Financial Crimes Enforcement Network (FinCEN)

On October 23, the Financial Crimes Enforcement Network (“FinCEN”) published a notice of proposed rulemaking (“NPRM”) entitled Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern.  Section 311 of the Patriot Act, codified at 31 U.S.C. § 5318A (“Section 311”), grants the Secretary of the Treasury authority – which has been delegated to FinCEN – to require domestic financial institutions and agencies to take certain “special measures” if FinCEN finds that reasonable grounds exist for concluding that one or more classes of transactions within or involving a jurisdiction outside of the United States is of “primary money laundering concern.” 

In this NPRM, FinCEN proposes to designate under Section 311 all convertible virtual currency (“CVC”) mixing transactions, as defined by the NPRM.  This designation would require imposing reporting and recordkeeping requirements upon covered financial institutions (“FIs”) regarding transactions occurring by, through, or to a FI when the FI “knows, suspects, or has reason to suspect” that the transaction involves CVC mixing.

The NPRM is complicated and raises complex questions.  We only summarize here, and note selected issues.  Comments are due on January 22, 2024.  FinCEN can expect many comments.

Continue Reading  FinCEN Proposes to Require Recordkeeping and Reporting for CVC Mixing Transactions

FinCEN announced on October 20 that, once again, it is extending the Geographic Targeting Order, or GTO, which requires U.S. title insurance companies to identify the natural persons behind so-called “shell companies” used in purchases of residential real estate not involving a mortgage.  FinCEN also has expanded slightly the reach of the GTOs and the FAQs.

The new GTO is here.  FinCEN’s press release is here.  FAQs issued by FinCEN on the GTOs are here.  This is a topic on which we previously have blogged extensively.

Continue Reading  FinCEN Renews and Expands GTO

On September 29, the Financial Crimes Enforcement Network (“FinCEN”) entered into a consent order with Shinhan Bank America (“SHBA”), which imposed a $15 million dollar civil penalty against SHBA for allegedly willfully failing to implement and maintain an AML program that meets the minimum requirements of the Bank Secrecy Act (“BSA”), and for allegedly willfully failing to accurately and timely report suspicious transactions to FinCEN.

In its press release, FinCEN noted that, as a result of SHBA’s inactions, “tens of millions of dollars in suspicious transactions were not reported to FinCEN in a timely manner, including transactions connected to tax evasion, public corruption, money laundering, and other financial crimes.”

Working in collaboration with FinCEN, the FDIC also separately issued a civil penalty against SHBA in the amount of $5 million dollars – which FinCEN will credit toward its own fine, leaving an amount owed of $10 million dollars – and the NYDFS also issued a stand-alone civil penalty in the amount of $10 million dollars.

As we will discuss, this enforcement action involves several typical allegations by the government, including an alleged failure to file required SARs, prior regulatory problems, and insufficient AML compliance staffing and funding.

Continue Reading  FinCEN Issues $15 Million Dollar Civil Penalty Against Shinhan Bank America for Alleged Failure to Implement and Maintain Effective AML Compliance Program

The new Director of FinCEN, Andrea Gacki, addressed several key topics on October 3, 2023 at the Association of Certified Anti-Money Laundering Specialists (“ACAMS”) conference in Las Vegas, Nevada.  Specifically, Director Gacki addressed the issues of beneficial ownership under the Corporate Transparency Act (“CTA”); the real estate industry; investment advisers; fentanyl trafficking; and whistleblowers

The Financial Crimes Enforcement Network (“FinCEN”) has issued a flurry of publications relating to the Corporate Transparency Act (“CTA”).  They pertain, in part, to a proposed extension of the filing deadline for certain reports of Beneficial Ownership Information (“BOI”); a proposed revision to the BOI reporting form; and expanded FAQs.  We discuss each in turn.

Continue Reading  CTA Round-Up:  FinCEN Proposes Extended CTA Filing Deadline, Revised Reporting Form, and Privacy Act Exemption; Expands CTA FAQs; and Requests Comments on FinCEN Identifier

The Financial Crimes Enforcement Network (“FinCEN”) has published a Small Entity Compliance Guide (the “Guide”) for beneficial ownership information (“BOI”) reporting under the Corporate Transparency Act (“CTA”), as well as updated FAQs regarding CTA compliance.

The Guide contains six chapters and an appendix. It is 56 pages long. It appears to be useful to its apparent target audience, which is small businesses confronting relatively simple issues under the CTA. The Guide is relatively clear, simply-worded and contains helpful infographics. However, what neither the Guide nor the updated FAQs does is provide any real insights into how to interpret the BOI reporting regulations. Rather, they reiterate the existing BOI regulatory requirements. Thus, anyone looking for insights into nuanced CTA issues will be disappointed.

The CTA takes effect on January 1, 2024. On that date, FinCEN needs to have implemented a working data base to accept millions of reports by newly-formed companies required to report BOI under the CTA, as well as reports by the even greater population of existing reporting companies, which must report their BOI by January 1, 2025. This is a logistically daunting task, because FinCEN estimates that over 30 million entities will need to register by the 2025 date. Perhaps one of the most interesting things about the Guidance is that it clearly asserts that the January 1, 2024 date is good, and that the CTA BOI database will be functioning by then.

That claim is debatable. FinCEN still needs to issue important and basic regulations implementing the CTA, including final rules regarding access to the data base, and proposed rules regarding how the existing Customer Due Diligence (“CDD”) Rule applicable to banks and other financial institutions might be amended – and presumably, expanded – to align with the different and often broader requirements of the CTA. Further, FinCEN’s notice and request for comment regarding FinCEN’s proposed form to collect and report BOI to FinCEN was criticized roundly. Given the backlash, FinCEN now is revising the proposed reporting form.

Similarly, on June 7, 2023 four members of the U.S. House of Representatives (the Chairpersons of the House Committee on Financial Services; the House Committee on Small Business; the House Subcommittee on  National Security, Illicit Finance, and International Financial Institutions; and the House Subcommittee on Financial Services and General Government) sent a letter directed to Janet Yellen, Secretary of the Treasury, and Himamauli Das, Former Acting Director of FinCEN, regarding the status of the implementation of the CTA. The letter, fairly or not, stresses the need for transparency by FinCEN, and implies that January 1, 2024 may not be a viable date.

The fact that FinCEN devoted its limited resources to producing a 56-page publication which repeats but does not explicate current regulatory requirements for BOI reporting is unusual, given FinCEN’s many other pressing demands – such as finishing the rest of the regulations under the CTA. However, it is possible that the Guide is a reaction to demands placed upon FinCEN by certain members of Congress, who are pushing for clarity for affected businesses.

Continue Reading  FinCEN Issues Small Entity Compliance Guide for Corporate Transparency Act

Following Russia’s invasion of Ukraine, the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a joint alert and a supplemental alert (the “Joint Alerts”) urging U.S. financial institutions (“FIs”) to be attentive to attempts by Russia to evade U.S. sanctions and export controls. The Joint Alerts also reminded FIs of their obligations to file suspicious activity reports (“SAR”s) detailing suspected export control evasion.  We blogged on the Joint Alerts here and here.

FIs complied, and on September 8, 2023, FinCEN published a Financial Trend Analysis (“FTA”) describing insight it gained from those SARs into Russian procurement activities potentially in violation of the Export Administration Regulations. FinCEN issued the FTA right before the Office of Foreign Asset Control (“OFAC”) announced on September 14, 2023 another wave of related sanctions by adding to the list of Specially Designated Nationals more than 150 foreign companies and individuals accused of aiding Russia, including by shipping American or other Western technology.

The FTA is based on 333 SARs filed between June 28, 2022 and July 12, 2023. The SARs—96% of which were filed by U.S.-based depository institutions—detailed nearly 1 billion dollars in suspicious activity

Continue Reading  FinCEN Analysis Reveals Patterns and Trends in Suspected Evasion of Russia-Related Export Controls

On September 8, 2023, the Financial Crimes Enforcement Network (“FinCEN”) released an alert regarding a notorious virtual currency scam called “pig butchering,” because, unfortunately, it resembles the “fattening a hog before slaughter.” These scams are primarily perpetrated by criminal organizations in Southeast Asia where these scams are also called “Sha Zhu Pan.”

The unwitting victims are the so-called “pigs,” who, according to various U.S. law enforcement sources, have lost billions of dollars to this scam. Unfortunately, some victims have liquidated tax-advantaged accounts or taken out home equity lines of credit or second mortgages to purchase virtual currency, as part of falling victim to these scams. The alert highlights that pig butchering is linked to fraud and cybercrime, two of FinCEN’s stated national priorities.

As we discuss, FinCEN’s alert provides 15 “red flags” for financial institutions (“FIs”) to consider when attempting to detect, prevent and report potential suspicious activity relating to such scams.  These “red flags” may serve not only to put FIs on guard for potential Suspicious Activity Report (“SAR”) filings under the Bank Secrecy Act (“BSA”), but they also may serve as considerations for FIs to try to detect and stop such activity, in order to cut off potential related civil suits by victim customers who may blame a FI for purportedly “allowing” the scam to occur.

Continue Reading  “Pig Butchering”: FinCEN Issues Alert on Virtual Currency Scam

Complex Civil and Criminal Cases Converge

On August 17, 2023, Judge Robert Pitman of the federal district court for the Western District of Texas issued an Order granting summary judgment for the U.S. Treasury Department (“Treasury”) in a lawsuit brought by six individuals, and denying the cross-motion for summary judgment filed by the individuals. The lawsuit alleged that Treasury overstepped its authority by imposing sanctions on the coin mixing service Tornado Cash.  Deciding for the government, Judge Pitman determined that Tornado Cash is a “person” that may be designated by OFAC sanctions.  Specifically, the regulatory definition of “person” includes an “association,” and Tornado Cash is an “association” within its ordinary meaning.

Shortly thereafter, on August 23, 2023, the U.S. Department of Justice (“DOJ”) unsealed an indictment returned in the Southern District of New York against the alleged developers of Tornado Cash, Roman Storm (“Storm”), a naturalized citizen residing in the U.S., and Roman Semenov (“Semenov”), a Russian citizen.  The indictment charges them with conspiring to commit money laundering, operate an unlicensed money transmitting business, and commit sanctions violations involving the International Emergency Economic Powers Act, or IEEPA.  When the indictment was unsealed, Storm was arrested and then released pending trial.  Treasury simultaneously sanctioned Semenov, who remains outside of the U.S., adding him to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List.

These are very complicated cases raising complicated issues.  They are separate but obviously related.  As we will discuss, the factual and legal issues tend to blend together, and how a party characterizes an issue says a lot about their desired outcome:  has the government taken incoherent action against a technology, or has it pursued a group of people attempting to hide behind tech?

Continue Reading  All Roads Lead to Roman: Alleged Tornado Cash Co-Founders Roman Storm Arrested and Roman Semenov Sanctioned, Days After Treasury Defeats Lawsuit Challenging OFAC

The Financial Crimes Enforcement Network (“FinCEN”) has issued a notice entitled “FinCEN Calls Attention to Payroll Tax Evasion and Workers’ Compensation Fraud in the Construction Sector” (the “Notice”).  According to the Notice, “state and federal tax authorities [annually] lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers.”

The Notice describes these combined schemes as follows.  Individuals create a shell company whose sole purpose is to allow construction contractors to avoid paying workers’ compensation premiums as well as state and federal payroll taxes.  The operators of the shell company will take out a minimal workers’ compensation policy and “rent” or sell the policy to construction contractors that employ a much larger number of workers than the policy is designed to cover.  The insurance policy enables the shell company to apply for and receive official business registration status.  The shell company operators will include the business license and tax documents in the package “rented” to the contractors.  This is the insurance fraud aspect.  Although insurance fraud is a state and local crime, it easily can be charged federally through use of the mail and wire fraud statutes.  Mail and wire fraud also can serve as predicate offenses – more precisely, “Specified Unlawful Activities” – underlying federal money laundering charges.

Continue Reading  FinCEN Issues Notice on Payroll Tax Evasion and Workers’ Compensation Fraud in the Construction Industry