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On December 17, the Financial Industry Regulatory Authority (FINRA), the Financial Crimes Enforcement Network (FinCEN), and the SEC announced separate settlements (see here, here, and here) with a global broker-dealer following investigations into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer and its affiliated securities firm allegedly failed to establish and implement AML processes reasonably designed to detect and report potentially high-risk transactions, including foreign currency wire transfers to and from countries known to be at high risk for money laundering, as well as penny stock transactions processed through the use of an omnibus account on behalf of undisclosed customers. FINRA alleged that from January 2004 to April 2017, the broker-dealer “processed thousands of foreign currency wires for billions of dollars, without sufficient oversight.”
In a separate investigation conducted by FinCEN in conjunction with FINRA and the SEC, the broker-dealer reached a settlement over allegations that it failed to, among other things, (i) develop and implement a risk-based AML program that “adequately addressed the risks associated with accounts that included both traditional brokerage and banking-like services”; (ii) implement policies and procedures, which would ensure the detection and reporting of suspicious activity through all accounts, particularly for those accounts with little to no securities training; (iii) “implement an adequate due diligence program for foreign correspondent accounts”; and (iv) provide sufficient staffing, leading to a backlog of alerts and decreased ability to file suspicious activity reports (SARs).
According to the SEC's investigation, from at least 2011 to 2013, the broker-dealer allegedly failed to file SARs as required by the Bank Secrecy Act’s reporting requirements and Section 17(a) of the Securities Exchange Act of 1934. Among other things, the SEC also claimed that the broker-dealer (i) provided customers with other services, such as cross-border wires, internal transfers between accounts and check writing, which increased its susceptibility to risks of money laundering and other types of associated illicit financial activity; and (ii) “did not properly review suspicious transactions flagged by its internal monitoring systems and failed to detect suspicious transactions involving the movement of funds between certain accounts in suspicious long-term patterns.”
After factoring in remedial actions, the broker-dealer has been assessed total civil money penalties of $14.5 million, including a $500,000 fine against the securities firm.
On December 4, the Financial Crimes Enforcement Network (FinCEN) issued Notice 2018-1 announcing a further extension of time for certain Report of Foreign Bank and Financial Accounts (FBAR) filings in light of FinCEN’s notice of proposed rulemaking (NPR) published March 10, 2016. (See previous InfoBytes coverage on the 2016 NPR here.) Specifically, one of the proposed amendments seeks to “expand and clarify the exemptions for certain U.S. persons with signature or other authority over foreign financial accounts,” but with no financial interest, as outlined in FinCEN Notice 2017-1 issued December 22, 2017. FinCEN noted that because the proposal has not been finalized, it is extending the filing due date to April 15, 2020 for individuals who previously qualified for a filing due date extension under Notice 2017-1. All other individuals must submit FBAR filings by April 15, 2019.
Agencies encourage financial institutions to explore innovative industry approaches to BSA/AML compliance
On December 3, the Financial Crimes Enforcement Network (FinCEN) released a joint statement along with federal banking agencies—the Federal Reserve Board, FDIC, NCUA, and OCC (together, the “agencies”)—to encourage banks and credit unions to explore innovative approaches such as artificial intelligence, digital identity technologies, and internal financial intelligence units to combat money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system. According to the agencies, private sector innovation and the adoption of new technologies can enhance the effectiveness and efficiency of Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. Moreover, new innovations and technologies can also enhance transaction monitoring systems. Specifically, the agencies urged banks to test innovative programs to explore the use of artificial intelligence. However, the agencies emphasized that while feedback on innovative programs may be provided, the “pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful. Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.” The joint statement further specifies that the agencies will be willing to grant exceptive relief from BSA regulatory requirements to facilitate pilot programs, “provided that banks maintain the overall effectiveness of their BSA/AML compliance programs.” However, banks that maintain effective compliance programs but choose not to innovate will not be penalized or criticized.
According to Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker, “[a]s money launderers and other illicit actors constantly evolve their tactics, we want the compliance community to likewise adapt their efforts to counter these threats,” pointing to the recent use of innovative technologies to identify and report illicit financial activity related to both Iran and North Korea.
As previously covered by InfoBytes, earlier in October the agencies provided guidance on resource sharing between banks and credit unions in order to more efficiently and effectively manage their BSA/AML obligations.
Federal, state financial regulatory agencies issue guidance for institutions affected by California wildfires; FinCEN encourages financial institutions to communicate BSA filing delays
On November 19, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions that file Bank Secrecy Act reports encouraging such institutions to communicate with FinCEN and their functional regulators regarding any expected filing delays caused by the California wildfires. FinCEN also reminded financial institutions to review advisory FIN-2017-A007, previously covered by InfoBytes, which discusses potential fraudulent activity related to recent disaster relief schemes.
In a related action, the Federal Reserve Board, California Department of Business Oversight, Conference of State Bank Supervisors, FDIC, NCUA, and OCC (collectively, the “agencies”) issued a joint statement on November 15 providing guidance to financial institutions impacted by the California wildfires. The agencies encouraged lenders to work with borrowers in impacted communities to modify loans as appropriate based on the facts and circumstances of each borrower and loan. In addition, the agencies assured lenders that they would (i) expedite any request to operate temporary facilities to provide more convenient services to those affected by the wildfires; (ii) not generally assess penalties for institutions that take prudent steps to satisfy any publishing or reporting requirements, including by contacting their state or federal regulator to discuss satisfaction of such requirements; and (iii) consider granting institutions favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.
Find continuing InfoBytes coverage on disaster relief here.
FinCEN revises GTOs to expand coverage to 12 metropolitan areas, lower reporting threshold, and include virtual currencies
On November 15, the Financial Crimes Enforcement Network (FinCEN) reissued a revised Geographic Targeting Order (GTO), which requires U.S. title insurance companies to identify the natural persons behind shell companies that pay “all cash” (i.e., the transaction does not involve external financing) for high-end residential real estate in 12 major metropolitan areas. Notably, the purchase amount threshold for the beneficial ownership reporting requirement—which previously varied by city—is now set at $300,000 for residential real estate purchased in the 12 covered areas. In addition, FinCEN requires title insurance companies to report covered purchases made using virtual currencies. FinCEN states that the reissued GTO “will further assist in tracking illicit funds and other criminal or illicit activity, as well as inform FinCEN’s future regulatory efforts in this sector.”
The revised GTO takes effect November 17, and covers certain counties within the following areas: Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco and Seattle.
Visit here for additional InfoBytes coverage on FinCEN GTOs.
On October 31, the Financial Crimes Enforcement Network (FinCEN) issued an advisory reminding financial institutions that, on October 19, the Financial Action Task Force (FATF) updated two documents that list jurisdictions identified as having “strategic deficiencies” in their anti-money laundering and combatting the financing of terrorism (AML/CFT) regimes. (See previous InfoBytes coverage here.) The first document, the FATF Public Statement, identifies two jurisdictions, the Democratic People’s Republic of Korea and Iran, that are subject to countermeasures and/or enhanced due diligence (EDD) due to their strategic AML/CFT deficiencies. The second document, Improving Global AML/CFT Compliance: On-going Process - 19 October 2018, identifies jurisdictions with strategic AML/CFT deficiencies that have developed an action plan with the FATF to address those deficiencies: the Bahamas, Botswana, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, and Yemen. Notably, the Bahamas, Botswana and Ghana have been added to the list due to the lack of effective implementation of their AML/CFT frameworks. FinCEN urges financial institutions to consider both the FATF Public Statement and the Improving Global AML/CFT Compliance: On-going Process documents when reviewing due diligence obligations and risk-based policies, procedures, and practices.
FinCEN encourages financial institutions affected by Hurricane Michael to communicate BSA filing delays; extends FBAR filing deadline
On October 15, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions that file Bank Secrecy Act reports to encourage communication with FinCEN and their functional regulators regarding any expected filing delays caused by Hurricane Michael. FinCEN also reminded financial institutions to review advisory FIN-2017-A007, previously covered by InfoBytes, which discusses potential fraudulent activity related to recent disaster relief schemes.
The same day, FinCEN issued a second notice for certain filers affected by Hurricane Michael to extend the deadline for submitting their 2017 calendar year Reports of Foreign Bank and Financial Accounts (FBARs). FBARs for affected filers are now due February 28, 2019.
Find more InfoBytes disaster relief coverage here.
On October 11, the Financial Crimes Enforcement Network (FinCEN) issued an advisory for financial institutions on ways to help better detect and report the Iranian regime's efforts to evade U.S. sanctions through potentially illicit transactions. The advisory outlines deceptive practices used by the Iranian regime to evade sanctions, including front companies, fraudulent documents, transactions involving exchange houses, falsified shipping documents, and the use of virtual currencies, and warns financial institutions that FinCEN expects Iran to expand use of these practices following the November 5 return of sanctions previously suspended as part of the Joint Comprehensive Plan of Action. (See previous InfoBytes coverage here on Executive Order 13846, issued last August reimposing sanctions against Iran.) The advisory also includes a series of red flags to help banks identify possible deceptive activity, and provides information for filing suspicious activity reports. FinCEN advises foreign financial institutions to consult the advisory to “better understand the obligations of their U.S. correspondents, to avoid exposure to U.S. sanctions, and to address the Anti-Money Laundering/Combating the Financing of Terrorism risks that Iranian activity poses to the international financial system.”
See here for continuing InfoBytes coverage of actions related to Iran.
On October 4, the Financial Crimes Enforcement Network (FinCEN) issued advisory FIN-2018-A005 to U.S. financial institutions to increase awareness of the growing risk that certain Nicaraguan senior foreign political figures may potentially move assets using the U.S. financial system in reaction to a “perceived threat of further unrest, potential sanctions, or other factors.” FinCEN warns that the assets could be the proceeds of corruption and may be directed into U.S. accounts, or laundered through the U.S. financial system. The advisory—which is underscored by actions taken against Nicaraguan officials involved in corruption and human rights abuse pursuant to the Global Magnitsky sanctions program, as previously covered by InfoBytes—provides due diligence guidance for U.S. financial institutions consistent with existing Bank Secrecy Act obligations. It also reminds financial institutions of their suspicious activity report filing obligations and of the potential need to refer to advisory FIN-2018-A003 released last June on the use of financial facilitators to gain access to global financial systems for the purpose of moving or hiding illicit proceeds and evading U.S. and global sanctions. (See previous InfoBytes coverage here.)
On October 3, the Financial Crimes Enforcement Network, Federal Reserve Board, FDIC, NCUA, and OCC (together, the agencies) issued an interagency statement outlining instances where banks and credit unions may choose to enter into collaborative arrangements to share resources in order to more efficiently and effectively manage their Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations. The statement noted that collaborative arrangements are most suitable for “banks with a community focus, less complex operations, and lower-risk profiles for money laundering or terrorist financing.” The agencies described several examples in which collaboration between banks may be beneficial, such as (i) conducting internal control functions, including reviewing and drafting BSA/AML policies and procedures and risk-based customer identification and account monitoring processes; (ii) sharing resources for BSA/AML independent testing; and (iii) conducting BSA/AML training on regulatory requirements and internal policies, procedures, and processes. Other potential benefits include cost reductions, increases in operational efficiencies, and the availability to leverage specialized expertise.
However, the agencies cautioned that banks who choose to enter into collaborative agreements should carefully consider the associated risks “in relation to the bank’s risk profile, adequate documentation, consideration of legal restrictions, and the establishment of appropriate oversight mechanisms.” Moreover, banks should ensure that the collaborative arrangement is consistent with sound principles of corporate governance, have in place a contractual agreement, conduct periodic performance reviews, and consult their regulator’s guidance concerning third-party relationship to ensure compliance. The agencies further noted that “each bank is responsible for ensuring compliance with BSA requirements. Sharing resources in no way relieves a bank of this responsibility.” The interagency statement emphasizes that it is not applicable “to collaborative arrangements or consortia formed for the purpose of sharing information under Section 314(b) of the USA PATRIOT Act,” and “banks that form collaborative arrangements as described in this interagency statement are not an association for purposes of Section 314(b) of the USA PATRIOT Act.”
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