Fincrime Briefing: FinCEN AML compliance innovation update, OFAC ‘U-turn’ on Cuba, ACFCS Scholarship Spotlight, and more

In today’s ACFCS Fincrime Briefing, FinCEN fincrime compliance innovation update, OFAC makes U-turn on U-turn transactions as sanctions tighten on Cuba, ACFCS Human Trafficking Scholarship Spotlight, and more.

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FinCEN calls for compliance effectiveness in era of innovation, regulatory reform, prioritizing AML scrutiny of non-bank sectors, including crypto exchanges

The country’s administrator of anti-money laundering rules is making a critical change in tone when it comes to reviewing and grading financial institution compliance programs, further exhorting firms to bolster innovation to improve effectiveness, while conversely shifting focus to non-bank entities representing higher crypto and fincrime risks.

The emerging revelatory dynamic detailed in a recent speech by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) may potentially – and finally – allow institutions to curry more credit with federal regulators and garner more tangible rewards for creating actual timely relevant intelligence for investigators.

This system holds portent to be a major upgrade for banks creating, running and remediation AML programs.

In short, banks would get credit for concrete enhancements to compliance effectiveness – improved false positive rates, identifying linked and larger value suspicious activity reports (SARS) and partnering with banks on actual cases – rather than examiners relentlessly dinging institutions for failings in technical program compliance and missing hits on lower and medium-risk entities.

Here are some snapshots from the speech by FinCEN Deputy Director Jamal El-Hindi at the 2019 Money Transmitter Regulators Association Annual Conference.

Improving AML efficiency, effectiveness

Despite the variations in the products, there were some general themes that emerged from the discussions:

• The potential for these products to help more efficiently identify and prioritize information while reducing false positives to assist human analysis;
• The importance of training and feedback for these systems to make them more effective; and
• The potential roles that government actors can play in those training and feedback efforts.

Promoting innovation in the FinTech and RegTech context is only one aspect of reform in the anti-money laundering arena. Other areas where we are focusing our attention include:

• Working with our supervisory partners to review the examination practices for the BSA for the purpose of ensuring that examinations are sufficiently focused on effectiveness of anti-money laundering efforts in addition to technical compliance with the regulations;
• Working with law enforcement to better communicate priorities that allow financial institutions to better allocate resources to be more impactful and efficient;
• Continuing to promote the expansion of information sharing, both between government and industry and between and among financial institutions themselves, as a means of making our efforts more effective; and
• Understanding and documenting all the ways in which BSA information has value so that we can assess potential changes in our requirements based on quantifiable metrics.

Non-bank financial institution (NBFI) supervision

While the intensity of our efforts with respect to innovation and reg reform have increased over the past couple of years, our commitment to enhance supervision of NBFIs has been steady for several years. FinCEN is actively prioritizing and engaging in a number of activities with respect to NBFIs.

These include:

• conducting more FinCEN-led examinations of specialized, rapidly evolving financial services providers such as virtual currency exchangers and administrators;
• working closely with regulatory and industry partners, domestically and internationally, to identify and collate sources of valuable sector data that can bolster our analytical endeavors; and
• procuring the resources and capabilities to develop a stronger framework for risk-assessing the sector from both the compliance and illicit activity standpoints.

Culture of Compliance

An update to recent U.S. Department of Justice guidance on a Culture of Compliance:

• Financial Institution Leadership Should Be Engaged
• Compliance Should Not Be Compromised By Revenue Interests
• Information Should Be Shared Throughout the Organization
• Leadership Should Provide Adequate Human and Technological Resources
• The Program Should Be Effective and Tested By an Independent and Competent Party
• Leadership and Staff Should Understand How BSA Reports are Used, (via FinCEN).

Monroe’s Musings: This news could be great news for banks updating and upgrading AML programs. But working to innovate is just one part of the financial crime compliance oversight puzzle.

As FinCEN and federal regulators pull back in one area as part of broader regulatory reform efforts, that only means examiners are doing so to marshal resources to perceived areas at a higher risk for financial crime – or that in recent years have gotten short shrift due to examiners, particularly those overseeing non-bank operations subject to AML rules – being overwhelmed by the dozens of sectors and thousands of individual operations they must review.

Taken together, this likely means money services businesses (MSBs), money remitters, crypto currency exchanges – in particular anything in the crypto sector – will finally get the attention they deserve from an AML perspective.

So they better work on creating stronger, or any, AML programs or they could be on the receiving end of a hefty dose of formal enforcement actions or penalties.

OFAC pulls ‘U-Turn’ financial transaction exemption and restricts remittances to cuba

In a further turnabout from a more lax foreign policy related to Cuba from the prior administration, the country’s chief sanctions architect has made it more challenging for large international banks that want to do business with the United States to also engage in transactions tied to the isolated island nation – a region that had experienced a veritable renaissance in recent years of tourism and even talk of investment.

On September 6, 2019, the US Treasury Department Office of Foreign Assets Control (OFAC) announced that it is amending the Cuban Assets Control Regulations (CACR) to further financially isolate the Cuban government and implement President Trump’s June 2017 National Security Presidential Memorandum (NSPM) Strengthening the Policy of the United States Towards Cuba (the CACR Amendment).

The CACR Amendment (1) removes the authorization for banks subject to US jurisdiction to process pass-through or “U-turn” transactions, and (2) eliminates or restricts certain types of remittances to Cuba. The CACR Amendment was published in the Federal Register on September 9, 2019, and will take effect on October 9, 2019.

OFAC also published Frequently Asked Questions and a Fact Sheet on the CACR Amendment.

‘U-Turn’ Transactions

OFAC revised the “U-turn” general license provided in 31 CFR § 515.584(d). Since March 2016, the general license has authorized banking institutions subject to US jurisdiction to process “U-turn” transactions, i.e., Cuba-related funds transfers (typically in US dollars) from one non-US bank to another non-US bank where neither the originator nor beneficiary is a person subject to US jurisdiction.

Under the CACR Amendment, banks subject to US jurisdiction may no longer process “U-turn” transactions. However, they are authorized to reject such transactions and are not required to block them, (via Baker McKenzie).

Here are some snapshots from the OFAC FAQs:

OFAC currently authorizes a number of categories of remittances from persons subject to U.S. jurisdiction to persons in Cuba.

As previously noted, the September 9, 2019 rule amended certain general licenses related to specific remittance categories, including family remittances. The September 9, 2019 rule also eliminated the general license for donative remittances that was previously located at 31 CFR § 515.570(b).

Family remittances

Effective October 9, 2019 OFAC placed a cap on family remittances of $1,000 in any consecutive three-month period.

Accordingly, persons subject to U.S. jurisdiction are authorized to make remittances to nationals of Cuba who are close relatives of the remitter, provided that the remitter’s total family remittances to any one Cuban national do not exceed $1,000 in any consecutive three-month period.

In addition, the recipient may not be a prohibited official of the Government of Cuba, as defined in § 515.337 or a prohibited member of the Cuban Communist Party, as defined in § 515.338, or a close relative of such persons, as defined in § 515.339. See 31 CFR § 515.570(a) for additional applicable conditions.

Monroe’s Musings: Many banks and money remitters had shied away from Cuba in the last decade as sanctions on the recalcitrant regime tightened. But that changed as the Obama administration took a more conciliatory approach to nudge Cuba back to the negotiating table in a bid to normalize overall relations.

As a result, more individuals were allowed to travel to Cuba without fear of regulatory reprisal. The island became more popular with tourists, cruise lines and airlines, with many businesses wondering aloud if it was the right time to invest in Cuba as it ponders a shift from Communist philosophies to certain capitalist compunctions.

That, of course, has changed.

The September OFAC Cuba update, with a quickly encroaching effective date of October 9 – yes, that is less than a month away – has added some compliance complexity for banks and remitters still choosing to do limited business with Cuba.

In short, the amendments removed a general license for donations and put a cap on the total amount a family member can remit back to Cuba to $1,000 every three months.

Clearly this move dissolves many of the incentives financial institutions had for dealing with Cuba. This will be felt very painfully in South Florida, which has had a thriving Cuban community for decades with close familial ties to the Island.

This means banks that choose to keep those relationships going will need to more rigorously review individuals engaging in remittances to ensure they don’t go above the $1,000 roughly quarterly cap.

They also must update current sanctions policies and procedures to reflect that the general license for certain donations has evaporated, with banks potentially being forced to lobby for specific licenses if they have deep longstanding ties with charities in Cuba or operations in the United States engaging in charitable efforts to benefit the island.

New York finds $1 billion in hidden transfers by family behind OxyContin

The family that owns OxyContin maker Purdue Pharma used Swiss and other hidden accounts to transfer $1 billion to themselves, New York’s attorney general contends in court papers filed Friday.

New York — asking a judge to enforce subpoenas of companies, banks and advisers to Purdue and its owners, the Sackler family — said it has uncovered the previously unknown wire transfers among family members, entities they control and several financial institutions.

The transfers bolster allegations by New York and other states that the Sacklers worked to shield their wealth in recent years because of mounting worries about legal threats.

Scores of those transactions sent millions of dollars to Mortimer D.A. Sackler, a former member of Purdue’s board and a son of one of its founders, according to the filings.

They point to $20 million shifted from a Purdue parent company to Sackler, who then redirected substantial amounts to shell companies that own family homes in Manhattan and the Hamptons. Another $64 million in transfers to Sackler came from a previously unknown family trust, using a Swiss account, prosecutors said in their filing.

The filing, made in a New York court, follows decisions by that state and others to reject a tentative settlement with Stamford, Connecticut-based Purdue, announced this week, arguing it does not do enough to make amends for the company’s and family’s alleged roles in flooding U.S. communities with prescription painkillers.

A spokesperson for Mortimer D.A. Sackler called the attorney general’s contention an attempt to “torpedo a mutually beneficial settlement that is supported by so many other states and would result in billions of dollars going to communities and individuals across the country that need help.”

The transfers were “perfectly legal and appropriate in every respect,” the spokesperson said.

As part of the settlement, Purdue is likely to soon file for bankruptcy protection.

But New York and other states have promised they will continue to pursue the Sacklers, alleging that family members drained more than $4 billion from the company over the past dozen years. The family has used a complex chain of companies and trusts to control their holdings, some located in offshore tax havens.

The Sacklers had an estimated net worth of $13 billion as of 2016, making them America’s 19th-richest family, according to Forbes magazine, (via AP).

Monroe’s Musings: This story is fascinating and has financial crime compliance tethers aplenty, even though formal charges are still being duked out in court.

At issue: How and why did the company make these alleged money transfers and did the banks involved notice that and file related customer transaction reports (CTRs) and suspicious activity reports (SARs).

Now, mind you, banks may have not filed SARs going back several years, but that scrutiny should have changed more recently as the family is known to be tied to big pharma and the negative news should have primed banks to be on the lookout for large, suspicious transfers indicative of secreting wealth away in anticipation of a settlement or bankruptcy – or in this case both.

The various familial financial transfers could later be linked to fraud or corruption depending on the evidence at hand, precursor crimes that would come with telltale transactional red flags, issues that fall squarely on the shoulders of anti-money laundering compliance professionals.

Scholarship Spotlight: Stronger bank information sharing, public-private partnerships key to countering human trafficking, says Rosie McWhorter

Trying to counter a crime as complex and nuanced as human trafficking – with criminal networks in recent years more aggressively weaving transactions in crypto coins and dispersing them through seemingly unconnected credit and prepaid cards and bank accounts – is a team effort, says Rosie McWhorter.  

As a senior anti-money laundering (AML) investigator for Capital One’s Special Investigations Unit, the Dallas resident has dedicated herself to learning the latest transactional red flags of trafficking operations, and the expanding array of businesses they can hide behind, to better teach her own team at the financial services company and share those best practices with other institutions and law enforcement.  

For McWhorter, her focus on human trafficking under the ambit of the over-arching AML program is the culmination of more than 15 years working in financial services, mostly in investigations roles, where she has been voraciously gathering expertise on a broad array of financial crimes, including fraud, identity theft, sanctions, terror financing and others.  

It was for those and many other reasons ACFCS chose McWhorter as one of the recipients of the association’s inaugural Human Trafficking Scholarship Program.

The selection process centered on individuals in roles combating human trafficking, an effort to share broad thought leadership on the issue as part of the association’s “Quarterly Focus” on human trafficking from April through June of this year.

The scholarship offers complimentary registration for the Certified Financial Crime Specialist (CFCS) certification, the full suite of prep materials, and a year of membership in ACFCS.

After receiving more than 130 applications from professionals across 20 countries, ACFCS selected 15 recipients of its scholarship program. To view an ACFCS human trafficking resource page, click here.

ACFCS in the current quarter has a focus on crime and compliance around cryptocurrencies. To read more about the crypto initiative and find a list of useful resources, click here. 

Those chosen for these scholarships submitted applications with compelling professional and often personal experience related to human trafficking – from running investigations and creating transaction monitoring rules, to advocating for legislation and working directly with survivors.

To learn more about how McWhorter uses her passion and position to counter criminals, read the full Scholarship Spotlight here.