Financial Crimes Enforcement Network (FinCEN)

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

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

It is a potential crime to conduct a business that exchanges virtual currency and fail to register with the Financial Crimes Enforcement Network (“FinCEN“), even if the State in which one operates does not impose a similar licensing requirement. A federal district court in Louisiana has reaffirmed this principle in United States v. Lord, in which the defendants unsuccessfully sought to withdraw their pleas of guilty to offenses based on a failure to register with FinCEN.

Law and Justice

The defendants are father and son. According to the court opinion, in 2013, they began to operate a bitcoin business through a website called localbitcoins.com, which advertised the services of other bitcoin exchangers. The defendants’ clients provided cash, credit card payments and wire transfers to the defendants to purchase bitcoins from a third-party online bitcoin broker on their client’s behalf, in exchange for commissions charged by the defendants. In the Spring of 2014, the third-party bitcoin broker warned the defendants that they were required to register with FinCEN because they were acting as virtual currency exchangers. Although the defendants allegedly misrepresented to the third-party online broker that they already had registered with FinCEN, the defendants did not actually register until November 2014. By that time, however, they already had exchanged more than $2.5 million worth of virtual currency. This registration delay was the basis of the charges relating to the defendants’ virtual currency business. Continue Reading Failure to Register with FINCEN Sustains Guilty Pleas by Virtual Currency Exchangers

This week, we have the opportunity to lead a discussion with real estate industry professionals about AML and CFT trends at the Real Estate Services Providers Council, Inc. (RESPRO®) Annual Conference in Las Vegas. We have written several times in this blog about the real estate industry, including the 2017 extension of the GTOs for title insurance companies, other recent FinCEN activities, and the FATF’s conclusions regarding real estate in their 2016 Mutual Evaluation Report.

We are very pleased that Anne Marie Minogue of Navigant will be joining us on the panel. The real estate industry operates differently in different states and efforts to enhance AML and CFT supervision and enforcement will need to reflect this complexity. RESPRO members include a broad range of industry participants that will be affected by further actions by FinCEN so we are looking forward to the discussion.Beautiful Swimming Pool at an Estate Home

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

 

"Group of pedestrians walking on a cobbled street, sharing the frame with their bag-carrying shadows"

Earlier this week, we blogged about how the United States recently declared the Philippines to be a “major money laundering country.”  On the same day of our post, March 7, the European Parliament (EP) issued a Report which describes the United States as a growing haven for tax evasion and money laundering.  Specifically, the Report concludes that the United States “is seen as an emerging leading tax and secrecy haven for rich foreigners. By resisting new global disclosure standards, it provides an array of secrecy and tax-free facilities for non-residents at federal and state levels, notably in Nevada, Delaware, Wyoming, and South Dakota.” Continue Reading European Parliament: The U.S. is a Haven for Tax Cheats and Money Launderers