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AUGUST 2014 SUMMARY Volume 1, Issue 6


BuckleySandler's Financial Crimes practice group is pleased to produce this monthly newsletter. Whether read alone or in conjunction with the monthly financial crimes webinar series, it is our intention to provide a forum in which industry leading practices can be discussed and enhanced.  

IN THIS ISSUE:

BuckleySandler Opens London Office | Upcoming FinCrimes Webinar: FinCEN's Proposed Rule Amending Customer Due Diligence Obligations  |  BSA/AML & OFAC  |  Virtual Currency & Payment Systems  |  FCPA & Anti-Corruption  |  Criminal Enforcement


BUCKLEYSANDLER OPENS LONDON OFFICE

The Firm is pleased to announce the opening of its first international office, located in London. Click here to learn more.
 

UPCOMING FINCRIMES WEBINAR: FinCEN's Proposed Rule Amending Customer Due Diligence Obligations

Please join BuckleySandler and distinguished panelists on Thursday, September 18 from 12:00 to 1:30 pm as we discuss the following topics:
  • How will the proposed rule, if finalized in its current form, impact client acceptance (CIP) and ongoing KYC obligations?
  • What is the anticipated impact of the rules from a governance standpoint on the oversight responsibilities of boards of directors and senior management?
  • What should all financial institutions be doing now to prepare for the rules anticipated onset date?
  • What is the anticipated regulatory oversight impact on large/small financial institutions, and domestic/international financial institutions?
Panelists:
  • Sarah K. Runge, Director, Office of Strategic Policy, Terrorist Financing and Financial Crimes, U.S. Department of the Treasury
  • James Cummans, Vice President of BSA/AML Operations, TCF Bank
  • Jacqueline Seeman, Managing Director, Global Head of KYC, Citigroup, Inc.
  • Amy Davine Kim, Counsel, BuckleySandler LLP
  • James Parkinson, Partner, BuckleySandler LLP (moderator)
When: Thursday, September 18, 2014 from 12:00 to 1:30 pm EST

Complimentary registration: https://www1.gotomeeting.com/register/806337400
Registration required. Please no outside law firms, government agency personnel, consulting firms, or media. After registering and being approved, you will receive a confirmation email containing instructions for joining the webinar.   

BSA/AML & OFAC:

FINCEN PUBLISHES LONG-AWAITED PROPOSED CUSTOMER DUE DILIGENCE REQUIREMENTS
On August 4, 2014, FinCEN published a Notice of Proposed Rulemaking (NPRM) that would amend existing Bank Secrecy Act regulations intended to clarify and strengthen customer due diligence (CDD) obligations for banks, securities broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities. Under the NPRM, covered financial institutions would be obligated to collect information on the natural persons behind legal entity customers (beneficial owners) and the proposed rule would make CDD an explicit requirement. If adopted the NPRM would amend FinCEN’s AML program rule (the four pillars) by making CDD a fifth pillar. Comments on the proposed rulemaking are due October 3, 2014. Click here to view BuckleySandler's Special Alert.
 
FINCEN RULES REGULATIONS ON MONEY SERVICES BUSINESSES DO NOT APPLY TO ISOS AND EXEMPT PAYMENT PROCESSORS
On August 27, FinCEN issued FIN-2014-R009, an administrative ruling clarifying that Independent Sales Organizations (ISOs) and exempt payment processors are not money transmitters subject to Bank Secrecy Act regulations applicable to Money Services Businesses (MSBs). Under BSA MSB regulations, the term “money transmitter” applies to any person that provides money transmission services or otherwise engages in the transfer of funds. The term “money transmission services” includes the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. Applying these standards, FinCEN determined that BSA MSB regulations do not apply to an ISO, so long as it: (i) merely solicits merchants to offer them the credit and debit card processing services of two counterparties; and (ii) does not take possession or control of merchant funds at any point. However, FinCEN concluded that BSA MSB regulations will apply to a payment processor unless the payment processor qualifies for the payment processor exemption established by 31 CFR § 1010.100(ff)(5)(ii)(B) and clarified by FIN-2013-R002. Under this exemption, BSA MSB regulations do not apply to a payment processor, so long as it: (i) facilitates the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself); (ii) operates through clearance and settlement systems that admit only BSA-regulated financial institutions; (iii) provides its services pursuant to a formal agreement; and (iv) the agreement itself is at a minimum with the seller or creditor that provides the goods or services and receives the funds.
 
FINCEN PERMANENTLY BARS CASINO OFFICIAL OVER BSA VIOLATIONS
On August 20, FinCEN announced an action against a casino employee who admitted to violating the Bank Secrecy Act by willfully causing the casino to fail to file certain reports. FinCEN asserted based in part on information obtained from an undercover investigation that the employee helped high-end gamblers avoid detection of large cash transactions by agreeing not to file either Currency Transaction Reports or Suspicious Activity Reports as required under the BSA. FinCEN ordered the employee to pay a $5,000 civil money penalty, and immediately and permanently barred him from participating in the conduct of the affairs of any financial institution located in the U.S. or that does business within the U.S.
 
NEW YORK SANCTIONS BANK FOR ALLEGED FAILURE TO COMPLY WITH PRIOR AML SETTLEMENT
On August 19, the New York DFS announced a consent order with a British bank to resolve claims that the bank and its U.S. subsidiary failed to remediate AML compliance deficiencies as required by a prior settlement with the DFS that required the bank to, among other things, implement a transaction monitoring program. The DFS states that the compliance monitor appointed as part of the prior agreement determined that the procedures adopted by the bank to detect high-risk transactions contained errors and other problems that prevented the bank from identifying high-risk transactions for further review. The DFS asserts that the bank failed to detect these problems because of a lack of adequate testing both before and after implementation of the monitoring system. The DFS also claims the bank failed to properly audit its monitoring system. Under the latest consent order, the bank must: (i) suspend its dollar clearing operations for high-risk retail business clients of the bank’s Hong Kong subsidiary; (ii) obtain prior DFS approval to open a U.S. Dollar demand deposit account for any customer who does not already have such an account with the U.S. entity; and (iii) pay a $300 million penalty. The bank also must implement additional compliance enhancements, including enhanced due diligence and know-your customer requirements.

NEW YORK ANNOUNCES LATEST ACTION AGAINST A BANK CONSULTING FIRM
On August 18, the New York DFS announced an agreement with a bank consulting firm to resolve allegations related to certain services it performed for a bank charged last year with sanctions violations. The consulting firm allegedly altered an historical transaction review (HTR) report submitted to regulators regarding wire transfers that the bank completed on behalf of sanctioned countries and entities. At the bank’s request, the firm allegedly removed from the original HTR report key information and warning language concerning the bank’s transactions. Specifically, the DFS alleges that the firm: (i) removed the English translation of the bank’s wire stripping instructions; (ii) removed a regulatory term to describe the wire-stripping instructions and a discussion of the activities; and (iii) deleted “several forensic questions” that the firm identified as necessary for consideration in connection with the HTR report. The agreement prohibits the firm from doing business with any DFS-regulated institution for two years and requires the firm to: (i) pay a $25 million penalty; and (ii) implement certain reforms to address the conflicts of interest within the consulting industry. Those reforms are based on a similar agreement obtained by the DFS last year from another consulting firm.
 
FINRA CHARGES FIRM WITH AML AND SYSTEMATIC MARKET ACCESS VIOLATIONS
On August 18, FINRA announced a complaint against a financial services and investment firm, alleging that the firm was responsible for systematic supervisory and AML violations in connection with providing direct market access and sponsored access to broker-dealers and non-registered market participants. Specifically, FINRA claims that from January 2008 through August 2013, the firm failed to “ensure appropriate risk management controls and supervisory systems and procedures,” thereby allowing its market access customers to “self-monitor and self-report” possibly manipulative trades. Moreover, FINRA asserts that during the relevant time period, the firm was made aware of these potential regulatory and compliance risks though numerous industrywide notices, disciplinary decisions taken against other industry participants, and multiple self-regulatory organization inquiries and examinations. The firm may request a hearing before the FINRA disciplinary committee. If FINRA’s charges stand, the firm could face suspension, censure, and/or monetary penalties.

FINCEN ADVISORY URGES INSTITUTIONS TO PROMOTE CULTURE OF COMPLIANCE
On August 11, FinCEN issued Advisory FIN-2014-A007 to provide guidance regarding BSA/AML compliance programs. Specifically, the guidance recommends that institutions create a “culture of compliance” by ensuring that: (i) leadership actively supports and understands compliance efforts; (ii) efforts to manage and mitigate BSA/AML deficiencies and risks are not compromised by revenue interests; (iii) relevant information from the various departments within the organization is shared with compliance staff to further BSA/AML efforts; (iv) the institution devotes adequate resources to its compliance function; (v) the compliance program is effective by, among other things, ensuring that it is tested by an independent and competent party; and (vi) leadership and staff understand the purpose of the institution’s BSA/AML efforts. The guidance follows numerous public remarks by FinCEN Director Jennifer Shasky Calvery and other financial regulators and enforcement authorities calling for stronger compliance cultures, particularly with regard to BSA/AML compliance. Director Shasky Calvery reinforced that message in an August 12, 2014 speechin which she asserted that, in the enforcement matters she has seen, a culture of compliance “could have made all the difference.” In the same speech, Ms. Shasky Calvery criticized—as Comptroller of the Currency Thomas Curry also did earlier this year—financial institutions which may be “de-risking” by preventing certain categories of businesses from accessing banking services. She stressed that “just because a particular customer may be considered high risk does not mean that it is ‘unbankable’,” and called on banks to develop programs to manage high risk customer relationships.
 
FINCEN ADVISORY UPDATES FATF AML/CFT DEFICIENT JURISDICTIONS LIST
On August 5, FinCEN issued an advisory, FIN-2014-A006, which provides guidance to financial institutions for reviewing their obligations and risk-based approaches with respect to certain jurisdictions. The Financial Action Task Force (FATF) recently updated its lists of jurisdictions that appear in two documents: (i) jurisdictions that are subject to the FATF’s call for countermeasures or Enhanced Due Diligence as a result of the jurisdictions’ Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) deficiencies; and (ii) jurisdictions identified by the FATF as having  AML/CFT deficiencies. The advisory notice (i) summarizes the changes made by the FATF; (ii) provides specific guidance regarding jurisdictions listed in each category including when Enhanced Due Diligence is required; and (iii) reiterates that if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution must file a Suspicious Activity Report.
 
FINCEN ENHANCES OVERSIGHT OF CROSS-BORDER CASH MOVEMENT
On August 1, FinCEN and its Mexican counterpart announced a series of reporting initiatives designed to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement’s concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services (ACS) and other common carriers of currency, FinCEN issued a Geographic Targeting Order (GTO) that requires enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California. FinCEN also issued updated guidance concerning detailed and proper filing of Currency and Monetary Instruments Reports (CMIRs), which are filed when $10,000 or more in currency is moved across the U.S. border.
 
FREDDIE MAC IMPLEMENTS FINCEN AML RULES
On August 14, Freddie Mac issued Bulletin 2014-15, which reminds seller/servicers subject to the AML requirements of the BSA that they are expected to maintain an AML compliance program and are required to report to Freddie Mac any instances of AML program noncompliance. Effective October 1, 2014, Freddie Mac is also requiring seller/servicers not subject to the AML provisions of the BSA to develop internal controls and policies and procedures to detect and report Suspicious Activity to Freddie Mac (but without the requirement to file SARs).
   

VIRTUAL CURRENCY & PAYMENT SYSTEMS:

FEDERAL DISTRICT COURT IN TEXAS HOLDS THAT BITCOIN INVESTMENTS ARE SECURITIES
On August 26, the U.S. District Court for the Eastern District of Texas held that the Bitcoin investments at issue are “investment contracts” and “securities” within the meaning of the Securities Act of 1933 and the Exchange Act of 1934. S.E.C. v. Shavers, et al., No. 4:13-CV-416, (E.D. Tex. Aug. 26, 2014). The Court found that the Bitcoin investments in the case satisfy the “investment of money” prong established by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946), because Bitcoin has a measure of value, can be used as a form of payment, and is used as a method of exchange. The essence of an investment contract, the court reasoned, was the contribution of an exchange of value, rather than “money” in the narrow sense of legal tender only. The SEC alleged that the Defendants made a number of solicitations aimed at enticing lenders to invest in Bitcoin-related investment opportunities. The Court granted the Defendants’ motion to reconsider its prior decision on subject-matter jurisdiction, but denied the Defendants’ motion to dismiss for lack of subject-matter jurisdiction.
 
FEDERAL DISTRICT COURT IN NEW YORK HOLDS BITCOIN IS MONEY
On August 19, the U.S. District Court for the Southern District of New York found that Bitcoin is “money” in a memorandum order denying a defendant’s motion to dismiss a federal money laundering charge. Faiella et al. v. United States, No. 14-cr-243 (JSR), 2014 WL 4100897 (S.D.N.Y. Aug. 19, 2014). The defendant is a former Bitcoin exchange owner who was charged in 2013 with unlawfully operating an unlicensed money transmitting business. In his motion before the court, the defendant argued that the charge should be dismissed because Bitcoin is not “money” within the meaning of the statute. The court disagreed, relying upon the dictionary definition of “money” to conclude that Bitcoin “clearly qualifies as ‘money’” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” The court additionally relied on Congress’ intent that anti-money laundering statutes keep pace with evolving threats, and also cited an opinion from a similar case in the U.S. District Court for the Eastern District of Texas that concluded Bitcoin can be used as money. SEC v. Shavers, No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013).
 
CFPB ANNOUNCES TWO ACTIONS RELATED TO VIRTUAL CURRENCIES
On August 11, the the CFPB issued a “consumer advisory” concerning virtual currency and also announced that it would begin accepting consumer complaints about virtual currency or virtual currency companies. These actions are the consumer agency’s first foray into virtual currencies, and they follow a recentGAO report that recommended the CFPB play a larger role in the development of federal virtual currency policy. Read more…
   

FCPA & ANTI-CORRUPTION

FEDERAL APPEALS COURT AFFIRMS DODD-FRANK WHISTLEBLOWER PROTECTIONS DO NOT APPLY OUTSIDE U.S.
On August 14, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s holding that the Dodd-Frank Act’s antiretaliation provision does not apply extraterritorially. Liu Meng-Lin v. Siemens AG, No. 13-4385, 2014 WL 3953672 (2nd Cir. Aug. 14, 2014). A foreign worker was allegedly fired by his foreign employer for internally reporting violations of U.S. anti-corruption rules, which he claimed violated the antiretaliation provision of the Dodd-Frank Act. This provision prohibits an employer from firing or otherwise discriminating against any employee who makes a disclosure that is required or protected under Sarbanes-Oxley or any other law, rule, or regulation subject to the SEC’s jurisdiction. The court first determined that the facts alleged in the complaint revealed “essentially no contact with the United States” and rejected an argument that the foreign company voluntarily subjected itself to U.S. securities laws by listing its securities on the New York Stock Exchange. The court also held that, given the longstanding presumption against extraterritoriality and the absence of any “explicit statutory evidence that Congress meant for the provision to apply extraterritorially,” the cited provision does not apply to purely foreign-based claims.

TERRA TELECOMMUNICATIONS EXECUTIVES PETITION SUPREME COURT
On August 14, two former Terra Telecommunications Corp. executives convicted of FCPA and related offenses petitioned the U.S. Supreme Court for certiorari review of the U.S. Court of Appeals for the Eleventh Circuit’s definition of “instrumentality” under the FCPA.  In May, the Eleventh Circuit upheld the former executives’ conviction under the FCPA and defined “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  As a consequence of this definition, the Eleventh Circuit deemed an employee of a partially state-owned Haitian telephone company to be a “foreign official” for purposes of the FCPA.  In asking for certiorari review and in citing reasons to grant the petition, the former executives focused on the absence of a definition of “instrumentality” of a foreign government within the FCPA, which, according to petitioners, has resulted in persistent questions about the correct interpretation of the term.  The petitioners faulted the Eleventh Circuit for applying “an unacceptably broad interpretation of the term ‘instrumentality’ that expands the reach of” the FCPA.   In so doing, the former executives described the Eleventh Circuit’s reasoning as “illogic[al]” and under “its statutory construction, a janitor working for U.S. Government-subsidized General Motors could qualify as a ‘foreign official’ if General Motors were located overseas.”  According to published reports, this is believed to be the first substantive FCPA cert petition in the history of the FCPA.  In addition, the Supreme Court has never substantively addressed any FCPA issue.
 
COBALT INTERNATIONAL ENERGY TARGETED IN SEC FCPA INQUIRY
Houston-based Cobalt International Energy, Inc. said in an August 5, 2014 securities filingthat it received a Wells Notice in connection with the Securities and Exchange Commission’s investigation of its oil-exploration operations in Angola. The Company stated in its filing that due to the SEC’s investigation and recommendation, it may be “exposed to liabilities under the U.S. Foreign Corrupt Practices Act.” Wells Notices indicate that the staff of the SEC has made a preliminary determination to recommend an enforcement action alleging violations of certain federal securities laws. According to Cobalt’s 2013 10-K filing, the SEC first began an informal inquiry of the company in March 2011 which was later joined by the Department of Justice. In April 2012, as first reported by the Financial Times, allegations surfaced that three Angolan officials, including the head of the country’s state-owned oil company and two military generals, held shares in Nazaki Oil and Gáz, the local partner in a Cobalt-led deepwater oil venture launched in early 2010. The government officials admitted owning shares in the joint venture but denied using their influence to award Cobalt oil-exploration rights in Angola. The company has previously “strongly refuted” allegations of wrongdoing and has said it was forced to enter into a joint venture with two Angolan-based oil exploration and production companies as part of its deal with the Angolan government.
 
FOUR SENTENCED IN UNITED KINGDOM FOR ROLE IN INNOSPEC MATTER
On August 4, 2014, the United Kingdom’s Serious Fraud Office announced that four former executives of Innospec Inc. (formerly known as Associated Octel Corp.) were sentenced following a long-running investigation related to conduct in in Indonesia and Iraq.  Three of the four were sentenced to prison terms, with a former chief executive receiving four years in prison after being convicted at a jury trial earlier this year.  A former regional sales director received an 18 month sentence following a conviction at trial, and another former CEO was sentenced to two years following a guilty plea.  The fourth individual, a former business unit director, received a suspended 16-month sentence following a guilty plea.
The sentencing of these former executives comes after Innospec pled guilty in 2010 to FCPA and anti-bribery criminal charges brought by DOJ and the UK’s Serious Fraud Office, and after Innospec settled civil charges brought by the SEC.  The charges alleged that Innospec, a global specialty chemicals company, had bribed Indonesian and Iraqi government officials to win sales of a gasoline additive after environmental legislation in the US and abroad led to a decline in sales of that additive.  As part of the settlement, Innospec paid U.S. authorities $27.5 million, and paid UK authorities $12.7 million.  Two of the four individuals sentenced in the UK had also previously settled with the SEC over civil FCPA charges.
 
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CRIMINAL ENFORCEMENT:
MANHATTAN DISTRICT ATTORNEY INDICTS PAYDAY LENDERS
On August 12, Manhattan District Attorney (DA) Cyrus Vance, Jr. announced the indictment of twelve payday lending companies and related individuals for allegedly engaging in criminal usury by making high interest payday loans to Manhattan residents. According to the DA’s press release, between 2001 and 2013, one of the indicted individuals allegedly created multiple companies, including establishing one as a website and offshore corporation, to accept and process online applications for payday loans. The DA also indicted the payday lending business’ chief operating officer and legal counsel. The DA charged the defendants with 38 counts of felony first degree criminal usury and one count of conspiracy in the fourth degree. The defendants are also accused of continuing to extend such loans to New York residents for years, even after, according to the DA, they had been repeatedly warned by New York State officials of the loans’ illegality.
 
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STATE AGS:
NEW YORK AG SUES BANK FOR ALLEGED REDLINING
On September 2, the NY AG sued a regional bank claiming the bank engaged in unlawful discriminatory practices by intentionally avoiding offering mortgage loan products to predominately African-American neighborhoods in Buffalo. People of the State of New York v. Evans Bancorp, Inc. et al., No. 14-cv-00726 (W.D.N.Y. Sept. 2, 2014). In the complaint, the NY AG asserts that by creating a map of its lending area in Buffalo that included most of the city and its surroundings, but excluded certain African-American neighborhoods on the city’s east side, the bank engaged in redlining in violation of the Fair Housing Act, New York state human rights law, and city code. The suit also alleges that the bank did not market its loan products to minority customers and located bank branches and ATMs outside of minority neighborhoods. The NY AG further claims that the bank’s rates of lending and receiving applications from African-American borrowers allegedly lags behind comparable banks and that these purported discriminatory effects are due to the bank’s alleged redlining practices.  The NY AG seeks injunctive relief, damages, civil penalties, punitive damages, fees and costs.  In its release announcing the lawsuit, the NY AG stated that the suit is part of ongoing investigations by the AG into potential mortgage redlining across the state.
 
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