Is Art an “Ideal Playing Ground” for Money Laundering?

Last week, the Permanent Subcommittee on Investigations for the U.S. Senate released a detailed, 147-page report titled “The Art Industry and U.S. Policies That Undermine Sanctions” (“the Report”). Although the Report ostensibly addresses the evasion of U.S. sanctions law, much of the Report actually focuses on the connection between high-end art and potential money laundering schemes and anti-money laundering (“AML”) risks. Among other proposals, the Report recommends that the Bank Secrecy Act (“BSA”) be amended to include art dealers as “financial institutions” subject to AML obligations under the BSA.

The Report focuses on an elaborate case study documenting how certain Russian oligarchs allegedly used transactions involving high-end art and shell companies to evade U.S. sanctions, imposed on them on March 20, 2014 in response to Russia’s invasion of Ukraine and the annexation of Crimea. We will not focus on the detailed allegations in the Report regarding the particular facts of this alleged scheme, or the alleged involvement of certain major art auction houses. Rather, we will focus on the more general sections in the Report relating to systemic concerns about the potential role of high-end art in money laundering schemes, and the more general findings of fact and recommendations generated by these concerns.

The Report was not issued in a vacuum; rather, it clearly was written in part to spur legislative action. Proposed legislation on BSA/AML reform is pending before the U.S. Congress and Senate, including a proposal – currently nestled within a lengthy proposed amendment to a defense spending bill – to (i) add to the list of “financial institutions” covered by the BSA “a person trading or acting as an intermediary in the trade of antiquities, including an advisor, consultant or any other person who engages as a business in the solicitation of the sale of antiquities;” and (ii) require a study by the Secretary of the Treasury “on the facilitation of money laundering and terror finance through the trade of works of art or antiquities,” including an evaluation of whether certain art industry markets (“by size, entity type, domestic or international geographic locations, or otherwise”) should be regulated under the BSA. And, this general issue has been percolating for some time. Last year, we blogged in detail about the potential role of high-end art and antiquities in money laundering schemes, and the voluntary AML programs which art dealers might adopt to combat such schemes. Continue Reading Using Art to Evade Sanctions and Launder Money: The Senate Report

On Monday, the Financial Crimes Enforcement Network (FinCEN) issued new Frequently Asked Questions (FAQs) regarding customer due diligence (CDD) requirements for covered financial institutions.  The FAQs supplement FinCEN’s previously issued FAQs on the topic from July 2016 and April 2018 and deal with requirements regarding obtaining customer information, establishing a customer risk profile, and performing ongoing monitoring of the customer relationship.

The issuance of these FAQs amidst the current regulatory landscape – that is, in the context of FinCEN’s onslaught of guidance surrounding possible fraudulent schemes arising out the current global pandemic – is not a surprise.  Indeed, this week’s FAQs further clarifies FinCEN’s expectations that financial institutions take seriously not only their initial duties to conduct risk-appropriate levels of due diligence of their customers, but also continue to monitor the relationships on an ongoing basis and at a cadence that matches any assigned risk assessment. Continue Reading FinCEN Issues New FAQs on CDD Rule

The Financial Crimes Enforcement Network (“FinCEN”) just issued yet another Advisory regarding fraud threats faced by financial institutions, as exacerbated by the COVID-19 pandemic. This Advisory pertains to “Cybercrime and Cyber-Enabled Crime Exploiting the Coronavirus Disease (COVID-19) Pandemic.” We consistently have blogged on FinCEN’s pronouncements on the enhanced fraud risks created by COVID-19. And, our most recent post – a guest post by Professor Moyara Ruehsen – specifically addressed cyber-enabled financial crime. This post therefore will be high level, and we direct you to FinCEN’s recent Advisory for further details, as well as the commentary in our prior blog posts on such advisories.

FinCEN states that it issued this recent Advisory to “alert financial institutions to potential indicators of cybercrime and cyber-enabled crime observed during the COVID-19 pandemic. Many illicit actors are engaged in fraudulent schemes that exploit vulnerabilities created by the pandemic. This advisory contains descriptions of COVID-19-related malicious cyber activity and scams, associated financial red flag indicators, and information on reporting suspicious activity.” Further, “[t]his advisory is intended to aid financial institutions in detecting, preventing, and reporting potential COVID-19-related criminal activity. This advisory is based on FinCEN’s analysis of COVID-19-related information obtained from Bank Secrecy Act (BSA) data, open source reporting, and law enforcement partners.”

The Advisory focuses on two main areas, and sets forth a list of related red flags:

The Advisory further states that, “[a]s no single financial red flag indicator is necessarily indicative of illicit or suspicious activity, financial institutions should consider additional contextual information and the surrounding facts and circumstances, such as a customer’s historical financial activity, whether the transactions are in line with prevailing business practices, and whether the customer exhibits multiple indicators, before determining if a transaction is suspicious or otherwise indicative of potential fraudulent COVID-19-related activities. In line with their risk-based approach to compliance with the BSA, financial institutions are also encouraged to perform additional inquiries and investigations where appropriate.” All of this is perfectly logical, but it is also perhaps easier said than done, particularly in the chaotic compliance environment created by COVID-19. The Advisory also concedes that most scammers are directly targeting the customers of financial institutions (vs. the institutions themselves), which complicates the task of financial institutions pursuing their BSA/AML obligations.

It is now trite to observe that COVID-19 has created a fertile breeding ground for rampant fraud. The real question facing financial institutions is how regulators in practice will regard potential BSA/AML compliance failures relating to COVID-19 in future examinations. Will regulators remember and acknowledge the pressures and confusion endemic to 2020, or will they regard today’s BSA/AML violations with skewed 20/20 hindsight and an unsympathetic eye, once the pandemic (hopefully) has faded? If the latter, these advisories will serve primarily as warnings, not helpful guides.

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.

A Guest Blog by Professor Moyara Ruehsen

Today we are very pleased to welcome guest blogger Moyara Ruehsen, PhD, CAMS, CFCS, who is  an Associate Professor and Director of the Financial Crime Management Program at the Middlebury Institute of International Studies in Monterey, California. For more than 20 years, Professor Ruehsen has taught financial crime-related courses on a variety of topics including money laundering, trade-based financial crime, corruption, proliferation financing, terrorist financing and cyber-enabled financial crime.  She has published articles and book chapters on a variety of topics related to threat finance and is a Certified Anti-Money Laundering Specialist and a Certified Financial Crime Specialist. Professor Ruehsen also consults for the U.S. government, multilateral organizations and the private sector. She served for several years on the Editorial Advisory Board of Money Laundering Alert, and the Middle East Task Force of the Association of Certified Anti-Money Laundering Specialists, or ACAMS.

For an extremely entertaining and illuminating discussion by Professor Ruehsen of how popular TV and movies get money laundering right (and wrong), see here.

This blog post takes the form of a Q & A session, in which Professor Ruehsen responds to several questions posed by Money Laundering Watch about the critical topic of cyber-enabled financial crime. We hope you enjoy this discussion, which addresses how cyber-enabled financial crime threatens financial institutions and their customers. –Peter Hardy Continue Reading Cyber-Enabled Financial Crime and Money Laundering

FBI Highlights Feared AML Deficiencies in Combating Private Equity Money Laundering

Courtesy of a leaked internal Federal Bureau of Investigation (“FBI”) document, it’s now no secret that the FBI suspects that many investment vehicles, such as private equity firms and hedge funds, are widely utilized for money laundering. The FBI apparently compiled a January 2019 report titled “Financial Crime Threat Actors Very Likely Laundering Illicit Proceeds Through Fraudulent Hedge Funds and Private Equity Firms to Obfuscate Illicit Proceeds.” Now, a recently leaked May 1, 2020 internal FBI report similarly titled “Threat Actors Likely Use Private Investment Funds to Launder Money, Circumventing Regulatory Tripwires” (the “Report”) purports to supplement the January 2019 report “by providing recent reporting of hedge funds and private equity firms used to launder illicit proceeds, and expands the threat context beyond financial threat actors to include foreign adversaries.”

The Report does more than simply identify the financial threat posed by this type of money laundering; it uses some real-world examples to explain the process by which criminals are perceived to be infiltrating the global financial system using hedge funds and private equity firms, and how the current anti-money laundering (“AML”) regulatory regime is ill-equipped to stop them. It’s safe to say the FBI certainly did not intend for this play-by-play money laundering “how to” guide to go public. Investment advisors and firms should consider whether this leaked Report might add at least some momentum to the otherwise moribund (and controversial) effort by FinCEN in 2015 to propose regulations that would have made investment advisors subject to the requirement to create and maintain full AML programs under the Bank Secrecy Act (“BSA”). Continue Reading Leaked FBI Report Reveals Private Equity Under Enhanced Money Laundering Scrutiny

The Office of the Comptroller of the Currency (“OCC”) issued a letter yesterday stating that  “a national bank [and federal savings associations] may provide . . . cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency. This letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they chose, including cryptocurrency business, so long as they effectively manage the risks and comply with applicable law.”  (“Letter”).

The key phrase above is “any lawful business.”  When a financial institution deals with crypto clients, whether the institution is actually dealing with a customer engaged in lawful activity is literally the question.  Oddly, therefore, the Letter is simultaneously groundbreaking and yet also nothing new. Continue Reading OCC Announces that Federally-Chartered Banks and Thrifts May Provide Custody Services for Crypto Assets

In the rainforests of Guatemala, Honduras and Nicaragua, the fires often start when drug traffickers try to clear large swaths of land. Due to the dry bush and lack of rainfall, the flames often spread out of control, but in the end, the result is the same: oaks, palms, acacia and mahogany trees are replaced with bases, airstrips, and clandestine roads, and money is laundered through newly established ranching operations.

According to researchers at Texas State University, and what amounts to the first attempt to quantify the role “narco-cattle ranching” plays in the deforestation of such places as the Maya Biosphere Reserve in Guatemala, “anomalous” patches of deforestation are taking place by use of fire, at an unusually large scale, and at a much faster pace than typically found. While cocaine is surely the culprit, it is not the cultivation of the plant itself that is causing these tropical forests to disappear. The study, published in the June 2020 edition of Land Use Policy, calculates that up to 87 percent of the deforestation in the Maya Biosphere Reserve is the result of illegal cattle ranching. The researchers’ interviews with local officials, activists and others with knowledge of the area reveal that about two-thirds of this deforestation is directly funded by what are known locally as “narco-ganadero,” or narco-ranchers. Invariably, this activity leads to money laundering. Indeed, money laundering appears to be the ultimate point.

While clearing of forest for cattle may not be the sort of activity that one associates with drug traffickers, it is believed to be a highly efficient mechanism for laundering illicit proceeds. In the Maya Biosphere Reserve in Guatemala, for example, there are “extensive zones without [state] presence or control;” meanwhile, there is very little control over the sale of cattle within Central America more generally (the cattle industry is one of the few agro-industries that does not require itemized receipts). In other words, buying and clearing land for this purpose allows funds to be untraceably converted into private assets. While the clearing of protected land is itself illegal, in practice, these “ranchers” operate and bring their goods to market just like legitimate ranchers outside the forest.

This recent study is the latest to confirm the relationship between deforestation and narco-cattle ranching. It is also likely to signal what many had feared would be a devastating accounting of the environmental impact these operations are having on some of the world’s forests – in 2017, for example, researchers at The Ohio State University estimated that cocaine trafficking accounts for between 15% and 30% of annual forest loss in Honduras, Guatemala, and Nicaragua over the past decade.

It is a hard truth that drug trafficking takes advantage of weak environmental regulation and government, and even if the fight is won in the Maya Biosphere Reserve, it seems likely that trafficking will move ever deeper into the forest. As an alternative to militarized interdiction, the study suggests that directing funding to strengthening environmental governance at the local level, through community-based resource and land management, may prove effective.

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.

The Financial Crimes Enforcement Network (“FinCEN”) just issued another Advisory pertaining to two consumer fraud schemes exacerbated by the COVID-19 pandemic. This Advisory focuses on “imposter schemes” and “money mule schemes, ”which we discuss below.

This most recent Advisory is the latest in a string of pronouncements relating to the pandemic by FinCEN, which has stated that it regularly will issue such documents. As we have blogged, FinCEN issued an Advisory on May 18 regarding medical scams related to the pandemic, and issued a companion Notice that “provides detailed filing instructions for financial institutions, which will serve as a reference for future COVID-19 advisories.” On April 3, 2020, FinCEN also updated its March 16, 2020 COVID-19 Notice in order to assist “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.”

The most recent Advisory again provides a list of potential red flags that FinCEN believes that financial institutions should be monitoring for, in order to detect, prevent, and report such suspicious activity. As we previously have commented: although such lists can be helpful to financial institutions, they ultimately may impose de facto heightened due diligence requirements. The risk is that, further in time, after memories of the stressors currently imposed by COVID-19 have faded, some regulators may focus only on perceived historical BSA/AML compliance failures and will invoke these lists not merely as efforts by FinCEN to assist financial institutions in deterring crime, but as instances in which FinCEN was putting financial institutions on notice.

Further, the most recent Advisory suffers from the fact that its list of red flags for imposter schemes is best directed at consumers themselves, rather than at financial institutions offering services to consumers: many of the red flags pertain to anomalies in the communications sent directly by fraudsters to targeted consumer victims – information that financial institutions rarely possess. Continue Reading FinCEN Issues Advisory on COVID-19 and Imposter and Money Mule Schemes

The Southern District of New York (“SDNY”) recently rejected a retaliation claim brought by a former bank employee under the Bank Secrecy Act (“BSA”), granting summary judgment in favor of the employer bank because the former employee failed to demonstrate that his firing was caused by his act of reporting a potential violation of law to the government. Although the reasoning underlying the Court’s Order is straight-forward, the case provides another reminder of the often difficult employment issues that both financial institutions and potential whistleblowers can face.

Whistleblowing as to alleged anti-money laundering (AML) violations is a growing phenomenon, perhaps best exemplified by the fact that a whistleblower precipitated the colossal Dankse Bank money laundering scandal. Previously, we blogged about a bank whistleblower case producing the opposite result as the SDNY Order here. In this post, we discuss both the BSA whistleblower statute and the SDNY Order, and, more generally, we note steps that financial institutions might take to protect themselves from liability and legitimate whistleblowers from retaliation. Continue Reading Would-Be Whistleblower Fails to Show Causation Under the Bank Secrecy Act for Termination