Why it matters

Transparency in the financial system was underscored as a key focus for the Financial Crimes Enforcement Network (FinCEN) by Director Jennifer Shasky Calvery in a speech before the West Coast AML Forum in May. Emphasizing the value of the partnership between the government and the industry in keeping illicit actors out of the financial system, she outlined her agency’s recent efforts to create more transparency in the virtual currency space with the agency’s first enforcement action against a virtual currency company, her concerns about the lack of transparency in the real transactions because of the use of shell companies and the threat from third-party money launderers (3PML) who help criminal organizations gain access to the financial system. She also provided an update on FinCEN’s proposed beneficial ownership.

Detailed discussion

With a goal to ensure “an appropriate level of transparency in our financial system,” the director of the Financial Crimes Enforcement Network (FinCEN), Jennifer Shasky Calvery, outlined at the West Coast Anti-Money Laundering Forum several areas in which the regulator “has been harnessing its authorities.”

First up: efforts in the virtual currency space. Calvery highlighted FinCEN’s first civil enforcement action against a virtual currency business, Ripple Labs. FinCEN, which coordinated the action with the Department of Justice, ordered the company and a subsidiary to pay a $700,000 fine for the failure to register as a money services business, comply with certain reporting requirements, implement an effective anti-money laundering (AML) compliance program and undertake certain remedial actions. The CMP was partially offset by a $450,000 asset forfeiture to the DOJ.

“Virtual currency exchangers—like all members of regulated industry—must bring products to market that comply with our anti-money laundering laws,” Calvery said. “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”

FinCEN “regularly” engages with the virtual currency industry through administrative rulings and outreach efforts, Calvery explained, and recently launched a series of supervisory examinations of businesses in the industry “working closely” with “our delegated” Bank Secrecy Act (BSA) examiners at the Internal Revenue Service. “[T]hese exams will help FinCEN determine whether virtual currency exchangers and administrators are meeting their compliance obligations under the applicable rules.”

Key elements of the Ripple order that she cited were (1) compliance with the Funds Transfer and Funds Travel Rule for transactions of $3000 or more, and (2) a three-year “look-back” of records to identify and report “overdue” suspicious activity.

Another area Calvery identified as in need of transparency: The use of real estate—particularly shell companies used to purchase high-value properties—“has been a recurring theme throughout my professional career,” she noted, from transnational criminal organizations purchasing personal residences in large cities throughout the United States in the 1990s to the “endemic” use of narcotics proceeds to fund the purchase of luxury real estate in Miami.

The laundering of funds through real estate is a mainstay, Calvery told attendees. “Through our analysis of BSA reporting and other information, FinCEN continues to see the use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate in cash,” she said. Wire transfers originating from banks in offshore havens provide the funds for the real estate purchase, which is made in the name of a shell company to obfuscate the identity of the owner.

Calvery notes that the BSA established AML obligations for financial institutions involved in real estate transactions. “By including these businesses in the BSA’s definition of financial institution, Congress acknowledged the potential money laundering and financial crime risks in the real estate industry,” Calvery said.

In light of Congress’s mandate, FinCEN has established AML requirements for nonbank lenders and originators that issue mortgage-backed securities and has seriously considered issuing rules for the broader category of “persons involved in real estate closings and settlements.” In 2003, the regulator published an advance notice of proposed rulemaking to solicit comment on the issue and the scope of coverage for settlement and closing attorneys and agents, appraisers, title search and insurance companies, escrow companies, and possibly mortgage servicers and corporate service providers. But based on the comments received, FinCEN elected not to move forward “until we better identified the money laundering risks and activities involved.”

“So, even today, FinCEN’s task remains: to define the money laundering risks associated with certain persons involved in real estate closings and settlements, and consider appropriate initiatives to address these risks,” Calvery said. “Outreach and engagement with our regulatory, law enforcement, and real estate industry partners will be an important component of our efforts as we determine if additional AML requirements are needed.”

In the meantime, “an area of particular focus” remains greater transparency of beneficial ownership information to make it harder for criminals to hide their purchases of real estate through the use of shell companies. That focus brought Calvery to two other priorities for FinCEN: third-party money launderers and the issue of beneficial ownership.

3PMLs—including professional gatekeepers like attorneys and accountants—are used by criminals to gain access to financial institutions. A wide variety of schemes and methods are used, including shell companies and shelf corporations, layering financial transactions, and exerting improper influence on employees in financial institutions.

“FinCEN will pursue financial institutions that we believe facilitate third-party money laundering activity,” Calvery promised, citing an action earlier this year against Banca Privada d’Andorra charging that the bank facilitated transactions for 3PMLs involved in organized crime, corruption, smuggling, and fraud. “We cannot permit institutions and their associated 3PMLs to act as gateways to the U.S. financial system for criminal and other bad actors.”

Calvery also provided an update on FinCEN’s rulemaking on beneficial ownership “to help prevent the use of shell and shelf companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector.”

“As proposed, the rule would clarify and strengthen customer due diligence obligations of banks and other financial institutions, including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities,” Calvery detailed. “The proposed amendments would add a new requirement that these entities know and verify the identities of the real people who own, control, and profit from the companies they service.”

Since the public comment period on the proposed regulation closed last October, FinCEN has been reviewing 126 comments and is considering in the next step of the process. “We want to get this right,” Calvery emphasized.

To read the prepared remarks, click here.