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FINRA outlines red flags for suspicious activity monitoring and reporting
On May 6, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 19-18, which provides guidance to member firms regarding suspicious activity monitoring and reporting obligations under FINRA’s Anti-Money Laundering Compliance Program. Specifically, the Notice is intended to assist broker-dealers with their existing obligations under Bank Secrecy Act/Anti-Money Laundering (BSA/AML) requirements by providing a list of “money laundering red flags,” augmenting the red flags list from the 2002 Notice to Members 02-21 with additional red flags published by a number of U.S. government agencies and international organizations. The guidance lists potential red flags in a number of categories, including (i) customer due diligence and interactions with customers; (ii) deposits of securities; (iii) securities trading; (iv) money movements; and (v) insurance products. The Notice emphasizes that the list of 97 red flags “is not an exhaustive list and does not guarantee compliance with AML program requirements or provide a safe harbor from regulatory responsibility,” but rather provides examples for firms to consider incorporating into their AML programs, as may be appropriate in implementing a risk-based approach to BSA/AML compliance. The Notice also reminds firms to be aware of emerging areas of risk, such as those associated with activity in digital assets.
Updated FinCEN advisory warns of continued Venezuelan money laundering attempts
On May 3, the Financial Crimes Enforcement Network (FinCEN) issued an updated advisory to warn financial institutions of continued public corruption and attempted money laundering related to Venezuelan government agencies and political figures. The advisory updates a September 2017 advisory (previously covered by InfoBytes here) and renews the description of public corruption in Venezuela. The advisory also describes how “corrupt Venezuelan senior political figures exploit a Venezuelan government-administered food program by directing overvalued, no-bid contracts to co-conspirators that use ‘an over-invoicing trade-based money laundering’” scheme, which involves, among other things, front or shell companies, non-dollar denominated accounts, and nested accounts designed to evade sanctions and anti-money laundering/countering the financing of terrorism (AML/CFT) controls. The advisory also notes attempts by former President Maduro’s regime to evade sanctions and AML/CFT controls through the use of digital currency. The update provides revised financial red flags to assist with the identification and reporting of suspicious activity to FinCEN in connection with senior Venezuelan political figures.
FinCEN further emphasizes that financial institutions should continue to follow a risk-based approach and that normal transactions involving Venezuelan business and nationals are not necessarily reflective of the aforementioned risks.
See here for continuing InfoBytes coverage of actions related to Venezuela.
FinCEN issues first ever penalty against peer-to-peer virtual currency exchanger
On April 18, the Financial Crimes Enforcement Network (FinCEN) announced a civil money penalty against a California-based individual operating as peer-to-peer exchanger for willful violations of Bank Secrecy Act (BSA) money service business (MSB) requirements. According to FinCEN, the exchanger engaged in activities such as (i) advertising his intentions to purchase and sell bitcoin; and (ii) completing transactions using in-person cash payments, currency sent or received in the mail, or wire transfers through the use of a depository institution. These activities, FinCEN claimed, qualified him as a virtual currency exchanger, MSB, and a financial institution under the BSA. As such, the exchanger was required to register as a MSB with FinCEN, establish and implement an effective written anti-money laundering program, detect and file suspicious activity reports, and report currency transactions, which he failed to do. The order requires the exchanger to pay a $35,350 civil money penalty and permanently prohibits him from engaging in any activity that would qualify him as a MSB.
FATF releases permanent mandate to combat money laundering and other proliferation financing
On April 12, the U.S. Department of the Treasury announced that the Financial Action Task Force (FATF), an international standard setting body, agreed to a permanent mandate for the FATF to continue its work against combating money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction. FATF ministers agreed to meet every two years, starting in 2022, to support the commitment to implementing the mandate. Among other things, the mandate states the FATF will (i) develop and refine international standards for combating money laundering; (ii) respond to significant new and emerging threats to the global financial system; (iii) maintain engagement with other international organizations and bodies; and (iv) consult the private sector on matters relating to FATF’s work. The mandate also provides a detailed layout of the organization’s membership composition and internal organization.
NYDFS denies virtual currency license for BSA/AML compliance deficiencies
On April 10, NYDFS announced that it denied a company’s applications to engage in virtual currency business and money transmission activity in New York due to the company’s alleged deficiencies in BSA/AML and Office of Foreign Assets Control (OFAC) compliance requirements, capital requirements, and token and product launches. According to the denial letter, the company applied for a virtual currency business activity license in August 2015, and had been operating under NYDFS’ virtual currency “safe harbor” ever since. Additionally, in July 2018, the company applied to engage in money transmission activity with the state. According to NYDFS, the state’s licensing law requires an applicant to demonstrate the ability to comply with the provisions of the licensing requirements, including “implementing an effective BSA/AML/OFAC compliance program as well as other measures to protect customers and the integrity of the virtual currency markets.” Based on NYDFS’ four-week on-site review of the company’s operations, NYDFS concluded, among other things, that the company’s BSA/AML/OFAC compliance program lacked (i) adequate internal policies, procedures and controls; (ii) a qualified, effective compliance officer; (iii) adequate employee training; (iv) adequate independent program testing; and (v) adequate customer due diligence. The company is required to immediately cease operating in New York State and doing business with New York residents and has 60 days to wind down or transfer its positions and transactions.
Micronesian official pleads guilty to corruption-related money laundering conspiracy
On April 3, the DOJ announced that a Micronesian government official pleaded guilty in the District of Hawaii to a money laundering conspiracy “involving bribes made to corruptly secure engineering and project management contracts from the government of the Federated States of Micronesia (FSM), in violation of the” FCPA. The official was arrested in February after a Hawaiian executive pleaded guilty to a related FCPA conspiracy charge the prior month (see previous FCPA Scorecard coverage here).
According to the DOJ, the official "was a government official in the FSM Department of Transportation, Communications and Infrastructure who administered FSM’s aviation programs, including the management of its airports.” The official admitted that, between 2006 and 2016, a Hawaii-based engineering and consulting company “paid bribes to FSM officials, including [the official], to obtain and retain contracts with the FSM government valued at nearly $8 million.” The official’s sentencing is scheduled for July 29.
Waters says housing finance reform and diversity are top priorities
On April 2, House Financial Services Committee Chairwoman Maxine Waters (D-CA) spoke before the American Bankers Association’s Washington Summit to discuss several priorities and emerging issues, including comprehensive housing reform, diversity in financial services, fintech regulation, cannabis banking, and Bank Secrecy Act/anti-money laundering (BSA/AML) reform.
- Housing finance reform. Waters discussed resolving the long-term status of GSEs and several core principles underlying housing finance reform including, among other things, (i) maintaining access to the 30-year, fixed-rate mortgage; (ii) ensuring sufficient private capital is available to protect taxpayers; (iii) requiring transparency and standardization that ensures a level-playing field for all financial institutions especially community banks and credit unions; (iv) maintaining credit access for all qualified borrowers; and (v) ensuring access to affordable rental housing. “Many of the proposals for housing finance reform exclude small financial institutions from being able to access the secondary mortgage market. I believe that the inclusion of small financial institutions must be a critical part of any conversations about GSE reform,” Waters stated.
- Diversity in financial services. Waters discussed the newly formed Diversity and Inclusion Subcommittee (previously covered by InfoBytes here) when noting that minority representation in financial services management positions remains underrepresented. The new subcommittee will examine diversity trends to promote inclusion. “Diverse representation in these institutions, and particularly at the management level, is essential to ensure that all consumers have fair access to credit, capital, and banking and financial services,” Waters stated.
- Fintech regulation. Waters commented that fintech regulation is a committee priority. Waters stated that it is important “we encourage responsible innovation with the appropriate safeguards in place to protect consumers and without displacing community banks.”
- Cannabis banking. Waters highlighted her committee's work last month in advancing HR 1595, which would create protections for financial institutions that provide services to state-sanctioned cannabis-related businesses. The bill would create a safe harbor for depository institutions that would bar federal banking regulators from terminating banks’ deposit insurance or otherwise penalize them if they provide services to a cannabis-related legitimate business or service provider.
- BSA/AML reform. Waters discussed a hearing that was held to look at “common sense” improvements that could be made to the current BSA/AML framework. She further stated that the committee is considering beneficial ownership legislation, in addition to exploring ways to work with the Financial Crimes Enforcement Network regarding BSA/AML reporting.
Hong Kong energy executive sentenced to three years in prison for Chad and Uganda bribes
According to the DOJ, on March 25 a Hong Kong executive was sentenced in the SDNY to a 36-month prison sentence. He headed up a private Chinese energy company and was sentenced “for his role in a multi-year, multimillion-dollar scheme to bribe top officials of Chad and Uganda in exchange for business advantages.”
He was convicted of money laundering, violating the FCPA, and conspiracy after a week-long trial in December 2018. The DOJ alleged that starting in the fall of 2014, he used his US-based NGO to cover up a scheme in which he offered $2 million in cash to the President of Chad concealed in gift boxes, in exchange for the company receiving oil rights from the government; the President rejected the bribe. In Uganda, the DOJ alleged that he gave $1,000,000 in cash payments to the Foreign Minister of Uganda and the President of Uganda.
FinCEN updates list of FATF-identified jurisdictions with AML/CFT deficiencies
On March 8, the Financial Crimes Enforcement Network (FinCEN) issued an advisory reminding financial institutions that on February 22, the Financial Action Task Force (FATF) updated two documents that list jurisdictions identified as having “strategic deficiencies” in their anti-money laundering and combating the financing of terrorism (AML/CFT) regimes. The first document, the FATF Public Statement, identifies two jurisdictions, the Democratic People’s Republic of Korea and Iran, that are subject to countermeasures and/or enhanced due diligence due to their strategic AML/CFT deficiencies. The second document, Improving Global AML/CFT Compliance: On-going Process, identifies the following jurisdictions with strategic AML/CFT deficiencies that have developed an action plan with the FATF to address those deficiencies: the Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, and Yemen. Notably, Cambodia has been added to the list due to the lack of effective implementation of its AML/CFT framework. FATF further notes that several jurisdictions have not yet been reviewed, and that it “continues to identify additional jurisdictions, on an ongoing basis, that pose a risk to the international financial system.” Generally, financial institutions should consider both the FATF Public Statement and the Improving Global AML/CFT Compliance: On-going Process documents when reviewing due diligence obligations and risk-based policies, procedures, and practices.
CFTC, SEC settle with foreign trading platform conducting Bitcoin transactions without proper registration
On March 4, the CFTC resolved an action taken against a foreign trading platform and its CEO (defendants) for allegedly offering and selling security-based swaps to U.S. customers without registering as a futures commission merchant or designated contract market with the CFTC. The CFTC alleged that the platform permitted customers to transact in “contracts for difference,” which were transactions to exchange the difference in value of an underlying asset between the time at which the trading position was established and the time at which it was terminated. The transactions were initiated through, and settled in, Bitcoin. The CFTC alleged that these transactions constituted “retail commodity transactions,” which would have required the platform to receive the proper registration.
According to the CFTC, the defendants, among other things, (i) neglected to register as a futures commission merchant with the CFTC; and (ii) failed to comply with required anti-money laundering procedures, including implementing an adequate know-your-customer/customer identification program. The consent order entered by the U.S. District Court for the District of Columbia imposes a civil monetary penalty of $175,000 and requires the disgorgement of $246,000 of gains. The consent order also requires the defendants to certify to the CFTC the liquidation of all U.S. customer accounts and the repayment of approximately $570,000 worth of Bitcoins to U.S. customers.
In a parallel action, the SEC entered into a final judgment the same day to resolve claims that, among other things, the defendants failed to properly register as a security-based swaps dealer. The defendants are permanently restrained and enjoined from future violations of the Securities Act of 1933 and are required to pay disgorgement of approximately $53,393. This action demonstrates the potential application of CFTC and SEC registration requirements to non-U.S. companies engaging in covered transactions with U.S. customers.