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Thomas Ott Named FinCEN's Associate Director of Enforcement
On August 16, FinCEN named Thomas P. Ott Associate Director for FinCEN’s Enforcement Division. In his new role, Ott will oversee the agency’s Bank Secrecy Act compliance and enforcement program. Ott’s responsibilities will include “developing and implementing compliance and enforcement strategies, supervising investigations, enforcement actions, and other activities that have industry-wide, national, and international impact.” Ott has served as FinCEN’s Acting Associate Director of Enforcement since March 2016.
FinCEN Expands Reach of Real Estate Geographical Targeting Orders
On July 27, FinCEN issued temporary Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to identify and report the natural persons behind shell companies used to conduct “all-cash” purchases of high-end real estate in six major metropolitan areas. The GTOs cover the following areas: (i) all boroughs of New York City; (ii) Miami-Date, Broward and Palm Beach Counties in South Florida; (iii) Los Angeles County; (iv) San Francisco, San Mateo, and Santa Clara counties; (v) San Diego Country; and (vi) Bexar County, Texas, which includes San Antonio. FinCEN simultaneously released a table outlining the monetary thresholds that trigger the identification and reporting requirements in each jurisdiction. Upon taking effect, the GTOs will remain effective for 180 days absent an extension. As previously covered in InfoBytes, FinCEN remains concerned that all-cash purchases conducted through LLCs or other “opaque structures,” may be conducted by natural persons trying to hide their assets and identity. According to FinCEN’s Acting Director Jamal El-Hindi, “[b]y expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”
FinCEN Issues FAQs Regarding Customer Due Diligence Requirements
On July 19, FinCEN issued FAQs to clarify the scope of the May 2016 Customer Due Diligence (CDD) final rule. As previously covered by InfoBytes, and as outlined in Question 2 of the recently-released FAQs, the final rule imposes standardized CDD requirements for federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities (collectively, covered financial institutions). While the FAQs provide a detailed description of the CDD requirements, they state that, “[i]n short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers.” Notably, Question 5 of the FAQs clarifies that the CDD rule amends the AML program requirements to explicitly require covered financial institutions to implement and maintain risk-based procedures for conducting ongoing customer due diligence, including, but not limited to, (i) understanding the nature and purpose of the customer relationship; and (ii) conducting ongoing monitoring to identify and report suspicious transactions, as well as maintain and update customer information on a risk basis. The FAQs also note that covered financial institutions must include CDD procedures in their AML compliance program. In addition to discussing definitions for certain terms within the CDD rule, such as “account” and “beneficial owner,” the FAQs outline, among other things, the type of beneficial ownership information that covered financial institutions must collect for legal entity customers. Finally, as reiterated in the FAQs, the CDD rule has an effective date of July 11, 2016 and an applicability date of May 11, 2018.
FinCEN Determines North Korea is a Jurisdiction of Primary Money Laundering Concern, Issues NPRM to further Restrict Financial Transactions
On June 1, FinCEN announced a Notice of Finding that North Korea is a jurisdiction of “primary money laundering concern” under Section 311 of the USA PATRIOT Act. According to FinCEN, North Korea is a jurisdiction of primary money laundering because it (i) conducts international financial transactions that support the proliferation and development of WMD and ballistic missiles through its use of state-controlled financial institutions and front companies; (ii) lacks basic AML or combating the financing of terrorism (CFT) controls in its financial system; (iii) fails to maintain a diplomatic relationship with the U.S.; and (iv) relies on the alleged illicit and corrupt activity of high-level officials to support its government. In light of its findings, FinCEN further issued a Notice of Proposed Rulemaking seeking to implement “a special measure to further isolate North Korea from the international financial system by prohibiting covered U.S. financial institutions from opening or maintaining correspondent accounts with North Korea financial institutions, and prohibiting the use of U.S. correspondent accounts to process transactions for North Korea financial institutions.”
FinCEN Director Calvery Opines on Agency Efforts to Increase Financial Transparency
On May 24, FinCEN Director Calvery delivered remarks before the House Committee on Financial Services at a hearing entitled “Stopping Terror Finance: A Coordinated Government Effort.” Calvery noted FinCEN’s commitment to fostering an environment of financial transparency, and provided insight on the recent issuance of a final rule, issued on May 6, which clarified customer due diligence (CDD) requirements for financial institutions: “[w]e are confident that the CDD final rule will increase financial transparency and augment the ability of financial institutions and law enforcement to identify the assets and accounts of criminals and national security threats. We anticipate that the CDD rule will also facilitate compliance with sanctions programs and other measures that cut off financial flows to these actors.” Calvery further emphasized the significance of recently proposed beneficial ownership legislation, noting that it and the CDD rule “dovetail together.” Calvery opined that the level of transparency that the proposed legislation and the CDD rule offer would assist law enforcement in identifying who the “real people are that are involved in a transaction,” furthering its efforts to combat money laundering and terrorism, enforce sanctions, and prevent other unlawful abuses of the U.S. financial system. Finally, she noted that the beneficial ownership legislation, if enacted, would provide FinCEN with the ability to collect information on all funds transfers (instead of only monetary instruments, as currently authorized) through the use of geographic targeting orders.
Treasury Announces Beneficial Ownership Legislation; Proposes Foreign-Owned Single-Member LLC Regulations
Recently, the Treasury Department announced that it is sending Congress legislation that would require companies formed within the United States, or “that [use] the mail, wire, or any facility in interstate or foreign commerce in its formation, transfer of ownership, or business activity,” to file beneficial ownership information with the Department, and would impose a $5,000 penalty for failure to comply. The proposed legislation defers to the Department of the Treasury to define beneficial ownership. The new draft legislation also proposes technical amendments to FinCEN’s Geographic Targeting Order (GTO) authority to provide FinCEN the authority to collect information on funds transfers in general, including regarding bank wire transfers, instead of transactions using “monetary instruments.”
Treasury simultaneously announced proposed regulations to require foreign-owned “disregarded entities” to obtain an employer identification number with the IRS. The proposed regulations are intended to address “a narrow class of foreign-owned U.S. entities – typically single member LLCs – that have no obligation to report information to the IRS or to get a tax identification number.” These "disregarded entities” (which include foreign-owned-single-member LLCs) can, according to Treasury, be used to shield non-U.S. assets’ or non-U.S. bank accounts’ foreign owners. If finalized, the regulations would assist the IRS in determining whether a tax liability exists, and if so, how much. Finally, the regulations would allow the IRS to share information with other tax authorities.
FinCEN Deputy Director: Industry Collaboration Key to Finalizing Customer Due Diligence Rule
On May 16, FinCEN Deputy Director Jamal El-Hindi delivered remarks at the Institute of International Bankers (IIB) Annual Anti-Money Laundering Seminar in New York. The focal point of El-Hindi’s remarks were recent Treasury initiatives, including, (i) the final Customer Due Diligence (CDD) rule; (ii) draft beneficial ownership legislation; and (iii) FinCEN’s use of Geographical Targeting Orders, as addressed in the beneficial ownership draft legislation. The remarks provide an overarching summary of Treasury’s recent regulatory efforts and address the process by which Treasury developed the final CDD rule and the draft beneficial ownership legislation, specifically commenting on and emphasizing FinCEN’s collaborative rulemaking efforts with industry: “I encourage you to keep our conversation going—particularly with respect to support for the beneficial ownership legislation. . . .Please know that FinCEN depends on you, the institutions you represent, and the key feedback and financial intelligence they provide.”
FinCEN Finalizes Long-Awaited Customer Due Diligence Rule
On May 6, FinCEN issued a final rule imposing standardized customer due diligence requirements for banks, broker-dealers, mutual funds, futures commission’s merchants and introducing brokers in commodities. Subject to exceptions for certain types of entities deemed low risk by FinCEN, beginning on May 11, 2018, covered institutions must identify any natural person that owns, directly or indirectly, 25% or more of a legal entity customer or that exercises control over the entity. Covered financial institutions would also have to take measures to verify that they know the true identity of each person identified as a beneficial owner (but would not be required to verify that such persons are in fact beneficial owners). The requirement will apply to new accounts opened by legal entity customers, and will not be retroactive. Additionally, the final rule adds a standardized set of four customer due diligence requirements as a “fifth pillar” of an effective anti-money laundering program. In addition to identification and verification of beneficial owners of legal entities, the requirements include: (i) identification and verification of customers; (ii) understanding the nature and purpose of the customer relationship; and (iii) ongoing monitoring for reporting suspicious transactions and, on a risk basis, updating customer information.
FinCEN Announces Departure of Director Calvery
On April 26, FinCEN announced the departure of Director Calvery. Commenting on Calvery’s accomplishments during her tenure as Director, the agency opined that, “[u]nder Ms. Calvery’s direction, [it] has enhanced its reputation within the U.S. government, throughout the U.S. financial sector, and with international financial partners as a key resource in the fight against terrorist finance, money laundering, and transnational organized crime.” As Director of FinCEN since September 2012, Calvery’s team has addressed topics such as virtual currency, money laundering via real estate purchases, and terrorist financing. Calvery will be departing FinCEN at the end of May 2016.
FinCEN Director Calvery: All Cash Real Estate Purchases are an AML Gap to Address
On April 12, FinCEN Director Calvery delivered remarks at the ACAMS AML and Financial Crimes conference. Calvery addressed the vulnerabilities of the real estate market to money laundering. Although FinCEN has addressed a number of vulnerabilities in the mortgage lending industry by imposing AML program requirements on non-bank residential mortgage lenders and originators, Calvery noted that “all cash sales” — that is, properties purchased without a mortgage— are a “gap we must address.” The recent Geographical Targeting Orders (GTO) issued to certain U.S. title insurance companies targeting high-end, all cash real estate sales in New York and Miami are intended to assist FinCEN in gathering information to address this gap. Calvery also noted that FinCEN will continue to engage with its regulatory, law enforcement, and real estate industry partners to determine (i) where the most significant risks lie; (ii) whether additional AML requirements are needed; and (iii) the best approach for mitigating “identified vulnerabilities while balancing the benefits of information gathering tools like the GTOs with potential burden imposed on the industry.”