Suspicious Activity Report (SAR)

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series — a weekly podcast focusing on the consumer finance issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.  Our podcast discusses the conduct for which financial institutions have been faulted in recent Anti-Money Laundering (“AML”) enforcement actions, flags other AML-related missteps that can trigger regulatory scrutiny, and offers practical tips for avoiding regulatory criticism and reducing enforcement risk. This podcast follows up on two related blog posts, in which we provided some practical tips for financial institutions to increase the chances that their AML programs will withstand regulators’ scrutiny, and then discussed the consequences of potentially failing to heed these practical tips in a specific case: the New York Department of Financial Services’ (DFS) recent enforcement action against Mashreqbank.

We hope that you enjoy the podcast, moderated by our partner Alan Kaplinksy, and find it useful.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.  To visit Ballard Spahr’s award-winning Consumer Financial Monitor blog, please click here.

Regulators Spar Over BSA Reporting Thresholds and Regulatory Review for FinCEN

First Post in a Two-Part Series

Late last week, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Banking Committee”) met in open session to conduct a hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” The Banking Committee heard the testimony of, and questioned, representatives from FinCEN, the OCC, and the FBI. This was the fourth hearing held in 2018 by the Banking Committee on the state of the Bank Secrecy Act (“BSA”) framework and its effective implementation by regulators and law enforcement. The partial backdrop for this hearing is that Congress is considering a draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), which proposes the most substantial overhaul to the BSA since the PATRIOT Act, and which contains provisions regarding many of the same issues discussed during the hearing.

In this hearing, we heard from three individuals:

  • Kenneth A. Blanco, Director of FinCEN (written remarks here);
  • Steven D’Antuono, Section Chief of the FBI’s Financial Crimes Section (written remarks here); and
  • Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs of the OCC (written remarks here).

In this post, we will discuss the issues which appeared to generate the most sparks between the OCC—which emphasized attempting to ease BSA regulatory burdens, particularly for small- to medium-sized community banks—and FinCEN and the FBI, which stressed the value of BSA filings to law enforcement. In our next post, we will discuss some of the less contentious (although still critical) issues addressed at the hearing, which broadly canvassed many of the most pressing BSA/AML issues currently facing financial institutions and the government.  These issues are: (i) the exploration by financial institutions of technological innovation, including artificial intelligence, in order to comply more efficiently with their BSA/AML obligations; (ii) the identification of the beneficial owners of legal entities; and (iii) the role of real estate in money laundering schemes.

The tension during the hearing between FinCEN and OCC at times was palpable, and the divides in partisan thinking on the direction of certain aspects of AML reform were apparent. Although there seemed to be consensus on the importance of the beneficial ownership rules and other issues, senators and regulators alike disagreed about increasing the $5,000 and $10,000 respective reporting threshold for the filing of Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (“CTRs”).

Continue Reading FinCEN, OCC and FBI Offer Diverging Views on AML Reform in U.S. Senate Testimony

Ballard Spahr is very pleased to host on December 17, 2018 at noon in our Philadelphia office a CLE program for the gaming industry and associated counsel to participate in a panel discussion with speakers from the Internal Revenue Service (IRS) on the latest industry trends in BSA/AML compliance and examination.

Please join us in person to hear directly from the government about related gaming enforcement actions and lessons learned, and to discuss the ongoing importance of Suspicious Activity Reports, Currency Transaction Reports, and “Know Your Customer” due diligence.  I will have the pleasure of moderating a select panel from IRS Criminal Investigation and the IRS Bank Secrecy Act group, including:

  • Mark Young, Supervisory Special Agent, IRS – Criminal Investigation
  • Marita Gehan, Special Agent, IRS – Criminal Investigation
  • Angelo Horiates, III, Special Agent, IRS – Criminal Investigation
  • David Witiak, Revenue Agent, IRS – Small Business/Self-Employed Division

We greatly appreciate the IRS taking the time to participate in this program.  Direct communication between the government and representatives of the regulated industry always proves to be useful and important. We often have blogged on the many BSA/AML issues facing the gaming industry, including here, here and here.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

A recent court opinion emphasizes the sensitive issues involved in terminating potentially difficult employees — or, from the employee’s or perhaps the government’s perspective, in terminating whistleblowers who were retaliated against for being willing to point out compliance failures. Although this competing dynamic applies across all industries, a recent opinion from the U.S. Federal District Court for the Eastern District of Louisiana, Kell v. Iberville Bank, addressed such a situation in the Anti-Money Laundering (“AML”)/Bank Secrecy Act (“BSA”) context, in which a bank’s former compliance officer sued her former employer for allegedly terminating her in retaliation for raising uncomfortable issues about claimed insider abuse and the alleged failure to file a Suspicious Activity Report (“SAR”). Continue Reading Case Highlights Potential Protections for BSA Whistleblowers

Second Post in a Two-Part Series

NYDFS Action Highlights the Need for Good Monitoring – and Good Consultants

In part one of this two-part post, we provided some practical tips for financial institutions to increase the chances that their Anti-Money Laundering (“AML”) programs will withstand regulators’ scrutiny, including: (1) promoting a culture of AML/Bank Secrecy Act (“BSA”) compliance; (2) focusing on transaction monitoring; (3) improving information sharing; (4) identifying and handling high-risk accounts appropriately; and (5) knowing your risks and continually improving your AML program to control those risks.

In this post we’ll discuss the consequences of potentially failing to heed these practical tips in a specific case: the New York Department of Financial Services’ (DFS) recent enforcement action against Mashreqbank. Further, we look forward to discussing all of these issues in an upcoming podcast in Ballard Spahr’s Consumer Financial Monitor Podcast series. So please continue to stay tuned.

Mashreqbank is the oldest and largest private bank in the United Arab Emirates. Its New York branch is Mashreqbank’s only location in the United States. It offers correspondent banking and trade finance services and provides U.S. dollar clearing services to clients located in Southeast Asia, the Middle East and Northern Africa. In 2016, the branch cleared more than 1.2 million USD transactions with an aggregate value of over $367 billion. In 2017, the branch cleared more than one million USD transactions with an aggregate value of over $350 billion.

The DFS enforcement action asserted that Mashreqbank’s AML/BSA program was deficient in a number of respects and that the New York branch had failed to remediate identified compliance issues. The enforcement action began with a DFS safety and soundness examine in 2016. In 2017, DFS and the Federal Reserve Bank of New York (FRBNY) conducted a joint safety and soundness examination. DFS provided a report of its findings to which Mashreqbank submitted a response.

In a consent order signed on October 10, 2018, Mashreqbank admitted violations of New York laws and accepted a significant monetary penalty and increased oversight for deficiencies in its AML/BSA and Office of Foreign Assets Control (OFAC) programs. Regulators pursued the enforcement action despite the New York branch’s strong cooperation and demonstrated commitment to building an effective and sustainable compliance program. Among other things, Mashreqbank agreed to pay a $40 million fine; to hire a third-party compliance consultant to oversee and address deficiencies in the branch’s compliance function including compliance with AML/BSA requirements; and to develop written revised AML/BSA and OFAC compliance programs acceptable to DFS.

The DFS and FRBNY examination findings demonstrate Mashreqbank’s failure to follow the practical tips identified in part one of this post. Specifically, the regulators found that Mashreqbank failed to: (1) have appropriate transition monitoring; (2) identify and handle high-risk accounts appropriately; and (3) know its risk and improve its AML program to control those risks.

Further, and as our discussion will reflect, the Mashreqbank enforcement action is also notable in two other respects. First, the alleged AML failures pertain entirely to process and the general adequacy of the bank’s AML program – whereas the vast majority of other AML/BSA enforcement actions likewise discuss system failures, they usually also point to specific substantive violations, such as the failure to file Suspicious Activity Reports (“SARs”) regarding a particular customer or set of transactions. Second, although the use of external consultants usually represents a mitigating factor or even a potential reliance defense to financial institution defendants, the DFS turned what is typically a defense shield into a government sword and instead criticized Mashreqbank for using outside consultants who, according to DFS, were just not very rigorous. This alleged use of consultants performing superficial analysis became part of the allegations of affirmative violations against the bank, thereby underscoring how financial institutions must ensure that their AML/BSA auditors or other consultants are experienced, competent, and performing meaningful testing, particularly when addressing issues previously identified by regulators. Continue Reading Practical Tips in Action: The Mashreqbank AML Enforcement Action

First Post in a Two-Part Series

How do financial institutions get in trouble with their regulators? Recent AML enforcement actions suggest that the following two failures are at the heart of most of these actions: (1) inadequately identifying, monitoring and/or reporting suspicious activity; and (2) failing to implement adequate internal controls. And these same issues crop up year after year.

In this post, we’ll discuss these failures and their root causes and provide practical tips for ensuring that your AML program will withstand the scrutiny of regulators. In our next post, we will discuss how these practical tips apply in a specific AML enforcement action: the recent consent order between the New York Department of Financial Services and Mashreqbank.  Further, we look forward to discussing all of these issues in an upcoming podcast in Ballard Spahr’s Consumer Financial Monitor Podcast series.  So please stay tuned.

The U.S. financial institutions that recently found themselves in the government’s crosshairs allegedly engaged in the following behavior:

  • Failing to investigate alerts on high-risk accounts where those accounts had been investigated previously, even when the new suspicious activity to which the bank had been alerted differed from the activity that it previously had investigated.
  • Having a policy of not investigating or filing SARs on cash withdrawals from branches near the Mexican border if the customer said they were withdrawing cash in the U.S., rather than carrying cash into the U.S. from Mexico, in order to avoid having to file a Report of International Transportation of Currency or Monetary Instruments (CMIR).
  • Capping the number of alerts from its transaction monitoring systems based on the number of staff available to review the alerts rather than on the risks posed by the transactions (and lying to regulators about it).
  • Failing to report the suspicious activities of a longtime customer despite having been warned that the customer was laundering the proceeds of an illegal and fraudulent scheme through accounts at the bank.
  • Failing to conduct necessary due diligence on foreign correspondent accounts.
  • A brokerage company failing to file SARs on transactions that showed signs of market manipulation.
  • A MSB’s failing to implement proper controls and discipline crooked agents because those agents were so profitable for the MSB, thereby enabling illegal schemes such as money laundering.

Although the behavior of these financial institutions may differ, the root causes of their failures do not. They include the following:

  • An inadequate, ineffective or non-existent risk assessment.
  • Elevating the business line over the compliance function.
  • Offering products or using new technologies without adequate controls in place.
  • Compliance programs that are not commensurate with the risks, often due to under investment in AML technology or other resources and/or lack of awareness of AML risks or controls.
  • Corporate silos, both human and technological, that prevent or hinder information sharing.
  • Insufficient screening of parties and relationships and lack of effective processes and controls around EDD.

So how can you ensure that your AML program is adequate? Here are some practical tips. Continue Reading Practical Tips for Ensuring Your AML Program Withstands the Scrutiny of Regulators

The Treasury Inspector General for Tax Administration, or TIGTA, issued last month a Report, entitled The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance, which sets forth a decidedly dim view of the utility and effectiveness of the current Bank Secrecy Act (“BSA”) compliance efforts by the Internal Revenue Service (“IRS”).  The primary conclusions of the detailed Report are that (i) referrals by the IRS to the Financial Crimes Enforcement Network (“FinCEN”) for potential Title 31 penalty cases suffer lengthy delays and have little impact on BSA compliance; (ii) the IRS BSA Program spent approximately $97 million to assess approximately $39 million in penalties for Fiscal Years (FYs) 2014 to 2016; and (iii) although referrals regarding BSA violations were made to IRS Criminal Investigation (“IRS CI”), most investigations were declined and very few ultimately were accepted by the Department of Justice for prosecution.

Arguably, the most striking claim by the Report is that “Title 31 compliance reviews [by the IRS] have minimal impact on Bank Secrecy Act compliance because negligent violation penalties are not assessed.”

A primary take-away from the Report is that an examination program lacking actual enforcement power is, unsurprisingly, not very effective.  The Report also highlights some potential problems which beset the IRS BSA Program, which include lack of staffing, lack of planning and coordination, and delay. Although the Report’s findings clearly suggest that what the IRS BSA Program really needs are resources and enhanced enforcement power, the repeated allusions in the Report to a certain purposelessness of the current BSA examination regime nonetheless might help fuel the current debate regarding possible AML/BSA reform, with an eye towards curbing regulatory burden.

The Report made five specific recommendations to the IRS for remedial steps. We will focus on four of those recommendations, and the findings upon which they rest:

  • Coordinate with FINCEN on the authority to assert Title 31 penalties, or reprioritize BSA Program resources to more productive work;
  • Leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy;
  • Evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and
  • Improve the process for referrals to IRS CI.

Continue Reading U.S. Treasury Report: IRS BSA Program “Has Minimal Impact on Compliance”

Charges Represent First Criminal Case Based Solely on Alleged Unauthorized SAR Disclosure

On October 17, the U.S. Attorney for the Southern District of New York (“SDNY”) announced the arrest of a senior employee at the Financial Crimes Enforcement Network (“FinCEN”). That employee, Natalie Mayflower Sours Edwards, has been charged with unlawfully disclosing Suspicious Activity Reports (“SARs”) to a member of the media, in violation of 31 U.S.C. § 5322 and 18 U.S.C. § 371, both of which carry a maximum sentence of five years in prison.

The Bank Secrecy Act (“BSA”) requires certain financial institutions, including banks, to file a SAR with FinCEN when they detect a known or suspected violation of federal law or regulation, or suspicious activity relating to money laundering, terrorist financing or other illicit activity. The BSA imposes strict confidentiality requirements as to the disclosure of information relating to a SAR, including the very existence of one. For instance, the statute prohibits any current or former officer or employee of, or contractor for, federal or state governments, as well as local, tribal or territorial governments from disclosing to any person involved in a suspicious transaction that the transaction has been reported, “other than as necessary to fulfill the official duties of such officer or employee.” The BSA also contains a similar prohibition applicable to the reporting financial institution and its agents, and the regulations more broadly prohibit the disclosure of “a SAR or any information that would reveal the existence of a SAR” by government officers or employees, or by the reporting institution. The relevant regulation also states that any covered financial institution, or its agent, which receives a subpoena or is otherwise requested to disclose a “SAR or any information that would reveal the existence of a SAR, shall decline to produce the SAR or such information[.]”

The government’s decision to charge Ms. Edwards is significant in numerous respects. For one, this appears to be the first criminal case based solely upon an unauthorized disclosure of a SAR. To be sure, there are at least two prior prosecutions involving the unauthorized disclosure of a SAR, but those cases also involved other, related charges. Specifically, in 2011, former bank employee Frank Mendoza was convicted of an illegal SAR disclosure. The government charged that Mr. Mendoza approached the subject of a SAR filed by Mr. Mendoza’s bank and solicited a bribe in exchange for Mr. Mendoza’s assistance with the bank. In this conversation, he disclosed the filing of the SAR by the bank and advised the subject that a federal criminal investigation was imminent. The subject of the SAR immediately reported the bribery solicitation to the FBI and Mr. Mendoza was arrested. Following a one-week trial, a federal jury in the Central District of California found Mr. Mendoza guilty of disclosing the existence of a SAR and accepting a bribe. He was sentenced to six months imprisonment, and was further assessed a civil monetary penalty of $25,000 by FinCEN. Likewise, the SDNY charged Robert Lustyik, a former Special Agent with the FBI, in 2013 with an unauthorized disclosure of a SAR in violation of 31 U.S.C. § 5322(a). Mr. Lustyik’s case also centered on a purported bribery scheme, during which he allegedly sold SARs and other confidential law enforcement information in exchange for personal payments.

In contrast, Ms. Edwards purportedly disclosed SARs (and other materials) via encrypted email to a reporter, the substance of which related to matters under investigation by the U.S. Office of the Special Counsel, including the investigation of Paul Manafort, Jr., the President’s former campaign manager. The complaint alleges that this information subsequently was published, over the course of numerous news articles, by the same organization that employed the reporter. In that regard, the complaint against Ms. Edwards contains an interesting allegation, albeit one limited to a footnote: Ms. Edwards told investigators she considered herself a “whistleblower,” and the government acknowledges that Ms. Edwards had in fact filed a whistleblower complaint within the Treasury Department. The complaint also alleges that Ms. Edwards initially concealed from investigators her contacts with the reporter at issue. Also of note is that, unlike the cases against Mr. Mendoza and Mr. Lustyik, the government has charged Ms. Edwards with a conspiracy to defraud the United States.

Although the potential political circumstances surrounding the complaint filed against Ms. Edwards may be difficult to ignore, this action nonetheless serves to underscore the basic need to comply with the BSA’s confidentiality rules, and the potentially severe consequences of failing to do so. Although Ms. Edwards is a government employee, the rules which she allegedly violated apply with equal force to financial institutions and their employees.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

Estonian “Non-Resident Portfolio” Produces Colossal Money Laundering Scandal

This week Danske Bank released a report detailing the results of its much anticipated internal investigation into allegations of money laundering perpetrated in its Estonian branch. The results of the investigation dwarfed even the boldest predictions. The report found between 2007 and 2015 the Estonian branch processed a staggering 200 billion Euros, or $234 billion, in suspicious transactions by thousands of non-resident costumers. The report finds the AML procedures at the Estonian branch were “manifestly insufficient and inadequate,” resulting in numerous breaches of legal obligations by the Estonian branch. The report details a numerous red flags that allegedly should have alerted the parent Danske Bank Group (“Group”) to the issues.

However, the report also concludes that the Group’s Board of Directors, Chairman, Audit Committee, or Chief Executive Officer did not violate any legal obligations in failing to detect or stop the suspicious transactions. Despite this finding, the CEO, Thomas Borgan, resigned the same day the report was released. Borgan stated, “Even though I was personally cleared from a legal point of view, I hold the ultimate responsibility. There is no doubt that we as an organization have failed in this situation and did not live up to expectations.” The consequences of this colossal money laundering scandal are unlikely to stop with Brogan’s resignation.

This blog post will summarize the scope of the report, findings of suspicious activity, the causes and red flags of potential money laundering violations, and outline the known and anticipated consequences of this scandal for Danske Bank. Continue Reading Danske Bank CEO Resigns on Heels of Report Detailing an Astounding $234 Billion in Suspicious Transactions in Money Laundering Scandal

According to the Financial Flow from Human Trafficking report recently published by the Financial Action Task Force (“FATF”) and the Asia/Pacific Group on Money Laundering, human trafficking is estimated to generate $150.2 billion per year. Human trafficking remains one of the fastest growing and most profitable forms of international crime affecting nearly every country in the world. The FATF report examines the financial flow associated with human trafficking for the purpose of forced labor, sexual exploitation, and the removal of organs, and the common and unique ways that the proceeds from these types of exploitation are laundered.

The FATF report identifies issues related to designing better efforts to detect money laundering related to human trafficking. First, the more exposure the offender and/or the victim have to the formal financial sector or government, the greater the opportunities for identifying signs of money laundering. Second, no single indicator alone is likely to confirm money laundering from human trafficking. Third, wider contextual information can prove useful in identifying signs of trafficking. Fourth, human trafficking may be easiest to identify at the victim level or at the lowest level of a criminal organization; at higher levels of criminal organizations, the indicators may be more opaque and suggest a variety of crimes. Continue Reading Recent FATF Report Provides New Guidance for Identifying Money Laundering Related to Human Trafficking