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FinCEN, California U.S. Attorney Assess Civil Money Penalties Against Virtual Currency Transmitter and Operator for AML Violations
On July 27, the Financial Crimes Enforcement Network (FinCEN), in partnership with the U.S. Attorney’s Office for the Northern District of California, assessed a more than $110 million civil money penalty against an internet-based, foreign-located virtual currency transmitter for willfully violating the anti-money laundering (AML) provisions of the Bank Secrecy Act. A second, separate $12 million penalty was assessed against one of the company’s operators, a Russian national. Additionally, a California grand jury handed down a 21-count indictment against the currency transmitter and the Russian national. According to allegations, the company exchanged fiat currency in addition to virtual currencies such as bitcoin, and “facilitated transactions involving ransomware, computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.” The company also processed transactions using stolen funds.
Pursuant to the terms of the assessment, from November 2011 through the present, both the company and the operator allegedly failed to (i) meet money services business (MSB) registration requirements; (ii) implement an effective AML program; (iii) detect suspicious transactions or file suspicious activity reports; and (iv) obtain and retain records for transmitted funds of $3,000 or more. FinCEN warned that regardless of ownership or location, foreign-located MSBs are “required to comply with U.S. AML laws and regulations . . . including AML program, MSB registration, suspicious activity reporting, and recordkeeping requirements.”
This is the first action FinCEN has taken against a foreign-located MSB conducting business in the U.S.
FDIC Releases List of Enforcement Actions Taken Against Banks and Individuals in May 2017
On June 30, the FDIC released its list of 36 orders in administrative enforcement actions taken against banks and individuals in May. Several of the orders on the list assess civil money penalties for violations of the Flood Disaster Protection Acts of 1973 and 1968 and their flood insurance requirements including: (i) failing to obtain flood insurance before loan origination; (ii) failure to maintain adequate insurance coverage on loans; (iii) failure to provide the required notification and failure to provide timely notification on loans; (iv) failing to maintain adequate flood insurance during the term of the loan; (v) allowing flood insurance to lapse during the term of the loan; and (vi) failing to provide written notice to the borrower concerning flood insurance before renewing a loan.
Also on the list are 14 assessments of civil money penalties, three of which are coupled with orders of restitution. Additionally, there are six orders for removal and prohibition for bank employees breaching fiduciary duties and using positions of control to “facilitate and conceal schemes perpetrated by Bank customers” that caused the bank to violate the Bank Secrecy Act.
There are no administrative hearings scheduled for July 2017.
Charges Filed by SEC Allege Bank Secrecy Act Violations
On June 5, the SEC filed charges against a U.S. brokerage firm (firm) for failure to comply with suspicious activity reports (SARs) filing requirements, in violation of the Bank Secrecy Act (BSA), the Exchange Act Section 17(a), and Rule 17a-8. The complaint, filed in the U.S. District Court for the Southern District of New York, alleges that although the firm had a BSA Compliance Program, the program did not accurately reflect what the firm did in practice. More specifically, the SEC alleges thousands of violations including failure to file SARs, failure to file SARs within the required 30 days after the date the suspicious activity was detected, and filing incomplete SARs that did not include the requisite narratives describing what is “unusual, irregular, or suspicious” about the transaction. According to the SEC press release, “by failing to file SARs, [the firm] deprived regulators and law enforcement of critically important information often related to trades in microcap securities used to investigate potentially serious misconduct.”
The SEC requested relief in the form of permanent injunctions and monetary penalties and interest.
Treasury Audit Report Analyzes Responses to Threats by Office of Terrorist Financing and Financial Crimes
On May 23, the Treasury Department’s Office of Inspector General issued an audit report presenting the results of its study into how, and to what extent, the Treasury’s Office of Terrorist Financing and Financial Crimes (TFFC) addresses threats to international financial systems. The OIG reviewed TFFC—which is responsible for leading and assisting tasks forces, including the Anti-Money Laundering Task Force—to determine how its collaboration efforts with the national security community and other federal agencies identifies and addresses “threats to the international financial system from money laundering and other forms of illicit finance.” According to the findings, while the majority of federal agency officials interviewed for the report were satisfied with TFFC’s collaboration efforts overall, others believed enhanced collaboration efforts were warranted. The OIG also found that TFFC failed to establish “policies or procedures for collaboration or a mechanism to monitor, evaluate, and report the results of its collaborative efforts as recommended by the Government Accountability Office” in a 2009 report. Accordingly, the OIG recommended that TFFC develop and improve upon the necessary policies and procedures needed to monitor the effectiveness of “interagency collaboration,” as well as address areas of concern regarding collaboration efforts with foreign countries. TFFC agreed with these recommendations and stated it is currently working to improve interagency collaboration.
FDIC Releases List of Enforcement Actions Taken Against Banks and Individuals in April 2017
On May 26, the FDIC released its list of 18 administrative enforcement actions taken against banks and individuals in April. Among the consent orders on the list are civil money penalties for violations of the Flood Disaster Protection Act of 1973 and its flood insurance requirements. Also on the list are a cease and desist order and a civil money penalty assessment issued to a Louisiana-based bank (Bank) for violations of the Bank Secrecy Act (BSA), EFTA, RESPA, TILA, HMDA, and the National Flood Insurance Program. According to the cease and desist order, the FDIC Board of Directors agreed with the Administrative Law Judge’s recommended decision that the Bank engaged in unsafe or unsound practices, which warranted a cease and desist order and civil money penalty. The order also addressed a number of shortcomings identified by the Bank’s examiners, including the following: (i) the Bank’s BSA program lacked adequate internal controls to ensure compliance; (ii) it failed to provide correct and compete electronic funds transfer disclosures to consumers; (iii) borrowers were provided “untimely and improperly completed” good faith estimates; and (iv) the Bank repeatedly failed to accurately report required HMDA information to federal agencies.
An additional eight actions listed by the FDIC related to unsafe or unsound banking practices and breaches of fiduciary duty, including five removal and prohibition orders. There are no administrative hearings scheduled for June 2017. The FDIC database containing all of its enforcement decisions and orders may be accessed here.
Big Bank Agrees to $41 Million Fine by Federal Reserve Over Lax AML Controls
On May 26, the Board of Governors of the Federal Reserve (Board) and a multinational bank agreed on a settlement over allegations of anti-money laundering (AML) and Bank Secrecy Act (BSA) violations. The settlement, which only relates to the bank’s U.S. operations, includes a $41 million fine and a cease and desist order. The agreement was reached after the most recent Board examination of the bank’s AML program identified “significant deficiencies” in the bank’s transaction monitoring capabilities as well as its risk management and compliance with BSA/AML requirements. According to the Board, among other things, the resulting regulatory compliance deficiencies prevented the bank from properly assessing potentially suspicious transactions between 2001 and 2015. Under the settlement, the bank must provide written plans to the Board within 60 days, which include the methodology and target date for enhancement of their transaction monitoring system. Within the same 60 days, the bank also must submit a strategy to “strengthen its oversight of anti-money laundering compliance across its U.S. operations.”
California-Based Financial Institution Reaches Agreement with DOJ, Forfeits More Than $97 Million for Bank Secrecy Act Violations
On May 22, the U.S. Department of Justice announced that a California-based financial institution and its parent company have agreed to forfeit over $97 million to resolve an investigation into alleged Bank Secrecy Act (BSA) violations. The May 18 agreement between the Bank and the DOJ included a Statement of Facts in which the Bank admitted to criminal violations for willfully failing to maintain an effective anti-money laundering compliance program with appropriate policies, procedures, and controls to guard against money laundering, as well as willfully failing to file suspicious activity reports (SARs). It further admitted that from at least 2007 until at least 2012, it processed more than 30 million remittance transactions to Mexico with a total value of more than $8.8 billion, but, while its monitoring system issued more than 18,000 alerts involving more than $142 million in potentially suspicious remittance transactions, it conducted fewer than 10 investigations and filed only nine SARs. Notably, the nine SARs covered only 700 transactions totaling overall approximately $341,307. Furthermore, the financial institution recognized that over the same time period it needed to improve its monitoring of its money services businesses’ (MSBs) remittances but failed to provide appropriate staffing and resources, which led to its BSA department being unable to “conduct appropriate transaction monitoring.” This resulted in a failure to file SARs on suspicious remittance transactions. Although the financial institution recognized the need to enhance its monitoring process as early as 2004, it continued to expand its MSB business without adding staffing resources and failed to make necessary improvements to its transaction monitoring controls.
However, the DOJ stated its decision to enter into a non-prosecution agreement with the financial institution was based on evidence of extensive remedial actions. According to the DOJ’s press release, the financial institution devoted significant resources to remediation of its BSA and anti-money laundering (AML) deficiencies, exited its MSB business entirely, and ultimately ceased all banking operations. It was further credited for its cooperation with the DOJ’s criminal investigation by: (i) providing factual presentations; (ii) voluntarily making available foreign-based employees for interviews in the U.S.; (iii) producing foreign documents without implicating foreign data privacy laws; and (iv) collecting, analyzing, and organizing voluminous evidence and information for the DOJ. Under the terms of the agreement, the financial institution and its parent company have agreed to fully cooperate in this and any future DOJ investigations relating to violations of the BSA and AML statutes, as well as report, for a period of one year, any evidence or allegations of such violations. The parent company has also agreed to report to the DOJ “regarding [the] implementation of compliance measures to improve oversight of its subsidiaries’ BSA compliance.”
FinCEN Recognizes Law Enforcement Agencies for Use of BSA Reporting
On May 9, the Financial Crimes Enforcement Network (FinCEN) announced its third annual Law Enforcement Awards to law enforcement agencies that use Bank Secrecy Act data provided by financial institutions in their criminal investigations. The program seeks to recognize law enforcement agencies that made effective use of financial institution reporting to obtain a successful prosecution, and to demonstrate to the financial industry the value of its reporting to law enforcement. The following agencies were recognized:
- Suspicious Activity Report Review Task Force Category—New York State Police. Based on a financial institution reporting an unusual pattern of cash deposits, the New York State Police Special Investigations Unit identified suspicious transactions occurring in the Hudson Valley Region indicative of money laundering. The investigations led to the identification of expansive criminal organizations responsible for bringing large quantities of narcotics into the region, operating business fronts used for money laundering, and extensive gang activity.
- Transnational Organized Crime/Third Party Money Launderers Category—FBI. After receiving a referral from local law enforcement regarding an individual suspected of carrying out various fraud and money laundering schemes, the FBI conducted an investigation, and its review of sensitive financial information resulted in investigators uncovering a network of criminal actors located in the U.S. and Canada, which was bringing in $100-$300 million in annual criminal proceeds in North America alone.
- Transnational Security Threats Category—FBI. The FBI used a high volume of sensitive financial information obtained in connection with its investigation into a criminal organization moving hundreds of millions of U.S. dollars to support foreign nuclear and ballistic missile programs, to identify two families that operated a network of exchange houses, precious metals companies, trading companies, and front companies throughout the Middle East to carry out financial activity for the benefit of multiple OFAC-sanctioned entities, as well as several entities with close ties to foreign military organizations.
- Cyber Threats Category—Internal Revenue Service-Criminal Investigation (IRS-CI). A multi-year, multi-agency investigation led by IRS-CI focused on several targets selling narcotics on the dark web and distributing them throughout the U.S. The investigation identified sensitive financial information, which enabled investigators to corroborate the financial and personal information of the targets. The data also indicated that the subjects used Bitcoins in an effort to conceal their illicit proceeds. The information identified in the financial data and from subpoenas issued to numerous financial institutions and Bitcoin exchangers helped clarify the series of transactions conducted to launder the funds.
- Significant Fraud Category—Defense Criminal Investigative Service (DCIS). DCIS initiated a long-term investigation based on structuring and excessive credit card charges identified by multiple financial institutions on a single individual. Investigators determined that one of the subjects was transferring funds to a shell company owned by a U.S. military official. A detailed analysis of sensitive financial information and contract documents revealed that the U.S. military official had received bribes from the primary target in exchange for helping the primary target win military contracts in Afghanistan.
- Third-Party Money Launderers Category—Immigration and Customs Enforcement Homeland Security Investigations (HSI). HSI investigators utilized an extensive volume of sensitive financial information to assist in their investigation into a large-scale illegal third-party money laundering organization. The investigation began based largely on information gleaned from a FinCEN-issued Geographic Targeting Order (GTO). The GTO information used by investigators allowed them to identify an “armored car company, which was importing U.S. dollars and Mexican pesos from casas de cambio in Mexico and depositing them into shell company bank accounts that were opened and operated by the two individuals who owned and operated the company.”
Federal Regulators Enter Settlement Agreement with Former Chief Compliance Officer Following AML Program Investigation
On May 4, FinCEN and the U.S. Attorney’s Office for the Southern District of New York announced a $250,000 settlement with the former chief compliance officer of an international money transfer company over allegations that he failed to report suspicious activity and knowingly participated in the company’s failure to maintain an effective anti-money laundering program. The settlement resolves a lawsuit filed in December of 2014 against the defendant, in which the district court dismissed the defendant’s motion to dismiss, ruling that the Bank Secrecy Act’s (BSA) general civil penalty provision, § 5321(a)(1), could subject a partner, director, officer, or employee of a financial institution to civil penalties for violations of any provision of the BSA or its regulations, excluding the specifically excepted provisions, and that because § 5318(h) was not listed as one of those exceptions, “the plain language of the statute provides that a civil penalty may be imposed on corporate officers and employees like [the defendant], who was responsible for designing and overseeing [the company's] AML program.” U.S. Dep’t of Treasury v. Haider, No. 15-cv-01518, WL 107940 (Dist. Ct. Minn. Jan. 8, 2016). (See previous InfoBytes summary.) In the stipulation and order of settlement and dismissal, the defendant (i) accepted responsibility for failing to further investigate consumer fraud reports; (ii) is required to pay $250,000 to the Department of the Treasury; and (iii) is banned for three years from performing compliance functions for other U.S.-based money transmitters. Notably, in February 2016, the money transfer company agreed to pay $13 million to settle claims from 49 states and the District of Columbia over charges that it transferred money to third parties that were defrauding customers. As part of the company’s settlement, it was required to ensure its agents attend mandatory compliance training, enhance its comprehensive anti-fraud compliance program, and implement a hotline system for employees to report noncompliance.
House Financial Services Subcommittee Explores Ways to Safeguard Financial System from Terrorist Financing
On April 27, the Financial Services Subcommittee on Terrorism and Illicit Finance held a hearing entitled Safeguarding the Financial System from Terrorist Financing to examine information sharing and data collection practices at the Financial Crimes Enforcement Network (FinCEN) and assess how the process could be improved. According to a Committee memorandum released in advance of the hearing, the hearing was also called for the purposes of considering whether to amend the Bank Secrecy Act and USA PATRIOT Act to improve FinCEN’s effectiveness in disrupting terrorist financing and money laundering.
Jamal El-Hindi, the Acting Director of the Financial Crimes Enforcement Network (FinCEN) at the Department of the Treasury, was the only witness. For just over an hour, the Acting Director offered testimony and answered questions concerning, among other things, the collection, analysis and dissemination of Bank Secrecy Act data and information sharing between the public and private sectors. Mr. El-Hindi also discussed several new and evolving money laundering and terrorist financing challenges, including potential money laundering vulnerabilities associated with “all cash” real estate transactions, virtual currency, and cybersecurity.
In a statement delivered by Rep. Maxin Waters (D-CA), the Ranking Member of the Committee on Financial Services, the Congresswoman noted, among other things, that “high-end U.S. real estate is a key sector used by corrupt foreign leaders, drug traffickers and other criminals to launder illicit money.” The Ranking Member explained further that she “find[s] it disturbing that FinCEN continues to largely exempt the real-estate sector from even the most basic anti-money laundering requirements,” and urged the regulator to “take more urgent action to address these risks nationwide and on a permanent basis.”
A video recording of the hearing may be accessed here.