Second Part of a Two-Part Series

As we blogged yesterday, British Columbia’s (“B.C.”) Attorney General David Eby recently released an independent and very detailed report examining money laundering in B.C.’s gaming industry and providing 48 recommendations to combat the problem. See Peter M. German, QC, Dirty Money: An Independent Review of Money Laundering in Lower Mainland Casinos conducted for the Attorney General of British Columbia (Mar. 31, 2018) (“German Report”).  As we noted yesterday, when discussing the U.S. regulatory system, the German Report favorably cites the Nevada Gaming Commission and Nevada Gaming Control Board, whose Enforcement Division “acts as a first line of defence against organized crime and bulk cash buy-ins[,]” and further observes that the federal Financial Crimes Enforcement Network, “[i]n partnership with Internal Revenue Service, acts as the enforcement arm for most money laundering issues.”

The U.S.’s more robust, streamlined AML regulatory regime, although hardly perfect, stands in stark contrast to the dysfunction alleged in the German Report that plagues B.C.’s current framework. In this post, we describe the U.S. AML regulatory regime for the gaming industry, and the recent enforcement actions which it has produced.  Although the pace of AML enforcement has been somewhat sporadic, it appears to be increasing over time in regards to the gaming industry.  Certainly, attention by regulators — as well as by the industry itself — to AML/BSA compliance has increased over the last several years.

Continue Reading The U.S. Casino and Gaming Industry: AML/BSA Regulation and Enforcement

U.S. Regulatory Regime Favorably Cited in Report for B.C. Attorney General

First Part in a Two-Part Series on Gaming Industry and AML

British Columbia’s (“B.C.”) Attorney General David Eby recently released an independent and very detailed report examining money laundering in B.C.’s gaming industry and providing 48 recommendations to combat the problem. Eby appointed Peter German, a former deputy police commissioner and leading expert on money laundering, to conduct a six-month investigation into allegations of money laundering in the Lower Mainland casinos after reports emerged that one Vancouver-based casino accepted $13.5 million in $20 bills over the course of one month in 2015.  See Peter M. German, QC, Dirty Money: An Independent Review of Money Laundering in Lower Mainland Casinos Conducted for the Attorney General of British Columbia (Mar. 31, 2018) (“German Report”)

Following German’s investigation, which included over 150 interviews with industry and government insiders in B.C., Ontario, and the United States, German issued the German Report to detail his findings and recommendations. The report reveals that a multitude of alleged criminal syndicates, tied primarily to China, have used Vancouver-area casinos to launder money.  It highlights the anti-money laundering (“AML”) challenges faced by a predominantly cashed-based industry, and also underscores the systemic issues that have made B.C.’s gaming industry an alleged breeding ground for money laundering: a dysfunctional, fragmented regulatory regime that lacks independence.  To streamline and strengthen B.C.’s regulatory framework, the German Report recommends creating an independent gaming regulator analogous to the regulatory regime in the United States.  The German Report focuses on the Nevada Gaming Commission and Nevada Gaming Control Board, whose Enforcement Division “acts as a first line of defence against organized crime and bulk cash buy-ins[,]” whereas the federal Financial Crimes Enforcement Network, “[i]n partnership with Internal Revenue Service, acts as the enforcement arm for most money laundering issues.”

In announcing the German Report, Eby blamed the former Liberal government for “turn[ing] a blind eye to the escalating money laundering in B.C. casinos.” He also stated his acceptance of all 48 of these recommendations.

In this post, we will describe the findings and recommendations of the German Report.  In the next post, we will contrast the B.C. regulatory regime described in the German Report with the AML regulatory regime in the United States involving the gaming industry, and the recent enforcement actions which it has produced.

Continue Reading British Columbia’s Gaming Industry Reportedly Faces Serious Money Laundering Vulnerabilities

The U.S. Department of Justice (“DOJ”) announced last week that it was disbanding the Financial Fraud Enforcement Task Force, established under the Obama Administration. In its place, pursuant to an Executive Order, the DOJ plans to establish the Task Force on Market Integrity and Consumer Fraud (“Task Force”). The purpose—according to a DOJ press release—is to deter fraud on consumers and the government. Additionally, the Task Force will focus on money laundering, “including the recovery of proceeds;” fraud related to digital currency; tax fraud; health care fraud; securities and commodities fraud; and other financial crimes.

The Task Force is a multiagency effort. Although the DOJ will lead the group under Deputy Attorney General Rod Rosenstein, the Executive Order directs him to include a host of other federal agencies, including the Secretary of the Treasury, the Comptroller of the Currency, and the Chairperson of the Board of Governors of the Federal Reserve System.

This is a potentially important development regarding government enforcement, including as to money laundering. We and our colleague Alan Kaplinsky therefore discuss the new DOJ task force in detail here.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

In February 2017, we blogged about a whistleblower complaint filed against Bank of the Internet (“BofI”) by its former internal auditor. The blog post addressed what the whistleblower believed was BofI’s wrongdoing in relation to responding to a subpoena from the Securities and Exchange Commission (“SEC”), and when dealing with a certain loan customer in potential violation of the Anti-Money Laundering (“AML”) rules of the Bank Secrecy Act (“BSA”).

Less than two months after our blog post, three BofI stockholders brought a putative class action complaint against BofI seeking to represent a class of individuals who purchased BofI stock, in a case captioned Mandalevey v. BofI Holding, Inc. These plaintiffs alleged BofI violated the Securities Exchange Act through, among other alleged misrepresentations, falsely denying the company was under investigation for money laundering violations.  A federal court recently dismissed all claims against BofI.

This post focuses on that decision, the allegations relating to the federal investigation of BofI, and the Court’s interesting reasoning in dismissing these plaintiffs’ claims. Although the bank won this latest round, the saga involving BofI underscores how financial institutions face an increasing risk that alleged AML and Counter-Terrorism Financing (“CTF”) violations will lead to follow-on allegations of securities law violations – allegations brought not only by the government (see here), but also by investor class action suits (see here, here and here). Continue Reading When A Purported Money Laundering Investigation Turns Into a Class Action Complaint: The Latest Round in BofI’s Fight to Put Money Laundering Allegations in the Rearview Mirror

 

The U.S. Government Accountability Office (“GAO”) issued a statement earlier this week regarding testimony before the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit Committee on Financial Services regarding the potential perils of “derisking.”

As described by the GAO, “derisking is the practice of depository institutions limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering or other criminal activity such as financing to terrorist groups.” Derisking is a significant ongoing issue in AML-related enforcement.  As we have blogged, the U.S. Treasury Department previously attempted to allay the fears driving the phenomenon of derisking by (i) suggesting that U.S. banks have overreacted to concerns over AML/BSA enforcement by unnecessarily terminating correspondent banking relationships with foreign banks; (ii) noting that these relationships are crucial to the global economy; and (iii) stating that reflexive derisking could destabilize or disrupt access to U.S. financing, hinder international trade, cross-border business, and charitable activities, and make claim remittances harder to effectuate.

It is difficult to distill clear and specific practical points from the recent GAO statement, entitled “Bank Secrecy Act – Further Actions Needed to Address Domestic and International Derisking Concerns” (“Derisking Statement”). This is partly because, during the course of listing various perceived concerns regarding the practice of derisking, the Derisking Statement merely comments somewhat vaguely that, “[w]ithout accessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, Treasury, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome.”

Bearing in mind the above limitations of the statement, the Derisking Statement summarizes itself as follows:

Why GAO Did This Study

In recent years, some Southwest border residents and businesses reported difficulty accessing banking services, including experiencing bank account terminations and bank branch closings in the region. In addition, the World Bank and others have reported that some money transmitters have been losing access to banking services with depository institutions.

This statement is based on findings from GAO’s February 2018 report on access to banking services along the Southwest border (GAO-18-263) and March 2018 report on the effects of derisking on remittance flows to fragile countries (GAO-18-313). GAO discusses (1) the extent to which banks are terminating accounts and closing branches in the Southwest border region, (2) the extent to which money transmitters serving selected fragile countries are facing banking access challenges, and (3) actions relevant U.S. agencies have taken to respond to these challenges. For those reports, GAO surveyed more than 400 banks, developed an econometric model on the drivers of branch closures, and conducted case studies on four countries to assess the effects of derisking on remittances flows.

What GAO Recommends

GAO made five recommendations in the two reports: to Treasury and the federal banking regulators to conduct a retrospective review of BSA/AML regulations and their implementation, and to Treasury to assess shifts in remittance flows to nonbanking channels. Banking regulators agreed with the recommendations. GAO requested comments from Treasury, but none were provided.

Ultimately, what is clear from the Derisking Statement is that the spectrum of financial services available to certain markets is shrinking due to concerns over AML/BSA enforcement, which the U.S. government somewhat perversely suggests are overblown.  What is not clear from the statement is whether U.S. regulators will tackle this issue, or how they should tackle this issue.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

Critics Bemoan Removal of Potential Weapon Against Shell Companies

Last week, and on the eve of a scheduled markup of the original bill in the House Financial Services Committee, a new draft of the Counter Terrorism and Illicit Finance Act (“CTIFA”) was sent to Congress.  That bill, among other things, removes a key passage of what promised to be the most substantial overhaul to the Bank Secrecy Act (“BSA”) since the PATRIOT Act.

As we blogged in a January 2018 two-part series (see here and here), the original legislation would have required – subject to civil and criminal penalty provisions – non-exempt companies formed in the U.S. to disclose their real beneficial owners to the Financial Crimes Enforcement Network (FinCEN).  The new bill eliminates the beneficial ownership provision entirely; in its place, the bill merely requires the Comptroller General of the United States “to submit a report evaluating the effectiveness of the collection of beneficial ownership information under the Customer Due Diligence (“CDD”) regulation” (see here), “as well as the regulatory burden and costs imposed on financial institutions subject to it.”

Acknowledging the bill’s removal from mark-up, Ranking Member Maxine Waters (D-Calif.) said she hoped the new bill will be strengthened to address the issue of beneficial ownership, as well as “the problem of anonymous shell companies.”  The Fraternal Order of Police went further, describing the removal of the beneficial ownership provisions as “almost criminal.”

To be sure, the lack of transparency concerning beneficial ownership is widely viewed as a weakness in the U.S.’s efforts to combat money laundering. As noted in our February post concerning various Senate subcommittee hearings related to the topic, Acting Deputy Assistant Attorney General M. Kendall Day of the Department of Justice, Criminal Division, recently testified that “[t]he pervasive use of front companies, shell companies, nominees, or other means to conceal the true beneficial owners of assets is one of the greatest loopholes in this country’s AML regime.”  Indeed, the Financial Action Task Force (“FATF”) recently scored the U.S. as non-compliant – the lowest possible score – in connection with its ability to determine beneficial owners.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

 

On June 12, 2018, FinCEN issued an “Advisory on Human Rights Abuses Enabled by Corrupt Senior Foreign Political Figures and their Financial Facilitators” to highlight the connection between corrupt senior foreign political figures and their enabling of human rights abuses.  The Advisory provides examples of potential red flags to aid financial institutions in identifying the means by which corrupt political figures and their facilitators may move and hide proceeds from their corrupt activities – activities which, directly or indirectly, contribute to human rights abuses and other illegal activity.

The Financial Action Task Force (FATF) issued Recommendation 12 in June 2013 to address the risks posed by politically exposed persons (PEPs), and that Recommendation has been implemented through FinCEN rules and guidance.  Thus, U.S. banks already are expected to have in place risk-based policies, procedures and processes regarding PEPs, including conducting enhanced due diligence.  Nonetheless, FinCEN issued this Advisory to “further assist” U.S. financial institutions’ efforts to detect and report foreign PEP facilitators’ use of the U.S. financial system to “obscure and launder the illicit proceeds of high-level political corruption.” Continue Reading FinCEN Issues Advisory on Human Rights Abuses Enabled by Corrupt PEPs and Their Financial Facilitators

Bank’s Alleged “Tick Box” Approach Failed to Attain Substantive AML Compliance

Late last week, the Financial Conduct Authority (“FCA”), the United Kingdom’s financial services regulator, imposed a $1.2 million (896,100 pound) fine on the UK division of India’s Canara Bank, an Indian state-owned bank, and ordered a moratorium on new deposits for nearly five months.  The cause—according to Reuters—was Canara’s systemic anti-money laundering (“AML”) failures.

A 44-page final notice published by the FCA explains the multi-year regulatory process that led to a finding of systemic failures and the imposition of penalties.  The FCA’s investigation began in late 2012 and early 2013 with assessments of Canara’s AML systems.  Upon inspection, the FCA “notified Canara of a number of serious weaknesses in its AML systems and controls.”  After promises of remedial action by Canara, an April 2015 visit revealed that the AML systems had not been fixed.  The investigation ended with a final report from a “skilled person,” an expert brought in by the FCA to assess Canara’s AML policies and procedures, completed in January 2016.  Settlement followed, resulting in sanctions and the FCA’s published final notice.

These three visits from the FCA generated a laundry list of Canara’s AML shortcomings.  This enforcement action reflects three main take-aways: (i) the potential risks faced by banks operating in foreign countries in which they have limited AML experience; (ii) the need for swift remedial action after the first examination finding AML deficiencies; and (iii) the need for a substantive AML policy implemented in a substantive way, rather than through a rote reliance on AML-related checklists. Continue Reading Canara Bank of India Fined $1.2 Million by UK Regulators for Systemic AML Failures

OCC Identifies AML/BSA and Cyber Threats as Elevated Risks Facing Banks

Last week, the Office of the Comptroller of the Currency (“OCC”) published the Spring 2018 Semiannual Risk Perspective (the “Report”), which uses up-to-date data to identify risks to U.S. banks and measure their compliance with applicable laws and regulations.  The Report concluded that some of the OCC’s primary concerns are with banks’ abilities to comply with the anti‑money laundering (“AML”) laws and regulations, as well as to manage risks associated with cybersecurity threats.

Many of the OCC’s observations and recommendations remained the same from its Fall 2017 report, about which we previously blogged, begging readers to wonder what will spur less conversation and potentially more action among OCC-supervised banks or concrete guidance by the OCC.  Regardless, a common thread running throughout both reports is the potential risk presented to financial institutions by emerging technologies, which carry the simultaneous blessing and curse of business opportunities and compliance risks. Continue Reading OCC Report: Same Threats, Different Season

Commonwealth Bank of Australia (“CBA”), the largest bank in Australia, has agreed to a proposed civil settlement — subject to court approval — of historic proportions, involving a fine of approximately $700 million Australian dollars (roughly equivalent to $530 million U.S. dollars) regarding numerous alleged Anti-Money Laundering (“AML”) and Counter Terrorism Financing (“CTF”) violations.  The settlement is with the Australian Transaction Reports and Analysis Center (“AUSTRAC”) – a government financial intelligence agency whose counterpart in the U.S. would be the Financial Crimes Enforcement Network (“FinCEN”) — and represents the largest such enforcement action in the history of Australia.  Under the settlement, AUSTRAC also will recoup its legal costs of $2.5 million Australian dollars.

As we have blogged, AUSTRAC filed on August 3, 2017 a claim seeking civil monetary penalties against CBA for over 53,000 alleged violations of Australia’s AML/CTF law.  Although the case involves several types of alleged AML violations, it fundamentally rests on the bank’s use of so-called intelligent deposit machines (“IDMs”), a type of ATM which allowed customers to anonymously deposit and transfer cash.  Unfortunately, and perhaps not surprisingly, the IDMs also became an alleged favored conduit for money laundering by criminals involved in drug trafficking and illegal firearms. Continue Reading Australia’s Largest Bank Agrees to Historic AML Penalty