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FinCEN Reports Increased Mortgage Fraud SARs
On April 23, the Financial Crimes Enforcement Network (FinCEN) released an update on mortgage loan fraud suspicious activity reports (SARs) for 2011. The report indicates that mortgage fraud SARs increased 31 percent in 2011 compared to 2010, a spike that FinCEN states is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Based on a sample analysis, FinCEN found that in 40 percent of cases resulting in a SAR, the institution turned down the subject’s loan application, short sale request, or debt elimination because of the suspected fraud, indicating improvement in mortgage lending due diligence. Among other things, the report highlights short sales, appraisals, and identity theft as new fraud patterns in 2011 SARs.
How to Respond to a Subpoena: 10 Things You Should Do Immediately
Responding to a subpoena can be a daunting task and early missteps can have severe repercussions. Here is a short list of critical steps you can take in the early stages of the subpoena response to protect your company.
- Preserve. Preserve. Preserve. Immediately upon receipt of a subpoena, you should inform all necessary employees of the need to retain documents, including electronic documents, with a document hold memo that replaces standard document retention policies for potentially responsive materials. Destroying or removing documents in the context of a government investigationwhether done affirmatively or by failing to suspend automated document retention protocolsmay be viewed as obstruction of justice. At the very least, it will create the appearance of an unwillingness to cooperate with the investigation.
- Establish a dialogue with the appropriate enforcement authorities. Communication is critical to understanding the scope of the investigation and establishing a working relationship with the government. You should initiate contact quickly to discuss the scope of the subpoena and develop a feasible production schedule.
- Inform the companys key executives. Receiving a subpoena is no small matter and, depending on the nature of the subpoena and potential enforcement action, the key executives and even the board of directors need to be made aware immediately. This is especially important if your company is publicly traded as there may be disclosure obligations.
- Determine whether the subpoena was properly served. Not all subpoenas are properly served and improper service may provide valid grounds to get the subpoena quashed. You should quickly evaluate the basis upon which the subpoena was issued and served to determine whether to object or take other action.
- Advise employees of their rights and responsibilities, including access to counsel. Either at the time the subpoena is initially served or in follow up activities, agents may attempt to interview employees. It is important to remind employees immediately of their responsibility to be truthful when speaking with agents of the government, but that they may choose to have an attorney present if they do decide to be interviewed. You should also reiterate your companys policy on cooperating with investigations and request that employees inform the legal department of any discussions or contacts with the government.
- Evaluate your insurance policys notice requirements. Under many insurance policies, a subpoena is a triggering event. Putting your policy holder on notice early on increases your chances of having insurance pay for some or all of the investigation and/or litigation costs.
- Identify key company individuals. Identifying which individuals within the company are key to the subpoena response will help determine and potentially limit the overall scope of documents you are required to produce. Seeking to narrow or tailor the scope of a subpoena is an important early step in the response process.
- Narrow file search parameters. Once the key individuals are identified, you can then identify electronic and paper files that must be collected and searched. Fulfilling the governments request but not producing irrelevant or privileged documents requires a precisely-tailored search protocol.
- Protect and defend privileged materials. Protecting and defending privileged materials is a cornerstone responsibility of corporate counsel. Documents subject to privileges or protections should be isolated, logged, and preserved. While there are remedies available for inadvertently-produced privileged materials, no one wants to be in the position of having to seek return of a privileged document.
- Construct a formal, defensible review process. You should construct a formal review process that can be defended in court, with a focus on e-discovery issues. It is advisable to have your response protocol evaluated by outside legal counsel early in the process to ensure that all potential sources of electronic data have been identified and searched.
This post adapted from the article, 10 Steps Your Company Should Take When Responding to a Subpoena by Ben Klubes, James Parkinson, and John Kromer, originally published in Bloomberg Law Reports: Banking & Finance, Vol. 4, No. 8, August 1, 2011.
FinCEN Issues Guidance on New E-Filing System, Tax Refund Fraud
On March 29, the Financial Crimes Enforcement Network (FinCEN) announced that it is accepting the new Currency Transaction Report (CTR) and Suspicious Activity Report (SAR) into FinCEN’s BSA E-Filing System. FinCEN issued guidance to assist institutions in filing the new reports and indicated that the new forms will replace the existing forms (legacy reports), but do not create any new obligations or otherwise change existing statutory and regulatory expectations for financial institutions. The new forms are now accepted for electronic filing and their use becomes mandatory on March 31, 2013. Until that date institutions may electronically file either the new reports or the legacy reports. In a separate action FinCEN had already mandated the electronic filing of most reports through the BSA E-Filing System beginning on July 1, 2012. FinCEN has recommended that institutions file electronically before that date, but until then they may continue to file via paper or by use of the legacy report form. The new CTR and SAR report forms may only be submitted electronically.
On March 30, FinCEN issued advisory FIN-2012-A005 to assist financial institutions with identifying tax refund fraud and filing SARs. The Advisory lists multiple “red flag” activities that could indicate tax refund fraud. When completing SARs on suspected tax refund fraud, financial institutions should use the term “tax refund fraud” in the narrative section of the SAR and provide a detailed description of the activity.
SEC moves to files amended complaint in FCPA enforcement action
On March 14, Fannie Mae followed its March 6 promise to update lender-placed insurance (LPI) requirements, by issuing Servicing Guide Announcement SVC-2012-4. The announcement details policy amendments and clarifications regarding the (i) use of LPI, (ii) coverage requirements, (iii) deductibles, (iv) carrier eligibility requirements, and (v) allowable reimbursable expenses. The Announcement also provides additional guidance to servicers for submitting property insurance claims and remitting outstanding insurance funds to Fannie Mae. The LPI updates will be published as a new section in Part II, Chapter 6 of the Servicing Guide, and servicers are required to implement the amended requirements by June 1, 2012. Additionally, on March 14, Fannie Mae announced the release of its 2012 Servicing Guide. According to SVC-2012-3, the new Guide incorporates all announcements issued through September 2, 2011. The new Guide does not include policies related to the servicing of reverse mortgages, which now form a new Servicing Manual. In addition, the new Guide includes certain policy clarifications regarding lender relationships and other miscellaneous issues.
Jury Convicts Stanford on Ponzi Scheme Charges
On March 6, a federal jury in the U.S. District Court for the Southern District of Texas convicted Allen Stanford on thirteen of fourteen fraud counts for orchestrating a major Ponzi scheme. U.S. v. Stanford, No 09-00342 (S.D. Tex. Mar. 6, 2012). The jury found that, over the course of twenty years, Mr. Stanford and others at his firm, Stanford International Bank Ltd., misappropriated $7 billion in certificates of deposit purchased by investors. The jury subsequently found that $330 million sitting in various frozen accounts controlled by Mr. Stanford could be pursued as proceeds from the scheme. The court has set June 14, 2012 as the sentencing date, following which Mr. Stanford plans to appeal the conviction.
FinCEN Issues SAR Confidentiality Reminder
On March 2, the Financial Crimes Enforcement Network (FinCEN) advised financial institutions and their lawyers that the contents of Suspicious Activity Reports (SARs) must remain confidential. Private parties increasingly are attempting to obtain SARs in civil litigation and other matters, but financial institutions, as well as their current and former directors, officers, employees, agents, and contractors are prohibited from disclosing SARs or any information that would reveal the existence of a SAR. FinCEN reminded covered financial institutions and individuals that unauthorized disclosure could subject them to civil and criminal penalties.
FinCEN Seeks Input on Proposed Customer Due Diligence Program, Finalizes Electronic Filing Rule
On February 29, the Financial Crimes Enforcement Network (FinCEN) released an advance notice of proposed rulemaking (ANPRM) to obtain stakeholder input regarding a proposed customer due diligence regulation that would require covered financial institutions to institute defined programs to identify the real or beneficial owners of customer accounts. The proposed regulation is designed to enhance federal anti-money laundering and counterterrorism efforts. According to FinCEN, financial institutions are not addressing beneficial ownership in a uniform and consistent manner. As a result, FinCEN is beginning a regulatory process that could eventually require banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities to develop customer due diligence programs. The programs would include requirements to (i) conduct initial due diligence and verify customer identities at the time of account opening, (ii) understand the purpose and intended nature of the account, (iii) identify and verify all customers’ beneficial owners, and (iv) monitor the customer relationship and conduct additional due diligence as needed. In the ANPRM, FinCEN states that it will consider extending such a program in the future to cover all financial institutions currently subject to FinCEN’s anti-money laundering requirements, including casinos, money services businesses, nonbank mortgage lender and originators, and others. Consequently, in addition to input from the types of institutions that would be subject to an initial rulemaking, FinCEN is specifically requesting comments from these additional institutions that may later become subject to the rules. FinCEN is accepting comments on the ANPRM for sixty days from the date of publication in the Federal Register.
On the same day, FinCEN published a final rule mandating electronic filing of nearly all Bank Secrecy Act filings. The rule takes effect July 1, 2012. Although it largely mirrors a September 2011 proposal, it was modified in response to comments received, including a change to provide certain limited hardship exemptions for institutions that cannot begin electronic filing on time.
Buckley Sandler Litigators Obtain Dismissal in FCPA Sting Criminal Trial
Today, U.S. federal prosecutors abandoned one of the highest profile Foreign Corrupt Practices Act cases ever brought by the DOJ. Judge Richard Leon of the U.S. District Court for the District of Columbia granted the government’s motion to dismiss foreign bribery charges against all remaining defendants facing charges from an FBI sting operation. The defendants were charged with paying bribes to a purported government official from the country of Gabon in connection with contracts to supply Gabon with military and law enforcement products. The government sting operation resulted in the arrests of twenty-two individuals at an industry trade show in Las Vegas in 2010.
BuckleySandler represented John Mushriqui in the case, and in January successfully obtained a mistrial for Mr. Mushriqui following a nearly four-month jury trial after a federal jury failed to reach a unanimous verdict for Mr. Mushriqui and two other defendants, including his sister Jeana Mushriqui.
The mistrial ruling followed the same jury’s acquittal of two other defendants, Judge Leon’s acquittal of another defendant in December 2011, and a July 2011 mistrial involving four other defendants involved in the sting. Between the two Gabon sting trials to date, three defendants were acquitted and seven proceeded to a hung jury. In the face of these outcomes, the government decided to abandon the case with regard to all remaining defendants and will not seek to re-try the defendants whose previous trials ended in a mistrial. The government stated in its motion that it had "carefully considered (1) the outcomes of the first two trials in which, after extensive deliberations, the juries remained hung as to seven defendants and acquitted two defendants, and one defendant was acquitted on the sole charge against him pursuant to Fed. R. Crim. P. 29; (2) the impact of certain evidentiary and other legal rulings in the first two trials and the implications of those rulings for future trials, including with respect to Rule 404(b) and other knowledge and intent evidence the government proposed to introduce; and (3) the substantial governmental resources, as well as judicial, defense, and jury resources, that would be necessary to proceed with another four or more trials, given that the first two trials combined lasted approximately six months. In light of all of the foregoing, the government respectfully submits that continued prosecution of this case is not warranted under the circumstances."
BuckleySandler’s David Krakoff, who represented Mr. Mushriqui at trial along with counsel Lauren Randell, responded to the dismissal stating, “We are extremely pleased that the Department of Justice has decided to do the right thing by moving to dismiss the Indictment against our client John Mushriqui, ending his two year nightmare. We recognize that this was a difficult decision given the substantial resources that the government invested in this case. It's really hard to take on the government, but when you believe in your innocence and fight for your freedom, these cases can be won. Ultimately, the system worked for John Mushriqui. John can start the rest of his life today with his good name intact.”
FFETF Launches Federal-State Financial Fraud Consumer Protection Working
On February 10, the Financial Fraud Enforcement Task Force (FFETF) launched the Consumer Protection Working Group, which is charged with coordinating federal and state law enforcement and regulatory efforts to address consumer financial fraud, including fraud targeting unemployed persons, students, active-duty military personnel and veterans. The group is co-chaired by Assistant Attorneys General Tony West and Lanny Breuer, U.S. Attorney for the Central District of California André Birotte, Director of the FTC Bureau of Consumer Protection David Vladek, and CFPB Director of Enforcement Kent Markus. The Department of Justice’s press release states that meeting participants set priorities for the group as it seeks to address fraud in (i) payday lending, (ii) high-pressure telemarketing and Internet scams, (iii) business opportunity schemes, (iv) for-profit colleges, and (v) third-party payment processors. The meeting also addressed plans to establish a best-practices tool kit, policy initiatives (including legislative and regulatory proposals), and an information-sharing structure for Working Group participants.
FinCEN Issues Advisory Regarding Foreign-Located Money Services Businesses
On February 15, the Financial Crimes Enforcement Network (FinCEN) issued guidance regarding anti-money laundering (AML) programs for financial institutions that provide services to foreign-located money services businesses (MSB) or engage in transactions with such businesses. The guidance follows FinCEN’s July 2011 regulations issued under the Bank Secrecy Act that amended the definition of MSB to include businesses that conduct activities in the U.S. even if the business does not have any agents, agencies, branches, or offices physically located in the U.S. The advisory reviews the July regulations, reminds institutions about their obligations to file suspicious activity reports, and suggests that financial institutions update their AML programs using prior guidance on doing business with MSBs and on informal value transfer systems.