United States: FinCEN's Busy August Yields Noteworthy Anti-Money Laundering Developments

Andres Fernandez is a Partner and Gabriel Caballero is Senior Counsel in Holland & Knight's Miami office.


  • Financial institutions should be aware of several anti-money laundering initiatives issued by the U.S. Treasury's Financial Crimes Enforcement Network, FinCEN, during an especially busy month of August.
  • Among other topics, the recent FinCEN regulations, advisories, guidance and penalties involve CDD requirements for financial institutions, violations of the Bank Secrecy Act, misuse of armored cars and the application of MSB regulations to independent sales organizations and payment processors.

August was a busy month for the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). Among other initiatives, FinCEN issued its long-awaited proposed regulations on customer due diligence (CDD) requirements for financial institutions, multiple advisories/guidance and civil money penalties for violations of the Bank Secrecy Act (BSA). This alert discusses several of these initiatives, each of which has a significant impact on the financial services industry.

Guarding Against Misuse of Armored Cars

On Aug. 1, 2014, FinCEN, in close coordination with its Mexican counterpart, the Unidad de Inteligencia Financiera (UIF), announced a series of reporting initiatives designed to greatly improve the transparency of cross-border cash movements. Specifically, FinCEN issued a Geographic Targeting Order (GTO) that requires enhanced cash reporting by armored car services (ACS) and other common carriers of currency at the San Ysidro and Otay Mesa Ports of Entry in California. In conjunction with the GTO, FinCEN issued updated guidance concerning detailed and proper filing of Currency and Monetary Instruments Reports (CMIRs), which are filed when $10,000 or more in currency is moved across the U.S. border.

In 2010, Mexico enacted new anti-money laundering (AML) provisions to attack the flow of illicit cash from the United States to Mexico. While these efforts made it much more difficult for criminals and narcotraffickers to place large amounts of cash in Mexican financial institutions, they resulted in an increase in cash coming back to the United States from Mexico, via ACS or couriers, for attempted placement in U.S. financial institutions. Citing law enforcement information and BSA data analysis, FinCEN suggested that much of this cash movement is not properly reported on a CMIR and therefore not made available in the FinCEN database for the benefit of investigators and analysts following illicit money trails.

In response, FinCEN issued the GTO to bring greater transparency in financial reporting of cash movements along the U.S. border. The director of FinCEN is authorized to issue a GTO requiring any domestic financial institution, or certain other trade or business groups, in a geographic area to obtain and report desired information. In this case, the GTO requires more detailed information to be reported on cash movements.

CDD Requirements for Financial Institutions

On Aug. 4, 2014, FinCEN issued a Notice of Proposed Rulemaking to amend existing 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. The proposed rule seeks to clarify and strengthen customer due diligence (CDD) 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 rule would also add a new requirement that these entities know and verify the identities of the beneficial owners who own, control and profit from the companies they service.

Among other things, the proposed rule clarifies that CDD includes four core pillars:

  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
  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 via a proposed model form (one that appeased many in the financial services industry). Subject to certain exceptions, those financial institutions will have to identify and verify any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.

The comment period for the proposed rule expires on Oct. 3, 2014. If made final, the proposed rule would have an effective date one year after its adoption.

Advisory on the FATF-Identified Jurisdictions with AML/CFT Deficiencies

On Aug. 5, 2014, FinCEN issued an advisory regarding the Financial Action Task Force's (FATF) recent update to its list of jurisdictions with strategic Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) deficiencies. As part of the FATF's listing and monitoring process to ensure compliance with the international AML/CFT standards, the FATF identified certain jurisdictions as having strategic deficiencies in their AML/CFT regimes.

Specifically, the FATF updated its lists of jurisdictions that appear in two documents: (1) jurisdictions that are subject to the FATF's call for countermeasures or are subject to Enhanced Due Diligence (EDD) due to their AML/CFT deficiencies (FATF Public Statement List), and (2) jurisdictions identified by the FATF to have AML/CFT deficiencies (Improving Global AML/CFT Compliance List). According to the advisory, financial institutions should consider these changes when reviewing their obligations and risk-based approaches with respect to the jurisdictions identified on the lists.

Some of the notable changes to the aforementioned FATF lists include:

  1. the removal of Ethiopia, Pakistan, Syria, Turkey and Yemen from the FATF Public Statement List and inclusion on the Improving Global AML/CFT Compliance List
  2. the removal of Kenya, Kyrgyzstan, Mongolia, Nepal and Tanzania from the Improving Global AML/CFT Compliance List
  3. the identification of Panama on the Improving Global AML/CFT Compliance List due to strategic deficiencies in its AML/CFT regime

Although the advisory provides more detailed guidance on the obligations of financial institutions with respect to the jurisdictions identified on the FATF lists, it also highlights that financial institutions should take the FATF's decisions and the reasons behind delisting into consideration when assessing risk. In particular, the advisory affirms that if a financial institution knows, suspects or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing or other violation of federal law or regulation, the financial institution shall then file a Suspicious Activity Report (SAR).

Advisory on Promoting a Culture of Compliance

For more information regarding this FinCEN advisory to financial institutions, please refer to our previous alert, " FinCEN Advisory to US Financial Institutions: Create Culture of Compliance" (Aug. 13, 2014)."

Application of MSB Regulations to Independent Sales Organizations and Payment Processors

On Aug. 27, 2014, FinCEN issued an administrative ruling regarding the application of the money services business (MSB) regulations of the BSA to a company acting as an Independent Sales Organization (ISO) and as a payment processor. Specifically, the advisory examines whether a company acting in these capacities meets the definition of a "money transmitter" under the BSA. Based on the fact pattern described in the advisory, FinCEN concluded that such companies would not be money transmitters as a result of their ISO activities, nor would they be money transmitters because of their payment processor services, to the extent such companies comply with the requirements of the "payment processor exemption."

According to the advisory, when acting as an ISO, these companies neither accept nor transmit funds on behalf of the merchants they solicit, nor on behalf of the companies' counterparties; therefore, such marketing activities do not make theses companies money transmitters under FinCEN regulations. FinCEN was not as conclusive on the payment processor activities of such companies, citing a lack of information to determine whether every element of the payment processor exemption was fully met for the fact pattern in the advisory.

Nonetheless, FinCEN did clarify that if the disbursement to the merchants, nonprofit and religious organizations (as described in the advisory) is conducted outside of a clearance and settlement system that admits only BSA-regulated financial institutions (such as, in the form of monetary instruments), then the company would not be able to claim the payment processor exemption. Alternatively, to the extent such disbursements are conducted exclusively through a clearance and settlement system that admits only BSA-regulated financial institutions, the company would be operating within the four fundamental conditions of payment processor exemption, and its payment processing activities would not make it a money transmitter under FinCEN regulations.

MSB Assessed Civil Money Penalties for Violation of Bank Secrecy Act

On Aug. 28, 2014, FinCEN imposed a civil money penalty against a New Jersey money services business (MSB) for "willful and repeated" violations of the BSA. The MSB has consented to the civil money penalty of $125,000.

According to FinCEN, the MSB failed to address previous AML deficiencies (some of which were cited in previous examinations). In addition to deficiencies with its internal controls, independent testing and training, examiners found that, prior to a 2011 examination, the MSB had never filed a single SAR. Additionally, FinCEN alleged that the MSB employees also allowed customers to conduct transactions without verifying and retaining required identification information and also allowed customers to conduct money transfers by using expired identification documents.

According to FinCEN Director Jennifer Shasky Calvery:

[The MSB] had plenty of notice of its problems after warnings by state examiners, federal examiners, and even its own independent auditor. There is absolutely no excuse for a financial institution to ignore such warnings and render the U.S. financial system vulnerable to money laundering and terrorist financing.

In November 2013, the MSB's parent received approval from the Board of Governors of the Federal Reserve System to establish representative offices in New Jersey and Massachusetts. The MSB ceased operations in March 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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