FinCEN Cracks Down on Real Estate Secrecy

January 22, 2016

by Matthew D. Lee and Jed M. Silversmith

Law360

In yet another sign of its aggressive campaign to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network has trained its sights on the high-end real estate market in New York and Miami. With the issuance of a little-known yet incredibly powerful anti-money laundering tool called a “geographic targeting order,” FinCEN will soon require certain title insurance companies to identify the natural persons behind companies that used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County.[1] According to a press release announcing the issuance of the GTOs, FinCEN is concerned that individuals are using all-cash purchases of real estate as a mechanism to carry out money laundering, and such individuals are using limited liability companies or other opaque structures to conceal their identities in such transactions.[2] Under the terms of these GTOs, certain title insurance companies involved in all-cash real estate transactions with purchase prices exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, must report such transactions to FinCEN and, in particular, identify the “beneficial owner” of the entity used to facilitate the purchase.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act (BSA). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. GTOs are typically not made public, and generally only those businesses served with a copy of a particular are aware of its existence.

Over the course of the last 24 months, FinCEN — the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement — has exercised its authority to issue GTOs frequently throughout the United States in areas of money laundering concern. Recent GTOs have focused on shipments of cash across the border in California and Texas, the Fashion District of Los Angeles, exporters of electronics in South Florida, and check cashing businesses in South Florida. In each of these instances, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were highly susceptible to money laundering.

Prior Efforts to Prevent Money Laundering in Real Estate Transactions

For several years, FinCEN has sought to ensure financial transparency and combat illegality in the real estate market. In February 2015, the New York Times published a series of articles focused on the use of shell companies to purchase high-value real estate in New York City.[3] In a November 2015 speech, FinCEN’s director disclosed that through analysis of BSA reporting and other information, FinCEN has observed the frequent use of shell companies by international corrupt politicians, drug traffickers and other criminals to purchase luxury residential real estate in cash. FinCEN has uncovered fund transfers in the form of wire transfers originating from banks in offshore havens at which accounts have been established in the name of the shell companies. The perpetrator will direct an individual involved in the settlement and the closing in the U.S. to put the deed to the property in the name of the shell company, thereby obscuring the identity of the owner of the property.

The BSA established anti-money laundering obligations for financial institutions, including institutions involved in real estate transactions. By including these businesses in the definition of “financial institution,” Congress recognized the potential money laundering and financial crime risks in the real estate industry. In the USA Patriot Act, Congress mandated that FinCEN issue regulations requiring financial institutions to adopt AML programs with minimum requirements, or establish exemptions, as appropriate. Since that time, FinCEN has implemented AML requirements for certain real estate businesses or established exemptions for others consistent with the BSA.

One particular area of recent focus for FinCEN is seeking greater transparency in the area of beneficial ownership of corporate entities. To that end, in July 2014, FinCEN issued proposed regulations that would amend existing BSA regulations to help prevent the use of shell and shelf companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector. As proposed, the regulations would clarify and strengthen customer due diligence obligations of banks and other financial institutions, including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. The proposed amendments would add a new requirement that these entities know and verify the identities of the real people who own, control and profit from the companies they service.

In the press release announcing issuance of the two GTOs focused on real estate transactions, FinCEN Director Jennifer Shasky Calvery said that her agency was “seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money.” Calvery further explained that “[o]ver the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.” Information gathered by title insurance companies and reported to FinCEN will be utilized by federal law enforcement agencies to enhance their ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering and will combat the ability of individuals to disguise their involvement in such transactions.

Terms of the Manhattan and Miami-Dade GTOs

The latest GTOs focused on real estate transactions apply to certain title insurance companies engaging in “covered transactions,” which are defined as transactions in which (1) a legal entity (2) purchases residential real estate either in the borough of Manhattan or Miami-Dade County (3) for a total purchase price of excess of $3 million (Manhattan) or $1 million (Miami-Dade) (4) without a bank loan or other similar form of external financing and (5) using, at least in part, currency or a cashier’s check, certified check, traveler’s check, or money order. “Legal entity” is defined as a corporation, limited liability company, partnership or other similar business entity, whether domestic or foreign.

If a title insurance company is engaged in a transaction that meets all of the requirements for a “covered transaction,” the title insurance company must report said transaction to FinCEN within 30 days of the closing using a designated form titled “FinCEN Form 8300.” On the Form 8300, the title insurance company must identify (1) the purchaser; (2) the purchaser’s representative, if any; and (3) the beneficial owner, which is defined as each natural person who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The title insurance company must obtain and copy the driver’s license, passport or other similar identification for each beneficial owner. The title insurance company must retain all records relating to the GTO for at least five years and make such records available to FinCEN or any other law enforcement or regulatory agency upon request.

The Manhattan and Miami-Dade GTOs take effect on March 1, 2016, and remain effective until Aug. 27, 2016, unless extended by subsequent order of the FinCEN director. Each title insurer subject to the GTO is required to supervise, and is responsible for, compliance by each of its officers, directors, employees and agents. The title insurance company must transmit a copy of the GTO to each of its agents, and must also transmit a copy to its chief executive officer or similarly acting manager. Any title insurance company, and any of its officers, directors, employees and agents, may be held liable for civil or criminal penalties for violating any terms of the GTO.

Implications of FinCEN’s Latest GTOs

Title insurance companies handling transactions occurring in Manhattan or Miami-Dade County must immediately familiarize themselves, and their employees and agents, with the obligations imposed by these latest GTOs. Title insurance companies would be well-advised to implement training programs so that they are prepared to address these new compliance obligations when they take effect on March 1, 2016. Companies that fail to comply with the reporting and record-keeping requirements of these GTOs may face civil or criminal penalties. While the terms of each GTO currently last for only six months, FinCEN will likely extend the duration of each GTO for additional six months, and may even make them permanent through further regulatory action. Finally, depending upon the quality of the information reported to FinCEN by title companies in Manhattan and Miami, FinCEN may well determine to expand the geographic reach of these orders to other parts of the United States.

Footnotes:

[1] The Manhattan GTO is available here: https://www.fincen.gov/news_room/nr/files/Real_Estate_GTO-NYC.pdf. The Miami-Dade GTO is available here: https://www.fincen.gov/news_room/nr/files/Real_Estate_GTO-MIA.pdf.

[2] FinCEN’s press release dated Jan. 13, 2016, is available here: https://www.fincen.gov/news_room/nr/html/20160113.html.

[3] See “Towers of Secrecy,” The New York Times, Feb. 8-12, 2015, available at: http://www.nytimes.com/2015/02/08/nyregion/the-hidden-money-buying-up-new-york-real-estate.html?_r=0.


“FinCEN Cracks Down on Real Estate Secrecy,” by Matthew D. Lee and Jed M. Silversmith was published in Law360 on January 22, 2016. To read the article online, please click here.

FinCEN Cracks Down on Real Estate Secrecy in Manhattan and Miami

In yet another indication of its aggressive efforts to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) today issued another Geographic Targeting Order (GTO), this time targeting the luxury real estate market in New York and Miami.  The GTO reflects the government’s concerned that criminals are laundering proceeds of criminal activity through cash purchases of expensive real estate.  This latest GTO will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in Manhattan and Miami-Dade County.  FinCEN has used its powers to issue GTOs frequently in the past 24 months throughout the United States, including at the Texas and California borders (prior coverage here); the Fashion District of Los Angeles (prior coverage here); exporters of electronics in South Florida (prior coverage here); and check cashers in South Florida (prior coverage here).  In a subsequent post we will present more detailed analysis of this latest GTO.

The text of the FinCEN’s press release announcing today’s GTO follows:

FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami

 “Geographic Targeting Orders” Require Identification for High–End Cash Buyers

 WASHINGTON – The Financial Crimes Enforcement Network (FinCEN) today issued Geographic Targeting Orders (GTO) that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida. FinCEN is concerned that all-cash purchases – i.e., those without bank financing – may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. To enhance availability of information pertinent to mitigating this potential money laundering vulnerability, FinCEN will require certain title insurance companies to identify and report the true “beneficial owner” behind a legal entity involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.

 With these GTOs, FinCEN is proceeding with its risk-based approach to combating money laundering in the real estate sector. Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with the money laundering vulnerabilities associated with all-cash real estate transactions. This includes transactions in which individuals use shell companies to purchase high-value residential real estate, primarily in certain large U.S. cities.

 “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” said FinCEN Director Jennifer Shasky Calvery. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”

 Under specific circumstances, the GTOs will require certain title insurance companies to record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing. They will report this information to FinCEN where it will be made available to law enforcement investigators as part of FinCEN’s database.

 The information gathered from the GTOs will advance law enforcement’s ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering. This would mitigate the key vulnerability associated with these transactions – the ability for individuals to disguise their involvement in the purchase.

 FinCEN is covering certain title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern. The GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies. To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.

 The GTOs will be in effect for 180 days beginning on March 1, 2016. They will expire on August 27, 2016.

 Any questions about the Orders should be directed to the FinCEN Resource Center at 800-767-2825.

 ###

 FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

 

FinCEN Renews South Florida Geographic Targeting Order

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has announced that it is extending its Geographic Targeting Order (GTO) focused on trade-based money laundering schemes in South Florida. When the GTO was originally announced, FinCEN stated that it was investigating trade-based money laundering schemes used by drug cartels, including Sinaloa and Los Zetas, to launder illicit proceeds through businesses in South Florida. (See prior coverage here and here.)  FinCEN stated that the GTO was originally served on about 700 electronics exporters in and around Miami. An ongoing criminal investigation conducted jointly by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and the Miami Dade State Attorney’s Office South Florida Money Laundering Strike Force revealed that many electronics exporters are exploited as part of sophisticated trade-based money laundering schemes in which drug proceeds in the United States are converted into goods that are shipped to South America and sold for local currency, which is ultimately transferred to drug cartels.

A GTO is an order issued by the United States secretary of the Treasury requiring all domestic financial institutions that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act in 31 U.S.C. § 5326(a). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days.

In general, a nonfinancial trade or business that receives more than $10,000 in currency in a single transaction, or multiple related transactions, is required to file a Form 8300 with FinCEN. The Miami GTO lowers the $10,000 reporting threshold to $3,000 for covered businesses. These businesses are required to report to FinCEN currency transactions over $3,000, and to include in those reports information about the transaction and the persons involved. Each business covered under this GTO received notice of its obligations via personal service or by certified mail. Failure to comply could result in substantial criminal and civil penalties.

The Miami GTO was effective beginning on April 28, 2015, and was set to expire on Oct. 25, 2015, but has now been extended for an additional 180 days, through April 23, 2016. The GTO provides that its requirements apply to a “covered business,” which refers to any trade or business that exports electronics (including cell phones), and any of its agents, subsidiaries and franchisees, within the following U.S. zip codes: 33172; 33178; 33166; 33122 and 33126.

If, in the course of its trade or business, a business covered by the GTO receives currency in excess of $3,000 in one transaction (or two or more related transactions), then the business must report the transaction by filing a FinCEN Form 8300. For purposes of this GTO, “currency” means: (1) the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued, or (2) a cashier’s check (by whatever name called, including “treasurer’s check” and “bank check”), bank draft, traveler’s check or money order.

A covered business receiving more than $3,000 in currency must identify the customer involved in the transaction by obtaining a telephone number and one form of valid identification. The business must also determine whether the customer is conducting the transaction on behalf of a third party, by obtaining a written certification identifying whether such a third party is involved and, if so, the identity of such third party. In addition, when a covered business files a FinCEN Form 8300 to report a transaction, it must also include the following information in the comments section of the form: (1) a description of the goods involved in the covered transaction; (2) the name and phone number of the person receiving such goods; and (3) the address to which such goods are being shipped.

The GTO provides that a covered business must supervise, and is responsible for, compliance by each of its officers, directors, employees, agents, subsidiaries and franchisees with the terms of this order. In addition, a covered business must notify each of its officers, directors, employees, agents, subsidiaries and franchisees of the terms of the GTO, and must transmit the order to its chief executive officer. The GTO further provides that a covered business and any of its officers, directors, employees or agents may be liable, without limitation, for civil or criminal penalties for violating any of the terms of the GTO.

In a press release announcing the original issuance of the Miami GTO, FinCEN’s director, Jennifer Shasky Calvery, stated that “[w]hen we issued a similar GTO in the Los Angeles area last year, many speculated about whether we’d be doing the same in other parts of the country. We are committed to shedding light on shady financial activity wherever we find it. We will continue issuing GTOs, as necessary, as well as exercising FinCEN’s other unique anti-money laundering authorities, to ensure a transparent financial system that impedes money launderers and other criminals from masking their identity and illicit activity.”

The Miami GTO was the third publicly announced GTO issued by FinCEN since August 2014. Most recently, FinCEN announced a GTO covering check cashers in the Florida counties of Miami-Dade and Broward from August 3, 2015, through January 30, 2016.  (See prior coverage here.) Check cashers will have to obtain at the time of the check-cashing transaction: (1) a copy of the customer’s identification (which must evidence nationality or residence and include a photograph); (2) a digital photograph of the customer (surveillance video is insufficient for this requirement); (3) the customer’s phone number; and, (4) the customer’s thumbprint on the check. This GTO is meant to assist in combating stolen identity tax refund fraud, which has increased in South Florida. This crime involves filing a fraudulent tax return using a stolen identity and then cashing the refund check also using fake identification.

In October 2014, as part of a probe by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations targeting alleged money laundering activities in Los Angeles’ garment trade, FinCEN announced the issuance of a GTO that imposed additional reporting and record-keeping obligations on certain businesses located within the city’s fashion district. (See prior coverage here.) Businesses covered under the Los Angeles GTO include garment and textile stores, transportation companies, travel agencies, perfume stores, electronic stores (including those that only sell cell phones), shoe stores, lingerie stores, flower/silk flower stores, beauty supply stores, and stores bearing “import” or “export” in their name. The order took effect Oct. 9 and remained in effect for 180 days. In February 2015, the GTO was extended for an additional 180 days.

Working in close coordination with its Mexican counterpart, the Unidad de Inteligencia Financiera (UIF), FinCEN announced issuance of a GTO in August 2014 that covered the U.S.-Mexico border at two California ports of entry. The purpose of this GTO was to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services and other common carriers of currency, the GTO required enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California.

These recent GTOs described above demonstrate an increased attention to trade-based money laundering schemes by FinCEN and confirm that criminals are aggressively using legitimate U.S. businesses to launder the proceeds of their illegal activity. The GTOs issued in Miami, Los Angeles, and the San Ysidro and Otay Mesa Ports of Entry are presumably yielding a significant amount of information and data that FinCEN will then share with other federal law enforcement agencies in order to prosecute money launderers. Businesses that operate in any of the areas targeted by these three GTOs—electronics exporters, the fashion and garment industry, armored car services and common carriers—should be vigilant to the indicators of trade-based money laundering and take steps to ensure that cash transactions are properly documented and suspicious activity is reported.

FinCEN Announces Another Geographic Targeting Order

South Florida check cashers will soon be required to obtain additional identifying information about customers cashing federal tax refund checks over $1,000. The Financial Crimes Enforcement Network issued another Geographic Targeting Order on Monday that will apply to check cashers in Miami-Dade and Broward counties from August 3, 2015 through January 30, 2016. Check cashers will have to obtain at the time of the check-cashing transaction: (1) a copy of the customer’s identification (which must evidence nationality or residence and include a photograph); (2) a digital photograph of the customer (surveillance video is insufficient for this requirement); (3) the customer’s phone number; and, (4) the customer’s thumbprint on the check. This GTO is meant to assist in combating stolen identity tax refund fraud, which has increased in South Florida. This crime involves filing a fraudulent tax return using a stolen identity and then cashing the refund check also using fake identification. Requiring check cashers to obtain this additional information (and keep it until at least January 30, 2021) will assist authorities in prosecuting these crimes.

FinCEN’s announcement can be found here.

The order is available here.

Recent Actions Confirm FinCEN’s Aggressive Anti-Money Laundering Enforcement Agenda

July 2015

Matthew D. Lee

Financier Worldwide Magazine

Blank Rome Partner Matthew D. Lee recently authored an article for the July 2015 edition of Financier Worldwide Magazine, “Recent Actions Confirm FinCEN’s Aggressive Anti-Money Laundering Enforcement Agenda.”

The publicly stated mission of the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is to safeguard the US financial system from illicit use, and combat money laundering and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities. Historically viewed as primarily a data-gathering agency, FinCEN has recently advanced a significantly more aggressive enforcement agenda aimed at combating trade-based money laundering, money laundering through real estate transactions, the use of third-party money launderers, and money laundering through use of virtual currency. In each of these areas, FinCEN’s latest actions confirm that the agency intends to take a far more aggressive approach to enforcement and will exercise its authority, where warranted, to impose substantial penalties and sanctions on wrongdoers.

To read the full article, please click here.

“Recent Actions Confirm FinCEN’s Aggressive Anti-Money Laundering Enforcement Agenda,” by Matthew D. Lee was published in the Financier Worldwide Magazine July 2015 Issue.

FinCEN Announces First Civil Enforcement Action Against Virtual Currency Exchanger

Continuing its aggressive anti-money laundering enforcement agenda, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced yesterday that it had commenced the first-ever civil enforcement action against a virtual currency exchanger.  FinCEN announced that it had assessed a $700,000 civil money penalty against Ripple Labs Inc. and its wholly-owned subsidiary, XRP II, LLC.  Ripple is the second largest cryptocurrency by market capitalization, after Bitcoin.

FinCEN found that Ripple Labs willfully violated multiple provisions of the Bank Secrecy Act by acting as a money services business (MSB) and selling its virtual currency known as XRP.  Ripple Labs failed to register with FinCEN as a MSB and failed to implement and maintain an adequate anti-money laundering program designed to protect its products from use by money launderers or terrorist financiers.  Ripple Labs’ subsidiary, XRP II, also willfully violated the BSA by failing to implement an effective AML program and by failing to report suspicious activity related to several financial transactions.  Ripple Labs and XRP II agreed with FinCEN’s conclusions and consented to imposition of the civil money penalty.  In a companion civil settlement with the U.S. Attorney’s Office for the Northern District of California, Ripple Labs agreed to forfeit $450,000 and avoided criminal prosecution.

In a Statement of Facts and Violations released as part of the settlement documents, and agreed to by Ripple Labs and XRP II, FinCEN and U.S. Attorney’s Office described the following suspicious transactions that were not properly reported:

On September 30, 2013, XRP II negotiated an approximately $250,000.00 transaction by email for a sale of XRP virtual currency with a third-party individual. XRP II provided that individual with a “know your customer” (“KYC”) form and asked that it be returned along with appropriate identification in in order to move forward with the transaction. The individual replied that another source would provide the XRP virtual currency and did not “require anywhere near as much paperwork” and essentially threatened to go elsewhere. Within hours, XRP II agreed by email to dispense with its KYC requirement and move forward with the transaction. Open source information indicates that this individual, an investor in Ripple Labs, has a prior three-count federal felony conviction for dealing in, mailing, and storing explosive devices and had been sentenced to prison, see United States v. Roger Ver, CR 1-20127-JF (N.D. Cal. 2002);

In November 2013, XRP II rejected an approximately $32,000.00 transaction because it doubted the legitimacy of the overseas customer’s source of funds.  XRP II failed to file a suspicious activity report for this transaction; and

In January 2014, a Malaysian-based customer sought to purchase XRP from XRP II, indicating that he wanted to use a personal bank account for a business purpose.  Because of these concerns, XRP II declined the transaction but again failed to file a suspicious activity report for the transaction.

As part of this global settlement, Ripple Labs agreed to implement a series of remedial measures including the following:

  • It agreed to conduct activity only through a registered MSB;
  • It agreed to implement and maintain an effective AML program;
  • It agreed to comply with Funds Transfer and Funds Travel Rules;
  • It agreed to conduct a three-year “look-back” to require suspicious activity reporting for prior suspicious transactions; and
  • It agreed to retain external independent auditors to review BSA/AML compliance every two years until 2020.

FinCEN’s latest enforcement action is an outgrowth of its efforts to regulate the growing virtual currency industry.  Two years ago, FinCEN issued guidance specifying that virtual currency exchangers and administrators are “money transmitters” under the BSA and are required to register with FinCEN and institute certain recordkeeping, reporting, and AML program measures.  In a speech delivered today at the West Coast AML Forum, FinCEN Director Jennifer Shasky Calvery touted her agency’s enforcement action against Ripple Labs and warned other virtual currency businesses of the consequences of non-compliance:

     Virtual currency exchangers – like all members of regulated industry – must bring products to market that comply with our anti-money laundering laws. Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.

The regulatory framework for money services businesses, which include virtual currency exchangers and administrators, has been in existence for years.  To clarify these regulatory requirements, FinCEN issued guidance just over two years ago, noting that virtual currency exchangers and administrators are “money transmitters” under the Bank Secrecy Act (BSA) and its implementing regulations.  As such, they are required to register with FinCEN as a money services business and institute certain recordkeeping, reporting, and AML program measures.

Since issuing the guidance, FinCEN has regularly engaged with the virtual currency industry through administrative rulings and outreach efforts to further clarify our regulatory coverage.  We are extremely fortunate to have a team of experts who work very hard to keep pace with the quickly evolving technology in this area.  They share what they have learned through extensive training efforts with law enforcement, regulators, and prosecutors domestically and globally.  These are the people who are on the front lines of investigating illegal use of emerging payment systems.  They also share their experiences with industry so that companies will be able to avoid being compromised by unlawful actors, and being used as a vehicle for illicit finance.

The FinCEN Director also noted that her agency, working with BSA examiners at the Internal Revenue Service, recently initiated a series of supervisory examinations of virtual currency businesses:

     Working closely with our delegated BSA examiners at the Internal Revenue Service (IRS), FinCEN recently launched a series of supervisory examinations of businesses in the virtual currency industry.  As with our BSA supervision of other parts of the financial services industry, these exams will help FinCEN determine whether virtual currency exchangers and administrators are meeting their compliance obligations under the applicable rules.  Where we identify problems, we will use our supervisory and enforcement authorities to appropriately penalize non-compliance and drive compliance improvements.

 

Latest GTO Reflects FinCEN’s Aggressive Approach to Anti-Money Laundering

On April 21, 2015, the Treasury Department’s Financial Crimes Enforcement Network issued a geographic targeting order, an anti-money laundering device focused on trade-based money laundering schemes used by drug cartels, including Sinaloa and Los Zetas, to launder illicit proceeds through businesses in South Florida.[1] FinCEN stated that the GTO, the third such order issued publicly by the anti-money laundering agency since August 2014, was served on about 700 electronics exporters in and around Miami. An ongoing criminal investigation conducted jointly by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and the Miami Dade State Attorney’s Office South Florida Money Laundering Strike Force has revealed that many electronics exporters are exploited as part of sophisticated trade-based money laundering schemes in which drug proceeds in the United States are converted into goods that are shipped to South America and sold for local currency, which is ultimately transferred to drug cartels.

Background Regarding GTOs

A GTO is an order issued by the United States secretary of the Treasury requiring all domestic financial institutions that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act in 31 U.S.C. § 5326(a). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days.

In general, a nonfinancial trade or business that receives more than $10,000 in currency in a single transaction, or multiple related transactions, is required to file a Form 8300 with FinCEN. The Miami GTO lowers the $10,000 reporting threshold to $3,000 for covered businesses. These businesses are required to report to FinCEN currency transactions over $3,000, and to include in those reports information about the transaction and the persons involved. Each business covered under this GTO received notice of its obligations via personal service or by certified mail. Failure to comply could result in substantial criminal and civil penalties.

Terms of the Miami GTO

The terms of the latest GTO are effective beginning April 28, 2015, and ending Oct. 25, 2015. The GTO provides that its requirements apply to a “covered business,” which refers to any trade or business that exports electronics (including cell phones), and any of its agents, subsidiaries and franchisees, within the following U.S. zip codes: 33172; 33178; 33166; 33122 and 33126.

If, in the course of its trade or business, a business covered by the GTO receives currency in excess of $3,000 in one transaction (or two or more related transactions), then the business must report the transaction by filing a FinCEN Form 8300. For purposes of this GTO, “currency” means: (1) the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued, or (2) a cashier’s check (by whatever name called, including “treasurer’s check” and “bank check”), bank draft, traveler’s check or money order.

A covered business receiving more than $3,000 in currency must identify the customer involved in the transaction by obtaining a telephone number and one form of valid identification. The business must also determine whether the customer is conducting the transaction on behalf of a third party, by obtaining a written certification identifying whether such a third party is involved and, if so, the identity of such third party. In addition, when a covered business files a FinCEN Form 8300 to report a transaction, it must also include the following information in the comments section of the form: (1) a description of the goods involved in the covered transaction; (2) the name and phone number of the person receiving such goods; and (3) the address to which such goods are being shipped.

The GTO provides that a covered business must supervise, and is responsible for, compliance by each of its officers, directors, employees, agents, subsidiaries and franchisees with the terms of this order. In addition, a covered business must notify each of its officers, directors, employees, agents, subsidiaries and franchisees of the terms of the GTO, and must transmit the order to its chief executive officer. The GTO further provides that a covered business and any of its officers, directors, employees or agents may be liable, without limitation, for civil or criminal penalties for violating any of the terms of the GTO.

In a press release announcing issuance of the Miami GTO, FinCEN’s director, Jennifer Shasky Calvery, stated that “[w]hen we issued a similar GTO in the Los Angeles area last year, many speculated about whether we’d be doing the same in other parts of the country. We are committed to shedding light on shady financial activity wherever we find it. We will continue issuing GTOs, as necessary, as well as exercising FinCEN’s other unique anti-money laundering authorities, to ensure a transparent financial system that impedes money launderers and other criminals from masking their identity and illicit activity.”

Prior GTOs Issued in Los Angeles and the California-Mexico Border

The Miami GTO is the third publicly announced GTO issued by FinCEN since August 2014. On Oct. 2, 2014, as part of a probe by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations targeting alleged money laundering activities in Los Angeles’ garment trade, FinCEN announced the issuance of a GTO that imposed additional reporting and record-keeping obligations on certain businesses located within the city’s fashion district.[2] According to FinCEN, the Los Angeles GTO will enhance ongoing efforts to identify and pursue cases against individuals and businesses engaged in the illicit movement of U.S. currency to Mexico and Colombia on behalf of prominent drug trafficking organizations. The GTO directed at L.A.’s fashion district, which went into effect Oct. 9, was sought by the U.S. Attorney’s Office for the Central District of California, which is working with HSI and the Internal Revenue Service’s Criminal Investigation division to fight money laundering schemes designed to allow international drug cartels in Central America and South America to reach drug proceeds generated in the United States.

According to a press release announcing the GTO, extensive law enforcement operations have revealed evidence that money laundering activities and Bank Secrecy Act violations are pervasive throughout the Los Angeles Fashion District, which includes more than 2,000 businesses. Much of the money laundering is conducted through Black Market Peso Exchange schemes, also known as trade-based money laundering, in which drug money in the United States is converted into goods that are shipped to countries such as Mexico, where the goods are sold and money now in the form of local currency goes to the drug trafficking organizations.

On Sept. 10, 2014, more than 1,000 federal, state, and local law enforcement officials executed dozens of search warrants and arrest warrants linked to businesses in the L.A. Fashion District suspected of engaging in money laundering schemes and evasions of required Bank Secrecy Act reporting requirements. Criminal investigations have revealed evidence that many of these businesses are routinely accepting bulk cash as part of schemes involving black market peso exchange and trade-based money laundering on behalf of drug trafficking organizations based in Mexico and Colombia. During the Sept. 10 enforcement action, HSI special agents seized what was ultimately determined to be more than $90 million in currency. The cash was found at various residences and businesses stored in file boxes, duffel bags, backpacks, and even in the trunk of a Bentley automobile.

Businesses covered under the Los Angeles GTO include garment and textile stores, transportation companies, travel agencies, perfume stores, electronic stores (including those that only sell cell phones), shoe stores, lingerie stores, flower/silk flower stores, beauty supply stores, and stores bearing “import” or “export” in their name. The order took effect Oct. 9 and remained in effect for 180 days. In February 2015, the GTO was extended for an additional 180 days.[3]

Working in close coordination with its Mexican counterpart, the Unidad de Inteligencia Financiera (UIF), FinCEN announced issuance of a GTO in August 2014 that covered the U.S.-Mexico border at two California ports of entry.[4] The purpose of this GTO was to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services and other common carriers of currency, the GTO required enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California.

In 2010, Mexico enacted new anti-money laundering provisions to attack the flow of illicit cash from the United States to Mexico. These efforts made it much more difficult for criminals and narcotraffickers to place large amounts of cash in Mexican financial institutions and resulted in an increase in cash coming back to the United States from Mexico, via armored car services or couriers, for attempted placement in U.S. financial institutions. Law enforcement information and BSA data analysis suggest that much of this cash movement is not properly reported and therefore not made available in the FinCEN database for the benefit of investigators and analysts following illicit money trails.

Conclusion

The three recent GTOs described above demonstrate an increased attention to trade-based money laundering schemes by FinCEN and confirm that criminals are aggressively using legitimate U.S. businesses to launder the proceeds of their illegal activity. The GTOs issued in Miami, Los Angeles, and the San Ysidro and Otay Mesa Ports of Entry are presumably yielding a significant amount of information and data that FinCEN will then share with other federal law enforcement agencies in order to prosecute money launderers. Businesses that operate in any of the areas targeted by these three GTOs—electronics exporters, the fashion and garment industry, armored car services and common carriers—should be vigilant to the indicators of trade-based money laundering and take steps to ensure that cash transactions are properly documented and suspicious activity is reported.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Footnotes

[1] See FinCEN Press Release, “FinCEN Targets Money Laundering Infrastructure with Geographic Targeting Order in Miami” (Apr. 21, 2015).

[2] See FinCEN Press Release, “FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels” (Oct. 2, 2014).

[3] See FinCEN Press Release, “FinCEN Renews Geographic Targeting Order (GTO) Requiring Enhanced Cash Reporting at the San Ysidro and Otay Mesa Ports of Entry in California” (Feb. 2, 2015).

[4] See FinCEN Press Release, “FinCEN and Mexican Counterpart Shine Spotlight on Cross-Border Cash Couriers” (Aug. 1, 2014).

“Display of FinCEN’s Aggressive Anti-Laundering Approach,” by Matthew D. Lee was published in the April 30, 2015, edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.