due diligence

FinCEN Urges Financial Institutions to Focus on Detecting Proceeds of Foreign Public Corruption

 

The Financial Crimes Enforcement Network (“FinCEN”) recently issued an advisory urging financial institutions (including certain cryptocurrency businesses) to implement controls to help detect proceeds of foreign public corruption. The Advisory describes the types of corrupt payments and arrangements that financial institutions should be looking for and identifies red flags to help those institutions detect and report suspicious transactions that may involve kleptocracy and foreign public corruption.

Targeting Corruption. FinCEN reemphasizes that fighting corruption is a priority for the Biden Administration (as Orrick discussed here) and focuses on the “crucial role” financial institutions play in “identifying corrupt activity and associated money laundering on the part of foreign public officials” and kleptocrats, which it describes as those who wield political power or influence to enrich themselves at the expense of their nation.1 “Foreign public corruption erodes public trust and disproportionately harms the most vulnerable in societies[,]” said FinCEN Acting Director Himamauli Das in the press release accompanying the Advisory. Das urged financial institutions to “remain vigilant and promptly report suspicious financial activity.”2

While the Advisory’s cautions relate to public corruption globally, FinCEN singles out Russia as a “particular concern,” describing “widespread” corruption in, and linked to, the country, and the role that Russian kleptocrats and oligarchs play in supporting Russian President, Vladimir Putin’s regime, including Russia’s invasion of Ukraine. The Advisory builds on FinCEN guidance issued in recent weeks concerning the use of digital assets (crypto) and ransomware and the purchase of luxury goods and high-value assets to evade Russia sanctions.

Types of Corruption. The Advisory provides an overview of kleptocracy and foreign public corruption under the umbrellas of (1) wealth extraction and (2) laundering illicit proceeds.

FinCEN describes two methods of wealth extraction. The first, bribery and extortion, includes payments to foreign officials to obtain or retain business or other benefits, and may include coercion by corrupt officials. These improper arrangements may involve third-party facilitators or shell companies to conceal the purpose and flow of payments. The second, misappropriation or embezzlement of public assets, includes the theft, diversion, or misuse of public assets or resources for personal benefit. This type of corruption may involve officials exploiting or deceiving parties that seek to do business with the government.

Under the category of laundering illicit proceeds, the Advisory highlights the use of shell companies and offshore financial accounts to obscure the ownership and origin of illicit funds or facilitate the payment of bribes or misuse of assets, and the purchase of real estate, luxury goods and other high-value assets to launder proceeds of corruption. The Advisory also highlights U.S. government efforts against Russian elites, including pursuing their real estate, private aircrafts, and yachts.

Red Flags. The Advisory offers a list of red flags (available here) to help financial institutions detect transactions associated with kleptocracy and public corruption. The flags concern opacity in awarding government contracts; transactions involving services to state-owned companies; foreign business conducted through personal accounts; foreign jurisdictions that appear unrelated to the work of, or high-value assets not commensurate with, a government official’s role; charges at above-market rates that lack supporting detail or that do not match the documentation; and the use of third parties, fictitious emails, or fraudulent documents to conceal the origin of funds or ownership.

Suspicious Activity Reporting. The Advisory concludes with a “reminder” of Bank Secrecy Act (“BSA”) obligations for financial institutions, including scenarios in which financial institutions must file a suspicious activity report (“SAR”). The Advisory also asks institutions to specifically cite this document (“CORRUPTION FIN-2022-A001”) to indicate a connection between the suspicious activities being reported and the activities described in the Advisory. It also notes existing guidance on BSA reporting requirements and due diligence.

Takeaways. Although the Advisory and its guidance are framed in general terms, the explicit links to Russia and the types of corruption highlighted both serve as yet another indication of the Administration’s focus on such ties. Third-party analysis of SAR filings suggests that certain financial institutions, such as cryptocurrency exchanges and other “money services businesses,” may not be meeting their obligations to file corruption-related SARs.3 This Advisory suggests that such SAR filing failures will likely receive additional scrutiny from FinCEN.

The Advisory confirms that financial institutions need to take care to identify possible links to Russia. While the “red flags” listed are likely familiar to those who work in the anti-corruption field, they serve as a reminder and warning. Financial institutions should continue to prioritize the establishment of risk-based controls and procedures that include reasonable steps that can help them understand their customers and meet regulators’ due diligence expectations.

______________________________________________________________________________________________________

1 FinCEN Press Release, FinCEN Issues Advisory on Kleptocracy and Foreign Public Corruption, (April 14, 2022).

2 Id.

3 Alison Jimenez, Kleptocracy Suspicious Activity Reports, Dynamic Securities Analytics, Inc. (April 15, 2022).

FinCEN Issues Customer Due Diligence Rule (CDD) FAQs

On July 19, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued FAQs regarding the customer due diligence requirements (“CDD”) that it published on May 11, 2016, for certain financial institutions, including brokers, dealers, future commission merchants and introducing brokers in commodities.  The FAQs provide interpretive guidance with respect to these requirements, including, in particular, the new regulatory requirement to identify and verify the identity of the “beneficial owners” of virtually all legal entity customers, other than a sole proprietorship and an unincorporated association.  The CDD defines “beneficial owner” as:

  • each individual, if any, who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer; and
  • a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager. . .
  • or any other individual who regularly performs similar functions.”

The FAQs states:  “In short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers.”

Summary Judgment Denied in Monoline Insurer Lawsuit Against J.P. Morgan

On June 6, 2016, Justice Alan D. Scheinkman of the New York Supreme Court for Westchester County denied J.P. Morgan’s motion for summary judgment on MBIA’s fraudulent concealment claim. The court had previously granted summary judgment in favor of J.P. Morgan on MBIA’s fraud claim, but permitted MBIA to amend its complaint to add a fraudulent concealment claim that J.P. Morgan failed to disclose complete and accurate third-party due diligence results regarding the collateral underlying the securitization. First, Scheinkman rejected J.P. Morgan’s argument that it did not owe MBIA an affirmative duty to disclose the results of the due diligence review. The Court held that the bid letter between J.P. Morgan and MBIA evinced a contractual relationship between the parties, and that even in the absence of such a relationship, J.P. Morgan was acting as an agent for the deal’s sponsor, who was obligated to share the due diligence results with MBIA.  Second, Scheinkman held that issues of fact precluded summary judgment on actual reliance, because withholding, disguising the significance, and delivering an altered version of due diligence results may have thwarted MBIA’s ability to protect itself.  Last, the Court held that whether MBIA justifiably relied on J.P. Morgan’s failure to disclose the due diligence results is a question for the jury.  Decision & Order.

U.S. Treasury Announces Customer Due Diligence Final Rule for Financial Institutions

On May 5, 2016, the U.S. Department of the Treasury announced a Customer Due Diligence (CDD) Final Rule that requires financial institutions to conduct certain diligence to verify personal information of beneficial owners of legal entity customers.  The final rule under the Bank Secrecy Act was published in the Federal Register on May 11, 2016 and becomes effective July 11, 2016.  Press ReleaseFinal Rule.

Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion

On May 5, 2016, the U.S. Department of the Treasury announced several actions to strengthen financial transparency.  Treasury announced a Customer Due Diligence (CDD) Final Rule, proposed Beneficial Ownership legislation and proposed regulations related to foreign-owned, single-member limited liability companies (LLCs).

CDD Final Rule

The CDD Final Rule adds a new requirement that financial institutions – including banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities – collect and verify the personal information of the beneficial owners who own, control, and profit from companies when those companies open accounts.  The Final Rule also amends existing Bank Secrecy Act (BSA) regulations to clarify and strengthen obligations of these entities.

Specifically, the rule contains three core requirements: (1) identifying and verifying the identity of the beneficial owners of companies opening accounts; (2) understanding the nature and purpose of customer relationships to develop customer risk profiles; and (3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.  With respect to the new requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.  The final rule extends the proposed implementation period from one year to two years, expands the list of exemptions and makes use of a standardized beneficial ownership form optional as long as a financial institution collects the required information.

Beneficial Ownership Legislation

Treasury announced it is sending beneficial ownership legislation to Congress.  As part of the legislation, companies formed within the United States would be required to file beneficial ownership information with the Treasury Department, and face penalties for failure to comply.

Foreign-Owned Single-Member LLC Proposed Regulations

Treasury also announced proposed regulations to require foreign-owned “disregarded entities,” including foreign-owned single-member limited liability companies (LLCs), to obtain an employer identification number (EIN) with the IRS.

Rating Agency Developments

On June 30, Fitch updated its U.S. RMBS criteria for originator reviews, due diligence, and representations and warranties. Fitch Release.

On June 30, Fitch updated its criteria for rating U.S. timeshare loan ABS. Fitch Release.

On June 28, Fitch updated its criteria for global credit card ABS. Fitch Release.

On June 28, Moody’s published methodology for rating ABS backed by utility cost recovery charges. Moody’s Release.

On June 28, Moody’s released a report on its approach to analyzing performance disruption risk in securitizations. Moody’s Report.

On June 27, Moody’s issued a request for comment on changes to its ABCP operational risk guidelines. Comments are due by July 15. Moody’s Release.

On June 24, Fitch updated its future flow securitization rating criteria. Fitch Release.

Note: Free registration is required for Fitch and Moody’s releases and reports.