The Conference of State Bank Supervisors (CSBS) announced last week that seven states have agreed to a multi-state compact that, according to the CSBS, “standardizes key elements of the licensing process for money services businesses (MSB).”

The seven states consist of Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington.  The CSBS expects other states to join the compact.  Under the compact, if one participating state has reviewed key elements of a company’s operations in connection with the company’s application for money transmitter license (IT, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act), the other participating states will accept that state’s findings.

The CSBS describes the compact as “the first step among state regulators in moving towards an integrated, 50-state system of licensing and supervision for fintechs.”  It is expected to significantly streamline the MSB licensing process.

As we have blogged, 18 U.S.C. § 1960 makes it a crime to operate a money transmitter business without an appropriate license in a State, and/or without having registered with FinCEN as a MSB under 31 U.S.C. § 5330.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.

Attorney General Sessions Announces Rescission of Obama Administration Policies on Marijuana Enforcement; Financial Institutions Lose Grounds to Permit Financial Transactions with Marijuana Businesses

In a single-page memorandum issued today, Attorney General Sessions tersely rescinded a string of DOJ enforcement policies announced during the Obama Administration — chief among them the “Cole Memo,” described below — which collectively had indicated that although marijuana was still illegal under federal drug laws and the DOJ would continue its enforcement of those laws, the DOJ also would defer to state governments that had developed regulatory regimes legalizing marijuana under defined circumstances.  Although Attorney General Sessions is well known for his personal distaste for marijuana-related activity, he previously had not been entirely clear as to exactly what position his DOJ would take in regards to the Cole Memo and related enforcement.

Although this policy change has many potential implications, its primary relevance to Anti-Money Laundering (“AML”), the Bank Secrecy Act (“BSA”), and money laundering issues is that the Cole Memo had provided the support for the federal government to issue guidance that, under very defined circumstances, financial institutions could provide services to state-licensed marijuana businesses. Continue Reading Marijuana Enforcement: DOJ Cole Memo Up in Smoke

Second of a Two-Part Blog: Anti-Money Laundering Programs Coming to the Legal Profession?

Yesterday, we began our discussion of the proposed Corporate Transparency Act of 2017 (the “Act”), and observed that, if passed, the Act would represent another chapter in the domestic and global campaign to increase transparency in financial transactions through information gathering by private parties and expanded requirements for Anti-Money Laundering (“AML”) reporting. Today, we summarize the details of this complex legislation, focusing in particular on two significant ways in which the Act would amend the Bank Secrecy Act (“BSA”):

  • Requiring regulations to establish minimum standards for State procedures regarding the formation of legal entities such as corporations and limited liability companies (“LLCs”) and the identification of the beneficial owners of such entities when they are formed.
  • Adding “formation agents” – i.e., those who assist in the creation of legal entities – to the BSA’s definition of a “financial institution” which is subject to the BSA’s reporting and AML obligations. This new definition potentially applies to a broad swath of businesses and individuals previously not regulated directly by the BSA, including certain attorneys.

Continue Reading Expanded Beneficial Ownership Reporting and AML Duties Under the Corporate Transparency Act

First of a Two-Part Blog

In late June, Representatives Carolyn Maloney and Peter King of New York introduced The Corporate Transparency Act of 2017 (the “Act”). In August, Senators Ron Wyden and Marco Rubio introduced companion legislation in the Senate. A Fact Sheet issued by Senator Wyden is here. Representative King previously has introduced several versions of this proposed bipartisan legislation; the most recent earlier version, entitled the Incorporation Transparency and Law Enforcement Assistance Act, was introduced in February 2016.  Although it is far from clear that this latest version will be passed, the Act is worthy of attention and discussion because it represents a potentially significant expansion of the Bank Secrecy Act (“BSA”) to a whole new category of businesses.

The Act is relatively complex.  In part, it would amend the BSA in order to compel the Secretary of the Treasury to issue regulations that would require corporations and limited liability companies (“LLCs”) formed in States which lack a formation system requiring robust identification of beneficial ownership (as defined in the Act) to themselves file reports to the Financial Crimes Enforcement Network (“FinCEN”) that provide the same information about beneficial ownership that the entities would have to provide, if they were in a State with a sufficiently robust formation system.  More colloquially, entities formed in States which don’t require much information about beneficial ownership now would have to report that information directly to FinCEN – scrutiny which presumably is designed to both motivate States to enact more demanding formation systems, and demotivate persons from forming entities in States which require little information about beneficial ownership. However, there is another facet to the Act which to date has not seemed to garner much attention, but which potentially could have a significant impact. Under the Act, formation agents – i.e., those who assist in the creation of legal entities such as corporations or LLCs – would be swept up in the BSA’s definition of a “financial institution” and therefore subject to the BSA’s AML and reporting obligations.  This expanded definition potentially applies to a broad swath of businesses and individuals previously not regulated directly by the BSA, including certain attorneys. Continue Reading The Corporate Transparency Act: A Proposal to Expand Beneficial Ownership Reporting for Legal Entities, Corporate Formation Agents and – Potentially – Attorneys

Part Two of a Three-Part Series

In the second part of this series, we explore the practical effects of the FinCEN and DOJ guidance documents on industries attempting to serve marijuana related business (“MRBs”). On June 27, 2017, the Tenth Circuit issued an interesting and divided opinion showing us how difficult it can be to square the prohibitions in the federal Controlled Substances Act (“CSA”) and money laundering statutes with state legislation legalizing certain MRB activity and the seemingly permissive nature of the FinCEN and DOJ guidance documents. Continue Reading Continued and Unexpected Roadblocks to Serving the Marijuana Industry: Fourth Corner Credit Union v. Federal Reserve Bank

Part One of a Three-Part Series

We begin this week with a three-part series on banking and the marijuana industry. States continue to pass medical and recreational use marijuana legislation despite that the fact that the substance remains classified as a Schedule I drug subject to the federal Controlled Substances Act.  Thus, the medical and recreational marijuana industries continue to struggle with access to banking and credit, and those who attempt to serve these industries find themselves subject to the Bank Secrecy Act (“BSA”) and the criminal money laundering provisions.  As we will detail this week, the struggle for financial institutions attempting to service the marijuana industry comes not only from the BSA and AML provisions, but in other forms.  We start this week with an overview of the guidance documents issued by the federal government which identify the enforcement priorities and also potential windows for financial institutions to service the marijuana industry.  We will follow up with a discussion of a recent federal court decision illustrating the practical difficulties of squaring the prohibitions of the federal drug laws with permissive state laws and the federal guidance documents.  We will conclude with an exploration of how federal agencies beyond the Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”), such as the Securities and Exchange Commission (“SEC”), can further muddy these waters by staking out their own regulatory and enforcement priorities.  –Priya Roy Continue Reading Banking and the Marijuana Industry

Gavel on sounding block

Ballard Spahr LLP Legal Team Obtains Key Court Victory

It is with great pleasure that I introduce the following post by our colleague and fellow blogger Joanna Kunz.  She was part of a team of Ballard Spahr lawyers who, working pro bono, recently obtained a landmark victory for their client — and for property owners throughout Pennsylvania — when the Pennsylvania State Supreme Court unanimously affirmed a lower court decision defining the parameters of civil forfeiture and arming Pennsylvanians involved in such cases with robust constitutional and statutory protections.  The team also included Jessica Anthony, who argued the case before the Supreme Court, and Jason Leckerman. — Peter D. Hardy

Elizabeth Young is a 72-year-old grandmother whose home and car the government sought to forfeit based on several relatively minor drug sales her adult son conducted out of the house and car. Young fought the forfeiture and lost at the trial level. However, last week the Pennsylvania Supreme Court affirmed the Commonwealth Court’s en banc reversal of that decision. Its 73-page opinion ends years of uncertainty in the law regarding the constitutional limits on civil forfeiture where the property owner often is not charged with any crime. Continue Reading Pennsylvania Supreme Court Strengthens Protections For Property Owners In Landmark Civil Forfeiture Decision

The Conference of State Bank Supervisors (CSBS) has continued its efforts to promote improvements in Bank Secrecy Act/Anti-Money Laundering compliance with the release in January 2017 of a new BSA/AML Self-Assessment Tool for banks. The optional tool is intended to help state-chartered banks enhance their risk assessment process.

The tool, which is provided in Microsoft Excel format, includes a standard methodology for a risk and control self-assessment (RCSA): determination of inherent risks, assessment of the strength of “risk mitigation/controls” and a residual risk rating. The tool is helpful as far as it goes, which is providing a general methodology and identifying common inherent risk areas for banks. The tool does not provide guidance on what constitutes “low,” “moderate” or “high” inherent risks for each category, nor does it provide a list of expected controls or guidance regarding how to rate the strength of controls. The identification and rating of controls is the more challenging part of conducting an RCSA.

State-chartered banks should consider how they might be able to leverage this tool to enhance their current risk assessment process. Given the critical role of risk assessments in building a robust and sustainable BSA/AML compliance program, this tool can help some banks and other companies supervised by state regulators raise the level of their risk assessment. Banks and others will still have to do so some hard thinking as they build out a meaningful RCSA, but the framework provided by the CSBS should prove helpful to many institutions.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.

NY DFS Seal CircleThe New York State Department of Financial Services (“DFS”) has issued its fifth BitLicense to date, continuing a marked effort to bring legitimacy and controls to the virtual currency (“VC”) industry, whose advantages in lowering costs and creating efficiencies have been marred with concerns of nefarious use.

Founded in 2012, Coinbase, Inc. operates as a digital currency exchange and is perched at the top of well-funded startups in the VC industry. Its BitLicense signifies an important milestone in the company’s nearly two-year, multi-state licensing strategy. In the same vein, the fact that a VC market-leader has sought after and is now approved to do business in New York is an equally important occasion for the BitLicense program itself. Continue Reading Coinbase the Latest to Obtain New York BitLicense

House and cashThe field of forfeiture saw significant action in 2016. The IRS offered to return forfeited funds used in structuring, but Congress still may clip its ability to forfeit such funds. Meanwhile, DOJ renewed a controversial program that incentivizes local law enforcement to aggressively pursue forfeiture. It filed a major forfeiture action which reminds law firms of their own need to vet the source of funds flowing into firm bank accounts. Finally, the U.S. Supreme Court made it clear that “clean” funds cannot be restrained pretrial when a defendant needs those funds for his criminal defense, even if the government wants to restrain the money in order to pay for forfeiture or restitution if the defendant is convicted. Continue Reading 2016 Year in Review: Forfeiture