Category: Anti-Money Laundering

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

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

roulette by Chris Yiu

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

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

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

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

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

Sources:

Roulette by Chris Yiu CC BY SA

A Small Step Forward in Real Estate Anti-Money Laundering

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

Miami skyline

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

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

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

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

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

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

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

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

Sources:

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

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

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

laundering dollar bills money

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

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

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

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

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

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

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

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

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

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

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

Sources:

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

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

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

5857345827_ecf5d1853a_z

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

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

Here is the main part of the proposed regulations:

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

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

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

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

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

Sources:

Upcoming Anti-Money Laundering Rules for Private Funds

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

5857345827_ecf5d1853a_z

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

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

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

It looks like changes are coming.

Sources:

Laundering Dollar Bills is by  TaxRebate.org.uk

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

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

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

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

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

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

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

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

These are the groups that signed the letter:

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

Sources:

Anti-Money Laundering Regulations are Coming for Private Funds

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

Investment advisers and private funds have largely not been under the strict regulatory requirements under Bank Secrecy Act. The rationale is that the custody requirements impose a custody account and the custodian is subject to those rules.

It looks like things are going to change. U.S. Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen gave  speech to to the ABA/ABA Money Laundering Enforcement Conference and said changes are underway.

FinCEN, in consultation with the SEC, is working to define SEC-registered investment advisers as financial institutions and, because of their unique insight into customer and transaction information, to extend AML program and suspicious activity reporting requirements to them.

In 2012, the Federal Reserve, FDIC, OCC, NCUA, SEC, CFTC, IRS, and DOJ, formed an AML Task Force to review the AML regime.  The Task Force’s mandate was to take a close look at what was working well and what areas might need some improvement, leveraging input from the private sector through the Bank Secrecy Act Advisory Group.

Sources:

Kleptocracy Asset Recovery Initiative

glove

Last week, the son and heir-apparent to the president of Equatorial Guinea agreed to give up $34 million in assets as part of a settlement with the U.S. government over corruption claims. This was the latest attack by the Department of Justice’s Kleptocracy Asset Recovery Initiative.

According to the Wall Street Journal, the Kleptocracy Asset Recovery Initiative has collected about $600 million out of the $1.2 billion pursued from 15 cases against current or former officials and businessmen.

The government accused Second Vice President Teodoro Obiang Nguema Mangue of amassing assets worth $300 million on an annual salary of less than $100,000.

He has agreed to sell a Malibu mansion, a Ferrari and six life-size Michael Jackson statues. He gets to keep a Gulfstream jet, a luxury boat and most of his collection of Michael Jackson memorabilia, including the crystal-encrusted glove from the late singer’s ‘Bad’ tour (At least for now). If you want to see an incredible collection of Michael Jackson memorabilia, you can find it at the Equatoguinean Cultural Center in Malabo.

Mr. Obiang’s father is still in power, so the government of Equatorial Guinea didn’t cooperate with the U.S. government’s investigation. There are obvious signs of corruption, but the US government faced an uphill battle trying to trace Mr. Obiang’s US based assets back to corruption in his native country.

The main link was the anti-Money laundering failures of Riggs Bank. Starting in the mid-1990s, Riggs Bank opened dozens of accounts for the government of Equatorial Guinea, as well as senior government officials. By 2003 those accounts were worth almost $700 million.

Sources:

Proposed Regulations on Customer Due Diligence Requirements

fincen logo

The U.S. Treasury Department’s Financial Crimes Enforcement Network has proposed revisions to its customer due diligence rules. Of course, the proposed rule would affect financial institutions that are currently subject to FinCEN’s customer identification program requirement: banks, brokers-dealers, and mutual funds. However, FinCEN suggested that it may be considering expanding these customer due diligence requirements to other types of financial institutions. FinCEN names money services business, casinos and insurance companies. Investment advisers and private fund managers are not specifically mentioned.

According to FinCEN, an Anti-Money Laundering program should have four elements:

  1. Identify and verify the identity of customers;
  2. Identify and verify the identity of beneficial owners of legal entity customers
  3. Understand the nature and purpose of customer relationships; and
  4. Conduct ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

Please notice number 2. The definition of “beneficial owner” is proposed as have two prongs:

  • Ownership Prong: each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer, and
  • Control Prong: An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or (ii) any other individual who regularly performs similar functions.

For identifying ownership of an entity, FinCEN has proposed a form of certification. I find the certification to be overly simplistic. It only asks for individuals with ownership in the entity. This would clearly miss ownership of the account holder by other entities who could be “bad guys.” The certification also only requires one senior officer.  That makes it too easy to appoint a straw man as executive officer to hide the underlying control by a “bad guy.”

On the other hand, it makes it really easy for the financial institution to check the boxes with requirements and confirm compliance.

The rule does not specifically contemplate investment advisers or private fund managers. For many investment advisers, the underlying broker-dealer or custodian will end up with KYC responsibilities. The investment adviser will have to be a conduit for that information.

Sources:

FinCEN Emphasizes a Culture of Compliance

Compliance Secrets Advice Following Rules Yellow Envelope

The US Financial Crimes Enforcement Network has finally come around to realizing that US financial institutions should promote a culture of compliance. FinCEN does not point to any specific problem, but mere notes that “Shortcomings identified in recent Anti-Money Laundering enforcement actions confirm that the culture of an organization is critical to its compliance.”

FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities.

I don’t think that that anyone believes that these roadblocks in the financial system will prevent terrorism, drug sales or other illegal activities. But it should prevent law-abiding financial institutions from helping illegal activities.

The FinCEN’s advisory (.pdf) comes off as a bit stale since the culture of compliance mantra has been echoing throughout financial institutions for many years.

One piece of the FinCEN guidance did catch my eye:

Compliance should not be compromised by revenue interests

Again, this guidance is not novel, but rarely have I seen it so specific. AML compliance should operate independently and be able to take appropriate actions to mitigate risk and investigate possible inappropriate activity.

When BNP Paribas SA, compliance staff gave warnings but then assisted with misconduct, you understand the need for FinCEN to be more explicit about compliance culture.

Sources: