping and conspiracy.  The longstanding Cartel is based in the city of Culiacan, Sinaloa, but it has organized crime activities across the world. The Sinaloa Cartel is well-acquainted with United States law enforcement agencies; one of its other money launderers was sentenced last month to 10 years in prison for laundering approximately $15 million from sales of drugs that were smuggled into the United States.  Other Cartel members were also convicted of conspiracy to violate several statutes—including the Racketeering Influenced Corrupt Organization (RICO) statute, drug possession and importation, money laundering, and firearms possession—for their roles in the Cartel’s narcotics distribution operations.

The CJNG, known as the “most aggressive” cartel in Mexico, and certainly one of the bloodiest, is also no stranger to U.S. law enforcement.  In August 2020, 28 people connected to CJNG were charged with, conspiracy to launder money and other financial, drug, and gun crimes.  Earlier, in February 2020, an additional four people were indicted on federal money laundering charges for their part in laundering Cartel money from 2018 to January 2020.

The more-recently formed CJNG is reputed to be the Sinaloa Cartel’s main rival—which begs the question of whether the two organizations knew their money was being handled by the same MLO.  The two Cartels have engaged in well-known battles over drug trafficking routes, so the recent indictment could cause even more strife between the organizations.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

Travel Rule and Beneficiary Information Continues to Challenge Virtual Asset Service Providers

In late October, the Financial Action Task Force issued its long-awaited updated guidance on Virtual Assets and Virtual Asset Service Providers (“FATF Guidance”), an extremely lengthy and detailed document setting forth how virtual asset service providers (“VASPs”) and related virtual asset activities fall within the scope of FATF standards for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”).  The FATF Guidance is important to VASPs worldwide, as well as the more traditional financial institutions (“FIs”) doing business with them.  Because of its great breadth, we focus here only on its comments regarding implementation of the so-called “Travel Rule” for virtual assets.  This portion of the FATF Guidance is particularly relevant to the U.S. because, as we have blogged, the Financial Crimes Enforcement Network (“FinCEN”) proposed regulations in 2020 – still pending – which would change the Travel Rule by lowering the monetary threshold for FIs from $3,000 to $250 for collecting, retaining, and transmitting information related to international funds transfers, and explicitly would make the Travel Rule apply to transfers involving convertible virtual currencies.

The FATF Guidance has additional relevance to U.S. VASPs and FIs because, this month, the U.S. President’s Working Group on Financial Markets (“PWG”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller (“OCC”) (together, “the U.S. Agencies”) issued a Report on Stablecoins (the “Report”).  Stablecoins are digital assets designed to maintain stable value as related to other reference assets, such as the U.S. Dollar.  In the Report, the U.S. Agencies delineate perceived risks associated with the increased use of stablecoins and highlight three types of concerns: risks to rules governing AML compliance, risks to market integrity, and general prudential risks.  We of course will focus here on the Report’s discussion of AML risks, particularly because it repeatedly invokes the FATF Guidance, thereby illustrating the increasing efforts by governments to seek a global and relatively coordinated approach to addressing AML/CFT concerns regarding virtual assets. Continue Reading Global Developments in AML and Virtual Assets:  FATF Guidance and the Travel Rule, and U.S. Pronouncements on Stablecoins

I am very pleased to be part of two upcoming panels focused on key current risks relating to money laundering and anti-money laundering (“AML”), joined by wonderful and distinguished speakers.  I hope that you can join – the discussions should be lively, informative and useful to legal and compliance professionals.

ACAMS: Money Laundering and Real Estate

On November 10, ACAMS, the largest international membership organization for anti-financial crime professionals, will host Criminal Connections: The World of Real Estate and Limited Liability Companies, a two-hour webinar that will jump into the murky waters of real estate as a potential vehicle for money laundering, limited liability companies, and all cash transactions.  The panel will assess the potential effects of the new Corporate Transparency Act on the real estate industry, and will discuss many topics on which we repeatedly blog, including beneficial ownership, shell companies, Geographic Targeting Orders, and – of course – real estate.

The panel will be moderated by Dr. William Scott Grob, the AML Director for the Americas for ACAMS who manages the speaker faculty and training of ACAMS certificate programs.  Dr. Grob has over 25 years of financial and banking expertise, including at HSBC.  Joining us will be Dr. Carlos Barsallo, an attorney in Panama who is the founder and President of the Instituto Gobierno Corporativo-Panamá (IGCP), the Chairman of the Board of Directors of the Panamanian Chapter of Transparency International, and the Former Commissioner President of the National Securities Commission of Panama.

PACDL:  Money Laundering and Foreign Corruption Schemes

On November 11, I am happy to be moderating a virtual panel, Anti-Money Laundering Trends:  The Use of Domestic Money Laundering Tools to Target Foreign Corruption and U.S. Professionals, for the Pennsylvania Association of Criminal Defense Lawyers’ White Collar Practice Conference.  We will focus on recent U.S. prosecutions of foreign corruption schemes – with an emphasis on the use of the money laundering statutes. We also will analyze the related risks that U.S. professionals servicing foreign clients or transactions may face. We previously have blogged repeatedly about potential AML and money laundering issues facing U.S. professionals, who are under increasing scrutiny in light of: evolving international standards for professionals as AML “gate keepers”; global criticisms of the United States as a possible haven for money launderers and tax cheats; and international scandals pointing to legal professionals as the alleged facilitators of laundering and tax evasion by their clients.

I am very lucky to be joined by speakers Shirley U. Emehelu and Jonathan R. Barr.  Shirley, a member of Chiesa Shahinian & Giantomasi PC, is the former Chief of the Asset Recovery and Anti-Money Laundering section of the U.S. Attorney’s Office for the District of New Jersey.  Jonathan, a partner at BakerHostetler, is a former Assistant U.S. Attorney, Department of Justice Fraud Section Trial Attorney, and Securities and Exchange Commission Senior Counsel.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

The Second U.S. Circuit Court of Appeals, in a recent 27-page decision, held that Halkbank, the state-owned Turkish lender, cannot claim sovereign immunity under the Foreign Sovereign Immunities Act (“FSIA”) in a money laundering and sanctions-related prosecution.  Upholding a decision by U.S. District Judge Richard M. Berman, the court ruled that even if the FSIA could shield the bank in a criminal case, the charges against Halkbank fall under the “commercial activity” exception to FSIA immunity.  This interpretation of the commercial activity exception significantly limits the immunity bestowed under the FSIA in criminal cases and furthers American deterrence against foreign financial institutions that allegedly facilitate evasion of U.S. sanctions or launder funds through the U.S. financial system.  Halkbank now faces potential trial for an alleged $20 billion money laundering scheme, bank fraud, and conspiracy charges. Continue Reading Second Circuit Says Turkish Halkbank Must Face Criminal Charges In Money Laundering and Iran Sanctions Case

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