International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Wednesday, August 5, 2015

Congress Matches FBAR Filing to Tax Return Dates, Allows Extension, Penalty Abatement

BNA Reports - Practitioners are praising the new deadline for reporting foreign bank accounts tucked into newly signed legislation (Pub. L. No. 114-041) to extend the Highway Trust Fund.

The measure ensures that the due date for the Report of Foreign Bank and Financial Accounts Irs_logo(FBAR), formerly June 30, is now the same as the U.S. tax filing deadline of April 15—a change that practitioners said would help taxpayers who frequently didn't know the deadlines were different.

Taxpayers can also now ask for the same six-month extension for FBARs that they can get for their tax returns—permitting them to file by Oct. 15. That option didn't exist before.

August 5, 2015 in FinCEN | Permalink | Comments (0)

Tuesday, October 28, 2014

FinCEN Issues Two Administrative Rulings Regarding Virtual Currency

FINCENThe Financial Crimes Enforcement Network (FinCEN) today issued two administrative rulings regarding virtual currency. One ruling addresses the application of FinCEN regulations to a virtual currency trading platform (FIN-2014-R011), and the other addresses the application of FinCEN regulations to a virtual currency payment system (FIN-2014-R012). 



Specifically, you ask whether the convertible virtual currency trading and booking platform that the Company intends to set up (the “Platform”) would make the Company a money transmitter under the BSA. Based on the following analysis of the description of the Platform as presented in your letter, FinCEN finds that the Company would be a money transmitter pursuant to our regulations.



Specifically, you ask whether the convertible virtual currency payment system the Company intends to set up (the “System”) would make the Company a money transmitter under the BSA. Based on the following analysis of the description of the System to provide payments to merchants who wish to receive customer payments in Bitcoin, FinCEN finds that, if the Company sets up the System, the Company would be a money transmitter and should comply with all risk management, risk mitigation, recordkeeping, reporting, and transaction monitoring requirements corresponding to such status.


October 28, 2014 in FinCEN | Permalink | Comments (0)

Friday, October 3, 2014

FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels

FinCEN-logo-shieldThe Financial Crimes Enforcement Network (FinCEN) announced the issuance of a Geographic Targeting Order (GTO) that imposes additional reporting and recordkeeping obligations on certain trades and businesses located within the Los Angeles Fashion District.  The GTO will enhance law enforcement’s ongoing efforts to identify and pursue cases against persons and businesses engaged in the illicit movement of U.S. currency to Mexico and Colombia on behalf of prominent drug trafficking organizations.

The GTO, which will go into effect on October 9, was sought by the United States Attorney’s Office for the Central District of California, which is working with the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) and the Internal Revenue Service’s Criminal Investigation division (IRS Criminal Investigation) to fight money laundering schemes designed to allow international drug cartels in Central America and South America to reach drug proceeds generated in the United States.

Extensive law enforcement operations have revealed evidence that money laundering activities and Bank Secrecy Act (BSA) violations are pervasive throughout the Los Angeles Fashion District, which includes more than 2,000 businesses. Much of the money laundering is conducted through Black Market Peso Exchange schemes, also known as trade-based money laundering, in which drug money in the United States is converted into goods that are shipped to countries such as Mexico, where the goods are sold and money now in the form of local currency goes to the drug trafficking organizations.

On September 10, more than 1,000 federal, state and local law enforcement officials were in the Fashion District, where they executed dozens of search warrants and arrest warrants linked to
businesses suspected to be engaged in money laundering schemes and evasions of required BSA reporting. Criminal investigations have revealed evidence that many of these businesses are routinely accepting bulk cash as part of schemes involving black market peso exchange and trade-based money laundering on behalf of DTOs based in Mexico and Colombia. During the Sept. 10 enforcement action, HSI special agents seized what was ultimately determined to be more than $90 million in currency. The cash was found at various residences and businesses stored in file boxes, duffel bags, backpacks and even in the trunk of a Bentley.

Geographic Targeting Order 

October 3, 2014 in FinCEN | Permalink | Comments (0)

Tuesday, August 12, 2014

FINCEN Advisory to Financial Institutions on Promoting a Culture of Compliance

FINCENBSA/AML shortcomings have triggered recent civil and criminal enforcement actions — FinCEN seeks to highlight the importance of a strong culture of BSA/AML compliance for senior management, leadership and owners of all financial institutions subject to FinCEN’s regulations regardless of size or industry sector.

Shortcomings identified in recent Anti-Money Laundering (AML) enforcement actions confirm that the culture of an organization is critical to its compliance. Although enforcement actions are specific to the subject financial institution and the characteristics of the situation, certain general lessons could be gleaned from these actions that could be instructive to the leadership of all financial institutions required to comply with the Bank Secrecy Act (BSA).

Accordingly, the Financial Crimes Enforcement Network (FinCEN) issues this Advisory to highlight general principles illustrating how financial institutions and their leadership may improve and strengthen organizational compliance with BSA obligations.

Regardless of its size and business model, a financial institution with a poor culture of compliance is likely to have shortcomings in its BSA/AML program. A financial institution can strengthen its BSA/AML compliance culture by ensuring that:

(1) its leadership actively supports and understands compliance efforts;

(2) efforts to manage and mitigate BSA/AML deficiencies and risks are not compromised by revenue interests;

(3) relevant information from the various departments within the organization is shared with compliance staff to further BSA/AML efforts;

(4) the institution devotes adequate resources to its compliance function;

(5) the compliance program is effective by, among other things, ensuring that it is tested by an independent and competent party; and

(6) its leadership and staff understand the purpose of its BSA/AML efforts and how its reporting is used.

... Financial institutions should consider how to incorporate the guidance outlined in this advisory in a manner that is commensurate with their risk profile and business model.  

Read FINCEN's Advisory




August 12, 2014 in FinCEN | Permalink | Comments (0)

Monday, August 4, 2014

FINCEN Issues New Due Diligence for Beneficial Owners of US Accounts to Provide FATCA Reciprocity to Foreign Governments

FBARThe U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) to amend existing Bank Secrecy Act (BSA) regulations to help prevent the use of anonymous companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector.  See Proposed Rules and New Beneficial Ownership Form (Appendix A) here.

The proposed rule would clarify and strengthen customer due diligence obligations of banks and other financial institutions (including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities). 

The proposed amendments would add a new requirement that these entities know and verify the identities of the real people (also known as beneficial owners) who own, control, and profit from the companies they service.

FATCA's USA Reciprocity to Report Foreign Nationals Financial Information to Foreign Governments

The United States has collaborated with foreign governments to enter into intergovernmental agreements that facilitate the effective and efficient implementation of these requirements. Pursuant to many of these agreements, the United States has committed to pursuing reciprocity with respect to collecting and reporting to the authorities of the FATCA partner information on the U.S. accounts of residents of the FATCA partner.  A general requirement for U.S. financial institutions to obtain beneficial ownership information for AML purposes advances this commitment, and puts the United States in a better position to work with foreign governments to combat offshore tax evasion and other financial crimes.

The new rule will facilitate reporting and investigations in support of tax compliance, and advancing international commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA).

Required Due Diligence by US Financial Institutions

The rulemaking clarifies that customer due diligence includes four core elements:

  1. identifying and verifying the identity of customers;
  2. identifying and verifying the beneficial owners of legal entity customers;
  3. understanding the nature and purpose of customer relationships; and
  4. conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions. 

The proposed requirement to identify and verify the identity of beneficial owners is addressed through the proposal of a new requirement for covered financial institutions to collect beneficial ownership in a standardized format. 

Those financial institutions will have to identify and verify any individual who owns 25 percent of more of a legal entity, and an individual who controls the legal entity.

Determining Beneficial Ownership

The second element of CDD requires financial institutions to identify and verify the beneficial owners of legal entity customers.  FinCEN proposes a new requirement that financial institutions identify the natural persons who are beneficial owners of legal entity customers, subject to certain exemptions.  

The definition of “beneficial owner” proposed herein requires that the person identified as a beneficial owner be a natural person (as opposed to another legal entity). A financial institution must satisfy this requirement by obtaining at the time a new account is opened a standard certification form (Appendix A of Proposed Rules) directly from the individual opening the new account on behalf of the legal entity customer.

Financial institutions would be required to verify the identity of beneficial owners consistent with their existing CIP practices.  However, FinCEN is not proposing to require that financial institutions verify that the natural persons identified on the form are in fact the beneficial owners. In other words, the requirement focuses on verifying the identity of the beneficial owners, but does not require the verification of their status as beneficial owners. This proposed requirement states minimum standards.

In order to identify the beneficial owner, a covered financial institution must obtain a certification from the individual opening the account on behalf of the legal entity customer (at the time of account opening) in the form of Appendix A.  The form requires the individual opening the account on behalf of the legal entity customer to identify the beneficial owner(s) of the legal entity customer by providing the beneficial owner’s

  • name,
  • date of birth,
  • address and
  • social security number (for U.S. persons).

This information is consistent with the information required under the CIP rules for identifying customers that are natural persons. The form also requires the individual opening the account on behalf of the legal entity customer to certify, to the best of his or her knowledge, that the information provided on the form is complete and correct.  Obtaining a signed and completed form from the individual opening the account on behalf of the legal entity customer shall satisfy the requirement to identify the beneficial owners. 

This section also requires financial institutions to verify the identity of the individuals identified as beneficial owners on the certification form.  The procedures for verification are to be identical to the procedures applicable to an individual opening an account under the existing CIP rules.

Accordingly, the financial institution must verify a beneficial owner’s identity using the information provided on the certification form.  For foreign persons, the form requires -

  • a passport number and country of issuance, or
  • other similar identification number (name, date of birth, address, and social security number (for U.S. persons), etc.),

according to the same documentary and non-documentary methods the financial institution may use in connection with its customer identification program (to the extent applicable to customers that are individuals), within a reasonable time after the account is opened.

A financial institution must also include procedures for responding to circumstances in which it cannot form a reasonable belief that it knows the true identity of the beneficial owner, as described under the CIP rules.

Definition of Beneficial Owner

The proposed definition of “beneficial owner” includes two independent prongs:

(a) an ownership prong and

(b) a control prong.

A covered financial institution must identify each individual under the ownership prong (i.e., each individual who owns 25 percent or more of the equity interests), in addition to one individual for the control prong (i.e., any individual with significant managerial control).

If no individual owns 25 percent or more of the equity interests, then the financial institution may identify a beneficial owner under the control prong only. If appropriate, the same individual(s) may be identified under both criteria.

Purpose of New CDD Rules

Clarifying and strengthening CDD requirements for U.S. financial institutions, including an obligation to identify beneficial owners, advances the purposes of the BSA by: 

  • Enhancing the availability to law enforcement, as well as to the federal functional regulators and SROs, of beneficial ownership information of legal entity customers obtained by U.S. financial institutions, which assists law enforcement financial investigations and regulatory examinations and investigations; 
  • Increasing the ability of financial institutions, law enforcement, and the intelligence community to identify the assets and accounts of terrorist organizations, money launderers, drug kingpins, weapons of mass destruction proliferators, and other national security threats, which strengthens compliance with sanctions programs designed to undercut financing and support for such persons; 
  • Helping financial institutions assess and mitigate risk, and comply with all existing legal requirements, including the BSA and related authorities;
  • Facilitating reporting and investigations in support of tax compliance, and advancing international commitments made to foreign counterparts in connection with the provisions commonly known as the Foreign Account Tax Compliance Act (FATCA); and 
  • Promoting consistency in implementing and enforcing CDD regulatory expectations across and within financial sectors.

Cost of New Compliance?

FinCEN believes that there are approximately eight million such accounts opened annually by covered financial institutions. Based on the total number of covered financial institutions,65 this would result in each covered financial institution opening approximately 368 such accounts per
year, or 1.5 per day. Estimating an average time for a covered financial institution to receive the certification and verify the information of 20 minutes and an average cost of $20 per hour, this results in a cost of approximately $54 million.

I will draft a topic chapter on the new FINCEN Beneficial Ownership Due Diligence requirements for the Winter release of LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide (free download through link)


August 4, 2014 in FinCEN | Permalink | Comments (0)

Monday, July 21, 2014

FINCEN locks Cyprus regulated bank out of U.S. financial system for "illicit finance business from the darkest corners of the criminal underworld"

FinCEN-logo-shieldOn July 15, 2014 FBME Bank, a $2 billion asset size Tanzanian institution that conducts 90% of its business and holds 90% of its assets in Cyprus, has been named by  FINCEN as a foreign financial institution of "primary money laundering concern" pursuant to Section 311 of the USA PATRIOT Act.  FINCEN proposes to prohibit US  financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME, effectively shutting FBME out of the US financial system.

Update of July 22nd: the Central Bank of Cyprus (CBC) announced Monday night, July 21st, that the Resolution Authority issued a Decree, under the powers conferred to it by section 2A of the Resolution of Credit and Other Institutions Law, 2013 - 2014, which places the branch of FBME Bank Ltd in Cyprus under resolution.  The Decree’s purpose is to sell the operations of the branch with the aim of protecting FBME depositors.  The Cyprus Mail story describing the impact of this order is here.

What is FBME bank?

FBME was established in 1982 in Cyprus as the Federal Bank of the Middle East, Ltd., a subsidiary of the private Lebanese bank, Federal Bank of Lebanon. Both FBME and the Federal Bank of Lebanon are owned by Ayoub-Farid M. Saab and Fadi M. Saab.

Who regulates FBME bank?

FBME, via its Cypriot branches, are licensed and regulated by the Cyprus Central Bank.  According to a Wall Street Journal report of March 4, 2013, FBME acquired €240 million of Cypriot government junk bonds at the height of the 2011 Cypriot financial crisis, representing 13% of FBME's balance sheet.  In 2012, on the day of Parliament's announcement of the Cyprus financial system bailout WJS noted, FBME coincidently moved its headquarters to Cyprus and applied for a full banking license that would allow it EU wide distribution.

18 months later, in November 2013, the Cyprus Central Bank stated that FBME may be subject to sanctions and a fine of up to €240 million for alleged violations of Cypriot capital controls put in place with the bailout.  

On July 18, the Cyprus Central Bank took control of FMBE's Cypriot branch operations.   FMBE responded that it welcomed this takeover by its regulator that FBME may clear itself from the allegations of facilitating money laundering.   For a detailed look at Cyprus AML controls, see Special Assessment of the Effectiveness of Customer Due Diligence Measures in the Banking Sector in Cyprus of April 24, 2013.

What money laundering activities are FBME accused of facilitating?

FINCEN alleges that in just the year from April 2013 through April 2014, FBME conducted at least $387 million in wire transfers through the U.S. financial system that exhibited indicators of high-risk money laundering typologies, including widespread shell company activity, short-term “surge” wire activity, structuring, and high-risk business customers.  FBME was involved in at least 4,500 suspicious wire transfers through U.S. correspondent accounts that totaled at least $875 million between November 2006 and March 2013.

FINCEN alleges:

  • In 2008, an FBME customer received a deposit of hundreds of thousands of dollars from a financier for Lebanese Hezbollah.
  • As of 2008, a financial advisor for a major transnational organized crime figure who banked entirely at FBME in Cyprus maintained a relationship with the owners of FBME.
  • FBME facilitated transactions for entities that perpetrate fraud and cybercrime against victims from around the world, including in the United States. For example, in 2009, FBME facilitated the transfer of over $100,000 to an FBME account involved in a High Yield Investment Program (“HYIP”) fraud against a U.S. person.
  • In September 5 2010, FBME facilitated the unauthorized transfer of over $100,000 to an FBME account from a Michigan-based company that was the victim of a phishing attack.
  • Since at least early 2011, the head of an international narcotics trafficking and money laundering network has used shell companies’ accounts at FBME to engage in financial activity.
  • Several FBME accounts have been the recipients of the proceeds of cybercriminal activity against U.S. victims. For example, in October 2012, an FBME account holder operating as a shell company was the intended beneficiary of over $600,000 in wire transfers generated from a fraud scheme, the majority of which came from a victim in California.
  • FBME facilitates U.S. sanctions evasion through its extensive customer base of shell companies. For example, at least one FBME customer is a front company for a U.S.-sanctioned Syrian entity, the Scientific Studies and Research Center (“SSRC”), which has been designated as a proliferator of weapons of mass destruction

What is FMBE's response to FINCEN's allegations?

FMBE, denying the FINCEN allegations, responded as follows: 

FBME Bank commissioned a detailed assessment by the German office of a leading international accountancy firm into its operations and practices, which found that the Bank’s services are indeed in compliance with applicable AML rules of the Central Bank of Cyprus and the European Union.

FBME Bank welcomes the involvement of its regulator, is cooperating fully with it and reiterates its absolute continued commitment to full compliance with applicable laws and regulations.

FBME Bank continues to comply with European Capital Adequacy and Liquidity Standards and other healthy balance sheet ratios.

If FBME makes available its AML "assessment of the leading international accountancy firm", then I will post a follow up to this unfolding story with a link to that assessment.

What did FINCEN announce about FBME?

Director Jennifer Shasky Calvery stated in FINCEN's July 17, 2014 announcement:

“FBME promotes itself on the basis of its weak Anti-Money Laundering (AML) controls in order to attract illicit finance business from the darkest corners of the criminal underworld.” ... “Unfortunately, this business plan has been far too successful. But today’s action, effectively shutting FBME off from the U.S. financial system, is a necessary step to disrupt the bank’s efforts and send the message that the United States will not stand by while financial institutions help those who intend to harm or threaten Americans.”

In its Notice of Finding, FINCEN stated "FBME is used by its customers to facilitate money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasion, and other illicit activity internationally and through the U.S. financial system."

FINCEN Proposes Shutting FBME Out of US Financial System

In its Notice of Proposed Rulemaking, FINCEN states that it intends to impose the fifth, special measure allowed by Section 311 of the USA PATRIOT Act (“Section 311”).  FINCEN's Director has the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transaction, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” to address the primary money laundering concern.

The fifth special measure would prohibit covered financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME  Currently, only one U.S. covered financial institution maintains an account for FBME (FBME lists three U.S. correspondent relationships on its website).  FINCEN's fifth measure entails as follows:

Covered financial institutions also would be required to take reasonable steps to apply special due diligence .. to all of their correspondent accounts to help ensure that no such account is being used to provide services to FBME.  For direct correspondent relationships, this would involve a minimal burden in transmitting a one-time notice to certain foreign correspondent account holders concerning the prohibition on processing transactions involving FBME through the U.S. correspondent account.

U.S. financial institutions generally apply some level of screening and, when required, conduct some level of reporting of their transactions and accounts, often through the use of commercially-available software such as that used for compliance with the economic sanctions programs administered by the Office of Foreign Assets Control (“OFAC”) of the Department of the Treasury and to detect potential suspicious activity.  To ensure that U.S. financial institutions are not being used unwittingly to process payments for or on behalf of FBME, directly or indirectly, some additional burden will be incurred by U.S. financial institutions to be vigilant in their suspicious activity monitoring procedures. ...

A covered financial institution may satisfy the notification requirement by transmitting the following notice to its foreign correspondent account holders that it knows or has reason to know provide services to FBME:

Notice: Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, see 31 CFR 1010.661, we are prohibited from establishing, maintaining, administering, or managing a correspondent account for or on behalf of FBME Bank Ltd. The regulations also require us to notify you that you may not provide FBME Bank Ltd. or any of its subsidiaries with access to the correspondent account you hold at our financial institution. If we become aware that the correspondent account you hold at our financial institution has processed any transactions involving FBME Bank Ltd. or any of its subsidiaries, we will be required to take appropriate steps to prevent such access, including terminating your account.

The special due diligence would also include implementing risk-based procedures designed to identify any use of correspondent accounts to process transactions involving FBME. A covered financial institution would be expected to apply an appropriate screening mechanism to identify a funds transfer order that on its face listed FBME as the financial institution of the originator or beneficiary, or otherwise referenced FBME in a manner detectable under the financial institution’s normal screening mechanisms. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC.

A covered financial institution would also be required to implement risk-based procedures to identify indirect use of its correspondent accounts, including through methods used to hide the beneficial owner of a transaction. Specifically, FinCEN is concerned that FBME may attempt to disguise its transactions by relying on types of payments and accounts that would not explicitly identify FBME as an involved party. A financial institution may develop a suspicion of such misuse based on other information in its possession, patterns of transactions, or any other method available to it based on its existing systems. Under the proposed rule, a covered financial institution that suspects or has reason to suspect use of a correspondent account to process transactions involving FBME must take all appropriate steps to attempt to verify and prevent such use, ...

July 21, 2014 in FinCEN | Permalink | Comments (0)