Category: Anti-Money Laundering

Money Laundering Using Trust and Company Service Providers

Trusts and Company Service Providers (TCSPs) can provide an important link between financial institutions and some of their customers.  TCSPs have often been used, wittingly or unwittingly, in the conduct of money laundering activities. The majority of TCSPs are established for legitimate purposes, the Financial Action Task Force’s research Shows that some TCSPs are being used, unwittingly or otherwise, to help facilitate the misuse of trust and corporate vehicles.

The FATF’s Money Laundering Using Trust and Company Service Providers report evaluates the effectiveness of the practical applications of the FATF’s 40+9 Recommendations as they relate to TCSPs.  It also considers the role of TCSPs in the detection, prevention and prosecution of money laundering and terrorist financing.

The report is an update f the 2006 report: The Misuse of Corporate Vehicles, Including Trust and Company Service Providers, 2006. presents issues for consideration that should help to reduce the use of TCSPs for money laundering purposes.

There are no simple answers, other than knowing your business partner. Complex arrangement of entities are usually required to make structures tax-efficient across international borders, to isolate risk, to meet regulatory requirements, and to clarify management. On the other hand, bad guys can use these structures to hide the true ownership and that the true source of capital is dirty money.

The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing.

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Export Control Limitations

I don’t spend much time dealing with export regulations. It’s kind of hard to ship a commercial office building oversees. The Bureau of Industry and Security (BIS) is responsible for implementing and enforcing the Export Administration Regulations (EAR), which regulate the export and reexport of most commercial items. Other agencies regulate more specialized exports.

If you are shipping stuff oversees, you need to determine if you need a license. There four questions you need to ask:

  • What are you exporting?
  • Where are you exporting?
  • Who will receive your item?
  • What will your item be used for?

I’m focused on the “who will receive your item list, because there are long lists of individuals and organizations are prohibited from receiving U.S. exports. These are the general lists:

BIS Entity List – EAR Part 744, Supplement 4 – A list of organizations identified by BIS as engaging in activities related to the proliferation of weapons of mass destruction. http://www.access.gpo.gov/bis/ear/pdf/744spir.pdf

Treasury Department Specially Designated Nationals and Blocked Persons List – EAR Part 764, Supplement 3 – A list maintained by the Department of Treasury’s Office of Foreign Assets Control comprising individuals and organizations deemed to represent restricted countries or known to be involved in terrorism and narcotics trafficking. http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf

The Unverified List is composed of firms for which BIS was unable to complete an end-use check. Firms on the unverified list present a “red flag” that exporters have a duty to inquire about before making an export to them. http://www.bis.doc.gov/enforcement/unverifiedlist/unverified_parties.html

Denied Persons – You may not participate in an export or reexport transaction subject to the EAR with a person whose export privileges have been denied by the BIS. http://www.bis.doc.gov/dpl/thedeniallist.asp

If you’re dealing with defense articles and defense services, you will need to look at the Department of State’s Directorate of Defense and Trade Controls.  They have limitations imposed by country: County Policies and Embargoes.

If you’re dealing with nuclear material, then you need to avoid the embargoed countries listed in 10 CFR 110.28 and the restricted destinations in 10 CFR 110.29.

There are a bunch of other programs, but they seem mostly focused on specialized materials and are do not have specific lists of blocked parties.

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New Anti-Money Laundering Guidance

Money Laundering is bad and financial institutions need to have internal controls policies, procedures and processes to identify higher-risk accounts and monitor the activity. At the core of an anti-money laundering program is that an institution must know its customers and the risks presented by its customers.

The program becomes more difficult when the customer is a corporation or legal entity.

An alphabet soup of federal regulators just jointly issued new guidance “to clarify and consolidate existing regulatory expectations for obtaining beneficial ownership information for certain accounts and customer relationships.” The Financial Crimes Enforcement Network, Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, Securities and Exchange Commission, and Commodity Futures Trading Commission all joined in the guidance.

Identifying the ownership and control of a legal entity can be difficult. Often, the only way to get the information is from the entity itself, with no third party way to identify the veracity of the information. Most financial institutions struggle with how far to dive into a legal entity to determine the beneficial ownership.

This joint guidance effectively adopts the FinCEN definition of beneficial owner:

“[T]he individual(s) who have a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly, to control, manage, or direct the account. The ability to fund the account or the entitlement to the funds of the account alone, however, without any corresponding authority to control, manage, or direct the account (such as in the case of a minor child beneficiary), does not cause the individual to be a beneficial owner.” [31 CFR 103.175(b)]

The first step is to obtain enough information about the structure and ownership of the entity so you can determine if the account will pose a heightened risk. With a heightened risk, you should conduct enhanced due diligence.

Accounts for senior foreign political figures always require Enhanced Due Diligence that is reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption. [31 CFR 103.178 (b)(2) and (c)]

The one interesting statement is that financial institutions should consider implementing policies on an enterprise-wide basis to share information about beneficial ownership of their customers. Anti-money laundering staff should be able to cross-check for information with other departments. Avoid silos of information.

The guidance does not offer anything new or insightful. But it is good to see the regulators joining together to try to standardize the expectations across different types of financial institutions.

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Image is by AlwaysAwake: 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

FinCEN and Address Confidentiality Programs

How do you open a bank account when you are hiding from domestic violence?

The rules implementing the Bank Secrecy Act require a financial institution to implement a Customer Identification Program that includes procedures that enable it to form a reasonable belief that it knows the true identity of its customers. The rules also require that a financial institution obtain a residential or business street address from each customer.

To make it easier for the victims of domestic violence, sexual assault or stalking to stay hidden from their attackers, 31 states have enacted Address Confidentiality Programs to help protect the home address of victims. These programs provide a confidential mail forwarding system. Typically, the Secretary of the State assigns a substitute address to the program participant to be used as their legal mailing address. Staff retrieve the participant’s mail and forward it to the participant’s actual physical location.

That is where the Address Confidentiality Program program runs into the Customer Identification Program.

But the Financial Crimes Enforcement Network issued a letter ruling to help financial institutions get out of this pickle. The FinCEN regulations also allow:

“If the individual customer does not have a residential or business street address, then the rules permit the individual customer to provide a “residential or business street address of next of kin or of another contact individual.”

See 31 C.F.R. §103.121(b)(2)(i)(3)(ii), §103.122(b)(2)(i)(A)(3)(ii), §103.123(b)(2)(i)(A)(3)(ii) and§103.131(b)(2)(i)(A)(3)(ii)

In FIN-2009-R003, FinCEN found:

A customer who participates in a state-created ACP shall be treated as not having a residential or business street address and a secretary of state, or other state entity serving as a designated agent of the customer consistent with the terms of the ACP, will act as another contact individual for the purpose of complying with FinCEN’s rules. Therefore, a financial institution should collect the street address of the ACP sponsoring agency for purposes of meeting its CIP address requirement.

Problem solved. At least it will be once knowledge about the ruling is passed along to front line people enforcing the Customer Identification Programs.

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Credit Suisse Settles OFAC Charges for $536 million

credit-suisse-logo

The Credit Suisse Group has reached a settlement with U.S. authorities related to U.S. dollar payments involving parties subject to U.S. sanctions. The $536 million global settlement with Credit Suisse represents by far the largest sanctions settlement in the history of US Treasury’s Office of Foreign Assets Control.

The settlement arises out of Credit Suisse’s processing of thousands of transactions over a 20 year period that concealed the involvement of sanctioned parties. Credit Suisse approached OFAC in early April 2006 about an internal investigation it was conducting related to U.S. securities transactions executed on behalf of an entity subject to U.S. sanctions. In early 2007, after the New York County District Attorney’s Office began looking into several suspicious wire transfers, Credit Suisse also informed OFAC of a separate internal investigation related to its activities as a U.S. dollar correspondent for payments involving Iran, Sudan, Burma, Cuba, North Korea.

The settlement agreement lays out the decades long history of bad behavior at Credit Suisse.

“Credit Suisse in Zurich had a standard procedure of structuring payments to avoid disclosing the sanctions nexus of transactions passed through the United States, deleting or omitting certain information when transactions were to be processed through the United States, and providing incorrect information in wire transfer instructions executed through the United States on behalf of U.S. sanctioned individuals and entities. This standard procedure was embodied in internal directives, memoranda, and e-mails involving, among others, a Credit Suisse Bank Payments sector head, Credit Suisse’s Treasury and Trade Finance departments, the head of Credit Suisse’s Iran desk, as well as in e-mails between Credit Suisse and its Iranian bank clients.

…

Specifically, from on or about August 19,2003, to on or about November 1,2006, Credit Suisse processed 4,775 electronic funds transfers, in the aggregate amount of USD 480,072,032.00, through financial institutions located in the United States to the benefit of the Government of Iran and/or persons in Iran, including various Iranian financial institutions, in apparent violation of the prohibition against the “exportation, … directly or indirectly, from the United States, … of any … services to Iran or the Government of Iran,” 31 C.F.R. § 560.204.”

Credit Suisse is making the $536 million payment pursuant to a settlement agreement with OFAC and deferred prosecution agreements with the New York Country District Attorney’s Office and the United States Department Justice.

I would expect that a shareholder class action suit will be filed shortly as well. We have seen these shareholder suits result from FCPA settlements.

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Amendment to the Global Terrorism Sanctions Regulations

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The Office of Foreign Assets Control (OFAC) amended the Global Terrorism Sanctions Regulations, 31 C.F.R. part 594 to define the term “financial, material, or technological support,” as used in sanction regulations.

Section 594.201(a)(4)(i) of the regulations implements section 1(d)(i) of Executive Order 13224, as amended, by blocking the U.S. property of persons who assist in, sponsor, or provide financial, material, or technological support for acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S.

New section 594.317, in subpart C of the GTSR, defines the term “financial, material, or technological support” to mean any property, tangible or intangible, and includes a list of specific examples:

“The term financial, material, or technological support, as used in § 594.201(a)(4)(i) of this part, means any property, tangible or intangible, including but not limited to currency, financial instruments, securities, or any other transmission of value; weapons or related materiel; chemical or biological agents; explosives; false documentation or identification; communications equipment; computers; electronic or other devices or equipment; technologies; lodging; safe houses; facilities; vehicles or other means of transportation; or goods.

‘‘Technologies’’ as used in this definition means specific information necessary for the development, production, or use of a product, including related technical data such as blueprints, plans, diagrams, models, formulae, tables, engineering designs and specifications, manuals, or other recorded instructions.”

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Real Estate and OFAC Compliance

650 fifth avene

The tale of 650 Fifth Avenue is one that should be closely watched by compliance professionals dealing with real estate. Last year, the Department of Justice filed a forfeiture proceeding against a 40% interest in the property held by the Assa Corporation. They recently filed a forfeiture proceeding against the other 60% held by the Alavi Foundation.

The Amended Complaint alleges that the Alavi Foundation has been providing numerous services to the Iranian Government and transferring funds from 650 Fifth Avenue Company to Bank Melli, a bank wholly owned and controlled by the Government of Iran. The Amended Complaint alleges that the properties are forfeitable as the proceeds of violations of the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., together with Executive Orders and United States Department of Treasury regulations, and as property involved in and the proceeds of money laundering offenses.

Now the tenants are in the position of having been making rent payments to the Iranian government. This may not result in any criminal or civil sanctions, but the names of those tenants are being dragged through the muck. The same is true for the property management company.

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OFAC has Released its Economic Sanctions Enforcement Guidelines

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The final Office of Foreign Assets Control. This rule sets forth the Enforcement Guidelines that OFAC will follow in determining an appropriate enforcement response to apparent violations of the U.S. economic sanctions programs that OFAC enforces.

The final rule will appear as an Appendix to the Reporting, Procedures and Penalties Regulations, 31 C.F.R. Part 501.

These are the new General Factors that OFAC will consider in determining the appropriate administrative response:

  • Willful or Reckless Violation of Law
    • Willfulness
    • Recklessness
    • Concealment
    • Pattern of Conduct
    • Prior Notice
    • Management Involvement
  • Awareness of Conduct
    • Actual Knowledge
    • Reason to Know
    • Management involvement
  • Harm to Sanctions Program Objectives
    • Economic or Other Benefit to the Sanctioned Individual, Entity, or Country
    • Implications for U.S. Policy
    • License Eligibility
    • Humanitarian activity
  • Individual Characteristics
    • Commercial Sophistication
    • Size of Operations and Financial Condition
    • Volume of Transactions
    • Sanctions History
  • Compliance Program
  • Remedial Response
  • Cooperation with OFAC
  • Timing of apparent violation in relation to imposition of sanctions
  • Other enforcement action
  • Future Compliance/Deterrence Effect
  • Other relevant factors on a case-by-case basis

The Guidelines are the final rule and replace the Guidelines previously promulgated as an interim final rule with request for comments on September 8, 2008.

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Money Laundering Awareness Handbook

money laundering

The Organization for Economic Cooperation and Development issued a handbook that provides guidance designed to help tax examiners and tax auditors detect and deter money laundering: The Money Laundering Awareness Handbook for Tax Examiners and Their Auditors.

The purpose of this handbook is to raise the awareness level of tax examiners and auditors on money laundering, by providing guidance in identifying money laundering during the conduct of normal tax audits.

The handbook does not detail criminal investigation methods. But it does describe the nature of money laundering activities so that tax examiners and auditors can better understand how their contribution can assist criminal investigators in battling money laundering.

The handbook is rather basic. I focused on the section with specific indicators on real estate. It offered some typical examples of how money can be concealed in several different types of real estate transactions. The handbook failed to show how the illegal activities could be identified.

I suppose general awareness of ways to launder money is a good start.

Table of Contents:

  • Money Laundering
  • Role of Tax Examiners and Auditors
  • Money Laundering Indicators for Individuals
  • Tax Return Examination and Pre-Audit Indicators
  • Audit Indicators
  • Specific Indicators on Real Estate
  • Specific Indicators on Cash
  • Specific Indicators on International Trade
  • Specific Indicators on Loans
  • Specific Indicators on Professional Service Providers