The Office of Foreign Assets Control (“OFAC”) wrapped up 2017 by issuing a series of high-profile designations generally prohibiting U.S. persons from conducting financial or other transactions with the identified individuals and entities, and freezing any assets which these individuals and entities may have under U.S. jurisdiction. Specifically, OFAC, acting in conjunction with a new Executive Order issued by the President pursuant to the Global Magnitsky Human Rights Accountability Act (“Magnitsky Act”), sanctioned on December 21 a list of alleged international bad actors, including Dan Gertler, a billionaire and international businessman from Israel who has been involved in, among other notorious ventures, alleged corruption in the mining of diamonds and copper in the Democratic Republic of the Congo. The next day, OFAC then sanctioned individuals and entities allegedly associated with Thieves-in-Law, an alleged and unapologetically-named Eurasian criminal entity; according to the U.S. government, Thieves-in-Law originated in Stalinist prison camps and has grown over time into a “vast criminal organization” stretching across the globe and into the United States. Continue Reading OFAC Designates Diamond Mining Billionaire, “Thieves in Law,” and Many Other International Targets as Subject to U.S. Sanctions and Asset Freezes
We discuss two recent federal court opinions addressing two issues of increasing frequency and importance: (i) the potential civil liability of financial institutions to non-customers and other third-parties for alleged failures to implement an effective Anti-Money Laundering (“AML”) program; and (ii) the ability of private plaintiffs to sue foreign defendants who allegedly committed offenses against the plaintiffs abroad, and then laundered the proceeds of those offenses in the U.S. This second issue, of course, is relevant to U.S. government actions against foreign persons.
As we shall see, banks are not necessarily liable to anyone impacted by a bank’s alleged AML-related failures. Conversely, foreign defendants may be surprised by the ability of plaintiffs to haul them into U.S. court to redress alleged criminal offenses committed entirely abroad — if those foreign defendants sent the fruits of those offenses to the U.S. The case relevant to the latter point involves allegations of billions of dollars of theft and corruption committed in Kazakhstan as part of a complicated scheme to purchase high-end real estate in New York (a recurring theme in recent money laundering enforcement efforts, and in this blog) via European shell companies, using in part accounts held at the troubled foreign bank FBME, about which we have blogged before. Continue Reading The Courts Speak: Bank Liability for Alleged AML Failures Impacting Third Parties, and Hauling into U.S. Court Foreign Defendants Who Launder the Alleged Fruits of Foreign Crime
On July 26, FinCEN, in coordination with the U.S. Attorney’s Office for the Northern District of California (“NDCA USAO”), assessed a $110,003,314 civil money penalty against BTC-e a/k/a Canton Business Corporation (“BTC-e”) for willfully violating the Bank Secrecy Act (“BSA”), and a $12 million penalty against Alexander Vinnik, a Russian national who is one of the alleged operators of BTC-e, for his role in the violations. FinCEN’s press release indicates that this is the first enforcement action it has taken against a foreign-located money services business (“MSB”) doing business in the United States. As we previously have blogged, FinCEN released interpretive guidance in March 2013 stating that an administrator or exchanger of virtual currency is an MSB under the BSA unless a limitation or exemption applies.
In a parallel criminal investigation, Vinnik was arrested and detained in Greece and charged in a 21-count superseding indictment brought by the NDCA USAO and DOJ’s Computer Crime and Intellectual Property Section. The superseding indictment alleges that Vinnik and BTC-e operated an unlicensed MSB doing business in the U.S., in violation of 18 U.S.C. § 1960, and committed money laundering, in violation of 18 U.S.C. §§ 1956 and 1957, by facilitating virtual currency transactions involving various crimes, including computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. The superseding indictment also provides some clues to the fate of the collapsed virtual currency exchange Mt. Gox, once reportedly the largest such exchange in the world. Continue Reading FinCEN Takes First Action Against Foreign-Located MSB—“The Virtual Currency Exchange of Choice for Criminals”—For Willfully Violating U.S. AML Laws
Financial institutions face an increasing risk that alleged violations of the Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) requirements will lead to follow-on allegations of securities law violations. We have blogged about investor class action suits against financial institutions based on alleged violations of BSA/AML rules. We also have blogged about recent enforcement actions by the SEC alleging violations of the securities laws due to underlying violations of the BSA by broker dealers. This post briefly notes the latest chapter in what seems to be a growing book regarding the convergence of AML/BSA and securities law.
In a complaint, later amended, filed in the Middle District of Tennessee against BancorpSouth Inc., investor plaintiffs alleged that the bank and its CEO, CFO and COO made misleading statements and omissions in SEC filings regarding (1) the bank’s compliance with BSA/AML regulations and the bank’s fair lending practices, and (2) the closing of two pending mergers/acquisitions. Plaintiffs allege that defendants knew at the relevant time that the bank was not in compliance with the AML/BSA regulations, due to a pending “target review” by the FDIC – which later resulted in a consent order between the FDIC and the bank regarding its AML obligations – but nonetheless stated that (1) the bank was in compliance with all banking laws and regulations; (2) they expected the two planned mergers to close in the second quarter of 2014; and (3) they expected to receive regulatory approval for those mergers. The plaintiffs allege that defendants thereby violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 by making statements which misrepresented or omitted material facts. According to the plaintiffs, when the AML/BSA problems eventually came to light, these problems allegedly delayed the anticipated mergers, and the bank’s stock value fell significantly, which thereby harmed investors.
As noted, the plaintiffs sued not only the bank itself, but also members of senior management. This approach is consistent with the recent focus on individual liability in AML/BSA matters. Specifically, the plaintiffs alleged that the individual executive defendants:
. . . . were ultimately responsible for ensuring that the Bank maintained an effective BSA/AML compliance program and that the Company’s program complied with the “4 Pillars” of BSA/AML compliance. In fact, federal regulations specifically require that the Company’s BSA/AML compliance program must be in writing, approved by the Board of Directors . . . , and noted in the board minutes. Defendants were also responsible for creating a “culture of compliance” to ensure Company-wide adherence to the Bank’s BSA/AML policies, procedures and processes, but failed to do so, instead prioritizing . . . cost-cutting measures.
On Monday, the district court granted, for the second time (after having been initially reversed by the Court of Appeals for the Sixth Circuit), class certification to the plaintiffs against the bank. The class certification decision involved a review the requirements imposed by Rule 23(a) and Rule 23(b) of the Federal Rules of Civil Procedure and will not be analyzed here. The point for the purposes of this blog is that it has become clear that, in regards to AML/BSA compliance, publically-traded financial institutions are compelled to wage a multi-front war. Regardless of the actual merits of the complaint against BanccorpSouth, its mere existence reflects that financial institutions must concern themselves not only with FinCEN, the Department of Justice, and the relevant examiner, but also with putative investor plaintiffs and the SEC – thereby increasing the stakes regarding decisions over the disclosure in SEC filings of possible violations of AML/BSA requirements.
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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.
Although 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
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 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.