United States | Money Laundering Enforcement Trends: Spring 2024

United States | Money Laundering Enforcement Trends: Spring 2024


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

United States | Federal Trade Commission Announces Largest Penalty Ever for US-Made Violations

United States | Federal Trade Commission Announces Largest Penalty Ever for US-Made Violations

On January 25, 2024, the Federal Trade Commission (FTC) announced a $2 million civil fine against a farm equipment company for violating the FTC’s Made in USA (MUSA) rule, the largest fine for violations. of MUSA to date. Here is what you need to know:

FTC Made in USA Rule

  • The FTC regulates US origin claims in advertising and labeling under Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices.” Claims of American origin may be expressed (e.g., “Made in the USA” or “Made in the United States”) or implied, that is, specific to the context and generally involving the use of American symbols, such as flags or references to US locations
  • The MUSA Rule prohibits unqualified claims that a product, service, or component is manufactured in the U.S. unless: (1) final assembly or processing occurs in the U.S.; (2) all significant processing performed on the product occurs in the U.S.; and (3) all or substantially all ingredients or components are manufactured and sourced in the U.S. Both express representations that the products are “made,” “manufactured,” or “constructed” in the U.S. and representations implied fall within the scope of the Rule.
  • The FTC began imposing larger civil penalties in 2020, indicating that violations of the MUSA Rule would face stricter enforcement. Although the FTC’s enforcement of MUSA violations remains slow (the FTC only brought four cases in 2023 that resulted in monetary penalties), this is the second sanction against a publicly traded company since 2020.
    The order.

According to the FTC complaint, the farm machinery company labeled thousands of separately sold replacement parts for its products as “Made in the USA,” even though they were manufactured entirely outside the U.S. since at least 2021, the company allegedly packaged parts manufactured abroad. products in boxes with “Made in USA” printed.

The company is a repeat violator of the MUSA Rule. In 1999, the company entered into an Order with the FTC for MUSA violations, which expired in 2019. This prior application indicates that the manufacturer was aware of the MUSA Rule but failed to comply with it.

Under the latest Order, the company owes a $2 million civil penalty. The Order also requires the company to cease its deceptive labeling practices and creates compliance monitoring and recordkeeping and reporting obligations for the company.

Food for take away

Consider “qualified” MUSA claims . Given the very high standard applicable to non-qualified US origin claims and the increasingly real risk of financial penalties for non-compliance, the use of qualified US origin claims is sometimes more appropriate and worth considering. Examples of permitted qualified claims include: (1) claims indicating the existence of foreign content (“Made in the USA with American and Turkish parts”); (2) claims specifying the amount of US content (“50% US content”); and (3) statements indicating the presence of imported parts (“Made in the USA from imported cotton”).

We hope that the real threat of sanctions will encourage others to report false or misleading claims about American origin. If companies are concerned that their competitors are engaging in deceptive labeling practices, they can file complaints with the FTC. The FTC prioritizes enforcement against willful, repeat, or egregious violators.

For more information contact:

Jeffrey Lehman | Partner Miller & Chevalier | jlehtman@milchev.com

United States | Money Laundering Enforcement Trends: Spring 2024

United States | A broader path to collect foreign arbitration awards

On June 22, 2023, the U.S. Supreme Court decided Yegiazaryan v. Smagin and reaffirmed the principle that foreign plaintiffs are not barred from bringing lawsuits under the Racketeer Influenced and Corrupt Organizations (RICO) Act 1 in the US to file a successful RICO claim. a foreign plaintiff must allege “domestic injury” arising from the RICO violation. When evaluating whether an injury arose within the U.S., the Supreme Court ruled in favor of a context-specific approach, which requires courts to examine all of the circumstances surrounding an injury to determine whether it arose or occurred within the U.S. In doing so, the Court rejected the residency test, which prevents a foreign plaintiff from bringing a RICO claim based solely on his or her foreign residency.

The Yegiazaryan decision paves the way for creditors of foreign awards to enforce foreign arbitration awards in U.S. courts against debtors who use fraudulent tactics to avoid paying the awards.

Factual Background
In 2014, Russia-based Vitaly Smagin obtained a multimillion-dollar foreign arbitration award against Ashot Yegiazaryan, a Russian national who fled to Beverly Hills in California to avoid prosecution in Russia, for allegedly misappropriating Smagin’s investments in a real joint company. real estate project in Moscow (London Prize).

Smagin subsequently filed an enforcement action against Yegiazaryan under the New York Convention in the United States District Court for the Central District of California to enforce the London Award. In response, the district court ordered the freezing of Yegiazaryan’s assets in California.

In 2015, Yegiazaryan had won an unrelated foreign arbitration award (the Kerimov Award) against Russian businessman Suleiman Kerimov, and subsequently attempted to conceal a $198 million settlement in satisfaction of the Kerimov Award from Smagin’s collection. In violation of the district court’s preliminary injunction, Yegiazaryan received the funds through the London office of an American law firm before eventually transferring the money to a bank account at CMB Monaco through a network of offshore companies. . Yegiazaryan also directed an inner circle of friends to file fraudulent lawsuits against him in foreign jurisdictions to obtain false judgments against the Kerimov Award settlement. Additionally, he created a complex system of shell companies through members of his family within the US to protect his domestic assets from Smagin’s coercive actions.

Based on this “pattern of extortion activity,” in 2020, Smagin filed a civil lawsuit against Yegiazaryan, seeking more than $130 million in damages and arguing that Yegiazaryan’s attempts to protect assets from collection and commit wire fraud and obstruction of justice constituted a violation of RICO. . 2 The district court dismissed the case based on the Supreme Court’s decision in RJR Nabisco, Inc. v. European Community, ruling that Smagin failed to prove that he had suffered “internal injury.” On appeal, the Ninth Circuit reversed, after adopting a different interpretation of the “internal harm” test.

Before Yegiazaryan, there was a circuit split over a “domestic injury” test involving RICO claims.
In 2016, the Supreme Court held in RJR Nabisco, Inc. v. European Community that foreign plaintiffs bringing RICO claims must allege and prove an “internal damage”. 3 In other words, the Court held that the statute only permitted claims for domestic RICO-related damages, not for damages suffered extraterritorially.

The Court, however, did not define “internal harm,” which subsequently resulted in a circuit split. The Seventh Circuit adopted a clear residence-based test, establishing that the place of injury is the plaintiff’s residence. The Second, Third, and Ninth Circuits adopted a context-specific approach to determining the presence of internal harm, which “considers all the specific facts of the case related to where the harm ‘arises’, not just where it is ‘felt’” . 4

In the California proceedings involving Smagin and Yegiazaryan, the California district court initially dismissed Smagin’s RICO claim after applying the residency-based test and found that Smagin failed to sufficiently allege domestic injury because, among other things , his Russian citizenship and residence led him to suffer the detriment (i.e., his inability to collect the London Prize) in Russia and not in the US.

On the other hand, the Ninth Circuit rejected the residency-based test in favor of the context-specific approach, which requires courts to evaluate the circumstances as a whole to determine whether harm arose or occurred domestically within the U.S. Specifically, the Ninth Circuit concluded that the location of injury was California because Yegiazaryan’s alleged racketeering actions to prevent Smagin’s collection of a California judgment to enforce the London Award occurred largely within California. As such, the Ninth Circuit determined that Smagin sufficiently alleged that internal harm occurred.

The Supreme Court decision took the context-specific approach to determining “internal damage”
In Yegiazaryan , the Supreme Court resolved the circuit split and clarified the definition of “internal damage” regarding intangible property, including a ruling of a U.S. court to enforce a foreign arbitration award in a RICO lawsuit brought by a foreign plaintiff. The Court agreed with the Ninth Circuit and adopted the context-specific approach that examines the totality of the circumstances surrounding an injury to determine whether it arose or occurred domestically.

In doing so, the Court determined that the Russian plaintiff had sufficiently alleged RICO-related domestic injury by adequately alleging that racketeering activity that, for the most part, took place in California frustrated its efforts to collect a California judgment for enforcement. of a foreign arbitration award against a California resident.

The Court also rejected concerns about the fact-intensive nature of this approach, explaining that while it may be easier to implement as a clear rule under the residency-based test, it contradicted its 2016 RJR Nabisco decision by effectively prohibiting Foreign plaintiffs file RICO claims.

What are RICO claims and why are they important to foreigners?
RICO is an American federal statute that was enacted as part of the Organized Crime Control Act of 1970 to allow the prosecution of organized crime, particularly the mafia. Today, the application of RICO is much broader and has been used by prosecutors to criminally punish acts committed in support of organized crime.

The statute also creates a civil cause of action. According to RICO, “any harmed person” can recover based on a wide range of acts, defined as “extortion or illegal debt collection activity,” 5 such as drug trafficking, human trafficking, money laundering, money and identity fraud. Plaintiffs in civil RICO lawsuits can recover both tangible damages, such as property damage, and intangible injuries, such as financial losses.

RICO has served to incentivize reporting the activities of criminal organizations by allowing individuals to hold them liable for civil damages.

RICO, by its very nature, has an international impact. Many of the activities covered by the statute have a global reach because the conduct covered by “extortion activities” tends to involve cross-border activities. This is beneficial to non-US residents harmed by criminal organizations operating from the US, as non-US residents could potentially recover certain losses and damages from actors in the US under RICO.

Key Findings
The Supreme Court did not elaborate on other factors that may be relevant to the context-specific analysis or how to weigh the various factors. This decision, however, has a significant impact on the enforcement of foreign arbitration awards in the US:

Creditors of foreign awards now have an expanded path to collect foreign arbitration awards in the U.S. where the award debtor may have intentionally attempted to place assets beyond the reach of creditors through various fraudulent or deceptive activities.
While the Court reiterated that there must be domestic damages to recover under the RICO statute, it also noted that there is no evidence that Congress intended to exclude U.S. companies owned by persons living abroad from bringing a RICO suit. As the Court stated, “doing so runs the risk of generating international discord.”

For more information contact:

Jeffrey Lehman  | Partner Miller & Chevalier | jlehtman@milchev.com

United States | Five Takeaways From FinCEN’s First Enforcement Action Against a Trust Company

United States | Five Takeaways From FinCEN’s First Enforcement Action Against a Trust Company

The Financial Crimes Enforcement Network (FinCEN) recently announced its first enforcement action against a trust company for willful violations of the Bank Secrecy Act (BSA) and its implementing regulations. The BSA imposes compliance and reporting obligations on “financial institutions,” which includes among other entities, any “commercial bank or trust company,” to help detect and prevent money laundering. And yet, until last month, FinCEN had not brought an enforcement action against a trust company.


On April 2023, FinCEN announced a $1.5 million civil penalty against the Kingdom Trust Company (Kingdom Trust or the Company) for willful violations of the BSA stemming from the Company’s failure to have sufficient controls around filing Suspicious Activity Reports (SARs).

According to the Consent Order, Kingdom Trust is a trust company organized under South Dakota law that operates the majority of its trust services business out of Kentucky. Though its primary offering is custody services to individuals with self-directed IRAs, during the relevant time period, Kingdom Trust also provided account and payment services to foreign securities and investment firms and money services businesses in high-risk circumstances. Specifically, in 2014, Kingdom Trust began a business relationship with a consulting group that worked with broker-dealers in Argentina and Uruguay that had difficulty establishing bank accounts in the United States. Through this business relationship, Kingdom Trust provided accounts to the foreign firms to custody fixed income securities and to hold cash. As a result, Kingdom Trust processed more than $4 billion in transactions.

Among the other shortcomings identified, FinCEN characterized Kingdom Trust’s process for identifying and reporting potential suspicious transactions as “severely underdeveloped and ad hoc.” According to the Consent Order, prior to December 2018, the Company had no standalone process to screen for, identify, and report suspicious transactions. Rather, staff were instructed to simply flag potentially suspicious activity identified in the ordinary course of performing their duties. After December 2018, Kingdom Trust created a process to identify potentially suspicious activity but relied upon a single compliance employee with no prior anti-money laundering (AML) or BSA experience to conduct a daily review of a large volume of transactions. The daily transaction review did not include relevant contextual information about the customer or counterparty beyond their name. In 2020, Kingdom Trust hired a compliance analyst with AML experience. However, given the manual nature of the review process among other shortcomings, the Company filed only four SARs between February 2020 and March 2021.

In addition, Kingdom Trust maintained correspondent bank accounts for customers at other financial institutions – and at least 11 of those other financial institutions closed the accounts maintained by Kingdom Trust. In response, Kingdom Trust management questioned whether to continue with the foreign custody business and engaged a third party to conduct a BSA/AML audit. The audit identified deficiencies related to Kingdom Trust’s high-risk customers, but the Company did not exit the high-risk customer relationship, make meaningful changes to its controls, or file SARs.

Five Key Takeaways

  1. Heightened Scrutiny of U.S.-based Trust Companies by FinCEN: In a press release accompanying the enforcement action, FinCEN’s Acting Director, Himamauli Das underscored that the instant matter “is an important statement that we will not tolerate trust companies with weak compliance programs that fail to identify and report suspicious activities, particularly with respect to high-risk customers whose businesses pose an elevated risk of money laundering.” It is still too early to know whether the enforcement action against Kingdom Trust signals that FinCEN will more actively investigate and initiate actions against U.S. trust companies, and many of the services offered by Kingdom Trust are similar to those offered by traditional banks (i.e., providing accounts to foreign brokerage firms to custody fixed income securities, including U.S. government bonds, and to hold cash). Nevertheless, in light of FinCEN’s Consent Order and public statements, all trust companies (including those that provide only administrative trust services) should consider whether its AML program is sufficient to address the level of risk that accompanies the services it offers. This includes private trust companies without a federal functional regulator (i.e., an oversight agency such as the Office of the Comptroller of the Currency (OCC) or the U.S. Securities and Exchange Commission (SEC)), which, as of March 2021, are no longer exempt from certain BSA requirements.
  2. Compliance Resources Must Track an Evolving Risk Profile: According to the Consent Order, even after Kingdom Trust expanded into a new line of business offering services to customers that involved heightened risks of money laundering, the Company failed to recruit sufficient personnel with AML compliance experience and relied on manual processes to monitor thousands of transactions daily. As a company’s risk profile grows (whether because of new service/product offerings, new market entry, or otherwise), it is critical that the resources dedicated to complying with BSA requirements track the heightened risk profile. For example, most entities subjected to the BSA’s requirements find that implementing automated transaction monitoring software to flag suspicious behavior and to monitor daily cash flows for potential signs of illegal activity is far more efficient and effective than manual reviews. Furthermore, if all transaction-facing employees (not just the compliance team) are trained to spot red flags of money laundering and other atypical transactions, there is a higher likelihood that the institution will identify and timely report suspicious activity. This is particularly important in companies with a limited number of compliance team members.
  3. Check-the-Box Compliance Activities are Not Sufficient: FinCEN acknowledged that Kingdom Trust undertook certain AML efforts but highlighted significant shortcomings. The Consent Order indicated that Kingdom Trust provided AML training, but noted that training presentations were not tailored to the Company’s risk mitigation activities. For example, training presentations included red flags – such as “customer requests for anonymity, customer attempts to open an account without identification, and an account opened with a nominal balance that subsequently increased rapidly and significantly” – that employees could not have identified based on a review of the daily transaction reports alone. The order also notes that after financial institutions began closing correspondent accounts that Kingdom Trust maintained, Kingdom Trust engaged a third party to conduct a BSA/AML audit. The audit identified deficiencies related to Kingdom Trust’s high-risk customers and their transactions. However, according to FinCEN, Kingdom Trust did not exit relationships with high-risk customers, failed to make “meaningful changes” to its controls, and failed to file any SARs related to the high-risk business line. These examples serve as an important reminder that firms covered by the BSA’s requirements should engage in compliance-related activities that not only “check the box” but that drive firms and their personnel to actually mitigate risks posed.
  4. The Role of Cooperation: Kingdom Trust did not voluntarily disclose the violations, but the order reveals that the company “provided substantial cooperation to FinCEN” and cooperated with federal law enforcement regarding certain of the Company’s high-risk customers. However, the BSA’s SAR reporting obligations serve as proactive, ex ante cooperation, and the order makes clear that post-investigation cooperation cannot make up for failing to meet such preemptive obligations.
  5. Hiring of an Independent Consultant: In addition to agreeing to pay a $1.5 million civil penalty, Kingdom Trust undertook to hire an independent consultant, subject to FinCEN’s approval, (1) to conduct a SAR Lookback Review related to certain of the Company’s transactions; and (2) to test the effectiveness of Kingdom Trust’s AML program though an AML Program Review and to provide recommendations for enhancements. The independent consultant must submit written reports of the activities to FinCEN. The requirement to hire an independent consultant, like other forms of corporate monitorships, can be costly and create administrative burdens. Companies can seek to avoid such requirements by taking proactive measures to assess the effectiveness of its AML program, rather than waiting for enforcement authorities to mandate such assessments.

For more information contact:

Jeffrey Lehtman | Parner Miller & Chevalier | jlehtman@milchev.com

United States | Government publishes the Reference Guide on the FCPA in Spanish

United States | Government publishes the Reference Guide on the FCPA in Spanish

This month, the competent authorities of the Foreign Corrupt Practices Act (FCPA) at the Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC) published a Spanish version of the “  Guide  to US Foreign Corrupt Practices Act (FCPA) reference (FCPA Reference Guide). The Guide, first published in 2012, is a critical reference source for FCPA compliance and enforcement.

This novelty is yet another sign of the importance that US regulators place within the reach of the FCPA in Latin America and the Spanish-speaking world. In 2022, more than half of FCPA rulings involved questionable conduct in Latin America and about 70% of fines and penalties collected by the FCPA were attributed to settlements involving misconduct in the region. Since 2021, the Biden Administration has prioritized anti-corruption efforts in Latin America as part of its national security strategy. A Miami-based Federal Bureau of Investigation (FBI) corruption squad dedicated to investigating corruption issues in Latin America has been very active since 2019.

The publication is undoubtedly welcome news in Latin America. The  Miller & Chevalier Survey on Corruption in Latin America , which has measured the views of business people and legal and compliance  professionals of Latin America since 2008, has identified a growing awareness of the FCPA throughout the region in the last 15 years. Since the survey began in 2008, the percentage of respondents from local and regional companies with some familiarity with the FCPA has grown by approximately 50 percent in the region. Respondents from multinational companies in the region with familiarity have increased from three-quarters of those surveyed in 2008 to nearly nine in 10 respondents in 2020. These trends demonstrate the remarkable impact the FCPA is having on business in the region.

Perhaps more commonly used by the market, the FCPA Reference Guide provides specific guidance on what US authorities consider to be the hallmarks of a corporate anti-corruption compliance  program Of particular interest to a Spanish-speaking audience, the Guide discusses international anti-corruption legal frameworks, the jurisdictional scope of the FCPA, the elements of an FCPA violation, commonly misunderstood components such as facilitation or expediting payments, foreign government instrumentalities, and successor liability, and the particular accounting provisions of the FCPA.

For more information contact:

Jeffrey Lehtman  | Partner Miller & Chevalier | jlehtman@milchev.com