The US Treasury Wednesday stated it was actively examining the anti-money laundering compliance programs of virtual currency exchangers on the heels of the sector’s first enforcement penalty along with considering new rules for real estate facilitators.
Financial Crimes Enforcement Network (FinCEN) Director Jennifer Shasky Calvery told attendees at the West Coast AML Forum in San Francisco that, in conjunction with the IRS anti-money laundering (AML) division, the agency has “recently launched a series of supervisory examinations of businesses in the virtual currency industry.”
The moves are to get a better sense of compliance for virtual currencies, such as Bitcoin, and their exchangers, which typically are the only intersection with the physical world in the form of a bank account. Criminals have used bitcoins in several high-profile schemes, including as the currency of choice for a website selling illegal drugs and other items.
In the address, FinCEN also warned against the dangers of third-party money laundering, which is when entities, including attorneys, accountants and even bank executives, willfully aid criminals to facilitate the cleansing of dirty funds.
In the area of virtual currency, Calvery stated the exams will aid FinCEN in determining whether both the exchangers themselves and their administrators are “meeting their compliance obligations” under AML program rules.
Moreover, if weaknesses are found, both agencies will “use our supervisory and enforcement authorities to appropriately penalize non-compliance” and foster broader improvements across the sector, she said in the statement.
The IRS AML division has examination oversight duties of virtual currency exchangers, along with many of the sectors subject to AML rules that don’t have federal function regulators, including money services businesses, casinos and insurance firms.
The groups showed their teeth earlier this week.
FinCEN Tuesday penalized a virtual currency exchange company $700,000 for widespread AML compliance program failures, not filing required suspicious activity reports (SARs) and not registering as a money services business (MSB).
The penalty against Ripple Labs Inc., and its subsidiary, XRP II, LLC, is the first against a virtual currency exchanger, a class of MSBs that became subject to AML requirements in March 2013, when FinCEN clarified in guidance that virtual currency exchangers must register.
As part of the settlement, the operations must update their systems to monitor transactions, conduct a three-year transactional review, or “look-back,” for any missed suspicious activity and retain independent auditors to review compliance with AML rules every two years through 2020
FinCEN is also working with law enforcement, regulators and foreign and domestic prosecutors to “keep pace with the quickly evolving technology” of emerging payment systems and how they can be used by criminals to launder illicit gains, but the bureau is also working to share that information with banks and other companies so they can “avoid…being used as a vehicle for illicit finance.”
As for real estate, FinCEN has also stated there could be changes coming – some which could be controversial – to better secure the sector, and other facilitators involved, from being used by organized crime groups, drug kingpins and corrupt politicians.
FinCEN issued AML rules for non-bank residential mortgage lenders and 2012, but has had its eye on other areas around those involved in real estate closings and settlements for more than a decade.
In April 2003, FinCEN issued an advance notice of proposed rulemaking for the real estate sector, stating that any rules likely would cover settlement and closing attorneys and agents, appraisers, title search and insurance companies, escrow companies, and possibly mortgage servicers and corporate service providers.
The move was vociferously rallied against by attorneys and the political powerbrokers supporting many company service organizations, with FinCEN later dropping the initiative because of comments from stakeholders and that it had not adequately analyzed and defined the specific money laundering risks of these entities.
Even so, Calvery stated that through the analysis of BSA reports and other data, FinCEN “continues to see the use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate in cash.”
In the schemes, the agency has seen possibly illicit entities send wires from shell companies using banks in offshore havens to US individuals involved in real estate settlements, with the deed later being put in the name of the shell company, without ever divulging the beneficial owner.
Criminal organizations continue to infiltrate and gain access to financial institutions using gatekeepers and insdiers.
Recent investigations spanning the globe delineate a troubling trend of illicit money entering an institution with the help of a third party. Third-party money launderers, which Shasky refers to as 3PMLs, add an aura of legitimacy to criminals who exploit the financial system.
Banca Privada D’Andorra (BPA) is the latest case exhibiting a 3PML infiltration.
FinCEN targeted the bank with a Section 311 action which virtually shut down the bank’s operating capacities. While it is a rarely used tool, this enforcement action stemming from the Patriot Act has made waves across the sector. Financial institutions are putting 3PMLs at the top of the agenda, as they can not only provide a gateway to the financial system for bad actors, but also cause regulators to issue the bank a death sentence in the form of a 311 action.
In the BPA case, several criminal organizations based in Russia and China used third parties to create shell corporations, layered transactions and exerted internal influence on bank employees to gain access to the bank. FinCEN concluded that several high-level managers at BPA were facilitating the transactions on behalf of 3PML, who ultimately worked for criminal organizations involved in corruption, smuggling and fraud.
In light of the proposed rulemaking on BPA, which would prohibit US financial institutions from opening or maintaining correspondent or payable-through accounts for BPA, compliance departments should stress the importance of Know-Your-Customer due diligence, particularly for influence individuals and entities who may be operating on behalf of others.
Third-party money launderers want to seem legitimate and may do so by creating corporations and connecting with upper level employees, but digging deeper to the source of the money may reveal if it is clean or is derived from illicit origins.