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DOJ charges Turkish bank in Iran sanctions violation scheme
On October 15, the DOJ announced charges against a Turkish bank alleging fraud, money laundering, and sanctions offenses related to the bank’s alleged participation in a scheme to evade U.S. sanctions on Iran. According to the indictment, the bank used money service businesses and front companies to evade U.S. sanctions against Iran and “avoid prohibitions against Iran’s access to the U.S. financial system.” The bank allegedly lied to U.S. regulators and foreign banks about its participation in the fraudulent transactions. The concealed funds, the DOJ claimed, “were used to make international payments on behalf of the Government of Iran and Iranian banks, including transfers in U.S. dollars that passed through the U.S. financial system in violation of U.S. sanctions laws.” Additionally, the DOJ asserted that the conduct—which allowed Iran access to “billions of dollars’ worth of Iranian oil revenue”—was protected by high ranking government officials in Iran and Turkey, some of whom received millions of dollars in bribes to promote and protect the scheme from U.S. scrutiny.
Agencies issue BSA compliance reminder on digital assets
On October 11, the SEC, Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN) issued a joint statement to remind persons who engage in digital asset activities or handle cryptocurrency transactions of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). According to the agencies, AML/CFT obligations apply to entities defined as “financial institutions” under the Bank Secrecy Act, which include “futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSB) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC.” The obligations include, among other things, (i) establishing and implementing an effective AML program; and (ii) complying with recordkeeping and reporting requirements such as suspicious activity reporting (SARs).
The agencies note that persons who engage in digital asset-related activities may have AML/CFT obligations regardless of the “label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset.” According to the agencies, the facts and circumstances underlying the asset or service, “including its economic reality and use,” is what determines how the asset is categorized, the applicable regulatory treatment, and whether the persons involved are financial institution under the BSA.
Additionally, FinCEN reminded financial institutions of its supervisory and enforcement authority to “ensure the effectiveness of the AML/CFT regime,” emphasizing that persons who provide money transmission services are MSBs subject to FinCEN regulation. FinCEN also referred to its May 2019 interpretive guidance, which consolidated and clarified current FinCEN regulations, guidance, and administrative rulings related to money transmissions involving virtual currency. (Previous InfoBytes coverage here.)
FinCEN Director warns of account takeovers via fintech data aggregators
On September 24, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco spoke at the Federal Identity (FedID) Forum and Exposition, discussing the role of FinCEN in combatting fraud and cybercrime and highlighting concerns regarding identity crimes. Blanco noted that FinCEN sees approximately 5,000 account takeover reports each month, a crime that “involves the targeting of financial institution customer accounts to gain unauthorized access to funds.” Moreover, FinCEN sees a high amount of fraud through account takeovers via fintech platforms, where cybercriminals use fintech data aggregators to facilitate account takeovers and fraudulent wires. Blanco stated that cybercriminals create fraudulent accounts and are able to “exploit the platforms’ integration with various financial services to initiate seemingly legitimate financial activity while creating a degree of separation from traditional fraud detection efforts.”
Additionally, Blanco discussed how cybercriminals use business email compromise (BEC) fraud schemes to target financial institutions and relayed FinCEN’s efforts to combat these schemes. As previously covered by InfoBytes, in July, FinCEN issued an updated advisory, describing general trends in BEC schemes, information concerning the targeting of non-business entities, and risks associated with the targeting of vulnerable business processes. Blanco also discussed (i) FinCEN’s final rule titled the “Customer Due Diligence Requirements for Financial Institutions,” (the CDD Rule) (prior coverage by InfoBytes here); and (ii) FinCEN’s December 2018 joint statement with federal banking agencies encouraging innovative approaches to combatting money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system (previously covered by InfoBytes here).
Deputy Treasury Secretary discusses priorities and developments
On September 23, Department of Treasury Deputy Secretary Justin Muzinich delivered remarks at the 2019 Treasury Market Structure Conference. He discussed broadly the Department’s domestic and international finance priorities, including housing finance reform, digital taxation, cryptocurrency, and securities. Muzinich first addressed Treasury’s housing finance reform plan released September 5 (previously covered by InfoBytes here), stating that the “plan includes nearly 50 recommended legislative and administrative reforms that are incremental, realistic, and balanced, and aim to preserve widespread and affordable access to the 30-year fixed-rate mortgage.” With respect to digital taxation, Muzinich discussed the disproportionate effect of taxing digital businesses’ revenue on U.S. firms, and stated that the Department is actively seeking a multilateral solution. He next addressed several concerns regarding the use of cryptocurrency to evade existing legal frameworks, such as those governing taxation, anti-money laundering, and countering the financing of terrorism. Muzinich emphasized that the existing legal frameworks “apply to digital assets in no uncertain terms,” and referred to guidance released by the Department’s Office of Foreign Assets Control, which clarified that U.S. sanctions compliance obligations are the same regardless of whether a transaction is denominated in digital currency or traditional fiat currency (previously covered by InfoBytes here.) Muzinich noted, however, that there still exist several concerns that the government must consider regarding the effect cryptocurrency has on financial stability, the monetary base, consumer protection and privacy. The Deputy Secretary noted that these issues are being discussed both internationally and domestically. Muzinich closed his remarks by discussing the securities market and announced, among other things, that the Department is working with the Financial Industry Regulatory Authority to begin publicly releasing aggregated data on Treasury volumes, which will ensure that all market participants have access to the same comprehensive data.
FinCEN deputy director discusses innovation, non-bank supervision, and “culture of compliance”
On September 11, Financial Crimes Enforcement Network (FinCEN) Deputy Director Jamal El-Hindi delivered remarks at the 2019 Money Transmitter Regulators Association’s annual conference. El Hindi’s remarks focused on innovation and reform pertaining to the Bank Secrecy Act (BSA), supervision in the non-bank financial institution sector and coordination with state supervisors, and “the importance of a strong culture of compliance and what it means in a national and global security context.” According to El-Hindi, the BSA/anti-money laundering system “is good; but it can always be improved,” including through innovations that can “help better detect and safeguard against illicit activity.” El-Hindi reiterated FinCEN’s policy statement from December 2018, which encouraged innovation in the banking sector. (Previously covered by InfoBytes here.)
El-Hindi also highlighted recent discussions related to the role artificial intelligence can play in reducing false positives to assist human analysis, and the potential for blockchain technology to enhance transparency through the understanding of customer identity or transaction profiles. He noted that these themes and others emerged from FinCEN’s recent “Innovation Hours Program,” which encourages fintech companies, regtech companies, and financial institutions to present to FinCEN new and innovative products and services for potential use in the financial sector. The program’s upcoming September meeting will focus on innovations in “know your customer” compliance, BSA reporting, and core inter-bank payment and messaging systems associated with industry anti-money laundering/combating the financing of terrorism efforts. Additionally, El-Hindi noted that FinCEN’s enhanced supervision of nonbank financial institutions involves “actively prioritizing and engaging in,” among other activities, (i) conducting examinations of “specialized, rapidly evolving” financial services providers (e.g., virtual currency exchangers and administrators); (ii) identifying sector data to support FinCEN's analytic endeavors; and (iii) developing a stronger framework for risk assessments of the nonbank financial sector “from both the compliance and illicit activity standpoints.” El-Hindi closed his remarks by encouraging FinCEN and other regulators to discuss with foreign counterparts “the concept of a culture of compliance in the United States and what underpins it, and explore with our counterparts concepts that could underpin a culture of compliance in their own jurisdictions.”
FinCEN division will investigate global money-laundering threats
On August 28, the Financial Crimes Enforcement Network (FinCEN) announced a new division intended to investigate global money laundering threats. The Global Investigations Division (GID)—led by Matthew Stiglitz, a former senior official in the Department of Justice’s Criminal Division—will target activities such as weapons of mass destruction proliferation, rogue state actors, transnational organized crime, and narcotics trafficking. According to FinCEN, GID will utilize the agency’s Bank Secrecy Act authorities, including Section 311 of the USA PATRIOT Act, to combat both domestic and international illicit terrorist finance and money laundering threats.
OFAC and FinCEN target synthetic opioids
On August 21, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) and Treasury’s Financial Crimes Enforcement Network (FinCEN) announced coordinated actions related to the manufacturing, selling, or distribution of synthetic opioids or their precursor chemicals. OFAC identified two Chinese nationals, a trafficking organization, and a related entity as “significant foreign narcotics traffickers” pursuant to the Foreign Narcotics Kingpin Designation Act, for running “an international drug trafficking operation that manufactures and sells lethal narcotics, directly contributing to the crisis of opioid addiction, overdoses, and death in the United States.” OFAC notes that, in August 2018, the U.S. Attorney’s Office for the Northern District of Ohio unsealed an indictment, which charged one of the Chinese nationals and his father with operating a conspiracy that allegedly manufactured and shipped deadly fentanyl analogues, cathinones, and cannabinoids to at least 37 U.S. states. Additionally, in September 2017, the U.S. Attorney’s Office for the Southern District of Mississippi indicted another significant foreign narcotics trafficker on two counts of conspiracy to manufacture and distribute multiple controlled substances, including fentanyl, and seven counts of manufacturing and distributing the drugs in specific instances. As a result of the sanctions designation, “all property and interests in property of these individuals and entities that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.”
Additionally, FinCEN released an advisory alerting financial institutions to financial schemes related to the trafficking of fentanyl and other synthetic opioids. The advisory provides detailed explanations of the funding mechanisms associated with fentanyl trafficking patterns, including (i) purchases from a foreign source of supply made using money services businesses (MSBs), bank transfers, or online payment processors; (ii) purchases from a foreign source of supply made using convertible virtual currency (CVC); (iii) purchases from a U.S. source of supply made using a MSB, online payment processor, CVC, or person-to-person sales; and (iv) more general money laundering mechanisms associated with procurement and distribution. The advisory also provides a list of red flags financial institutions should be aware of that may assist in identifying suspected schemes related to illicit fentanyl trafficking. Lastly, the advisory reminds financial institutions of their regulatory obligations to combat illicit financing and anti-money laundering, such as due diligence obligations, customer identification, and suspicious activity reporting.
NCUA allows credit unions to serve hemp businesses
On August 19, the NCUA released interim guidance allowing federally insured credit unions to service hemp businesses. The guidance notes that, as of December 20, hemp is no longer a controlled substance at the federal level—the Agriculture Improvement Act of 2018 (2018 Farm Bill) removed hemp from Schedule I of the Controlled Substances Act. However, hemp may not be produced lawfully under federal law, beyond a 2014 pilot program, until the USDA promulgates regulations and guidelines to implement the hemp production provisions of the 2018 Farm Bill. The guidance instructs credit unions to be aware of federal, state, and tribal laws and regulations that apply to any hemp-related businesses they may service and to have Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance programs equal to the level of complexity and risks involved. The guidance emphasizes that lending to lawfully operating hemp-related businesses is permissible, but that the lending must be done in accordance with NCUA’s regulations for lending, and appropriate underwriting standards must be considered. NCUA notes that the guidance will be updated once the USDA regulations are finalized.
FinCEN director discusses gaming industry AML compliance
On August 13, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco delivered remarks at the 12th Annual Las Vegas Anti-Money Laundering Conference stressing the need for compliance within the gaming industry, particularly as new technologies emerge such as mobile gaming and the use of convertible virtual currencies (CVC) increases. With the U.S. Supreme Court issuing a decision in May holding that states can legalize sports gambling (previously covered by InfoBytes here), Blanco stated that casinos need to consider ways to integrate their sports betting programs—including mobile sports betting apps—into their existing anti-money laundering programs. These measures must include establishing and implementing procedures for detecting and reporting suspicious activities, Blanco noted, reminding the audience of FinCEN’s FAQs designed to assist financial institutions when reporting cyber indicators and cyber-enabled financial crime.
Blanco also discussed FinCEN’s work with respect to cybersecurity and virtual payments, noting, among other things, that both online and physical casinos that accept CVC need to consider how they review transactions to determine the source of the currency and recognize indicators of suspicious activity. Blanco referred casinos to consolidated guidance issued by FinCEN in May (previously covered by InfoBytes here), and expressed a concern that “CVC-related SAR filings by casinos have not been as robust as expected since the May CVC guidance and advisory were published.” He further stressed the importance of information-sharing between casinos, and highlighted that sharing SARs can contribute to the identification of suspicious transactions as well as Bank Secrecy Act compliance responsibilities.
FDIC Chairman stresses innovation in banking
On August 2, FDIC Chairman Jelena McWilliams spoke before the Financial Conduct Authority’s 2019 Global AML and Financial Crime TechSprint in Washington, D.C. on the importance of promoting innovation within the banking industry and ramping up efforts to help banks embrace new technologies. McWilliams noted that she is “impatient for transformation,” especially in areas that would assist banks—particularly community banks—in eliminating regulatory uncertainty, adopting new technologies, managing risks, or partnering with fintech startups to improve regulatory compliance in areas such as Bank Secrecy Act/anti-money laundering rules. McWilliams discussed the FDIC’s new office of innovation (FDiTech), which was created to support these goals. In particular, McWilliams indicated that the FDIC would support collaboration with developers, institutions, and regulators to pilot new products and services, with the goal of publishing the results of these pilots to facilitate understanding of what worked, what did not, and methods of improvement going forward. According to McWilliams, “[b]y promoting these developments and encouraging our FDIC-supervised institutions to voluntarily adopt a more advanced technological footing, we can help foster the transformation of the community banking sector. In turn, the institutions we supervise can reach greater efficiency with products and services that are more attractive to consumers.”