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
After over a year of negotiations, 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. These new regulations will require an increase in transparency by the trusts and trading companies to reveal the holders of virtual currency to thwart potential money laundering, tax evasion, and anonymous funding of terrorism. Primary among these regulations is a requirement to provide beneficial ownership information to authorities and “any persons that can demonstrate a legitimate interest” to access data on the beneficial owners of trusts.
This focus on beneficial ownership in regards to virtual currency is entirely consistent with the general AML regulatory efforts in the United States and around the globe over the last few years, which have emphasized heavily the need to identify the beneficial owners of financial accounts, real estate and other assets in order to attain a more transparent financial system.
The regulation adopted by the European Parliament and European Council also comes as Bitcoin’s prices surged over 1,700 percent since the start of 2017. This outstanding growth has increased main stream interest in the virtual currency while also sounding alarm bells as some fear that Bitcoin is a bubble bound to burst. A key part of the amendment is that access to beneficial ownership information should be provided to authorities and “any persons that can demonstrate a legitimate interest.” Continue Reading EU Adopts Regulations Increasing Transparency in Virtual Currency Trading to Combat Money Laundering, Tax Evasion, and Terrorism Financing
IRS Will Obtain Identifying Information Regarding Clients Who Conducted Any Transaction Equal to $20,000 or More
Last week, a federal magistrate judge in the Northern District of California granted in part and denied in part a motion by the IRS to enforce a “John Doe” summons served on Coinbase, Inc., which operates a virtual currency wallet and exchange business headquartered in San Francisco. As we have blogged, the court granted last year the IRS’s application to serve the summons on Coinbase, which then resisted and moved to quash. The recent ruling paves the way for potential criminal or civil tax investigations involving Coinbase customers, as well as potential money laundering investigations. The ruling also indicates that the IRS might be able to seek more information from Coinbase about specific individuals as its investigation progresses.
Needless to say, the semi- or pseudo-anonymity offered by virtual currency – traits which historically have made virtual currency attractive to some of its users – are the same traits which have made the IRS and other law enforcement agencies and regulators intensely interested in the use of virtual currency. Although the use of virtual currency generally may cloak the user and create practical problems for investigators, the Coinbase action demonstrates that virtual currency is not truly anonymous in the face of a focused law enforcement inquiry. Continue Reading Court Enforces — Partially — IRS “John Doe” Summons Served on Virtual Currency Exchanger
As the world now knows, an indictment against Paul Manafort, Jr., a former campaign chairperson for now-President Donald Trump, and Manafort’s associate, Richard Gates III, was unsealed yesterday. Brought by Special Counsel Robert S. Mueller, the indictment alleges that Manafort and Gates, while working as political consultants and lobbyists, acted as agents of the Government of Ukraine and other foreign entities; failed to properly register and report as such agents; generated tens of millions of dollars from this work; laundered these earnings through various U.S. and foreign entities and bank accounts; and hid these same earnings from the Internal Revenue Service (“IRS”) and the Financial Crimes Enforcement Network (“FinCEN”).
This post will discuss some legal aspects of the specific charges. This post will not delve into any potential political ramifications of the indictment, or speculate as to what the indictment may or may not supposedly reveal regarding the work of the Special Counsel in general. Standing alone, the indictment is a fascinating document for those interested in money laundering and international tax evasion issues, and highlights the potentially powerful overlap of money laundering charges, tax fraud charges, and alleged violations of the Bank Secrecy Act (“BSA”).
In particular, we will discuss:
- The charges involving the “international” prong of the money laundering statute, a rarely used charge;
- The charges under the BSA alleging failures to file Reports of Foreign Bank and Financial Account, or FBARs – a charge which has become a staple in the government’s decade-long enforcement campaign against international tax evasion and undisclosed foreign accounts held by all sorts of U.S. taxpayers; and
- How the indictment’s allegations conform with the recent regulatory emphasis on the alleged use of high-end real estate in the U.S. to launder illicit funds earned abroad.
PANA Issues Recommendations to European Parliament: Tougher Enforcement, Greater Transparency, Improved Information Sharing and Prohibitions Against Outsourcing of Customer Due Diligence
In the wake of the Panama Papers, the European Parliament (“EP”) formed PANA, a Committee of Inquiry into Money Laundering, Tax Avoidance, and Tax Evasion. We previously wrote about PANA in May when it was examining the role of lawyers in money laundering and tax evasion schemes. After opening their October 19 meeting with a moment of silence to honor the life of Maltese investigative journalist Daphne Coruana Galizia, who recently was killed by a car bomb, PANA approved a draft report and recommendations for review by the EP. The findings and recommendations range from reporting standardization to outsourcing to illicit real estate transactions to attorney-client privilege.
A few themes emerged from the PANA report:
- the European Union (“EU”) has strong law, but lacks vigorous enforcement;
- the EU’s many regulators are stymied by a severe lack of communication, both within nations and between countries;
- beneficial owners (“BOs”) are mostly unknown because regulated entities are not fulfilling their reporting obligations and the BO register is not robust, accessible, or standardized;
- intermediaries, like banks, lawyers, accountants, wealth managers, and other financial institutions, are not living up to their obligations because they are engaging in “creative compliance” and leaving compliance responsibility to third parties.
Based on these findings, PANA recommends:
- uniform definitions and punishments for money laundering and tax-related infractions,
- “automatic exchange of information,” reciprocity, and “Common Reporting Standards” between regulators to facilitate better information sharing,
- the creation of a “publically accessible,” standardized BO register that includes the ultimate beneficial owner (“UBO”),
- the EP pass legislation to “make it illegal to outsource [customer due diligence (“CDD”)] procedures to third parties,”
- adoption of stronger forfeiture laws that allow cross-border confiscation of illegally obtained assets,
- stronger sanctions against banks and other intermediaries that “are knowingly, willfully, and systematically implicated in illegal tax schemes,”
- lawyers should no longer be able to hide behind the attorney-client privilege to escape reporting requirements, like suspicious transaction reports (“STRs”),
- countries devote more resources to fighting money laundering and tax evasion,
- the EP vest more oversight powers in PANA.
A Guest Blog by Bruce Zagaris, Esq.
Today we are very pleased to welcome guest blogger Bruce Zagaris, who is a Partner at the Washington, D.C. law firm of Berliner, Corcoran & Rowe. He is the editor of the International Enforcement Law Reporter; the author of International White Collar Crime: Cases and Materials; and an Adjunct Professor at the Texas A & M University School of Law. Mr. Zagaris also is a member of the Task Force on the Gatekeeper and the Profession of the American Bar Association (“ABA”).
As Mr. Zagaris explains immediately below, growing international trends have led the ABA Task Force to consider a new Model Rule of Professional Conduct that would impose basic “client due diligence” requirements on U.S. lawyers to determine whether their clients are engaging in money laundering or terrorist financing. This development relates directly to issues about which we previously have blogged, including European perceptions of lawyers as potential gatekeepers and of the United States as a haven for money laundering and tax evasion. The possible new Model Rule potentially would represent a significant shift in how the U.S. legal profession regards itself and its relationship to its clients. We hope that you enjoy this discussion by Mr. Zagaris of these important issues. -Peter Hardy
Increasingly, international bodies are calling for higher standards for gatekeepers, known in the parlance of the Financial Action Task Force (“FATF”) as “designated non-financial businesses and professions” (“DNFBPs”). DNFBPs include lawyers, accountants, real estate agents, and trust and company service providers (other than trust companies). In particular, in the United States, lawyers play a key role in areas that give rise to potential money laundering: company formation; real estate transactions; business planning; tax planning; wealth management; trust and estate work; and formation and operation of charities, including transnational philanthropy.
In 2006 and again in 2016, the FATF, an intergovernmental body in charge of making and overseeing compliance with international money laundering standards, performed Mutual Evaluation Reports (“MERs”) to assess compliance by the United States with international standards. While the FATF gave the U.S. high marks generally, both MERs found the U.S. “non-compliant” in gatekeepers and entity transparency.
As a result of this international trend, 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. We discuss this potential new model rule, and the developments which have led to its consideration, below. Clearly, due diligence for lawyers will increasingly be on the radars of banks, financial institutions, and law firms. Continue Reading AML Due Diligence Standards for U.S. Lawyers
Part II of the Analysis of the Combatting Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017
As we recently blogged, Senators Chuck Grassley (R-Iowa) and Diane Feinstein (D-California) introduced on May 25, 2017 a bill, S. 1241, entitled the Combatting Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017. As we previously noted, the Panama Papers scandal presumably motivated much of S. 1241, which also may be seeking to respond to international criticism that the U.S. has become a haven for tax cheats and money launderers.
This post focuses on Section 11 of the bill, which seeks to amend 18 U.S.C. § 1956(a)(2), the “international” prong of the “transactional” money laundering statute. This amendment, if passed, would have a significant impact on any individual or company seeking to evade U.S. taxes through a cross-border transfer of funds. This is important because pursuing the use of undisclosed foreign accounts, and related efforts to evade taxes through the use of offshore instruments, has been the centerpiece of U.S. tax fraud enforcement for almost a decade.
The most commonly enforced section of the “transactional” money laundering statute, Section 1956(a)(1), requires the proceeds involved in the transaction at issue to in fact represent the proceeds of “specified unlawful activity” (“SUA”), a defined statutory term which broadly includes many types of criminal conduct. One of the few offenses not included is tax fraud: Congress has defined “SUA” so as to not include tax crimes under Title 26, the Internal Revenue Code. Indeed, and as we note below, DOJ currently has a general policy against trying to base money laundering charges on the proceeds of tax fraud.
In contrast, Section 1956(a)(2), the “international” prong, does not necessarily require the funds at issue to in fact represent “specified unlawful activity” proceeds. In fact, the proposed amendment in Section 11 of S. 1241 appears to transform any cross-border transfer of funds done with the intent to commit U.S. tax evasion or the filing of a false U.S. tax return into an actual money laundering violation, including transfers involving entirely clean funds. Continue Reading Proposed Bill Seeks to Transform International Tax Evasion into Money Laundering
Senators Chuck Grassley (R-Iowa) and Diane Feinstein (D-California) introduced on May 25, 2017 a bill, S. 1241, entitled the “Combatting Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” Although it is of course impossible to know whether this bill ultimately will be enacted into law, the bill addresses a lengthy catalogue of important issues relevant to money laundering, AML programs, and international tax evasion.
- The bill is here.
- A general summary of the bill is here.
- A more detailed and useful summary of each section of the proposed bill is here.
- The press release for the bill is here.
Perhaps not surprisingly, the press release repeatedly states that the bill is designed to fight terrorism. No doubt – but if enacted, the bill’s terms also will apply to any sort of conduct implicated by its amendments to sections of the criminal money laundering statutes, 18 U.S.C. §§ 1957 and 1957, and the Bank Secrecy Act. Further, the press release does not explicitly mention the Panama Papers scandal. However, given language in the bill seeking to address international tax evasion; the subpoenaing of records of foreign banks using U.S. correspondent bank accounts; the concealment of account ownership; and the concealment of the source of assets in transactions; the Panama Papers scandal looms in the background and presumably motivated much of S. 1241, just as it may have influenced the timing of the final release of the beneficial ownership regulations by FinCEN. Further, S. 1241 may be seeking to respond to mounting international criticism that the U.S. has become a haven for tax cheats and money launderers.
The proposed bill reads like a wish list of statutory amendments provided by the Department of Justice. Indeed, the press release also quotes Senator Feinstein as stating that “[o]ur bill adopts many of the recommendations made by the Justice Department to ensure that transnational criminal organizations, including terrorist groups, face consequences for laundering illicit funds, evading laws and promoting criminal activity[.]” The press release further states:
While calculating the exact scale of worldwide money laundering is impossible, estimates suggest the annual sum to be in the trillions of dollars. Perpetrators use a variety of methods to conceal and move funds across borders and through the global financial system in an effort to evade law enforcement. These techniques include longstanding unofficial money transferring systems, such as hawalas, and more modern tools, like prepaid access cards and digital currencies.
The Senators’ legislation modernizes criminal money laundering laws, updates counterfeiting statutes to prohibit state of the art counterfeiting methods, enhances tools to crack down on smugglers and tax cheats, and promotes transparency in the U.S. financial system.
We anticipate that follow-up blog posts will analyze certain specific amendments in more detail, and their potential implications. Given the breadth of issues covered by the bill, this post merely lists below the topics covered by the bill, by drawing from its table of contents. The section-by-section summary noted above provides more information on each topic.
- Transportation or transhipment of blank checks in bearer form.
- Bulk cash smuggling.
- Section 1957 violations involving commingled funds and aggregated transactions.
- Charging money laundering as a course of conduct.
- Illegal money services businesses.
- Concealment money laundering.
- Freezing bank accounts of persons arrested for offenses involving the movement of money across international borders.
- Prohibiting money laundering through hawalas, other informal value transfer systems, and closely related transactions.
- Technical amendment to restore wiretap authority for certain money laundering and counterfeiting offenses.
- Making the international money laundering statute apply to tax evasion.
- Conduct in aid of counterfeiting.
- Prepaid access devices, digital currencies, or other similar instruments.
- Administrative subpoenas for money laundering cases.
- Obtaining foreign bank records from banks with United States correspondent accounts.
- Clarification of Secret Service authority to investigate money laundering.
- Prohibition on concealment of ownership of account.
- Prohibition on concealment of the source of assets in monetary transactions.
Stay tuned . . . .
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.
Starting on April 27, and finishing on May 2, the European Parliament (EP)’s Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA) is holding two meetings to present several related studies which address the impact of, and the fight against, tax evasion and money laundering, particularly in light of the Panama Papers scandal. As we discuss below, some of these studies focus on the roles of lawyers as potential facilitators of tax evasion and money laundering. Although the EP recently has described the United States as an emerging tax and money laundering haven, as we previously have blogged, the EP interestingly now has looked to the United States as a partial model for how to govern lawyers serving clients who may be attempting to commit tax evasion or money laundering, as we describe below.
In his remarks during last week’s launch of Case Western Reserve School of Law’s Financial Integrity Institute, FDIC Chairman Martin J. Gruenberg spoke on the historical context of today’s BSA/AML regulatory framework and the FDIC’s role in promoting and maintaining financial integrity. The Financial Integrity Institute describes its mission as seeking “to advance financial integrity globally by conducting and promoting at the highest standards research, education and professional excellence in anti-money laundering, anti-corruption, targeted sanctions and countering the financing of terrorism and international tax evasion policies and practices.”
Chairman Gruenberg recounted the legislative history of money laundering and terrorist financing laws and reminded us that the BSA was originally developed to address the lack of data needed by law enforcement to prosecute financial crimes. The regulatory framework has evolved over time in response to continual technological advancements and the increasing volume and sophistication of financial crime being perpetrated. “[W]hat began as currency transaction reporting requirements to identify citizens evading tax payments,” he said, “has evolved into required BSA/AML compliance programs, suspicious activity monitoring, and new reporting requirements to identify money laundering and terrorist financing, among other financial crimes.” The Chairman also observed that anti-money laundering efforts continue to take on an increasingly international aspect, and that evolving technologies constitute a “double-edged sword” because they can represent new means to either commit, or detect and prevent, financial crime.
In his speech, the Chairman also touched on the FDIC’s supervisory program. He stated that the FDIC evaluates not only an institution’s compliance with the BSA but also whether an institution has established a “culture of compliance.” He further remarked that the BSA/AML compliance program failures seen by the FDIC “often reflect a failure on the part of an institution’s directors or senior management to establish a tone of compliance that permeates the institution.”
We previously have blogged about the regulatory focus on the importance of cultivating a culture of robust BSA/AML compliance within financial institutions. Chairman Gruenberg’s remarks suggest that this focus is not likely to diminish in the near future. As such, it is prudent for financial institutions to keep efforts to develop a culture of compliance top of mind. In particular, the Chairman noted that the FDIC looks for whether directors demonstrate strong corporate governance and have a general understanding of the BSA/AML regulations and the risks posed to their institution, and whether senior management and employees understand the importance of BSA/AML compliance.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.