Financial Action Task Force (FATF)

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.

Denmark Suffers Greatest Increase in Annual Risk Rating

The Basel Institute on Governance (“Basel Institute”) recently announced that the associated Basel Centre for Asset Recovery has released its seventh annual Basel Anti-Money Laundering Index (“AML Index”) for 2018, described by the Basel Institute as “an independent, research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing.”  The risk scores for each country in the AML Index “are based on 14 publicly available indicators of anti-money laundering and countering the financing of terrorism (AML/CFT) frameworks, corruption risk, financial transparency and standards, and public transparency and accountability.” The Basel Institute, which is associated with the University of Basel, describes itself as “an independent not-for-profit competence centre working around the world with the public and private sectors to counter corruption and other financial crimes and to improve the quality of governance.”

The public AML Index, which pertains to 129 countries, is here; an “expert edition” containing a full list of scores and sub-indicators for all 203 countries — available for cost to private persons or industry, or for free to academic, public, supervisory and non-profit organizations — is here.  A summary of the public AML Index is here.

As we will discuss, the AML Index bemoans a lack of progress in the global fight against corruption, and in particular cites lack of enforcement of existing laws and declining press freedom across the globe. The AML Index also underscores how countries with seeming low risk in fact have lurking problems. Continue Reading 2018 Basel AML Index Measures Risk and Cites Lack of Effective Enforcement and Declining Global Press Freedom

According to the Financial Flow from Human Trafficking report recently published by the Financial Action Task Force (“FATF”) and the Asia/Pacific Group on Money Laundering, human trafficking is estimated to generate $150.2 billion per year. Human trafficking remains one of the fastest growing and most profitable forms of international crime affecting nearly every country in the world. The FATF report examines the financial flow associated with human trafficking for the purpose of forced labor, sexual exploitation, and the removal of organs, and the common and unique ways that the proceeds from these types of exploitation are laundered.

The FATF report identifies issues related to designing better efforts to detect money laundering related to human trafficking. First, the more exposure the offender and/or the victim have to the formal financial sector or government, the greater the opportunities for identifying signs of money laundering. Second, no single indicator alone is likely to confirm money laundering from human trafficking. Third, wider contextual information can prove useful in identifying signs of trafficking. Fourth, human trafficking may be easiest to identify at the victim level or at the lowest level of a criminal organization; at higher levels of criminal organizations, the indicators may be more opaque and suggest a variety of crimes. Continue Reading Recent FATF Report Provides New Guidance for Identifying Money Laundering Related to Human Trafficking

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

On April 19, 2018, the European Parliament (“EP”) adopted the European Commission’s (the “Commission”) proposal for a Fifth Anti-Money Laundering Directive (“AMLD5”) to prevent terrorist financing and money laundering through the European Union’s (“EU”) financial system. The Commission proposed this directive on July 26, 2016 to build upon and amend the Fourth Anti-Money Laundering Directive (“AMLD4”) – before all 28 member states even implemented AMLD4.

Under AMLD4, the EU sought to combat money laundering and terrorist financing by imposing registration and customer due diligence requirements on “obliged entities,” which it defined as banks and other financial and credit institutions. It also called for the creation of central registers comprised of information about who owns companies operating in the EU and directed that these registers be accessible to national authorities and obliged entities.  However, the European Central Bank warned that AMLD4 failed to effectively address recent trends in money laundering and terrorist financing, which have spanned multiple jurisdictions and fallen both within and outside of the traditional financial sector.  As a result, and in response to recent terrorist attacks in Europe and to the Panama Papers, the EP has adopted AMLD5 to more effectively keep pace with these recent trends.

Although AMLD5 contains several important provisions, including a proposed public registry of beneficial owners of legal entities, we focus here on how AMLD5 addresses, for the first time, the potential money laundering and terrorist financing risks posed by virtual currencies. Continue Reading The Fifth Anti-Money Laundering Directive: Extending the Scope of the European Union’s Regulatory Authority to Virtual Currency Transactions

On February 23, the Financial Action Task Force (“FATF”) signaled that the inter-governmental body “will step up its efforts in monitoring the use of cryptocurrencies in money laundering.”  While the 37-member international body remains without an official policy for implementation, the pronouncement nonetheless demonstrates the heightened Anti-Money Laundering (“AML”) concern from regulators across the globe concerning illicit uses of cryptocurrency.

Notably, the FATF’s pronouncement comes on the heels of recent enforcement-related measures taken in various countries.  As we previously have blogged, the European Parliament and its executive arm, the European Council, recently agreed to an amendment to the Fourth Anti-Money Laundering Directive to include measures targeting exchange platforms for virtual currencies, such as Bitcoin, as well as prepaid cards.  More recently, France’s top financial markets regulator issued a statement that online trading platforms for cryptocurrency derivatives fall under the European Union’s central legislation regulating financial markets.  In the U.K., the Parliament’s Treasury Committee announced on February 22 that it has launched a probe to examine both the impact of cryptocurrencies on financial institutions and how best to police the new technology.  Meanwhile, South Korea’s ban on anonymous trading of cryptocurrencies—part of the country’s new policies which represent the first AML guidelines for cryptocurrencies among the nations of the FATF—took effect on January 30. Continue Reading Global Regulators to Maintain AML Pressure on the Cryptocurrency Industry

I am honored to be part of a panel on March 1, 2018 at the Florida Tax Institute in Tampa, Florida regarding potential money laundering risks, reporting obligations and related ethical issues facing U.S. tax professionals with foreign clients bringing money and assets into the United States.  The panel, entitled Working with Inbound Investors & Businesses – Some Things You May Not Think About May Hurt You, will be moderated by Fred Murray of the University of Florida Levin College of Law and also will include attorneys Jeffrey A. Neiman, A. Brian Phillips and Shawn P. Wolf.

This is a key topic with real-world implications. We previously have blogged about potential AML and money laundering issues facing U.S. lawyers, who are under increasing scrutiny in light of: evolving international standards on professionals as AML gate keepers; global criticisms of the United States as a possible haven for money launderers and tax cheats; and scandals — such as the Panama Papers — involving legal professionals as the alleged facilitators of laundering and tax evasion by their clients.

Specifically, both the Financial Action Task Force (“FATF”) and the European Parliament have called for U.S. lawyers to meet higher standards in performing due diligence to detect clients’ potential money laundering, and found U.S. lawyers to be “non-compliant” with entity transparency standards. Further, the U.S. Congress has tried to enact legislation over the years to address the issue of beneficial ownership and the role of lawyer (see our discussion of the Corporate Transparency Act here). More recently, and as we have blogged, the ABA’s Task Force on the Gatekeeper and the Profession has prepared and discussed a new ABA Model Rule of Professional Conduct that would impose basic “client due diligence” requirement on lawyers.  The panel should be interesting.

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.

Alleged Illicit Activity Included Transactions Promoting North Korea’s Missile Program and an Institutional Commitment to Laundering Money

On February 13, 2018, FinCEN announced that it had proposed a special measure naming ABLV Bank, AS (“ABLV”) an institution of primary money laundering concern pursuant to Section 311 of the USA Patriot Act.  We previously have blogged about FinCEN’s powers pursuant to Section 311 of the U.S. Patriot Act to designate institution “of primary money laundering concern” and impose a special measure which effectively cuts off the bank’s access to the U.S. financial system by requiring U.S. institutions as well as foreign institutions that create an indirect link between the foreign institution and the U.S. to sever ties with the designated bank.

Finding that ABLV was a foreign financial institution of primary money laundering concern, FinCEN proposed a prohibition under the fifth special measure restricting domestic financial institutions from opening or maintaining correspondent accounts with or on behalf of ABLV. FinCEN stated that ABLV executives, shareholders, and employees have institutionalized money laundering as a pillar of the bank’s business practices by orchestrating money laundering schemes, soliciting high-risk shell company activity that enables the bank and its customers to launder funds, maintaining inadequate controls over high-risk shell company accounts, and seeking to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.  Indeed, included in the illicit financial activity were transactions for parties connected to the U.S. and U.N.-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles.

ABLV shot back last Thursday stating that the allegations were based “on assumptions and information that is currently unavailable to the bank,” but that they were “continuing check into these allegations” and were open to cooperation with U.S. authorities.  As a result of FinCEN’s finding, Monday morning, the European Central Bank (“ECB”) halted all payments by ABLV pending further investigation into the allegations set forth in FinCEN’s Notice of Proposed Rulemaking (“NPRM”). Continue Reading FinCEN Imposes Section 311 Fifth Special Measure on Latvian Bank ABLV