Financial Crimes Enforcement Network (FinCEN)

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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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.

T2000px-US-FinancialCrimesEnforcementNetwork-Seal_svghe Financial Crimes Enforcement Network (FinCEN) and Office of the Comptroller of the Currency (OCC) yesterday announced the assessment of a $7 million civil money penalty against Merchants Bank of California of Carson, California, for willful violations of several provisions of the Bank Secrecy Act (BSA). (The FinCEN press release is here and assessment is here; the OCC press release is here and consent order is here.) FinCEN and the OCC found that the bank failed to (a) establish and implement an adequate anti-money laundering (AML) program, (b) conduct required due diligence on its foreign correspondent accounts, and (c) detect and report suspicious activity. FinCEN found that “Merchants’ failures allowed billions of dollars to flow through the U.S. financial system without effective monitoring to adequately detect and report suspicious activity. Many of these transactions were conducted on behalf of money services businesses (MSBs) that were owned or managed by Bank insiders who encouraged staff to process these transactions without question or face potential dismissal or retaliation.” In addition, FinCEN determined that bank insiders directly interfered with the BSA staff’s attempts to investigate suspicious activity related to these insider-owned accounts.

Seal_of_the_Office_of_the_Comptroller_of_the_Currency_svgThe OCC (Merchants’ federal functional regulator) previously identified deficiencies in Merchants’ BSA/AML compliance program which resulted in the issuance of consent orders in June 2010 and June 2014. Those consent orders required the bank to correct deficiencies in all four pillars of its BSA program (the system of internal controls, independent testing, a designated individual or individuals responsible for coordinating and monitoring BSA/AML compliance, and training for appropriate personnel). OCC concluded that Merchants violated numerous provisions of those consent orders, which no doubt contributed to the decision by FinCEN and the OCC to impose such a significant civil money penalty against the bank.

Merchants specialized in providing banking services for check-cashers and money transmitters (commonly referred to as “money services businesses” or MSBs). However, FinCEN found that it provided those services without adequately assessing the money laundering risks and without designing an effective AML program. Merchants also provided its high-risk customers with remote deposit capture services without adequate procedures for monitoring their use.

FinCEN’s assessment disclosed that one of Merchants’ MSB customers was the subject of a federal criminal investigation into its anti-money laundering compliance program. That customer, a Los Angeles-based check cashing store, its head manager, and its designated anti-money laundering compliance officer eventually pleaded guilty to criminal charges including conspiracy to fail to file currency transactions reports (CTRs) and failing to maintain an effective anti-money laundering program in connection with over $8 million in transactions. The head manager was sentenced to 5 years in prison, and the AML compliance officer was sentenced to 8 months in prison. FinCEN concluded that even after learning that this customer was under criminal investigation in February 2012, Merchants failed to report the customer and its activity on a Suspicious Activity Report (SAR).

According to FinCEN, Merchants also failed to provide the necessary level of authority, independence, and responsibility to its BSA officer to ensure compliance with the BSA as required, and compliance staff was not empowered with sufficient authority to implement the Bank’s AML program. Merchants’ leadership impeded BSA analysts and other employees from investigating activity on transactions associated with accounts that were affiliated with Bank executives, and the activity in these accounts went unreported for many years. FinCEN found that Merchants’ interest in revenue compromised efforts to effectively manage and mitigate its deficiencies and risks.

In addition, Merchants banked customers located in several jurisdictions considered to be high-risk but did not identify these customers as foreign correspondent customers and therefore did not implement the required customer due diligence program. In a three-month period, Merchants processed a combined $192 million in high-risk wire transfers through some of these accounts.

Merchants consented to imposition of the $7 million civil money penalty and accepted the findings of FinCEN that the bank had willfully violated the BSA’s program, recordkeeping, and reporting requirements. Merchants also consented to imposition of another OCC consent order. Notably, FinCEN’s settlement with Merchants does not preclude consideration of separate enforcement actions that may be warranted with respect to any financial institution or any partner, director, officer, or employee of a financial institution, suggesting the possibility that future criminal or civil enforcement actions may be forthcoming.

The specific findings made by FinCEN and accepted by the bank are outlined in more detail below.

  1. Failure to Establish and Implement an Adequate AML Program

The OCC requires each bank under its supervision to develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with the BSA’s recordkeeping and reporting requirements. At a minimum, a bank’s AML compliance program must: (a) provide for a system of internal controls to assure ongoing compliance; (b) provide for independent testing for compliance to be conducted by bank personnel or by an outside party; (c) designate an individual or individuals responsible for coordinating and monitoring day-to-day compliance; and (d) provide training for appropriate personnel. FinCEN found that Merchants failed to establish and maintain adequate internal controls to assure ongoing compliance. In particular, Merchants did not conduct a sufficient independent audit commensurate with the institution’s complexity and risk profile; it failed to provide the necessary level of authority, independence, and responsibility to its BSA Officer to ensure day-to-day compliance; and it did not provide adequate training for appropriate personnel.

Merchants provided banking services for as many as 165 check-cashing customers and 44 money transmitters, many of which were located hundreds of miles away from the bank. According to the assessment, Merchants did so without adequately assessing the money laundering risk of these customers and designing an effective AML program to address those risks. Specifically, it did not implement adequate due diligence programs and provided its high-risk customers with remote deposit capture services (RDC) without adequate procedures for monitoring their use. In addition, in several instances, bank insiders directly interfered with the BSA staff’s attempts to investigate suspicious activity related to insider-owned accounts. Insiders owned or managed MSBs, which had accounts at Merchants, and from 2007 to September 2016 certain of these accounts demonstrated highly suspicious transaction patterns including possible layering schemes, transactions not commensurate with the business’s purpose, and commingling of funds between two independent check cashing entities. Merchants’s leadership impeded BSA analysts and other employees investigating activity on transactions associated with accounts that were affiliated with Bank executives, and the activity in these accounts went unreported for many years. Employees who attempted to report suspicious activity in these accounts were threatened with possible dismissal or retaliation. Merchants’s executives weakened the Bank’s AML program by creating a culture that did not sufficiently detect or report on suspicious activity involving the accounts of insiders.

Until 2015, Merchants failed to conduct an independent audit that was commensurate with the Bank’s customer complexity and risk profile. Merchants is required to conduct independent compliance testing commensurate with the BSA/AML risk profile of the Bank to monitor and maintain an adequate program. By not conducting the required independent review, Merchants was unable to identify vulnerabilities in its compliance program and properly monitor the account activity of its customers to detect suspicious activity going through the Bank.

Merchants failed to have proper requirements within the Bank’s AML program to ensure that the audit firm conducted a comprehensive independent audit of its program. Specifically, Merchants failed to adequately review the engagement proposal of the audit firm to confirm it was sufficient in scope to identify weaknesses in the Bank’s program.

Merchants’ independent audit was not commensurate to the risk and complexity of the types of customers Merchants served, including its high-risk MSB customers. Therefore the 2012 independent audit failed to identify internal control deficiencies in Merchants’s AML program. The audit’s scope, procedures, and transaction review of Merchants’s independent testing were inadequate, given the bank’s high-risk customer base. In 2014, a new independent consultant conducted an audit but failed to identify significant gaps in Merchants’s overall BSA compliance program. In 2015, Merchants hired a different independent consultant only to conduct a required SAR look-back review of the bank’s MSB account activity. During this review, the consultant identified a number of AML compliance issues that Merchants’s former auditors failed to identify. The consultant identified issues that were consistent with Merchants’s internal controls violations related to providing banking services to high-risk MSBs without implementing the appropriate risk-based controls required by the BSA or creating an appropriate due diligence program.

2.  Due Diligence Program for Correspondent Accounts

From 2008 to 2014, Merchants failed to maintain a due diligence program for foreign correspondent accounts, which FinCEN refers to as “gateways to the U.S. financial system.” In particular, FinCEN concluded that the bank did not have policies and procedures to elevate foreign correspondent bank customers for enhanced due diligence, as required by the USA PATRIOT Act. For example, Merchants had four banking customers located in several jurisdictions considered to be high-risk including Honduras, Mexico, Colombia, and Romania but did not identify these customers as foreign correspondent customers, and therefore did not implement the required customer due diligence program. These four customers sent and received a combined $192 million in high-risk wire transfers during the period of August 2014 through October 2014. Merchants failed to establish adequate alert parameters for these accounts, resulting in the exclusion of this wire activity from monthly transactional monitoring because the bank failed to establish appropriate alert parameters on the accounts. Merchants also failed to identify suspicious wires and report that activity to FinCEN during this time.

3.  Failure to Report Suspicious Transactions

The BSA and its implementing regulations impose an obligation on banks to report transactions that involve or aggregate to at least $5,000, are conducted by, at, or through the bank, and that the bank “knows, suspects, or has reason to suspect” are suspicious. A transaction is “suspicious” if the transaction: (a) involves funds derived from illegal activities, or is conducted to disguise funds derived from illegal activities; (b) is designed to evade the reporting or recordkeeping requirements of the BSA or regulations under the Act; or (c) has no business or apparent lawful purpose or is not the sort in which the customer normally would be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including background and possible purpose of the transaction. From 2012 to 2016, Merchants failed to adequately monitor billions of dollars of transactions for suspicious activity. Because of this failure, Merchants failed to file or file timely on hundreds of millions of dollars of suspicious activity including millions of dollars of transactions of 57 of its customers later identified as part of an independent look-back review.

FinCEN determined that many of Merchants’ failures to file or file timely SARs were related to its higher-risk MSB customers’ activities, which were inconsistent with the anticipated behavior, stated business purpose, or customer profile information of these MSBs. FinCEN’s assessment set forth the following examples:

  • One of the MSB customers was a money transmitter located in the basement of the owner’s private residence in New York. Despite several red flags resulting from Merchants’s account review, including the fact that this MSB was the subject of multiple information requests from law enforcement, had significant increases in its account activity, and its wire transfers were, in two instances, rejected by another bank, Merchants determined that its activities were not suspicious and failed to timely file a SAR.
  • Merchants failed to file a SAR on another MSB customer engaging in suspicious activity. In a six-month period between 2011 and 2012, the MSB conducted approximately $500,000 and $700,000 in deposits and withdrawals, respectively, and received over $1.3 million in wire transfers. Within two to three days of receiving the funds, the MSB wrote large checks, cashing them out at other financial institutions. In January 2012, Merchants conducted a due diligence analysis on the same MSB’s activity and did not consider it suspicious. In February 2012, after learning of a criminal investigation involving the MSB, Merchants again conducted a due diligence analysis and again failed to report the customer and its activity in a SAR. As noted above, on September 19, 2012, the MSB, its manager, and its compliance officer pleaded guilty to eight counts of failing to file currency transaction reports and one count of failing to maintain an effective AML program.
  • Merchants failed to file a SAR on another licensed money transmitter and seller of money orders with physical locations in Nevada and California. This MSB’s customer base was located in Russia, Armenia, the United Kingdom, and Germany, and the MSB sent most of its money transmissions to these regions. Merchants rated this account as high-risk and conducted an account review, which indicated that for several months, the volume of account activity had significantly exceeded the anticipated activity established by the MSB during the account application process. Although the review indicated that Merchants asked the MSB for an explanation of its unexpected account behavior, the customer never provided the requested information and the Bank failed to investigate further. Merchants also failed to identify evidence of structuring flowing through the account.

In 2015, an independent consultant completed a look-back review of a sample of 100 of Merchants’s high-risk MSB accounts for the period of July 1, 2012 through June 30, 2014. The look-back review identified 57 customer accounts with activity that was deemed potentially suspicious and required escalation to management level along with an additional 11 customer accounts requiring further review due to a lack of documentation or a lack of transparency in the customer transactions. As a result of the look-back review, Merchants filed SARs on the activity and transactions identified through the review. The late SAR filings included reports covering structured transactions that were conducted through Merchants for two consecutive years totaling over $400 million. The subjects of one of the SARs engaged in a suspicious pattern of cashing multiple structured checks made to the order of the same individuals in Mexico without providing information concerning source of funds. Also, these subjects engaged in several suspicious wire transfers to the Office of Foreign Assets Control sanctioned countries. These same subjects were under a U.S. federal law enforcement investigation for fraudulent tax returns. This activity started in 2014 and was reported on a SAR two years later only after Merchants was required to conduct a look-back review. Another late SAR covered transactions worth over $395 million related to customers conducting large wire transfers between multiple foreign financial institutions without validating the source of funds or identifying the ultimate beneficiary. This activity resulted in large payouts to unknown entities in Colombia.

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The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced today that its aggressive efforts to combat money laundering in the luxury real estate market have been extended for an additional six months. Confirming his agency’s concerns about illicit funds flowing through the U.S. real estate industry, FinCEN Acting Director Jamal El-Hindi said today that this initiative is “producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector.” Today’s announcement means that temporary measures requiring U.S. title insurance companies to identify the natural persons behind shell companies used to pay all-cash to high-end residential real estate in six major metropolitan areas – known as “Geographic Targeting Orders” (GTOs) –remain in place for six more months.

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, 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 shipments of cash across the border in California and Texas, the fashion district of Los Angeles, exporters of electronics in South Florida, and check cashing businesses in South Florida. 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.

Prior Efforts to Prevent Money Laundering in Real Estate Transactions

For several years, FinCEN has sought to ensure financial transparency and combat illegality in the real estate market. In February 2015, The New York Times published a series of articles focused on the use of shell companies to purchase high-value real estate in New York City. In a November 2015 speech, FinCEN’s then-director disclosed that through analysis of Bank Secrecy Act reporting and other information, FinCEN has observed the frequent use of shell companies by international corrupt politicians, drug traffickers and other criminals to purchase luxury residential real estate in cash. In particular, FinCEN uncovered fund transfers in the form of wire transfers originating from banks in offshore havens at which accounts have been established in the name of the shell companies. The perpetrator will typically direct an individual involved in the settlement and the closing in the U.S. to place the deed to the property in the name of the shell company, thereby obscuring the identity of the owner of the property.

The Bank Secrecy Act established anti-money laundering obligations for financial institutions, including institutions involved in real estate transactions. By including these businesses in the definition of “financial institution,” Congress recognized the potential money laundering and financial crime risks in the real estate industry. In the USA Patriot Act, Congress mandated that FinCEN issue regulations requiring financial institutions to adopt AML programs with minimum requirements, or establish exemptions, as appropriate. Since that time, FinCEN has implemented AML requirements for certain real estate businesses or established exemptions for others consistent with the Bank Secrecy Act.

The Original Manhattan and Miami-Dade Real Estate GTOs

Approximately one year ago, FinCEN issued what were believed to be the first-ever GTOs focused on real estate transactions. Effective March 1, 2016, these GTOs required certain title insurance companies to identify the natural persons behind companies used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County. All-cash transactions exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, were to be reported to FinCEN with an identification of the “beneficial owner” behind the transaction.

The enhanced reporting required by the GTOs applied to “covered transactions,” which were defined as transactions in which (1) a legal entity (2) purchases residential real estate either in the borough of Manhattan or Miami-Dade County (3) for a total purchase price of excess of $3 million (Manhattan) or $1 million (Miami-Dade) (4) without a bank loan or other similar form of external financing and (5) using, at least in part, currency or a cashier’s check, certified check, traveler’s check, or money order. “Legal entity” was defined as a corporation, limited liability company, partnership or other similar business entity, whether domestic or foreign.

If a title insurance company is engaged in a transaction that meets all of the requirements for a “covered transaction,” it was required to report said transaction to FinCEN within 30 days of the closing using a designated form entitled “FinCEN Form 8300.” On the Form 8300, the title insurance company must identify (1) the purchaser; (2) the purchaser’s representative, if any; and (3) the beneficial owner, which is defined as each natural person who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The title insurance company must obtain and copy the driver’s license, passport, or other similar identification for each beneficial owner.

Expansion of GTOs to Six Other Major Metropolitan Areas

On the eve of the expiration of the original Manhattan and Miami-Dade GTOs in August 2016, FinCEN announced a significant expansion of its efforts to combat money laundering in real estate transactions with the issuance of six more GTOs. Effective on August 28, 2016, those GTOs covered the following geographic areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately 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; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each geographic area varied.[1]

Beyond expanding their geographic reach, the six new GTOs contained two significant changes from the original Manhattan and Miami-Dade GTOs. First, the earlier GTOs defined “cash” transactions to include money orders, cashier’s checks, certified checks, and traveler’s checks. The newly-issued GTOs also applied to personal and business checks, thereby expanding the types of transactions that will be subject to enhanced reporting. Notably, however, none of the GTOs apply to real estate transactions conducted solely using wire transfers, an area that FinCEN currently lacks authority to regulate. Critics of the real estate GTOs pointed out that money launderers could exploit this gap in the regulatory scheme by using wire transfers from offshore banks to finance their luxury real estate purchases. Second, the new GTOs applied to all U.S. title insurance companies, instead of the few title companies originally selected.

Implications of FinCEN’s Renewal of the Six Real Estate GTOs

Today’s action by FinCEN to extend the six real estate GTOs for an additional six months is not surprising and confirms that FinCEN remains concerned about the risk of money laundering when individuals attempt to purchase high-end real estate in all-cash deals through limited liability companies or similar structures. In a press release issued today, FinCEN revealed that approximately 30 percent of the transactions covered by the GTOs involved a beneficial owner or purchaser representative that is also the subject of a previously-filed “suspicious activity report,” thereby corroborating FinCEN’s long-expressed concerns about the use of shell companies to buy luxury real estate in all-cash deals.

Title insurance companies handling transactions occurring in the six geographic regions covered by the latest GTOs, and their employees and agents, must be familiar with the obligations imposed by these latest GTOs. Title insurance companies should have training programs in place so that they are prepared to address these ongoing compliance obligations. Companies that fail to comply with the reporting and record-keeping requirements of these GTOs, and their employees, may face civil or criminal penalties.

It will be interesting to see whether FinCEN will make permanent the temporary measures imposed by these GTOs through regulations. With a new administration in place committed to rolling back regulations, it is entirely possible that the GTOs may eventually expire without further regulatory action. On the other hand, the GTOs appear to have produced valuable information for law enforcement, and that result may prompt FinCEN to implement these anti-money laundering measures on a permanent basis.

[1] The New York thresholds are as follows: the Borough of Manhattan – $3,000,000; the Borough of Brooklyn – $1,500,000; the Borough of Queens – $1,500,000; the Borough of Bronx – $1,500,000; and the Borough of Staten Island – $1,500,000. The Florida thresholds are as follows: Miami-Dade County – $1,000,000; Broward County – $1,000,000; Palm Beach County – $1,000,000. The California thresholds are as follows: San Diego County – $2,000,000; Los Angeles County – $2,000,000; San Francisco County – $2,000,000; San Mateo County – $2,000,000; Santa Clara County – $2,000,000. The Texas threshold is as follows: Bexar County – $500,000.