Two days after North Korea’s successful long-range ballistic missile test, the U.S. District Court for the District of Columbia unsealed a memorandum opinion which granted the Department of Justice “damming” warrants to seize all funds in bank accounts belonging to five Chinese companies which allegedly were used to hide transactions with North Korea using U.S. currency in violation of U.S. sanctions and money laundering laws. The underlying conduct allegedly resulted in over $700 million of prohibited transactions being processed by eight international banks. The opinion is noteworthy not only because it demonstrates the important relationship between money laundering laws and foreign policy, but also for the government’s use of anticipatory warrants to seize the assets upon arrival to the targeted accounts, and to prevent those assets from exiting.

Continue Reading Damming the Funding to North Korea: Anticipatory Seizure Warrants as a Tool to Enforce Sanctions and Thwart Money Laundering Transfers

Part Two of a Three-Part Series

In the second part of this series, we explore the practical effects of the FinCEN and DOJ guidance documents on industries attempting to serve marijuana related business (“MRBs”). On June 27, 2017, the Tenth Circuit issued an interesting and divided opinion showing us how difficult it can be to square the prohibitions in the federal Controlled Substances Act (“CSA”) and money laundering statutes with state legislation legalizing certain MRB activity and the seemingly permissive nature of the FinCEN and DOJ guidance documents. Continue Reading Continued and Unexpected Roadblocks to Serving the Marijuana Industry: Fourth Corner Credit Union v. Federal Reserve Bank

Part One of a Three-Part Series

We begin this week with a three-part series on banking and the marijuana industry. States continue to pass medical and recreational use marijuana legislation despite that the fact that the substance remains classified as a Schedule I drug subject to the federal Controlled Substances Act.  Thus, the medical and recreational marijuana industries continue to struggle with access to banking and credit, and those who attempt to serve these industries find themselves subject to the Bank Secrecy Act (“BSA”) and the criminal money laundering provisions.  As we will detail this week, the struggle for financial institutions attempting to service the marijuana industry comes not only from the BSA and AML provisions, but in other forms.  We start this week with an overview of the guidance documents issued by the federal government which identify the enforcement priorities and also potential windows for financial institutions to service the marijuana industry.  We will follow up with a discussion of a recent federal court decision illustrating the practical difficulties of squaring the prohibitions of the federal drug laws with permissive state laws and the federal guidance documents.  We will conclude with an exploration of how federal agencies beyond the Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”), such as the Securities and Exchange Commission (“SEC”), can further muddy these waters by staking out their own regulatory and enforcement priorities.  –Priya Roy Continue Reading Banking and the Marijuana Industry

Financial institutions face an increasing risk that alleged violations of the Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) requirements will lead to follow-on allegations of securities law violations. We have blogged about investor class action suits against financial institutions based on alleged violations of BSA/AML rules.  We also have blogged about recent enforcement actions by the SEC alleging violations of the securities laws due to underlying violations of the BSA by broker dealers.  This post briefly notes the latest chapter in what seems to be a growing book regarding the convergence of AML/BSA and securities law.

In a complaint, later amended, filed in the Middle District of Tennessee against BancorpSouth Inc., investor plaintiffs alleged that the bank and its CEO, CFO and COO made misleading statements and omissions in SEC filings regarding (1) the bank’s compliance with BSA/AML regulations and the bank’s fair lending practices, and (2) the closing of two pending mergers/acquisitions. Plaintiffs allege that defendants knew at the relevant time that the bank was not in compliance with the AML/BSA regulations, due to a pending “target review” by the FDIC – which later resulted in a consent order between the FDIC and the bank regarding its AML obligations – but nonetheless stated that (1) the bank was in compliance with all banking laws and regulations; (2) they expected the two planned mergers to close in the second quarter of 2014; and (3) they expected to receive regulatory approval for those mergers. The plaintiffs allege that defendants thereby violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 by making statements which misrepresented or omitted material facts.  According to the plaintiffs, when the AML/BSA problems eventually came to light, these problems allegedly delayed the anticipated mergers, and the bank’s stock value fell significantly, which thereby harmed investors.

As noted, the plaintiffs sued not only the bank itself, but also members of senior management. This approach is consistent with the recent focus on individual liability in AML/BSA matters.  Specifically, the plaintiffs alleged that the individual executive defendants:

. . . . were ultimately responsible for ensuring that the Bank maintained an effective BSA/AML compliance program and that the Company’s program complied with the “4 Pillars” of BSA/AML compliance. In fact, federal regulations specifically require that the Company’s BSA/AML compliance program must be in writing, approved by the Board of Directors . . . , and noted in the board minutes.  Defendants were also responsible for creating a “culture of compliance” to ensure Company-wide adherence to the Bank’s BSA/AML policies, procedures and processes, but failed to do so, instead prioritizing . . . cost-cutting measures.

On Monday, the district court granted, for the second time (after having been initially reversed by the Court of Appeals for the Sixth Circuit), class certification to the plaintiffs against the bank.  The class certification decision involved a review the requirements imposed by Rule 23(a) and Rule 23(b) of the Federal Rules of Civil Procedure and  will not be analyzed here. The point for the purposes of this blog is that it has become clear that, in regards to AML/BSA compliance, publically-traded financial institutions are compelled to wage a multi-front war.  Regardless of the actual merits of the complaint against BanccorpSouth, its mere existence reflects that financial institutions must concern themselves not only with FinCEN, the Department of Justice, and the relevant examiner, but also with putative investor plaintiffs and the SEC – thereby increasing the stakes regarding decisions over the disclosure in SEC filings of possible violations of AML/BSA requirements.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.

On May 23, the federal court of appeals for the District of Columbia Circuit rejected an appeal by the majority shareholders in Banca Privada d’Andorra S.A. (“BPA”) regarding claims that FinCEN violated the Administrative Procedure Act when issuing a March 2015 Notice of Finding that the Andorran bank was a financial institution “of primary money laundering concern” and a Notice of Proposed Rulemaking to impose a special measure pursuant to Section 311 of the USA PATRIOT Act, effectively cutting off the bank’s access to the U.S. financial system.

Specifically, FinCEN had imposed against BPA the fifth and most severe special measure under Section 311, which prohibits a foreign financial institution from opening or maintaining in the United States through a domestic financial institution a correspondent account or payable-through account. See 31 U.S.C. § 5318A(b)(5).  We previously have blogged about FinCEN’s ability to impose the fifth special measure against foreign financial institutions, which the D.C. Circuit court aptly described in the BPA matter as a possible “death sentence” for smaller foreign banks which rely on access to correspondent accounts in the United States for U.S. dollar clearing.

The appellants had sought two principal claims for relief: (1) an order requiring FinCEN to withdraw the Notices; and (2) a declaration that the Notices were unlawfully issued. The D.C. Circuit affirmed the judgment of the district court dismissing the appellants’ first claim for relief on mootness grounds because FinCEN, once “satisfied that the Bank no longer posed a money laundering concern,” withdrew both Notices after the Andorran government seized BPA and transferred its assets to a bridge bank. However, the appellate court deviated from the analysis of the district court with respect to the second claim for relief by finding that this claim should be dismissed not for mootness, but for lack of standing because the appellants had failed to show that a judicial order would redress effectively their alleged injuries.

The appellants argued that a decision holding that the two Notices were unlawful would redress their injuries because “there is a substantial likelihood that a decision finding that FinCEN improperly labeled [the bank] as of ‘primary money laundering concern’ would materially impact the position of Andorran authorities as to the proper course to be followed with respect to the sale of [the bank’s] assets, what should be done with the corporate structure and any assets that remain, and how the majority shareholders, as [the bank’s] owners, should now be treated in the process.” The D.C. Circuit disagreed, reasoning that even if the appellants had shown injury and causation to support standing, the appellants nonetheless “offered no evidence that the Andorran Government would reverse course as a result of the withdrawal of FinCEN’s Notices” and so “have not shown that the sale actually could be undone even if the Andorran Government were so inclined.”

This case involves unusual facts and procedure and potentially represents a relatively unique holding. Having said that, the opinion more generally reflects how the government can put the “rabbit in the hat” in regards to standing to sue, or lack thereof:  by issuing a “death sentence” under Section 311, FinCEN ultimately deprived the former bank’s majority shareholders of standing to sue over almost certain and severe injury caused by FinCEN – specifically because the death sentence was implemented with such relentless efficiency.  Thus, harm and causation was so clear that, in effect, redress was impossible.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.

We were pleased to contribute an article to the May 2017 issue of Business Crimes Bulletin titled “The Growing Convergence of Cyber-Related Crime and Suspicious Activity Reporting.” Regulators and law enforcement are taking proactive steps to further leverage anti-money laundering monitoring and reporting tools in their battle with cyber attacks and cyber crimes. In-house legal and compliance teams need to be fully versed in the latest Financial Crimes Enforcement Network (FinCEN) and bank regulatory guidance on cyber-related crimes and have the right professionals available to assist them with these matters.

Cyber-related crimes increasingly are making headlines across the globe as cyber attacks and other cyber incidents grow in intensity, volume and sophistication against government, political and business targets. The motives of attackers are as varied as their methods, but there is clearly an increasing number of attacks and other illegal activity motivated by financial gain against businesses, including financial institutions. Recent regulatory developments reveal that that illegal cyber activity has become more relevant to the fight against money laundering and terrorist financing as well.

Click here to read the full article.

Reprinted with permission from the May 2017 issue of Business Crimes Bulletin.
© 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

 

 

A Guest Blog by Greg Baer, President of The Clearing House

Today we are very pleased to welcome guest blogger Greg Baer, who will address a series of significant issues posed by a detailed paper published by The Clearing House, a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.  The paper, titled A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement (The New Paradigm), analyzes the effectiveness of the current AML and Combatting the Financing of Terrorism (CFT) regime, identifies problems with that regime, and proposes a series of reforms to remedy them.

Gregory-Baer_7286A-PrintMr. Baer is the President of The Clearinghouse Association L.L.C. and the Executive Vice President and General Counsel of The Clearing House Payments Company L.L.C. The Clearing House Association represents the interests of The Clearing House’s commercial bank ownership on a diverse range of regulatory and legislative matters. Its affiliate, The Clearing House Payments Company, is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume. Prior to joining The Clearing House, Mr. Baer was Managing Director and Head of Regulatory Policy at JPMorgan Chase. He previously served as Deputy General Counsel for Corporate Law at Bank of America, and as a partner at Wilmer, Cutler, Pickering, Hale & Dorr. He also served as Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury, after serving as Deputy Assistant Secretary. Finally, Mr. Baer was managing senior counsel at the Board of Governors of the Federal Reserve System.

New ParadigmThe New Paradigm is the product of two closed-door symposia that convened approximately 60 leading experts in the field of AML/CFT. The group included senior former and current officials from law enforcement, national security, bank regulation and domestic policy; leaders of prominent think tanks in the areas of economic policy, development, and national security; consultants and lawyers practicing in the field; FinTech CEOs; and the heads of AML/CFT at multiple major financial institutions. This blog post takes the form of a Q & A session, in which Mr. Baer responds to questions posed by Money Laundering Watch and explains the main positions set forth in The New Paradigm, and also replies to some potential counter-arguments. We hope you enjoy this discussion of these important issues. Continue Reading The New Paradigm: Proposed Reforms of the AML/CFT Regime by The Clearing House

“Sometimes, the third time really is the charm” wrote the District Court for the District of Columbia on April 14, 2017. In its opinion, the court upheld FinCEN’s imposition of the Patriot Act’s fifth special measure against FBME Bank Ltd., a Tanzanian chartered bank operating primarily out of Cyprus.  The court previously had twice blocked FinCEN’s attempt to prevent FBME Bank from conducting banking business in the United States.  However, the district court granted FinCEN’s motion for summary judgment and lifted the stay blocking FinCEN’s final rule.  Last week, the D.C. Circuit refused to reinstate the full stay of judgment pending appeal noting simply that FBME Bank had “not satisfied the stringent requirements for a stay pending appeal,” without addressing any of the specific merits questions that remained before it. Thus, for the time being, the district court’s judgment upholding FinCEN’s rule finding that FBME Bank was “of primary money laundering concern” remains in place.  FBME Bank may no longer utilize correspondent banks in the United States.

FinCEN SealThe potentially broader implications for other banks and future actions are as follows: under the logic of the judgment which the Court of Appeals just declined to stay, FinCEN does not need to look to comparative or other objective benchmarks involving other similarly-situated banks to support a claim in an enforcement action that transactions occurring at the bank in question involved an unacceptably high number of SAR filings, use of shell companies, or other indicia of suspicious activity.  Rather, findings based on selected, absolute data may suffice. Continue Reading Bank Loses Stay of Court Judgment Upholding Broad FinCEN Discretion

Banks stand to advance the fight against human trafficking and modern slavery by reporting suspicious transactions and other financial activity that raise red flags, according to a report on March 15, 2017. Published by the Royal United Services Institute (RUSI), a renowned British think tank, the report notes that banks and other financial service providers are increasingly applying their transaction monitoring and data analyses to hold those who exploit people for sex and labor accountable.

Today, nearly 46 million people are living as slaves or indentured servants, according to the 2016 Global Slavery Index by rights group Walk Free Foundation. As the trafficking of people is heavily dependent upon the movement of money, the misuse of banks and intermediaries are a key component of keeping the industry afloat. In particular, these institutions not only process payments and serve as the final stop for illicit proceeds, but also act as a conduit for financing the trafficking supply chain itself. For example, money services businesses are exploited to pay transporters, prepaid cards are used to move funds across borders, and individual bank accounts are opened to funnel profits.

Some financial institutions, aware of their misuse, are teaming with regulators and law enforcement alike to seek out ways to stem the tide. In fact, some institutions have looked beyond their standard controls to implement techniques specifically tailored to detect human trafficking. The U.S. Department of Homeland Security’s Project STAMP – created to promote the enforcement of the BSA and the money laundering statutes – aims to shut down human trafficking organizations by identifying and seizing assets and proceeds derived or used in support thereof. Similarly, FinCEN has published guidance to financial institutions that, inter alia, describes a number of unique red flags, such as atypical remittance patterns and frequent payments to online escort services for “advertising.”

As RUSI’s report makes clear, preexisting AML/CFT controls present a potentially highly effective means of identifying and providing evidence to hold accountable those who provide and solicit human trafficking.  Given the industry’s heavy dependence on financial institutions, together with these institutions’ preexisting AML/CFT programs and vast amounts of financial data on hand, banks and intermediaries alike are in a unique position to make a meaningful impact.

Employers increasingly face the difficult scenario of employees who misappropriate company data in the pursuit of whistleblower claims alleging misconduct by the employer. Such cases can present a complex mix of regulatory, cybersecurity, and employment issues. These issues were front and center in a recent whistleblower case pitting a bank against its former internal auditor, who engaged in computer-facilitated misappropriation of the bank’s confidential information allegedly to support whistleblower conduct.Whistle

The U.S. District Court for the Southern District of California recently declined to summarily adjudicate whether the employee’s confidentiality agreement precluded any whistleblower affirmative defense based on the employee’s alleged violation of computer fraud, contract, and tort laws. The whistleblower laws in question included the Bank Secrecy Act, Sarbanes-Oxley, Dodd-Frank, and the California Labor Code.

In Erhart v. Bofi Holding, plaintiff Charles Matthew Erhart filed a whistleblower complaint against his employer, Bank of the Internet (BofI), alleging BofI retaliated against him for reporting unlawful conduct to the government. BofI, in turn, filed a complaint, alleging that Erhart breached his employee confidentiality agreement by misappropriating confidential data relating to his employer and its clients and disseminating that data to the government, family members, and the national press.

Erhart illustrates the complex and practical problems faced by employers dealing with employees who engage in conduct that would otherwise constitute computer fraud, intellectual property theft, breaches of employment-related agreements and policies, and related tort claims under the mantle of “whistleblower.” A key issue in the case was whether Erhart would be entitled to pursue his retaliation claims before a jury or would be precluded from doing so as a matter of law given his computer-facilitated theft of confidential information. Continue Reading Bank Whistleblower Suits Highlight Limits of Employee Confidentiality Agreements