March 2020 JD Supra and Foodman Website

The U.S. Department of the Treasury 2020 Strategy (National Strategy for Combating Terrorist and Other Illicit Financing released on February 6, 2020) describes ongoing significant AML/CFT threats.  The vulnerabilities in the U.S.A. related to AML/CFT are centered around:

Lack of a requirement to collect entity beneficial ownership information  

Law enforcement efforts to investigate corporations and limited liability companies suspected of being used for committing crimes have been impeded by a lack of available beneficial ownership information; as documented in reports and testimony by officials from the Department of Justice, the Department of Homeland Security, the Department of the Treasury,  the Government Accountability Office, and others.

Nearly 2,000,000 corporations and limited liability companies are formed in the U.S. under the laws of the States each year.  Few States require information about the beneficial ownership of the corporations and limited liability companies formed under their laws.   A person forming a corporation or limited liability company within the United States typically provides less information at the time of incorporation than is required to obtain a bank account or driver’s license; typically, not naming a single beneficial owner.   Criminals have exploited State formation procedures to conceal their identities when forming corporations or limited liability companies in the United States, and used the newly created entities to commit crimes affecting interstate and international commerce such as terrorism, proliferation financing, drug and human trafficking, money laundering, tax evasion, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption. 

Lack of comprehensive AML/CFT requirements for certain financial institutions, gatekeeper professions and anonymous purchases of real estate

According to the US Treasury Report, certain financial institutions that qualify as “banks”, are not regulated by appropriate federal regulators, are exempted from AML/BSA and provide banking services do not have AML programs in place.  Consequently, these institutions are not subject to Customer Identification Program (CIP) rules.   There are approximately 669 of these institutions in the U.S.  They are classified as: 

• state-chartered non-depository trust companies (some digital asset exchangers have reportedly taken steps to obtain)
• international banking entities (offshore banking entities chartered in Puerto Rico or the U.S. Virgin Islands)
• non-federally insured, non-federally chartered banks and savings associations
• non-federally insured credit unions (common in Puerto Rico)
• some private banks

Real estate professionals, mortgage brokers, real estate agents, lawyers, accountants, financial advisers and trust and company service providers may act as “complicit professionals” that assist criminals to launder money through real estate using legal entities to purchase or hold real estate via LLCs or LLPs, as well as through the use of nominees as purchasers or title holders of real estate. 

Volume of foreign funds and number of transactions that are processed through U.S. correspondent banks 

The BSA defines a correspondent account as: “an account established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institution; and  an account established for a foreign bank to receive deposits from, or to make payments or other disbursements on behalf of, the foreign bank, or to handle other financial transactions related to such foreign bank”. 

Correspondent accounts may be used as conduits to facilitate the flow of illicit proceeds into or through the U.S. financial system because when a U.S. bank receives funds or instructions for a funds transfer from a foreign correspondent,  it is unlikely that it has an account relationship with the originator of the payment.   Due to limited details regarding the transaction, corrupt funds may move through U.S. correspondent accounts on behalf of beneficial owners around the world.

Use of U.S. currency domestically and internationally

Cash continues to be transported into the U.S.A. in vehicles, commercial shipments, aircraft, boats, luggage, special compartments hidden inside of clothing and in packages wrapped to look like gifts.  Criminals seek out financial institutions or other regulated entities with weak AML/CFT controls or complicit insiders who willingly accept illicit cash.

Complicit actors in financial institutions and other businesses

The 2020 Strategy discusses how “complicit employees” at financial institutions as well as key gatekeepers use positions of trust and intimate technical knowledge to undermine AML/CFT measures. Criminal organizations seek out professionals to involve as accomplices.  U.S. law enforcement has increased its focus on these types of facilitators, which includes individuals in the financial sector, real estate agents, lawyers, and accountants.

Compliance weaknesses

It is challenging to avoid deficiencies in AML/CFT given the size of the financial services sector and the quantity of transactions that are processed:

• more than 10,000 depository institutions

• over 25,000 MSBs registered with FinCEN
• over 3,700 active broker-dealers registered with the SEC
• 64 Futures Commission Merchants registered with the CFTC
• approximately 465 casinos

Misuse of digital assets and failure of foreign jurisdictions to effectively supervise digital asset activity

Digital (virtual) assets continue to be attractive for illegal actors due to an inherent pseudo anonymity contained within payments (lack of transparency).  On February 22, 2019, the Financial Action Task Force (FATF) released a Public Statement – Mitigating Risks from Virtual Assets that sets forth detailed requirements for the regulation, supervision and monitoring of Virtual Asset Service Providers (VASPs).   Due to a belief that there is urgency for countries to take coordinated action to prevent the use of virtual assets for crime and terrorism, the FATF has been working on an “Interpretive Note to Recommendation 15”  The FATF urgently wants jurisdictions to take immediate legal and practical steps to prevent the misuse of virtual assets.  Its message is that virtual assets create opportunities for criminals and terrorists to launder proceeds and/or finance illicit activities. VASPs ought to implement a risk-based approach to ensure that measures to prevent or mitigate money laundering and terrorist financing are developed and implemented.      

The perception of the U.S. as a tax haven

The U.S. reputation in other jurisdictions as a tax haven has made it a place of choice for foreign investors; In part because laws in a number of states protect the identity of an Ultimate Beneficial Owner (UBO).  A perception of the US as a tax haven further stems from LACK OF:

• US participation in the Common Reporting Standard (CRS)
• US reciprocity under Intergovernmental Agreements (IGA) with other countries under FATCA
• US laws requiring the revelation of beneficial ownership of US corporations
• Comprehensive Anti-Money Laundering (AML) measures in the non-financial sector: lawyers, accountants, real estate agents, trust and company service providers

The U.S. Treasury is motivated to close AML/CFT Deficiency Gaps

On October 22, 2019, the “Corporate Transparency Act of 2019” (CTA) was passed as a Bill by the U.S. House of Representatives (now moving to the Senate):  “To ensure that persons who form corporations or limited liability companies in the United States disclose the beneficial owners of those corporations or limited liability companies, in order to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies, and for other purposes”.  

Financial Institutions are perceived by U.S. regulators as playing a key role in the fight against money laundering and financial crimes.  Consequently, if the CTA is signed into law, Financial Institutions will be required to participate with implementing its requirements to assist with the establishment of a secure national UBO database.   

Financial Institutions with concerns regarding the effectiveness of their existing Customer Due Diligence and BSA/AML programs ought to obtain the right consulting and training advice from a specialized BSA/AML provider.