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Archive for the ‘Money Laundering’ Category

Drivers & Impacts of Derisking

Posted by William Byrnes on June 12, 2016


The FCA is interested in the circumstances around banks closing customers’ accounts, or restricting access for new customers, over the last few years. It wishes to know more about FCA UKwhat is driving account closure and how many customers, of which type, are affected. The FCA is also concerned as to whether ‘wholesale’ derisking and financial exclusion from the withdrawal of banking services is occurring, and if due consideration is being given to the merits of individual cases before a decision is made to terminate an existing account or not to grant a new account.

The FCA wishes to understand which impacted customers have faced difficulties, delays and account closures. The FCA believes these to include Small and Medium-sized Enterprises (SMEs), the FinTech and defence sectors, personal account holders (including minorities and vulnerable groups), and those who are discouraged from using the banking system.

Drivers of Derisking

Many banks told us that they needed to lower their overall risk profile, to realign their businesses and that they are paying closer attention to compliance since the global financial crisis. Further, we heard that derisking is partly a result of the higher costs of compliance and the increased amount of regulatory capital now required, and partly a response to criminal, civil and regulatory actions. These include regulatory settlements, including Deferred Prosecution Agreements (DPAs), especially those reached in response to AML/CFT failings.

There is also no doubt that banks are trying to do what they believe is expected of them under the risk based approach (RBA) to AML/CFT, in reducing the extent to which their services are abused for financial crime purposes, by on occasion exiting relationships that present too high a perceived risk of such abuse, regardless of the costs of compliance. These perceptions of risk stem from their own judgments, in part reflecting the signals emitted (or judged to be emitted) from the range of regulators and prosecutors who are salient to their institutions, and also the global rankings from the commercial agencies involved in risk judgments.

Higher compliance costs may also be reducing incentives for larger banks to maintain many interbank relationships, which previously were seen as providing extra cover or transactional options: a majority of the small and medium-sized banks surveyed reported difficulties, which in some cases have led to them cutting services to customers and to other banks.

We assess that other factors have combined with regulatory actions, higher compliance costs and perceived pressure from correspondent banks, to create a ‘perfect storm’ of changes which have struck banks during this decade. These include much higher capital requirements; higher liquidity thresholds and ultimately a tougher environment in which to achieve profitable relationships.

For the majority of our bank interviewees, this has resulted in a strategic review of business and functions, often in parallel with an over-arching review of compliance risk processes. In turn this has sometimes resulted in slimming down of business, resulting in many exits being driven by the assessment that relationships are ‘non-core’. So we are describing a compound situation in which a range of factors may be involved in many of the exits. Ultimately, banks may feel themselves entitled to do business or notdo business with whomever they like, subject to legal (including regulatory) requirements.

Achieving the perception of legitimacy and fairness of the regulatory system requires consistency and transparency when dealing with each type of customer. Established risk-based approaches to financial crime identify the risk associated with various factors such as sector, occupation, types of business; geography and jurisdiction risk; political risk; distribution channels; and product or services that customer requires or uses. However, by contrast to some other banking risks like consumer credit loss and fraud risks, there is not yet a generally agreed quantitative assessment methodology for assessing financial crime risk and it is difficult to determine to what extent the data are sufficient for this purpose, other than to make a broad subjective assessment.

Banks vary in their ability to ‘score’ particular customers, depending on the bank’s size, resources, geographic coverage and other factors. Decisions on what financial crime residual risks fall within acceptable parameters for a particular bank may be taken through an expression of financial crime risk appetite and/or as an output from customer risk assessment tools, using the broad risk factor categories.

Risk appetite statements often contain broad definitions of acceptable risk, such as ‘minimal tolerance for residual Financial Crime risk’, but we have also found examples where particular sectors are specifically mentioned. If this amounted to a complete prohibition it could be classified as ‘wholesale derisking’, but we have found few examples relating solely to AML/CFT issues. Reputational risk, bribery and corruption concerns and strategic business reasons also factor in to some banks ruling out the banking of certain sectors, for example the defence industry.

Download Drivers-impacts-of-derisking

Money Laundering, Asset Forfeiture and Recovery, and Compliance- A Global Guide (LexisNexis Matthew Bender updated quarterly) is an eBook designed to provide the compliance officer, BSA counsel, and government agent with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources.  Special topic chapters will assist the compliance officer design and maintain effective risk management programs.  Over 100 country and topic experts from financial institutions, government agencies, law, audit and risk management firms have contributed analysis to develop this practical compliance guide

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Panama Papers Leak: Mossack Fonseca’s 14,000 client files expose 214,000 offshore companies assets & owners, politicians, FIFA officials, and hidden wealth

Posted by William Byrnes on April 4, 2016


A leak of searchable 11.5 million files, that’s 2.6 terabytes of data, from the embattled offshore services provider Mossack Journalists logoFonseca.  2.6 terabytes of data, 11.5 million files, is a lot of files and scanned documents to comb through, so this leak is potentially, and probably, more significant than the 2014 ICIJ reported on leak or even the HSBC and UBS‘ leaks.

214,000 company details of 14,000 clients, including national political leaders of Western and Asian nations, business figures, and high net wealth families.

The leaked data covers nearly 40 years, from 1977 through the end of 2015. It allows a never-before-seen view inside the offshore world — providing a day-to-day, decade-by-decade look at how dark money flows through the global financial system, breeding crime and stripping national treasuries of tax revenues.

  • The law firm’s leaked internal files contain information on 214,488 offshore entities connected to people in more than 200 countries and territories. ICIJ will release the full list of companies and people linked to them in early May.
  • The data includes emails, financial spreadsheets, passports and corporate records revealing the secret owners of bank accounts and companies in 21 offshore jurisdictions, from Nevada to Singapore to the British Virgin Islands.

The ICIJ investigative reporters have been searching, extracting, then compiling lists of names and hidden dollars, reported on the ICIJ website here.  When the list of 14,000 persons connecting them to hidden assets is published in May, expect a free for all

“When the complete list of 14,000 persons and each’s connections to offshore assets is published in early May by ICIJ, expect a free for all by the criminal investigative departments of the revenue authorities from the 200 countries uncovered in the files,” said Prof. William Byrnes of Texas A&M University’s School of Law.  “This is the fifth major, game-changing, leak of offshore records, including Portcullis Trust (Singapore), HSBC, UBS, and LuxLeaks.”

“When all the leaked data is combined with all the thousands of taxpayer and offshore advisor files gleaned from offshore voluntary compliance and non-prosecution programs, then crunched with AI (artificial intelligence, or neural network) programs that “connects the dots”, many additional politicians and business leaders are going to be exposed to criminal and civil tax and corruption investigations.” continued William Byrnes.  “I think many have been trying to run out the clock by suppressing this information.  For some countries that strategy may work, but others countries will experience televised perp walks and political backlash.”

Professor William Byrnes added, “I expect to see investigations and prosecutions of attorneys and staff of Mossack Fonseca, and eventual extradition.  Perhaps the firm will enter into nonprosecution agreements with governments, pay a fine, like the Swiss banks and several Big 4 accomplished, and turn over its remaining client files.  It may be an end to the firm, but when its partners and staff are faced with a choice of either US and other countries long term prison sentences or providing evidence against clients, the clients are going to be ‘thrown under the bus’.”

** download here for free Prof. William Byrnes 118 page in-depth analysis of tax information exchange, FATCA and CRS **  “In the field of international tax, Prof. William Byrnes is among LexisNexis’s best-selling authors and a leading authority in the fields of anti-money laundering and FATCA compliance.” Ray Camiscioli, Esq., Director, Product Strategy & Development for Tax, Accounting and Estates/Elder Law, LexisNexis, Inc.

Professor William Byrnes pivoted in the discussion, “The US has a highly successful international financial service industry that is important to the US economy, exemplified by, firstly, the international financial centres such as Miami and New York) of over a half trillion dollars of foreign deposits of high net wealth individuals whom many experts allege are not tax and exchange control compliant in their home countries; secondly, over 900,000 Delaware companies is the second to Hong Kong, and ahead of British Virgin Islands (BVI is actually third in the world);[1] and thirdly, the US territories’ offshore regimes, reducing the effective US corporate and income tax rates below 3.5 percent.[2]

“In 2011, 133,297 businesses incorporated in Delaware.  Delaware has more corporate entities than people — 945,326 to 897,934,” he continued. “These absentee corporate residents account for a quarter of Delaware’s total budget, roughly $860 million in taxes and fees in 2011.[3]  Moreover, the economic spill-over impact for Delaware includes substantial employment and professional fees to Delaware business participating in the incorporation and advisory industry. Delaware is just behind China’s Hong Kong in number of annual incorporations and overall incorporations, and well ahead of the UK’s Virgin Islands (British) both in terms of offshore business and the dollars earned from that offshore business.  Thus, I wonder how many of these Delaware companies, and Delaware corporate service providers, will be exposed once the data is disclosed by ICIJ in May?”

[1] “Storm Survivors”, Special Report: Offshore Finance, The Economist, 16 Feb 2013.

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New Lexis Advance® Tax Platform Now Available to Law School Faculty & Students; Cutting-Edge International Tax Titles

Posted by William Byrnes on October 22, 2015


On June 1, LexisNexis launched its new online tax research platform called Lexis Advance® Tax.

Already available to America’s law school faculty and students, it includes a rich, comprehensive package of nearly 1,400 sources, including tax news, primary law, journals and nearly 300 treatises, practice guides and forms products for both tax and estates lawyers.

Along with news, another strong area for L.A. Tax is its subpage devoted to International Tax. There, users will find a selection01701_11_1_cover of titles examining hot, cutting-edge issues like: Lexis Guide to FATCA Compliance, the Lexis global guide to anti-money laundering laws around the world, and the recently-revised Foreign Tax & Trade Briefs, 2nd Ed, which provides summaries of each country’s tax system and laws.

All of these titles are produced by a team of tax experts led by Professor William H. Byrnes, Associate Dean, International Financial Law, at Texas A&M University Law School, in Fort Worth, the newest law school in Texas. See https://law.tamu.edu/

Looking for Lexis Advance Tax?
Sign in to www.lexisadvance.com, look for the pull-down menu called “Lexis Advance Research” in the upper-left corner. Click the down arrow and select Lexis Advance Tax.

If you have questions or would like to schedule a short training, please contact your LexisNexis® Account Executive.

– See more at: http://www.lexisnexis.com/lextalk/legal-content-insider/f/21/t/2525.aspx?utm_content=2015-10-20+15:00:04#sthash.szct2yk6.dpuf

Posted in BEPS, FATCA, Financial Crimes, Money Laundering, Taxation, Transfer Pricing | Tagged: , , , | Leave a Comment »

New Lexis Advance® Tax Platform Now Available to Law School Faculty & Students; Highlights Include Cutting-Edge International Tax Titles

Posted by William Byrnes on October 15, 2015


On June 1, LexisNexis launched its new online tax research platform called Lexis Advance® Tax.

Already available to America’s law school faculty and students, it includes a rich, comprehensive package of nearly 1,400 sources, including tax news, primary law, journals and nearly 300 treatises, practice guides and forms products for both tax and estates lawyers.

Along with news, another strong area for L.A. Tax is its subpage devoted to International Tax. There, users will find a selection01701_11_1_cover of titles examining hot, cutting-edge issues like: Lexis Guide to FATCA Compliance, the Lexis global guide to anti-money laundering laws around the world, and the recently-revised Foreign Tax & Trade Briefs, 2nd Ed, which provides summaries of each country’s tax system and laws.

All of these titles are produced by a team of tax experts led by Professor William H. Byrnes, Associate Dean, International Financial Law, at Texas A&M University Law School, in Fort Worth, the newest law school in Texas. See https://law.tamu.edu/

Looking for Lexis Advance Tax?
Sign in to www.lexisadvance.com, look for the pull-down menu called “Lexis Advance Research” in the upper-left corner. Click the down arrow and select Lexis Advance Tax.

If you have questions or would like to schedule a short training, please contact your LexisNexis® Account Executive.

– See more at: http://www.lexisnexis.com/lextalk/legal-content-insider/f/21/t/2525.aspx?utm_content=2015-10-20+15:00:04#sthash.szct2yk6.dpuf

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Federal Government After Decades Tries To Stop Local Authorities From Profiting on Asset Seizure Abuse Justified by Federal Law (But What About State Abuse)?

Posted by William Byrnes on January 19, 2015


Read the Notice sent to State Enforcement today, and links of previous coverage of this issue – at http://lawprofessors.typepad.com/intfinlaw/2015/01/federal-government-after-decades-tries-to-stop-local-authorities-from-profiting-on-asset-seizure-abu.html

 

01701_11_1_coverUse your Lexis subscription to access LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This treatise by William Byrnes with commentary and analysis of hundreds of AML experts from over 100 countries,  is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. This multi-volume treatise is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

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Revised FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual

Posted by William Byrnes on December 5, 2014


The Federal Financial Institutions Examination Council (FFIEC) released the revised Bank FFIECSecrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual for 2014.

Statement of Applicability to Institutions With Total Assets Under $1 Billion: This Financial Institution Letter applies to all FDIC-supervised banks and savings associations, including community institutions.  The BSA/AML Examination Manual – see International Financial Law Prof Blog.

Posted in Financial Crimes, Money Laundering | Tagged: , | 1 Comment »

International Financial Law Prof Blog

Posted by William Byrnes on December 2, 2014


read the entire story with links at International Financial Law Prof Blog.

An analysis of the crime of bribery of foreign public officials

FATF logoMost international bribes are paid by large companies, usually with the knowledge of senior management, according to new OECD analysis of the cost of foreign bribery and corruption.

Bribes in the analysed cases equalled 10.9% of the total transaction value on average, and 34.5% of the profits – equal to USD 13.8 million per bribe. But given the complexity and concealed nature of corrupt transactions, this is without doubt the mere tip of the iceberg, says the OECD.

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FinCEN Statement on Providing Banking Services to Money Services Businesses

Posted by William Byrnes on November 19, 2014


FinCEN-logo-shieldMoney services businesses (“MSBs”),1 including money transmitters important to the global flow of remittances, are losing access to banking services, which may in part be a result of concerns about regulatory scrutiny, the perceived risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts.

MSBs play an important role in a transparent financial system, particularly because they often provide financial services to people less likely to use traditional banking services and because of their prominent role in providing remittance services. FinCEN believes it is important to reiterate the fact that banking organizations can serve the MSB industry while meeting their Bank Secrecy Act obligations.2

Read the full Statement at http://lawprofessors.typepad.com/intfinlaw/2014/11/fincen-statement-on-providing-banking-services-to-money-services-businesses.html

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FATF Summary of Outcomes on Corruption

Posted by William Byrnes on October 24, 2014


International Financial Law Prof Blog.

The key objectives for this meeting were:

  • to discuss the FATF’s draft Guidance on Transparency and Beneficial Ownership, and incorporate feedback from anti-corruption experts to enhance the paper, and
  • to build on the previous discussions between the FATF and the G20 on anti-corruption issues, with a particular focus on measures to combat the misuse of corporate vehicles.

PREVENTING THE MISUSE OF CORPORATE VEHICLES … read on at International Financial Law Prof Blog.

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Mafia Takes Over FirstPlus Financial, Drains it Into Bankruptcy

Posted by William Byrnes on September 21, 2014


International Financial Law Prof Blog.

According to court documents and evidence introduced at the trial of his coconspirators, Scarfo is a made member of the Lucchese organized crime family.  In April 2007, Scarfo, Salvatore Pelullo and others devised a scheme to take over FirstPlus.  Scarfo and Pelullo used threats of economic harm to intimidate and remove the prior management and board of directors and replaced those officers with individuals beholden to Scarfo and Pelullo.   

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Six Indicted For $500 Million FATCA Avoidance Scheme for 100 US Clients

Posted by William Byrnes on September 10, 2014


International Financial Law Prof BlogFor example, in response to a request received by a U.S. corrupt client from a U.S. transfer agent who had to determine whether the proceeds from manipulative stock trading transaction were taxable under U.S. law, the defendant Bandfield forwarded an IRS Form signed by co-defendant Godfrey as the nominee for the shell company which had been set up at the request of the client.  At one point during the government’s investigation, Bandfield boasted to an undercover law enforcement agent that he had specifically designed this “slick” corporate structure to counter President Barack Obama’s new laws, a reference to FATCA….

Posted in Compliance, FATCA, Financial Crimes, Money Laundering | Leave a Comment »

Will Delaware Give Up Its Status as the #1 Corporate Tax Haven?

Posted by William Byrnes on September 6, 2014


International Financial Law Prof Blog.

The tiny state is perennially at the top of the list of global tax havens and has gained a reputation as place where those with something to hide – embezzlers, arms merchants, money launders, drug dealers and the like – can set up shop, no questions asked. This is thanks to Delaware laws that allow the true owners of a corporate entity to remain a secret.

Posted in Money Laundering, OECD | Tagged: , , | 1 Comment »

Did Russian State Sponsored Hackers Attack 5 US Banks To Retaliate Against Sanctions? Or the NSA Attacks Against Russia?

Posted by William Byrnes on September 4, 2014


International Financial Law Prof Blog –

At least one of the banks has linked the breach to Russian state-sponsored hackers, said one of the people. The FBI is investigating whether the attack could have been in retaliation for U.S.-imposed sanctions on Russia, said the second person, who also asked not to be identified, citing the continuing investigation.

Code WH13743849

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BPI Fined $125,000 for Money Laundering Violations, Shuts Down its MSB Operation

Posted by William Byrnes on September 2, 2014


The Financial Crimes Enforcement Network (FinCEN) today imposed a civil money penalty of $125,000 against BPI, Inc., a New Jersey money services business (MSB), for willful and repeated violations of the Bank Secrecy Act (BSA).  In November 2013, BPI’s parent, Banco BPI, S.A., received approval from the Board of Governors of the Federal Reserve System to establish representative offices in New Jersey and Massachusetts and BPI ceased operations as an MSB in March 2014.  

read the entire article International Financial Law Prof Blog.

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Swiss Banks Lost $383 Billion So Far Due To Tax Evasion Investigations

Posted by William Byrnes on September 1, 2014


International Financial Law Prof Blog.

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FinCEN Proposes New Customer ID Rules

Posted by William Byrnes on August 29, 2014


International Financial Law Prof Blog – According to a Treasury press release and ThinkAdvisor, “The Treasury Department’s Financial Crimes Enforcement Network (FinCEN), recently issued proposed rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements — including anti-money laundering rules — for banks, brokers or dealers in securities, mutual funds, and futures commission merchants as well as introducing brokers in commodities.” … read on at International Financial Law Prof Blog

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FINCEN Issues New Due Diligence for Beneficial Owners of US Accounts to Provide FATCA Reciprocity to Foreign Governments

Posted by William Byrnes on August 4, 2014


FBARThe U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) to amend existing Bank Secrecy Act (BSA) regulations to help prevent the use of anonymous companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector.  See Proposed Rules and New Beneficial Ownership Form (Appendix A) here.

The proposed rule would clarify and strengthen customer due diligence obligations of banks and other financial institutions (including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities).

The proposed amendments would add a new requirement that these entities know and verify the identities of the real people (also known as beneficial owners) who own, control, and profit from the companies they service to facilitate reporting and investigations in support of tax compliance, and advancing international commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA).

FATCA’s USA Reciprocity to Report Foreign Nationals Financial Information to Foreign Governments

The United States has collaborated with foreign governments to enter into intergovernmental agreements that facilitate the effective and efficient implementation of these requirements. Pursuant to many of these agreements, the United States has committed to pursuing reciprocity with respect to collecting and reporting to the authorities of the FATCA partner information on the U.S. accounts of residents of the FATCA partner.  A general requirement for U.S. financial institutions to obtain beneficial ownership information for AML purposes advances this commitment, and puts the United States in a better position to work with foreign governments to combat offshore tax evasion and other financial crimes.

Required Due Diligence by US Financial Institutions

The rulemaking clarifies that customer due diligence includes four core elements:

  1. identifying and verifying the identity of customers;
  2. identifying and verifying the beneficial owners of legal entity customers;
  3. understanding the nature and purpose of customer relationships; and
  4. conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

The proposed requirement to identify and verify the identity of beneficial owners is addressed through the proposal of a new requirement for covered financial institutions to collect beneficial ownership in a standardized format.

Those financial institutions will have to identify and verify any individual who owns 25 percent of more of a legal entity, and an individual who controls the legal entity.

Determining Beneficial Ownership

The second element of CDD requires financial institutions to identify and verify the beneficial owners of legal entity customers.  FinCEN proposes a new requirement that financial institutions identify the natural persons who are beneficial owners of legal entity customers, subject to certain exemptions.

The definition of “beneficial owner” proposed herein requires that the person identified as a beneficial owner be a natural person (as opposed to another legal entity). A financial institution must satisfy this requirement by obtaining at the time a new account is opened a standard certification form (Appendix A of Proposed Rules) directly from the individual opening the new account on behalf of the legal entity customer.

Financial institutions would be required to verify the identity of beneficial owners consistent with their existing CIP practices.  However, FinCEN is not proposing to require that financial institutions verify that the natural persons identified on the form are in fact the beneficial owners. In other words, the requirement focuses on verifying the identity of the beneficial owners, but does not require the verification of their status as beneficial owners. This proposed requirement states minimum standards.

In order to identify the beneficial owner, a covered financial institution must obtain a certification from the individual opening the account on behalf of the legal entity customer (at the time of account opening) in the form of Appendix A.  The form requires the individual opening the account on behalf of the legal entity customer to identify the beneficial owner(s) of the legal entity customer by providing the beneficial owner’s

  • name,
  • date of birth,
  • address and
  • social security number (for U.S. persons).

This information is consistent with the information required under the CIP rules for identifying customers that are natural persons. The form also requires the individual opening the account on behalf of the legal entity customer to certify, to the best of his or her knowledge, that the information provided on the form is complete and correct.  Obtaining a signed and completed form from the individual opening the account on behalf of the legal entity customer shall satisfy the requirement to identify the beneficial owners.

This section also requires financial institutions to verify the identity of the individuals identified as beneficial owners on the certification form.  The procedures for verification are to be identical to the procedures applicable to an individual opening an account under the existing CIP rules.

Accordingly, the financial institution must verify a beneficial owner’s identity using the information provided on the certification form.  For foreign persons, the form requires –

  • a passport number and country of issuance, or
  • other similar identification number (name, date of birth, address, and social security number (for U.S. persons), etc.),

according to the same documentary and non-documentary methods the financial institution may use in connection with its customer identification program (to the extent applicable to customers that are individuals), within a reasonable time after the account is opened.

A financial institution must also include procedures for responding to circumstances in which it cannot form a reasonable belief that it knows the true identity of the beneficial owner, as described under the CIP rules.

Definition of Beneficial Owner

The proposed definition of “beneficial owner” includes two independent prongs:

(a) an ownership prong and

(b) a control prong.

A covered financial institution must identify each individual under the ownership prong (i.e., each individual who owns 25 percent or more of the equity interests), in addition to one individual for the control prong (i.e., any individual with significant managerial control).

If no individual owns 25 percent or more of the equity interests, then the financial institution may identify a beneficial owner under the control prong only. If appropriate, the same individual(s) may be identified under both criteria.

Purpose of New CDD Rules

Clarifying and strengthening CDD requirements for U.S. financial institutions, including an obligation to identify beneficial owners, advances the purposes of the BSA by:

  • Enhancing the availability to law enforcement, as well as to the federal functional regulators and SROs, of beneficial ownership information of legal entity customers obtained by U.S. financial institutions, which assists law enforcement financial investigations and regulatory examinations and investigations;
  • Increasing the ability of financial institutions, law enforcement, and the intelligence community to identify the assets and accounts of terrorist organizations, money launderers, drug kingpins, weapons of mass destruction proliferators, and other national security threats, which strengthens compliance with sanctions programs designed to undercut financing and support for such persons;
  • Helping financial institutions assess and mitigate risk, and comply with all existing legal requirements, including the BSA and related authorities;
  • Facilitating reporting and investigations in support of tax compliance, and advancing international commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA); and
  • Promoting consistency in implementing and enforcing CDD regulatory expectations across and within financial sectors.

Cost of New Compliance?

FinCEN believes that there are approximately eight million such accounts opened annually by covered financial institutions. Based on the total number of covered financial institutions,65 this would result in each covered financial institution opening approximately 368 such accounts per year, or 1.5 per day. Estimating an average time for a covered financial institution to receive the certification and verify the information of 20 minutes and an average cost of $20 per hour, this results in a cost of approximately $54 million.

I will draft a topic chapter on the new FINCEN Beneficial Ownership Due Diligence requirements for the Winter release of LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries,  is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

 

 

Posted in FATCA, Money Laundering | Tagged: , , , , , , | 1 Comment »

Former Senior Executive of Qualcomm Pleads Guilty to Insider Trading and Money Laundering

Posted by William Byrnes on July 22, 2014


DOJ-U-S-ATTORNEYS-OFFICEJing Wang, 51, the former Executive Vice President and President of Global Business Operations for Qualcomm Inc., today pleaded guilty to insider trading in shares of Qualcomm and Atheros Communications Inc. Wang also pleaded guilty to laundering the proceeds of his insider trading using an offshore shell company.

According to court documents, … read the entire story at http://lawprofessors.typepad.com/intfinlaw/2014/07/former-senior-executive-of-qualcomm-pleads-guilty-to-insider-trading-and-money-laundering.html

 

Posted in Money Laundering | Tagged: , , | 1 Comment »

New York to Bit- License Virtual Currency Firms

Posted by William Byrnes on July 20, 2014


Bitcoin_euro

 

Benjamin M. Lawsky, Superintendent of Financial Services, announced July 17, 2014 that the New York State Department of Financial Services (DFS) has issued for public comment a proposed “BitLicense” regulatory framework for New York virtual currency businesses. The proposed regulatory framework – which is the product of a nearly year-long DFS inquiry, including public hearings that the Department held in January 2014 – contains consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms.

 

 

The new DFS BitLicenses will be required for firms engaged in the following virtual currency businesses:

  • Receiving or transmitting virtual currency on behalf of consumers;
  • Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers;
  • Performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency;
  • Buying and selling Virtual Currency as a customer business (as distinct from personal use); or
  • Controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners.)

The license is not requiredfor merchants or consumers that utilize Virtual Currency solely for the purchase or sale of goods or services; or those firms chartered under the New York Banking Law to conduct exchange services and are approved by DFS to engage in Virtual Currency business activity.

Key requirements for firms holding BitLicenses include:

  • Safeguarding Consumer Assets. Each firm must hold Virtual Currency of the same type and amount as any Virtual Currency owed or obligated to a third party. Companies are also prohibited from selling, transferring, assigning, lending, pledging, or otherwise encumbering assets, including Virtual Currency, it stores on behalf of another person. Each licensee must also maintain a bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to DFS for the protection of the licensee’s customers.
  • Virtual Currency Receipts. Upon completion of any transaction, each firm shall provide to a customer a receipt containing the following information: (1) the name and contact information of the firm, including a telephone number established by the Licensee to answer questions and register complaints; (2) the type, value, date, and precise time of the transaction; (3) the fee charged; (4) the exchange rate, if applicable; (5) a statement of the liability of the Licensee for non-delivery or delayed delivery; (6) a statement of the refund policy of the Licensee.
  • Consumer Complaint Policies. Each firm must establish and maintain written policies and procedures to resolve consumer complaints in a fair and timely manner. The company must also provide notice to consumers, in a clear and conspicuous manner, that consumers can bring complaints to DFS’s attention for further review and investigation.
  • Consumer Disclosures. Companies must provide clear and concise disclosures to consumers about potential risks associated with virtual currencies, including the fact that: transactions in Virtual Currency are generally irreversible and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable; the volatility of the price of Virtual Currency relative to Fiat Currency may result in significant loss or tax liability over a short period of time; there is an increased risk of loss of virtual currency due to cyber attacks; virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to FDIC or SIPC protections; among others.
  • Anti-money Laundering Compliance. As part of its anti-money laundering compliance program, each firm shallmaintain the following information for all transactions involving the payment, receipt, exchange or conversion,purchase, sale, transfer, or transmission of Virtual Currency: (1) the identity and physical addresses of the parties involved; (2) the amount or value of the transaction, including in what denomination purchased, sold, or transferred, and the method of payment; (3) the date the transactionwas initiated and completed, and (4)a description of the transaction.
    • Verification of Accountholders. Firms must, at a minimum, when opening accounts for customers, verify their identity, to the extent reasonable and practicable, maintain records of the information used to verify such identity, including name, physical address, and other identifying information, and check customers against the Specially Designated Nationals (“SDNs”) list maintained by the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”). Enhanced due diligence may be required based on additional factors, such as for high-risk customers, high-volume accounts, or accounts on which a suspicious activity report has been filed. Firms are also subject to enhanced due diligence requirements for accounts involving foreign entities and a prohibition on accounts with foreign shell entities.
    • Reporting of Suspected Fraud and Illicit Activity. Each Licensee shall monitor for transactions that might signify money laundering, tax evasion, or other illegal or criminal activity and notify the Department, in a manner prescribed by the superintendent, immediately upon detection of such a transactions. When a Licensee is involved in a transaction or series of transactions for the receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency, in an aggregate amount exceeding the United States dollar value of $10,000 in one day, by one Person, the Licensee shall also notify the Department, in a manner prescribed by the superintendent, within 24 hours. In meeting its reporting requirements Licensees must utilize an approved methodology when calculating the value of Virtual Currency in Fiat Currency.
  • Cyber Security Program: Each licensee must maintain a cyber security program designed to perform a set of core functions, including: identifying internal and external cyber risks; protecting systems from unauthorized access or malicious acts; detecting systems intrusions and data breaches; and responding and recovering from any breaches, disruptions, or unauthorized use of systems.  Among other safeguards, each firm shall also conduct penetration testing of its electronic systems, at least annually, and vulnerability assessment of those systems, at least quarterly.
  • Chief Information Security Officer. Each Licensee shall designate a qualified employee to serve as the Licensee’s Chief Information Security Officer (“CISO”) responsible for overseeing and implementing the Licensee’s cyber security program and enforcing its cyber security policy.
  • Independent DFS Examinations: Examinations of licensees will be conducted whenever the superintendent deems necessary – but no less than once every two calendar years – to determine the licensee’s financial condition, safety and soundness, management policies, and compliance with laws and regulations.
  • Books and Records: Licensees are required to keep certain books and records, including transaction information, bank statements, records or minutes of the board of directors or governing body, records demonstrating compliance with applicable laws including customer identification documents, and documentation related to investigations of consumer complaints.
  • Reports and Financial Disclosures, Audit Requirements. Each firm must submit to DFS quarterly financial statements within 45 days following the close of the Licensee’s fiscal quarter. Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant and an evaluation by such accountant of the accounting procedures and internal controls of the firm within 120 days of its fiscal year end.
  • Capital Requirements: Necessary capital requirements will be determined by DFS based on a variety of factors, including the composition of the licensee’s total assets and liabilities, whether the licensee is already licensed or regulated by DFS, the amount of leverage used by the firm, the liquidity position of the firm, and extent to which additional financial protection is provided for customers.
  • Compliance Officer. Each Licensee shall designate a qualified individual or individuals responsible for coordinating and monitoring compliance with NYDFS’ BitLicense regulatory framework and all other applicable federal and state laws, rules, and regulations.
  • Business Continuity and Disaster Recovery. Each Licensee shall establish and maintain a written business continuity and disaster recovery plan reasonably designed to ensure the availability and functionality of the Licensee’s services in the event of an emergency or other disruption to the Licensee’s normal business activities.
  • Notification of Emergencies or Disruptions.Each firm must promptly notify DFS of any emergency or other disruption to its operations that may affect its ability to fulfill regulatory obligations or that may have a significant adverse effect on the Licensee, its counterparties, or the market.
  • Transitional Period. Applications for the license will be accepted beginning on the date the proposed regulations become effective. Those already engaged in virtual currency business activity will have a 45-day transitional period to apply for a license from the date regulations become effective. The superintendent will issue or deny the license within 90 days of a complete application submission.

See full press release here.

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FedEx corporation criminally indicted for drug trafficking after 9 year DEA investigation

Posted by William Byrnes on July 18, 2014


DEA badge

After a nine-year criminal investigation by the DEA and FDA, on July 17, 2014 the US Attorney for the Northern District of California filed a criminal indictment by a federal grand jury against FedEx Corporation, FedEx Express, Inc., and FedEx Corporate Services, Inc., for conspiracies to traffic in controlled substances and misbranded prescription drugs for its role in distributing controlled substances and prescription drugs for illegal Internet pharmacies.

If found guilty, the Fed Ex defendants face a maximum sentence of 5 years of probation, and a fine of up to $1.6 billion representing twice the gross gain derived from the offense, alleged in the indictment to be at least $820 million.  FedEx would also be liable for restitution to victims of the crime, as well as forfeiture of the gross proceeds of the offense and any facilitating property.

 

The alleged actions taken by Fed Ex to traffic in controlled substances  include:

  • FedEx established an Online Pharmacy Credit Policy to protect against large balances owed to FedEx.
  • FedEx established a Sales policy to protect its sales professionals commission-based compensation caused by online pharmacies moving shipping locations to avoid detection by the DEA.
  • FedEx adopted a procedure whereby Internet pharmacy packages from problematic shippers were held for pick up at specific stations.
  • FedEx’s employees knew that online pharmacies and fulfillment pharmacies affiliated with both the Chhabra-Smoley organization and Superior Drugs were closed down by state and federal law enforcement agencies and that their owners, operators, pharmacists, and doctors were indicted, arrested and convicted of illegally distributing drugs.

The FedEx indictment is available by link here.  The press release is excerpted below.

… In 2004, FedEx established an Online Pharmacy Credit Policy requiring that all online pharmacy shippers be approved by the Credit Department prior to opening a new account. The stated reason for this policy was that many Internet pharmacies operated outside federal and state regulations over the sale of controlled drugs and many sites had been shut down by the government without warning, leaving a large balance owed to FedEx.  According to the indictment, FedEx also established a Sales policy in which all online pharmacies were assigned to a “catchall” classification to protect the commission-based compensation of its sales professionals from the volatility caused by online pharmacies moving shipping locations often to avoid detection by the DEA.

According to the indictment, as early as 2004, FedEx knew that it was delivering drugs to dealers and addicts. FedEx’s couriers in Kentucky, Tennessee, and Virginia expressed safety concerns that were circulated to FedEx Senior management, including that FedEx trucks were stopped on the road by online pharmacy customers demanding packages of pills, that the delivery address was a parking lot, school, or vacant home where several car loads of people were waiting for the FedEx driver to arrive with their drugs, that customers were jumping on the FedEx trucks and demanding online pharmacy packages, and that FedEx drivers were threatened if they insisted on delivering packages to the addresses instead of giving the packages to customers who demanded them. In response to these concerns, FedEx adopted a procedure whereby Internet pharmacy packages from problematic shippers were held for pick up at specific stations, rather than delivered to the recipient’s address.

FedEx is charged in the indictment with conspiring with two separate but related Internet pharmacy organizations: the Chhabra-Smoley Organization, from 2000 through 2008, and Superior Drugs, from 2002 through 2010. In each case, FedEx is alleged to have knowingly and intentionally conspired to distribute controlled substances and prescription drugs, including Phendimetrazine (Schedule III); Ambien, Phentermine, Diazepam, and Alprazolam (Schedule IV), to customers who had no legitimate medical need for them based on invalid prescriptions issued by doctors who were acting outside the usual course of professional practice.

According to the indictment, FedEx began delivering controlled substances and prescription drugs for Internet pharmacies run by Vincent Chhabra, including RxNetwork and USA Prescription, in 2000. When Chhabra was arrested in December of 2003 for illegally distributing controlled substances based on a doctor’s review of an on-line questionnaire, Robert Smoley took over the organization and continued the illegal distribution of controlled substances and prescription drugs through FedEx.

According to the indictment, FedEx began delivering controlled substances and prescription drugs for Superior Drugs in 2002. FedEx’s employees knew that Superior Drugs filled orders for online pharmacies that sold controlled substances and prescription drugs to consumers without the need for a face-to-face meeting with, or physical examination or laboratory tests by, a physician.

According to the indictment, FedEx’s employees knew that online pharmacies and fulfillment pharmacies affiliated with both the Chhabra-Smoley organization and Superior Drugs were closed down by state and federal law enforcement agencies and that their owners, operators, pharmacists, and doctors were indicted, arrested and convicted of illegally distributing drugs. Nevertheless, FedEx continued to deliver controlled substances and prescription drugs for the Chhabra-Smoley organization and Superior Drugs.

“The advent of Internet pharmacies allowed the cheap and easy distribution of massive amounts of illegal prescription drugs to every corner of the United States, while allowing perpetrators to conceal their identities through the anonymity the Internet provides,” said U.S. Attorney Melinda Haag. “This indictment highlights the importance of holding corporations that knowingly enable illegal activity responsible for their role in aiding criminal behavior.”

“Pharmaceutical drug abuse is a serious problem affecting millions of consumers in the United States,” said DEA Special Agent in Charge Jay Fitzpatrick. “While DEA is committed to ensuring patients receive legitimate prescriptions, today’s action should send a strong message that corporations that participate in illegal activity risk investigation and prosecution.”

“Illegal Internet pharmacies rely on illicit Internet shipping and distribution practices. Without intermediaries, the online pharmacies that sell counterfeit and other illegal drugs are limited in the harm they can do to consumers,” said Philip J. Walsky, Acting Director, FDA’s Office of Criminal Investigations. “The FDA is hopeful that today’s action will continue to reinforce the message that the public’s health takes priority over a company’s profits.”

FedEx responded to the charges as follows:

…We have repeatedly requested that the government provide us a list of online pharmacies engaging in illegal activity. Whenever DEA provides us a list of pharmacies engaging in illegal activity, we will turn off shipping for those companies immediately. So far the government has declined to provide such a list.

FedEx transports more than 10 million packages a day. The privacy of our customers is essential to the core of our business. This privacy is now at risk, based on the charges by the Department of Justice related to the transportation of prescription medications.

We want to be clear what’s at stake here: the government is suggesting that FedEx assume criminal responsibility for the legality of the contents of the millions of packages that we pick up and deliver every day. We are a transportation company – we are not law enforcement. We have no interest in violating the privacy of our customers. We continue to stand ready and willing to support and assist law enforcement. We cannot, however, do the job of law enforcement ourselves.

Both UPS and Google settled their investigations relating to online pharmacy business, $40 million (2013) and $500 million (2011) respectively.   UPS established an Online Pharmacy Compliance Officer pursuant to its settlement with the DEA and DOJ.  The Google investigation had its origins in a separate, multimillion dollar financial fraud investigation unrelated to Google, the main target of which fled to Mexico.  While a fugitive, he began to advertise the unlawful sale of drugs through Google’s AdWords program. After being apprehended in Mexico and returned to the United States by the U.S. Secret Service, he began cooperating with law enforcement and provided information about his use of the AdWords program. During the ensuing investigation of Google, the government established a number of undercover websites for the purpose of advertising the unlawful sale of controlled and non-controlled substances through Google’s AdWords program.

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries,  is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

 

 

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Why are regulators so alarmed about Stored Value Cards? and Virtual Currency?

Posted by William Byrnes on July 11, 2014


Why are regulators so alarmed about Stored Value Cards?  Citron Research published a report about the impact on a financial institution’s share value when the financial institution ignores its anti money laundering compliance (and receives a regulatory warning consent order, and worst, a cease & desist order).

Citron Research’s report indicates that stored value cards pose a substantial risk for funding of terrorist activities.  The Report states:

“The Government crackdown on the stored value card business is real and not going anywhere.  In a banking industry article published TODAY, we read “I would think this action sends a message to every other prepaid issuer that they better be buttoned up on AML processes and work very closely with their clients,” Colgan said.

On another topic of money laundering concerns, the LexisNexis chapter on Virtual Currency (e.g. Bitcoin) is being updated by its authors: Emmanuel Rayes (TJSL alumni) and Dr. David Utzke (MAFF, CFE, CFI is a Sr. Agent and lead agent for Virtual Currency and Digital Transactions for the IRS).

Virtual currencies have caught mainstream popularity and use the past 24 months. It was only a matter of time before an internet currency would catch mass adoption because of the convenience, speed, and ease of use that the internet provides. Governments all over the world have had a difficult time regulating virtual currencies due to their unconventional structure that is not typical of paper or fiat currencies and due to the rapid evolution of technology. Bitcoin is one such virtual currency that has caught the attention of government regulators all over the world.

Bitcoin is not a typical currency, but rather it is a crypto-currency. In addition, Bitcoin is based on a decentralized peer-to-peer network that’s not only responsible for the issuing of the currency but also for the transfers of the currency. The general currency model followed by almost every government in the world designates a central authority or bank for the issuing of the currency along with intermediary banking institutions responsible for the transfers and record keeping of user transactions. In the Bitcoin model, the middleman, or bank, is completely removed and the user controls the issuance of the currency in addition to facilitating, verifying and recording every transaction.

book coverA greater concern is that criminals use the anonymity features of Bitcoin to launder money obtained from criminal activities or to fund criminal activities. The transactions made with Bitcoin are disclosed on a public ledger but the identity of the parties conducting the transactions are pseudo-anonymous which makes it laborious to identify the parties making the transfers. This creates increasing difficulty in charging and convicting criminals for crimes committed using Bitcoin.  Read the full crypto-currency chapter, which forms part of the 5,000 page treatise and compendium of LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide

 

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SunTrust Bank Pays $1.2 Billion for Mortgage and Foreclosure Abuses, Non-Prosecution Agreement

Posted by William Byrnes on July 3, 2014


On July 3, Sun Trust resolved the criminal investigation into its “Home Affordable Modification Program” (HAMP) by agreeing to pay $320 million.  Less than a month ago, SunTrust Mortgage Inc. (SunTrust) entered into a $968 million consent judgment to address mortgage origination, servicing, and foreclosure abuses, announced the  Justice Department, Department of Housing and Urban Development (HUD), and the Consumer Financial Protection Bureau (CFPB), along with 49 state attorneys general and the District of Columbia’s attorney general.

“SunTrust’s conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis,” Attorney General Eric Holder said. “From mortgage origination to servicing to securitization, the Department of Justice is attacking every facet of conduct that led to the Great Recession. We will continue to hold accountable financial institutions that, in the pursuit of their own financial interests, misuse public funds and cause harm to hardworking Americans. We expect that there will be more cases like this to come.”

“Deceptive and illegal mortgage servicing practices have pushed families into foreclosure and devastated communities across the nation,” said CFPB Director Richard Cordray.  “Today’s action will help homeowners and consumers harmed by SunTrust’s unlawful foreclosure practices.  The Consumer Bureau will continue to investigate mortgage servicers that mistreat consumers, and we will not hesitate to take action against any company that violates our new servicing rules.”

What is HAMP?

The federal government launched HAMP as an opportunity for homeowners in dire straits to save their homes from foreclosure.  However, SunTrust Mortgage, rather than assist homeowners in need, financially ruined many through an utter dereliction of its HAMP program. SunTrust Banks, Inc. received $4.85 billion in federal taxpayer funds through the U.S. Department of the Treasury Troubled Asset Relief Program (TARP) in 2008.

What SunTrust did? 

  • Unwilling to put resources into HAMP despite holding billions in TARP funds, SunTrust simply placed piles of unopened homeowners’ HAMP applications and paperwork on an office floor until at one point, the floor buckled under the sheer weight of the document packages.  Documents and paperwork were lost.
  • SunTrust issued “mass denials” to HAMP applicants and lied to the Treasury Department about the reasons for the denials. SunTrust’s statements to customers were false.
  • SunTrust improperly commenced foreclosure proceedings on homeowners in active HAMP trial periods, and some of those homeowners saw their homes listed by SunTrust for sale in local newspapers.
  • Rather than reviewing HAMP applications in 20 days and rendering modification decisions within an “as advertised” three- to four-month trial period, in the worst cases, some homeowners were confined to extended trial periods of two or more years.
  • SunTrust misreported current borrowers as delinquent to major credit bureaus.
  • SunTrust denied HAMP modifications to eligible homeowners and instead placed the homeowners in alternative, private modifications that were less favorable to borrowers.
  • SunTrust improperly capitalized amounts of interest onto borrowers’ unpaid principal balances.
  • Other borrowers who were transferred from SunTrust to another servicer while on active HAMP trial modifications were penalized.
  • SunTrust admitted that between January 2006 and March 2012, it originated and underwrote FHA-insured mortgages that did not meet FHA requirements, that it failed to carry out an effective quality control program to identify non-compliant loans, and that it failed to self-report to HUD even the defective loans it did identify.
  • SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes, and notified SunTrust management that as many as 50% or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements.
  • SunTrust failed to promptly and accurately apply payments made by borrowers, and charged unauthorized fees for default-related services.
  • SunTrust failed to provide accurate information about loan modification and other loss-mitigation services, failed to properly process borrowers’ applications and calculate their eligibility for loan modifications, and provided false or misleading reasons for denying loan modifications.
  • Engaged in illegal foreclosure practices by providing false or misleading information to consumers about the status of foreclosure proceedings where the borrower was in good faith actively pursuing a loss mitigation alternative also offered by SunTrust.
  • SunTrust robo-signed foreclosure documents, including preparing and filing affidavits whose signers had not actually reviewed any information to verify the claims.

Read about the $968 million consent judgment at CFSB and DOJ.

Read about the $320 million non-prosecution agreement at SIGTARP.

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries,  is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

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BNP Paribas Pays $8.9 Billion for Sanction Violations With Iran, Sudan & Cuba

Posted by William Byrnes on June 30, 2014


$8.9 Billion Settlement of $19 Billion Possible Penalty

On June 30th, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), as part of a combined $8.9 billion settlement (settlement agreement here) with federal and state government agencies, today announced a $963 million agreement with BNP Paribas (BNPP) to settle its potential liability for apparent violations of U.S. sanctions regulations.  The $8.9 billion is the largest OFAC settlement to date.  However, the statutory maximum and base civil monetary penalties in this case were $19,272,380,006.

What Did BNP Paribas Do Exactly?

For a number of years, up to and including 2012, BNPP processed thousands of transactions to or through U.S. financial institutions that involved countries, entities, and/or individuals subject to the sanctions programs listed above.  BNPP appears to have engaged in a systematic practice, spanning many years and involving multiple BNPP branches and business lines, that concealed, removed, omitted, or obscured references to, or the interest or involvement of, sanctioned parties in U.S. Dollar Society for Worldwide Interbank Financial Telecommunication payment messages sent to U.S. financial institutions.

The specific payment practices the bank utilized in order to process sanctions-related payments to or through the United States included omitting references to sanctioned parties; replacing the names of sanctioned parties with BNPP’s name or a code word; and structuring payments in a manner that did not identify the involvement of sanctioned parties in payments sent to U.S. financial institutions.  While these payment practices occurred throughout multiple branches and subsidiaries of the bank, BNPP’s subsidiary in Geneva and branch in Paris facilitated or conducted the overwhelming majority of the apparent violations.

How Bad Was BNP Paribas Conduct?

OFAC determined that BNPP did not voluntarily self-disclose its violations (it was a whistleblower), and that the apparent violations constitute an egregious case: BNPP’s systemic practice of concealing, removing, omitting, or obscuring references to information about U.S.-sanctioned parties in 3,897 financial and trade transactions routed to or through banks in the United States between 2005 and 2012, including:

$8 Billion with Sudan

BNPP officials have described Darfur as a “humanitarian catastrophe” and, while discussing the Sudanese business, noted that certain Sudanese banks “play a pivotal part in the support of the Sudanese government which…has hosted Osama Bin Laden and refuses the United Nations intervention in Darfur.”  BNPP’s senior compliance personnel agreed to continue the Sudanese business and rationalized the decision by stating that “the relationship with this body of counterparties is a historical one and the commercial stakes are significant. For these reasons, Compliance does not want to stand in the way.”

BNPP processed 2,663 wire transfers totaling approximately $8,370,372,624 between September , 2005, and July 24, 2009, involving Sudan.  The total base penalty for this set of apparent violations was $16,826,707,625.  $8 billion in four years – approximately $2 billion a year.

$1 Billion with Iran

BNPP processed 318 wire transfers totaling approximately $1,182,075,543 between July 15, 2005, and November 27, 2012, involving Iran.  The total base penalty for this set of apparent violations was $2,382,634,677.

$700 Million With Cuba

BNPP processed 909 wire transfers totaling approximately $689,237,183 between July 18, 2005, and September 10, 2012.  The total base penalty for this set of apparent violations was $59,085,000.

$1.5 Million with Burma

BNPP processed seven wire transfers totaling approximately $1,478,371 between November 3, 2005, and approximately May 2009, involving Burma.  The total base penalty for this set of apparent violations was $3,952,704.

Who Was Involved?

Benjamin M. Lawsky, New York’s Superintendent of Financial Services, said, “BNPP employees – with the knowledge of multiple senior executives – engaged in a long-standing scheme that illegally funneled money to countries involved in terrorism and genocide. As a civil regulator, we are taking action today not only to penalize the bank, but also expose and sanction individual BNPP employees for wrongdoing. In order to deter future offenses, it is important to remember that banks do not commit misconduct – bankers do.”

– COO Signed Off on Continuing Illicit Transactions at Meeting Where He Asked Minutes Not to be Taken”;

– North American Head of Ethics/Compliance wrote: “The Dirty Little Secret Isn’t So Secret Anymore, Oui?”

Did Anyone Go to Prison?

No.  No charges have been brought.

If Not Prison, Then What Was the Discipline?

Some executives were merely ‘separated’.  What does separated mean?  Asked to resign?  Awarded severance?  Kept the high salaries and bonuses derived from the illicit business – yes.  What of the COO who “signed off on continuing illicit transactions at a meeting where he asked minutes not to be taken“?  He was allowed to retire.  He keeps his pension, retirement funds, bonuses …

What BNP states: “As a result of BNP Paribas’ internal review, a number of managers and employees from relevant business areas have been sanctioned, a number of whom have left the Group.”

But what the Department of Financial Services states: At DFS’s direction, 13 individuals were terminated by or separated from the Bank as a result of the investigation, including the following senior executives:

  • George Chodron de Courcel, Group Chief Operating Officer
  • Vivien Levy-Garboua, Current Senior Advisor to the BNPP Executive Committee and Former Group Head of Compliance
  • Christopher Marks, Group Head of Debt Capital Markets
  • Dominique Remy, Group Head of Structured Finance for the Corporate Investment Bank (CIB)
  • Stephen Strombelline, Head of Ethics and Compliance for North America

In total, including those terminated, the Department of Financial Services reports that the Bank disciplined 45 employees, with levels of discipline ranging from dismissals, to cuts in compensation, demotion, and other sanctions, while 27 additional BNPP employees who would have been subject to potential disciplinary action during the investigation had already resigned.

Who Is Paying the Fine?

BNP Paribas shareholders inevitably.  No fines have been levied against the employees involved.  BNP shareholders include:

Belgian State (through SFPI (1)) 10.3%
Grand Duché de Luxembourg 1.0%
Employees 5.5%
Retail shareholders 4.9%
European institutional Investors 46.1%
Non-European institutional investors 30.0%
Other and unidentified 2.2%
Total 100%

How Will BNP Minimize the Risk of Its Doing It Again?  

Under the settlement agreement, BNPP is required to put in place and maintain policies and procedures to minimize the risk of the recurrence of such conduct in the future.  BNPP is also required to provide OFAC with copies of submissions to the Board of Governors relating to the OFAC compliance review that it will be conducting as part of its settlement with the Board of Governors.

BNP states that it has designed new robust compliance and control procedures:

  • a new department called Group Financial Security US, part of the Group Compliance function, will be headquartered in New York and will ensure that BNP Paribas complies globally with US regulation related to international sanctions and embargoes.
  • all USD flows for the entire BNP Paribas Group will be ultimately processed and controlled via the branch in New York.

Read my previous analysis warning to financial institutions about lack of education

Is AML Training Effective or Whitewashing?

Is AML Training Effective or Whitewashing? Part II

Are Financial Service Firms Serving High Net Wealth Suffering As a Result of Compliance Costs?

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries,  is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.

Selected Settlement Agreements:

2014 Information

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and BNP Paribas SA

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Clearstream Banking, S.A.

2013 Information

The U.S. Department of the Treasury’s Office of Foreign Assets Control has issued a Finding of Violation to VISA International Service Association

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and the Royal Bank of Scotland plc.

2012 Information

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and HSBC Holdings plc

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Standard Chartered Bank

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and ING Bank, N.V.

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Online Micro, LLC

2011 Information

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Sunrise Technologies and Trading Corporation

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and JPMorgan Chase Bank N.A.

2010 Information

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Barclays Bank PLC.

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Innospec, Inc

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Aviation Services International, B.V.

2009 Information

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Lloyds TSB Bank, plc.

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Credit Suisse AG.

Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Australia and New Zealand Banking Group, Ltd.

Posted in Compliance, Money Laundering | Tagged: , , , , , , | 5 Comments »

FINCEN Director speaks out on BITCOIN and other virtual currencies

Posted by William Byrnes on March 22, 2014


The director of FINCEN, Jennifer Shasky Calvery, spoke about virtual currencies, specifically naming BITCOIN, in her remarks on March 18, 2014 to a conference on anti money laundering.  I excerpt pertinent remarks related to virtual currency.

The Financial Crimes Enforcement Network (FinCEN) published earlier this year two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s (BSA) definition of a money transmitter. The first ruling stated that, to the extent a user creates or “mines” a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA. The second ruling stated that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN’s March 18, 2013 Guidance Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies to address these business models. The Financial Crimes Enforcement Network (“FinCEN”) issued the March 18, 2013 interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.

Definition of Currency and Virtual Currency

FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

Excerpts of Remarks

“In the case of Bitcoin, it has been publicly reported that its users processed transactions worth approximately $8 billion over the twelve-month period preceding October 2013; however, this measure may be artificially high due to the extensive use of automated layering in many Bitcoin transactions.”

“By way of comparison, according to information reported publicly, in 2012 Western Union made remittances totaling approximately $81 billion; PayPal processed approximately $145 billion in online payments; the Automated Clearing House Network processed $36.9 trillion in transactions; and Bank of America processed $244.4 trillion in wire transfers.”

“This relative volume of transactions becomes important when you consider that, according to the United Nations Office on Drugs and Crime, the best estimate for the amount of all global criminal proceeds available for laundering through the financial system in 2009 was $1.6 trillion.”

“Exactly one year ago today, FinCEN issued interpretive guidance to bring clarity and regulatory certainty for businesses and individuals engaged in money transmitting services and offering virtual currencies.”

“In the simplest of terms, FinCEN’s guidance explains that administrators or exchangers of virtual currencies must register with FinCEN, and institute certain recordkeeping, reporting, and AML program control measures, unless an exception to these requirements applies. The guidance also explains that those who use virtual currencies exclusively for common personal transactions – like buying goods or services online – are users, and not subject to regulatory requirements under the BSA.”

“In all cases, FinCEN employs an activity-based test to determine when someone dealing with virtual currency qualifies as a money transmitter. The guidance clarifies definitions and expectations to ensure that businesses engaged in such activities are aware of their regulatory responsibilities, including registering appropriately.”

“Furthermore, FinCEN closely coordinates with its state regulatory counterparts to encourage appropriate application of FinCEN guidance as part of the states’ separate AML compliance oversight of financial institutions.”

“Earlier this year, FinCEN expanded upon this guidance, issuing two administrative rulings. The rulings provide additional information on our regulatory coverage of certain activities related to convertible virtual currency. In both rulings, the convertible virtual currency at issue was the crypto-currency, Bitcoin, and we were clarifying how users who obtain virtual currency only for their own use or investment are not money transmitters.”

“I am also pleased to report that since FinCEN issued its guidance, dozens of virtual currency exchangers have registered with FinCEN, and some virtual currency exchangers are beginning to comply with reporting requirements and are filing SARs. They appear to be appreciative of the need to develop controls to make themselves resilient to abuse by bad actors.”

And they are also coming to terms with the fact that as administrators and exchangers they must obtain, verify, and store key information about the senders and recipients of virtual currency and, under certain circumstances, pass that information on to other administrators or exchangers involved in the transaction.

“This last issue is key. Simply put, these exchangers and administrators, like other money transmitters, are subject to the so-called Travel Rule. Thus, they have to incorporate into their business models the same transparency with respect to funds transfers as other money transmitters.”

“While we are encouraged by these industry efforts to increase transparency in this space, I do, however, remain concerned that there appear to be many domestic virtual currency exchangers that are not fulfilling their recordkeeping and reporting requirements.  Those who do not comply with these rules should understand that their actions will have  consequences. Not only are they subject to civil monetary penalties, but the knowing failure to register a money transmitting business with FinCEN – or with state authorities where there is a state licensing requirement – is a federal criminal offense.”

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.

Each chapter is made up of five parts. Part I, “Introduction,” begins with the analysis of money laundering risks and compliance with the recommendations of the Financial Action Task Force (FATF), and then concludes with the country’s rating based on the International Narcotics Control Strategy Report (INCSR) of the U.S. State Department.  Part II, “Anti-Money Laundering and Combating Terrorist Financing (AML/CTF)” and Part III, “Criminal and Civil Forfeiture,” evaluate the judicial and legislative structures of the country. Given the increasing global dimension of AML/CTF activities, these sections give special attention to how a country has created statutes, decisions, policies and the judicial enforcement procedures needed to combat money laundering and terrorist financing. Part IV, “Compliance,” examines the most critical processes for the prevention and detection of money laundering and terrorist financing. This section reflects on the practical elements that should be in place so that financial institutions can comply with AML/CTF requirements; these are categorized into the development and implementation of internal controls, policies and procedures. Part V, “International Cooperation,” reviews the compilation of international laws and treaties between countries working together to combat money laundering and terrorist financing.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities. 

Posted in Financial Crimes, Money Laundering | Tagged: , , , | Leave a Comment »

Application of Anti Money Laundering Regulations to Virtual Currencies like BITCOIN

Posted by William Byrnes on February 1, 2014


The Financial Crimes Enforcement Network (FinCEN) on Thursday published two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s (BSA) definition of a money transmitter. The first ruling states that, to the extent a user creates or “mines” a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA. The second states that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN’s March 18, 2013 Guidance Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies to address these business models. The Financial Crimes Enforcement Network (“FinCEN”) issued the March 18, 2013 interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.

Currency vs. Virtual Currency

FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

FIN-2014-R001: Application of FinCEN’s Regulations to Virtual Currency Mining Operations (http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R001.pdf)

FIN-2014-R002: Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity (http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R002.pdf)

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook is designed to provide the reader with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.

Each chapter is made up of five parts. Part I, “Introduction,” begins with the analysis of money laundering risks and compliance with the recommendations of the Financial Action Task Force (FATF), and then concludes with the country’s rating based on the International Narcotics Control Strategy Report (INCSR) of the U.S. State Department.  Part II, “Anti-Money Laundering and Combating Terrorist Financing (AML/CTF)” and Part III, “Criminal and Civil Forfeiture,” evaluate the judicial and legislative structures of the country. Given the increasing global dimension of AML/CTF activities, these sections give special attention to how a country has created statutes, decisions, policies and the judicial enforcement procedures needed to combat money laundering and terrorist financing. Part IV, “Compliance,” examines the most critical processes for the prevention and detection of money laundering and terrorist financing. This section reflects on the practical elements that should be in place so that financial institutions can comply with AML/CTF requirements; these are categorized into the development and implementation of internal controls, policies and procedures. Part V, “International Cooperation,” reviews the compilation of international laws and treaties between countries working together to combat money laundering and terrorist financing.

As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities. – See more at: http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp;jsessionid=0AE5A4DFFE9101B2B8254B9E9191D6C7.psc1706_lnstore_001?pageName=relatedProducts&catId=&prodId=prod-us-ebook-01701-epub#sthash.prR4HmVX.dpuf

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LexisNexis® Guide to FATCA Compliance release …

Posted by William Byrnes on May 3, 2013


Over 400 pages of compliance analysis !! now available with the 20% discount code link in this flier –> LN Guide to FATCA_flier.

The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies,  in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions.  A sample chapter from the 25 is available on LexisNexis: http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

book coverContributing FATCA Expert Practitioners

Kyria Ali, FCCA is a member of the Association of Chartered Certified Accountants (“ACCA”) of Baker Tilly (BVI) Limited.

Michael Alliston, Esq. is a solicitor in the London office of Herbert Smith Freehills LLP.

Ariene d’Arc Diniz e Amaral, Adv.  is a Brazilian tax attorney of Rolim, Viotti & Leite Campos Advogados.

Maarten de Bruin, Esq. is a partner of Stibbe Simont. 

Jean-Paul van den Berg, Esq.  is a tax partner of Stibbe Simont.

Amanda Castellano, Esq. spent three years as an auditor with the Internal Revenue Service.

Luzius Cavelti, Esq. is an associate at Tappolet & Partner in Zurich.

Bruno Da Silva, LL.M.  works at Loyens & Loeff, European Direct Tax Law team and is a tax treaty adviser for the Macau special administrative region of the People’s Republic of China.

Prof. J. Richard Duke, Esq. is an attorney admitted in Alabama and Florida specializing over forty years in income and estate tax planning and compliance, as well as asset protection, for high net wealth families.  He served as Counsel to the Ludwig von Mises Institute for Austrian Economics 1983-1989.

Dr. Jan Dyckmans, Esq. is a German attorney at Flick Gocke Schaumburg in Frankfurt am Main.

Arne Hansen is a legal trainee of the Hanseatisches Oberlandesgericht (Higher Regional Court of Hamburg), Germany.

Mark Heroux, J.D. is a Principal in the Tax Services Group at Baker Tilly who began his career in 1986 with the IRS Office of Chief Counsel.

Rob. H. Holt, Esq. is a practicing attorney of thirty years licensed in New York and Texas representing real estate investment companies.

Richard Kando, CPA (New York) is a Director at Navigant Consulting and served as a Special Agent with the IRS Criminal Investigation Division where he received the U.S. Department of Justice – Tax Division Assistant Attorney General’s Special Contribution Award.

Denis Kleinfeld, Esq., CPA. is a renown tax author over four decades specializing in international tax planning of high net wealth families.  He is Of Counsel to Fuerst Ittleman David & Joseph, PL, in Miami, Florida and was employed as an attorney with the Internal Revenue Service in the Estate and Gift Tax Division.

Richard L. Knickerbocker, Esq.  is the senior partner in the Los Angeles office of the Knickerbocker Law Group and the former City Attorney of the City of Santa Monica.

Saloi Abou-Jaoude’ Knickerbocker Saloi Abou-Jaoude’ Knickerbocker is a Legal Administrator in the Los Angeles office of the Knickerbocker Law Group concentrated on shari’a finance.

Jeffrey Locke, Esq.  is Director at Navigant Consulting.

Josh Lom works at Herbert Smith Freehills LLP.

Prof. Stephen Polak is a Tax Professor at Thomas Jefferson School of Law’s International Tax & Financial Services Graduate Program where he lectures on Financial Products, Tax Procedure and Financial Crimes. As a U.S. Senior Internal Revenue Agent, Financial Products and Transaction Examiner he examined exotic financial products of large multi-national corporations. Currently, Prof. Polak is assigned to U.S. Internal Revenue Service’s three year National Research Program’s as a Federal State and Local Government Specialist where he examines states, cities, municipalities, and other governmental entities.

Dr. Maji C. Rhee is a professor of Waseda University located in Tokyo.

Jean Richard, Esq.  a Canadian attorney, previously worked for the Quebec Tax Department, as a Senior Tax Manager with a large international accounting firm and as a Tax & Estate consultant for a pre-eminent Canadian insurance company.  He is currently the Vice President and Sr. Wealth Management Consultant of the BMO Financial Group.

Michael J. Rinaldi, II, CPA. is a renown international tax accountant and author, responsible for the largest independent audit firm in Washington, D.C.

Edgardo Santiago-Torres, Esq., CPA, is also a Certified Public Accountant and a Chartered Global Management Accountant, pursuant to the AICPA and CIMA rules and regulations, admitted by the Puerto Rico Board of Accountancy to practice Public Accounting in Puerto Rico, and an attorney.

Hope M. Shoulders, Esq. is a licensed attorney in the State of New Jersey whom has previously worked for General Motors, National Transportation Safety Board and the Department of Commerce.

Jason Simpson, CAMS is the Director of the Miami office for Global Atlantic Partners, overseeing all operations in Florida, the Caribbean and most of Latin America. He has worked previously as a bank compliance employee at various large and mid-sized financial institutions over the past ten years.  He has been a key component in the removal of Cease and Desist Orders as well as other written regulatory agreements within a number of Domestic and International Banks, and designed complete AML units for domestic as well as international banks with over three million clients.

Dr. Alberto Gil Soriano, Esq.  worked at the European Commission’s Anti-Fraud Office in Brussels, and most recently at the Legal Department of the International Monetary Fund’s Financial Integrity Group in Washington, D.C. He currently works at the Fiscal Department of Uría Menéndez Abogados, S.L.P in Barcelona (Spain).

Lily L. Tse, CPA. is a partner of Rinaldi & Associates (Washington, D.C.).

Dr. Oliver Untersander, Esq. is partner at Tappolet & Partner in Zurich.

Mauricio Cano del Valle, Esq. is a Mexican attorney who previously worked for the Mexican Ministry of Finance (Secretaría de Hacienda) and Deloitte and Touche Mexico.  He was Managing Director of the Amicorp Group Mexico City and San Diego offices, and now has his own law firm. 

John Walker, Esq. is an accomplished attorney with a software engineering and architecture background.

Bruce Zagaris, Esq. is a partner at the Washington, D.C. law firm Berliner, Corcoran & Rowe, LLP. 

Prof. William Byrnes was a Senior Manager then Associate Director at Coopers & Lybrand, before joining academia wherein he became a renowned author of 38 book and compendium volumes, 93 book & treatise chapters and supplements, and 800+ articles.  He is Associate Dean of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Dr. Robert J. Munro is the author of 35 published books is a Senior Research Fellow and Director of Research for North America of CIDOEC at Jesus College, Cambridge University, and head of the anti money laundering studies of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Posted in Compliance, Estate Tax, Financial Crimes, information exchange, Money Laundering, OECD, Reporting, Tax Policy, Taxation, Wealth Management | Tagged: , , , , , , | 1 Comment »

Treasury & IRS Issue Final FATCA Regulations

Posted by William Byrnes on January 21, 2013


Treasury Advances Efforts to Secure International Participation, Streamline Compliance, and Prepare for Implementation of the Foreign Account Tax Compliance Act (January 17, 2013 U.S. Treasury Department of Public Affairs)

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) on January 17, 2013 issued comprehensive final regulations implementing the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion.

These regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

The final regulations issued today:
 Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all nonexempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.

 Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.

 Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities.

 Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations:

(1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds;

(2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and

(3) clarify the types of passive investment entities that must be identified and reported by financial institutions.

 Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

Progress on International Coordination, Including Model Intergovernmental Agreements

Since the proposed regulations were published on February 15, 2012, Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. These models serve as the basis for concluding bilateral agreements with interested jurisdictions and help implement the law in a manner that removes domestic legal impediments to compliance, secures wide-spread participation by every non-exempt financial institution in the partner jurisdiction, fulfills FATCA’s policy objectives, and further reduces burdens on FFIs located in partner jurisdictions. Seven countries have already signed or initialed these agreements.

Today, Treasury announced for the first time that Norway has joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.

Additional Background on the Model Agreements
On July 26, 2012, Treasury published its first model intergovernmental agreement (Model 1 IGA). Instead of reporting to the IRS directly, FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.  Treasury also developed a second model intergovernmental agreement (Model 2 IGA) published on November 14, 2012. A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.

These agreements do not offer an exemption from FATCA for any jurisdiction but instead offer a framework for information sharing pursuant to existing bilateral income tax treaties. Under both models, all financial institutions in a partner jurisdiction that are not otherwise excepted or exempt must report the information about U.S. accounts required by FATCA. Therefore, the IRS receives the same quality and quantity of
information about U.S. accounts from FFIs in jurisdictions with IGAs as it receives from FFIs applying the final regulations elsewhere, but these agreements help streamline reporting and remove legal impediments to
compliance.

Background on FATCA

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers,
or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

 Identify U.S. accounts,
 Report certain information to the IRS regarding U.S. accounts, and
 Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

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Money Laundering, Asset Forfeiture and Recovery, and Compliance: A Global Guide

Posted by William Byrnes on December 2, 2011


Register now to access Money Laundering, Asset Forfeiture and Recovery, and Compliance: A Global Guide, and receive a complimentary chapter in PDF! Order before December 15, 2011 and save 20%!*

View more information here

Written by Professors William Byrnes & Robert Munro of Thomas Jefferson School of Law, the new publication contains in-depth coverage of the laws and government actions in 47 nations to combat money laundering, terrorist funding and similar practices. Each nation has its own chapter with sections covering:

  • Anti-money laundering and counter-terrorist financing;
  • Criminal and civil forfeiture;
  • Compliance & risk; and
  • International cooperation.

The remaining nations of the world will be covered in quarterly updates scheduled to go live in 2012 and 2013.

Because the new product spans so many practice areas, it appears on seven area-of-law pages (Accounting, Banking, Criminal, Foreign Law, International Law, International Trade, and Taxation), plus Lexis Tax Center.  Just look under “Search Analysis, Law Reviews & Journals”.

This title is also available as an ebook and mobile-book.

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LexisNexis® Tax Law Community Podcast: The Authors of “Money Laundering, Asset Forfeiture and Recovery, and Compliance–A Global Guide”

Posted by William Byrnes on November 21, 2011


click here for PodCast LexisNexis® Tax Law Community Podcast: The Authors of “Money Laundering, Asset Forfeiture and Recovery, and Compliance–A Global Guide”.

Posted in Compliance, Courses, Money Laundering | Tagged: , , , | Leave a Comment »

Posted by William Byrnes on November 10, 2011


Receive free chapter from new LexisNexis Anti-Money Laundering Electronic Book

http://www.lexisnexis.com/connectthedots 

Register now to access Money Laundering, Asset Forfeiture and Recovery, and Compliance: A Global Guide complimentary chapter in PDF!

 Order before November 30, 2011 and save 20%!*


				

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Offshore Swiss Bank Indictments Follow Voluntary Disclosure Program

Posted by William Byrnes on April 1, 2011


Why is this Topic Important to Wealth Managers? This topic discusses the potential consequences of not playing by the rules; it is important to constantly keep in mind the balance between providing the most efficient and effective services to clients and crossing the line into illegal territory. Clients may not realize the harsh penalties associated with offshore activity, and although when performed by expert planners under the proper circumstances, that some offshore transactions may be legal and beneficial, it is the job of informed wealth managers to keep clients abreast of information that is useful in making long-term financial decisions.

Four bankers at an international bank incorporated and with its headquarters in Zurich, Switzerland, with offices worldwide, including New York City and Miami, were indicted by a federal grand jury in the Eastern District of Virginia and charged with conspiring with other Swiss bankers to defraud the United States, the Justice Department and the Internal Revenue Service (IRS) announced Wednesday.

According to the indictment, the international bank’s managers and bankers engaged in illegal cross-border banking that was designed to assist U.S. customers evade their income taxes by opening and maintaining secret bank accounts at the bank and other Swiss banks. As of the fall of 2008, the international bank maintained thousands of secret accounts for customers in the United States with as much as $3 billion in total assets under management in those accounts.

The Justice Department announced the scheme dates back to 1953 and involved two generations of U.S. tax evaders including U.S. customers who inherited secret accounts at the international bank.

The indictment asserts that four foreign individuals, members of senior management, bankers and others assisted U.S. taxpayers in evading their U.S. taxes through the use of secret bank accounts in Switzerland.

According to the indictment, the defendants and their co-conspirators solicited U.S. customers to open secret accounts because Swiss bank secrecy would permit them to conceal from the IRS their ownership of accounts at the bank and other Swiss banks. It is further alleged that they provided unlicensed and unregistered banking services and investment advice to customers in the United States in person while on travel to here, including at the international bank’s representative office in New York City and by mailings, e-mail and telephone calls to and from the United States.

Read the analysis at AdvisorFYI

 

Posted in Compliance, Money Laundering | Tagged: , , , , , , , | 2 Comments »

Wikileaks To Release Details of Secret Swiss Accounts

Posted by William Byrnes on March 1, 2011


Wikileaks is set to release confidential Swiss banking documents, and although the scope of information included in the documents isn’t yet clear, the release could pave the way for a new IRS surge against tax evaders.  Similar disclosures by bank insiders were at the heart of the Justice Department’s UBS investigation.   This most recent leak came from a former senior private banker and chief operating officer of Julius Baer’s Caribbean operation.   He’s currently on trial in Switzerland for allegedly leaking client documents in 2005.

… the statute of limitations for criminal tax offenses is generally three years, but there are a number of exceptions that extend the statute to six years, including “willfully attempting to evade or defeat any tax.” Leaked documents from prior to 2002 would reveal activities that would generally fall outside the six-year statute of limitations; however, the six year statute only begins to run on the day the last affirmative act is committed by the defendant, so criminal prosecution of accountholders revealed by the leak may still be viable.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the IRS’s offshore enforcement efforts in Advisor’s Journal, see Offshore’s Limited Shelf Life (CC 10-47)IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52), and IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118).

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Are Financial Service Firms Serving High Net Wealth Suffering As a Result of Compliance Costs?

Posted by William Byrnes on August 19, 2009


Over the past blogticles, we have been examining a number of financial crimes issues including several for anti money laundering.  Now we turn to compliance costs and the dis-connect?  Feel free to comment or email me with any burning questions, Professor William Byrnes (www.llmprogram.org), as well as join one of our weekly webcasts.

Are Financial Service Firms Serving High Net Wealth Suffering As a Result of Compliance Costs?

In my 900-page economic report on the international financial services industry, I examined and calculated the economic size and impact of the sector on local jurisdictions.[1]  But for periods of global financial crisis, the sector had experienced double-digit annual growth and contributed robustly to the local economy and society.  Since 1998, the international financial services sector client base has expanded nearly 10% on average. 

In the past decade, the number of global high-net-worth individuals (HNWIs) served by practitioners, such as my able graduates, has doubled to more than 10 million by 2008 (though the global financial crisis has caused a decline to less than 9 million) —and their assets have more than doubled from $17 trillion to $40 trillion though currently just under $33 trillion due to the last twelve month’s financial crisis.[2] 

Is The Future For Clients Dim?

Dim? On the contrary!  In just four years, the pool of HNWI clients’ assets is projected to grow to nearly $50 trillion.  Though the global re-calibrating of asset values may impact the nominal wealth value for HNWIs in the short term, historically, based upon both the recessions coined after the Asian Financial Crisis and the Tech-Bust, the wealth value will likely return to projected levels with a two-year lag. 

The average HNWI, excluding the value of primary residences and collectables, is worth approximately $4 million!  HNWI’s continue to leverage offshore skill sets, growing their assets from $5.8 trillion from 1998 to $11 trillion today.[3]  That $11 trillion under management represents, at combined fees of just 1%, at least $100 billion to private bank firms offshore, and six times that taking all HNWI assets into account.

Some Financial Centers Spend More on Compliance than Others

39% of Florida banks surveyed reported that private banking accounted for more than 50% of their operating revenues.  Florida’s international private banking and wealth management customers predominantly reside, as one would expect, in Latin America and the Caribbean, with 1/3 residing in Europe.  South American residents account for 44% of private banking and wealth management customers of Florida’s international banks.  Approximately 19% of international private wealth management clients reside in Mexico or Central America, while 4% reside in the Caribbean.

Even though the market has been growing in terms of the available pool of HNW clients, the international banking industry in Florida has been characterized by consolidation and contraction since 2000.  The number of foreign bank agencies operating in Florida fell from 38 in 2000 to 31 in 2005.[4]  There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005.  The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005.

Based on a survey of banks significantly engaged in international banking in South Florida, the economics firm based on direct surveys estimated Miami’s international bankers staffing cost for 271 full-time employees of anti-terrorism/anti-money laundering compliance at nearly $25 million in 2005. [5]  The average survey respondents indicated that it devoted 2.9 FTE employment positions to BSA/AML compliance in 2002 versus 6.8 FTE positions in 2005. The number of full-time employees devoted to compliance represented 9% of the workforce in 2005.  Staff resources devoted to compliance increased by 160% between 2002 and 2005.

So Where is the Dis-Connect?

So if enough money is being spent by some banks, by example in Miami, and this expenditure is even potentially impacting earnings in some regions such as Miami, (as an industry – small institutions are being clobbered compared to their larger brethren), then why are some banks and other financial service providers employees failing in their implementation of AML programs in light of the expenditure?   Where is the dis-connect between expenditure and results?  Might the expenditure be more about white-washing than about achieving an educated work force?  Might throwing money at the problem not be the answer?  Or is not enough money flowing to training?

As the Miami marketplace apparently illustrates, in general the compliance and training budgets have reached the deal-breaker point at some banks and in some regions.  Thus, rather than it being a quantitative issue of bigger budgets, it is more likely a qualitatively issue, that is, spending either on poorly designed products or on good products but with poor instruction, follow-up, and support.  It may be that purchasing decisions are based not on price, but rather are based on how to spend as little labor time as possible to meet a minimum level of information and training sufficient for an employee to appear to be able to implement AML policy.  That is, institutions may be spending more to obtain less quality products because the product requires less labor activity time.

By example, some institutions send the high level AML staff for a one or two day workshop at between one and three thousand dollars and now call that staff member an expert.  A time-saving approach certainly.  But is this a reasonable approach in light of the likely outcomes of such minimal education consisting of little to no follow up, guidance, and academic support?  Can a board member, much less a regulator, feel confident that such a staff member is able to exercise the necessary skills gained from the one or two day session to protect the financial institution and public from an money laundering/financial crime incident?

By another example, some financial service provider compliance officers and their advisors will establish a library budget, purchasing a variety of publications.  Yet the staff is not trained in knowledge management for the library, that is how to interact with and study such information. Thus, the library collects dust.

White-Washing

Is a two day course sufficient to qualify someone as a certified expert?  A one week course even?  How long will the regulators allow such white washing to continue, or is it merely an issue of fines when holes are found in the dikes?


[1] Report on the Economic, Socio-Economic, and Regulatory Impact of the Tax Savings Directive and EU Code of Conduct for Business Taxation upon Selected Offshore Financial Centers as well as a Competitiveness Report for Selected Offshore Financial Centers (Foreign Commonwealth Office 2004).

[2] Cap Gemini Merrill Lynch World Wealth Report 2003 through 2008.

[3] Tax Haven Abuses: The Enablers, The Tools and Secrecy” (Sen. Rep., Perm. Sub-Comm. On Investigations, August 1, 2006) and World Wealth Report 2008.

[4] In 2005, however, 7 of the 31 international banks had no deposits booked in Florida, while in 2000 only 2 of the 38 had zero deposits.

[5] It is important to note that these cost estimates only include manpower or staffing costs, and do not include costs such as transaction monitoring software, possible IT investments and services, legal counsel and similar support.  The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

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Is AML Training Effective or Whitewashing? Part II

Posted by William Byrnes on August 15, 2009


In my previous blogticle I presented a few of the very many examples of regulatory fines for financial institutions failing to meet minimum money laundering training for staff, in many cases leading to failures of their money laundering risk management system.  Hereunder I turn to expenditures on money laundering training.

Consider that the above regulatory enforcement actions, and those referred to by the GAO report, were issued at least three years after the US financial institutions were put on initial notice of the hawkish nature of enforcement of AML programs.  Certainly, neither management nor staff wanted to, by example, be responsible for over 2,000 filing errors for only 1,639 SARs.  Riggs divestiture of its international banking operations certainly provided a resounding warning for boards to take their AML compliance responsibilities seriously.  Enforcement actions generally lead to management and staff level firing holding persons accountable for their errors.

In a global review of money laundering legislation throughout financial centers, none of the legislation provides specific benchmarks or at least an assessable minimum standard for a level of training of the staff or the MLRO.  Further, the regulator guidance, where available, is scant to the issue of quality assurance of training.  The US Federal Financial Institutions Examination Council’s (“FFIEC”) Bank Secrecy Act/Anti Money Laundering Manual (“Manual”) states that a bank must –

        “[T]rain employees to be aware of their responsibilities under the BSA regulations and internal policy guidelines”

 whereas the UK FSA Handbook states that a firm’s should ensure that its –

         “systems and controls include (1) appropriate training for its employees in relation to money laundering …”.[1] 

The FFIEC Manual’s most specific example of what should be contained within a training program is “…training for tellers should focus on examples involving large currency transactions or other suspicious activities; training for the loan department should provide examples involving money laundering through lending arrangements.”

Aren’t Expenditures on Training Going up, uP, UP?

Thus, to avoid enforcement actions and thus being fired, in some markets the training budgets and the compliance cost per-dollar-of-deposit have more than doubled.  By example, from 2002 – 2005, banks offering international financial services in Miami reported a 160% increase both in the total costs of staff resources devoted to AML compliance and in the compliance costs of staff resources per dollar of deposit.[2] 

Senior banking management perceives rising and unpredictable compliance costs that undermine global competitiveness as the most significant threats to the future growth of banking.[3]  The cost of AML compliance increased around 58% globally and 71% in North America between 2004 and 2007.[4]

A 2005 survey of Florida banks engaged in international banking estimated the staffing cost of AML compliance at nearly $25 million. The study concluded that compliance costs are not uniform across institutions, even after making adjustment for size.[5] Banks estimate that training costs and transaction monitoring will require the largest investment of all AML activities. All North American banks provide AML training for nearly all of their employees. See KPMG’s Figure in its AML Survey.

Larger institutions (measured in terms of deposits) typically devote more resources and spend more on compliance than smaller ones, of course, but the compliance burden does not rise proportionately with size.  That is, survey data indicates that economies of scale in compliance are present, and that compliance costs per dollar of deposits is greater for smaller institutions than for larger ones.[6] Even after the dramatic increases in compliance costs and regulatory complexity since 2001, the regulatory environment is likely to become increasingly challenging in coming years.

In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance with government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.[7]


[1] http://www.ffiec.gov/pdf/bsa_aml_examination_manual2007.pdf and http://fsahandbook.info/FSA/html/handbook/SYSC/6/3#D78.

[2] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[3] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[4] KPMG’s Global Anti-Money Laundering Survey 2007.

[5] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[6] The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.

[7] Economist Intelligence Unit, Bank Compliance: Controlling Risk and Improving Effectiveness (2006).

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Is AML Training Effective or Whitewashing?

Posted by William Byrnes on August 10, 2009


Over the coming weeks we will examine a number of financial crimes issues including several for anti money laundering.  Feel free to comment or email me with any burning questions. Professor William Byrnes (www.llmprogram.org) as well as join one of daily webcasts.  This is part one in a series that I will compose on whether instiutions are implementing effective training programs or merely whitewashing to avoid criticism (at the cost of risk of non-detection of internal or external AML infraction).

The Regulatory Environment [1]

For the past several years, the US banking industry has focused on regulatory issues, such as the corporate governance provisions of the Sarbanes-Oxley Act (enacted in 2002) and the banking-related parts of the USA Patriot Act (enacted in 2001). Much literature and studies have been provided regarding the cost impact of the various implemented measures.

Smaller community banks have contended that it is difficult for them to comply with certain Sarbanes-Oxley provisions, such as the requirement that audit committees be composed entirely of independent directors and that companies have a “financial expert” on the board of directors. The provisions of the USA Patriot Act require increased investments in technology (though many in the industry have questioned the effectiveness of these investments in preventing the funding of terrorist groups or activities).

The Reporting Impact

Resulting from the impetus of the Al Qaeda’s terrorist attacks of 9/11, the US financial institution regulators became an enforcement hawk of the money laundering provisions of the Bank Secrecy Act (“BSA”).  In turn, hawkish enforcement has led to a drastic increase in the number of BSA filings.  In 2007, the approximate two hundred thousand US depository institutions filed over 649,176 Suspicious Activity Reports (“SAR”s), as  reported by the US Government Accountability Office (“GAO”) (over 1.2 million SARs filed by all financial service providers).  In 2008, these deposit institutions increased their SAR filings by nearly a hundred thousand.  In contrast, just two hundred, twenty thousand STRs were filed in the UK by all covered persons in 2006-07 (of which 140,000 were filed by banks) with a 10,000 total filing decrease last year.[2] 

This begs the question: are too many being filed in the USA, clogging the investigatory system, or are too few filed in the UK, allowing criminals to operate freely?  And leads to many other questions such as: Do criminals launder more money in the US and less in the UK?  Are US personnel improperly trained and thus filing SARs improperly or with little use?  Are UK institutions whitewashing their responsibilities and thus staff are not equipped to identify suspicious transactions and patterns?  We will discuss these and many others if not here, in the webinars.

Notwithstanding this level of apparent US hawkish compliance, the GAO noted that the federal regulatory authorities cited well over 7,000 BSA violations, leading to over 2,000 various actions against banking institutions.  Interestingly, a majority of 2005 actions were issued against the traditionally smaller credit unions that at first glance may be considered to carry less risk for money laundering.[3]  Moreover, these enforcement figures did not include the actions taken against casinos, jewelry stores, and money service businesses, such as check-cashing, whose anti money-laundering (“AML”) program compliance is audited by the IRS. 

Managing Risk through Training

International financial centers all have a requirement that firms subject to money laundering legislation have a designated compliance officer, known by different acronyms such as MLRO.  Further, the legislation requires staff training on a continuing basis.  By two examples, the USA and the UK respectively:

Bank Secrecy Act § 5318:

(h) Anti-Money Laundering Programs.—

(1) In general.— In order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum—  …

(B) the designation of a compliance officer;

(C) an ongoing employee training program; ….

The Money Laundering Regulations 2007 Training: 

21. A relevant person must take appropriate measures so that all relevant employees of his are—

(a) made aware of the law relating to money laundering and terrorist financing; and

(b) regularly given training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing.

KPMG reports that the training of employees to recognize money laundering, which is labor intensive, has required a big cost increase for banks.  Yet, reviewing a few of the high dollar value civil penalty actions issued by the US regulators in the last two years illustrates that a lack of money laundering expertise at the management level and a lack of firm wide education and training at the staff level cuts across both large and small banking firms. 

Penalties for Lack of Training and Expertise

The highest publicity action in the past few years occurred against American Express Bank International (“AMEX”) – shortly thereafter purchased by Standard Chartered.  AMEX’s original sixty-five million dollar penalty resulted partly from the gross amount of errors in just one year in its SAR filings regarding its private banking services to its high net-worth individuals (HNWI) and the individuals’ respective businesses throughout Latin America.  In the 12 month period from May 2006, over 2,000 filing error were found for only 1,639 SARs, not including over 1,000 late SAR filings.  Other recent large penalties citing the lack of staff training include ABN-AMRO’s (forty million dollars) and fines of ten million dollars each for Bank Atlantic and AmSouth. 

A medium size Chicago head office bank suffered a two million dollar penalty because “management failed to implement adequate training for appropriate personnel to ensure compliance with the suspicious activity reporting requirements”.  The regulator found that the  Bank staff was inadequately trained in suspicious activity identification and monitoring, detection of structured transactions, and identification of possible money laundering.  Israel Discount Bank, with branches in a few states, paid a twelve million dollar file for inadequately training its staff regarding the heightened risks associated with its transaction involving Delaware LLC shell companies.  On the opposite size spectrum from AMEX, a one branch bank, Beach Bank of Miami, with less than $150 million in assets, suffered an eight hundred thousand dollar fine for its lack of monitoring of high risk accounts, including six foreign correspondent accounts. 


[1] Standard and Poor’s Industry Surveys: Banking (Dec. 6, 2007).

[2] The SAR Activity Review – By the Numbers Issue 10 (FINCEN May 2008); Money Laundering Regulations 2007: Regulatory Impact Assessment (HM Treasury July 2007), and The Suspicious Activity Reports Regime, Serious Organised Crime Agency (SOCA) United Kingdom http://www.soca.gov.uk/assessPublications/downloads/SAR-Annual-Report-08-pn.pdf.

[3] http://www.gao.gov/cgi-bin/getrpt?GAO-07-212

Posted in Compliance, Financial Crimes, Money Laundering | 5 Comments »

 
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