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Agencies announce new measures to combat ransomware
On October 15, the U.S. Treasury Department announced additional steps to help the virtual currency industry combat ransomware and prevent exploitation by illicit actors. The guidance builds upon recent “whole-of-government” actions focused on confronting “criminal networks and virtual currency exchanges responsible for laundering ransoms, encouraging improved cyber security across the private sector, and increasing incident and ransomware payment reporting to U.S. government agencies, including both Treasury and law enforcement.” (Covered by InfoBytes here.) The newest industry-specific guidance—part of the Biden administration’s efforts to counter ransomware threats—outlines sanctions compliance best practices tailored to the unique risks associated with this space. According to Treasury, there is a “need for a collaborative approach to counter ransomware attacks, including public-private partnerships and close relationships with international partners.”
The same day, the Financial Crimes Enforcement Network (FinCEN) released new data analyzing ransomware trends in Bank Secrecy Act reporting filed between January 2021 and June 2021. The report follows FinCEN’s government-wide priorities for anti-money laundering and countering the financing of terrorism priorities released in July (covered by InfoBytes here). Issued pursuant to the Anti-Money Laundering Act of 2020, the report flags “ransomware as a particularly acute cybercrime concern,” and states that in the first half of 2021, FinCEN identified $590 million in ransomware-related suspicious activity reports (SARs)—an amount exceeding the entirety of the value report in 2020 ($416 million). If this trends continues, FinCEN warns that ransomware-related SARs submitted in 2021 will have a higher transaction value than similar SARs filed in the previous 10 years combined. FinCEN attributes this uptick in activity to several factors, including an increasing overall prevalence of ransomware-related incidents, improved detection and incident reporting, and an increased awareness of reporting obligations and willingness to report by financial institutions.
In conjunction with the “growing prevalence of virtual currency as a payment method,” Treasury’s Office of Foreign Assets Control (OFAC) issued sanctions compliance guidance for companies in the virtual currency industry, including technology companies, exchangers, administrators, miners, wallet providers, and financial institutions. OFAC warned that “sanctions compliance obligations apply equally to transactions involving virtual currencies and those involving traditional fiat currencies,” and that participants “are responsible for ensuring that they do not engage, directly or indirectly, in transactions prohibited by OFAC sanctions, such as dealings with blocked persons or property, or engaging in prohibited trade- or investment-related transactions.” Among other things, the guidance will assist participants on ways to evaluate risks and build a risk-based sanctions compliance program. OFAC also updated related FAQs 559 and 646.
District Court: News reports cannot reverse dismissal of sanctions suit
On October 13, the U.S. District Court for the Southern District of New York denied a relator’s motion seeking indicative relief, ruling that post-ruling news reports were insufficient to reverse the dismissal of a qui tam suit accusing a UK-based bank and related entities (collectively, “defendants”) of violating U.S. sanctions against Iran. In 2020, the court dismissed the complaint after finding that the government “had articulated multiple valid purposes served by dismissal, and that relator had not carried its burden to show that a dismissal would be ‘fraudulent, arbitrary or capricious, or illegal.’” The relator’s appeal to the U.S. Court of Appeals for the Second Circuit is pending. At the district court, the relator moved for indicative relief based on the premise that if the court had jurisdiction, it would have vacated the dismissal based on disclosures in post-dismissal media reports.
According to the opinion, the defendants entered into a deferred prosecution agreement (DPA) with the DOJ in 2012 following a multi-year, multi-agency investigation concerning allegations that defendants deceptively facilitated U.S. dollar transactions by Iranian clients between 2001 and 2007 in violation of U.S. sanctions and various New York and federal banking regulations. The defendants admitted to the violations and paid hundreds of millions of dollars in fines and penalties. The relator subsequently filed a qui tam action alleging the defendants misled the government in negotiating the DPA. A government investigation found no support for the allegations. In 2019, the DOJ entered a new DPA with defendants. The relator amended its complaint alleging improper conduct related to the 2019 DPA, which the court dismissed.
The relator then filed the instant motion to reopen the case, arguing that news reports published in 2020 showed that the defendants engaged in transactions with sanctioned Iranian entities after 2007, which was contrary to the government’s representations when it moved to dismiss the case. The relator claimed that the government incorrectly asserted that it closely examined records before seeking dismissal and failed to honestly conclude that the allegations were meritless. In denying the relator’s motion, the court explained that the relator failed to show that the news reports would be admissible or were important enough to change the outcome of the earlier motion to dismiss. The court held that news reports are inadmissible and further concluded that none of the suspicious activity reports discussed in the news reports contradicted the government’s representations in its motion to dismiss.
FinCEN releases notice regarding online child sexual exploitation crimes
On September 16, FinCEN issued a notice regarding an increase in online child sexual exploitation (OCSE) and provided financial institutions with specific suspicious activity report (SAR) filing instructions, noting some financial trends related to OCSE. According to FinCEN, there was a “147 percent increase in OCSE-related SAR filings between 2017 and 2020.” The notice provides that financial institutions should, among other things: (i) “reference only this notice in SAR field 2 (Filing Institution Note to FinCEN) using the keyword ‘OCSE-FIN-2021-NTC3,’” which should also be referenced to specify a relationship between the suspicious activity being reported and the activities in this notice,” and (ii) “select SAR Field 38(z) (Other) as the associated suspicious activity type to indicate a connection between the suspicious activity reported and OCSE activity and include the term ‘OCSE’ in the text box.” FinCEN requests that reporting entities utilize the Child Sexual Exploitation terms and definitions located in the Appendix of the notice when detailing suspicious activity. FinCEN also specifies the selections to be utilized if human trafficking and human smuggling is suspected.
Former officials agree SEC usurped FinCEN’s BSA enforcement authority
On August 20, former FinCEN officials filed an amicus brief in support of a petition for certiorari filed by penny stock broker-dealer (petitioner) against the SEC claiming the agency usurped FinCEN’s Bank Secrecy Act (BSA) enforcement authority. The petition seeks to reverse a U.S. Court of Appeals for the Second Circuit decision, which upheld a $12 million penalty and concluded the SEC has the authority to bring an action under Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 promulgated thereunder for failure to comply with the Suspicious Activity Report (SAR) provisions of the BSA. As previously covered by InfoBytes, the appellate court rejected the broker-dealer’s argument that the SEC is attempting to enforce the BSA, which only the U.S. Treasury Department has the authority to do. The appellate court noted that the SEC is enforcing the requirements of Rule 17a-8, which requires broker-dealers to adhere to the BSA in order to comply with requirements of the Exchange Act, which does not constitute the agency’s enforcement of the BSA. Moreover, the appellate court concluded that the SEC did not overstep its authority when promulgating Rule 17a-8, as SARs “serve to further the aims of the Exchange Act by protecting investors and helping to guard against market manipulation,” and that the broker-dealer did not meet its “‘heavy burden’ to show that Congress ‘clearly expressed [its] intention’ to preclude the SEC from examining for SAR compliance in conjunction with FinCEN and pursuant to authority delegated under the Exchange Act.”
The former officials’ brief states that they “have no interest in the facts” of the petitioner’s dispute with the SEC, but rather “are concerned that the Second Circuit’s misunderstanding of FinCEN’s delegated enforcement authority will lead to confusion among the financial institutions that must comply with the BSA; create multiple, conflicting BSA regulatory regimes; decrease American influence over global financial regulators; and hamper U.S. law enforcement and national security efforts by diminishing the value of BSA data.” They further pointed out that the appellate court “erred in conflating delegated compliance examination efforts with the exercise of enforcement authority and let stand SEC and lower court decisions applying materially different legal standards with a lower level of judicial oversight and review than that established by Congress.” The former officials stressed that the appellate court’s decision fails “to appreciate the nature of the AML regime and therefore FinCEN’s unique expertise and central role,” adding that the decision “threatens to undermine the BSA statutory regime and harm U.S. efforts to fight money laundering and terrorist financing” and may affect other regulators and regulated entities.
FinCEN’s interactive SAR stats include 2020 data
On August 19, FinCEN announced that its Interactive SAR Stats webpage now includes Filing Trend Data by industry updated through December 31, 2020. As previously covered by InfoBytes, SAR Stats—formerly called By the Numbers—is an annual compilation of numerical data gathered from the Suspicious Activity Reports (SARs) filed by financial institutions using FinCEN’s new unified SAR form and e-filing process. Interactive SAR Stats provide users the opportunity to find FinCEN’s trend data for aggregated counts of defined suspicious activities that financial institutions file with FinCEN as required by the Bank Secrecy Act.
Broker-dealer settles with SEC for failing to file SARs
On May 12, the SEC announced a settlement with a broker-dealer for allegedly violating the Securities and Exchange Act by failing to consistently implement its anti-money laundering (AML) program and file Suspicious Activity Reports (SARs) despite knowing individuals were attempting to gain unauthorized access to retirement accounts. According to the SEC’s order, from September 2015 through October 2018, the broker-dealer allegedly knew that individuals were attempting to gain access, or had gained access, to plan participants’ retirement accounts through the use of improperly obtained personal identifying information. The SEC alleged that, despite this knowledge, the broker-dealer failed to file approximately 130 SARs in cases where it had detected the suspicious activity and, in the roughly 297 SARs that it did file, failed to include certain required information linked to the bad actors, such as URL addresses, IP addresses, and other electronic identifying information. The order requires the broker-dealer, who has neither admitted nor denied the SEC’s allegations, to cease and desist from future violations and pay a $1.5 million penalty. The SEC acknowledged the broker-dealer’s significant cooperation in the investigation and subsequent remedial efforts.
DOJ charges unlicensed money service business with AML violations
On April 14, the DOJ unsealed an indictment charging two defendants with allegedly failing to maintain anti-money laundering (AML) controls, failing to file suspicious activity reports (SARs) with the Department of Treasury, and owning and operating an unlicensed, unregistered money transmitting business in violation of the Bank Secrecy Act (BSA). According to the DOJ, the defendants allegedly conducted high-risk transactions through their unlicensed money transmitting and money service business via a New York credit union, “caus[ing] the transfer of more than $1 billion in high-risk transactions, including hundreds of millions of dollars originating from foreign jurisdictions.” The DOJ alleged that while the defendants represented to financial institutions that they were aware of the risks associated with the high-risk business and would conduct the required, appropriate BSA/AML oversight, one of the defendants “willfully failed to implement and maintain the requisite [AML] programs or conduct oversight required to detect, identify, and report suspicious transactions.” The defendants have been charged with failure to maintain an AML program, failure to file SARs, and operating an unlicensed money transmitting business. The indictment seeks forfeiture of any property constituting, or derived from, proceeds obtained directly or indirectly as a result of the alleged offenses.
FinCEN Exchange discusses BSA suspicious activity reporting statistics
On March 23, FinCEN convened a virtual FinCEN Exchange event with representatives from depository institutions, money services businesses, and law enforcement to discuss Bank Secrecy Act (BSA) filing statistics for certain low-dollar, voluntarily-filed suspicious activity reports containing a transaction nexus to Arizona, New Mexico, Texas, Oklahoma, and Louisiana. As previously covered by InfoBytes, FinCEN launched the exchange program in 2017 to create opportunities for regular briefings between FinCEN, law enforcement, and financial institutions, and to assist financial institutions meet their BSA compliance obligations while filing “high-quality BSA reports,” which aid law enforcement in detecting, preventing, and prosecuting criminals and other bad actors.
FinCEN issues warning about fraud targeting Covid-19 economic impact payments
On February 24, the Financial Crimes Enforcement Network (FinCEN) issued an advisory alerting financial institutions to potential fraud and other financial crimes targeting Covid-19 economic impact payments (EIP). The advisory is based on FinCEN’s analysis of Covid-19 related information obtained from Bank Secrecy Act data, public reporting, and law enforcement partners, and outlines potential methods of EIP fraud, associated red flags, and information for reporting suspicious activity related to such fraud. According to FinCEN, U.S. authorities have detected a wide range of EIP-related fraud, including (i) fraudulent, altered, or counterfeit checks; (ii) theft of EIPs; (iii) phishing schemes using EIPs as a lure, in which emails, letters, phone calls, and text messages are used by fraudsters in order to obtain personal information such as account numbers and passwords; and (iv) private companies with control over a person’s finances that seize a person’s EIP for wage garnishment or debt collection and do not return the inappropriately-seized payment.
FinCEN also issued a notice for filing suspicious activity reports (SAR) related to Covid-19. The notice consolidates filing instructions and key terms for fraudulent activities, crimes, and cyber/ransomware attacks related to the pandemic. FinCEN reminded financial institutions to consult previously issued advisories and notices to access additional SAR filing instructions and other Covid-19-related advisories and alerts (available here).
Fed proposes SAR filing exemptions
On January 22, the Federal Reserve Board published a notice of proposed rulemaking, which would modify the requirements to file Suspicious Activity Reports (SARs) for state member banks, Edge and agreement corporations, U.S. offices of foreign banking organizations supervised by the Federal Reserve, and bank holding companies and their nonbank subsidiaries. The proposal would amend the Board’s SAR regulations to allow for the issuance of exemptions from the requirements of those regulations. As previously covered by InfoBytes, in December, the FDIC and the OCC issued similar proposals. As with the OCC and the FDIC proposals, the Board’s proposal is intended “to facilitate supervised institutions in meeting Bank Secrecy Act requirements more efficiently and effectively, including through development of innovative solutions.” Comments on the proposed rule are due February 22.