U.S. Treasury authority over anti-laundering reporting expanded beyond financial services

Congress late last month quietly gave the U.S. Treasury a potentially game-changing tool to probe non-financial business activity for money laundering, pushing the government’s search for illicit wealth further beyond the banking industry. The enhanced authority, which was tucked into a bill levying new sanctions against Russia, Iran and North Korea, will provide much-needed intelligence to spot illicit financial activity, law enforcement sources say.

The power handed to Treasury’s Financial Crimes Enforcement Network (FinCEN) was mainly aimed at giving authorities more access to wire transfer information in “all-cash” real estate deals — those in which there is no mortgage involved. However, it has the potential to affect the anti-money laundering obligations of businesses accepting virtual currency, mobile funds transfers and other technology- based payment platforms that did not exist when Congress enacted the Bank Secrecy Act (BSA), the primary U.S. AML law, in 1970 and even when it passed subsequent amendments, experts said.

Clearly, based on longstanding concerns of U.S. law enforcement officials, Congress is looking beyond multinational banks as it seeks to recruit the country’s businesses to combat money laundering and terror finance.

Under the law enacted last month, FinCEN will have broad discretion when drafting revised BSA regulations defining the type of transactions non-financial businesses must report under targeted anti-laundering measures.

“It really just depends how far FinCEN wants to go,” said a veteran U.S. law enforcement official who specializes in combating money laundering.

When asked for details about FinCEN’s plans to draft amended regulations, a spokesman said “we’ll make our intentions known soon.” He declined further comment.

The Countering America’s Adversaries Through Sanctions Act

Section 275 of the Countering America’s Adversaries Through Sanctions Act, passed by Congress last month and signed into law by President Donald Trump on August 2, amended the types of transactions FinCEN can oblige businesses to report when it issues special anti-money laundering demands known as Geographic Targeting Orders, or GTOs.

GTOs are used to target select non-financial businesses in specific regions thought to be money laundering hotspots. The orders require businesses to make special reports beyond the reporting of cash transactions of more than $10,000, which all must report. They can force the businesses to temporarily report smaller transactions, or to take other specific steps to help spot transactions potentially linked to criminal activity.

This GTO enhancing provision of the new sanctions law had received “overwhelming” support when included in an earlier legislative effort that stalled, Congressman Stephen F. Lynch, who stewarded the measure through the House of Representatives, said in an interview with Thomson Reuters Regulatory Intelligence. “It had been previously vetted by all the relevant committees, so it was a little easier to get it added to the (sanctions act),” Lynch said.
The measure also reportedly received support from U.S. Senator Chuck Grassley, a prominent lawmaker and longtime advocate of strong anti-money laundering measures.

GTO authority no longer limited to cash

In the past, FinCEN’s GTO authority under Section 5326 of the BSA allowed it only to require the special reporting of “United States coins or currency (or such other monetary instruments as the Secretary may describe in such order)” by business, but the new law expands the range of FinCEN’s GTO demands to include any “funds (as the Secretary may describe in the regulation or order).” The Secretary in question is the Secretary of the Treasury, and such AML-related decisions are delegated to FinCEN.

Law enforcement authorities must funnel requests for the issuance of GTOs through FinCEN when they suspect a particular type of business in a specific region has become an active participant in money laundering – wittingly or not. GTOs target a swath of similar businesses as opposed to a single entity and often are issued when authorities have evidence that certain businesses of that type in that area have played a significant role in laundering dirty money.
Law enforcement officials have long been calling for more authority to track wire transfers, as they were frustrated by FinCEN’s inability to force U.S. businesses to report offshore wire transfers, law enforcement sources said.

For instance, in January 2016, FinCEN issued GTOs requiring title insurance companies in certain urban areas to make reports known as Forms 8300 within 30 days of closing, and to identify the true, or “beneficial” owners of limited liability companies and other entities that purchase high-end real estate in cash deals — those that do not involve a mortgage. Those GTOs expire this month.

The step was taken because law enforcement authorities had reason to believe drug traffickers, corrupt officials and other had long been pouring ill-gotten gains into U.S. real estate via all-cash deals for posh properties.

But in these GTOs, FinCEN could only define cash deals as those involving currency, a certified check, cashier’s check, traveler’s check, or a money order and it required reporting only if the purchase exceeded a certain amount — $3 million in Manhattan or $1 million in Miami-Dade County, for example. FinCEN was powerless to require the reporting deals involving wire transfers.

While the real estate GTOs nevertheless provided useful information, law enforcement officials felt they likely were missing a lot of potentially important intelligence on criminal activity because of the wire transfer loophole.

In a May 2016 speech, a senior FinCEN official who now is the acting director of the Treasury bureau, decried the loophole and called for a legislative fix. The official, Jamal El-Hindi, added that after the real estate GTOs were issued, “some were quick to point out, and perhaps even advise clients, that they could keep their real estate activities outside of the scope of the GTO by avoiding use of any form of cash or monetary instrument as part of their transactions.”

The problem was especially concerning because offshore money, often controlled by trusts and other opaque entities, is typically wired to the United States to pay for real estate in cash deals, said the veteran law enforcement official, who has personally faced the frustration of FinCEN’s inability to demand reporting of wire transfers. The amended GTO authority “will provide a lot of additional information to law enforcement,” the source said.

Other GTOs issued in recent years targeted electronics exporters in Miami and their peers in the “fashion district” of Los Angeles, in both cases due to concerns about trade-based money laundering by drug traffickers where international trade helps cartels rid themselves of U.S. currency generated by drug sales.

Bitcoins in crosshairs?

When asked whether the broad language of the statute might allow FinCEN to go beyond wire transfers and require the reporting of the receipt of virtual currency, prepaid funds, mobile and online payments and other forms of wealth transfer, the law enforcement official said FinCEN must decide.

“With that said, you’re not going to get a better climate for pushing expansion of the definition of funds,” he said, noting the U.S. government is eager to combat money laundering and financial crimes, in part due to concerns about terrorist financing.

Bitcoins, a virtual currency, in particular have been cited as a money laundering concern by law enforcement authorities, in part because of online drug dens that accepted them as payment. FinCEN has issued AML rules for certain bitcoin businesses dubbed money transmitters, but businesses receiving bitcoin payments have no reporting obligations.

The last major revisions to the BSA occurred under the USA Patriot Act of 2001, which provided Treasury sweeping new powers with an eye toward combating terror finance.

Lifting the corporate veil

Last year, FinCEN issued a rule requiring banks to take additional steps to know their customers. In particular they must collect information about the true, or “beneficial,” owners of legal entity accounts. That requirement will come into force in May of next year.
But those enhancements were aimed at banks, broker-dealers and select other financial institutions, which makes the GTO provision of the sanctions law all the more noteworthy.
It was enacted even as Congress considersbills that, among other things, would prompt FinCEN to issue regulations requiring corporations and limited liability companies to file information about their beneficial owners.

That legislation is aimed at easing law enforcement concerns that states’ failures to record such information hinders investigations by creating a corporate veil that hides the actual owners of potentially ill-gotten wealth. Congress appears squarely focused on the potential for money laundering and terror finance to be facilitated by non-financial businesses that have long enjoyed relative exemption, avoiding the burdensome costs faced by banks.
Although reliable figures are not available, banks and other financial institutions are thought to spend billions of dollars each year to scrub transactions for crime proceeds or transactions linked to U.S.-sanctioned parties.

The price tag associated with compliance by non-financial entities remains unclear, but will depend largely on the degree to which FinCEN employs its enhanced GTO authority.

Published 15-Aug-2017 by 
Brett Wolf, Regulatory Intelligence

If you are interested in learning more about this news update, please read more here