Regulatory Compliance & Financial Crimes May 2024 Update

Regulatory Compliance & Financial Crimes May 2024 Update

In this edition of our monthly update, we will look at relevant regulatory updates, including enforcement actions, guidance, rulemakings, and other public statements made by federal and state financial service regulatory agencies as of April 30, 2024. We aim to provide our clients and network with highlights of relevant and useful updates within the compliance and financial crimes industry.

May 07, 2024

Regulatory Updates 

Oregon Re-Criminalizes Small Amounts of Hard Drugs After 2020 Voter Initiative Is Overturned

In 2020, Oregon voters overwhelmingly passed the decriminalization measure to reduce penalties for possessing small amounts of hard drugs and establishing a framework for treatment and recovery. Last month, Oregon legislators also overwhelmingly overturned that decision, citing that the state was too progressive and hopes to reduce the rapidly increasing addiction and overdose crisis. Possession of small amounts of hard drugs will carry a maximum six-month jail sentence, with treatment offered as an alternative. Opponents of the 2020 bill remarked that the tax revenue generated was earmarked for treatment services, but that was never fully implemented, and it caused more problems than intended.

FinCEN's Push for Transparency: Impact on Investment Advisors, Real Estate, and the Corporate Transparency Act

At the annual Financial and International Business Association (FIBA) AML conference, FinCEN director Andrea Gacki continued to champion FinCENs commitment to increased transparency in the financial system. The first step is the Notice of Proposed Rulemaking (NPRM) for Registered Investment Advisers (RIAs) aiming to consider these advisers as financial institutions under the BSA. The previous lack of oversight for RIAs allowed sanctioned individuals to enter the financial system, thus weakening it. The next NPRM involves all-cash real estate transactions, as cartels and money launderers buy homes in all cash to conduct business. This rule would require more information to be collected and sent to FinCEN before the transaction is finished.

FinCEN Notice on the Use of Counterfeit U.S. Passport Cards to Perpetrate Identity Theft and Fraud Schemes at Financial Institutions

Since 2018, the U.S. Department of State’s Diplomatic Security Service (DSS) has noticed an uptick in counterfeit passport cards to gain access to victims’ accounts or to create accounts. DSS estimates that, between 2018 and 2023, there have been approximately $10 million in losses, $8 million in attempted losses, and over 4,000 victims. FinCEN notices that bad actors may be using these cards to open fake bank accounts and issued this notice to provide an overview of U.S. passport card fraud, red flags to notice, and a reminder of reporting requirements under the BSA.

FATF Ministers Commit to Step Up Efforts to Fight Money Laundering, Terrorist and Proliferation Financing

At the biennial Financial Action Task Force (FATF) meeting in Washington, DC, Ministers celebrated FATF President T. Raja Kumar’s achievements in enhancing asset recovery and reinforcing the international framework for transparency. However, the Ministers recognize that there needs to be improvements on monitoring and preventative measures, beneficial ownership transparency, investigation and prosecution of money laundering, and confiscation of proceeds of crime. The Ministers pledge to uphold and implement the FATF standards and to hold other member countries accountable. Members also agreed to strengthen strategic partnerships to better support the Global Network, a network of over 200 jurisdictions that share a commitment to stop financial crime by using one set of standards.

U.S. President Signs National Security Package

On April 24, President Biden signed a new national security package that broadens the foreign aid provided to Israel, Ukraine, and the Indo-Pacific. This new package includes a myriad of topics, including that the statute of limitations for sanctions violations would be doubled from five years to 10 years. Additionally, Russian state-owned assets could be seized and used to aid Ukraine under the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act. More sanctions were imposed on Russia, Iran, and Hamas, including petroleum and terrorist sanctions. Pressure is increasing for ByteDance to divest TikTok, as this order could lead to civil penalties by the Justice Department. Finally, data brokers would be banned from transferring sensitive personal information to foreign adversaries or entities controlled by a foreign adversary. “Data broker” is defined to be an entity that makes U.S. citizens’ personal data available to another entity and acts as a service provider.

EU Parliament Adopts Anti-Money Laundering Rules Package, Also Policing Crypto

The European Union has voted to adopt new laws regarding money laundering and terrorist financing, primarily focusing on crypto companies and football clubs. This new authority is housed in Frankfurt, Germany, to oversee the implementation. Laws will include new enhanced due diligence measures and will require reporting to financial intelligence units and other appropriate agencies. Critics of this package state that this allows for the media to have free access to beneficial ownership information. There will be another meeting to formally adopt the new regulations.

Letter to FinCEN on the PRA Burden for Legal Entity BOI Collection Under the CDD Rule

With FinCEN introducing the Paperwork Reduction Act (PRA), the American Bankers Association (ABA) took an opportunity to discuss their concerns about the revision of the customer due diligence (CDD) rule in an open letter. While the ABA supports FinCEN’s PRA, the letter urges FinCEN to reconsider the time burden that FinCEN has previously outlined, stating that the estimated 20 minutes to update and maintain CDD procedures and 80 minutes to review beneficial ownership is not sufficient. Even for small banks, this eight-year-old estimate is not sufficient. ABA polled members of all sizes and demographics to strengthen the claim.

Enforcement Updates 

Binance Founder CZ sentenced to Four Months in Prison

On April 30, Binance founder Changpeng Zhao (CZ) was sentenced to four months in prison, far below the three years requested by the U.S. prosecutors. CZ previously struck a deal with the U.S. DOJ, pleading guilty in November 2023 to violating the BSA, paying a fine of $50 million, and agreeing to step down as the company CEO.

Tornado Cash Dev Roman Storm Moves to Dismiss Indictment Over Crypto-Laundering Allegations

Last summer, developers Roman Storm and Roman Semenov were indicted on charges of conspiring to commit money laundering, operate an unlicensed money transfer, and violate U.S. sanctions. In a motion to dismiss their charges, it states that Tornado Cash, the tool built by Storm and Semenov to obscure the origin and destination of crypto transfers, is not considering money laundering, nor does Tornado Cash fall under the definition of a financial institution. Another Dutch developer on this project was arrested in 2022 for money laundering charges. While trials are ongoing, a motion to compel asks a judge to have the DOJ share communications from the U.S. and Dutch authorities, as well as the Office of Foreign Assets Control and FinCEN.

Elaborate Scheme Used Drones to Drop Drugs in Prisons, Authorities in Georgia Say

Over 150 individuals, including eight department employees, in Georgia were arrested and charged with a contraband-smuggling scheme that used drones to drop drugs into prisons. There are over 1,000 criminal charges for suspects, and many will face charges under the Racketeer Influenced and Corrupt Organizations (RICO) Act and may be the largest Gang RICO in state history. Evidence includes 87 drones, 22 weapons, 273 contraband cell phones, 180 civilian cellphones, and a total of over 300 lbs. of illegal drugs, including marijuana, ecstasy, and various pills.

Chinese Firms Helping Military Get AI Chips Added to U.S. Export Blacklist

Chinese companies LINKZOL Technology Co., Xi’an Like Innovative Information Technology Co., Beijing Anwise Technology Co., and SITONHOLY Co. were added to an export blacklist for seeking to acquire AI chips for China’s military. China asks the U.S. to stop creating policies around trade and technology, citing that the U.S. is using the blacklist to suppress Chinese companies. There are 11 other Chinese companies on the blacklist for involvement with Russia. The use of these AI chips in military technology is currently unknown.

“Bitcoin Jesus” charged with tax fraud by IRS

An indictment was unsealed on April 29 charging Roger Ver, an early investor in bitcoins, with mail fraud, tax evasion, and false tax return filing. Ver was arrested in Spain based on the U.S. criminal charges. The United States will seek Ver’s extradition to stand trial in the United States.

According to the indictment, Ver formerly of Santa Clara, California, owned Inc. and Inc., two companies that sold computer and networking equipment. Starting in 2011, Ver allegedly began acquiring bitcoins for himself and his companies, and began selling his stake in 2017, for which he did not pay capital gains taxes on the hundreds of millions of dollars he raised. He also allegedly avidly promoted bitcoins, obtaining the moniker “Bitcoin Jesus.” 

Morgan Stanley's Wealth Arm Probed by Multiple Federal Regulators

Regulators are looking into how Morgan Stanley investigates clients who are at a higher risk of money laundering in the banks massive wealth management division, specifically in CDD and source of wealth information. The SEC and FinCEN both provided a list of names to Morgan Stanley, and OFAC subpoenaed their sanctions policies and procedures. The SEC and FinCEN are also interested in why customer relationships that were ended due to red flags on the E*Trade platform were also not terminated in the Morgan Stanley wealth management platform.

Hot Topics

Russia Seeking to Impose its Laws on NATO States

Russia’s Prosecutor General Igor Krasnov stated in an interview that Moscow “will continue to assert its right, contrary to international law, to enforce Russian federal law on officials of NATO and post-Soviet states for their actions taken within the territory of their own countries where Russian courts have no jurisdiction.” Several NATO members have been placed on the Russian Ministry of Internal Affair’s wanted list for “breaking various Russian laws within their own countries.” French President Emmanuel Macron suggested sending troops to Ukraine back in February, citing a need for stronger security between Europe and Russia.

China-based Syndicates Using Fake Passports, Bribes to Undermine U.S. AML Programs

Federal officials are warning that Chinese Money Laundering Organizations (CMLOs) are funneling hundreds of millions in U.S. dollars through the U.S. financial system, gaining access by using fraudulent Chinese passports to open accounts. The CMLOs are reportedly working with drug cartels based in Mexico to operate the scheme.

MAS Launches Centralized Digital Platform Against Money Laundering, Terrorism Financing

The Monetary Authority of Singapore (MAS) launched Cosmic, short for Collaborative Sharing of Money Laundering / Terrorist Financing Information and Cases, to facilitate information sharing between financial institutions. The Financial Services and Markets Act of 2022 (FSMA) laid the groundwork for Cosmic and includes safeguards for confidentiality. During the initial phase, the six banks that helped develop it (OCBC, UOB, DBS, Citibank, HSBC, and Standard Charter) will use the system to find more bad actors.

Known Terrorist Spent Year in U.S. After Being Wrongly Released by Feds

A Somali terrorist, whose name remains publicly unknown, was granted entry into the United States after being detained in 2023 for attempting to illegally enter the country and operated freely for nearly a year before the error was corrected. The individual is a confirmed member of al Shabaab, which is involved in the use, manufacturing, and transportation of explosives or firearms. Despite entering through California, the individual was found in Minnesota. A letter from Republican lawmakers seeks to figure out his path to Minnesota and if any taxpayer dollars were used during his transit.

Chainalysis Hires Former IRS Criminal Investigations Chief Jim Lee

After 29 total years of service with the IRS, Jim Lee adopted the newly created role of Global Head of Capacity Building with Chainalysis. His role will involve communicating with regulators, law enforcement, tax agencies, and financial intuitions and providing advisory services on how to fight crypto crime using Chainalysis systems. During his leadership as IRS-CI Chief, he shut down a darknet marketplace, seized crypto from Hamas, and had previously taken down a child abuse network, rescuing 23 children and arresting 337 abusers.

TD Bank Takes an Initial Provision Related to BSA/AML Matters

TD Bank has accepted an initial provision of $450 million after having conversations with U.S. regulators related to their BSA/AML program. TDs existing program was inadequate at monitoring, detecting, and reporting suspicious activity. Additional fines are expected. TD acknowledges its forward-looking statement and realizes that the landscape will continue to change, and as such, should adjust risks with the market.