Suspicious Activity Report (SAR)

U.K. Think Tank Report Criticizes International AML Reporting Regimes

First in a Series of Blog Posts

The Royal United Services Institute (“RUSI”) for Defence and Security Studies — a U.K. think tank – has released a study:  The Role of Financial Information-Sharing Partnerships in the Disruption of Crime (the “Study”).  The Study focuses on international efforts — including efforts by the United States — regarding the reporting of suspicious transactions, money laundering, and terrorist financing.  The Study is a critique of current approaches to AML reporting.

In this first blog post on the Study, we will describe some of the criticisms set forth by the Study regarding the general effectiveness of suspicious activity reporting.  Some of these criticisms will ring true with U.S. financial institutions, and echo in part criticisms previously raised by a detailed paper published by The Clearing House, a banking association and payments company. That paper, titled A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement (“The New Paradigm”), analyzes the effectiveness of the current AML and Combatting the Financing of Terrorism (CFT) regime in the U.S., identifies problems with that regime, and proposes reforms.  As we previously have blogged, The New Paradigm has argued that the regime for filing SARs is outdated, that “the combined data set [from filed SARs] has massive amounts of noise and little information of use to law enforcement,” and that “the SAR database includes no feedback loop [and] . . . . there is no mechanism for law enforcement to provide feedback on whether a given SAR produced a lead or was never utilized.”  These same criticisms are repeated in the Study, which looked at AML systems in the U.S, the U.K, Hong Kong, Singapore, Australia, and Canada.  Although suspicious activity reporting is generally considered to be the engine which drives AML and money laundering enforcement by the government, the Study asserts: “Interviews with past and present {Financial Intelligence Units] heads as part of this project consistently raised figures of between 80% and 90% of [such reporting] being of no operational value to active law enforcement investigations.” Continue Reading Suspicious Activity Reports Rarely Provide “Operational Value” to Law Enforcement Investigations

In its Summer 2017 issue of Supervisory Insights, published last week, the Federal Deposit Insurance Corporation (“FDIC”) provides some insight into its examination process and outcomes for Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) compliance in an article entitled The Bank Secrecy Act: A Supervisory Update (“Supervisory Update”).  Although the Supervisory Update also summarizes the BSA and its history, we will focus here on the discussion of FDIC examinations. Continue Reading FDIC Provides Some Statistics on Violations Found During BSA/AML Exams: One Percent of Exams Lead to Formal Enforcement Actions

FinCEN has announced the expansion of its Geographical Targeting Orders (GTOs) for high-end cash buyers of real estate. The expansion is two-fold. First, FinCEN has expanded the scope of Form 8300 reportable transactions to include “funds transfers” in addition to currency, cashier’s checks, certified checks, traveler’s check, personal checks, business checks, or money orders in any form. Second, FinCEN has added real estate transactions with a total purchase price of $3,000,000 or more in the City and County of Honolulu, Hawaii. This brings the markets covered to seven metropolitan areas.

The renewed GTOs require title insurance companies to identify and report on the natural persons behind shell companies that make covered transactions. The renewed and expanded GTOs will be in effect from September 22, 2017 through March 20, 2018. FinCEN has again praised the “assistance and cooperation” of the title insurance industry in this effort.

On the same day as the GTO expansion, FinCEN published an “Advisory to Financial Institutions and Real Estate Firms and Professionals.” This Advisory is in line with our expectation that FinCEN would further expand their supervisory and enforcement activity in the real estate market, as recommended by the FATF in their 2016 Mutual Evaluation Report and highlighted in an April 12, 2016, speech by former FinCEN Director Jennifer Shasky Calvery.

Continue Reading FinCEN Continues Its Focus on Real Estate Transactions through Advisory and GTOs

On June 5, the SEC filed suit against Salt Lake City-based Alpine Securities, Corp. (“Alpine”). The complaint, filed in the Southern District of New York, alleges that the broker-dealer ran afoul of AML rules by “routinely and systematically” (i) failing to file Suspicious Activity Reports (“SARs”) for stock transactions it had flagged as suspicious or, (ii) on thousands of occasions between 2011 and 2015 when Alpine did file SARs, omitting key information, such as the criminal or regulatory history of customers and disclosures as to whether those customers represented a foreign institution.

Under the Bank Secrecy Act (“BSA”), Alpine and other broker-dealers must report suspicious transactions in the form of SARs filed with FinCEN. These filings pertain to reports of transactions or patterns of transactions involving at least $5,000 wherein a covered entity “knows, suspects, or has reason to suspect” that the transaction involves funds representing ill-gotten gains; is intended to hide funds obtained from illegal activities; is designed to evade the BSA; or has no business or apparent lawful purpose and the filing institution knows of no reasonable explanation for the transaction. SARs have a narrative section for the filer to describe the facts of the suspicious incident, which is regarded by law enforcement as a critical section.

The SEC has alleged that Alpine violated Section 17(a) of the Securities Exchange Act of 1934, and Rule 17a-8 promulgated thereunder, which require broker-dealers to comply with the recordkeeping, retention and report obligations of the BSA. Although Alpine had an AML/BSA compliance program (as is required for broker-dealers by both the BSA and FINRA Rule 3310), the complaint alleges that the program was not implemented properly in practice and mischaracterized what Alpine actually did. In part, the SEC alleges that Alpine used two standard templates for SAR filings which did not allow the filer to describe any of the red flags or other material information which caused Alpine to file the SAR. Importantly, the complaint also alleges that FINRA had examined Alpine and brought these deficiencies to its attention, but Alpine thereafter failed to take meaningful steps to address them and “continued its pattern of omitting material red flag and other information from its SARs.”

Much of Alpine’s business involves clearing microcap transactions. Although the broker-dealer has a history of disciplinary action by FINRA, the instant action also reflects a trend by the SEC to use AML rules as a means to combat alleged fraud related to the sale of microcap securities. Earlier this year, New York-based Windsor Street Capital also was charged with failing to file SARs; that matter, currently before an SEC administrative law judge, remains pending. All told, the action against Alpine exemplifies the SEC’s heightened interest in ensuring broker-dealers’ adherence to AML rules and standards. It also reiterates the need for any financial institution to implement effectively in practice its AML compliance plan: the best written compliance plan can turn into the centerpiece of regulators’ allegations if it merely becomes a catalogue of what the financial institution failed to do.

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

We were pleased to contribute an article to the May 2017 issue of Business Crimes Bulletin titled “The Growing Convergence of Cyber-Related Crime and Suspicious Activity Reporting.” Regulators and law enforcement are taking proactive steps to further leverage anti-money laundering monitoring and reporting tools in their battle with cyber attacks and cyber crimes. In-house legal and compliance teams need to be fully versed in the latest Financial Crimes Enforcement Network (FinCEN) and bank regulatory guidance on cyber-related crimes and have the right professionals available to assist them with these matters.

Cyber-related crimes increasingly are making headlines across the globe as cyber attacks and other cyber incidents grow in intensity, volume and sophistication against government, political and business targets. The motives of attackers are as varied as their methods, but there is clearly an increasing number of attacks and other illegal activity motivated by financial gain against businesses, including financial institutions. Recent regulatory developments reveal that that illegal cyber activity has become more relevant to the fight against money laundering and terrorist financing as well.

Click here to read the full article.

Reprinted with permission from the May 2017 issue of Business Crimes Bulletin.
© 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

 

 

A Guest Blog by Greg Baer, President of The Clearing House

Today we are very pleased to welcome guest blogger Greg Baer, who will address a series of significant issues posed by a detailed paper published by The Clearing House, a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.  The paper, titled A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement (The New Paradigm), analyzes the effectiveness of the current AML and Combatting the Financing of Terrorism (CFT) regime, identifies problems with that regime, and proposes a series of reforms to remedy them.

Gregory-Baer_7286A-PrintMr. Baer is the President of The Clearinghouse Association L.L.C. and the Executive Vice President and General Counsel of The Clearing House Payments Company L.L.C. The Clearing House Association represents the interests of The Clearing House’s commercial bank ownership on a diverse range of regulatory and legislative matters. Its affiliate, The Clearing House Payments Company, is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume. Prior to joining The Clearing House, Mr. Baer was Managing Director and Head of Regulatory Policy at JPMorgan Chase. He previously served as Deputy General Counsel for Corporate Law at Bank of America, and as a partner at Wilmer, Cutler, Pickering, Hale & Dorr. He also served as Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury, after serving as Deputy Assistant Secretary. Finally, Mr. Baer was managing senior counsel at the Board of Governors of the Federal Reserve System.

New ParadigmThe New Paradigm is the product of two closed-door symposia that convened approximately 60 leading experts in the field of AML/CFT. The group included senior former and current officials from law enforcement, national security, bank regulation and domestic policy; leaders of prominent think tanks in the areas of economic policy, development, and national security; consultants and lawyers practicing in the field; FinTech CEOs; and the heads of AML/CFT at multiple major financial institutions. This blog post takes the form of a Q & A session, in which Mr. Baer responds to questions posed by Money Laundering Watch and explains the main positions set forth in The New Paradigm, and also replies to some potential counter-arguments. We hope you enjoy this discussion of these important issues. Continue Reading The New Paradigm: Proposed Reforms of the AML/CFT Regime by The Clearing House

“Sometimes, the third time really is the charm” wrote the District Court for the District of Columbia on April 14, 2017. In its opinion, the court upheld FinCEN’s imposition of the Patriot Act’s fifth special measure against FBME Bank Ltd., a Tanzanian chartered bank operating primarily out of Cyprus.  The court previously had twice blocked FinCEN’s attempt to prevent FBME Bank from conducting banking business in the United States.  However, the district court granted FinCEN’s motion for summary judgment and lifted the stay blocking FinCEN’s final rule.  Last week, the D.C. Circuit refused to reinstate the full stay of judgment pending appeal noting simply that FBME Bank had “not satisfied the stringent requirements for a stay pending appeal,” without addressing any of the specific merits questions that remained before it. Thus, for the time being, the district court’s judgment upholding FinCEN’s rule finding that FBME Bank was “of primary money laundering concern” remains in place.  FBME Bank may no longer utilize correspondent banks in the United States.

FinCEN SealThe potentially broader implications for other banks and future actions are as follows: under the logic of the judgment which the Court of Appeals just declined to stay, FinCEN does not need to look to comparative or other objective benchmarks involving other similarly-situated banks to support a claim in an enforcement action that transactions occurring at the bank in question involved an unacceptably high number of SAR filings, use of shell companies, or other indicia of suspicious activity.  Rather, findings based on selected, absolute data may suffice. Continue Reading Bank Loses Stay of Court Judgment Upholding Broad FinCEN Discretion

The Western Union Company (“Western Union”) entered into a deferred prosecution agreement (“DPA”) on January 19th with the Department of Justice, based on alleged willful failures to maintain an effective AML program and the aiding and abetting of wire fraud.  The DPA involved a combined $586 million monetary penalty and also involved related civil enforcement actions by the Federal Trade Commission and FinCEN.  The agreement has been well-publicized and its details will not be repeated here; very generally, the DPA rests on allegations involving conduct stretching from 2004 through 2012 and an overall failure by Western Union to detect and prevent a kaleidoscope of illicit behavior by customers, from structured transactions to an international consumer fraud scheme to potential drug distribution.  To be sure, this is a significant agreement – but it echoes the same general sort of facts and allegations which have become almost standard in large AML enforcement actions. However, the Western Union action contains at least one interesting wrinkle. Continue Reading The Western Union DPA and the Need to Investigate One’s Own