As we have blogged, courts have held that financial institutions generally do not owe a duty of care to a noncustomer and that no special duty of care arises from the duties and obligations set forth in the Bank Secrecy Act (“BSA”), absent a special relationship or contractual relationship. Moreover, there is no private right of action stemming from the BSA. Nor does the BSA define a financial institution’s standard of care for the purposes of a negligence claim.  A majority panel of the Eighth Circuit (“the Court”) very recently confirmed these principles in a detailed opinion which affirmed summary judgment in favor of a bank which had provided services to the alleged perpetrators of a $193 million Ponzi scheme, thereby rejecting claims brought by a Receiver on behalf of defrauded investors that the bank had aided and abetted fraud, breach of fiduciary duty, and other claims.

After dissecting the record in detail, the Court determined in Zayed v. Associated Bank, N.A. — over a vigorous dissent — that the Receiver failed to present direct or circumstantial evidence that the bank actually knew about the Ponzi scheme being perpetrated by its former customers, much less that it substantially assisted the scheme. The Court emphasized the fact that evidence of possible “sloppy banking” and the existence of potential red flags fell short of the high bar required to sustain a claim for aiding and abetting a fraud against the third party non-customers.

Although the Zayed opinion is one of many cases rejecting AML-inspired tort claims by defrauded investors against a financial institution which had done business with a fraudster, it is notable for its methodical treatment of the facts — many of which appear in one form or another in other cases — regarding the various red flags which the Receiver claimed that the bank had missed, or the alleged misconduct which the Receiver claimed that bank personnel had perpetrated.  The list of alleged compliance failures discussed and found insufficient to establish potential liability in Zayed demonstrates that, however rigorous AML/BSA obligations and programs may be for financial institutions, their alleged violations often fail to pave a path to recovery for civil plaintiffs. Continue Reading Alleged BSA Violations Do Not Support Civil Negligence/Fraud Claims – Again

Former Bankers Allegedly Concealed “Master of Kickbacks” from Internal Compliance Department

Sculpture on top of Credit Suisse headquarters in Zürich, Switzerland

A detailed indictment unsealed on January 3 in the Eastern District of New York alleges that former Credit Suisse bankers, a Lebanese businessman, and former top officials in Mozambique, including the former Minister of Finance, participated in a $2 billion corruption, fraud and money laundering scheme (“the Indictment”).

The defendants, including three former members of Credit Suisse’s Global Financing Group, face charges of conspiracy to commit money laundering, wire fraud, securities fraud, and Foreign Corrupt Practices Act (“FCPA”) violations. As we will discuss, the former bankers are alleged to have thwarted Credit Suisse’s compliance department by circumventing internal controls and hiding information in order to convince the bank to fund the illicit investment projects at issue.

The Indictment represents another example of DOJ using the money laundering statutes to enforce the FCPA, as we have blogged repeatedly: defendant Manuel Chang, the former Minister of Finance of Mozambique, has been charged with conspiracy to launder the proceeds of FCPA violations, but not with violating the FCPA itself – because the FCPA provides that it cannot be used to directly charge foreign officials themselves. The Indictment is also another example of the DOJ using the money laundering and FCPA statutes to prosecute conduct, however reprehensible if proven, committed entirely by non-U.S. citizens operating in foreign countries and involving alleged corruption by foreign officials, with an arguably incidental connection to the U.S. Although the Indictment alleges that certain illicit loans were sold in part to investors located in the U.S., the Indictment again recites now-familiar allegations that the illegal monetary transactions at issue, including bribe and kickback payments, in part flowed through U.S. correspondent bank accounts as the money traveled from one foreign country to another.

Ultimately, the alleged scheme highlights the bribery, kickback, and money laundering risks that financial institutions must consider when vetting and funding international projects. And, it starkly illustrates that internal controls may not always be sufficient to protect institutions from fraud when internal bad actors conspire to circumvent the processes. Continue Reading Indictment Alleges Former Credit Suisse Bankers Conspired to Circumvent the Bank’s Internal Controls in $2 Billion International Corruption and Money Laundering Scheme

On December 7 and 10, 2018, the Financial Action Task Force (“FATF”) released two reports evaluating the United Kingdom’s (“UK”) and Israel’s anti-money laundering (“AML”) and counter-terror financing (“CTF”) programs and welcomed Israel as the 38th member of the task force. The FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”). When releasing both reports, the FATF described the UK and Israel as key leaders and innovators in the fight against ML/TF and provided several recommendations on how both programs can be strengthened.

Because both reports total over 250 pages, this blog post focuses on only the key findings in each report.  The FATF Evaluation of the United Kingdom (the “UK Report”) concluded that, although the UK has effective and robust AML policies addressing both current and future threats, it needs to improve its AML oversight by increasing the resources dedicated to its financial intelligence unit. Meanwhile, the Joint FATF/MONEYVAL Evaluation of Israel (the “Israel Report”) praised the country’s effective use of financial intelligence but found that Israel needs to strengthen its preventative measures to address future ML/TF risks.

Continue Reading FATF Evaluates the UK’s and Israel’s AML/CTF Programs and Welcomes Israel as its 38th Member

As reported in Reuters and other media outlets, the partial government shutdown has impaired the ability of the U.S. Treasury to maintain many of its anti-money laundering and counter-terrorist financing (“AML/CTF”) efforts.  Specifically, the Financial Crimes Enforcement Network (“FinCEN”), the Office of Foreign Assets Controls (“OFAC”) and the Office of Terrorism and Financial Intelligence (“TFI”) have implemented a “lapse in appropriations contingency plan.”

Reuters summarizes the situation regarding FinCEN and OFAC as follows, and provides links to the relevant government announcements:

[FinCEN] will not be working on regulatory guidance or rulemaking as its normal workforce of 285 employees is slashed to 130, according to a document posted on Treasury’s website [here].

It also will not be providing public speakers for AML events, nor will it respond to routine requests for financial intelligence submitted by foreign law enforcement agencies.

FinCEN will, however, continue to provide financial intelligence to U.S. law enforcement and intelligence agencies in support of money laundering and terror finance investigations, the document states. It also will continue to maintain the IT systems that banks and other financial institutions use to file Suspicious Activity Reports and other filings required by the Bank Secrecy Act.

“Forgoing these critical functions may prevent law enforcement and intelligence agencies from receiving timely information related to potential terrorism or ongoing crimes which potentially compromises safety of life and property,” the document states.

[OFAC] will also continue updating its sanctions blacklist during the shutdown, separate Treasury guidance states [here].

Further, according to a separate Treasury document, TFI will continue to perform the following functions during a lapse of appropriations:

  • Monitor and disseminate intelligence reporting on anticipated or actual events to Treasury leadership and other law enforcement, intelligence and military authorities; maintain SCI/collateral communication connectivity with NSC and intelligence community (Watch Officers excepted for protection of life and property)
  • Administer the Specially Designated Nationals (SDN) list and enforce economic and trade sanctions as directed by the Secretary
  • Implement and administer new sanctions on foreign countries or targeted individuals or entities through newly issued Executive Orders (EO) as directed by the Secretary
  • Develop and provide policy recommendations in response to national security incidents as directed by the Secretary
  • Participate in national security policy and intelligence forums responsible for development of response to any national security incident (e.g., NSC Counterterrorism Security Group) as directed by the Secretary
  • Ensure continuity of key regulatory and enforcement actions to preclude exploitation by adversaries during national security event/emergency
  • Limited communications with financial sector participants, including finance ministries and central bank authorities of foreign states, regarding threats and emergent conditions, as directed by the Secretary
  • Limited IT support to service those positions excepted from furlough
  • Limited handling of incoming inquiries (Hotline calls)
  • Limited analytic support (Bank Secrecy Act data, intelligence information, and international financial intelligence unit information including Egmont Secure Web (ESW) case support) to federal law enforcement agencies
  • Use of Section 314 (a) Patriot Act authority, which enables federal law enforcement agencies, through FinCEN, to reach out to financial institutions to locate accounts andtransactions of persons that may be involved in illegal activity
  • Operations funded by other than annual appropriations, including [the Treasury Executive Office for Asset Forfeiture].

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

Government Alleges that Broker Dealer Ignored Major Red Flags Raised by Pay Day Lending Scheme

For the first time, a broker-dealer, Central States Capital Markets, LLC (Central States), has been prosecuted for violating the Bank Secrecy Act (BSA). Central States stipulated to the accuracy of a deferred prosecution agreement‘s (DPA) Statement of Facts, which detailed significant failures to comply with its customer identification procedures (CIP), failures to investigate and file Suspicious Activity Reports (SARs), and failures to monitor red flag transactions.

The government’s prosecution of Central States is not surprising given its recent heightened interest in ensuring that financial gatekeepers like broker-dealers are complying with the AML/BSA laws. Indeed, the allegations show that Central States failed to take basic steps to comply with their AML/BSA obligations despite having procedures and processes in place. Continue Reading SDNY Unveils First Criminal Prosecution of Broker-Dealer for Violating BSA

Happy New Year! But while 2018 is still (just barely) with us, let’s take a look back.

2018 has been a very busy year in the world of money laundering and AML/BSA. We are highlighting 12 of our most-read blog posts, which address many of the key issues we’ve examined this year.

This was the second year of Money Laundering Watch.  We want to thank our many readers around the world who continue to make this blog such a success. The feedback we receive from financial industry professionals, compliance officers, in-house and external lawyers, AML/BSA consultants, government personnel, journalists, and others interested in this field is invaluable, and we hope you will continue to share your perspectives with us.  We pride ourselves on providing in-depth discussions of the important developments in this ever-evolving area.

We also would like to thank the other platforms that host our blog: Digital Currency & Ledger Defense Coalition, Money Laundering Bulletin, and Federal Tax Crimes.

We look forward to continuing to keep you informed in 2019.  If you would like to subscribe to Money Laundering Watch, please click here. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

Second Post in a Two-Part Series

Opinion Stresses Importance of Narrative Sections and Supporting Documentation for SARs

In our first post in this series, we discussed the Securities and Exchange Commission’s (“SEC”) enforcement action against Alpine Securities, Inc. (“Alpine”), a clearing broker that provides services for microcap securities traded in the over-the-counter market, and in particular Alpine’s continued challenge to the SEC’s authority to enforce alleged violations of the Bank Secrecy Act (“BSA”). Judge Denise Cote of the Southern District of New York has repeatedly rejected that argument and, on December 11, granted partial summary judgement in the SEC’s favor, finding in part that the SEC indeed has the authority not only to exam for, but also to enforce, alleged BSA violations.

In this post, we turn to the court’s very detailed findings in support of its grant of summary judgment in favor of the SEC as to most of the case, finding that Alpine committed thousands of violations relating to Suspicious Activity Reports, or SARs. Specifically, the court found as a matter of summary judgment that Alpine was liable, among other things, for thousands of violations of Rule 17a-8 of the Securities Exchange Act of 1934 (“Exchange Act”), which obligates a broker-dealer to comply with certain regulations promulgated under the BSA, including 31 C.F.R. § 1023.320 (“Section 1023.320”), which dictates how a broker-dealer must file SARs.

Although the decision clearly carries significant implications for the SEC’s case against Alpine, it also may serve as a potential bellwether for other broker-dealers who transact microcap securities. The district court’s opinion sets forth extremely detailed findings regarding a variety of SAR-related failures, including alleged failures to (i) provide adequate narrative descriptions in SARs actually filed; (ii) file required SARs; (iii) file SARs on time; and (iv) maintain adequate supporting documentation regarding decisions whether to file a SAR. The opinion also underscores the dangers in AML/BSA compliance of relying on templates and mechanistic or “cookie cutter” processes. It is not enough to simply file SARs defensively – rather, once a decision to file a SAR has been made, each SAR must be supported and contain adequate detail. Continue Reading Court Decision Reinforces SAR Obligations of Penny Stock Clearing Brokers

First Post in a Two-Part Series

On December 11, Judge Denise Cote of the Southern District of New York granted, in part, the Securities and Exchange Commission’s (“SEC”) motion for summary judgement in its action against Alpine Securities, Inc. (“Alpine”), finding that the clearing broker was liable for thousands of violations of Rule 17a-8 of the Securities Exchange Act of 1934 (“Exchange Act”), which requires broker-dealers to report potentially illegal trading activity under the Bank Secrecy Act (“BSA”). This enforcement action is significant in numerous respects, including the question raised repeatedly by Alpine – and what appears to be one of first impression – as to whether, in the absence of explicit authority, the SEC may file suit to enforce alleged violations of the BSA.

In our next post, we will discuss the Alpine court’s detailed findings that Alpine committed thousands of alleged SAR-related violations.

Continue Reading Clearing Broker Continues to Take Aim at SEC’s Ability to Enforce the BSA

The U.S. Department of Justice (“DOJ”) continues to pursue Venezuelan nationals through high-dollar and high-profile money laundering and foreign bribery charges. The latest development in this ongoing saga is the recent sentencing of the former national treasurer of Venezuela, Alejandro Andrade Cedeno (“Andrade”), by the Southern District of Florida to a decade in prison, after Andrade pleaded guilty last year to a single-count information charging him with conspiracy to commit money laundering (specifically, a conspiracy to violation 18 U.S.C. § 1957, the so-called “spending” money laundering provision, which requires transactions involving over $10,000 in criminal proceeds, but no specific intent) in an alleged sprawling bribery and money laundering scheme. His plea agreement (the “Plea”) was one of several connected proceedings unsealed on November 20, most notable of which is the grand jury indictment (the “Indictment”) of fugitive Raúl Gorrín Belisario (“Gorrín”), the owner of Venezuelan cable news network Globovision, erstwhile resident of Miami, and alleged architect of the money laundering conspiracy.

Although he retired to Florida after having served as the head of the Venezuelan treasury, Andrade did not begin his career in the world of high finance. Rather, his climb to power and wealth began when he used to serve as the bodyguard for the President of Venezuela, Hugo Chavez.

As we will discuss, there is more to come. Aside from telling a lurid tale of corruption rewarded through high-end bribes involving aircraft, real estate (widely acknowledged as a major vehicle for laundering) and thoroughbred horses, Andrade’s plea agreement contains cooperation language, and his counsel has stated publically that Andrade has been cooperating with the DOJ for some time. Notably, Andrade was charged only with a single count of Section 1957, which has a statutory maximum sentence of 10 years – exactly the sentence imposed on Andrade, whose advisory Federal Sentencing Guidelines range was presumably much, much higher. It is fair to assume that Andrade will be pursuing a second sentencing hearing at which his sentence could be reduced based on his cooperation with the government.

Andrade’s case is part of a steady stream of money laundering and bribery charges recently brought by the DOJ which relate to Venezuela, which is reeling from massive inflation and a near-existential economic crisis that is inflicting widespread suffering. His case also represents another instance of the DOJ’s increasing tactic of using the money laundering statutes to charge foreign officials who cannot be charged directly under the Foreign Corrupt Practices Act (“FCPA”). Continue Reading Another Sprawling Money Laundering and Bribery Scheme Involving Venezuela: Currency Exchange Rate Manipulation, Rewarded By Aircraft, Real Estate, and Thoroughbred Horses