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FinCEN and OCC Penalize CA Bank for BSA/AML Violations
On February 27, the Financial Crimes Enforcement Network (FinCEN) announced that it had assessed a $7 million civil money penalty against a bank specializing in providing services for check-cashers and money transmitters, for alleged “willful violations” of several Bank Secrecy Act provisions. The OCC also identified deficiencies in the bank’s practices and assessed a $1 million civil money penalty for “violations of previous consent orders entered into by [the bank].” As noted in the release, the bank’s payment of the $1 million OCC penalty will go towards satisfying the FinCEN penalty. According to FinCEN, the bank allegedly failed to (i) “establish and implement an adequate anti-money laundering program;” (ii) “conduct required due diligence on its foreign correspondent accounts;” and (iii) “detect and report suspicious activity.” Furthermore, FinCEN claims $192 million in high-risk wire transfers were processed through some of these accounts.
BAFT Issues Comments on Proposed AML/CFT Guidance Revisions
On February 22, the Bankers Association for Finance and Trade (BAFT), an international financial services association for organizations engaged in international transaction banking, together with the Institute of International Finance (IIF) issued a letter to the Basel Committee on Banking Supervision (BCBS) with comments on BCBS’ proposed revisions to its risk management guidance related to anti-money laundering and counter-terrorism financing. In the letter, BAFT and IFF note that, while both associations are “particularly pleased with [BCBS’] recognition that not all correspondent banking relationships bear the same level of risk and [BCBS’] acknowledgment of the difference between inherent and residual risk,” they do summarize several areas where enhancements would assist with the “general usefulness” of the final guidance:
- BCBS should “design guidance that explicitly permits a correspondent bank to rely upon appropriate utilities for the vast majority of cases rather than simply permitting a correspondent bank to use a utility as another source of information supporting the due diligence process” with the purpose of “establishing international standards or sound practices for such utilities to create greater assurance of achieving official ALM/CFT goals.”
- BCBS should adopt “regulatory practices [that] include standards for ‘verification’ that national authorities could administer or supervise.”
The “[s]tandardization of information requirements (or templates) for utilities could also be extended to include [the] international standardization of basic due diligence information and ‘enhanced due diligence’ information for higher-risk relationships.” A “basic standardization would give both parties a ground of expectations to build upon in making judgments about how to do business. It could [also] eliminate a degree of unnecessary duplication of effort and costs.”
IRS Releases Annual Criminal Investigations Report for FY2016
On February 27, the IRS announced the release of its Annual Criminal Investigation Report (“Report”), discussing the significant accomplishments and criminal enforcement actions taken by the IRS in fiscal year 2016. Highlights in the Report include case examples on a range of matters, including money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes, as well as a discussion of a drop in the number of agents and professional staff at the IRS, and a drop in the total number cases brought for the third consecutive year.
FinCEN Renews GTOs for Title Insurance Companies in Six Major Metropolitan Areas Upon Finding that GTOs Provide ‘Valuable Data’
On February 23, the Financial Crimes Enforcement Network (FinCEN) announced the renewal of its existing GTOs Geographic Targeting Orders (GTOs), each of which temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. Generally, the GTOs require all title insurance companies in the targeted cities to file a FinCEN Form 8300 within 30 days of closing a covered transaction, identifying the buyer, any beneficial owner of the buyer, and the individual primarily responsible for representing the buyer in an “all-cash” purchase of high-end residential real estate. Covered businesses must also retain their records for at least five years after the GTO expires.
Notably, the decision to continue the GTO program for another 180 days—beginning on February 24, 2017—was based largely on FinCEN’s finding that the first GTOs issued back in July are producing “valuable data” that is assisting both law enforcement and FinCEN’s efforts to address money laundering through real estate transactions. Nearly one-third of the targeted transactions covered by the July GTOs ended up involving a beneficial owner or representative who is already the subject of a previous suspicious activity report. The results appear to validate the concerns underlying FinCEN’s rationale for issuing GTOs in the first place, namely the use of shell companies to buy luxury real estate in all-cash transactions.
The targeted geographic areas and corresponding closing price thresholds include: (i) Manhattan ($3 million) and all other boroughs of New York City ($1.5 million); (ii) Miami-Dade, Broward, and Palm Beach counties ($1 million); (iii) Los Angeles County ($2 million); (iv) San Francisco, San Mateo, and Santa Clara counties ($2 million); (v) San Diego County ($2 million); and (vi) Bexar County, Texas, which includes San Antonio ($500,000). In targeting the above-listed metropolitan areas, FinCEN clarified that “GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies.” Rather, as explained by FinCEN Acting Director Jamal El-Hindi, “Money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”
For additional information concerning GTO compliance, FAQs released by FinCEN in August 2016 are available here.
DOJ Fraud Section Unveils New Guidelines on Corporate Compliance Programs
The DOJ’s Fraud Section recently published an “Evaluation of Corporate Compliance Programs.” The guidelines were released on February 8 without a formal announcement. Their stated purpose is to provide a list of “some important topics and sample questions that the Fraud Section has frequently found relevant in evaluating a corporate compliance program.” The guidelines are divided into 11 broad topics that include dozens of questions. The topics are:
- Analysis and Remediation of Underlying Conduct
- Senior and Middle Management
- Autonomy and Resources
- Policies and Procedures
- Risk Assessment
- Training and Communications
- Confidential Reporting and Investigation
- Incentives and Disciplinary Measures
- Continuous Improvement, Periodic Testing and Review
- Third Party Management
- Mergers & Acquisitions
According to the Fraud Section, many of the topics also appear in, among other sources, the United States Attorney’s Manual, United States Sentencing Guidelines, and FCPA Resource Guide published in November 2012 by the DOJ and SEC. While the content of the guidelines is not particularly groundbreaking, it is nonetheless noteworthy as the first formal guidance issued by the Fraud Section under the Trump administration and new Attorney General Jeff Sessions. By consolidating in one source and making transparent at least some of the factors that the Fraud Section considers when weighing the adequacy of a compliance program, the guidelines are a useful tool for companies and their compliance officers to understand how the Fraud Section and others at the DOJ may proceed in the coming months and years.
However, while the guidelines may give some indication of what the DOJ views as a best practices compliance program, they caution that the Fraud Section “does not use any rigid formula to assess the effectiveness of corporate compliance programs,” recognizes that “each company’s risk profile and solutions to reduce its risks warrant particularized evaluation,” and makes “an individualized determination in each case.”
FTC Returning $436,000 to Consumers Scammed in Non-Existent Money-Lending Scheme
On February 17, the FTC announced that it is mailing checks to 2,031 consumers who lost money as part of a business opportunity scheme that cheated consumers out of more than $7 million. The compensation follows a 2013 complaint filed by the Commission focused on 20 individuals and eight companies who, according to the Commission’s allegations, “falsely claimed consumers would earn up to $3,000 per month by referring small businesses to the defendants to obtain an average loan or cash advance of $20,000, and that they could operate a profitable business from their home.” The defendants were charged with engaging in unlawful conduct by: (i) falsely claiming consumers would earn substantial income; (ii) repeatedly calling consumers who told them not to call, often times using obscenities and threats, as well as calling numbers listed on the National Do Not Call Registry; and (iii) failing “to provide specific information to help consumers evaluate a business opportunity…and making earnings claims without substantiation,” in violation of the FTC’s Business Opportunity Rule.
The FTC obtained judgments and settlements in 2015 totaling over $7.3 million, and banned 18 defendants from similar telemarketing activities.
FTC Fines Large Debt Collector $700,000 for Unlawful Collection Calls
On February 14, the FTC announced that it has entered a Stipulated Order for Permanent Injunction and Civil Penalty Judgment of $700,000 with a debt collector that allegedly used unlawful tactics to collect on federal student loans and other debts. According to the complaint, filed by the DOJ on behalf of the FTC in the District Court for the Southern District of Texas, agents working for the defendant-debt collectors (i) left messages that illegally disclosed purported debts to individuals other than the debtors without permission to do so; and (ii) contacted consumers multiple times despite being told they had the wrong number or that the person answering did not owe the debt. Furthermore, the company was alleged to have falsely represented to regulators that it would take steps to prevent its employees from making such unlawful calls. In addition to the $700,000 fine, the Stipulated Order also enjoined the company from continuing such practices going forward.
FTC Reports on 2016 Enforcement Activities to Counter Illegal Debt Collection Practices
On February 14, the FTC announced that it has provided the CFPB with a letter summary of the Commission’s efforts during the past year to combat unlawful debt collection practices, provide education and public outreach activities, and conduct research and policy initiatives in the debt collection area. The purpose of the letter, as explained by the Commission, is to “assist the CFPB in its annual report to Congress about its administration of the [Fair Debt Collection Practices Act]”—an act for which the Commission and the CFPB share enforcement responsibilities.
According to the summary, many of the Commission’s law enforcement actions focused on curbing illegal debt collection practices, including phantom debt collection. Specifically, during 2016, the Commission, among other things: (i) filed or resolved 12 cases against 61 defendants, and obtained nearly $70 million in judgments; (ii) permanently banned 44 companies and individuals that engaged in “serious and repeated violations of law” from working in the debt collection industry; and (iii) obtained summary judgment decisions in three litigated matters that resulted in court orders banning the pertinent defendants from the debt collection industry. The summary notes further that, during 2016, two federal appellate courts adopted interpretations of the FDCPA that it considered “favorable” to consumers in cases in which the Commission and CFPB filed joint amicus briefs.
Moreover, with respect to educational initiatives, the summary highlights the Commission’s continued efforts to educate consumers and businesses during the past year about their rights and responsibilities under the FDCPA and the FTC Act. Among other things, the Commission reported: (i) reaching consumers through approximately 16,000 community-based organizations and national groups; (ii) distributing 15.5 million print publications to libraries, police departments, schools, non-profit organizations, banks, credit unions, and other businesses and government agencies; (iii) logging more than “43 million views” on its pertinent website pages; and (iv) reaching consumers through its videos, which were viewed more than 600,000 times. The Commission also noted that it continues to monitor and evaluate the debt collection industry and its practices through public workshops, and by providing input to the CFPB regarding related “rulemaking and guidance initiatives.”
7th Circuit Orders District Court to Consider Bank’s Responsibility for Losses Due to Fraud
On February 10, the U.S. Court of Appeals for the Seventh Circuit issued an opinion, in which it held that a District Court had erred in failing to consider a bank’s responsibility for nearly $900,000 in losses resulting from a scheme in which defendants persuaded the bank to issue mortgage loans to borrowers who, the defendants knew, were unable to repay the loans. See U.S. v. Litos, et al., Nos. 16-1384, -1385, -2248, -2249, -2330 (7th Cir. Feb. 10, 2017) (Posner, R.). At issue before the appellate court was the propriety of the restitution, in the amount of $893,015. The district judge had ordered the defendants to pay such restitution to the bank, on the ground that they had misled the bank by pretending that the buyers were the source of the down-payment, when it was defendants themselves who had supplied the money.
In remanding the matter with instructions to re-sentence defendants based on the bank’s role in allowing the fraud to occur, the appellate panel determined that the bank’s professed ignorance as to the source of the down payments and the creditworthiness of the loan applicants was “reckless” in light of the information that was available at the time of the transaction. Specifically, the appellate court held that, based on the record, the fraud evident in the loan applications was “transparent,” and that the bank had “ignored clear signs” of problems with the loans. The appellate court held that, as a result, the lower court needed to determine whether the bank’s lack of clean hands rendered it partially responsible for the losses. Among other things, the appellate panel noted statements by the district judge that the loan applications were “a joke on their face” and “laughable,” as well as the fact that the bank had approved multiple loans to the same individuals in short spans of time. Accordingly, the court ordered the district judge to consider whether the bank is entitled to restitution.
SEC Settles Fraud Charges in Investment Scheme, Issues Fine of Over a Half-Million Dollars
On February 14, the SEC announced a settlement with a real estate investment manager based in Arizona over allegations that he defrauded investors. According to the complaint, the investment manager allegedly told investors he would make personal investments in real estate projects which he failed to do, instructed some investors to “falsely state that they were ‘accredited investors’” to avoid registration requirements for the offerings, and falsely represented that he would personally manage the projects when, instead, he entrusted management to a real estate broker who was later imprisoned for other crimes. The settlement requires the investment manager to disgorge $51,358 plus interest of $4,893.98 and pay a penalty of $450,000.