Anti-Money Laundering (AML)

Today the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced that it had fined a California card club, Artichoke Joe’s Casino, $8 million for numerous willful violations of the Bank Secrecy Act occurring since 2009. In its assessment, FinCEN found that during the last eight years, the card club failed to implement and maintain an effective anti-money laundering program and failed to detect and adequately report suspicious transactions in a timely manner. This is the third enforcement action against a card club for FinCEN, the only federal regulator with anti-money laundering enforcement authority over card clubs. Artichoke Joe’s Casino did not consent to imposition of the assessment, which means that the Justice Department must now file suit in federal court to enforce the assessment and collect the penalty amount.

Artichoke Joe’s Casino is located in San Bruno, California, and has been in operation since 1916. A “card club” is a gaming establishment that only offers card games, and most are located in Montana and California. One of the largest card clubs in California, Artichoke Joe’s Casino contains 38 tables offering card and tile games, including baccarat, blackjack, poker, and Pai Gow, and has a history of compliance deficiencies. The Internal Revenue Service, which examines card clubs for compliance with the Bank Secrecy Act, conducted an examination in 2015 that identified significant violations of the Bank Secrecy Act. In addition, on May 9, 2011, Artichoke Joe’s Casino entered into a stipulated settlement with the California Bureau of Gambling Control, agreeing to pay a fine of $550,000, with $275,000 stayed for a two-year period, and agreed to modify its surveillance, work with the city of San Bruno to improve coordination with law enforcement, replace employees at the Pai Gow tables, and provide additional training on loan-sharking, illegal drugs, and compliance with the Bank Secrecy Act.

In a press release announcing the assessment, Jamal El-Hindi, Acting Director of FinCEN, said, “[f]or years, Artichoke Joe’s turned a blind eye to loan sharking, suspicious transfers of high-value gaming chips, and flagrant criminal activity that occurred in plain sight. FinCEN’s $8 million civil penalty results from the card club’s failure to establish adequate internal controls and its willful violations of the Bank Secrecy Act. Casinos, card clubs and others in the gaming industry should consider their risk of exploitation by criminal elements, and understand that they will be held accountable if they disregard anti-money laundering and illicit finance laws. This significant action highlights the need for all entities, including those in the gaming industry, to build a robust culture of compliance into their policies and procedures to ensure they are not facilitating illicit activities.”

In March 2011, Artichoke Joe’s Casino was the subject of a raid by state and federal law enforcement which led to the racketeering indictment and conviction of two customers for loan-sharking and other illicit activities conducted at the casino. Senior-level employees knew that loan-sharks were conducting criminal activity through the card club and using gaming chips to facilitate illegal transactions. Nonetheless, according to FinCEN, Artichoke Joe’s Casino failed to file any Suspicious Activity Reports (SARs) on this activity.

According to FinCEN, Artichoke Joe’s Casino also failed to implement adequate internal controls, which exposed the card club to a heightened risk of money laundering and other criminal activity. In particular, the card club failed to adopt adequate policies and procedures to address risks associated with gaming practices that allow customers to pool or co-mingle their bets with relative anonymity. Further, Artichoke Joe’s Casino did not establish procedures for obtaining and incorporating information from propositional players (players paid by casinos or card clubs to wager at a game) or other employees who may have observed suspicious transactions. The card club also failed to file complete and timely reports on suspicious transactions involving potentially structured chip redemptions and purchases, and redemptions of large volumes of chips with no cash-in or gaming activity.

FinCEN’s action today represents only its third enforcement action against a card club, and its first ever non-consensual card club assessment. Its first action was against Oaks Card Club of Emeryville, California in December 2015. In that proceeding, Oaks Card Club admitted that it violated the program and reporting requirements of the Bank Secrecy Act and agreed to pay a fine of $650,000. In July 2016, FinCEN fined Hawaiian Gardens Casino (also based in California) $2.8 million, which admitted that it violated the Bank Secrecy Act’s program and reporting requirements and agreed to future undertakings, including periodic independent reviews to examine and test its AML program.

BitcoinIn its recently-published 2017 National Drug Threat Assessment (NDTA), the Drug Enforcement Administration reports that drug trafficking organizations are turning to Bitcoin and other virtual currencies to enable easy transfer of illicit funds internationally. The NDTA is a comprehensive strategic assessment of the threat posed to the United States by domestic and international drug trafficking and the abuse of illicit drugs. The report combines a wide variety of law enforcement reporting and other data to determine which substances and criminal organizations represent the greatest threat to the United States.

The NDTA notes that in order to avoid law enforcement detection and banking regulations, transnational criminal organizations (TCOs) employ various strategies to move and launder drug proceeds into, within, and out of the United States. Preferred methods to move and launder illicit proceeds – such as bulk cash smuggling, money value transfer systems, trade-based money laundering, and through the formal banking sector – remain the same as in past years. Emerging as a new money laundering threat, however, are Bitcoin and other virtual currencies because of their “anonymizing nature and ease of use.” Bitcoin is the most common form of payment for drug sales on dark net marketplaces and is emerging as a desirable method to transfer illicit drug proceeds internationally. Bitcoin is the most widely used virtual currency due to its longevity and growing acceptance at legitimate businesses and institutions worldwide.

The NDTA notes that Bitcoin’s widespread popularity in China has now spread to trade-based money launderers operating in that country. Many trade-based money laundering schemes are China-based, and have historically consisted of the purchase by TCOs of large shipments of “made-in-China” goods via wire transfer or bulk cash carrying from the United States to China. The “made-in-China” goods are then shipped to business owners in Mexico and South America, who in turn reimburse the drug trafficking organizations in local currency. Now, many China-based firms manufacturing goods used in such schemes prefer to accept Bitcoin for payment.

The use of Bitcoin in this type of trade-based money laundering scheme no doubt facilitates the money laundering process for TCOs, which currently face scrutiny from U.S. banks whenever they wire money to Chinese manufacturers. In contrast, the NTDA notes that a TCO purchasing Bitcoin through a licensed money service business without raising red flags will face no further scrutiny when transferring the Bitcoin to China. Many TCOs can also buy Bitcoin from individuals selling Bitcoin on the Internet without any MSB license. Many TCOs will thus be able to convert their cash drug proceeds to Bitcoin and buy Chinese goods with no fear of oversight from a formal financial institution.

The NDTA also notes that Bitcoin is increasingly being used by Over-the-Counter (OTC) Bitcoin brokers who conduct high-risk Bitcoin trading consistent with Chinese capital flight and money laundering. These brokers likely use foreign Bitcoin wallet-hosting services and exchanges that do not properly conduct “know your customer” or anti-money laundering monitoring on Bitcoin purchases. OTC Bitcoin brokers primarily attract two types of clients: those who want to use Bitcoin to move their money out of China and those who want to convert large quantities of cash into Bitcoin. Chinese underground banking systems money brokers sell Bitcoin to drug traffickers for cash earned from drug sales in the United States, Australia, and Europe. This drug cash is then sold to Chinese nationals in exchange for Bitcoin the Chinese nationals use to transfer the value of their assets outside of China. The NTDA concludes that the increasing use of OTC Bitcoin brokers, who are capable of transferring millions of dollars in Bitcoin across international borders as part of a capital flight scheme, is expected to continue to intertwine criminal money laundering networks with capital flight.

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued an advisory to alert financial institutions of widespread public corruption in Venezuela and the methods Venezuelan senior political figures and their associates may use to move and hide proceeds of their corruption through the U.S. financial system. The advisory also describes a number of financial red flags to assist financial institutions in identifying and reporting suspicious activity that may be indicative of corruption.

“In recent years, financial institutions have reported to FinCEN their suspicions regarding many transactions suspected of being linked to Venezuelan public corruption, including government contracts,” said Acting FinCEN Director Jamal El-Hindi in a press release. “Not all transactions involving Venezuela involve corruption, but, particularly now, during a period of turmoil in that country, financial institutions need to continue their vigilance to help identify and stop the flow of corrupt proceeds and guard against money laundering and other illicit financial activity.”

Background Regarding Venezuela

In its advisory, FinCEN notes that Venezuela faces severe economic and political circumstances due to the rupture of democratic and constitutional order by the government and policy choices. In recent years, financial institutions have reported to FinCEN their suspicions regarding many transactions suspected of being linked to Venezuelan public corruption, including government contracts. Based on this reporting and other information, all Venezuelan government agencies and bodies, including state-owned enterprises (SOEs), appear vulnerable to public corruption and money laundering. The Venezuelan government appears to use its control over large parts of the economy to generate significant wealth for government officials and SOE executives, their families, and associates. In this regard, there is a high risk of corruption involving Venezuelan government officials and employees at all levels, including those managing or working at Venezuelan SOEs.

FinCEN Recommends Risk-Based Approach

According to FinCEN, financial institutions should take risk-based steps to identify and limit any exposure they may have to funds and other assets associated with Venezuelan public corruption. Awareness of money laundering schemes used by corrupt Venezuelan officials may help financial institutions (1) differentiate between illicit and legitimate transactions, and (2) identify and report transactions involving suspected corruption proceeds being held or moved by their customers, including through their private and correspondent banking relationships. Consistent with a risk-based approach, however, financial institutions should be aware that normal business and other transactions involving Venezuelan nationals and businesses do not necessarily represent the same risk as transactions and relationships identified as being connected to the Venezuelan government, Venezuelan officials, and Venezuelan SOEs involved in public corruption that exhibit the red flags below or other similar indicia.

Recent OFAC Sanctions

On February 13, 2017, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated Venezuelan Vice President Tareck El Aissami for playing a significant role in international narcotics trafficking pursuant to the Foreign Narcotics Kingpin Designation Act. On the same day, OFAC also designated his front man, Samark Lopez Bello, for materially assisting El Aissami and acting on his behalf.  OFAC further designated or identified as blocked property 13 companies owned or controlled by Lopez Bello or other designated parties that comprise an international network spanning the British Virgin Islands, Panama, the United Kingdom, the United States, and Venezuela. Five U.S. companies owned or controlled by Lopez Bello were also blocked as well as significant real property and other assets in the Miami, Florida area tied to Lopez Bello. As a result of this action, U.S. persons are generally prohibited from engaging in transactions or otherwise dealing with these individuals and entities, and any assets the individuals and entities may have under U.S. jurisdiction are frozen. FinCEN believes that these OFAC designations increase the likelihood that other non-designated Venezuelan senior political figures may seek to protect their assets, including those that are likely to be associated with political corruption, to avoid potential future blocking actions.

Venezuela Government Corruption Red Flags

In its advisory, FinCEN states that transactions involving Venezuelan government agencies and SOEs, particularly those involving government contracts, can potentially be used as vehicles to move, launder, and conceal embezzled corruption proceeds. SOEs (as well as their officials) may also try to use the U.S. financial system to move or hide proceeds of public corruption. Among the SOEs referenced in OFAC’s recent designations related to Venezuela are the National Center for Foreign Commerce (CENCOEX), Suministros Venezolanos Industriales, CA (SUVINCA), the Foreign Trade Bank (BANCOEX), the National Telephone Company (CANTV), the National Electric Corporation (CORPELEC), Venezuelan Economic and Social Bank (BANDES), and similar state-controlled entities. As law enforcement and financial institutions increase scrutiny of transactions involving Venezuelan SOEs, corrupt officials may try to channel illicit proceeds through lesser-known or newly-created SOEs or affiliated enterprises.

The red flags noted below, which are derived from information available to FinCEN (including suspicious activity reporting), published information associated with OFAC designations, and other public reporting, may help financial institutions identify suspected schemes by corrupt officials, their family members, and associates to channel corruption proceeds, often involving government contracts or resources, through transactions involving Venezuelan SOEs and subsidiaries:

FinCEN believes that corrupt officials may use contracts with the Venezuelan government as vehicles to embezzle funds and receive bribes. In this regard, some financial red flags can include:

  • Transactions involving Venezuelan government contracts that are directed to personal accounts.
  • Transactions involving Venezuelan government contracts that are directed to companies that operate in an unrelated line of business (e.g., payments for construction projects directed to textile merchants).
  • Transactions involving Venezuelan government contracts that originate with, or are directed to, entities that are shell corporations, general “trading companies,” or companies that lack a general business purpose.
  • Documentation corroborating transactions involving Venezuelan government contracts (e.g., invoices) that include charges at substantially higher prices than market rates or that include overly simple documentation or lack traditional details (e.g., valuations for goods and services). Venezuelan officials who receive preferential access to U.S. dollars at the more favorable, official exchange rate may exploit this multi-tier exchange rate system for profit.
  • Payments involving Venezuelan government contracts that originate from non-official Venezuelan accounts, particularly accounts located in jurisdictions outside of Venezuela (e.g., Panama or the Caribbean).
  • Payments involving Venezuelan government contracts that originate from third parties that are not official Venezuelan government entities (e.g., shell companies). Public reports indicate that the use of third parties, or brokers, to deal with government entities is common in Venezuela and is a significant source of risk. Brokers, particularly when colluding with corrupt government officials, can facilitate overseas transactions in a way that circumvents currency controls and masks payments from SOEs.
  • Cash deposits instead of wire transfers in the accounts of companies with Venezuelan government contracts.

In addition, FinCEN identifies these other financial red flags observed in transactions suspected of involving Venezuelan government corruption include:

  • Transactions for the purchase of real estate – primarily in the South Florida and Houston, Texas regions – involving current or former Venezuelan government officials, family members or associates that is not commensurate with their official salaries.
  • Corrupt Venezuelan government officials seeking to abuse a U.S. or foreign bank’s wealth management units by using complex financial transactions to move and hide corruption proceeds.

Overlap with Geographic Targeting Orders

It is noteworthy that two of the “red flags” identified by FinCEN its advisory directly relate to recent Geographic Targeting Orders (GTOs) issued by FinCEN. A GTO is an administrative anti-money laundering device, authorized by the Bank Secrecy Act and the USA Patriot Act, which is issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value.

One of the red flags identified by FinCEN are “[p]ayments involving Venezuelan government contracts that originate from non-official Venezuelan accounts, particular accounts located in jurisdictions outside of Venezuela (e.g., Panama or the Caribbean).” In its advisory, FinCEN noted that “[e]xport businesses in South Florida that specialize in sending goods to Venezuela are particularly vulnerable to trade-based money laundering (TBML) schemes. These include businesses that send heavy equipment, auto parts, and electronics (cell phones and other appliances) from Florida to Venezuela.” In April 2015, FinCEN issued a GTO focused on trade-based money laundering schemes used by drug cartels to launder illicit proceeds through electronics exporters in South Florida. At that time, FinCEN disclosed that an ongoing criminal investigation conducted jointly by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and the Miami Dade State Attorney’s Office South Florida Money Laundering Strike Force revealed that many electronics exporters are exploited as part of sophisticated trade-based money laundering schemes in which drug proceeds in the United States are converted into goods that are shipped to South America and sold for local currency, which is ultimately transferred to drug cartels.

Another “red flag” involves “[t]ransactions for the purchase of real estate – primarily in the South Floria and Houston, Texas regions – involving current or former Venezuelan government officials, family members or associates that is not commensurate with their official salaries.” The purchase of high-end real estate in the United States – particularly in an all-cash transaction – is a common money laundering vehicle, and FinCEN has taken aim at this practice by issuing a series of GTOs focused on cash purchases of luxury residential real estate in seven major metropolitan markets, including South Florida. In an advisory to the real estate industry issued a few weeks ago, FinCEN warned that “real estate transactions involving luxury property purchased through shell companies – particularly when conducted with cash and no financing – can be an attractive avenue for criminals to launder illegal proceeds while masking their identities.” In that same advisory, FinCEN specifically identified Venezuelan Vice President Tareck El Aissami and his frontman Samark Lopez Bello as a prime example of this practice:

An example of abuse of the luxury real estate sector involves current Venezuelan Vice President Tareck El Aissami and his frontman Samark Lopez Bello. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated El Aissami under the Foreign Narcotics Kingpin Designation Act for playing a significant role in international narcotics trafficking. Lopez Bello was designated for providing material assistance, financial support, or goods or services in support of the international narcotics trafficking activities of, and acting for or on behalf of, El Aissami. In addition, OFAC designated shell companies tied to Lopez Bello that were used to hold real estate. Lopez Bello is tied to significant property and other assets, which were also blocked as a result of OFAC’s action.

While FinCEN’s advisory mentions real estate transactions taking place in South Florida and Houston, Texas, FinCEN does not presently have a GTO covering the real estate market in Houston.  This may suggest that an additional GTO may be issued by FinCEN to cover that particular geographic market.

Conclusion

FinCEN stated that it is providing this advisory to assist U.S. financial institutions in meeting their due diligence obligations that may apply to activity involving certain Venezuelan persons. To best meet these obligations, financial institutions should generally be aware of public reports of high-level corruption associated with senior Venezuelan foreign political figures, their family members, associates, or associated legal entities or arrangements. Financial institutions should assess the risk for laundering of the proceeds of public corruption associated with specific particular customers and transactions. Financial institutions also should be aware that OFAC has designated (and provided related guidance on) several Venezuelan persons and entities located in or related to Venezuela.

This article is Part II of a series in which we address the U.S. government’s attempts to combat money laundering in real estate transactions. Part I is available here.

On August 22, 2017, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued revised Geographic Targeting Orders (GTOs) requiring title insurance companies, and their subsidiaries and agents, to collect and report information about certain residential real estate transactions in the following jurisdictions: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately to the north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; (6) the county that includes San Antonio, Texas (Bexar County); and (7) the City and County of Honolulu in Hawaii. In this article, which address the additional reporting and recordkeeping requirements imposed upon businesses that engage in transactions covered by the terms of the revised GTOs.

Which Title Insurance Companies Are Impacted by the Revised GTOs?

Any title insurance company, and its subsidiaries and agents, is deemed to be a “Covered Business” subject to the terms of the revised GTOs. In addition, each Covered Business must supervise, and is responsible for, compliance by each of its officers, directors, employees, and agents with the terms of the revised GTOs. Each Covered Business must transmit a copy of the revised GTO to each of its agents. Each Covered Business must also transmit a copy of the revised GTO to its Chief Executive Officer or other similarly acting manager.

What Type of Transactions Are Covered by the Revised GTOs?

A real estate transaction that is considered a “Covered Transaction” is subject to the revised GTOs. In order for a transaction to be “covered,” it must meet all of the following requirements:

  1. A “Legal Entity” (which is defined as a corporation, limited liability company, partnership, or other similar business entity, whether formed under the laws of a state or of the U.S. or a foreign jurisdiction) purchases residential real property:
    • For a total purchase price of $500,000 or more in the Texas county of Bexar;
    • For a total purchase price of $1,000,000 or more in the Florida county of Miami-Dade, Broward, or Palm Beach;
    • For a total purchase price of $1,500,000 or more in the Borough of Brooklyn, Queens, Bronx, or Staten Island in New York City, New York;
    • For a total purchase price of $2,000,000 or more in the California county of San Diego, Los Angeles, San Francisco, San Mateo, or Santa Clara;
    • For a total purchase price of $3,000,000 or more in the Borough of Manhattan in New York City, New York; or
    • For a total purchase price of $3,000,000 or more in the City and County of Honolulu in Hawaii; and
  1. Such purchase is made without a bank loan or other similar form of external financing; and
  2. Such purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form, or a funds transfer.

For purposes of the revised GTOs, “residential real property” means real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families.

Payment of at least part of the purchase price using one of these methods, such as a wire transfer, a cashier’s check (sometimes referred to as a “bank check,” “official check,” or “treasurer’s check”), a personal check, a business check, or a certified check, triggers a Covered Transaction, assuming the other three criteria listed above are met.

Importantly, FinCEN has made clear that there is no de minimis exception to any of the methods of payment covered by the revised GTOs. If any part of the purchase price was made using one of the specified methods of payment in the revised GTOs, then the transaction is considered a Covered Transaction (assuming the other three criteria are met). FinCEN expects a Covered Business to take reasonable steps to determine whether any part of the purchase price was made using one of the specified methods of payment. FinCEN recognizes that in some instances a small percent of the purchase price of a residential real estate transaction may be held by a third party, such as a real estate agent holding an earnest money deposit. A Covered Business may reasonably rely on information provided to it by such third parties.

What Information Is Required To Be Reported Pursuant to the GTOs?

If the Covered Business is involved in a Covered Transaction, then the Covered Business shall report the Covered Transaction to FinCEN by filing a FinCEN Form 8300, which is entitled “Report of Cash Payments Over $10,000 Received in a Trade or Business.” This form must be filed within 30 days of the closing of the Covered Transaction. Each FinCEN Form 8300 filed pursuant to the revised GTOs must be (i) completed in accordance with the terms of the revised GTOs and FinCEN Form 8300 instructions (although when such terms conflict, the terms of the revised GTOs apply), and (ii) e-filed through the Bank Secrecy Act E-filing system.

Each Form 8300 filed pursuant to the revised GTOs shall contain the following information about the Covered Transaction:

Part I shall contain information about the identity of the individual primarily responsible for representing the Purchaser, which refers to the individual authorized by the entity to enter legally binding contracts on behalf of the entity. The Covered Business must obtain and record a copy of this individual’s driver’s license, passport, or other similar identifying documentation. A description of such documentation must be provided in Field 14 of the form.

Part II shall contain information about the identity of the Purchaser, which refers to the Legal Entity that is purchasing residential real property as part of a Covered Transaction. The Covered Business should select Field 15 on the FinCEN Form 8300, which will enable reporting of multiple parties under Part II of the form.

Part II shall also contain information about the identity of the Beneficial Owner(s) of the Purchaser. “Beneficial Owner” means each individual who, directly or indirectly, owns 25 percent or more of the equity interests of the Purchaser. The Covered Business must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. A description of such documentation must be provided in Field 27 of the form.

Part III shall contain information about the Covered Transaction as follows:

  • Field 28: Date of closing of the Covered Transaction.
  • Field 29: Total amount transferred using currency or a cashier’s check, a certified check, a personal check, a business check, or a money order in any form.
  • Field 31: Total purchase price of the Covered Transaction.
  • Field 34: Address of real property involved in the Covered Transaction.

With respect to information required to be reported in Field 29 of the Form 8300, the Covered Business should include the total amount of the purchase price, if any, that was paid using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form. With respect to information required to be reported in Field 31, the Covered Business should include the total purchase price, if different from the amount included in Field 29.

Part IV shall contain information about the Covered Business.

The Comments section to the Form 8300 shall contain the following information:

  • The term “REGTO” as a unique identifier for this Order.
  • If the purchaser involved in the Covered Transaction is a limited liability company, then the Covered Business must provide the name, address, and taxpayer identification number of all its members.
  • If a Form 8300 is being filed by an agent of the Covered Business named in this Order, then the agent shall include the name of such Covered Business.

When Are the Revised GTOs Effective?

The revised GTOs are effective beginning on September 22, 2017, and ending on March 20, 2018 (unless they are further extended by FinCEN).

What Records Relating to the Revised GTOs Must Be Retained?

Consistent with the general recordkeeping provisions of the regulations promulgated under the Bank Secrecy Act, each Covered Business must (1) retain all records relating to compliance with the revised GTOs for a period of five years from the last day that the GTOs are effective (including any renewals); (2) store such records in a manner accessible within a reasonable period of time; and (3) make such records available to FinCEN or any other appropriate law enforcement or regulatory agency, upon request.

What Are the Penalties for Noncompliance with the Revised GTOs?

Each Covered Business, and any of its officers, directors, employees, and agents, may be held liable for civil or criminal penalties for violating any of the terms of the revised GTOs.

What Procedures Should Covered Businesses Implement to Ensure Compliance with the Revised GTOs?

To assist Covered Businesses in complying with the revised GTOs, FinCEN has published an updated list of frequently asked questions (FAQs) in response to inquiries it has received. In those FAQs, FinCEN states that it expects a Covered Business to implement procedures reasonably designed to ensure compliance with the terms of the GTOs, including reasonable due diligence to determine whether it (or its subsidiaries or agents) is involved in a Covered Transaction and to collect and report the required information. In complying with the terms of the GTOs, a Covered Business may reasonably rely on information provided to it by third parties, including other parties involved in Covered Transactions. Covered Businesses may also contact the FinCEN Resource Center at (800) 767-2825.

To What Extent Must a Covered Business Verify Information About the Beneficial Owner of a Purchaser?

The revised GTOs require a Covered Business to collect and report certain identifying information about the Beneficial Owner(s) of the Purchaser in a Covered Transaction. For purposes of the GTOs, a “Beneficial Owner” means each individual who, directly or indirectly, owns 25 percent or more of the equity interests of the Purchaser. The GTOs provide that the Covered Business must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. The Covered Business may reasonably rely on the information provided to it by third parties involved in the Covered Transaction, including the Purchaser or its representatives, in determining whether the individual identified as a Beneficial Owner is in fact a Beneficial Owner.

Who Is Considered a Covered Business’s “Agents” for Purposes of the Revised GTOs?

“Agents” of a Covered Business refer to people or entities that are authorized by the Covered Business, usually through a contractual relationship, to act on its behalf to provide title insurance underwritten by the Covered Business (or its subsidiaries). FinCEN notes that the recordkeeping and reporting requirements under the GTOs are triggered only when a Covered Business (or its subsidiaries or agents) is involved in a Covered Transaction by providing title insurance underwritten by that Covered Business (or its subsidiaries) in connection with the Covered Transaction.

FinCEN also recognizes that a person or entity may be an independent agent of a Covered Business, and thus may act on behalf of multiple title insurance companies. A Covered Business is responsible for the recordkeeping and reporting requirements under the revised GTOs only when such agents are acting on its behalf in connection with a Covered Transaction.

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This article is Part I of a series in which we address the U.S. government’s attempts to combat money laundering in real estate transactions.

This week the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced that it was both extending and broadening its anti-money laundering efforts in the luxury real estate area to capture a broader array of suspicious transactions. In January 2016, FinCEN issued Geographic Targeting Orders (GTOs) that required U.S. title insurance companies to report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami—specifically, luxury residential property purchased by a shell company without a bank loan and made at least in part using a cashier’s check or similar instrument. In July 2016 and February 2017, FinCEN reissued the original GTOs and extended coverage to all boroughs of New York City, two additional counties in the Miami metropolitan area, five counties in California (including Los Angeles, San Francisco, and San Diego), and the Texas county that includes San Antonio. Confirming that its prior GTOs generated meaningful intelligence for law enforcement, FinCEN has now extended the measures for a third time and also expanded them to include another geographic market – Honolulu, Hawaii – as well as transactions involving wire transfers, a critical payment method not covered by the prior GTOs, which focused instead on all-cash purchases.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses within a designated geographic area to report on transactions any greater than a specified value. Authorized by the Bank Secrecy Act, GTOs were originally only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days (with renewals permitted). Historically, FinCEN’s issuance of a GTO was not publicized, and generally only those businesses served with a copy of a particular GTO were aware of its existence. Over the course of the last three years, however, FinCEN – the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement – has aggressively exercised its GTO authority frequently throughout the United States in areas of money laundering concern. Recent, publicly-announced GTOs have focused on the fashion district of Los Angeles, exporters of electronics in South Florida, check cashing businesses in South Florida, and most recently, all-cash purchases of luxury residential real estate in high profile U.S. real estate markets. In each of these examples, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were vulnerable to money laundering. These GTOs demonstrate an increased attention to trade-based money laundering schemes by FinCEN and confirm that criminals are aggressively using legitimate U.S. businesses to launder the proceeds of their illegal activity.

Enactment of Countering America’s Adversaries Through Sanctions Act

FinCEN’s extension and expansion of the real estate GTOs was prompted, at least in part, by the recent passage of a wide-ranging sanctions law called the “Countering America’s Adversaries Through Sanctions Act” that was signed by the President on August 2, 2017. While primarily focused on sanctions directed at Iran, Russia, and North Korea, the law made a critical modification to the statute authorizing FinCEN to issue GTOs. Previously, that statute authorized the issuance of a GTO to obtain information regarding transactions in which a financial institution or nonfinancial trade or business is involved “for the payment, receipt, or transfer of United States coins or currency (or such other monetary instruments as the Secretary [of the Treasury] may describe in such order).” As amended, the statute now authorizes the issuance of a GTO to obtain information regarding transactions in which a financial institution or nonfinancial trade or business is involved “for the payment, receipt, or transfer of funds (as the Secretary may describe in such order).”

With the replacement of the limited phrase “United States coins or currency” with the significantly broader term “funds,” FinCEN can now issue significantly more expansive GTOs that are not limited to transactions involving cash and other monetary instruments (like checks and money orders). Indeed, in the press release announcing the GTO expansion, FinCEN Acting Director Jamal El-Hindi acknowledged that this change in the law enabled his agency to capture a broader range of transactions: “FinCEN also thanks Congress for its modification of the Geographic Targeting Order authority, the first use of which will enable FinCEN to collect further information to combat the potential misuse of shell companies to purchase luxury real estate.”

The new sanctions law also directed Treasury to expand the number of real estate geographic targeting orders or other regulatory actions in order to counter money laundering and other illicit financial activity relating to Russia.  We therefore expect to see FinCEN impose significantly more anti-money laundering measures like GTOs in the coming months.

Extension of Previous GTOs

FinCEN’s announcement means that the prior GTOs covering six major metropolitan areas, which are set to expire on September 21, 2017, will be extended for an additional six months. In its press release announcing the extension, FinCEN stated that the GTOs were producing meaningful information that was advancing criminal investigations. (See prior blog coverage here.)  Specifically, FinCEN announced that nearly one-third of the transactions reported pursuant to the GTOs involved a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report (SAR). An article written by Kevin G. Hall of the Miami Herald contains the following GTO data obtained from FinCEN through a Freedom of Information Act request for the period February 29, 2016, through March 9, 2017.

 County or Borough

Total
Reported
Transactions

Transactions with
Related Suspicious
Activities
Percent of
Suspicious
Transactions
Manhattan 137 30 22
Miami-Dade 32 16 50
Brooklyn 35 13 37
Los Angeles 15 5 33
Bexar (San Antonio) 4 3 75
Queens 8 3 38
Palm Beach 4 2 50
Santa Clara 5 1 20
Bronx 0 0 0
San Diego 1 0 0
San Francisco 1 0 0
San Mateo 1 0 0
Staten Island 1 0 0

Of particular note are the reported transactions in Manhattan, Miami-Dade, and Brooklyn, where both the actual number of transactions and the percentages of reported transactions are significant.

Expansion of GTO Coverage to Hawaii

The revised GTOs, which effective September 22, 2017, now cover seven major geographic markets in the United States, with the addition of Honolulu, Hawaii. The markets now covered by GTOs, and the minimum purchase price thresholds in each market, are as follows:

  • Bexar County, Texas – $500,000
  • Miami-Dade, Broward, and Palm Beach Counties, Florida – $1,000,000
  • Boroughs of Brooklyn, Queens, Bronx, and Staten Island, New York – $1,500,000
  • Borough of Manhattan, New York – $3,000,000
  • San Diego and Los Angeles Counties, California – $2,000,000
  • San Francisco, San Mateo, and Santa Clara Counties, California – $2,000,000
  • Honolulu County, Hawaii – $3,000,000

FinCEN’s announcement is silent as to why the GTOs were extended to cover the Honolulu real estate market. The expansion of coverage to Hawaii is presumably based upon FinCEN’s conclusion that criminals are attempting to launder money through purchases of real estate in that market just as in the six markets already covered by GTOs.

Closing the “Wire Transfer” Loophole

In addition to expanding the geographic scope of the GTOs, the revisions announced yesterday also address a significant perceived weakness in the prior GTOs: they only covered all-cash transactions, and omitted from their scope any real estate transaction where the purchase price was paid by wire transfer. Critics of the prior GTOs contended that criminals could easily exploit this loophole by simply using wire transfers, rather than cash or checks, to pay for real estate purchases. The revised GTOs, which take effective in September, will apply to real estate transactions where the purchase price is paid, at least in part, using cash, check, money order, or funds transfer.

As noted above, before enactment of the Countering America’s Adversaries Through Sanctions Act, FinCEN’s authority to issue GTOs was limited to transactions involving cash or monetary instruments. With the newly expanded authority granted to it by Congress, FinCEN has the authority to issue GTOs covering transactions involving the payment, receipt, or transfer of “funds.”

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Today the Financial Crimes Enforcement Network (FinCEN) announced the issuance of revised Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used to pay for high-end residential real estate in seven metropolitan areas.  (For prior blog coverage, see here and here.)  Following the recent enactment of the Countering America’s Adversaries through Sanctions Act, FinCEN revised the GTOs to capture a broader range of transactions and include transactions involving wire transfers. FinCEN also expanded the GTOs to include transactions conducted in the City and County of Honolulu, Hawaii. In addition, FinCEN published an Advisory to provide financial institutions and the real estate industry with information on the money laundering risks associated with real estate transactions, including those involving luxury property purchased through shell companies, particularly when conducted without traditional financing. Such transactions are vulnerable to abuse by criminals seeking to launder illegal proceeds and mask their identities. The Advisory provides information on how to detect and report these transactions to FinCEN.

“Through this advisory and other outreach to the private sector, FinCEN, industry, and law enforcement will be better positioned to protect the real estate markets from serving as a vehicle to launder illicit proceeds,” said FinCEN Acting Director Jamal El-Hindi.  “FinCEN also thanks Congress for its modification of the Geographic Targeting Order authority, the first use of which will enable FinCEN to collect further information to combat the potential misuse of shell companies to purchase luxury real estate.”

In January 2016, FinCEN issued GTOs to require U.S. title insurance companies to report beneficial ownership information on legal entities, including shell companies, used to purchase certain luxury residential real estate in Manhattan and Miami—specifically, luxury residential property purchased by a shell company without a bank loan and made at least in part using a cashier’s check or similar instrument.  In July 2016 and February 2017, FinCEN reissued the original GTOs and extended coverage to all boroughs of New York City, two additional counties in the Miami metropolitan area, five counties in California (including Los Angeles, San Francisco, and San Diego), and the Texas county that includes San Antonio.

Within this narrow scope of real estate transactions covered by the GTOs, FinCEN data indicate that about 30 percent of reported transactions involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report.  FinCEN reported that this finding corroborates its concerns about this small segment of the market in which shell companies are used to buy luxury real estate in “all-cash” transactions.  In addition, FinCEN stated that feedback from law enforcement indicates that the reporting has advanced criminal investigations, and that the expanded GTOs will further help law enforcement and inform FinCEN’s future efforts to assess and combat the money laundering risks associated with luxury residential real estate purchases.

We will have analysis of the revised GTOs and related anti-money laundering issues in the subsequent blog posts.

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Over at the In The Weeds blog (which explores developments in cannabis law and business), Melissa T. Sanders writes about the recent publication by the Treasury Department’s Financial Crimes Enforcement Network of its “Marijuana Banking Update.”  In this publication, FinCEN summarizes the number of depository institutions providing banking services to marijuana-related businesses in the United States as reported by the filing of “suspicious activity reports” (SARs).  Marijuana-related businesses present myriad anti-money laundering compliance challenges, as well as complex federal tax issues as our colleague Jennifer E. Benda has addressed here, here, and here.

The IRS recently released Revenue Procedure 2017-31 which adds Belgium, Columbia and Portugal to the list of participates in the automatic exchange of information on bank interest paid to nonresident alien individuals for interest paid on or after January 1, 2017. Back in December, we discussed the previous additions to the list of participates and the implications of the expanding program. With these additional countries, there are now 43 countries participating in the automatic exchange program.

The IRS may only share information with a foreign government that has entered into a mutual information exchange agreement. The U.S. only enters into information exchange agreements after the U.S. Treasury and IRS are satisfied that the foreign government has strict confidentiality protocols and protections. The IRS is statutorily barred from sharing information with another country without such an agreement in place. All U.S. information exchange agreements require that the information exchanged under the agreement be treated and protected as secret by the foreign government.

As has been the case for the last decade, U.S. is ramping up enforcement through the use of information reporting requirements, which is one of the most effective tools it has to combat tax evasion.

2000px-US-FinancialCrimesEnforcementNetwork-Seal_svg

In a press release touting recent law enforcement success stories based upon Bank Secrecy Act reporting by financial institutions, the Treasury Department’s Financial Crimes Enforcement Network revealed publicly for the first time that its recent Geographic Targeting Orders (GTOs) are generating meaningful leads that are leading to the investigation and prosecution of individuals for money laundering violations. GTOs are a little-known, but powerful, anti-money laundering tool authorized by federal law which impose enhanced anti-money laundering reporting obligations on financial institutions that are short-term and limited to geographic regions of the United States that are perceived to be particularly vulnerable to money laundering. One such geographic area of concern is the U.S. Mexico border at two California ports of entry, which was the subject of a GTO intended to improve transparency of cross-border movements of cash. FinCEN’s announcement revealed that information generated by that GTO led Homeland Security Investigations agents to uncover a money laundering scheme that moved $45 million from the U.S. to Mexico during a 15-month period.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. Authorized by the Bank Secrecy Act, GTOs were originally only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. Historically, FinCEN’s issuance of a GTO was not publicized, and generally only those businesses served with a copy of a particular GTO were aware of its existence. Over the course of the last three years, however, FinCEN – the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement – has aggressively exercised its GTO authority frequently throughout the United States in areas of money laundering concern. Recent, publicly-announced GTOs have focused on the fashion district of Los Angeles, exporters of electronics in South Florida, check cashing businesses in South Florida, and most recently, all-cash purchases of luxury residential real estate in six high profile U.S. real estate markets. In each of these examples, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were vulnerable to money laundering. These GTOs demonstrate an increased attention to trade-based money laundering schemes by FinCEN and confirm that criminals are aggressively using legitimate U.S. businesses to launder the proceeds of their illegal activity.

GTO Focused on Cross-Border Cash Transport

In August 2014, working in close coordination with its Mexican counterpart, the Unidad de Inteligencia Financiera (UIF), FinCEN announced issuance of a GTO covering the U.S.-Mexico border at two California ports of entry. The purpose of this GTO was to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services and other common carriers of currency, the GTO required enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California.

When this GTO was announced, FinCEN noted that in 2010, Mexico enacted new anti-money laundering provisions to attack the flow of illicit cash from the United States to Mexico. These efforts made it much more difficult for criminals and narco-traffickers to place large amounts of cash in Mexican financial institutions and resulted in an increase in cash coming back to the United States from Mexico, via armored car services or couriers, for attempted placement in U.S. financial institutions. According to FinCEN, law enforcement information and BSA data analysis suggest that much of this cash movement is not properly reported and therefore not made available in FinCEN’s database for the benefit of investigators and analysts following illicit money trails.

In August 2015, FinCEN renewed the California border crossing GTO and issued another GTO focused on eight major border crossing locations in Texas. These GTOs temporarily modified the Report of International Transportation of Currency or Monetary Instruments (CMIR) requirements for common carriers of currency when physically moving more than $10,000 in cash across designated border crossings in California and Texas. The GTOs required 100 percent CMIR reporting and recordkeeping by common carriers of currency at these border crossings because they eliminate the reporting exemption for these carriers that might otherwise apply to transporting currency from a foreign person to a bank. The GTOs’ enhanced reporting also required common carriers of currency to note additional information when completing the CMIR, including the name and address of the currency originator; the name and address of the currency recipient; and the name and address of all other parties involved in the movement of currency and monetary instruments. According to FinCEN, this additional information significantly assists law enforcement’s ability to identify and prosecute illegal transportation of currency and disrupt the illicit movement of bulk cash across the southwest border.

Law Enforcement’s Use of GTO Data

FinCEN’s announcement explained that HSI agents initiated an investigation which was based largely on information provided in response to the California border GTO:

Over the course of 18 months, HSI investigators utilized an extensive volume of sensitive financial information to assist in their investigation into a large-scale illegal third-party money laundering organization. The investigation began based largely on information gleaned from a FinCEN-issued Geographic Targeting Order (GTO). This GTO required armored car services importing or exporting funds through two specific geographies in the southwest border region to acquire additional identifying information on certain transactions.

The information that investigators discovered as a result of the GTO led them to focus on one particular armored car company that appeared to be facilitating a money laundering scheme outside southern California. Investigators discovered that the company was importing U.S. dollars and Mexican pesos from casas de cambio in Mexico and depositing them into shell company bank accounts that were opened and operated by the two individuals who owned and operated the company.

Law enforcement was able to identify and connect an address for the armored car company that was shared by several other companies owned by the same individuals. Two of these newly identified companies were registered as money services businesses (MSB). Further investigation and a detailed analysis of financial data indicated that these additional companies were simply shell companies that the two individuals used to funnel millions of U.S. dollars back into Mexico.

Subpoenas were issued to the banks used by each of these companies, as well as to all of the people known to be involved with the companies. Transaction records identified cash deposits of $45 million over a 15-month period, which were then transferred in and out of the accounts of the various companies owned by the individuals before ultimately being wired to Mexico.

As a result of the investigation and discovery of the money laundering scheme, both individuals pled guilty to violations regarding failures to maintain an effective anti-money laundering program. They also lost all licenses necessary to operate as an MSB and forfeited hundreds of thousands of U.S. dollars and Mexican pesos.

The investigation and prosecution referred to in FinCEN’s announcement appears to be United States v. Angelica Padilla and Valente Marquez, No. 16-1075 (Southern District of California). In that case, the defendants, who are husband and wife, were charged with failing to maintain an effective anti-money laundering program in connection with a series of money transmitting businesses that they owned and operated. The press release announcing their guilty pleas described their offenses as follows:

SAN DIEGO – Bonita residents Angelica Padilla and her husband, Valente Marquez, pleaded guilty in federal court today, admitting that they failed to establish and maintain an effective anti-money laundering program in connection with their money transmitting businesses.  The guilty pleas were heard before U.S. Magistrate Judge Karen Crawford.

Under U.S. law, any business which provides check cashing, currency exchange, or money transmitting or remittance services, or any person who engages as a business in the transmission of funds, must register with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).  In addition, any such business must establish and maintain an anti-money laundering program including the development of internal policies, procedures and controls.

According to the plea agreements, Padilla and Marquez owned and operated money transmitting businesses in Bonita, through which they accepted and transmitted large amounts of U.S. currency.  Although Padilla and Marquez registered their businesses with FinCEN, they admitted that they lied to financial institutions about the true nature of their operations.

Specifically, Padilla operated money transmitting businesses under the names “Giros Express” and “Liberty Metals and Coins,” while Marquez operated a money transmitting business under the name “Cuva.”  Both falsely claimed that they were in the business of buying and selling precious metals.  All three businesses operated from an office at 4045 Bonita Road.

As part of their plea agreements, Padilla and Marquez agreed to cease operating as money transmitters and to relinquish their licenses. In addition, both agreed to forfeit $400,000.

U.S. Attorney Laura Duffy said, “Those who choose to operate a money transmitting business under U.S. law must fully comply with all federal regulations governing their operations, and will be held to the highest standards to ensure that criminal proceeds do not filter into the financial system.”

Both defendants were sentenced on January 9, 2017, to probation for a period of five years. They were also ordered to pay a fine of $25,000 and to forfeit the amount of $400,000, which the parties agreed represented proceeds of the criminal activity.

Conclusion

Over the course of the last three years, each of the GTOs described above has been accompanied by a FinCEN press release and a flurry of media coverage.  FinCEN has been notably (and understandably) silent, however, on whether any of the information disclosed by financial institutions pursuant to the terms of the GTOs has been valuable.  FinCEN’s announcement confirms that its campaign to crack down on trade-based money laundering through the frequent and expansive use of Georgraphic Targeting Orders appears to be generating meaningful information for law enforcement, and we expect to see additional investigations and prosecutions in the future based upon information reported to FinCEN pursuant to the GTOs.  We also expect that FinCEN will continue to make aggressive use of its authority to issue GTOs in regions or industries perceived to have money laundering vulnerabilities.