FinCEN’s mandate to create a beneficial ownership database will continue creating ripple effects for businesses and individuals across all sectors. Jason Ross, an attorney at Dykema Gossett in Dallas, shares his insights, focusing particularly on special guidance for antiquities dealers.
For decades, the United States has been at the forefront of a global effort to combat kleptocracy, or “rule by thieves.” That effort is rapidly intensifying. At the same time, financial institutions face new challenges to tighten their internal controls, enhance their due diligence protocols to identify red flags and ensure that they properly report suspicious financial activity.
Fortunately, FinCEN has taken an active role to keep financial institutions and the public at large up-to-date on the latest schemes favored by fraudsters and red flags that can warn financial professionals of fraud and money laundering.
In the most significant overhaul of U.S. bank secrecy and anti-money laundering legislation since the 2001 USA Patriot Act, the Anti-Money Laundering Act of 2020 heightened financial reporting requirements and created new enforcement mechanisms. One of the key components of the new legislation is to direct FinCEN to create a national registry of beneficial owners of entities that are deemed “reporting companies.” The goal of the registry is to allow law enforcement to draw direct lines between companies and the individuals who own them.
Notably, the AML Act also amended the Bank Secrecy Act (BSA) to expand reporting requirements to individuals and businesses engaged in the antiquities trade; the antiquities sector was previously exempt from the BSA. Unique aspects of the antiquities trade — such as the tradition of preserving customer confidentiality, the opacity of documenting provenance, the use of intermediaries and the subjectivity of market price — have been exploited by fraudsters seeking to protect and conceal proceeds of criminal activity. The AML Act requires beneficial ownership reporting and directs antiquities dealers to file suspicious activity reports (SARs) when transactions bear markers of fraud.
On the heels of the AML Act’s enactment, in June 2021 President Joe Biden issued a comprehensive memorandum declaring the fight against global kleptocracy and corruption as a core national security interest. In the memo, Biden outlined 10 actions the U.S. will take to deploy civil and criminal enforcement resources, build international coalitions and partner with private institutions to make financial systems more transparent and responsive to possible abuse by corrupt individuals.
Among these actions, Biden indicated that the administration would: “Combat all forms of illicit finance in the United States and international financial systems, including by robustly implementing Federal law requiring United States companies to report their beneficial owner or owners to the Department of the Treasury; reducing offshore financial secrecy; improving information sharing; and, as necessary, identifying the need for new reforms.”
New regulations will require companies to report accurate and up-to-date beneficial ownership information to the U.S. government. Keeping track of changes could prove to be a tall task.
After Russia’s unprovoked attack on Ukraine, multiple nations took swift and aggressive action to impose sanctions to isolate Russia from global financial markets and international trade. Additionally, the Treasury’s OFAC identified several Russian oligarchs and their family members as persons whose property or interests in property are blocked and must be reported to OFAC.
In light of these comprehensive and aggressive regulatory and enforcement actions, compliance professionals at financial institutions are likely wondering how to keep their compliance and reporting programs up-to-date and how to incorporate these new regulations into existing training programs. The first resource in updating compliance programs is guidance and advisories from FinCEN itself. Under the AML Act, FinCEN is required to publish, at least twice a year, threat pattern and trend information to provide “meaningful information about the preparation, use, and value” of SARs.
While individual SARs may provide a financial institution with a ground-level view of single incidents, FinCEN’s financial trend analyses offer a bird’s-eye view of the patterns and trends the government sees when aggregating the thousands of SARs received daily.
For example, FinCEN’s October 2021 analysis focused on ransomware trends in bank secrecy data between January and June 2021. In that advisory, FinCEN’s aggregated data analysis identified several common money-laundering themes among ransomware transactions, including common requests for payment in anonymity-enhanced cryptocurrencies, avoidance of reusing wallet addresses and using decentralized exchanges to cash out proceeds.
While these reports can be somewhat dense, FinCEN includes a helpful section at the end of each report that highlights practical steps a financial institution can take to be on the lookout for transactions with similar hallmarks and offers ways to prepare SARs so they provide FinCEN with relevant, actionable information. These analyses are a valuable resource for financial institution compliance departments; their guidance should be circulated as-is, or distilled to bullet points for employees who play a role in identifying suspicious transactions and drafting SARs.
On April 14, 2022, FinCEN published an advisory on kleptocracy and foreign public corruption. The advisory offers a plain-language primer on various types of financial crimes associated with kleptocracy, including bribery and extortion, embezzlement of public assets, money laundering through shell companies and offshore accounts and money laundering through the purchase of real estate, luxury goods and high-value assets.
The advisory then provides 10 red-flag indicators that financial institutions should use to detect, prevent and report possible kleptocracy and foreign public corruption:
- Transactions that involve long-term government contracts that are usually awarded to entities that share similar beneficial ownership structures through an opaque selection process.
- Transactions that involve services provided to state-owned companies or public institutions by companies registered in high-risk locations.
- Transactions involving official foreign government business conducted through personal accounts.
- Transactions with public officials that involve high-value assets inconsistent with the reported wealth of the official.
- Transactions involving foreign officials through jurisdictions with which the official does not appear to have ties.
- Use of third parties to hide a foreign official’s involvement.
- Transactions that involve fictitious email addresses or false invoices.
- Documents showing government contracts with charges at a substantially higher than market rate.
- Transactions with payment amounts that don’t match what’s in underlying documentation.
- Proof of assets held in the name of legal entities whose beneficial owners are tied to a kleptocrat or their family member.
Again, these practical red flags should be used by compliance professionals to update training materials and compliance procedures.
For businesses that may not have robust compliance procedures, such as antiquities dealers or other companies that have new reporting obligations, FinCEN advisories can provide valuable guidance on what to look for and how to effectively report suspicious activity.
Since expanding the BSA to apply to the antiquities sector, the government has also offered guidance specific to dealers, as well as real-world examples of red flags unique to antiquities.
For firms in all sectors, FinCEN’s advisories and alerts are an excellent source material for employee training on kleptocracy. Their real-world examples provide compliance professionals opportunities to walk through the life cycle of the transactions and ask trainees to identify actions the financial institutions involved could have taken to identify and report the suspicious activity. Trainers could create dramatic and outlandish hypotheticals involving comic-book-villain characters and invite trainees to identify which of FinCEN’s 10 red flags are raised.
A goal of compliance training is to have employees associate dry rules and guidelines with real-world factual situations they encounter in their work. Using FinCEN advisories to create memorable fact patterns can help employees apply this new guidance effectively.