Overview Criminal Anti-Money Laundering Laws Bank Secrecy Act of 1970 (as amended by the USA PATRIOT ACT of 2001) U.S. Economic and Trade Sanctions Administered by the Office of Foreign Assets Control (OFAC)
Criminal Anti-Money Laundering Laws Unlawful to knowingly conduct or attempt to conduct certain financial transactions with funds known to involve the proceeds of specified unlawful activity. Unlawful to transfer funds to/from the United States from/to a place outside of the United States knowing that the funds involve the proceeds of specified unlawful activity, and that the transaction is designed to conceal the funds or avoid transaction reporting requirements.
Willful Blindness Courts have defined the term knowingly broadly to include willful blindness. –It is well settled that willful blindness or conscious avoidance is the legal equivalent to knowledge." United States v. Rodriguez, 53 F.3d 1439, 1447 (7th Cir. 1996) –Generally requires proof that a defendant may have deliberately closed his or her eyes to what otherwise had been obvious to him or her." United States v. Anderskow, 88 F.3d 245, 252 (3d Cir. 1996).
Avoiding Willful Blindness Demonstrate sensitivity to anti-money laundering laws. Suggestions: –Corporate policy statement to detect and report money laundering activity. –Adoption of anti-money laundering compliance program. –Addressing anti-money laundering matters at periodic compliance training sessions for employees.
Bank Secrecy Act of 1970 Currency and Foreign Transactions Reporting Act of 1970 (a.k.a., the BSA). Original purpose was to require certain reports or records … [that] have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. The foundation of most U.S. anti-money laundering reporting and recordkeeping requirements, including requirements under the USA PATRIOT ACT of 2001.
General BSA Requirements Develop and maintain an anti-money laundering compliance program. Verify the identity of accountholders. File reports on suspicious transactions. Maintain records of certain information in connection with wire transfers. Share information, upon request, with federal regulators regarding accountholders. Conduct due diligence on foreign correspondent and private banking accounts.
Application of the Bank Secrecy Act Generally applies only to financial institutions, as defined by statute and Treasury regulations. –Banks –Broker-Dealers –Mutual Funds Generally does not apply to transfer agents unless they are banks or registered broker-dealers.
Potential Application of BSA to TAs Transfer agents that are financial institutions (e.g., banks or broker-dealers). –The definition of bank is broad, and includes agents of traditional banks. Applies to subsidiaries of traditional banks. –Such transfer agents are fully subject to the BSAs reporting and recordkeeping requirements. Certain financial institutions (e.g., mutual funds) may delegate responsibility for implementing the financial institutions AML program to transfer agents. –Transfer agents must agree, in writing, to inspection and examination by federal regulators with respect to the AML activities they perform for such financial institutions.
AML Program AML program must be reasonably designed to prevent money laundering or terrorist financing, and to cause compliance with applicable BSA requirements. Designation of an AML Compliance Officer. Employee training (generally performed annually). Independent review.
Verify the Identity of Accountholders Must obtain certain identifying information from customers before opening an account. Must verify the identity of customers within a reasonable time after opening the account. –Documentary verification (e.g., passport, drivers license). –Non-documentary verification (e.g., Equifax, Lexis) Generally no requirement to verify the identity of existing accountholders.
Suspicious Activity Reports File reports on suspicious transactions with the Financial Crimes Enforcement Network (FinCEN). Financial institutions must protect the confidentiality of suspicious activity reports, and avoid tipping off the subjects of such reports. Financial institutions enjoy broad statutory protection from civil liability for matters associated wit the filing of suspicious activity reports.
Wire Transfer Regulations Generally apply to banks and broker-dealers (including transfer agents that are banks or broker- dealers). Provide that certain information on wire transfers must be collected and retained by financial institutions. Require certain information about wire transfers to travel with the wire transfer.
Information Sharing Section 314(a) of the USA PATRIOT Act requires financial institutions to search accounts for persons that may be involved in money laundering or terrorist financing. FinCEN typically requests this information every two weeks. Subject to strict confidentiality. Section 314(b) of the USA PATRIOT Act provides a safe harbor to financial institutions that engage in voluntary information sharing
Due Diligence on Certain Foreign Accounts Banks and broker-dealers must ensure that they do not maintain a correspondent account for a foreign shell bank, and conduct due diligence on foreign correspondent banking accounts. All financial institutions must conduct initial and ongoing due diligence on all correspondent accounts maintained for foreign financial institutions, and on all foreign private banking accounts.
Certain BSA Requirements Apply to All Transfer Agents Although most BSA requirements apply only to financial institutions, certain BSA requirements apply to all U.S. persons – including transfer agents: –Reports on transactions involving currency (and certain other monetary instruments). –Reports on certain cross-border transactions involving currency and certain other monetary instruments. –Reports on certain foreign financial accounts.
Currency Transactions Banks and broker-dealers are required to file a Currency Transaction Report on currency transactions that aggregate to $10,000. –Applies only to transactions involving coin and currency. All other persons must file FinCEN/IRS Form 8300 on the receipt of more than $10,000 in a transaction or related transactions. –Applies to transactions in both coin and currency, as well as certain bearer instruments.
Cross-Border Currency Transactions All persons must file a Currency or Monetary Instruments Report (FinCEN Form 105) if they transport or ship currency and certain bearer instruments exceeding $10,000. Exception for banks or broker-dealers that ship currency or monetary instruments through the postal service or by common carrier.
Reports on Foreign Financial Accounts Any United States person who has a financial interest in or signature authority over any financial account in a foreign country must file a FBAR if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. FBAR compliance by financial institutions is historically low. Generally filed in connection with individual tax returns.
Office of Foreign Assets Control Bureau of the U.S. Treasury Department that administers most U.S. economic and trade sanctions. Charged with administering a variety of sanctions regimes imposed by statute, regulation or executive order.
Relevant Statutes Trading with the Enemy Act –Basis of U.S. embargoes against Cuba and North Korea. –Generally applies to both U.S. persons and persons subject to the jurisdiction of the United States, including foreign subsidiaries of U.S. persons. International Emergency Economic Powers Act –Basis of most other sanctions regimes, including sanctions against terrorist entities and drug traffickers, and various countries such as Iran, Sudan, and Burma. –Generally applies only to U.S. persons.
What Does OFAC Require? OFAC does not require transfer agents or other U.S. persons to adopt compliance procedures, check lists, or take any action designed to cause compliance with OFAC-administered sanctions. However, U.S. persons generally face strict liability for any violation of OFAC-administered sanctions. Even financial institutions with the best OFAC- compliance programs are liable if they inadvertently effect a prohibited transaction.
Examples of Prohibited Transactions Persons on the SDN List. –Generally what you get when you search the OFAC list. Cuban nationals (wherever located). Prohibited governmental entities (e.g., Sudan and Iran). Individuals or entities located in Iran.
Problem of Beneficial Ownership Property generally is blocked if a prohibited person has an interest in the property. Recommended that financial institutions develop a risk-based approach to ensuring that they are not dealing in property in which a prohibited person has an interest. Certain sanctions regimes also prohibit facilitating a prohibited transaction.
OFAC Compliance Develop an OFAC Compliance Program. –Conduct a risk assessment and apply stronger controls to areas of heightened risk. –Perform periodic back-testing to ensure compliance and modify compliance programs as appropriate. Seek and obtain representations and warranties from counterparties regarding OFAC compliance.