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FinCEN Assesses Civil Money Penalty Against Nevada-Based Casino for BSA/AML Violations
On April 5, FinCEN assessed a civil money penalty against a Nevada-based casino for willfully violating the anti-money laundering provisions of the BSA. From 2010 through November 2013, the casino allegedly failed to (i) establish and implement an effective, written anti-money laundering program; (ii) establish and maintain appropriate internal controls in compliance with the BSA’s reporting requirements; (iii) conduct independent testing of its AML program; (iv) implement automated data processing systems that ensured compliance with the BSA and the casino’s AML program; (v) report suspicious activity; and (vi) secure and retain certain required records. According to FinCEN, the casino generally “lacked a culture of compliance” and had a “blatant disregard for AML compliance permeat[ing] at all levels.” The casino agreed to a $1 million civil money penalty and admitted to willfully violating the BSA’s program, reporting, and recordkeeping requirements.
FinCEN Prohibits U.S. Financial Institutions from Holding Correspondent Accounts for FBME Bank Ltd.
On March 31, FinCEN published a final rule imposing the fifth special measure against FBME Bank Ltd. (FBME). Pursuant Section 311 of the USA PATRIOT Act, the fifth special measure prohibits U.S. financial institutions from opening or maintaining a correspondent account for, or on behalf of, FBME. As previously covered in InfoBytes, on July 29, 2015, FinCEN published a similar final rule, which did not take effect as, one day before its effective date, a U.S. district court granted FBME’s motion for a preliminary injunction to stop the rule from taking effect. In November 2015, FinCEN subsequently re-opened its comment period for the final rule, soliciting additional comments “particularly with respect to the unclassified, non-protected documents that support the rulemaking and whether any alternatives to the prohibition of the opening or maintaining of correspondent accounts with FBME would effectively mitigate the risk to domestic financial institutions.” According to FinCEN, its recently issued final rule will “guard against the international money laundering and terrorist financing risks that FBME poses to the U.S. financial system.” The Final Rule is effective July 29, 2016.
FinCEN Proposes Imposing BSA Requirements on Crowdfunding Portals
On April 4, FinCEN issued a proposed rule to amend the definitions of “broker or dealer in securities” and “broker-dealer” under the regulations implementing the BSA. Specifically, FinCEN proposed that the definitions be amended to “explicitly include funding portals that are involved in the offering or selling of crowdfunding securities pursuant to section 4(a)(6) of the Securities Act of 1933.” Intended to help prevent money laundering, terrorist financing, and other financial crimes, the amendments would require funding portals to implement policies and procedures reasonably designed to ensure compliance with the BSA requirements currently applicable to brokers or dealers in securities. Comments on the proposal are due by June 3, 2016.
Pakistani Bank Reaches Agreement with NYDFS to Enhance AML Compliance Controls
Recently, the Federal Reserve and NYDFS announced that a New York branch of a Pakistani bank agreed to strengthen its compliance with BSA/AML requirements and OFAC regulations. The NYDFS’s and the NY Federal Reserve Bank’s recent examination into the bank’s branch found deficiencies related to its risk management and compliance with BSA/AML and OFAC regulations. Pursuant the agreement, the bank must submit written plans to the NYDFS and the NY Federal Reserve Bank on its strategy to improve its BSA/AML/OFAC compliance and its suspicious activity reporting. In addition, the bank must submit quarterly progress reports to the aforementioned regulators.
The recently issued agreement comes after a similar agreement earlier this month in which a New York branch of a Korean bank agreed to enhance its BSA/AML/OFAC compliance.
The Panama Papers: Implications for Financial Crimes Compliance Professionals
A group of international news outlets published a series of articles this week regarding the so-called “Panama Papers;” 11.5 million documents leaked from a Panamanian law firm specializing in creating offshore companies. Offshore companies form a well-recognized component of tax planning, but have come under increased scrutiny recently. According to the reporting, the Panama Papers reveal that a large number of foreign politicians, celebrities and other high net worth individuals used opaque structures, such as limited liability companies (LLCs), personal investment companies (PICs) and trusts, to hold (and as implied in the reporting, hide) wealth offshore. Other reporting depicts the use of the offshore PICs, trusts and/or LLCs to conduct business with sanctions targets in Iran, North Korea, and Syria. A number of international foreign financial institutions providing trust administration and wealth management services held thousands of accounts for offshore companies identified in the Panama Papers, according to the reporting.
The information in the Panama Papers has a number of immediate implications for U.S. and foreign financial institutions:
- First, financial institutions should anticipate that any dealings with the Panamanian law firm at issue will be the subject of regulatory scrutiny. Indeed, it has already been reported that the U.S. Department of Justice is reviewing the documents for evidence of corruption that can be prosecuted in the United States, and the United Kingdom’s Financial Conduct Authority has directed as many as 20 banks to provide details of accounts handled by the firm by April 15, 2016. It would not be unexpected if FinCEN and/or US regulatory authorities followed suit. Therefore, those dealings, including whether they are a customer or involved in transactions with customers, should be identified and reviewed.
- Second, banks would be well served to review press reporting for information regarding clients involved in transactions with the Panamanian law firm, and reassess risks posed by those clients based on the information. As the press reporting is evolving daily, banks should establish a process for monitoring new information and incorporating that new information into their reviews. Additionally, in early May, the International Consortium of Investigative Journalists, which investigated the Panama Papers, plans to publish the names of the more than 214,000 offshore entities incorporated by the Panamanian law firm and the people connected to them as beneficiaries, shareholders, or directors. Once published, this information should be included in banks’ reviews.
- Third, the reporting calls public attention to a number of important financial crime risk issues. These include the importance of understanding beneficial ownership, especially when dealing with LLCs, trusts, and/or PICs or other potentially opaque structures, understanding the sources of a customer’s wealth (and the source of wealth of any beneficial owner(s)), conducting thorough due diligence and, in high risk areas such as high net worth individuals and politically exposed persons (PEPs), enhanced due diligence. As reported by a New York-based newspaper company on April 6, 2016, FinCEN’s Proposed Rule regarding Customer Due Diligence (see our prior analysis of this) is expected to be published within a few months.
- Fourth, Delaware, Wyoming and Nevada provide a means to establish structures comparable to those established in Panama. Banks should evaluate whether a review of account relationships with LLCs, PICs, trusts, and other structures created in these jurisdictions may be warranted.
- Fifth, the Panama Papers highlight the reputational risk to banks of engaging with secrecy havens (domestic and international). While the reporting thus far does not appear to allege illegality on the part of the banks, they have been put on notice that their due diligence regimes will be scrutinized in light of the Panama Papers’ revelations.
In sum, the reporting once again highlights the potential legal and reputational risks of offering banking services (including depository and lending services, such as mortgages) to entities such as LLCs, trusts, PICs, PEPs and their close associates, and high net worth customers in the private banking context and the importance of monitoring their transactions and accounts for money laundering, tax reporting (FATCA), and corruption-related purposes.
CFPB Releases Guidance on Financial Exploitation of Older Americans
On March 23, the CFPB simultaneously issued a report and an advisory providing financial institutions with information on the financial exploitation of older Americans and recommendations on how to prevent and respond to such exploitation. The report combines the CFPB’s “expertise regarding elder financial exploitation” with knowledge gained from interviews conducted between May 2014 to March 2016 with various stakeholders, including, but not limited to, representatives of individual banks and credit unions of various sizes, trade associations, technology vendors, and law enforcement. According to the CFPB, the release of recommendations outlined in the report and advisory mark the “first time a federal regulator has provided an extensive set of voluntary best practices to help banks and credit unions fight [financial exploitation of older Americans].” The CFPB recommended that financial institutions (i) establish protocols for ensuring staff compliance with the Electronic Fund Transfer Act; (ii) train staff to detect the warning signs of financial exploitation and respond appropriately to suspicious events; (iii) maintain fraud detection systems that provide analyses of the types of products and account activity associated with elder financial exploitation; (iv) report cases of suspected exploitation, which includes filing Suspicious Activity Reports with FinCEN when necessary; and (v) collaborate with stakeholders, including law enforcement, at the local, regional, and state level.
FinCEN Supplements 2011 FAQs Regarding Prepaid Access
On March 24, FinCEN issued FIN-2016-G002 to supplement guidance issued in 2011 regarding aspects of its Prepaid Access Final Rule. FIN-2016-G002 provides answers to a list of frequently asked questions related to the following areas: (i) the relationship between de minimis cash refund requirements under state law and the exemption in FinCEN’s regulations for closed loop prepaid access products; (ii) conditions under which the use of quick response codes and other technology would fall within the definition of closed loop prepaid access; (iii) whether the term “defined merchant” in the context of closed loop prepaid access is limited to a single merchant; (iv) policies and procedures reasonably adapted to avoid the threshold for being designated as a “seller” of prepaid access; and (v) listing sellers of prepaid access on the provider’s money services business (MSB) agent list.
FinCEN Imposes Civil Money Penalty Against Owner of Kentucky-Based Money Services Business
On March 24, FinCEN assessed a civil money penalty against a Kentucky-based MSB and its owner for violations of the Bank Secrecy Act (BSA). As the designated AML compliance officer of the MSB, the owner willfully violated the BSA’s AML program and reporting requirements by failing to ensure that the MSB complied with obligations under the BSA and its implementing regulations. In 2009, after an IRS Small Business/Self-Employed Division (IRS SB/SE) examination of the MSB’s activities, FinCEN issued a warning letter advising the company to take corrective actions. A subsequent 2013 IRS SB/SE examination found continued violations. Specifically, the MSB failed to (i) establish and implement an effective AML program by “failing to implement policies, procedures, and internal controls reasonably designed to assure ongoing compliance, failing to designate an adequate compliance officer, failing to provide adequate training, and failing to conduct independent testing of its compliance program”; and (ii) file accurate and timely currency transaction reports. The MSB’s owner admitted to violating the BSA’s AML program and reporting requirements and agreed to a $10,000 civil money penalty.
FinCEN, Banking Agencies Release Guidance on Applying Customer Identification Program Requirements to Holders of Prepaid Cards
On March 21, the Federal Reserve, FDIC, NCUA, OCC, and FinCEN published guidance to issuing banks (i.e., banks that authorize the use of prepaid cards) intended to clarify the application of customer identification program (CIP) requirements to prepaid cards. The guidance clarifies that when the issuance of a prepaid card creates an “account” as defined in CIP regulations, CIP requirements apply. The guidance indicates that a prepaid card should be treated as an account if it has attributes of a typical deposit product, including prepaid cards that provide the ability to reload funds or provide access to credit or overdraft features. Once an account has been opened, CIP regulations require identification of the “customer.” The guidance explains that the cardholder should be treated as the customer, even if the cardholder is not the named accountholder, but has obtained the card from a third party program manager who uses a pooled account with the bank to issue prepaid cards. Finally, the guidance stresses that third party program managers should be treated as agents, not customers, and that “[t]he issuing bank should enter into well-constructed, enforceable contracts with third-party program managers that clearly define the expectations, duties, rights, and obligations of each party in a manner consistent with [the] guidance.”
FATF Updates List of Jurisdictions with AML Deficiencies, FinCEN Issues Related Advisory
On March 21, FinCEN issued advisory bulletin FIN-2016-A002 notifying financial institutions of updates to the Financial Action Task Force’s (FATF) list of jurisdictions containing AML/CFT deficiencies. The FATF updated two documents categorizing certain jurisdictions: (i) the FATF Public Statement, identifying jurisdictions that are subject to the FATF’s call for countermeasures or are subject to Enhanced Due Diligence due to AML/CFT deficiencies; and (ii) the Improving Global AML/CFT Compliance: on-going process, identifying jurisdictions which have developed an action plan with the FATF to address strategic AML/CML deficiencies. Revisions to the FATF Public Statement include the removal of Myanmar (Burma); in turn, Myanmar was added to the Improving Global AML/CFT Compliance: on-going process list. Iran and North Korea remain listed as subject to countermeasures on the FATF Public Statement. Additional jurisdictions currently on the Improving Global AML/CFT Compliance: on-going process list include Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Papua New Guinea, Syria, Uganda, Vanuatu, and Yemen. Algeria, Angola, and Panama were removed from the list. FinCEN reminded U.S. financial institutions that they are subject to a broad range of restrictions on dealing with Iran and North Korea. FinCEN also advised U.S. financial institutions to consider the risks associated with countries on the Improving Global AML/CFT Compliance: on-going process list, and reminded them of their general due diligence obligations, including for foreign correspondent accounts.