Category: Anti-Money Laundering

Paper as a Sanctions Violation

The United States has a long arm in imposing financial restrictions. U.S. companies cannot assist their foreign subsidiaries or affiliates with sales to sanctioned countries or persons on the blocked persons list. A US company got caught doing this.

White Birch was accused of facilitating the sale and shipment of Canadian paper from White Birch’s Canadian subsidiary to Sudan. Sudan was subject to a U.S. embargo under the Sudanese Sanctions Regulations, 31 C.F.R. part 538. The Office of Foreign Asset Control determined that White Birch personnel from both its U.S. headquarters and Canadian subsidiary “were actively involved in discussing, arranging, and executing the export transactions to Sudan.” Assistance is prohibited under OFAC’s regulations that bar U.S. persons from “facilitating” transactions between non-U.S. companies (such as foreign subsidiaries) and sanctioned countries.

I’m not sure “discussing” by itself is enough to trigger a sanctions violation. Many companies discuss how to deal with potential transactions that implicate sanctions. The discussion will generally end in “no.” It was taking the steps to help with arranging and executing that are the problem.

This was not a little paper. It was over 500 metric tons of paper worth over $300,000 when the sale and shipment happened in 2013.

As with the recent diamond case, FinCEN was short on details. The enforcement information did note that White Birch tried to conceal the ultimate destination of the paper shipment from its bank. The bank was involved as the confirming bank on the letter of credit for the export. I would assume that the bank would have filed a suspicious activity report that caught FinCEN’s attention.

FinCEN brought the charges even though the Sudan ban has now been lifted. Effective January 17, 2017, all transactions prohibited under the Sudanese Sanctions Regulations are authorized pursuant to the general license (31 C.F.R. § 538.540). In the enforcement action, FinCEN made it clear that this general license does not affect past, present, or future OFAC enforcement investigations or actions related to any apparent violations of the Sudanese Sanctions Regulations relating to activities that occurred prior to the effective date of the general license.

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Diamonds Are A Sanctions Violation

On four separate occasions, an individual purchased jewelry from one of the Cartier boutiques located in California or Nevada for shipment to Shuen Wai Holding Limited in Hong
Kong. I’m sure the store routinely ships purchases around the world. The problem is that Shuen Wai Holding Limited is named as a Specially Designated Narcotics Trafficker pursuant to the Foreign Narcotics Kingpin Designation Act. Shuen Wai Holding Limited is associated with Wei Hsueh Kang and the United Wa State Army that produce opium out of Golden Triangle in Burma.

If a person is on the sanctions list, you can’t do business with them in the United States.

I had never thought about the sanctions list in the context of consumer transactions. It did bring to mind a story I heard while attending the FBI’s Corporate Compliance Officer Outreach Event several years ago. An agent told the story of a border guard who flagged through a car with a suitcase full of gift cards. The border guard was looking for cash and didn’t think twice about the gift cards. Of course the gift cards, have some limitations, but are just as good as cash in most instances.

The same could be true of Cartier. They many never have thought that their customers would be drug kinpin associates trying to launder money.

There is no background in the sanctions notice about the circumstances of the purchases, so I used my imagination to think of scenarios that I thought likely.

The first scenario that came to mind would be one of mistaken name. Cartier was audited and the shipping to Shuen Wai Holding Limited was a false positive. Cartier should have resolved it and did not. Assuming Cartier even checks shipments against the SDN list. That seems unlikely given that there was an enforcement action.

The second scenario was a foolish associate of Wei Hsueh Kang spending time in the US and looking for some fancy jewelry. The associate foolishly uses a real address instead of an anonymous one.

The third scenario is Wei Hsueh Kang actively used a weakness in Cartier’s shipping policies to launder money. The Cartier boutiques were located in California or Nevada. I assume that means Las Vegas, the home of gambling and lots of cash transactions. The casinos are going to check off-shore wires against the SDN list. With that path blocked, the associate chose instead to walk into the Cartier in the casino. There is one in the Wynn hotel. Or the associate could have walked down the street to the Las Vegas Forum or the The Shops at Crystals. The associate purchases a suitcase full of jewelry that can easily be resold. Or perhaps its unset diamonds or other precious items.

That looks like some a soft spot that money laundering syndicates could take advantage of. The Office of Foreign Assets Control points that out in the enforcement press release:

This enforcement action highlights the risks for companies with retail operations that engage in international transactions, specifically including businesses that ship their products directly to customers located outside of the United States. OFAC encourages companies to develop, implement, and maintain a risk-based approach to sanctions compliance, and to implement processes and procedures to identify and mitigate areas of risks. Some of the multitude of factors that a company could consider with respect to its compliance program is an assessment of its products and services, frequency and volume of international transactions and shipments, client base, and size and geographic location(s).

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More Targeting of Real Estate Transactions by FinCEN

The US Financial Crimes Enforcement Network has started to look closely at cash purchases of expensive real estate as a possible source of money laundering. In January, FinCEN issued two Geographic Targeting Orders, one for New York and one for Miami. Now more metropolitan areas are in FinCEN’s sights.

Alamo

According to the press release, FinCEN has been gathering some good data from the small step it took earlier this year. Apparently it thinks there are other jurisdictions that are likely places for money laundering.

The new order targets all of New York City, more of the greater metropolitan Miami area, and adds in metropolitan areas in California and the area around San Antonio.

The covered transactions must meet the following criteria:

  1. An entity is the purchaser .
  2. It’s purchasing residential real estate.
  3. It’s for a large purchase price (see below).
  4. There is no bank loan or similar external financing.
  5. The purchased in made in part with cash or check or or certified check or cashier’s check.

One problem is the inclusion of a certified check or cashier’s check in the included transactions. If you’ve ever bought a home, you usually come to the closing with a certified check or cashier’s check. The closing needs cash equivalents at the closing to make sure it can send the money back out to the seller. In Massachusetts, its mandated by law.

I would guess that the FinCEN targeting order is generating mostly reports of ordinary, legal transactions.

That’s not to say that the efforts should not be applauded. Legitimate parties in real estate transactions do not want to be engaged in money laundering.

I would guess that most people engaged in this type of residential real estate money laundering have stopped using title companies in the transaction. That moves it out of the reporting requirements of the order. Title companies provide a great service, but not a required part of the transaction. It seems easy to structure around.

The purchase price guidelines in the targeted areas:

New York:

  • The Borough of Manhattan $3,000,000
  • The Borough of Brooklyn $1,500,000
  • The Borough of Queens $1,500,000
  • The Borough of Bronx $1,500,000
  • The Borough of Staten Island $1,500,000

Florida:

  • Miami-Dade County $1,000,000
  • Broward County $1,000,000
  • Palm Beach County $1,000,000

California:

  • San Diego County $2,000,000
  • Los Angeles County $2,000,000
  • San Francisco County $2,000,000
  • San Mateo County $2,000,000
  • Santa Clara County $2,000,000

Texas:

  • Bexar County $500,000

FinCEN is using title insurance companies as the gatekeeper because title insurance is a common feature in real estate transactions. FinCEN is quick to note that the title insurance companies themselves are not being implicated in the money laundering. “To the contrary, FinCEN appreciates the continued assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.”

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New Anti-Money Laundering Rules

The U.S. Treasury Department’s Financial Crimes Enforcement Network’s new customer due diligence rule requires covered financial institutions to collect information on the significant beneficial owners of customers that are legal entities.

laundering dollar bills money

For a private fund manager, the rule is not explicitly applicable. The term ‘‘covered financial institution’’ refers to: (i) Banks; (ii) brokers or dealers in securities; (iii) mutual funds; and (iv) futures commission merchants and introducing brokers in commodities.

But I don’t think private fund managers should ignore the rule. FinCEN really wants to force investment advisers into an anti-money laundering regime. And it’s still illegal to do business with those people and companies on the blocked lists.

I look at the rule as a new standard or best practice.

The Final Rule requires each covered financial institution to verify the identity of each beneficial owner of an account using risk-based procedures to the extent reasonable and practicable.

There are two prongs to the definition of “beneficial ownership”:

  1. Ownership: An individual who directly or indirectly owns 25% or more of the equity interests of a legal entity customer.
  2. Control: An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions.

The first thing I noticed was the 25% threshold for ownership to trigger beneficial ownership. The release discusses this choice, noting that many comments proposed a 10% threshold.  FinCEN notes that 25% is the FATF standard.

FinCEN continues to believe that a 25 percent threshold strikes the appropriate balance between the benefit of identifying key natural persons who have substantial ownership interests in the legal entity and the costs associated with implementing this information collection requirement.

The release makes it clear that you can set a lower threshold, but the 25% is the maximum baseline.

Investment advisers and private fund managers can continue to argue that the KYC rules should not apply to them. But FinCEN’s response will be that you are supporting terrorism and drug lords by not implementing a program.

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Laundering Dollar Bills by TaxRebate.org.uk CC BY
https://www.flickr.com/photos/59937401@N07/5857345827/

A $81 Million Dollar Hole in Anti-Money Laundering Laws

I’m vastly understating that number. We know that thieves planned to run that much through the Philippines gambling establishments. It’s a clear case of appeasing a local industry by writing loopholes in legislation.

roulette by Chris Yiu

A month ago, thieves began looting Bangladesh’s account at the New York Federal Reserve. The transfer of the money had been “fully authenticated” by an international financial messaging system, known as Swift. That means there may have been a security breach in Bangladesh. The thieves sent three dozen transfer requests. Four succeeded in moving $81 million. A fifth was stopped when the thieves misspelled the recipient’s name.

$81 million of the Bangladeshi money was sent to accounts at Rizal Commercial Banking Corp in the Philippines. According to reports, from there $29 million was directed to the account of a gambling junket operator identified as Weikang Xu at Solaire Resort & Casino, while approximately $30 million was delivered to Mr. Xu in cash. Another $21 million was transferred to a local online game company called Eastern Hawaii Leisure Co.

Casinos have always been an ideal spot for laundering money. You take cash or wires in, turn them into chips, then the chips are as good as gold. You can then cash in the chips and move money back out, looking clean and fresh.

The Philippines beefed up its anti-money laundering laws in 2013, but it decided not to add casinos to the list of covered entities. Lawmakers wanted the fledgling casino industry, and the jobs it promised to create, to flourish.

Of course, the Philippines is not alone in carving out casinos. Other countries have similar exemptions for their casinos. That makes them easier tools for money laundering.

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Roulette by Chris Yiu CC BY SA

A Small Step Forward in Real Estate Anti-Money Laundering

Real estate in the United States has been rumored to be an interesting place for hiding money. In particular, the US Treasury is concerned about illegal money getting filtered through US real estate. Until now, FinCEN has mostly relied on anti-money laundering protections on real estate transactions involving lending. FinCEN is now looking at vulnerabilities associated with all-cash real estate transactions.

Miami skyline

The focus is on high-end residential real estate in Miami and New York. Someone is buying those ultra-expensive condos in the new residential towers. FinCEN is worried that some of those buyers may be doing so with illicit money.

“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” said FinCEN Director Jennifer Shasky Calvery.

The Director of FinCEN may issue an order that imposes certain additional recordkeeping and reporting requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a geographic area. See 31 U.S.C. § 5326(a); 31 CFR § 1010.370; Treasury Order 180-01.

FinCEN issued two Geographic Targeting Orders, one for New York and one for Miami. They cover transactions that meet the following criteria:

  1. An entity is the purchaser
  2. of residential real estate in Manhattan or Miami-Dade County
  3. for a large purchase price, $3 million in Manahattan or $1 million is Miami-Dade
  4. without a bank loan or similar external financing, and
  5. is purchased with cash or check.

The big question I had is who is responsible for reporting the transaction and conducting the diligence into the beneficial owner of the purchaser entity. FinCEN put this at the foot of title companies.

FinCEN believes that title companies play a central role in the majority of real estate transactions. That is very true in the case of bank financing. Banks required title insurance on their mortgages. Homeowners may or may not pay for an owner’s policy of title insurance. It’s a good idea, but an expense when you are putting most of your free cash into the purchase.

I suppose a bad guy will just buy their high end residential real estate without title insurance to avoid a nosy investigation into who he really is and where his money comes from.

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Image is
Miami Skyline Tight Before Dawn Reflection Composite by
Matthew Paulson CC BY NC SA

New York’s Proposed Anti-Money Laundering Regulations Could Send CCOs to Jail

To start with the obvious, helping terrorists and drug kingpins with their finances is bad. The US regulatory machine has been clamping down tighter on financial institutions who engage in this bad behavior. As the bad acts continue, the regulators keep tightening the regulatory requirements. The latest tightening of the screws comes from New York.

laundering dollar bills money

Governor Andrew M. Cuomo announced that New York is proposing a new anti-terrorism and anti-money laundering regulation that includes a requirement modeled on Sarbanes-Oxley that the chief compliance officer certify that their institutions has sufficient systems in place to detect, weed out, and prevent illicit transactions. That potentially opens the certifying officer to criminal charges if the certification is incorrect or false.

It’s hard to argue against anti-money laundering regulatory requirements. The regulator’s stock response is “Then you are in favor of financing terrorists.” Nobody is in favor of that. A few greedy financial executives have gone bad and that causes the rest to endure increasing scrutiny.

The key question is who is going to get caught up in these proposed regulations.

§504.3 Transaction Monitoring and Filtering Program Requirements.
(a) Each Regulated Institution shall maintain a Transaction Monitoring Program…

§ 504.2 Definitions.
(e)“Regulated Institutions” means all Bank Regulated Institutions and all Nonbank Regulated Institutions.

(b) “Bank Regulated Institutions” means all banks, trust companies, private bankers, savings banks, and savings and loan associations chartered pursuant to the New York Banking Law (the “Banking Law”) and all branches and agencies of foreign banking corporations licensed pursuant to the Banking Law to conduct banking operations in New York.

(d) “Nonbank Regulated Institutions” shall mean all check cashers and money transmitters licensed pursuant to the Banking Law.

That moves the regulatory requirements into an area I’m no longer familiar with. New York banking law licensing and charters is outside my scope of knowledge.

The regulations go on to require the Chief Compliance Officer or functional equivalent to file an annual certification.

[T]he undersigned hereby certifies that they have reviewed, or caused to be reviewed, the Transaction Monitoring Program and the Watch List Filtering Program (the “Programs”) of (name of Regulated Institution) as of ___________ (date of the Certification) for the year ended________(year for which certification is provided) and hereby certifies that the Transaction Monitoring and Filtering Program complies with all the requirements of Section 504.3.

This is most likely not applicable to most fund managers not associated with licensed banks. We still need to keep an eye on FinCEN who is working on a new anti-money laundering requirement for registered investment advisers.

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Laundering Dollar Bills is by TaxRebate.org.UK
CC BY

Proposed Anti-Money Laundering Regulations for Investment Advisers and Fund Managers

After years of talking about it, the Financial Crimes Enforcement Network (FinCEN) issued a proposed a rule requiring certain investment advisers to establish anti-money laundering programs and report suspicious activity to FinCEN. The new regulations propose to include investment advisers in the general definition of “financial institution,” which would require them to file Currency Transaction Reports and keep records relating to the transmittal of funds.

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For private funds, engaging in Know-Your-Customer and Anti-Money Laundering has become a standard practice. Now, 12 years after FinCEN first proposed a rule-making, and then withdrew it, FinCEN published a new 86-page proposal.

The proposal would apply to investment advisers that are required to be registered with the U.S. Securities and Exchange Commission, including advisers to hedge funds, private equity funds, and other private funds. FinCEN would delegate its authority to examine investment advisers for compliance with these requirements to the SEC.

Here is the main part of the proposed regulations:

(a)(1) Each investment adviser shall develop and implement a written anti-money laundering program reasonably designed to prevent the investment adviser from being used for money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and the implementing regulations thereunder.

(2) Each investment adviser’s anti-money laundering program must be approved in writing by its board of directors or trustees, or if it does not have one, by its sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors. An investment adviser shall make its anti-money laundering program available for inspection by FinCEN or the SEC upon request.

(b) Minimum requirements. The anti-money laundering program shall at a minimum:

(1) Establish and implement policies, procedures, and internal controls reasonably designed to prevent the investment adviser from being used for money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder;
(2) Provide for independent testing for compliance to be conducted by the investment adviser’s personnel or by a qualified outside party;
(3) Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the program; and
(4) Provide ongoing training for appropriate persons.

You would have 60 days to comment once it is published.

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Upcoming Anti-Money Laundering Rules for Private Funds

The Treasury’s Financial Crimes Enforcement Network has been toying with how to impose anti-money laundering standards on private funds and investment advisers for years. There is rumbling from the White House Office of Management and Budget that it approved proposed new regulation.

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A notice of rulemaking was dropped a few years ago. The thought then was that the underlying custodian has AML standards in place to keep things in line for investment advisers.

The posting at the OMB states that a proposal is moving along. According to the entry, the rule would “prescribe minimum standards for anti-money laundering programs to be established by certain investment advisers and to require such investment advisers to report suspicious activity to FinCEN.”

A few months ago U.S. Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen gave speech to to the ABA/ABA Money Laundering Enforcement Conference and said changes are underway.

It looks like changes are coming.

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Laundering Dollar Bills is by  TaxRebate.org.uk

Lighting Up the Towers of Secrecy Through Anti-Money Laundering Requirements

Money Laundering: Hiding ownership and profits in offshore jurisdictions using myriad mechanisms in Switzeland, money laundering capital of the world, & other islands and nations. Favorite tool of mega-rich arch-criminal banking & corporate investors

A group of nonprofit organizations urged the Treasury Department’s Financial Crimes Enforcement Network to repeal the 2002 temporary exemption from provisions of the Patriot Act that had been granted to the real estate industry. The letter was a reaction to the Towers of Secrecy story in the New York Times.

Behind the dark glass towers of the Time Warner Center looming over Central Park, a majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names. By piercing the secrecy of more than 200 shell companies, The New York Times documented a decade of ownership in this iconic Manhattan way station for global money transforming the city’s real estate market.

The issue with imposing anti-money laundering requirements on real estate transactions is deciding who is responsible for doing so. Is it the real estate broker? the buyer? the buyer’s attorney (if there is one)? If there is a mortgage loan, the lender is running a KYC program. But if there is no loan, there is no AML check.

You can also understand privacy concerns of many wealthy buyers. Tom Brady and Giselle Bundchen don’t need crazed fans outside their door. Besides the nuisance, there are legitimate personal safety concerns.

When it comes to anti-money laundering requirements in real estate there are really several different sectors. The Towers of Secrecy story focuses only on ultra-expensive residential real estate. When the purchase price is in the tens or hundreds of millions of dollars it is easier to impose some transaction costs and paperwork associated with anti-money laundering. It’s hard when the scale comes down to regular priced real estate that you and I could afford.

Commercial real estate already operates under the concern of anti-money laundering. There may not be any specific proscribed steps, but its still illegal to conduct business with sanctioned individuals.

These are the groups that signed the letter:

Center for Effective Government
Citizens for Responsibility and Ethics in Washington (CREW)
EG Justice
Financial Accountability and Corporate Transparency (FACT) Coalition
Global Financial Integrity
Global Integrity
Global Witness
Government Accountability Project
(GAP)
Jubilee USA Network
Missionary Oblates USA
New Rules for Global Finance Coalition
Open The Government.org
Oxfam America
Tax Justice Network USA
Transparency International
Transparency International – USA
U.S. Public Interest Research Group (PIRG)

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