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FinCEN Highlights Existing AML Program Obligations on MSB Principal-Agent Relationships
On March 11, FinCEN issued FIN-2016-G001 to provide clarity to money services business (MSB) principals regarding the risks associated with foreign agents’ AML compliance. FinCEN’s guidance, which complements recently issued state guidance, encourages coordination among Federal and state regulators on issues related to MSBs’ AML program obligations. FinCEN emphasizes that an MSB “remains independently and wholly responsible for implementing adequate AML program requirements,” noting, therefore, that “neither the agent nor the principal can avoid liability for failing to establish and maintain an effective AML program by pointing to a contract assigning this responsibility to another party (whether the agent or principal).” According to FinCEN’s guidance and pursuant 31 CFR § 1022.210, an effective AML program must, at a minimum, (i) incorporate policies, procedures, and internal controls reasonably designed to ensure BSA compliance; (ii) designate an individual responsible for monitoring day-to-day BSA compliance; (iii) provide adequate training to the appropriate personnel regarding their responsibilities under the program; and (iv) provide for independent testing of the program to ensure there are no material weaknesses. In addition, FinCEN reminds MSB principals that, when conducting monitoring of their agents, they must (i) identify the owners of the MSB’s agents; (ii) continually evaluate agents’ operations; and (iii) evaluate agents’ implementation of policies, procedures, and controls. Finally, the guidance advises MSB principals to consider certain risk factors when conducting agent monitoring, including, but not limited to, (i) whether the agent has an established and adhered to AML program; (ii) whether the owners are known or suspected to be linked to criminal conduct or terrorism; (iii) the nature of the markets the agent serves and whether money laundering or terrorist financing are associated risks of the markets; (iv) the anticipated level of activity of the agent’s services; and (v) the nature and duration of the relationship.
OCC and FinCEN Assess Civil Money Penalties against Florida-Based Wealth Management Firm for BSA Violations
On February 25, the OCC, in coordination with FinCEN, announced that it took action against a Florida-based wealth management firm and private bank for allegedly violating the Bank Secrecy Act (BSA). According to the OCC, the bank failed to maintain an effective BSA/AML compliance program, thus violating its 2010 agreement with the OCC to “revise its policies, procedures, and systems related to the BSA/AML laws and regulations (‘BSA/AML Compliance Program’), and, among other things, address weaknesses with the Bank’s BSA/AML Compliance programs, including a lack of internal controls necessary to ensure effective and timely customer identification, risk assessment, monitoring, validation, and suspicious activity reports (‘SARs’).” Without admitting or denying any wrongdoing, the bank agreed to pay a total of $4 million in civil penalties, with $2.5 million to be paid directly to the OCC and, pursuant to FinCEN’s separately announced civil money penalty, $1.5 to be paid to the U.S. Department of the Treasury.
FinCEN Withdraws Findings and Proposed Rulemakings
On February 19, FinCEN withdrew three findings and proposed rulemakings under Section 311 of the USA PATRIOT Act. FinCEN determined that the three entities subject to the proposed rulemakings “no longer pose a money laundering threat to the U.S. financial system.” FinCEN withdrew its findings and proposed rulemakings against (i) a Costa Rica-based financial institution; (ii) a Belarus-based financial institution; and (iii) an Andorra-based financial institution. Regarding the Costa Rica-based institution, FinCEN noted that the DOJ “seized [its] accounts and Internet domain names and charged seven of its principals and employees with money laundering;” the institution stopped functioning after such actions were taken. According to FinCEN, the Belarus-based entity, along with its successor, no longer operates as a foreign financial institution and does not operate in a way that poses a threat to the U.S. financial system. Finally, concerning the third entity, FinCEN noted that Andorran authorities assumed control of the management and operations of the entity, arrested its chief executive officer on money laundering charges, and “are in the final stages of implementing a resolution plan that is isolating the assets, liabilities, and clients of [the entity] that raise money laundering concerns.”
Government Accountability Office Issues Report on Proposed AML Legislation
Recently, the GAO published a report regarding the potential illicit use of remittance transfers and how, if at all, the proposed Remittance Status Verification Act (RSVA or Act) would assist federal agencies in their anti-money laundering (AML) requirements under the Bank Secrecy Act. If adopted, the RSVA would, among other things, require that remittance providers verify remittance senders’ legal status under the U.S. immigration laws; those unable to provide proof of immigration status would be subject to a fine. The proposed Act would also lower the $3,000 threshold level at which remittance providers are required to obtain and record data for a funds transfer. According to the GAO’s findings, almost all stakeholders expressed concern over the potential requirement to verify legal immigration status, with IRS officials concluding that “verifying identities and collecting information at a near zero dollar threshold would not be useful and could cause remitters to resort to off-the-book methods.” Most law enforcement officials, however, suggested that a lower threshold would benefit agencies’ AML efforts.
European Commission Releases Fact Sheet on Plan to Strengthen the Fight Against Terrorist Financing
On February 2, the European Commission issued a fact sheet regarding its plan to strengthen the fight against terrorist financing, posing and answering questions on topic areas including, but not limited to: (i) the measures the EU has already taken to combat the financing of terrorism; (ii) how the EU addresses terrorist financing risks linked to high-risk third countries; (iii) the possibility of defining a legal framework for freezing the assets of terrorists posing a threat to EU internal security; (iv) the risks associated with prepaid cards as used by terrorists; and (v) how the EU tackles the movement of large volumes of cash across borders. The fact sheet frequently refers to the Fourth Anti-Money Laundering package, which was adopted in May 2015 and, among other things, seeks to protect credit and financial institutions against the risks associated with money laundering and terrorist financing.
FinCEN Updates FATF AML/CFT Deficient Jurisdictions List
On January 19, FinCEN issued an advisory, FIN-2016-A001, to provide financial institutions with guidance on reviewing their obligations and risk-based approaches with respect to certain jurisdictions. According to the advisory, on October 23, the Financial Action Task Force (FATF) updated two documents identifying the following: (i) jurisdictions that are either subject to the FATF’s call to apply countermeasures, or to Enhanced Due Diligence (EDD) due to their AML/CFT deficiencies; and (ii) jurisdictions with AML/CFT deficiencies. FinCEN’s recently issued advisory summarizes the changes made to the respective lists and reiterates that a financial institution must file a Suspicious Activity Report if it “knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation.”
U.S. FinCEN Issues Geographical Targeting Orders Requiring Reporting of High-End Cash Purchases and Buyers of Residential Real Estate in Manhattan and Miami
On January 13, FinCEN issued two Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to provide identification for certain “all-cash” buyers of high end real estate, and to report such transactions. One GTO focuses on the Borough of Manhattan in New York City, New York and the other focuses on Miami-Dade County, Florida.
According to FinCEN, natural persons may be purchasing real estate without bank financing and through LLCs or “other opaque structures” in an attempt to hide their assets and identity. FinCEN commented: “Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with money laundering vulnerabilities associated with all-cash real estate transactions.” The two GTOS will be effective from March 1, 2016 through August 27, 2016, and will require certain title insurance companies to “record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing.”
The GTOs are identical with the exception of the purchase price value applicable to the different locations. For purchases exceeding $3 million in the Borough of Manhattan, or $1 million in Miami-Dad County, that are made by a legal entity (as defined in the GTO), “without a bank loan or other similar form of external financing,” where “the purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form,” a title insurance company, and any of its subsidiaries and agents, is required to file a Form 8300 within 30 days of closing.
Among other information, the Form 8300 must:
- Contain information about the identity of the individual primarily responsible for representing the Purchaser, including a copy of this individual’s driver’s license, passport, or other similar identifying documentation.
- Contain information about the identity of the Purchaser.
- Contain information about the identity of the Beneficial Owner(s) of the Purchaser. The Covered Business must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. A “Beneficial Owner” means each individual who, directly or indirectly, owns 25% or more of the equity interests of the Purchaser.
- If the purchaser involved in the Covered Transaction is a limited liability company, then the Covered Business must provide the name, address, and taxpayer identification number of all its member
This development is consistent with FinCEN’s long-term trend of pushing for greater transparency, exemplified by its pending proposed rule that would mandate enhanced customer due diligence related to beneficial ownership. See prior InfoBytes Alert and our description of the proposed rule.
District Court Denies Motion to Dismiss, Rules Compliance Officers Responsible for AML Program Failures
On January 8, the U.S. District Court of Minnesota ruled that individual officers of financial institutions may be held responsible for ensuring compliance with anti-money laundering laws under the Bank Secrecy Act (BSA). U.S. Dep’t of Treasury v. Haider, No. 15-cv-01518, WL 107940 (Dist. Ct. Minn. Jan. 8, 2016). In May 2015, the defendant filed a motion to dismiss the U.S. Department of the Treasury’s December 2014 complaint against him. The Treasury’s complaint alleged that the defendant failed in his responsibility as the Chief Compliance Officer for an international money transfer company to ensure that “the Company implemented and maintained an effective AML program and complied with its SAR-filing obligations.” The complaint sought a $1 million judgment against the defendant and enjoined him from working for, either directly or indirectly, any “financial institution” as defined in the BSA. In his motion to dismiss, the defendant contended that the Treasury’s complaint should be dismissed because, among other reasons, 31 U.S.C. § 5318(a) permits the imposition of a penalty for AML program failures against an entity, not an individual. However, the District Court of Minnesota dismissed the motion, ruling that the BSA’s more general civil penalty provision, § 5321(a)(1), could subject a partner, director, officer, or employee of a domestic financial institution to civil penalties for violations “of any provision of the BSA or its regulations, excluding the specifically excepted provisions.” Judge David Doty further opined, “Because § 5318(h) is 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.” The defendant also challenged the Treasury’s complaint on the bases that (i) the request for injunctive relief was time barred by the applicable statute of limitations; (ii) FinCEN should not have been permitted to receive and publicly use grand jury information; and (iii) FinCEN violated his due process rights. For various reasons, the District Court declined to decide on such issues or to dismiss materials based on the arguments presented.
SEC Outlines 2016 Examination Priorities
On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.
FinCEN Assesses Civil Money Penalty Against LA-Based Precious Metals Business for AML Violations
On December 30, FinCEN announced a civil money penalty of $200,000 against a Los Angeles-based precious metals business – a financial institution as defined by the BSA – and its owner and compliance officer. The company and the two individuals admitted to willfully violating federal AML laws by (i) failing to adequately asses its own risk; and (ii) failing to conduct due diligence on its highest-risk customers. Specifically, the business did not have an AML program in place until 2011, five years after the IRS instructed it to establish one. In 2013, IRS examiners found that the company’s recently-established AML program did not ensure compliance with the BSA and, as a result, the company “failed to appropriately assess its money laundering to terrorist financing risks, conducted almost no due diligence on money laundering and terrorist financing, conducted almost no due diligence on many of its highest risk customers, and failed to implement effective procedures to identify red flags or to conduct inquiries when such red flags were present, among other things.” In addition to the civil money penalty, the company and the two individuals agreed that, until 2020, they would: (i) retain an auditor; (ii) provide a comprehensive annual report to FinCEN detailing the implementation of the company’s improved AML program; and (iii) annually provide FinCEN with a copy of the company’s AML training program, certifying attendance and testing results of the program.