United States | Money Laundering Enforcement Trends: Spring 2024
Introduction
Combatting money laundering remained a key priority of regulators and enforcement authorities worldwide during the first quarter of 2024. The U.S. Department of Justice (DOJ) continues to target money laundering and associated conduct with recent public statements underscoring DOJ’s reliance on the Money Laundering and Asset Recovery Section to further several key initiatives, including enforcement involving virtual assets and a pilot program to pay monetary rewards to whistleblowers.
In this edition of Money Laundering Enforcement Trends, we share our top five picks for the most important AML developments of the last few months.
- The Beneficial Ownership Information Reporting Rule (BOI Reporting Rule) went into effect on January 1, 2024. However, recent constitutional challenges to the Corporate Transparency Act (CTA) (pursuant to which the BOI Reporting Rule was enacted) may impact parties’ obligations to comply with the rule in the future.
- The Department of the Treasury’s draft rule on Anti-Money Laundering Regulations for Residential Real Estate Transfers would require parties to submit reports to the Financial Crimes Enforcement Network (FinCEN) related to certain residential real estate transfers in the U.S.
- The U.S. government continues to focus on matters that pose a potential risk to national security, with Treasury’s Office of Foreign Assets Control (OFAC), continuing to be particularly active in Q1 2024.
- In this quarter, FinCEN and DOJ concluded parallel actions against a former compliance officer of a credit union and DOJ resolved multiple cases for anti-money laundering (AML) compliance program failures.
- On the international stage, the Financial Action Task Force (FATF) took important actions during its February 2024 plenary session, including the removal of Gibraltar, the United Arab Emirates, and others from the FATF’s “grey list.”
1. Questions Remain About Beneficial Ownership Reporting Obligations as BOI Reporting Rule Requirements Go Live
The BOI Reporting Rule that was enacted as part of the CTA went into effect on January 1, 2024, and shortly thereafter, litigants began to challenge the constitutionality of the law.
On March 1, 2024, the U.S. District Court of the Northern District of Alabama held that the CTA was unconstitutional, holding that the CTA “cannot be justified as an exercise of Congress’ enumerated powers.” The DOJ filed a notice of appeal and FinCEN announced that while the litigation was ongoing, it would continue to implement the CTA, though the specific plaintiffs involved in the litigation would not be required to report beneficial ownership information. At time of publication, at least two other lawsuits had been filed challenging the constitutionality of the CTA, one in the District of Maine, and one in the Western District of Michigan.
Despite the challenges, reporting obligations continue for most companies. The BOI Reporting Rule requires certain “reporting companies” to provide FinCEN information about their beneficial owners. We discussed key takeaways regarding the BOI Reporting Rule here.
To help companies navigate their new reporting obligations, FinCEN provided substantial public guidance over the last year. In September 2023, FinCEN published a small entity compliance guide, and in December 2023, FinCEN held both a webinar on beneficial ownership reporting requirements and a briefing on the beneficial ownership access rule. FinCEN also released a detailed Frequently Asked Questions (FAQ) page, which it continues to update.
Nevertheless, questions remain regarding the application of exemptions to certain corporate structures, in particular portfolio companies of private equity firms. The BOI reporting Rule establishes 23 exemptions allowing entities that meet certain criteria to not disclose information about their beneficial ownership. One exemption covers subsidiaries of certain exempt entities. However, subsidiaries of exempted pooled investment vehicles (PIVs) are not included in the subsidiary exemption. In other words, a portfolio company that is wholly owned or controlled by a PIV is not exempt from reporting under the subsidiary exemption by virtue of being a subsidiary of an exempt PIV. That has raised some questions about whether subsidiaries of PIVs are exempt because they are substantially controlled by an exempt registered investment advisor, such as the fund’s general partner. Companies will have to deal with this and other difficult questions as they decide whether and how to register with FinCEN.
2. Treasury Releases Draft Real Estate Rule
On February 7, 2024, FinCEN announced a Notice of Proposed Rulemaking (NPRM) (the Proposed Rule) that would require those involved in the settlement and closing of certain non-financed (i.e., all cash) residential real estate transfers to report information about the transfer and the beneficial owners of the transferees. The fact sheet published with the Proposed Rule states that FinCEN is focused on the residential real estate sector because “these types of transfers have been identified as vulnerable to money laundering, and FinCEN believes that the risk of illicit activity is sufficient to require reporting.” The Proposed Rule would create national standards for FinCEN reporting regarding covered real estate transfers, in place of the Geographic Targeting Order (GTO) requirements that currently exist for title insurance companies in select jurisdictions.
The Proposed Rule would require a designated “reporting person” to complete and file a Real Estate Report within 30 days of a “reportable transfer” of property. A reportable transfer is defined as a non-financed transfer of residential real property – including buildings designed for occupancy of one to four families, land zoned for that purpose, and shares in housing cooperatives – to a “transferee entity” or a “transferee trust.” Transfers of residential real estate to individuals are not covered by the Proposed Rule and many highly regulated entities, such as securities issuers, banks, money services businesses, and many others, are exempt. (The exemptions overlap with but are not the same as the exemptions to the BOI Reporting Rule under the CTA, discussed above).
Importantly, a transfer would be reportable regardless of the purchase price, and gifts are covered by the Proposed Rule unless exempted as a certain type of low-risk transfer. The Real Estate Report would require BOI for the transferee entity or trust along with identifying information about the individuals representing the transferees, the reporting person, the property, the transferor, and the payment. The definition of BOI as defined in the Proposed Rule closely tracks the definition of BOI promulgated by FinCEN’s recently enacted BOI Reporting Rule.
The “reporting person” is determined in one of two ways: parties can either follow the “cascade” delineated in the Proposed Rule or enter into an agreement that designates an individual. The cascade method ranks different functions incident to the settlement of real estate transactions in order of priority. If a person performing the function listed in category one (settlement agent) is involved in the transaction, they are the reporting person; if no such person is involved, the reporting person is identified from category two, and so on. Parties providing real estate transaction services appear to be able to avoid the cascade method, however, by entering into a written agreement designating a reporting person.
Notably, attorneys are covered as reporting persons under the Proposed Rule, raising practical questions regarding preserving the professional privilege between clients and their counsel.
The Proposed Rule emphasizes that FinCEN aims to create a reporting structure that is streamlined and flexible to drive transparency while seeking to avoid over-burdening a sector largely made up of small businesses. The Real Estate Report is essentially an abridged Suspicious Activity Report (SAR) that is designed to require less discretion on the part of the reporting person, as it minimizes the judgement required to determine whether a report should be filed and does not require an assessment of a written narrative. Additionally, under the Proposed Rule, most residential real estate professionals would continue to be exempt from the Bank Secrecy Act’s (BSA) requirement to establish an AML compliance program.
Comments on the Proposed Rule must be submitted on or before April 16, 2024, via mail or the federal e-rulemaking portal.
3. U.S. Authorities’ Continued Focus on National Security and AML
As discussed in prior alerts, U.S. authorities continue to focus heavily on money laundering to facilitate conduct that poses a risk to U.S. national security interests.
On February 7, 2024, Treasury published the 2024 National Risk Assessments for Money Laundering, Terrorist Financing, and Proliferation Financing. Among its key findings, Treasury noted money laundering risks relating to: “(1) the misuse of legal entities; (2) the lack of transparency in certain real estate transactions; (3) the lack of comprehensive AML/counter financing of terrorism (CFT) coverage for certain sectors, particularly investment advisers; (4) complicit merchants and professionals that misuse their positions or businesses; and (5) pockets of weaknesses in compliance or supervision at some regulated U.S. financial institutions.”
Treasury also found that the most common financial connections between the U.S. and foreign terrorist groups are between “individuals directly soliciting funds for or attempting to send funds to foreign terrorist groups utilizing cash, registered money services businesses, or in some cases, virtual assets.” Treasury specifically noted the methods used by Hamas to exploit the international financial system.
Faced with these threats to national security interests, U.S. authorities continued to use legal and regulatory tools to combat money laundering and terrorist financing:
- On January 12, 2024, OFAC designated two companies located in Hong Kong and the United Arab Emirates for shipping commodities on behalf of Sa’id al-Jamal, a financial facilitator for the Houthis and the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF). OFAC also took actions on February 27 and March 6, 2024, against multiple vessels and persons who have facilitated these commodity shipments. On January 22, 2024, OFAC also designated three leaders and supporters of IRGC-QF’s Iran-aligned Iraqi counterpart, Kata’ib Hizballah (KH) and Baghdad-based Al-Massal Land Travel and Tourism Company — a company that, according to OFAC, KH used to generate revenue, launder money, evade taxes on illegal imports, and illegally confiscate land and other physical property from Iraqis.
- On January 22, 2024, OFAC announced an additional round of sanctions involving facilitators of virtual currency transfers used to support Hamas and Palestinian Islamic Jihad in Gaza. As part of the announcement, OFAC designated several parties associated with the Shamlakh and Herzallah Networks. According to OFAC, Gaza-based financial facilitator Zuhair Shamlakh has used various companies, including Al-Markaziya Li-Siarafa and Arab China Trading Company, to channel tens of millions of dollars from Iran to Hamas. In 2023, Israeli authorities reportedly seized 189 cryptocurrency accounts connected to three Palestinian currency exchanges, including Al-Markaziya. As it relates to the Herzallah Network, OFAC stated that Gaza-based Herzallah Exchange and General Trading Company LLC and Samir Herzallah and Brothers For Money Exchange and Remittances have laundered money for Hamas and Palestinian Islamic Jihad, including through the use of cryptocurrencies.
- On January 29, 2024, Treasury issued a finding and NPRM identifying Iraqi Al-Huda Bank as “a foreign financial institution of primary money laundering concern” for facilitating terrorist financing. The NPRM would prohibit “domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Al-Huda Bank.” Further, OFAC designated the bank’s owner and president of the board of directors, Hamad al-Moussawi, for his support of the IRGC-QF through proxy militia groups in Iraq.
- On February 13, 2024, FinCEN issued an NPRM to combat illicit finance and national security threats in the investment advisor industry. The proposed regulations would classify investment advisors as “financial institutions” under the BSA, which would require investment advisors to implement risk-based AML/CFT programs, report suspicious activities to regulators, and fulfill recordkeeping requirements and other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.
4. First Joint DOJ/FinCEN Enforcement Resolution of 2024
On January 31, 2024, DOJ and FinCEN announced parallel resolutions of criminal and civil BSA violations (respectively) with a former credit union BSA compliance officer, Gyanendra Kumar Asre, for misrepresenting his AML experience and failing to properly implement an AML compliance program for his credit union.
- FinCEN: There are some interesting takeaways from FinCEN’s first published consent order of 2024, including two themes that have come up in other recent FinCEN resolutions. First, FinCEN underscored that Asre represented to the credit union that he had extensive AML/BSA experience and various professional compliance certifications. Second, FinCEN notes that, even though Asre played a key role in increasing the credit union’s risk profile by convincing it to engage in bulk cash imports and international check clearance, he failed to take those increased risks into account with respect to AML compliance program implementation. FinCEN has in the past (and again here) highlighted that changes to a company’s risk profile require updates to a company’s AML compliance program. From the settlement documents, it does not appear that the company had an effective AML program to begin with, and the consent order highlights myriad compliance deficiencies, including a failure to train relevant employees, the preparation of an inadequate risk assessment, and a failure to file even a single SAR during the individual’s tenure as the BSA compliance officer.
- DOJ: Asre also reached a plea agreement with the DOJ, wherein he pleaded guilty to one count of failure to maintain an AML program. This may represent an enforcement pattern for DOJ, which settled another unrelated criminal BSA charge against Scott Sibella, the former president of casino company MGM Grand within a week of Asre’s guilty plea. Sibella was investigated for his failure to report suspicious transactions. Both Asre and Sibella are scheduled to be sentenced in May.
5. Highlights from the February 2024 FATF Plenary
Following its plenary meeting in February 2024, FATF added Kenya and Namibia to its list of “jurisdictions under increased monitoring” (the grey list), and removed Barbados, Gibraltar, Uganda, and the United Arab Emirates from that list. The grey list identifies jurisdictions with strategic deficiencies in their AML/CFT/Countering Proliferation Financing (CPF) regimes but have agreed to monitoring and have committed to resolve deficiencies swiftly.
In delisting the United Arab Emirates, a major financial hub that has been on the grey list since March 2022, FATF stated that the country “strengthened the effectiveness of its AML/CFT regime” by allocating more resources towards regulatory financial intelligence, strengthening its capacity to investigate and prosecute money laundering, enhancing financial institutions’ capacity to assess and mitigate AML/CFT risks, implementing regulations requiring private parties to mitigate such risks, and establishing sanctions for entities that fail to comply with AML/CFT regulations. Among other benefits, removal from the grey list typically increases investor confidence in a country, which may increase foreign investments and inflows of foreign capital.
FATF made no changes to s list of “high-risk jurisdictions subject to a call for action” (the black list), which currently includes the Democratic People’s Republic of Korea (DRK), Iran, and Myanmar. The black list identifies jurisdictions with “serious strategic deficiencies” in their AML/CFT/CPF regimes. Placement on the grey or black lists subjects a country’s financial institutions to increased scrutiny in their transactions with international counterparts, increasing both the time and cost of such transactions.
In addition, following the February 2024 plenary session, FATF updated its guidance related to Recommendation 25 on Beneficial Ownership and Transparency of Legal Arrangements. Recommendation 25 instructs countries to assess the risks of trusts and other legal arrangements and to take steps to assure that authorities can efficiently obtain access to key information about the legal arrangements, including beneficial ownership information. To support parties in implementing Recommendation 25, in March 2024, FATF published detailed, non-binding guidance on topics such as assessing the risks associated with certain legal arrangements, maintaining accurate and up-to-date information on beneficial ownership, and ensuring mechanisms to obtain such information exist.
Jeffrey Lehtman | Socio Miller & Chevalier | jlehtman@milchev.com
