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Posts Tagged ‘Financial Crimes’

Are HNWI Passports Obtained Through St. Kitts and Nevis Used to Facilitate Terrorism? FinCEN Adds to EDD Lists!

Posted by William Byrnes on January 10, 2015


post from the International Financial Law Prof Blog.

See FinCEN Announcement at http://lawprofessors.typepad.com/intfinlaw/2015/01/passports-obtained-through-st-kitts-and-nevis-citizenship-by-investment-program-used-to-facilitate-financial-crime.html

 

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

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.   

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

Willingness to Pay to Reduce White Collar and Corporate Crime?

Posted by William Byrnes on September 21, 2014


International Financial Law Prof Blog

Utilizing a contingent valuation survey approached that has been used to estimate the cost of street crimes, the average willingness to pay for a 10% reduction in each of these four offenses is estimated to range between $70 and $75 per household. In the case of consumer fraud and financial fraud – where estimates of prevalence are available, this translates into a willingness to pay of $2,700 per consumer fraud and $21,000 for financial fraud. In contrast, the out-of-pocket costs to victims of consumer fraud have been estimated to average about $100, and about $200 to $250 for various types of financial frauds. These figures also compare favorably to the willingness to pay for a reduced household burglary of $18,000.

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

FinCEN Issues Guidance to Financial Institutions Allowing Marijuana Businesses

Posted by William Byrnes on February 14, 2014


FINCEN issued a Valentine today to the marijuana industry that may open the door to financial institutions bank accounts in states where growing and selling marijuana is legal under state law.  

Whether a financial institution will be willing to open such an account is another matter, as each account will require an Suspicious Activity Report (SAR) filing.  However,  FINCEN has created a low level of concern “Marijuana Limited” SAR filing that appears to allow a level of comfort regarding disclosure for the financial institutions and allowing FINCEN to track the number of marijuana business account openings.  

In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes:

  1. verifying with the appropriate state authorities whether the business is duly licensed and registered;
  2. reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
  3. requesting from state licensing and enforcement authorities available information about the business and related parties;
  4. developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
  5. ongoing monitoring of publicly available sources for adverse information about the business and related parties;
  6. ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
  7. refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

“Marijuana Limited” SAR

A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole
Memo priorities or violate state law should file a “Marijuana Limited” SAR.  U.S. Department of Justice Deputy Attorney General James M. Cole issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning marijuana enforcement under the CSA.

The Cole Memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations. It also notes that DOJ is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provides guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities (the “Cole Memo priorities”):

• Preventing the distribution of marijuana to minors;
• Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
• Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Preventing marijuana possession or use on federal property.

FINCEN Guidance http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-G001.pdf

Cole Memo: http://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf

Department of Justice Memorandum: James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes (February 14, 2014).

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

Mutual Assistance in the Recovery of Tax Claims

Posted by William Byrnes on October 26, 2009


Historical anecdotes relating to tax information exchange and cross-border assistance with tax collection (continued)

This week I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection.  In this blogticle I turn to the OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims and the EU Directive on the Mutual Assistance for the Recovery of Claims  In our live webinars in the tax treaty course, Marshall Langer will continue to address these issues indepthly.

1981 OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims

This 1981 OECD Model provides for both the exchange of information (article 5) and the assistance in recovery (article 6), which state respectively:

EXCHANGE OF INFORMATION

At the request of the applicant State the requested State shall provide any information useful to the applicant State in the recovery of its tax claim and which the requested State has power to obtain for the purpose of recovering its own tax claims.

ASSISTANCE IN RECOVERY

1. At the request of the applicant State the requested State shall recover tax claims of the first-mentioned State in accordance with the laws and administrative practice applying to the recovery of its own tax claims, unless otherwise provided by this Convention.

Procedurally, the documentation must state (1) the authority requesting, (2) name, address and other particulars for identification of the taxpayer, (3) nature and components of the tax claim, and (4) assets of which the Requesting State is aware of from which the claim may be recovered.  The nature of the tax claim must include documentary evidence in the form of the instrumentality establishing that the tax is determined, that it is due, and that it is without further recourse to contest under the Requesting State’s laws.  The applicable Statute of Limitation is of the Requesting State.

The Requested State’s obligation is limited, as under the OECD DTA Model Article 26 and 27, if the request requires the Requested State to go beyond its own or the Requesting State’s capacity to either provide information or take administrative actions pursuant to their respective internal laws.  The Requesting State has a duty to exhaust its own reasonable collection remedies before making the request which procedural requirement may be relied upon by the Requested State.  All requests are also limited by ordre public.

1988 Convention On Mutual Administrative Assistance In Tax Matters

Coming into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, this multilateral convention was originally agreed in 1988.  The Convention provides for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.

Tax covered includes income, capital gains, wealth, social security, VAT and sales tax, excise tax, immovable property tax, movable property tax such as automobiles, and any other tax save customs duties.  The tax also includes any penalties and recovery costs.  The tax may have been levied by the State and any of its subdivisions. 

The convention allows the request of information regarding the assessment, collection, recovery and enforcement of tax.  The information may be used for criminal proceedings on a case-by-case basis pursuant to the Requested State agreeing, unless the States have waived the requirement of agreement.

Spontaneous provision of information shall be provided without request when a State with information:

(1) has “grounds for supposing” a loss of tax to another State,

(2) knows that a taxpayer receives a tax reduction in its State that would increase the tax in the other State,

(3) is aware of business dealings between parties located in both States that saves tax,

(4) has grounds for supposing an artificial intro-group transfer of profits, and

(5) that was obtained from the other State has led to further information about taxes in the other State.  

Similar to the OECD Model Conventions above, procedurally the requesting documentation must state (1) the authority requesting and (2) name, address and other particulars for identification of the taxpayer.  For an information request, the document should include in what form the information should be delivered.  For a tax collection assistance request, (1) the tax must be evidenced by documentation in the form of the instrumentality establishing that the tax is determined, that it is due and that it is without further recourse to contest, (2) the nature and components of the tax claim, and (3) assets of which the Requesting State is aware of from which the claim may be recovered. 

This Multilateral Convention’s limitations follow the 1981 and 2003 OECD Model, but further provide for a non-discrimination clause.  The non-discrimination clause limits providing assistance if such assistance would lead to discrimination between a requested State’s national and requesting State’s nationals in the same circumstances.

2001 EU Directive on the Mutual Assistance for the Recovery of Claims relating to Certain Levies, Duties, Taxes and Other Measures

The OECD is not alone in its quest to improve tax information exchanges.  On June 15, 2001 the EU Commission issued a Directive that amended a previous 1976 Directive which substantially changed the impact of that 1976 Directive (on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and in respect of value added tax and certain excise duties).

The 2001 Directive provided that Member States enact regulations that provide for the implementation of a number of EU Directives on mutual assistance between Member States of the Community on the provision of information in respect of, and the recovery in the State of, claims made by Other Member States in respect of debts due to the Member State in question from:

  • Import & Export Duties
  • Value Added Tax
  • Excise duties on manufactured tobacco, alcohol and alcoholic beverages and mineral oils
  • Taxes on income and capital
  • Taxes on insurance premiums
  • Interest, administrative penalties and fines, and costs incidental to these claims (with the exclusion of any sanction in respect of which the act or commission giving rise to the sanction if committed in the State would be criminal in nature)
  • Refunds, interventions and other measures forming part of the system of financing the European Agricultural Guidance and Guarantee Fund
  • Levies and other duties provided for under the common organization of the market of the market for the sugar section

In summary, the Directive provides for one Member State’s competent authority at the request of another Member State’s competent authority to disclose to the requester’s competent authority any information in relation to a claim which is required to be disclosed by virtue of the Directive.
On receipt of a request, the Revenue Commissioners can decline a request to provide information in the following circumstances:

– if the information would, in the opinion of the Competent Authority, be liable to prejudice the security of the State or be contrary to public policy;

– if the Competent Authority would not be able to obtain the information requested for the purpose of recovering a similar claim, or

– if the information, in the opinion of the Competent Authority, would be materially detrimental to any commercial, industrial or professional secrets.

Any information provided to a competent authority under the enacting regulations pursuant to the Directive can only be used for the purposes of the recovery of a claim or to facilitate legal proceedings to the recovery of such a claim.

Under the Directive, the collecting Member State is obliged to collect the amount of a claim specified in any request received from a competent authority in another Member State and remit the amount collected to that competent authority.

In the Tax Treaties course, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above regarding the IRS efforts to collect tax via assistance from foreign states.  For further tax treaty course information, please contact me at William Byrnes (wbyrnes@tjsl.edu).

Posted in Compliance, Financial Crimes, information exchange, Legal History, OECD, Taxation | Tagged: , , , , , , | 1 Comment »

Historical Anecdotes of Tax Information Exchange (continued)

Posted by William Byrnes on October 22, 2009


This week I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection.  In this blogticle I turn to the FATF, Edwards and KPMG reports, OECD and Offshore Group of Bank Supervisors.  In our live webinars, Marshall Langer will continue to address these issues indepthly.

1990 – 2001 Financial Action Task Force (FATF)

In 1990, the FATF established forty recommendations as an initiative to combat the misuse of financial systems by persons laundering drug money. In 1996, the FATF revised its forty recommendations to address “evolving money laundering typologies”.  The 1996 forty recommendations developed into the international anti-money laundering standard, having been endorsed by more than 130 countries.  In 2001, because of 9/11, the FATF issued eight terrorist financing special recommendations to combat the funding of terrorist acts and terrorist organizations.  Regarding the micro-economies, the activities of the Offshore Group of Banking Supervisors (OGBS) have lead to agreement with the FATF on ways to evaluate the effectiveness of the money-laundering laws and policies of its members. The difficulty is that only about a half of offshore banking centers are members of OGBS.

See the FATF Methods and Trends page for detailed typologies.

1999 Review Of Financial Regulation In The Crown Dependencies (Edwards Report)

In 1999 and 2000, the UK government in association with the governments of its Crown Dependencies and Overseas Territories assessed the territories financial regulations against international standards and good practice, as well as make recommendations for improvement where any territory fell beneath the standards.  In general the reports concluded that the regulatory regimes were good, given limited resources, but that significant further resources had to be employed.  The primary conclusions of the reports included:

(1) employment of more regulatory resources,

(2) establish an independent regulatory body in each jurisdiction,

(3) maintain records of bearer share ownership,

(4) allow disclosure of beneficial owners’ names to regulators for possible onward transmittal to other jurisdiction’s regulators, and

(5) expand company disclosure with regard to the directors.

2000 KPMG Review Of Financial Regulation in The Caribbean Overseas Territories and Bermuda

In 2000, the UK government in association with the governments of the Caribbean Overseas Territories and Bermuda commissioned the London office of KPMG to assess the territories financial regulations against international standards and good practice, as well as make recommendations for improvement where any territory fell beneath the standards.  A brief example summary for Anguilla and British Virgin Islands (BVI) is below.

Anguilla

KPMG commented that while Anguilla’s offshore regulatory operations are “well-run by skilled officers”, KPMG critiqued that the regulatory operations were not fully in accordance with international standards.  KPMG’s principal recommendations for regulatory refinement were: 

  • Shift responsibility for offshore financial services from the Governor back to the Minister of Finance, specifically the Director of the Financial Services Department.
  • Fight money laundering and other fraud by keeping records of bearer share ownership, allowing, where necessary the disclosure of the owners’ names to Anguilla’s regulators for possible onward transmittal to other jurisdiction’s regulators.
  • Expand the IBC disclosure by including director’s names in the Articles of Incorporation as well as empowering the Registrar of Companies to apply for a Court appointed inspector.
  • Require partnerships to maintain financial records.
  • Enact a new insurance law.
  • Amend the 1994 Fraudulent Dispositions and 1994 Trust Act’s disclosure requirements to prevent insertion in trust documents of clauses hampering legitimate creditors or restricting official investigations.

 The KPMG Report concluded that Anguilla’s ACORN electronic company registration system “enhanced” the regulatory environment.

British Virgin Islands

KPMG commented that while BVI’s offshore regulatory operations are well run, KPMG pointed out that the regulatory operations were not fully in accordance with international standards.  KPMG’s principal recommendations for regulatory refinement were: 

  • Consolidating control of offshore financial services in an independent Financial Services Department (which was renamed the Financial Services Commission), which at the time functioned as the regulatory authority. This required devolving powers of licensing, regulation and supervision from the Governor in Council, composed of the Governor, Attorney General, Chief Minister, and four Ministers.  KPMG urged the FSD to give up its marketing activities.  In 2002 this activity was hived off and reposed in a newly established BVI International Financial Centre.
  • Grant the Registrar of Companies power to initiate an investigation of a company and petition the courts to wind up an IBC.
  • Establish standards, based upon the International Organisation of Securities Commissions, for supervision of mutual funds, drafting a regulatory code affecting all securities and investment ventures, and increasing the Registrar of Mutual Funds’ enforcement powers.
  • Enact enforceable codes of practice for company and trust service providers and increase the supervisor’s regulatory powers.

Influenced by international reports concerning combating money laundering, the BVI passed legislation restricting the anonymity and mobility of bearer shares through requiring them to be held by a licensed financial institution. The anonymity of directors was reduced by requiring information about them to be filed preferably in the Company Registry in the jurisdiction.

2000 Improving Access To Bank Information For Tax Purposes (OECD)

In 2000, the OECD issued Improving Access to Bank Information for Tax Purposes.  The 2000 OECD Report acknowledged that banking secrecy is “widely recognised as playing a legitimate role in protecting the confidentiality of the financial affairs of individuals and legal entities”.  This Report focused on improving exchange of information pursuant to a specific request for information related to a particular taxpayer.  In this regard, it noted that pursuant to its 1998 Report, 32 jurisdictions had already made political commitments to engage in effective exchange of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006.  We have already covered the corresponding TIEAs established in light of this report in a previous blogticle hereunder.   Black/White and Grey lists will be covered in a future blogticle.

2002 Offshore Group Of Banking Supervisors Statement Of Best Practices

In 2002, the OGBS formed a working group to establish a statement of best practices for company and trust service providers. The working group included representatives from the micro-economies of Bahamas, Bermuda, B.V.I., Cayman Islands, Cyprus, Guernsey, Gibraltar, Isle of Man an Jersey and from the OECD members   France, Italy, the Netherlands, the U.K., as well as the relevant NGOs of the FATF, IMF, and OECD.  The terms of reference of the working groups was to “To produce a recommended statement of minimum standards/guidance for Trust and Company Service Providers; and to consider and make recommendations to the Offshore Group of Banking Supervisors for transmission to all relevant international organisations/authorities on how best to ensure that the recommended minimum standards/guidance are adopted as an international standard and implemented on a global basis”.

The Working Group concluded: “There should be proper provision for holding, having access to and sharing of information, including ensuring that – 

       (i)  information  on the ultimate beneficial owner and/or controllers of companies, partnerships and other legal entities, and the trustees, settlor, protector/beneficiaries of trusts is known to the service provider and is properly recorded;

       (ii) any change of client control/ownership is promptly monitored (e.g. in particular where a service provider is administering a corporate vehicle in the form of a “shelf” company or where bearer shares or nominee share holdings are involved); 

       (iii) there is an adequate, effective and appropriate mechanism in place for information to be made available to all the relevant authorities (i.e. law enforcement authorities, regulatory bodies, FIU’s); 

       (iv) there should be no barrier to the appropriate flow of information to the authorities referred to in 3 (iii) above; 

       (v) KYC and transactions information  regarding the clients of the Service Provider is maintained in the jurisdiction in which the Service Provider is located; 

       (vi) there should be no legal or administrative barrier to the flow of information/documentation necessary for the recipient of business from a Service Provider who is an acceptable introducer to satisfy itself that adequate customer due diligence has been undertaken in accordance with the arrangements set out in the Basel Customer Due Diligence paper.

Please contact me with any comments or follow up research materials.  Prof. William Byrnes wbyrnes@tjsl.edu

Posted in information exchange, Legal History, OECD | Tagged: , , , , , , | 2 Comments »

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).

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

 
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