Financial Crimes Enforcement Network (FinCEN)

The United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) launched the “FinCEN Exchange” program today in order to enhance information sharing with financial institutions and to strengthen public-private partnerships to combat financial crime. As part of this program, FinCEN, in close coordination with law enforcement, will convene regular briefings with financial institutions to exchange information on priority illicit finance threats, including targeted information and broader typologies. This will enable financial institutions to better identify risks and focus on high priority issues, and will help FinCEN and law enforcement receive critical information in support of their efforts to disrupt money laundering and other financial crimes.

“Strong public-private partnerships and two-way information sharing is a crucial component of our efforts to combat the sophisticated money laundering methods and evolving threats we face today,” said Sigal P. Mandelker, Treasury Under Secretary for Terrorism and Financial Intelligence. “FinCEN Exchange will bring together law enforcement, FinCEN, and different types of financial institutions from across the country to share information that can help identify vulnerabilities and disrupt terrorist financing, proliferation financing and other financial crimes.”

Private sector participation in FinCEN Exchange is strictly voluntary, and the program does not introduce any new regulatory requirements. It also does not replace or otherwise affect existing mechanisms by which law enforcement engages directly with the financial industry. It is part of Treasury’s broader objective of strengthening the anti-money laundering framework by encouraging, enabling, and acknowledging more regular industry focus on high-value and high-impact activities. Operational briefings under the FinCEN Exchange program will begin in the coming weeks.

Law enforcement relies on the financial industry to report important data to fight financial crime through mechanisms such as Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs). The government, in turn, provides feedback to the private sector, including through FinCEN Advisories, SAR Statistics, briefings, and other forms of information to guide and encourage industry efforts.

Since 2015, FinCEN has convened over a dozen special briefings in five cities with over 40 financial institutions and multiple law enforcement agencies. In connection with these briefings, FinCEN, working closely with law enforcement, issues requests pursuant to Section 314(a) of the USA PATRIOT Act related to investigations and provides associated financial typologies. Information provided after the briefings by financial institutions through SARs has helped the public sector map out and target weapons proliferators, sophisticated global money laundering operations, human trafficking and smuggling rings, corruption and trade-based money laundering networks, among other illicit actors. The briefings also have proved useful to financial institutions, helping them focus on specific priorities and better identify risks.

FinCEN Exchange will build on the success of these efforts by convening more regularly scheduled and as-needed operational briefings across the nation with law enforcement, FinCEN, and financial institutions to exchange information on priority illicit finance and national security threats. In consultation with law enforcement, FinCEN will invite financial institutions to participate based on a variety of factors, including whether they may possess information relevant to a particular topic. While the contours of each briefing will vary, the information shared, whether through Section 314(a) of the USA PATRIOT Act or other authorities, will often include information intended to support specific lines of investigation or broader typologies related to a particular illicit finance threat. After receiving information at a FinCEN Exchange operational briefing, financial institutions will be better equipped to incorporate responsive information into SARs.

FinCEN’s regulations under Section 314 of the USA Patriot Act enable federal, state, local, and foreign (such as European Union) law enforcement agencies, through FinCEN, to reach out to more than 37,000 points of contact at more than 16,000 financial institutions to locate accounts and transactions of persons that may be involved in terrorism or money laundering. FinCEN receives requests from law enforcement and upon review, sends notifications to designated contacts within financial institutions across the country once every 2 weeks informing them new information has been made available via a secure Internet web site. The requests contain subject and business names, addresses, and as much identifying data as possible to assist the financial industry in searching their records. The financial institutions must query their records for data matches, including accounts maintained by the named subject during the preceding 12 months and transactions conducted within the last 6 months. Financial institutions have 2 weeks from the posting date of the request to respond with any positive matches. If the search does not uncover any matching of accounts or transactions, the financial institution is instructed not to reply to the 314(a) request.

FinCEN also encourages financial institutions to voluntarily share, as appropriate, information with other FinCEN Exchange participants as well as other financial institutions or associations of financial institutions pursuant to Section 314(b) of the USA PATRIOT Act. Section 314(b) provides financial institutions with the ability to share information with one another, under a safe harbor that offers protections from liability, in order to better identify and report potential money laundering or terrorist activities.

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.

 

Today the U.S. Department of the Treasury announced Kenneth A. Blanco as Director of the Financial Crimes Enforcement Network (FinCEN), a bureau in Treasury’s Office of Terrorism and Financial Intelligence. The leading federal anti-money laundering (AML) regulator, FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. Mr. Blanco will replace Jamal El-Hindi, who has served as acting FinCEN Director since May 2016, when Jennifer Shasky Calvery resigned as FinCEN Director and joined HSBC.

Mr. Blanco’s appointment as FinCEN Director continues a recent trend of criminal prosecutors departing the Justice Department to join FinCEN’s leadership ranks. Mr. Blanco has been a federal criminal prosecutor for 28 years, most recently serving as Acting Assistant Attorney General of the Justice Department’s Criminal Division. During his tenure with the Criminal Division, Mr. Blanco has overseen a number of its sections, including the Money Laundering and Asset Recovery Section (formerly the Asset Forfeiture and Money Laundering Section), the Narcotic and Dangerous Drug Section, the Organized Crime and Gang Section, and the Child Exploitation Section. Mr. Blanco has supervised many of the Criminal Division’s most significant national and international investigations into illicit finance, money laundering, Bank Secrecy Act, and sanctions violations, including investigations of global financial institutions and money services businesses. Much of his work is in the international banking and financial services area, working and collaborating with international partners in countries such as Mexico, Colombia, and Panama, among others.

Mr. Blanco’s predecessor, Jennifer Shasky Calvery, was appointed FinCEN Director in August 2012, following a 15-year career as a Justice Department prosecutor, where she led the Asset Forfeiture and Money Laundering Section and also worked in the Organized Crime and Racketeering Section prosecuting cases targeting international organized crime groups and particularly the professional money launderers who supported them. Ms. Shasky Calvery, the first career prosecutor ever to lead FinCEN, subsequently recruited many of her former Justice Department colleagues to join her at FinCEN, thereby bringing a decidedly prosecutorial bent to an agency that was historically viewed as primarily a data-gathering institution rather than a law enforcement agency.

Since Ms. Shasky Calvery’s appointment as FinCEN Director in 2012, the agency has advanced a significantly more aggressive enforcement agenda aimed at combating terrorist financing, trade-based money laundering, money laundering through real estate transactions, the use of third-party money launderers, and money laundering through use of virtual currency. FinCEN has also increased substantially its use of Geographic Targeting Orders, a temporary and geographically-limited anti-money laundering device authorized by the Bank Secrecy Act and the USA Patriot Act. This dramatic change-of-direction was no doubt the product of a prosecutorial mindset that Ms. Shasky Calvery and her Justice Department colleagues brought to FinCEN. With the announcement of Mr. Blanco’s appointment as FinCEN Director, another veteran criminal prosecutor is at the agency’s helm, and he will almost certainly continue the rigorous AML enforcement agenda that his predecessor initiated five years ago.

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.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

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.”

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

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.