On June 5, the SEC filed suit against Salt Lake City-based Alpine Securities, Corp. (“Alpine”). The complaint, filed in the Southern District of New York, alleges that the broker-dealer ran afoul of AML rules by “routinely and systematically” (i) failing to file Suspicious Activity Reports (“SARs”) for stock transactions it had flagged as suspicious or, (ii) on thousands of occasions between 2011 and 2015 when Alpine did file SARs, omitting key information, such as the criminal or regulatory history of customers and disclosures as to whether those customers represented a foreign institution.

Under the Bank Secrecy Act (“BSA”), Alpine and other broker-dealers must report suspicious transactions in the form of SARs filed with FinCEN. These filings pertain to reports of transactions or patterns of transactions involving at least $5,000 wherein a covered entity “knows, suspects, or has reason to suspect” that the transaction involves funds representing ill-gotten gains; is intended to hide funds obtained from illegal activities; is designed to evade the BSA; or has no business or apparent lawful purpose and the filing institution knows of no reasonable explanation for the transaction. SARs have a narrative section for the filer to describe the facts of the suspicious incident, which is regarded by law enforcement as a critical section.

The SEC has alleged that Alpine violated Section 17(a) of the Securities Exchange Act of 1934, and Rule 17a-8 promulgated thereunder, which require broker-dealers to comply with the recordkeeping, retention and report obligations of the BSA. Although Alpine had an AML/BSA compliance program (as is required for broker-dealers by both the BSA and FINRA Rule 3310), the complaint alleges that the program was not implemented properly in practice and mischaracterized what Alpine actually did. In part, the SEC alleges that Alpine used two standard templates for SAR filings which did not allow the filer to describe any of the red flags or other material information which caused Alpine to file the SAR. Importantly, the complaint also alleges that FINRA had examined Alpine and brought these deficiencies to its attention, but Alpine thereafter failed to take meaningful steps to address them and “continued its pattern of omitting material red flag and other information from its SARs.”

Much of Alpine’s business involves clearing microcap transactions. Although the broker-dealer has a history of disciplinary action by FINRA, the instant action also reflects a trend by the SEC to use AML rules as a means to combat alleged fraud related to the sale of microcap securities. Earlier this year, New York-based Windsor Street Capital also was charged with failing to file SARs; that matter, currently before an SEC administrative law judge, remains pending. All told, the action against Alpine exemplifies the SEC’s heightened interest in ensuring broker-dealers’ adherence to AML rules and standards. It also reiterates the need for any financial institution to implement effectively in practice its AML compliance plan: the best written compliance plan can turn into the centerpiece of regulators’ allegations if it merely becomes a catalogue of what the financial institution failed to do.

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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.

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Settlement of FinCEN Action Against Former AML Chief Compliance Officer Serves as Possible Bellwether of Future Cases

This post discusses individual liability in AML/BSA enforcement, which is an area of increasing attention. Indeed, according to public statements by the government, individual liability is the focus of enhanced scrutiny across the enforcement table.

Man looking over shoulder with suspicionAlthough the raw number of enforcement actions against individuals in the AML/BSA realm (or even in the broader realm of general financial crime) has not climbed dramatically, even a few enforcement actions can have a profound effect on an industry – and that appears to be occurring in the AML realm. We begin our discussion here with a recent settlement of a high-profile enforcement action against a former AML compliance officer, and how it highlights potential individual liability.  Ironically, special scrutiny can apply to the very people specifically tasked with maximizing compliance at a corporation, and such scrutiny can end up pitting them against a company’s management and board. Continue Reading Individual Accountability in AML Cases

“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

The Supreme Court granted certiorari on April 3 to decide whether Jordan-based Arab Bank may be liable for claims including allegations that its New YorkDetail view of the United States Supreme Court branch processed transactions for known terrorists. While the central issue before the Court will be the scope of the Alien Tort Statute (“ATS”) – namely whether it permits corporate liability for violations of international law – Jesner v. Arab Bank also illustrates how alleged AML/BSA failures can lead to yet another avenue for secondary legal liability for financial institutions, as we previously have noted in other contexts. Depending on the outcome of the Court’s opinion in Jesner, such U.S. exposures may extend to foreign financial institutions even when the alleged conduct occurs primarily abroad. Continue Reading Weighing Corporate Liability under the Alien Tort Statute: What it Means for AML/CFT Controls

 

Neon sign depicting money transfer.

On January 19, 2017, the Western Union Company (“Western Union” or the “Company”) entered into a deferred prosecution agreement (“DPA”) with the Department of Justice (“DOJ”), in which Western Union admitted to willful failures to maintain an effective AML program as well as aiding and abetting of wire fraud schemes.  Western Union agreed to a $586 million monetary penalty which will resolve criminal and civil allegations brought by the DOJ and the Federal Trade Commission against the Company, as well as a related Assessment of Civil Money Penalty by FinCEN against a subsidiary of Western Union.  However, Western Union now faces additional costs and litigation for its admittedly insufficient AML program in the form of shareholder suits brought in federal court following the announcement of this sizeable settlement.  Shareholder derivative suits based on alleged AML failures are becoming increasingly common, and this recent action fits squarely into the apparent trend. Continue Reading Investor Suits Follow in the Wake of Western Union Settlement of Money Laundering and Fraud Claims

The Western Union Company (“Western Union”) entered into a deferred prosecution agreement (“DPA”) on January 19th with the Department of Justice, based on alleged willful failures to maintain an effective AML program and the aiding and abetting of wire fraud.  The DPA involved a combined $586 million monetary penalty and also involved related civil enforcement actions by the Federal Trade Commission and FinCEN.  The agreement has been well-publicized and its details will not be repeated here; very generally, the DPA rests on allegations involving conduct stretching from 2004 through 2012 and an overall failure by Western Union to detect and prevent a kaleidoscope of illicit behavior by customers, from structured transactions to an international consumer fraud scheme to potential drug distribution.  To be sure, this is a significant agreement – but it echoes the same general sort of facts and allegations which have become almost standard in large AML enforcement actions. However, the Western Union action contains at least one interesting wrinkle. Continue Reading The Western Union DPA and the Need to Investigate One’s Own

House and cashThe field of forfeiture saw significant action in 2016. The IRS offered to return forfeited funds used in structuring, but Congress still may clip its ability to forfeit such funds. Meanwhile, DOJ renewed a controversial program that incentivizes local law enforcement to aggressively pursue forfeiture. It filed a major forfeiture action which reminds law firms of their own need to vet the source of funds flowing into firm bank accounts. Finally, the U.S. Supreme Court made it clear that “clean” funds cannot be restrained pretrial when a defendant needs those funds for his criminal defense, even if the government wants to restrain the money in order to pay for forfeiture or restitution if the defendant is convicted. Continue Reading 2016 Year in Review: Forfeiture

2016 was a busy year for developments in Anti-Money Laundering (AML), the Bank Secrecy Act (BSA), the criminal money laundering statutes, forfeiture, and related issues. In part one of our year-in-review, we discuss six key topics:

  • The Panama Papers and its spotlight on the United States as a potential money laundering haven

You can read more about these topics areas in the blogs that follow. Click here to read the full article 2016 Year in Review: Money Laundering (Part One).

The New York State Department of Financial Services (NYDFS) emerged in 2016 as a leader in AML enforcement by issuing new and detailed AML regulations with the unique requirement of an individual certification of compliance.

On June 30, 2016, the NYDFS finalized a new regulation setting forth rigorous standards for monitoring and filtering programs to monitor transactions for potential AML violations and block transactions prohibited by the Office of Foreign Assets Control (OFAC). The regulation, which became effective on January 1, 2017, applies to all banks, trust companies, private bankers, savings banks, and savings and loan associations chartered under the New York Banking Law (NYBL); branches and agencies of foreign banking corporations licensed under the NYBL to conduct banking operations in New York; and check cashers and money transmitters licensed under the NYBL (collectively, the Regulated Institutions). The NYDFS regulation is instructive to all financial institutions as a benchmark for future standards potentially to be issued by other states and/or federal regulators.

Continue Reading 2016 Year in Review: NYDFS Finalizes Broad AML Regulations