Author: admin

Eighteen Things to Consider in the Cannabis Debate

Advocates on both (all?) sides of the cannabis, marijuana, and hemp debates are looking for fast and sure solutions to whatever problems they feel are most pressing, whether decriminalization, descheduling cannabis, rescheduling cannabis, righting past societal and racial wrongs, etc. Whether it is the proposed STATES Act or the SAFE Banking Act, some advocates suggest that Congressional action will quickly and easily solve many of the issues around accessibility, safety, access to banking, etc.

But is it that simple?

Today, the cannabis and financial services industries, local, county and state governments, and law enforcement agencies and prosecutors, are all in limbo, waiting for Congress to pass, and the President to enact, federal legislation that will pave the way for regulations and regulatory guidance that will truly open up banking services to cannabis related businesses. But it will take time, as there is always “regulatory lag” between new legislation being passed, regulations being written, and regulatory guidance being published. And then it takes even longer for financial institutions to implement those regulatory changes: to build programs, write policies, implement new technologies, etc. So even if Congress acted today, all of the cannabis industry actors won’t have a clear path forward for (at least) a couple of years. Until then, many of those actors – notably financial institutions looking to provide safe and effective banking services to the industry – will manage the risks through luck and chance, not knowing whether, how, or when financial regulators or prosecutors could pounce on them for failing to do perfectly that which they didn’t know they had to do.

What must be done? Until there are legislative changes, the federal banking regulators need to provide more current, clearer guidance for banks and credit unions.  It has been more than five years since FinCEN issued its Valentine’s Day 2014 guidance, and none of the banking and credit union regulators have formally opined on it or provided written guidance. What has been said about the Guidance?

• The Courts: I’m aware of one federal court judge who has commented on the FinCEN guidance. In a December 28, 2015 hearing in the Fourth Corner Credit Union v Federal Reserve Bank of Kansas City case (District Court of Colorado, 15CV01633), Judge Brooke Jackson responded to a statement by the credit union’s lawyer that the FinCEN guidance “authorized financial institutions to serve marijuana related businesses” by saying: “No, it didn’t do that, did it? … It seems to me that the DOJ and guideline people are just saying, well, maybe we can put our head in the sand and this will go away.” (Transcript of hearing, page 3). And later in the same hearing, Judge Jackson stated: “But in [the credit union’s] brief, in black and white, you say the FinCEN guidance authorizes banks to serve marijuana related businesses. I don’t agree with you. I don’t think it does.” (Transcript, page 63).
• Federal Reserve: in a June 17, 2018 press conference, Federal Reserve Chairman Jerome Powell is reported (by MarketWatch) to have said: “This is a very difficult area, because many state laws permit the use of marijuana and federal law still doesn’t. So it puts federally-chartered banks in a very difficult situation … it puts the supervisor in a very, very difficult position. Of course, our mandate has nothing to do with marijuana … We just would love to see it clarified, I think.”
• OCC: on January 17, 2019, OCC Comptroller Joseph Otting told reporters that Congress has “to act at the national level to legalize marijuana if they want those entities involved in that business to utilize the US banking system” and that he “hopes for resolution to marijuana banking issues in 2020” (quoting a PoliticoPro tweet).

Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer. 

But even with Congressional action, what issues could remain that need to be dealt with? Below are some observations on some issues to consider as these debates continue and, to some degree, are resolved.

Observations on the Current Environment:

1. Lotteries, casinos, pawnshops, liquor stores are all examples of legalized vices that have been found to disproportionally harm, or at least not appropriately benefit, lower income and communities of color. Despite efforts to prefer local, minority, and women-run businesses, most local, county, and state regimes are becoming dominated by large, interstate (international) corporations. More action needs to be taken to understand the problems that have arisen with lotteries, casinos, pawnshops, and liquor stores … to understand whether and how cannabis production, manufacturing, processing, and distribution can result in similar problems, and then to prevent those problems. Let’s learn from what we know and be better for it.
2. Cannabis and cannabis products are sold as either medicinal products or non-medicinal. Other products that are sold both as a “medicine” and as a non-medicine include toothpaste and tooth whiteners, deodorant and antiperspirant, and suntan lotion and sunscreen. But all of those products are first approved as either foods, drugs, or cosmetics. Currently, the same or similar products (cannabis flower, tinctures, edibles, lotions) are sold as non-approved adult-use products (and are taxed accordingly) or as non-approved medicinal products (and generally not taxed at all or as much). That creates confusion and opportunities for mischief.
3. The medicinal cannabis industry does not appear to uniformly adhere to the “under the care of a physician” or “legitimate or bona fide physician/patient relationship” standards in all states’ medical/medicinal marijuana regimes. A simple review of online applications for, and customer reviews of, medicinal cannabis cards suggests that an online form and quick video chat “in ten minutes or less!” isn’t a true physician patient relationship.
4. The 6-plant personal grow is a legacy of the California cooperative environment and may not be appropriate in a go-forward regime. Six plants – up to 99 for Colorado and California medicinal cannabis – can produce as many as 30 joints a day (or up to 1,800 for 99 plants). Some argue that is excessive and goes against all the other strict production, labeling, and distribution laws and regulations otherwise in place. Home grows are a major concern of the DEA.
5. Ownership and control of marijuana-related businesses: there are too many definitions, no central database (such as the Nationwide Multistate Licensing System for money transmitters and other state-licensed businesses).
6. Has there been a balanced look at whether the license fees and taxes actually cover the direct and indirect governmental costs, let alone any societal harms, that are a result of the cannabis regime?
7. Everyone is focused on federal criminal laws around narcotics, but there have been virtually almost no convictions for true marijuana possession in the last ten years at the federal level. It is a state issue. Solving criminal law issues (including the expungement of past convictions) at the federal level doesn’t address the criminal law issues.
8. The current production FAR exceeds demand in some states. Oregon’s supply of recreational marijuana is estimated to be 6.5 years (per the OLCC’s 2019 Recreational Marijuana Supply and Demand Legislative Report), and California has reported that as much as 11 million of the 13 million pounds of cannabis produced in California is diverted and not taxed. The states’ failure to address over-production (notably California and Oregon) could result in a federal crackdown.
9. The last four Surgeons General have all said that there needs to be more clinical trials. Clinical trials take time.
10. Continuing noncompliance is occurring in the industry. For example, the Oregon Liquor & Cannabis Commission reported on April 18, 2019 of “significant noncompliance by marijuana licensees failing to abide by the state’s laws and rules”.
11. The current FinCEN guidance is not sustainable. Read literally – which is how any guidance or regulation is read when it is being used to sanction a bank – the guidance is impossible to follow in a commercially reasonable manner when the risks of noncompliance are unknown. I have advocated that any Marijuana Related Business (MRB) regulations and guidance should mirror the Money Services Business (MSB) regulations and guidance.

Observations on the Proposed “Quick Fix” Solutions

Some advocates for Congressional action are suggesting that rescheduling or descheduling cannabis and passing a SAFE Banking Act or STATES Act will resolve many of the issues currently facing the cannabis industry. These suggestions are probably accurate, but certainly incomplete. It will take years, and many more steps, before the major issues are known and addressed. Some observations:

1. Rescheduling Cannabis – if cannabis is rescheduled, to which schedule? If moved to Schedule III or lower, what about the US treaty commitments enshrined in law? Do doctor “recommendations” become “prescriptions” and require specific and DEA/FDA-approved dosage, duration, means of delivery, and FAERS-like reporting? And if rescheduled, what about DEA registration, inspection, Suspicious Order Reporting, etc., for growers, manufacturers, and distributors?
2. Descheduling Cannabis – if descheduled, FDA approval would still be required (as for hemp), whether for medicinal use or as an additive to food. Also, the same foreign treaty issues (three UN conventions/treaties) apply as for rescheduling.
3. Other Federal Laws – in addition to changes to the Controlled Substances Act in Title 21 of the US Code, many other laws would also need to be amended or rescinded, including those in Title 8 (Aliens and Immigration), Title 12 (Banks and Banking), Title 18 (Crimes and Criminal Procedure), Title 21 (Food and Drugs), Title 26 (Income Tax), Title 31 (Money and Finance), and Title 50 (War, for sanctions-related laws).
4. Once federal legislation is enacted, it will take months/years for federal regulations, and years for regulatory guidelines, guidance, policy manuals to be revised. Also, for medical cannabis, it will take years for clinical studies then FDA/DEA approvals of new drugs.
5. Federal Legalization brings federal taxation – like alcohol and tobacco. Depending on tax rates, the black market will thrive and survive.
6. Interstate distribution – another area that hasn’t had much attention, but will require thoughtful and collaborative solutions. Which leads to:
7. Amazon, Big Pharma and Big Tobacco – or combinations of them. Is there any way to stop them from taking over the production, manufacturing, and distribution of cannabis?

Conclusion and Path Forward

First and foremost, there has to be a chance in the level of discourse. Like in the political arena, there appears to be a polarization of opinion so that neither side in the cannabis debate is prepared to even listen to, let alone compromise with, the other. I’ve seen examples of advocates for expunging all marijuana possession convictions employ ad hominin attacks on anyone who suggests that not all marijuana convictions are the same, and each should be looked at carefully. I’ve seen examples of advocates for preventing any medicinal uses of marijuana until full FDA approvals are in hand employ those same ad hominin attacks on anyone who suggests that, even without FDA approval, there are situations where compassion and common sense dictate medicinal uses of marijuana.  Even my list of seventeen “observations” will no doubt elicit scorn, ridicule, condemnation, and name-calling. So be it.

Those most passionate are often the most vocal, and grab the most headlines, and those most passionate are sometimes the ones that aren’t listening to anyone who doesn’t share their passion. But there are also many – probably most – of the people along the spectrum of opinion that are not only willing to listen to all sides of an issue, but recognize there are many sides to an issue, and that solutions aren’t simple, and consequences are many. There are many strong advocates on both sides of the various marijuana/cannabis debates: let’s have those debates. Let’s put all of the possible issues on the table. Let’s have the courage to listen to those that present those issues and try to understand their perspectives and concerns. And let’s have the courage to compromise to get to solutions that at least do the least harm.

A call to action for all US financial institutions!

On May 7, 2019, FinCEN published a “Notice and Request for Comments” in the Federal Register that sought comments from the public on its renewal, without change, of the 314(a) Program … the program created by section 314(a) of the USA PATRIOT Act of 2001, and established by regulations published on September 26, 2002, where law enforcement, through FinCEN, can ask covered financial institutions to search their customer and transactional records for names of persons and entities believed to be involved in terrorist financing or money laundering.

The notice is at https://www.regulations.gov/document?D=FINCEN-2018-0017-0001 but I couldn’t find any reference on FinCEN’s website to indicate that it published the Notice and Request for Comments.

The original 2002 regulation gave federal law enforcement agencies the ability to use 314(a). The regulation was revised in 2010 to give certain non-federal law enforcement entities access to 314(a). This Notice and Request for Comments only applies to the non-federal law enforcement entities: footnote 4 on page 20000 of the Federal Register notice provides ” this renewal applies only to the use of the 314(a) Program with respect to queries initiated by non-Federal law enforcement entities.”

Under the Paperwork Reduction Act, each such notice requires a statement of how many entities are affected by the notice or proposed rule, and how much time each of those entities will take to comply.

Here’s where it gets interesting …

14,463 financial institutions receive 314(a) requests that come from non-federal law enforcement agencies

FinCEN writes that “On an annual basis, there are approximately 14,643 covered financial institutions, consisting of certain commercial banks, savings associations, and credit unions, securities broker-dealers, future commission merchants, certain trust companies, life insurance companies, mutual funds and money services businesses.” (footnote 5)

And how many 314(a) requests does FinCEN send to these 14,463 financial institutions that do not originate with federal law enforcement agencies?

FinCEN sends ninety (90) requests a year under section 314(a) that do not originate with federal law enforcement agencies

Footnote 6 provides the details: “Estimated cases/subjects per annum subject to the [Paperwork Reduction Act] include, 10 from FinCEN, 50 from state/
local law enforcement, and 30 from European Union countries approved by treaty, for a total of 90 requests per annum, with each request containing an average of 7 subjects (including aliases).”

How much time is spent responding to each request?

According to FinCEN, it takes a bank 4 minutes on average to determine if a 314(a) name is a match on its customer and transactional systems

Footnote 6 continues with this: “Each subject requires 4 minutes to research, resulting in (90 × 7 × 4 ÷ 60) = 42 hours per year.”

Does it really take only 4 minutes to scour bank records to determine if there is a match?

What does the 314(a) regulation require of financial institutions? 31 CFR s.1010.520(b)(3) sets out the two “obligations of a financial institution receiving an information request” – searching records and, if there is a name match, to report to FinCEN:

(i) Record search. Upon receiving an information request from FinCEN under this section, a financial institution shall expeditiously search its records to determine whether it maintains or has maintained any account for, or has engaged in any transaction with, each individual, entity, or organization named in FinCEN’s request. A financial institution may contact the law enforcement agency, FinCEN or requesting Treasury component representative, or U.S. law enforcement attaché in the case of a request by a foreign law enforcement agency, which has been named in the information request provided to the institution by FinCEN with any questions relating to the scope or terms of the request. Except as otherwise provided in the information request, a financial institution shall only be required to search its records for:

(A) Any current account maintained for a named suspect;

(B) Any account maintained for a named suspect during the preceding twelve months; and

(C) Any transaction, as defined by §1010.505(d), conducted by or on behalf of a named suspect, or any transmittal of funds conducted in which a named suspect was either the transmittor or the recipient, during the preceding six months that is required under law or regulation to be recorded by the financial institution or is recorded and maintained electronically by the institution.

(ii) Report to FinCEN. If a financial institution identifies an account or transaction identified with any individual, entity, or organization named in a request from FinCEN, it shall report to FinCEN, in the manner and in the time frame specified in FinCEN’s request, the following information:

(A) The name of such individual, entity, or organization;

(B) The number of each such account, or in the case of a transaction, the date and type of each such transaction; and

(C) Any Social Security number, taxpayer identification number, passport number, date of birth, address, or other similar identifying information provided by the individual, entity, or organization when each such account was opened or each such transaction was conducted.

So … given a name, the financial institution needs to search all of its customer systems going back twelve months, and all of its transaction systems going back six months, to look for name matches and, if there is a match, to report back to FinCEN.  This process takes much longer than four minutes.

The most important part of the entire Notice came at the end of footnote 6, where FinCEN wrote: “For the 2016 renewal of this information collection, FinCEN did not receive any public comments regarding the estimate of 4 minutes.”

Action Required – Financial Institutions, Let FinCEN Know How Long It Takes to Comply With 314(a) Requests!

I strongly urge financial institutions to submit comments to FinCEN by the deadline date of July 8, 2019, to let it know how long it actually takes to comply with 314(a) requests.

A review by the UK’s Solicitors Regulation Authority (SRA) results in 44% of solicitor firms tested will be subject to disciplinary process. That’s bad, but what is worse is that US lawyers performing the same type of work are not subject to equivalent regulations

There are 7,000 regulated law firms in England and Wales that are subject to the anti-money laundering program and reporting regulations promulgated as a result of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Act 2017. Among other things, those firms are required to have a risk-based ML/TF compliance program, including customer due diligence and suspicious activity reporting requirements.

Note 1: not all “lawyers” are subject to these regulations. In the UK (and Canada) lawyers are either barristers – representing clients in criminal and civil proceedings in court – or solicitors – acting for clients in all other legal matters. The ML/TF regulations apply, generally, to solicitors, or “independent legal professionals and trust of company service providers” that provide “legal or notorial services to other persons, when participating in financial or real property transactions concerning” the buying or selling of real property and businesses, managing client money or asserts, opening and management of bank, savings, or securities accounts, and creating companies, trusts, and foundations. Put simply, financial, company, or property transactional work outside the court systems is covered by the ML/TF program and reporting requirements.

Note 2: the money laundering and terrorist financing compliance program requirements address at least (or only) three (3) of the enumerated thirty-eight (38) risks identified by the SRA in its Regulatory Risks Index. Ten (10) of the risks relate to the market and are not given a “severity” score: twenty-eight (28) of the risks relate to individual firms and are given a severity risk. Those risks range from a low of 4% for geographical or jurisdictional conflicts to a high of 96% for misuse of money or assets. The mean (average) risk is 43%, and the median (middle) risk is 38%. The second highest severity score was for criminal association (77%), the third highest was for money laundering (73%), and the fourth highest was for bribery and corruption (67%). Other than stealing clients’ money, the Solicitors Regulation Authority considers financial crimes – associating with criminals, money laundering, and bribery and corruption – to be the risks with the greatest severity. So with such severe risk, one would assume that firms would be serious about their compliance requirements: the results of the SRA’s review suggest otherwise.

In 2018 the SRA reviewed the programs of 59 law firms. On May 7, 2019 the SRA published the results. The actual report is at Go to the review. The press release is at https://www.sra.org.uk/sra/news/press/aml-tcsp-review-2019.page.

The SRA’s press release provided as follows:

A review has shown that a significant minority of law firms are not doing enough to prevent money laundering, with some falling seriously short.

The review did not find evidence of actual money laundering or that firms had any intention of becoming involved in criminal activities. However, it did find a range of breaches of the 2017 Money Laundering Regulations, as well as poor training and processes.

One of the biggest areas of concern was firms’ risk assessments. A firm risk assessment is required in legislation and should be the backbone of a firm’s anti-money laundering approach. We found that more than a third (24) of firms reviewed fell short in this area, including four that had no risk assessment at all.

There were also issues around appropriate customer due diligence. This included inadequate processes in almost a quarter (14) of firms to manage risks around Politically Exposed Persons, known as PEPs. However, in some instances effective customer due diligence did result in firms turning down work. Fifteen firms had done this, with one of the main reasons being evasive clients.

As a result of the review we have put 26 firms [out of 59] into our disciplinary processes. We have also published a warning notice reminding the profession of their obligations, particularly in relation to firm risk assessments. And we have begun a further review of 400 other law firms to check compliance with the Governments 2017 Money Laundering Regulations. This review will be led by a new dedicated anti-money laundering unit, being set up to bolster resources to prevent and detect money laundering.

But as important as what the press release did include is what it did not include. According to the actual report:

“Firms had raised low numbers of internal suspicious activity reports (ISARs).” The actual data, represented by the graphic below, suggests an even bleaker picture: only three (3) of fifty-nine (59) firms  – or one out of twenty – averaged more than one internal report on potential suspicious activity per year.  And the report noted that “only 10 firms had submitted SARs in the last 24 months”, but like the ISAR data, the actual SAR data was even more bleak, with only two (2) of the fifty-nine (59) firms filing more than one SAR a year over the last two years. 

Other results are worth highlighting:

• two firms failed to consider the countries that they operate in and failed to have a PEP process in place
• two firms failed to consider the geographical location of their clients or the nature of their firm’s work
• five firms failed to consider the types of transactions that they undertake. They also failed to provide information and procedures in their AML policy about scrutinising complex and/or unusual transaction or transactions that have no apparent economic or legal purpose
• one firm failed to address how they deliver legal services and also acknowledged that they do not see 5% of their clients
• five firms that did not have a file [client] risk assessment process in place. This is concerning and suggests that some firms are not systematically addressing money laundering issues. This undermines the ability of fee earners to detect issues, report concerns and mitigate risks.
• nine firms that had a [client risk assessment] process in place, but the fee earner was unable to provide an adequate risk assessment for each file. These failures suggest some firms struggle to monitor the compliance levels of fee earners and/or fail to implement the process/policy
• We made eight referrals into our disciplinary processes about inadequate AML policies. This included one referral for a complete lack of written policies
• of the 59 firms we visited, the fee earner we spoke to at 10 of the firms (17%) was unable to provide the relevant CDD for each of their files
• eight files did not contain adequate information and/or recorded evidence about beneficial owners of the relevant trust or company
• eight firms had no PEP process. These firms were referred into our disciplinary process

These same firms are advising financial institutions on how to comply with UK AML laws and regulations. It is inconceivable that these firms would ignore their own advice – assuming it is good advice – by having programs that have inadequate risk assessments, missing or inadequate customer due diligence files, no or inadequate internal processes for escalating unusual or potentially suspicious activity, and missing SARs. In fairness, though, where five firms have no programs, fifty-four have programs; where eight firms have no PEP process, fifty-one have a PEP process. And, as the headline indicates, at least the UK solicitors are equal partners with their financial institution clients in the global fight against money laundering and terrorist financing … unlike their American counterparts.

Sed quis custodiet ipsos Custodes

But who will guard the guards themselves? – Roman poet and satirist Juvenal, c. 100 AD

On May 15, 2019 the Senate Banking Committee held a hearing on “Oversight of Financial Regulators”. The link to the hearing is:

https://www.banking.senate.gov/hearings/oversight-of-financial-regulators

The heads of the OCC, FDIC, and NCUA, and the head of regulatory supervision of the Board of Governors of the Federal Reserve, submitted written statements and testified. Anti-money laundering (AML) and its regulatory regime under the Bank Secrecy Act (BSA) were touched on by three of the four witnesses in their written statements.

The OCC’s Comptroller, Joseph Otting, had the following:

“Compliance risk remains elevated as banks seek to manage money-laundering risks in a complex, dynamic operating and regulatory environment.”

“My priorities also include improving the efficiency and effectiveness of Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations, supervision, and examination, while continuing to support law enforcement, protect the financial system from those who seek to exploit it for illicit and illegal purposes, and reduce the burden of BSA/AML compliance.”

And under the heading “Bank Secrecy Act and Anti-Money Laundering”, the Comptroller wrote:

The BSA and AML laws and regulations exist to protect our financial system from criminals who would exploit that system for their own illegal purposes or use that system to finance terrorism. While regulators and the industry share a commitment to fighting money laundering and other illegal activities, the process for complying with current BSA/AML laws and regulations has become inefficient and costly. It is critical that the BSA/AML regime be updated and enhanced to address today’s threats and better use the capabilities of modern technology to protect the financial system from illicit activity.

The OCC has taken a leadership role in coordinating discussions with the FDIC, Board of Governors of the Federal Reserve System, National Credit Union Administration, Treasury’s Office of Financial Intelligence, and FinCEN to identify and implement ways to improve the efficiency and effectiveness of BSA/AML regulations, supervision, and examinations, while continuing to meet the requirements of the statute and regulations, support law enforcement, and reduce BSA/AML compliance burden. In October 2018, these agencies released a joint statement clarifying ways in which community banks with a lower BSA risk profile may be able to increase efficiency and reduce burden in their BSA/AML compliance programs by sharing BSA resources. The statement describes how these banks can effectively use collaborative arrangements to share human, technology, or other resources related to BSA compliance to reduce costs, increase operational efficiency, and leverage specialized expertise.

More recently, in December 2018, these agencies issued a joint statement encouraging banks to take innovative approaches to meet their BSA/AML compliance obligations. The statement recognizes significant potential for technological innovation to transform BSA/AML compliance. In addition to assisting banks’ efforts to control their costs, innovation is increasingly necessary to counter constantly changing threats, as illicit financing methods evolve to exploit vulnerabilities in existing systems. The statement makes clear the agencies are committed to continued engagement with the private sector to modernize and innovate in their BSA/AML compliance programs. The OCC is actively engaged in discussions with banks and other stakeholders regarding ways to explore enhanced technology usage while maintaining the current strong protections for the financial system.

The OCC also has identified areas in which legislative changes could increase the impact and efficiency of BSA/AML regulation and compliance programs. The OCC generally supports legislative changes that would reduce unnecessary industry burden and compliance costs and allow for more effective information sharing related to illicit finance. These include requiring a regular review of BSA/AML regulations to identify those that could be strengthened, refined or to reduce unnecessary burden, and providing safe harbors to promote sharing of information.

The written statements of Jelena Williams, Chair of the FDIC, and Randal K. Quarles, Vice Chair for Supervision for the Federal Reserve, did not include anything on BSA/AML.

The written statement of Rodney E. Hood, Chairman of the National Credit Union Administration (NCUA), included the following on BSA/AML (footnotes omitted):

Ensuring Compliance with the Bank Secrecy Act The NCUA takes seriously its obligations to supervise federal credit unions for compliance with the various BSA and AML laws and regulations. As technology has become embedded in financial systems, even small financial institutions like credit unions can be vulnerable to illicit finance activity. The NCUA examines federal credit union compliance with BSA during every examination that we conduct. Additionally, the NCUA assists state regulators by conducting BSA examinations in federally insured, state-chartered credit unions where state resources are limited. In 2018, the NCUA conducted 3,308 BSA examinations in federal credit unions.

The NCUA’s BSA reviews are risk-focused and include a set of core procedures that cover an institution’s compliance with the pillars of the BSA. These core procedures are based on the FFIEC examination procedures we issue jointly with the other federal financial regulatory agencies. In addition to the core procedures, examiners are trained and directed to tailor examinations based on the unique risk characteristics of each federal credit union. Federal credit unions that have diverse platforms with higher risk activities will receive an expanded review tailored to the unique risk characteristics they present. Conversely, examinations of smaller, low-risk credit unions are appropriately scaled to minimal necessary procedures consistent with their risk characteristics and our obligations under the FCU Act.

The NCUA coordinates regularly with our counterparts as the other federal financial regulatory agencies, as well as the Financial Crimes Enforcement Network (FinCEN). The NCUA actively participates in the Bank Secrecy Act Advisory Group (BSAAG) and the FFIEC BSA Working Group. Additionally, the NCUA is part of a recently established interagency working group to improve effectiveness and streamline, where possible, our regulations and supervisory processes. The working group recently issued a Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing, as well as an Interagency Statement on Shared BSA Resources. Both joint statements provide appropriate information for institutions to leverage resources and new technologies to improve and streamline their BSA compliance obligations. The NCUA intends to continue to foster collaborative working relationships with our regulatory counterparts, including FinCEN. I believe that this is especially important in addressing substantial concerns related to the proliferation of cash-based businesses, which further necessitates reforming and modernizing the BSA regime.

Finally, the NCUA also communicates with the credit union industry through numerous channels, including: BSAAG participation and outreach; assistance and participation in national events applicable to the BSA attended by credit union industry professionals and leaders; and through periodic and ongoing training via webinars. The NCUA continues to maintain transparency in its policy positions. To that end, the agency publishes our examination and policy manuals, as well as nearly all guidance and directives provided to examiners related to the supervisory process or examinations.

I’ve highlighted three excerpts from Comptroller’s Otting’s statement:

It is critical that the BSA/AML regime be updated and enhanced to address today’s threats and better use the capabilities of modern technology to protect the financial system from illicit activity.

The agencies issued a joint statement encouraging banks to take innovative approaches to meet their BSA/AML compliance obligations. The statement recognizes significant potential for technological innovation to transform BSA/AML compliance.

The OCC generally supports legislative changes that would reduce unnecessary industry burden and compliance costs and allow for more effective information sharing related to illicit finance. These include requiring a regular review of BSA/AML regulations to identify those that could be strengthened, refined or to reduce unnecessary burden, and providing safe harbors to promote sharing of information.

Comptroller Otting’s testimony – and indeed the actions of the OCC and the other regulators – around the encouragement of innovative uses of technology is a very positive for all financial institutions struggling to balance the competing and sometimes conflicting interests and perspectives of their regulators, their customers, and law enforcement. The promotion of sharing information is also very positive: financial institutions working individually will never fulfill their regulatory obligations effectively or efficiently, and can only do so by sharing information with other institutions. Big data intelligence and collaborative investigations are the future of BSA/AML.

One key question – do the Committees’ investigations have a valid legislative purpose? – brings Anti-Money Laundering investigations and legislation into the spotlight

Posted May 11, 2019 with an update from one court’s decision on May 20, 2019

I am not offering an opinion, one way or another, on the relative merits of the parties’ allegations: I am pointing out that these cases could have an impact on AML programs and professionals.

In two different federal courts in a span of seven days, President Trump and various companies he owned or controlled, directly or indirectly (or owns or controls, directly or indirectly, through a trust or otherwise, or otherwise has or had an interest in), and in the New York case, three of his children (all collectively referred to “the Plaintiffs Trump”), sought to quash a number of subpoenas issued by three Democrat-controlled U.S. House of Representative committees. In both cases, the plaintiffs Trump argued that the Democrats or Democrat-controlled committees:

“ignored the constitutional limits on Congress’ power to investigate. Article I of the Constitution does not contain an ‘Investigations Clause’ or an ‘Oversight Clause.’ It gives Congress the power to enact certain legislation. Accordingly, investigations are legitimate only insofar as they further some legitimate legislative purpose. No investigation can be an end in itself. And Congress cannot use investigations to exercise powers that the Constitution assigns to the executive or judicial branch.”

In the Washington DC case, the Plaintiffs Trump allege:

“[the] subpoena … lacks a legitimate legislative purpose. There is no possible legislation at the end of this tunnel; indeed, the Chairman does not claim otherwise. With this subpoena, the Oversight Committee is instead assuming the powers of the Department of Justice, investigating (dubious and partisan) allegations of illegal conduct by private individuals outside of government. Its goal is to expose Plaintiffs’ private financial information for the sake of exposure, with the hope that it will turn up something that Democrats can use as a political tool against the President now and in the 2020 election.”

In the New York case, the Plaintiffs Trump allege:

“The subpoenas … lack any legitimate legislative purpose. There is no possible legislation at the end of this tunnel; indeed, the Committee Chairs have not claimed otherwise. With these subpoenas, the Committees are instead assuming the powers of the Department of Justice, investigating (dubious and partisan) rumors of illegal conduct by private individuals, many of whom are outside of government. Their goal is to rummage around Plaintiffs’ private financial information in the hope that they will stumble upon something they can expose publicly and use as a political tool against the President.”

The cases are very similar and involve the same four basic principles of law: the scope of the investigatory powers of Congress, whether and to what extent the various committees have the power to investigate, whether a committee has a “valid legislative purpose” in issuing a subpoena, and the role of the courts in quashing Congressional subpoenas. In the DC case, the “valid legislative purpose” or purposes involve conflicts of interest and financial disclosure issues: in the New York case, those purposes involve compliance with banking regulations, money laundering, industry-wide compliance with anti-money laundering policies, the use of anonymous corporations as vehicles to launder illicit funds, and transparency regarding ownership of anonymous shell corporations generally.

For AML professionals, the New York case should be watched closely to see if there is any impact on AML legislation, regulation, and expectations.

The Washington DC Case – Federal District Court, District of Columbia, Civil Case Number 19CV01136 –filed April 22, 2019

In this case, President Trump and various Trump-owned and/or controlled (previously or currently, directly or indirectly through trusts or otherwise) companies, sued Elijah Cummings in his official capacity as Chairman of the House Committee on Oversight & Reform, and Mazars USA LLP. The opening two paragraphs of the complaint paint the picture:

“The Democrat Party, with its newfound control of the U.S. House of Representatives, has declared all-out political war against President Donald J. Trump. Subpoenas are their weapon of choice.”

“This case involves one of those subpoenas. Last week, Defendant Elijah E. Cummings invoked his authority as Chairman of the House Oversight Committee to subpoena Mazars USA LLP—the longtime accountant for President Trump and several Trump entities (all Plaintiffs here). Chairman Cummings asked Mazars for financial statements, supporting documents, and communications about Plaintiffs over an eight-year period—mostly predating the President’s time in office.”

(One week after the complaint was filed, the parties agreed to, essentially, dismiss the case against the accounting firm and the Chairman of the House Committee, and substitute as the sole defendant the actual Committee, to be represented by the Office of General Counsel of the House of Representatives).

On May 9th, Judge Amit Mehta issued an order that has the effect of turning the May 14th hearing on the preliminary injunction into a trial on the merits: the Judge will hear arguments on the 14th and then decide whether the subpoena shall stand or not.

The New York Case – Federal District Court, Southern District of New York, Civil Case Number 19CV03826 – filed April 29, 2019

This complaint is very similar to the complaint filed in Washington DC the prior week. Here, President Trump, a number of his companies, and three of his children (Donald Jr., Eric, and Ivanka: again, “the Plaintiffs Trump”) brought a civil complaint against two of the Plaintiffs Trump’s banks, Deutsche Bank and Capital One, to prevent the banks from responding to subpoenas issued by the House Permanent Select Committee on Intelligence and the House Financial Services Committee. Among other allegations, the Plaintiffs Trump pleaded that the subpoenas “have no legitimate or lawful purpose”, are “to harass” the President, “to rummage through every aspect of his personal finances” and are intended to “ferret about” for incriminating information. And as in the DC case, the Plaintiffs Trump also argue that the Committees are exceeding their constitutional powers:

“The Committees have ignored the constitutional limits on Congress’ power to investigate. Article I of the Constitution does not contain an ‘Investigations Clause’ or an ‘Oversight Clause.’ It gives Congress the power to enact certain legislation. Accordingly, investigations are legitimate only insofar as they further some legitimate legislative purpose. No investigation can be an end in itself. And Congress cannot use investigations to exercise powers that the Constitution assigns to the executive or judicial branch.”

“The subpoenas to Deutsche Bank and Capital One lack any legitimate legislative purpose. There is no possible legislation at the end of this tunnel; indeed, the Committee Chairs have not claimed otherwise. With these subpoenas, the Committees are instead assuming the powers of the Department of Justice, investigating (dubious and partisan) rumors of illegal conduct by private individuals, many of whom are outside of government. Their goal is to rummage around Plaintiffs’ private financial information in the hope that they will stumble upon something they can expose publicly and use as a political tool against the President.”

On May 3rd the plaintiffs filed a Motion for Preliminary Injunction to prevent the defendant banks from responding to the subpoenas. The two Committees intervened, and were added as Intervenor-Defendants (“real parties in interest”) and are represented by the Office of General Counsel of the U.S. House of Representatives. The parties agreed on a schedule for submitting replies to the Motion and for a hearing date – May 15th.

On May 10th the House filed its Opposition to the Trump motion. Among other things, the Opposition addresses the Plaintiffs Trump arguments about the powers of the Congressional committees and their motives in issuing the subpoenas:

• “Mr. Trump’s request for a preliminary injunction betrays a fundamental misunderstanding of the powers of the Legislative Branch under our constitutional scheme and is flatly inconsistent with nearly a century of Supreme Court precedent.”
• “Contrary to Mr. Trump’s allegation that the Committees are merely attempting to expose his finances, the Committees are investigating serious and urgent questions concerning the safety of banking practices, money laundering in the financial sector, foreign influence in the U.S. political process, and the threat of foreign financial leverage, including over the President, his family, and his business.”
• “The Committees are conducting wide-ranging investigations of issues bearing upon the integrity of the U.S. financial system and national security, including bank fraud, money laundering, foreign influence in the U.S. political process, and the counterintelligence risks posed by foreign powers’ use of financial leverage.”

The House Opposition provides some details on what the two committees are investigating. The details relating to the Committee on Financial Services are particularly interesting for AML professionals. That Committee is:

“… investigating serious issues regarding compliance with banking regulations, loan practices, and money laundering … the movement of illicit funds throughout the global financial system … the questionable financing provided to President Trump and the Trump Organization by banks like Deutsche Bank to finance his real estate properties …. industry-wide compliance with banking statutes and regulations, particularly anti-money laundering policies … the use of anonymous corporations as vehicles to launder illicit funds through legitimate investments and enterprises …”

And “[t]he Committee is considering legislation that would increase transparency regarding ownership of anonymous shell corporations generally.”

As of this writing, the Plaintiffs Trump have not yet replied to the House Opposition to their motion.

Update May 20, 2019 – In the District of Columbia case, the District Court judge upheld the Committee’s subpoena and ordered the accounting firm to comply with the subpoena. The Plaintiffs Trump have indicated they will appeal that decision.

In his written opinion, the Judge began with the following (citations omitted):

“I do, therefore, . . . solemnly protest against these proceedings of the House of Representatives, because they are in violation of the rights of the coordinate executive branch of the Government, and
subversive of its constitutional independence; because they are
calculated to foster a band of interested parasites and informers,
ever ready, for their own advantage, to swear before ex parte
committees to pretended private conversations between the
President and themselves, incapable, from their nature, of being
disproved; thus furnishing material for harassing him, degrading
him in the eyes of the country . . .” – President James Buchanan

These words, written by President James Buchanan in March 1860, protested a resolution adopted by the U.S. House of Representatives to form a committee—known as the Covode Committee—to investigate whether the President or any other officer of the Executive Branch had sought to influence the actions of Congress by improper means. 

Buchanan “cheerfully admitted” that the House of Representatives had the authority to make inquiries “incident to their legislative duties,” as “necessary to enable them to discover and to provide the appropriate legislative remedies for any abuses which may be ascertained.” But he objected to the Covode Committee’s investigation of his conduct. He maintained that the House of Representatives possessed no general powers to investigate him, except when sitting as an impeaching body. Buchanan feared that, if the House were to exercise such authority, it “would establish a precedent dangerous and embarrassing to all my successors, to whatever political party they might be attached.” 

Some 160 years later, President Donald J. Trump has taken up the fight of his predecessor.

*****

Echoing the protests of President Buchanan, President Trump and his associated entities are before this court, claiming that the Oversight Committee’s subpoena to Mazars exceeds the Committee’s constitutional power to conduct investigations. The President argues that there is no legislative purpose for the subpoena. The Oversight Committee’s true motive, the President insists, is to collect personal information about him solely for political advantage. He asks the court to declare the Mazars subpoena invalid and unenforceable.

Courts have grappled for more than a century with the question of the scope of Congress’s investigative power. The binding principle that emerges from these judicial decisions is that courts must presume Congress is acting in furtherance of its constitutional responsibility to legislate and must defer to congressional judgments about what Congress needs to carry out that purpose. To be sure, there are limits on Congress’s investigative authority. But those limits do not substantially constrain Congress. So long as Congress investigates on a subject matter on which “legislation could be had,” Congress acts as contemplated by Article I of the Constitution.

Applying those principles here compels the conclusion that President Trump cannot block the subpoena to Mazars.

*****

… it is not for the court to question whether the Committee’s actions are truly motivated by political considerations. Accordingly, the court will enter judgment in favor of the Oversight Committee. 

More to come …

US-based AML practitioners are familiar with FinCEN Guidance and Advisories. Most are probably not sure what the differences are between a Guidance document and an Advisory. But both seem to have something called “persuasive precedential effect”. What is persuasive precedential effect? Is it different from non-persuasive precedential effect? My spell check doesn’t recognize the word “precedential”, and Googling the phrase only brings back 74 hits.

Just what is “persuasive precedential effect”? Having just glanced at the title of the first search result – “Legitimacy Model for the Interpretation of Plurality Decisions” – I couldn’t bear to try to answer that question myself, so … could a financial institution subject to the BSA please seek an Administrative Ruling from FinCEN to get an answer to the question “what does the phrase ‘persuasive precedential effect’ actually mean?”

FinCEN’s Regulatory Releases – Regulations, Guidance, Statements of Policy, Advisories, and Enforcement Rulings

On May 9, 2019, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which has responsibility for the administration of the Bank Secrecy Act (BSA) under Treasury Order 180-01 (1992), issued formal Guidance (FIN-2019-G001) titled “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies.”

https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf

Also on May 9th, FinCEN issued an Advisory (FIN-2019-A003) titled “Advisory on Illicit Activity Involving Convertible Virtual Currency”.

https://www.fincen.gov/sites/default/files/advisory/2019-05-09/FinCEN%20Advisory%20CVC%20FINAL%20508_0.pdf

Why two documents? Why was one labeled “Guidance” and the other “Advisory”? The answers, in part, can be found at FinCEN’s “Regulatory Releases” page: FinCEN Regulatory Releases

According to FinCEN, it has authority to issue regulations, regulatory interpretations and guidance, advisories, and enforcement assessments/consent assessments. As explained by FinCEN:

I. Regulations

Regulations implementing the Bank Secrecy Act codified in title 31 of the Code of Federal Regulations, Chapter X (31 CFR Chapter X). Related publications include:

• Final rules
• Interim final rules
• Notices of proposed rulemakings (known as “NPRM”)
• Advance notices of proposed rulemakings (known as “ANPRM”)
• Corrections

Final rules, interim final rules, and any subsequent corrections to these rules, are binding obligations on individuals and entities within the scope of such rules.

II. Regulatory Interpretations and Guidance

According to FinCEN, it “routinely issue[s] interpretations of BSA regulations as well as guidance to financial institutions on complying with our regulations.” There are three categories that fall into this bucket:

1. Administrative Rulings

The authority, process, and effect of Administrative Rulings is contained in subpart G of Part X of Title 31 of the code of Federal regulations – 31 CFR § 1010.710-717. Although FinCEN’s website provides that “published letter rulings often express an opinion about a new issue, apply an established theory or analysis to a set of facts that differs materially from facts or circumstances that have been previously considered, or provide a new interpretation of Title 31 of the United States Code, or any other statute granting FinCEN authority”, the regulation itself is somewhat more direct. It provides:

The result? If FinCEN publishes an Administrative Ruling, it shall have precedential value and may be relied upon by financial institutions “similarly situated” as the requestor.

2. Interpretive Guidance

FinCEN provides three examples of interpretive guidance:

• Interpretive releases, including written responses to informal inquires on the application of 31 CFR Chapter X that are not made and submitted to the Financial Crimes Enforcement Network consistent with the procedures outlined at 31 CFR § 1010.711
• Frequently Asked Questions
• Staff commentaries

Notably, interpretations of BSA regulations that are published on FinCEN’s public web site under the heading “Guidance” shall have persuasive precedential effect and, to that extent, may be relied upon by those financial institutions subject to the specific provision of the BSA regulation being interpreted until such interpretation is superseded, revoked, or amended.

FinCEN notes that “if written guidance is not published on FinCEN’s public web site under the heading “Guidance”, although not binding, such guidance provides useful insight into our view of the application of the Bank Secrecy Act and its implementing regulations at the time that the guidance is issued.”

3. Statements of Policy

This appears to cover guidance not published as “Guidance”, as well as “statements outlining or describing our policy with respect to specific issues arising under the Bank Secrecy Act.” According to FinCEN, “these statements provide useful insight into our view of the application of the Bank Secrecy Act and its implementing regulations at the time the statement is issued.”

III. Advisories

Advisories are published to financial institutions “concerning money laundering or terrorist financing threats and vulnerabilities for the purpose of enabling financial institutions to guard against such threats.”  If published on the FinCEN web site under the heading “Advisories” and to the extent they interpret BSA regulations , Advisories shall have persuasive precedential effect and may be relied upon by those financial institutions subject to the specific provision of the BSA regulation being interpreted until such interpretation is superseded, revoked, or amended.

And, like guidance not published under the heading “Guidance”, advisories not published under the heading “Advisory”, are not binding but provides “useful insight into [FinCEN’s] view of the application of the BSA and BSA regulations at the time that the advisory/guidance is issued.

IV. Enforcement Assessments and Consent Assessments

Public enforcement actions, often referred to as “Consent Orders” by the OCC and Federal Reserve and “Consent Assessments” by FinCEN because they are entered into with the (grudging) consent of the sanctioned entity, are binding on and apply exclusively to the sanctioned entity. However, as FinCEN notes, any “regulatory interpretations contained in such assessments shall have persuasive precedential effect and, to that extent, may be relied upon by those financial institutions subject to the specific provision of 31 CFR Chapter X being interpreted until such interpretation is superseded, revoked, or amended.”

FINRA Provides Guidance to Firms Regarding Suspicious Activity Monitoring and Reporting Obligations

http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-19-18.pdf

May 9, 2019

FINRA issued the Notice to provide guidance to member firms regarding suspicious activity monitoring and reporting obligations under FINRA Rule 3310 (Anti-Money Laundering Compliance Program). The guidance included ninety-seven (97) red flags organized into six sections:

1. Potential Red Flags in Customer Due Diligence and Interactions With Customers (19 red flags, 10 are new)
2. Potential Red Flags in Deposits of Securities (8 red flags, all are new)
3. Potential Red Flags in Securities Trading (20 red flags, 18 are new)
4. Potential Red Flags in Money Movements (31 red flags, 20 are new)
5. Potential Red Flags in Insurance Products (5 red flags, all are new)
6. Other Potential Red Flags (14 red flags, 10 are new)

The Notice provided that these red flags were in addition to the money laundering red flags that appeared in Notice to Members 02-21 (NTM 02-21) published in April 2002:

“Since NTM 02-21 was published [in April 2002], guidance detailing additional red flags that may be applicable to the securities industry have been published by a number of U.S. government agencies and international organizations. FINRA is issuing this Notice to provide examples of these additional money laundering red flags for firms to consider incorporating into their AML programs, as may be appropriate in implementing a risk-based approach to BSA/AML compliance.”

“This Notice is intended to assist broker-dealers in complying with their existing obligations under BSA/AML requirements and does not create any new requirements or expectations. In addition, this Notice incorporates the red flags listed in NTM 02-21 so that firms can refer to this Notice only for examples of potential red flags.”

So the twenty-five 2002 red flags are included, but not identified, within the ninety-seven 2019 red flags. To assist compliance professionals, I have gone through the 2002 red flags and inserted them into the 2019 red flags so that those professionals can more easily determine whether their current programs are covering off the “new” red flags.

2002 Red Flags

1. The customer exhibits unusual concern regarding the firm’s compliance with government reporting requirements and the firm’s AML policies, particularly with respect to his or her identity, type of business and assets, or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspect identification or business documents.
2. The customer wishes to engage in transactions that lack business sense or apparent investment strategy, or are inconsistent with the customer’s stated business strategy.
3. The information provided by the customer that identifies a legitimate source for funds is false, misleading, or substantially incorrect.
4. Upon request, the customer refuses to identify or fails to indicate any legitimate source for his or her funds and other assets.
5. The customer (or a person publicly associated with the customer) has a questionable background or is the subject of news reports indicating possible criminal, civil, or regulatory violations.
6. The customer exhibits a lack of concern regarding risks, commissions, or other transaction costs.
7. The customer appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate commercial reasons, to provide information or is otherwise evasive regarding that person or entity.
8. The customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry.
9. The customer attempts to make frequent or large deposits of currency, insists on dealing only in cash equivalents, or asks for exemptions from the firm’s policies relating to the deposit of cash and cash equivalents.
10. The customer engages in transactions involving cash or cash equivalents or other monetary instruments that appear to be structured to avoid the $10,000 government reporting requirements, especially if the cash or monetary instruments are in an amount just below reporting or recording thresholds.
11. For no apparent reason, the customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third-party transfers.
12. The customer is from, or has accounts in, a country identified as a non-cooperative country or territory by the Financial Action Task Force (FATF).
13. The customer’s account has unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity.
14. The customer’s account shows numerous currency or cashiers check transactions aggregating to significant sums.
15. The customer’s account has a large number of wire transfers to unrelated third parties inconsistent with the customer’s legitimate business purpose.
16. The customer’s account has wire transfers that have no apparent business purpose to or from a country identified as a money laundering risk or a bank secrecy haven.
17. The customer’s account indicates large or frequent wire transfers, immediately withdrawn by check or debit card without any apparent business purpose.
18. The customer makes a funds deposit followed by an immediate request that the money be wired out or transferred to a third party, or to another firm, without any apparent business purpose.
19. The customer makes a funds deposit for the purpose of purchasing a long-term investment followed shortly thereafter by a request to liquidate the position and transfer of the proceeds out of the account.
20. The customer engages in excessive journal entries between unrelated accounts without any apparent business purpose.
21. The customer requests that a transaction be processed in such a manner to avoid the firm’s normal documentation requirements.
22. The customer, for no apparent reason or in conjunction with other “red flags,” engages in transactions involving certain types of securities, such as penny stocks, Regulation “S” (Reg S) stocks, and bearer bonds, which although legitimate, have been used in connection with fraudulent schemes and money laundering activity. (Such transactions may warrant further due diligence to ensure the legitimacy of the customer’s activity.)
23. The customer’s account shows an unexplained high level of account activity with very low levels of securities transactions.
24. The customer maintains multiple accounts, or maintains accounts in the names of family members or corporate entities, for no apparent business purpose or other purpose.
25. The customer’s account has inflows of funds or other assets well beyond the known income or resources of the customer.

2019 Red Flags (with references to 2002 red flags)

I. Potential Red Flags in Customer Due Diligence and Interactions With Customers

1. The customer provides the firm with unusual or suspicious identification documents that cannot be readily verified or are inconsistent with other statements or documents that the customer has provided. Or, the customer provides information that is inconsistent with other available information about the customer. This indicator may apply to account openings and to interaction subsequent to account opening. (2002 red flag # 1 – The customer exhibits unusual concern regarding the firm’s compliance with government reporting requirements and the firm’s AML policies, particularly with respect to his or her identity, type of business and assets, or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspect identification or business documents.)
2. The customer is reluctant or refuses to provide the firm with complete customer due diligence information as required by the firm’s procedures, which may include information regarding the nature and purpose of the customer’s business, prior financial relationships, anticipated account activity, business location and, if applicable, the entity’s officers and directors. (2002 red flag # 1 – The customer exhibits unusual concern regarding the firm’s compliance with government reporting requirements and the firm’s AML policies, particularly with respect to his or her identity, type of business and assets, or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspect identification or business documents.)
3. The customer refuses to identify a legitimate source of funds or information is false, misleading or substantially incorrect. (2002 Red Flag #4 – Upon request, the customer refuses to identify or fails to indicate any legitimate source for his or her funds and other assets. Also, 2002 red flag #3 – The information provided by the customer that identifies a legitimate source for funds is false, misleading, or substantially incorrect.)
4. The customer is domiciled in, doing business in or regularly transacting with counterparties in a jurisdiction that is known as a bank secrecy haven, tax shelter, high-risk geographic location (e.g., known as a narcotics producing jurisdiction, known to have ineffective AML/Combating the Financing of Terrorism systems) or conflict zone, including those with an established threat of terrorism.
5. The customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry. (2002 red flag # 8 – The customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry.)
6. The customer has no discernable reason for using the firm’s service or the firm’s location (e.g., the customer lacks roots to the local community or has gone out of his or her way to use the firm).
7. The customer has been rejected or has had its relationship terminated as a customer by other financial services firms.
8. The customer’s legal or mailing address is associated with multiple other accounts or businesses that do not appear related.
9. The customer appears to be acting as an agent for an undisclosed principal, but is reluctant to provide information. (2002 red flag # 7 – The customer appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate commercial reasons, to provide information or is otherwise evasive regarding that person or entity.)
10. The customer is a trust, shell company or private investment company that is reluctant to provide information on controlling parties and underlying beneficiaries.
11. The customer is publicly known or known to the firm to have criminal, civil or regulatory proceedings against him or her for crime, corruption or misuse of public funds, or is known to associate with such persons. Sources for this information could include news items, the Internet or commercial database searches. (2002 red flag #5 – The customer (or a person publicly associated with the customer) has a questionable background or is the subject of news reports indicating possible criminal, civil, or regulatory violations.)
12. The customer’s background is questionable or differs from expectations based on business activities.
13. The customer maintains multiple accounts, or maintains accounts in the names of family members or corporate entities, with no apparent business or other purpose. (2002 red flag # 11 – For no apparent reason, the customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third-party transfers. Also 2002 red flag #24 – The customer maintains multiple accounts, or maintains accounts in the names of family members or corporate entities, for no apparent business purpose or other purpose.)
14. An account is opened by a politically exposed person (PEP), particularly in conjunction with one or more additional risk factors, such as the account being opened by a shell company beneficially owned or controlled by the PEP, the PEP is from a country which has been identified by FATF as having strategic AML regime deficiencies, or the PEP is from a country known to have a high level of corruption. (similar to 2002 red flag # 12 – The customer is from, or has accounts in, a country identified as a non-cooperative country or territory by the Financial Action Task Force (FATF).)
15. An account is opened by a non-profit organization that provides services in geographic locations known to be at higher risk for being an active terrorist threat.
16. An account is opened in the name of a legal entity that is involved in the activities of an association, organization or foundation whose aims are related to the claims or demands of a known terrorist entity.
17. An account is opened for a purported stock loan company, which may hold the restricted securities of corporate insiders who have pledged the securities as collateral for, and then defaulted on, purported loans, after which the securities are sold on an unregistered basis.
18. An account is opened in the name of a foreign financial institution, such as an offshore bank or broker-dealer, that sells shares of stock on an unregistered basis on behalf of customers.
19. An account is opened for a foreign financial institution that is affiliated with a U.S. broker-dealer, bypassing its U.S. affiliate, for no apparent business purpose. An apparent business purpose could include access to products or services the U.S. affiliate does not provide.

II. Potential Red Flags in Deposits of Securities

1. A customer opens a new account and deposits physical certificates, or delivers in shares electronically, representing a large block of thinly traded or low-priced securities.
2. A customer has a pattern of depositing physical share certificates, or a pattern of delivering in shares electronically, immediately selling the shares and then wiring, or otherwise transferring out the proceeds of the sale(s).
3. A customer deposits into an account physical share certificates or electronically deposits or transfers shares that:

• • were recently issued or represent a large percentage of the float for the security;
  • reference a company or customer name that has been changed or that does not match the name on the account;
  • were issued by a shell company;
  • were issued by a company that has no apparent business, revenues or products;
  • were issued by a company whose SEC filings are not current, are incomplete, or nonexistent;
  • were issued by a company that has been through several recent name changes or business combinations or recapitalizations;
  • were issued by a company that has been the subject of a prior trading suspension; or
  • were issued by a company whose officers or insiders have a history of regulatory or criminal violations, or are associated with multiple low-priced stock issuers.

4. The lack of a restrictive legend on deposited shares seems inconsistent with the date the customer acquired the securities, the nature of the transaction in which the securities were acquired, the history of the stock or the volume of shares trading.
5. A customer with limited or no other assets at the firm receives an electronic transfer or journal transfer of large amounts of low-priced, non-exchange-listed securities.
6. The customer’s explanation or documents purporting to evidence how the customer acquired the shares does not make sense or changes upon questioning by the firm or other parties. Such documents could include questionable legal opinions or securities purchase agreements.
7. The customer deposits physical securities or delivers in shares electronically, and within a short time-frame, requests to journal the shares into multiple accounts that do not appear to be related, or to sell or otherwise transfer ownership of the shares.
8. Seemingly unrelated clients open accounts on or at about the same time, deposit the same low-priced security and subsequently liquidate the security in a manner that suggests coordination.

III. Potential Red Flags in Securities Trading

1. The customer, for no apparent reason or in conjunction with other “red flags,” engages in transactions involving certain types of securities, such as penny stocks, Regulation “S” stocks and bearer bonds, which although legitimate, have been used in connection with fraudulent schemes and money laundering activity. (Such transactions may warrant further due diligence to ensure the legitimacy of the customer’s activity.) (2002 red flag # 22 – The customer, for no apparent reason or in conjunction with other “red flags,” engages in transactions involving certain types of securities, such as penny stocks, Regulation “S” (Reg S) stocks, and bearer bonds, which although legitimate, have been used in connection with fraudulent schemes and money laundering activity. (Such transactions may warrant further due diligence to ensure the legitimacy of the customer’s activity.)).
2. There is a sudden spike in investor demand for, coupled with a rising price in, a thinly traded or low-priced security.
3. The customer’s activity represents a significant proportion of the daily trading volume in a thinly traded or low-priced security.
4. A customer buys and sells securities with no discernable purpose or circumstances that appear unusual. (2002 red flag #2 – The customer wishes to engage in transactions that lack business sense or apparent investment strategy, or are inconsistent with the customer’s stated business strategy.)
5. Individuals known throughout the industry to be stock promoters sell securities through the broker-dealer.
6. A customer accumulates stock in small increments throughout the trading day to increase price.
7. A customer engages in pre-arranged or other non-competitive securities trading, including wash or cross trades, with no apparent business purpose.
8. A customer attempts to influence the closing price of a stock by executing purchase or sale orders at or near the close of the market.
9. A customer engages in transactions suspected to be associated with cyber breaches of customer accounts, including potentially unauthorized disbursements of funds or trades.
10. A customer engages in a frequent pattern of placing orders on one side of the market, usually inside the existing National Best Bid or Offer (NBBO), followed by the customer entering orders on the other side of the market that execute against other market participants that joined the market at the improved NBBO (activity indicative of “spoofing”).
11. A customer engages in a frequent pattern of placing multiple limit orders on one side of the market at various price levels, followed by the customer entering orders on the opposite side of the market that are executed and the customer cancelling the original limit orders (activity indicative of “layering”).
12. Two or more unrelated customer accounts at the firm trade an illiquid or low priced security suddenly and simultaneously.
13. The customer makes a large purchase or sale of a security, or option on a security, shortly before news or a significant announcement is issued that affects the price of the security.
14. The customer is known to have friends or family who work at or for the securities issuer, which may be a red flag for potential insider trading or unlawful sales of unregistered securities.
15. The customer’s purchase of a security does not correspond to the customer’s investment profile or history of transactions (e.g., the customer may never have invested in equity securities or may have never invested in a given industry, but does so at an opportune time) and there is no reasonable explanation for the change.
16. The account is using a master/sub structure, which enables trading anonymity with respect to the sub-accounts’ activity, and engages in trading activity that raises red flags, such as the liquidation of microcap issuers or potentially manipulative trading activity.
17. The firm receives regulatory inquiries or grand jury or other subpoenas concerning the firm’s customers’ trading.
18. The customer engages in a pattern of transactions in securities indicating the customer is using securities to engage in currency conversion. For example, the customer delivers in and subsequently liquidates American Depository Receipts (ADRs) or dual currency bonds for U.S. dollar proceeds, where the securities were originally purchased in a different currency.
19. The customer engages in mirror trades or transactions involving securities used for currency conversions, potentially through the use of offsetting trades.
20. The customer appears to buy or sell securities based on advanced knowledge of pending customer orders.

IV. Potential Red Flags in Money Movements

1. The customer attempts or makes frequent or large deposits of currency, insists on dealing only in cash equivalents, or asks for exemptions from the firm’s policies and procedures relating to the deposit of cash and cash equivalents. (2002 red flag # 9 – The customer attempts to make frequent or large deposits of currency, insists on dealing only in cash equivalents, or asks for exemptions from the firm’s policies relating to the deposit of cash and cash equivalents.)
2. The customer “structures” deposits, withdrawals or purchases of monetary instruments below a certain amount to avoid reporting or recordkeeping requirements, and may state directly that they are trying to avoid triggering a reporting obligation or to evade taxing authorities. (2002 red flag # 10 – The customer engages in transactions involving cash or cash equivalents or other monetary instruments that appear to be structured to avoid the $10,000 government reporting requirements, especially if the cash or monetary instruments are in an amount just below reporting or recording thresholds.)
3. The customer seemingly breaks funds transfers into smaller transfers to avoid raising attention to a larger funds transfer. The smaller funds transfers do not appear to be based on payroll cycles, retirement needs, or other legitimate regular deposit and withdrawal strategies.
4. The customer’s account shows numerous currency, money order (particularly sequentially numbered money orders) or cashier’s check transactions aggregating to significant sums without any apparent business or lawful purpose. (2002 red flag # 14 – The customer’s account shows numerous currency or cashiers check transactions aggregating to significant sums.)
5. The customer frequently changes bank account details or information for redemption proceeds, in particular when followed by redemption requests.
6. The customer makes a funds deposit followed by an immediate request that the money be wired out or transferred to a third party, or to another firm, without any apparent business purpose. (2002 red flag # 18 – The customer makes a funds deposit followed by an immediate request that the money be wired out or transferred to a third party, or to another firm, without any apparent business purpose.)
7. Wire transfers are made in small amounts in an apparent effort to avoid triggering identification or reporting requirements. (this is similar to 2002 red flag # 21 – The customer requests that a transaction be processed in such a manner to avoid the firm’s normal documentation requirements.)
8. Incoming payments are made by third-party checks or checks with multiple endorsements.
9. Outgoing checks to third parties coincide with, or are close in time to, incoming checks from other third parties.
10. Payments are made by third party check or money transfer from a source that has no apparent connection to the customer.
11. Wire transfers are made to or from financial secrecy havens, tax havens, high risk geographic locations or conflict zones, including those with an established presence of terrorism. (2002 red flag #16 – The customer’s account has wire transfers that have no apparent business purpose to or from a country identified as a money laundering risk or a bank secrecy haven.)
12. Wire transfers originate from jurisdictions that have been highlighted in relation to black market peso exchange activities.
13. The customer engages in transactions involving foreign currency exchanges that are followed within a short time by wire transfers to locations of specific concern (e.g., countries designated by national authorities, such as FATF, as non-cooperative countries and territories).
14. The parties to the transaction (e.g., originator or beneficiary) are from countries that are known to support terrorist activities and organizations.
15. Wire transfers or payments are made to or from unrelated third parties (foreign or domestic), or where the name or account number of the beneficiary or remitter has not been supplied. (2002 red flag # 15 – The customer’s account has a large number of wire transfers to unrelated third parties inconsistent with the customer’s legitimate business purpose.)
16. There is wire transfer activity that is unexplained, repetitive, unusually large, shows unusual patterns or has no apparent business purpose.
17. The securities account is used for payments or outgoing wire transfers with little or no securities activities (i.e., account appears to be used as a depository account or a conduit for transfers, which may be purported to be for business operating needs). (similar to 2002 red flag # 23 – The customer’s account shows an unexplained high level of account activity with very low levels of securities transactions.).
18. Funds are transferred to financial or depository institutions other than those from which the funds were initially received, specifically when different countries are involved.
19. The customer engages in excessive journal entries of funds between related or unrelated accounts without any apparent business purpose. (2002 red flag #20 – The customer engages in excessive journal entries between unrelated accounts without any apparent business purpose.)
20. The customer uses a personal/individual account for business purposes or vice versa.
21. A foreign import business with U.S. accounts receives payments from outside the area of its customer base.
22. There are frequent transactions involving round or whole dollar amounts purported to involve payments for goods or services.
23. Upon request, a customer is unable or unwilling to produce appropriate documentation (e.g., invoices) to support a transaction, or documentation appears doctored or fake (e.g., documents contain significant discrepancies between the descriptions on the transport document or bill of lading, the invoice, or other documents such as the certificate of origin or packing list).
24. The customer requests that certain payments be routed through nostro or correspondent accounts held by the financial intermediary instead of its own accounts, for no apparent business purpose.
25. Funds are transferred into an account and are subsequently transferred out of the account in the same or nearly the same amounts, especially when the origin and destination locations are high-risk jurisdictions.
26. A dormant account suddenly becomes active without a plausible explanation (e.g., large deposits that are suddenly wired out). (similar to 2002 red flag # 13 – The customer’s account has unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity.)
27. Nonprofit or charitable organizations engage in financial transactions for which there appears to be no logical economic purpose or in which there appears to be no link between the stated activity of the organization and the other parties in the transaction.
28. There is unusually frequent domestic and international automated teller machine (ATM) activity.
29. A person customarily uses the ATM to make several deposits into a brokerage account below a specified BSA/AML reporting threshold.
30. Many small, incoming wire transfers or deposits are made using checks and money orders that are almost immediately withdrawn or wired out in a manner inconsistent with the customer’s business or history; the checks or money orders may reference in a memo section “investment” or “for purchase of stock.” This may be an indicator of a Ponzi scheme or potential funneling activity. (2002 red flag # 17. The customer’s account indicates large or frequent wire transfers, immediately withdrawn by check or debit card without any apparent business purpose.)
31. Wire transfer activity, when viewed over a period of time, reveals suspicious or unusual patterns, which could include round dollar, repetitive transactions or circuitous money movements.

V. Potential Red Flags in Insurance Products

1. The customer cancels an insurance contract and directs that the funds be sent to a third party.
2. The customer deposits an insurance annuity check from a cancelled policy and immediately requests a withdrawal or transfer of funds.
3. The customer cancels an annuity product within the free-look period. This could be a red flag if accompanied with suspicious indicators, such as purchasing the annuity with several sequentially numbered money orders or having a history of cancelling annuity products during the free-look period.
4. The customer opens and closes accounts with one insurance company, then reopens a new account shortly thereafter with the same insurance company, each time with new ownership information.
5. The customer purchases an insurance product with no concern for the investment objective or performance.

VI. Other Potential Red Flags

1. The customer is reluctant to provide information needed to file reports to proceed with the transaction.
2. The customer exhibits unusual concern with the firm’s compliance with government reporting requirements and the firm’s AML policies. (similar to part of 2002 red flag #1 – The customer exhibits unusual concern regarding the firm’s compliance with government reporting requirements and the firm’s AML policies, particularly with respect to his or her identity, type of business and assets, or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspect identification or business documents.)
3. The customer tries to persuade an employee not to file required reports or not to maintain the required records.
4. Notifications received from the broker-dealer’s clearing firm that the clearing firm had identified potentially suspicious activity in customer accounts. Such notifications can take the form of alerts or other concern regarding negative news, money movements or activity involving certain securities.
5. Law enforcement has issued subpoenas or freeze letters regarding a customer or account at the securities firm.
6. The customer makes high-value transactions not commensurate with the customer’s known income or financial resources. (2002 red flag #25 – The customer’s account has inflows of funds or other assets well beyond the known income or resources of the customer.)
7. The customer wishes to engage in transactions that lack business sense or an apparent investment strategy, or are inconsistent with the customer’s stated business strategy.
8. The stated business, occupation or financial resources of the customer are not commensurate with the type or level of activity of the customer.
9. The customer engages in transactions that show the customer is acting on behalf of third parties with no apparent business or lawful purpose.
10. The customer engages in transactions that show a sudden change inconsistent with normal activities of the customer.
11. Securities transactions are unwound before maturity, absent volatile market conditions or other logical or apparent reason. (similar to 2002 red flag # 19 – The customer makes a funds deposit for the purpose of purchasing a long-term investment followed shortly thereafter by a request to liquidate the position and transfer of the proceeds out of the account.)
12. The customer does not exhibit a concern with the cost of the transaction or fees (e.g., surrender fees, or higher than necessary commissions). (2002 red flag # 6 – The customer exhibits a lack of concern regarding risks, commissions, or other transaction costs.)
13. A borrower defaults on a cash-secured loan or any loan that is secured by assets that are readily convertible into currency.
14. There is an unusual use of trust funds in business transactions or other financial activity.

“single most significant law enforcement disruption of the Darknet to date”

DeepDotWeb administrators led hundreds of thousands of users to DarkNet marketplaces

In an indictment dated April 24th and announced publicly on May 8th, the Department of Justice charged  Tal Prihar, 37, an Israeli citizen residing in Brazil, and Michael Phan, 34, an Israeli citizen residing in Israel, with one count of money laundering based on a number of underlying (predicate) criminal acts. The Government also seized the website, http://www.deepdotweb.com (DDW).

From October 2013 through April 2019, Prihar and Phan ran a “gateway” service that made it easy for people to access DarkNet marketplaces. In return, they received “Referral Bonuses” from the marketplaces, based on a percentage of purchases made by those they referred. In total, they received ~8,155 bitcoin worth $8.1 million (based on the value at the time of each transaction) in 40,000 deposits or transactions. They then made 2,700 withdrawals from their wallet (from at least three exchanges – OKCoin, Kraken, and BitPay – based on the forfeiture allegations) valued at $15.5 million, and converted bitcoin to fiat currency in accounts in at least three banks – Baltikums Bank in Latvia, First International Bank of Israel in Israel, and TBC Bank in Georgia (also based on the forfeiture allegations).

Does “good faith” mean “effective”?

On November 17, 2017 the DOJ issued a press release titled “Attorney General Jeff Sessions Ends the Department’s Practice of Regulation by Guidance”. It provided, in part:

“Today, in an action to further uphold the rule of law in the executive branch, Attorney General Jeff Sessions issued a memo prohibiting the Department of Justice from issuing guidance documents that have the effect of adopting new regulatory requirements or amending the law. The memo prevents the Department of Justice from evading required rulemaking processes by using guidance memos to create de facto regulations. ‘Guidance documents can be used to explain existing law,’ Associate Attorney General Brand said.  ‘But they should not be used to change the law or to impose new standards to determine compliance with the law … This Department of Justice will not use guidance documents to circumvent the rulemaking process, and we will proactively work to rescind existing guidance documents that go too far.’”

See https://www.justice.gov/opa/pr/attorney-general-jeff-sessions-ends-department-s-practice-regulation-guidance

On April 30, 2019 the DOJ issued a press release titled “Criminal Division Announces Publication of Guidance on Evaluating Corporate Compliance Programs.” It provided, in part:

“The Criminal Division announced today the release of a guidance document for white-collar prosecutors on the evaluation of corporate compliance programs.  The document, entitled ‘The Evaluation of Corporate Compliance Programs,’ updates a prior version issued by the Division’s Fraud Section in February 2017.  It seeks to better harmonize the guidance with other Department guidance and standards while providing additional context to the multifactor analysis of a company’s compliance program.”

See https://www.justice.gov/opa/pr/criminal-division-announces-publication-guidance-evaluating-corporate-compliance-programs

This new Guidance Document brings far-reaching consequences for corporations and those that work for corporations. It provides as follows:

“As the Justice Manual notes, there are three ‘fundamental questions’ a prosecutor should ask:

1. ‘Is the corporation’s compliance program well designed?’
2. ‘Is the program being applied earnestly and in good faith?’ In other words, is the program being implemented effectively?
3. ‘Does the corporation’s compliance program work’ in practice?

And then it cites JM [Justice Manual] § 9-28.800.

So as I usually do, I went to the source – the Justice Manual – to make sure that it does, in fact, have those same three fundamental changes. What does that section actually provide? Accessing  https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.800 on May 3, 2019, it provides as follows:

“The fundamental questions any prosecutor should ask are: Is the corporation’s compliance program well designed? Is the program being applied earnestly and in good faith? Does the corporation’s compliance program work?”

So it appears that the Guidance has interpreted “applied earnestly and in good faith” to mean “implemented effectively.”

This appears to be a shift from one that appears more focused on intent – earnestness and good faith both describe the intent of the actor – to one that is more focused on outcome – effectiveness.

That appears to be a real change.  Does it mean that acting earnestly and in good faith doesn’t bear much weight if, at the end of the day, the program was found to have been implemented ineffectively?

Notwithstanding former AG Sessions “no more guidance!” command, perhaps AG Barr can provide some guidance on the guidance of whether they’ve shifted from an intent standard to a result standard.

Finally, I didn’t see anything in the new Guidance, nor in the DOJ press release, that referenced the September 5, 2015 memo (guidance) put out by then-DAG Sally Yates titled “Individual Accountability for Corporate Wrongdoing”. Among other things, that guidance provided that “to be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.”

Perhaps that guidance was rescinded by then-AG Sessions at or around the same time he rescinded the Cole and Ogden Memos around federal priorities for cannabis prosecutions?

Former Bank Cash Vault Manager Sentenced to 10 Years in Federal Prison for Stealing over $4 Million – Case Reveals Gaps in “Dual Control” Training