OCC Presages Regulators’ Joint Statement on Banks Using Technological Innovation to Comply with BSA/AML Obligations

Second Post in a Two-Part Series

In our first post in this series, we described how the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Banking Committee”) met in open session late last week to conduct a hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” The Banking Committee heard the testimony of, and questioned, representatives from the FinCEN, the OCC, and the FBI. The partial backdrop of this hearing is that Congress is considering a draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), which proposes the most substantial overhaul to the Bank Secrecy Act (“BSA”) since the PATRIOT Act.   As we have noted, three individuals testified at this hearing:

  • Kenneth A. Blanco, Director of FinCEN (written remarks here);
  • Steven D’Antuono, Section Chief of the FBI’s Financial Crimes Section (written remarks here); and
  • Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs of the OCC (written remarks here).

In our first post, we discussed some of the tensions which emerged during the hearing between the OCC, which emphasized attempting to ease BSA regulatory burdens, particularly for small- to medium-sized community banks, and FinCEN and the FBI, which stressed the value of BSA filings to law enforcement. Today, we discuss the some of the less contentious – although still critical – issues addressed during the hearing, which covered much of the current AML landscape:

  • exploration by financial institutions of technological innovation, including artificial intelligence, in order to comply more efficiently with their BSA/AML obligations;
  • identification of the beneficial owners of legal entities; and
  • the role of real estate in money laundering schemes.

Continue Reading More on AML Reform: Artificial Intelligence, Beneficial Ownership and Real Estate

Former Bank Employee Testimony Highlights Limited Whistleblower Protections in Europe

In September, the Danish law firm Bruun & Hjejle’s report (“B&H Report”) released its internal investigation report into alleged money laundering conducted through the Estonian branch of Danske Bank (“Danske”). The enormity of the scandal outlined in the report cannot be understated: from 2007 through 2015, at least 200 billion Euros were laundered through Danske. The release of the B&H Report has triggered the predictable cascade of resignations, investigations, hearings, recriminations and stock plunges that have begun playing out over the past eight weeks. These events, in turn, are beginning to illuminate the two principal sides of the scandal: the institutional failures at a large, sophisticated, international bank that allegedly allowed wrongdoing on this scale to go unchecked for eight years; and the efforts countries like Russia will make – and individuals and entities they will exploit – to illegally channel substantial wealth to the West.

As we previously blogged, the B&H Report found that Danske processed 200 billion Euros in suspicious transactions made by thousands of non-resident customers, principally from Russia and former Soviet states. According to the B&H Report, the success of the laundering was due to the near-total failure of the Estonian Danske branch to implement adequate anti-money laundering (“AML”) procedures and the parent Danske Bank Group’s failure to recognize and act upon numerous red flags that should have alerted it to the Estonian branch’s issues. However, while finding that the Estonian branch violated numerous legal obligations in failing to have and implement adequate AML processes and procedures, the B&H Report stopped short of accusing Danske’s Board of Directors, Chairman, Audit Committee, Chief Executive Officer or any executive of violating their legal obligations in regard to these failures.

Recent testimony by former Danske employee turned whistleblower painted a less forgiving picture. Continue Reading Danske Bank Money Laundering Scandal: The Tip of the Iceberg(s)

Are Proposed AML Regulations for Real Estate Closings and Settlements Soon to Follow?

The Financial Crimes Enforcement Network (“FINCEN”) announced on November 15 that it has renewed and revised its Geographic Targeting Orders (“GTOs”) that require U.S. title insurance companies to identify the natural persons behind legal entities used in purchases of residential real estate performed without a bank loan or similar form of external financing.  The new GTOs extend through May 15, 2019.

Notably, the list of covered geographic areas has expanded, and the monetary threshold has been reduced significantly to $300,000, so that it now no longer applies only to so-called “high end” real estate purchases.  Further, purchases involving virtual currency are now included within the reach of the GTO — an expansion which is consistent with prior expansions which extended the GTOs’ reach to transactions involving wires and personal and business checks.  Currently, the GTOs broadly apply to any purchases made using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency.

A “legal entity” subject to the GTO reporting regime is defined as “a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state, or of the United States, or a foreign jurisdiction.”  The “beneficial owner” who must be identified is defined as “each individual who, directly or indirectly, owns 25% or more of the equity interests of the Legal Entity purchasing real property in the Covered Transaction.”  This definition tracks the Beneficial Ownership rule issued by FinCEN in 2016 for customer due diligence by covered financial institutions for new legal entity accounts by focusing on 25% or more ownership percentage, but it differs from the Beneficial Ownership rule by not including a “control” prong in its definition of a beneficial owner.

The press release issued by FinCEN for the new GTOs summarizes things well and is set forth here:

The purchase amount threshold, which previously varied by city, is now set at $300,000 for each covered metropolitan area. FinCEN is also requiring that covered purchases using virtual currencies be reported. Previous GTOs provided valuable data on the purchase of residential real estate by persons implicated, or allegedly involved, in various illicit enterprises including foreign corruption, organized crime, fraud, narcotics trafficking, and other violations. Reissuing the GTOs will further assist in tracking illicit funds and other criminal or illicit activity, as well as inform FinCEN’s future regulatory efforts in this sector.

Today’s GTOs cover certain counties within the following major U.S. metropolitan areas: Boston; Chicago; Dallas-Fort Worth; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; and Seattle.

FinCEN appreciates the continued assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.

The reporting is done through a special Currency Transaction Report, or CTR; the template for GTO reporting is here. Covered entities must retain relevant records for five years from the last effective day of the Orders (i.e., May 15, 2024) and must make them available to FinCEN and upon appropriate requests by law enforcement. FinCEN continues to maintain FAQs regarding the GTOs.

The latest GTOs represent a sustained scrutiny of the real estate market by FinCEN which began almost three years ago, and which has been expanded through repeated six-month increments.  The initial GTOs were issued in January 2016 to only certain title insurance companies for certain purchases only in the Borough of Manhattan and Miami-Dade County.  Clearly, FinCEN finds the data gleaned from GTOs to be very useful; FinCEN previously has claimed that it “about 30 percent of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report.”

These sustained and expanding GTOs are also clearly part of the ongoing scrutiny by regulators across the globe regarding the issue of beneficial ownership and its role in potential money laundering schemes, as well as a similar global focus on money laundering through real estate and the general role of third party professionals who may facilitate money laundering.  As we have blogged, both FinCEN and the Financial Action Task Force (“FATF”) have focused for years on the AML risks inherent in real estate. For example, the December 2016 FATF Mutual Evaluation Report on the United States’ Measures to Combat Money Laundering and Terrorist Financing repeatedly highlighted the need for U.S. regulators and the real estate industry to do more to address money laundering and terrorist financing risks.  The FATF report’s executive summary asserted that “Residential Mortgage Lenders and Originators [RMLOs] . . . do not seem to have a good understanding of [money laundering] vulnerabilities in their sector or the importance of their role in addressing them.” The body of the FATF report elaborated that, “although banks have reasonably good AML/CFT programs overall, the same cannot be said of RMLOs, whose programs are still in the early implementation stage . . . .”

Future AML Regulation for Real Estate Closings and Settlements?

FinCEN’s press release states that the new GTOs “will inform FinCEN’s future regulatory efforts in this sector.” Presumably, FinCEN is using the data collected over the last three years to prepare to propose regulation which will formalize FinCEN’s scrutiny of the residential real estate market.  Indeed, the website for the OMB’s Office of Information and Regulatory Affairs currently states that, by the end of 2018, “FinCEN will issue an [Advance Notice of Proposed Rule Making] soliciting information regarding various businesses and professions, including real estate brokers that could be covered by the BSA as persons involved in real estate closings and settlements[,]” with the comment period to extend through to December 2019.  Over 15 years ago, in April 2003, FinCEN issued a similar advanced notice of proposed rule making regarding AML program requirements for persons involved in real estate closings and settlements — but of course never issued a final rule.  Now, given the data from years of GTOs, coupled with the heightened global scrutiny of the real estate industry, such regulations finally may become a reality.

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.

 

FinCEN Cites Low Risk of Money Laundering and High Regulatory Burden of Rule

On September 7, 2018, the Financial Crimes Enforcement Network (“FinCEN”) issued permanent exceptive relief (“Relief”) to the Beneficial Ownership rule (“BO Rule”) that further underscores the agency’s continued flexibility and risk-based approach to the BO Rule.

Very generally, the BO Rule — effective as of May 11, 2018, and about which we repeatedly have blogged (see here, here and here) — requires covered financial institutions to identify and verify the identities of the beneficial owners of legal entity customers at account opening. FinCEN previously stated in April 3, 2018 FAQs regarding the BO Rule that a “new account” is established – thereby triggering the BO Rule – “each time a loan is renewed or a certificate of deposit is rolled over.” As a result, even if covered financial institutions already have identified and verified beneficial ownership information for a customer at the initial account opening, the institutions still must identify and verify that beneficial ownership information again – and for the same customer – if the customer’s account has been renewed, modified, or extended.

However, the Relief now excepts application of the BO Rule when legal entity customers open “new accounts” through: (1) a rollover of a certificate of deposit (CD); (2) a renewal, modification, or extension of a loan, commercial line of credit, or credit card account that does not require underwriting review and approval; or (3) a renewal of a safe deposit box rental. The Relief does not apply to the initial opening of any of these accounts.

The Relief echoes the exceptive relief from the BO Rule granted by FinCEN on May 11, 2018 to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund. Once again, although the Relief is narrow, FinCEN’s explanation for why the excepted accounts present a low risk for money laundering is potentially instructive in other contexts. Continue Reading FinCEN Issues Exceptive Relief from Beneficial Ownership Rule to Certain Account Renewals

The Financial Action Task Force (“FATF”) recently released a special report on professional money launderers (“PMLs”) who provide money laundering expertise and services to their crime-committing clients. The Report describes the functions and characteristics of a PML and the services they provide. Although the FATF has issued many reports on potential vulnerabilities in anti-money laundering efforts, this Report focuses on the affirmative threats posed by money laundering regimes.

The Report is primarily descriptive, and contains examples of enforcement actions involving PMLs across the globe. A non-public version of the Report, available to Members of the FATF and the FATF Global Network, sets forth practical recommendations for the detection, investigation, prosecution, and prevention of PML-related laundering, including “appropriate regulation,” law enforcement coordination, and international co-operation and information exchange. Presumably, the Report will provide additional fuel to efforts across the world to close perceived regulatory gaps involving the collection of beneficial ownership information, and the potential role of professionals, including lawyers, in assisting others to launder illicit funds. Continue Reading FATF Report: Professional Money Laundering and Related Threats

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

Incorporation Solidifies Customer Due Diligence as “Fifth Pillar” to BSA/AML Compliance Program

May 11, 2018 was the much anticipated effective date for the Customer Due Diligence (“CDD”) Requirements for Financial Institutions Rule (the “Beneficial Ownership Rule”) issued by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). On the same day, the Federal Financial Institutions Examination Council (“FFIEC”) released two updates to the Bank Secretary Act/Anti-Money Laundering (“BSA/AML”) examination manual that incorporate and clarify the CDD Requirements and Beneficial Ownership Rule.  The FFIEC is an interagency body that is “empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions.”  The FFIEC examination manual drives the principles and obligations of covered financial instructions in creating BSA/AML compliance programs.  The new updates further clarify the FinCEN rules and solidify CDD as the fifth pillar of the BSA/AML compliance regime.

As we previously blogged here, when FinCEN announced its final rule on CDD requirements it established two important requirements for covered financial institutions.  First, the covered financial institutions were required to establish procedures to identify and verify the beneficial owners of all legal entity customers. Second, the rule required covered financial institutions to adopt ongoing risk-based CDD procedures as part of their AML compliance programs – including developing and updating customer risk profiles and conducting ongoing AML monitoring.  We previously provided practical guidance to aid covered financial institutions in preparing for implementation of these two requirements.  Now we will highlight the key considerations of FFIEC examination manual addressing these topics.  Of particular interest, the new FFIEC examination manual provisions state in part that regulatory examiners are not supposed to engage in second-guessing specific decisions; rather, during an examination “the bank should not be criticized for individual customer decisions unless it impacts the effectiveness of the overall CDD program, or is accompanied to evidence of bad faith or other aggravating factors.” Continue Reading FFIEC Manual Incorporates Beneficial Ownership Rule and CDD Requirements

Relief is Narrow, but FinCEN’s Explanation of Low Money Laundering Risk Posed by Lending Products is Instructive

On May 11, the Financial Crimes Enforcement Network (“FinCEN”) issued a ruling to provide exceptive relief from the application of the new Beneficial Ownership rule (the “BO Rule,” about which we repeatedly have blogged: see here, here and here) to premium finance lending products that allow for cash refunds.

Very generally, the BO Rule — effective as of May 11, 2018 — requires covered financial institutions to identify and verify the identity of the beneficial owner of legal entity customers at account opening. One exemption provided by the BO Rule from its requirements is when a legal entity customer opens a new account for the purpose of financing insurance premiums and the payments are remitted directly by the financial institution to the insurance provider or broker.  However, this exemption does not apply when there is a possibility of cash refunds.

In its May 11th ruling, FinCEN granted exceptive relief from the BO Rule to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund.  Although this exception is narrow when compared to the many other financial institutions covered by the broad BO Rule, FinCEN’s explanation for why the excepted entities present a low risk for money laundering is potentially instructive in other contexts, such as risk assessments undertaken by financial institutions for the purposes of their anti-money laundering (“AML”) compliance programs. Continue Reading FinCEN Provides Exceptive Relief from New Beneficial Ownership Rule