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NYDFS encourages New York state chartered financial institutions to establish relationships with medical marijuana businesses
On July 3, the New York Department of Financial Services (NYDFS), at the direction of Governor Andrew Cuomo, released guidance encouraging New York state chartered banks and credit unions to consider establishing relationships with regulated and compliant medical marijuana and industrial hemp-related businesses operating in New York. According to the guidance, these businesses often rely solely on cash to conduct transactions, because of a lack of access to traditional financial services. The press release announcing the guidance cites to the New York Compassionate Care Act, enacted in 2014, which provides medical patients suffering from “debilitating symptoms and diseases” access to, under strict requirements, medical marijuana. NYDFS is encouraging New York financial institutions to form appropriate banking relationships with these business, because “[p]roviding access to regulated banking services is an essential part of taking the legal cannabis industry out of the shadows and establishing it as a transparent, regulated, tax-paying part of our economy, and a necessary part of fulfilling the goal of relieving the suffering of seriously ill patients.”
NYDFS will not impose any regulatory action on a New York financial institution that establishes a business relationship with legal medical marijuana and industrial hemp-related businesses, as long as the institution also complies with other applicable guidance and regulations, such as the Financial Crimes Enforcement Network’s 2014 guidance—which clarifies expectations under the Bank Secrecy Act (BSA) for financial institutions providing services to these businesses.
FinCEN issues advisory on connection between politically exposed persons and financial facilitators
On June 12, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to U.S. financial institutions to increase awareness of the connection between high-level political corruption and human rights abuses. The advisory highlights the use of financial facilitators as a means to gain access to global financial systems for the purpose of moving or hiding illicit proceeds and evading U.S. and global sanctions. Among other things, the advisory, which is designed to assist financial institutions in identifying and reporting suspicious activity, provides typologies used by “politically exposed persons” (PEPs) to access the U.S. financial system and obscure illicit activity. FinCEN also provides several red flags outlining various types of suspected schemes that may be indicators of suspicious activity. The advisory’s regulatory guidance further reminds financial institutions of their risk-based, due diligence obligations, which include (i) identifying legal entities owned or controlled by PEPs (as required by FinCEN’s Customer Due Diligence Rule); (ii) complying with anti-money laundering program obligations; and (iii) filing Suspicious Activity Reports related to illegal activity undertaken by senior foreign political figures.
FinCEN issues ruling temporarily suspending beneficial ownership requirements for automatic renewal products for 90 days
On May 16, the Financial Crimes Enforcement Network (FinCEN) issued a ruling to provide a 90-day limited exceptive relief from the requirements for covered financial institutions to obtain and verify the identity of beneficial owners of legal entity customers with respect to certificate of deposit rollovers and loans that renew automatically. As previously covered in InfoBytes, FinCEN clarified that covered financial institutions seeking to renew a loan or roll over a certificate of deposit must treat these as new accounts and require their legal entities customers to certify or confirm beneficial owners, “even if the legal entity is an existing customer.” FinCEN acknowledged, however, that certain covered financial institutions with automatic processes that do not treat these types of rollovers or renewals as new accounts, have expressed concerns regarding their ability to comply with the rule’s requirements. As a result, FinCEN’s ruling will apply to qualified products and services that were established before the May 11 compliance date and will continue until August 9, during which time FinCEN will re-evaluate the requirement to determine whether more permanent relief is needed.
FinCEN issues ruling to clarify beneficial ownership requirements for premium finance cash refunds
On May 11, the Financial Crimes Enforcement Network (FinCEN) issued a ruling to provide exceptive relief to covered financial institutions from the requirements to obtain and verify the identity of beneficial owners of legal entity customers at account opening to insurance premium finance lending products that allow for cash refunds. Although FinCEN’s regulations already exempted covered financial institutions from the requirements to identify and verify the identity of the beneficial owner of legal entity customers at account opening to the extent that the legal entity customer opens the account for the purpose of financing insurance premiums, the exemption does not apply if there is a possibility of cash refunds. However, because premium finance lenders typically process a significant number of cash refunds, and premium finance loans present a low risk for money laundering, FinCEN issued the ruling to provide for additional relief for premium finance loans offering cash refunds. A condition of the relief is that the cash “refunds are only remitted directly to the borrower or the borrower’s agent or broker.”
FFIEC releases customer due diligence and beneficial ownership examination procedures
On May 11, the Federal Financial Institutions Examination Council released updated examination procedures for the Financial Crimes Enforcement Network's (FinCEN) final rule, “Customer Due Diligence Requirements for Financial Institutions” (CDD rule). Compliance with the CDD rule became mandatory on May 11. The updated customer due diligence exam procedures were developed in close collaboration with FinCEN and replace those in the current Bank Secrecy Act/Anti-Money Laundering Examination Manual. Additionally, a new set of exam procedures address the CDD rule’s beneficial ownership requirements.
According to an OCC bulletin released the same day, the examination procedures reflect federal and state banking agencies’ “ongoing commitment to examine financial institutions for compliance with the Bank Secrecy Act . . . in accordance with uniform standards and principles.”
See here for continuing InfoBytes coverage of the CDD rule.
FinCEN recognizes law enforcement agencies for use of BSA reporting
On May 8, the Financial Crimes Enforcement Network (FinCEN) announced its third annual Law Enforcement Awards to law enforcement agencies that use Bank Secrecy Act data provided by financial institutions in their criminal investigations. The program seeks to recognize law enforcement agencies that made effective use of financial institution reporting to obtain a successful prosecution, and to demonstrate to the financial industry the value of its reporting to law enforcement. The following agencies were recognized:
- Suspicious Activity Report Review Task Force Category – Internal Revenue Service-Criminal Investigation (IRS-CI). Based on a review of financial data showing a pattern of unusual cash withdrawals by one subject from a single financial institution, IRS-CI uncovered a criminal conspiracy to defraud the estate of a deceased individual of over $2 million. IRS-CI executed warrants and recovered over $500,000 and over $2 million in restitution was ordered to be returned to the true heir of the estate.
- Transnational Organized Crime/Third Party Money Launderers Category – Drug Enforcement Administration (DEA). Using FinCEN’s data and investigative tools, the DEA helped dismantle two Southern California and Tijuana-based money laundering schemes. Arrest warrants were issued for 27 individuals and officials were able to seize millions of dollars in cash, real estate, and vehicles.
- Transnational Security Threats Category – FBI. Utilizing FinCEN resources, an FBI investigation, conducted in coordination with the Office of Foreign Assets Control (OFAC), resulted in the blocking of $7 million in transactions used to provide access to the U.S. financial system on behalf of North Korean entities, a $20 million monetary penalty, and the addition of several entities to OFAC’s Designated Nationals and Blocked Persons List (SDN list).
- Cyber Threats Category – Internal Revenue Service-Criminal Investigation (IRS-CI). IRS-CI untangled a money laundering scheme that had generated over $17 million in proceeds through wire transfers from multiple foreign-based accounts. IRS-CI search warrants led to the forfeiture of $10 million in fraudulent proceeds and three subjects pled guilty to conspiracy to commit fraud and related activity in connection with computers, with a fourth found guilty of wire fraud and money laundering.
- Significant Fraud Category – Immigration and Customs Enforcement – Homeland Security Investigations (HSI). HSI led an investigation that identified a complex money laundering conspiracy in which operators at an India-based call center and U.S.-based facilitators worked together to launder $300 million. Twenty-four subjects in the United States were arrested across eight states, all of whom were convicted of conspiracy, money laundering, and various fraud crimes.
- Third-Party Money Launderers Category – Internal Revenue Service – Criminal Investigation (IRS-CI). IRS-CI led a multi-agency effort to combat Mexican kleptocracy. Using FinCEN resources and a high volume of financial data, an investigation resulted in seizure of over $800 million in assets and subjects being charged with various financial crimes, such as money laundering, bank fraud, wire fraud, loan fraud, and racketeering.
- State and Local Law Enforcement – Nassau County Policy Department. Nassau County Police launched an investigation after becoming aware of a high volume of cash deposits in a subject’s account. In coordination with the DEA, Nassau County Police determined the activity was a trade-based money laundering scheme designed to launder the proceeds of illegal narcotics transactions. The investigation resulted in fines totaling $8.5 million.
FINRA amends anti-money laundering rule to comply with FinCEN’s CDD rule
On May 3, FINRA issued a Regulatory Notice 18-19 amending Rule 3310—Anti-Money Laundering (AML) Compliance Program rule—to reflect the Financial Crimes Enforcement Network’s final rule concerning customer due diligence requirements for covered financial institutions (CDD rule), which becomes applicable on May 11. According to Regulatory Notice 18-19, member firms should ensure that their AML programs are updated to include, among other things, appropriate risk-based procedures for conducting ongoing customer due diligence including (i) “understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile,” and (ii) “conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.” The announcement also makes reference to FINRA’s Regulatory Notice 17-40, issued last November, which provides additional guidance for member firms complying with the CDD rule. (See previous InfoBytes coverage here.). The notice further states that the “provisions are not new and merely codify existing expectations for firms.”
FinCEN and California card club agree to a reduced penalty for AML violations
On May 3, the Financial Crimes Enforcement Network (FinCEN) and a California card club agreed to a $5 million penalty for Bank Secrecy Act (BSA) and anti-money laundering (AML) violations from 2009 to 2017. In November 2017, FinCEN assessed the company $8 million in civil money penalties but has now agreed to suspend $3 million pending compliance with certain requirements in the consent order. As previously covered by InfoBytes, FinCEN alleges the company failed to file certain Suspicious Activity Reports (SARs) regarding loan sharking and other criminal activities being conducted through the company and failed to implement sufficient internal controls to monitor risks associated with gaming practices that allowed customers to co-mingle and pool bets with anonymity. The order requires the company to, among other things, adopt an AML program and hire a qualified independent consultant to review its effectiveness and retain a compliance officer to ensure compliance with BSA requirements.
FinCEN updates FATF-identified jurisdictions with AML/CFT deficiencies
On April 27, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to financial institutions concerning the Financial Action Task Force’s (FATF) updated list of jurisdictions identified as having “strategic deficiencies” in their anti-money laundering/combatting the financing of terrorism (AML/CFT) regimes. FinCEN urges financial institutions to consider this list when reviewing due diligence obligations and risk-based policies, procedures, and practices.
As further described in the Improving Global AML/CFT Compliance: On-going Process, FATF identified the following jurisdictions as having developed action plans to address AML/CFT deficiencies: Ethiopia, Iraq, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, Vanuatu, and Yemen. Notably Serbia has been added to the list for failing to effectively implement its AML/CFT framework, whereas Bosnia and Herzegovina has been removed from the list due to “significant progress in improving its AML/CFT regime . . . [and] establishing the legal and regulatory framework to meet the commitments in its action plan.” The Democratic People’s Republic of Korea and Iran remain the two jurisdictions subject to countermeasures and enhanced due diligence due to AML/CFT deficiencies.
House Financial Services Committee holds hearing on FinCEN’s CDD rule
On April 27, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Implementation of FinCEN's Customer Due Diligence Rule—Financial Institution Perspective” to discuss challenges facing financial institutions when complying with FinCEN’s Customer Due Diligence Rule (CDD Rule). As previously covered in InfoBytes, the CDD Rule takes effect May 11, and imposes standardized customer due diligence (CDD) requirements under the Bank Secrecy Act (BSA) for covered financial institutions, including the identification and verification of the beneficial owners of legal entity customers. The hearing’s four witnesses expressed certain concerns regarding the effects of implementation on financial institutions, as well as the timing of additional guidance released April 3 in the form of frequently asked questions.
In prepared remarks, Executive Director of The Financial Accounting and Corporate Transparency (FACT) Coalition, Gary Kalman, commented that the CDD Rule, which calls for additional AML requirements, is a “positive step forward but falls short of what is needed to protect the integrity of [the] financial system”—particularly in terms of what defines a “beneficial owner.” Greg Baer, President of The Clearing House Association, expressed concerns that the CDD Rule (i) requires financial institutions to verify beneficial owners for each account that is opened, instead of verifying on a per-customer basis; and (ii) does not explicitly state in its preamble that FinCEN possesses sole authority to set CDD standards, which may present opportunities for examiners to make ad hoc interpretations.
Additionally, Executive Vice President of the International Bank of Commerce Dalia Martinez, observed, among other things, that compliance with the CDD Rule is costly and burdensome, and that banks have not been provided with the tools or guidance to determine whether the information provided by legal entity customers is accurate when verifying beneficial owners. The “gray areas” within the CDD Rule, Martinez noted, present challenges for compliance. A fourth witness, Carlton Green, a partner at Crowell & Morning, expressed concerns with the relationship between FinCEN and the federal functional regulators, stating that because FinCEN has delegated examination authority to these regulators, there is a chance regulators will “create and enforce their own interpretations of or additions to BSA rules” that may “diverge from FinCEN’s priorities.”