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Regulatory Efficiency and Effectiveness - 2009
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FinCEN continues to work with Federal regulators, members of the financial industry, and law enforcement to increase the efficiency and effectiveness of BSA regulations.
Following the release of the examination manual for MSBs, FinCEN and the IRS held a national conference call to help MSBs better understand BSA requirements and examination expectations.
FinCEN also collaborated with the Commodity Futures Trading Commission (CFTC) to enter into an agreement for the exchange of information to coordinate efforts and maximize resources in discharging the agencies’ statutory obligations under the Commodity Exchange Act (CEA) and the BSA. The collective goal of the agencies is to ensure that CFTC-regulated entities – particularly futures commission merchants and introducing brokers – have in place anti-money laundering programs that comply with the BSA and its implementing regulations. An additional goal is to ensure that terrorist financing, money laundering, and other financial crimes – including violations of the CEA – are identified, deterred, and interdicted.
As a resource for financial institutions to help address questions frequently asked by their customers, FinCEN issued an educational pamphlet on the CTR reporting requirement. The pamphlet, which can be provided to customers, uses plain language to explain the CTR reporting requirement to those who may not be familiar with a financial institution’s obligations under the BSA. For example, the pamphlet explains that large currency transactions are not illegal, and that financial institutions are required to obtain information from their customers when these transactions do occur. The pamphlet does not alter in any way a financial institution’s BSA reporting requirements and explains that if a customer attempts to break up, i.e. “structure,” transactions in order to evade the CTR reporting requirement there are potential civil and criminal consequences.
The following day, FinCEN issued another informational resource – its latest analysis of depository institution SARs reporting mortgage fraud as a category of suspicious activity. The report showed SARs filed on suspected mortgage fraud increased 44 percent in the 12 months ending in June 2008, compared with the prior year.
Overall, from July 1, 2007 through June 30, 2008, the 12-month period examined for this analysis, financial institutions filed 62,084 depository institution SARs reporting mortgage loan fraud, up 44 percent from 43,054 reported from July 1, 2006 through June 30, 2007. The 62,084 figure represents 9 percent of all depository institution SARs filed during the period. In addition to suspicion triggered in connection with repurchase demands, there were other trends in the growth in suspected mortgage fraud. Filing institutions referenced foreclosures in 13 percent of their SAR filings, insurers in 8 percent and early default payments in 2 percent of filings as indications of suspected fraud. These patterns of filings generally involved the detection of suspected fraud after the mortgage had been granted. That notwithstanding, there also was an increase in the percentage of SARs filed prior to granting the loan (34 percent as compared to 31 percent in the prior one-year period, which, as highlighted in FinCEN’s April 2008 report, was an increase from 21 percent over the preceding decade). The overall SAR filing trend does not necessarily reflect fraudulent activity on current mortgage originations. This is FinCEN’s third mortgage fraud assessment since November 2006.
Consistent with two important purposes of the BSA – promoting financial institutions’ efforts to detect and report money laundering and terrorist financing, as well as ensuring the confidentiality of a SAR or any information that would reveal the existence of a SAR – FinCEN announced proposals to permit the certain financial institutions to share a SAR, or information that would reveal the existence of the SAR, with an affiliate provided that affiliate is subject to a SAR regulation issued by FinCEN or the Federal Banking Agencies. FinCEN has proposed revised rules and new guidance that permit certain affiliates of depository institutions, as well as broker-dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities, to share SARs within a corporate organizational structure for purposes consistent with Title II of the BSA.
“The rule and guidance … helps to ensure that critical information is appropriately shared and reaffirms our commitment to protect this sensitive information,” said FinCEN Director James H. Freis, Jr. in announcing details of a new SAR sharing plan. “FinCEN recognizes the need to remove regulatory inefficiencies that detract from providing timely and accurate information to law enforcement. We will continue to pursue this shared goal with our regulatory, industry, and law enforcement partners.”
In another example of its commitment to provide affected industries with written feedback within 18 months from the effective date of a new regulation or significant change to an existing regulation, FinCEN released a report on the impact of final rules concerning Special Due Diligence Programs for Certain Foreign Accounts. On August 9, 2007, FinCEN issued a final rule implementing the enhanced due diligence provisions of Section 312, requiring that covered financial institutions apply risk-based procedures to the accounts of three categories of foreign banks. The 2007 rule supplemented the Special Due Diligence Final Rule published on January 4, 2006, which implemented due diligence requirements for correspondent accounts for foreign financial institutions. As FinCEN attempts to provide additional feedback to the industry on changes to our regulations and/or trends we find in overall BSA filings, we encourage financial institutions to respond with reactions and comments to these products. FinCEN provides these reports so that financial institutions can improve the effectiveness and efficiency of their BSA and general fraud programs, and strives to make these products as beneficial to industry as possible.
Continuing its focus on the analysis of SARs regarding mortgage fraud, FinCEN released a report showing the connection between mortgage fraud and other financial crime. FinCEN’s fourth mortgage loan fraud report shows that subjects reported for suspected mortgage loan fraud also may be involved in other financial crimes, such as check fraud, money laundering, stock manipulation, and structuring to avoid currency transaction reporting requirements. From depository institution SARs, FinCEN identified approximately 156,000 mortgage fraud subjects, and found that 2,360 were reported for suspicious activity in 3,680 of the other SAR types.
"This study analyzes the possible interrelationship of illicit activity occurring across different financial sectors. Criminal actors may attempt to exploit any vulnerability to commit fraud and launder money through a range of financial institutions," Director Freis said. "The interconnected nature of suspicious activity across multiple financial sectors covered by FinCEN's Bank Secrecy Act regulations underscores the immense value of combining insights from the different sectors for the purpose of detecting and thwarting criminal activity."
Also in March, FinCEN joined a multi-agency task force to deter, detect, and investigate fraud and abuse. The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) announced March 11 the formation of a task force designed to deter, detect, and investigate instances of fraud in the Term Asset-Backed Securities Loan Facility (TALF) program. FinCEN will be a participant in this task force along with law enforcement and regulatory agencies. FinCEN will commit its unique authorities and capabilities to ensure that the financial industry remains vigilant and provides law enforcement with the lead information needed to aggressively root out fraud while promoting legitimate economic activity and growth.
As part of Secretary Geithner’s April 6 announcement of a major interagency effort to combat foreclosure rescue scams, FinCEN issued an advisory to help financial institutions spot questionable loan modification schemes and report that information to law enforcement. The advisory provides “red flags” for financial institutions that may indicate a loan modification or foreclosure rescue scam. In addition, FinCEN will coordinate the Treasury Department’s targeting effort to deter fraudulent activity and combat fraudulent loan modification schemes. FinCEN, working with its partners from the law enforcement and the regulatory community, will utilize information provided by the financial industry, and other information supplied by participating agencies, to identify possible loan modification fraud suspects for civil and criminal investigations, and help law enforcement agencies coordinate their efforts to bring wrongdoers to justice. This initiative also will streamline efforts to ensure that the resources of multiple investigative and prosecutorial agencies are focused in the most efficient way.
Furthering efforts to carry out the administration of the BSA in the most efficient and effective manner possible, FinCEN transferred all resources for money services businesses to the "financial institutions" section of its Web site. MSBs now will find all BSA information related to their industry in one place on www.fincen.gov. This change consolidates information for all industries subject to BSA reporting and recordkeeping requirements to a single Web site.
Also in April, FinCEN and the Office of the Comptroller of the Currency (OCC) announced the assessment of concurrent civil money penalties, each $5 million, against the New York Branch of Doha Bank, Doha, Qatar, for past violations of the BSA. The Branch, without admitting or denying the allegations, consented to payment of the civil money penalties, which were to be satisfied by a single payment of $5 million to the U.S. Department of the Treasury.
At the end of April, FinCEN issued guidance to enable depository institutions to more easily determine and document certain business customers' eligibility for exemption from currency transaction reporting. In December 2008, FinCEN announced a final rule simplifying requirements for depository institutions to exempt their eligible customers from such reporting. The guidance is expected to both ease compliance with applicable regulatory requirements and enhance supervisory consistency. This step complements other changes made by FinCEN in 2008 to the CTR regulations, designed to increase the efficiency of the reporting process, including promoting exemptions for reporting that is less valuable to law enforcement.
In May, FinCEN issued a letter ruling, responding to the question of whether a "non-listed" insurance company "serves as a financial institution" and is therefore an "ineligible business" pursuant to 31 C.F.R. § 103.22(d)(6)(viii). FinCEN determined that any use of the term "financial institution" in 31 C.F.R. § 103.22 refers to the regulatory definition in 31 C.F.R. § 103.11(n). Because insurance companies do not fall within the regulatory definition of "financial institution," they are eligible for exemption.
In direct support of its BSA Efficiency and Effectiveness Initiative to craft a more narrow definition of MSBs, FinCEN announced a Notice of Proposed Rulemaking (NPRM) designed to make the determination of which businesses qualify as MSBs more straightforward and predictable. FinCEN is proposing to revise the MSB definition by describing with more clarity the types of financial activity that will subject a business to the BSA implementing rules. This proposal will incorporate past FinCEN rulings and policy determinations into the regulatory text and will make it easier for MSBs to determine their responsibilities.
FinCEN also released the latest edition of the SAR Activity Review - Trends, Tips and Issues. This edition focuses on the securities and futures industry, and addresses several noteworthy topics. Articles in the Trends & Analysis section include an assessment of SARs filed by the securities and futures industry by FinCEN's Office of Regulatory Analysis, as well as information from staff of the Securities and Exchange Commission (SEC) on how to file SARs, the SEC's use of SARs, and the consequences to regulated institutions for failure to file. An article by staff from the SEC and FINRA (Financial Industry Regulatory Authority) looks at how securities regulators review SARs during examinations.
Following the conclusion of the Egmont Plenary in Doha, Qatar, Director Freis announced that FinCEN had signed three MOUs with the financial intelligence units (FIUs) of Bermuda, Serbia, and Ukraine, which will further improve cooperation between each of these nations and the United States in the global effort to fight financial crimes. FIUs were created as countries around the world developed systems to address the global threats of money laundering and illicit finance. They offer law enforcement agencies around the world an important avenue for information exchange. As the FIU of the United States, FinCEN recently elevated its Office of International Programs to become its own division within the bureau to bring significant efficiency to its international operations. Also during the plenary, Director Freis discussed the concept of SAR sharing as a way to help promote the incentives of transnationally active institutions to manage risks in an efficient way.
FinCEN issued a Notice of Proposed Rulemaking (NPRM) that would replace a mutual fund requirement to file IRS/FinCEN Form 8300 - Report of Cash Payments Over $10,000 Received in a Trade or Business - with a requirement to file FinCEN Form 104 (CTR), which is standard for financial institutions. Both forms document a transaction in currency above $10,000, but differ in some technical aspects. If adopted, this proposal will bring the mutual fund industry into greater conformity with the rest of the financial industry, which currently files CTRs. It promotes efficiency and effectiveness by reducing paperwork for mutual funds, and helping FinCEN more directly identify suspicious activity involving money laundering and fraud. To make the change, FinCEN is proposing to include mutual funds within the general definition of "financial institution" in rules implementing the BSA.
FinCEN also issued guidance to financial institutions to clarify information sharing under section 314(b) of the USA PATRIOT Act. Section 314(b) permits participating financial institutions, upon providing notice to FinCEN, to avail themselves of a statutory safe harbor from civil liability for sharing information with one another to identify and report activities that they suspect may involve possible terrorist activity or money laundering. The guidance clarifies the scope of permissible information sharing covered by the section 314(b) safe harbor provision.
In early July, FinCEN issued an advisory on apparent structuring by casino patrons and personnel. Structuring - the breaking up of transactions for the purpose of evading BSA reporting or recordkeeping requirements - is unlawful and involves potential civil and criminal penalties. FinCEN had received information from law enforcement and regulatory authorities that raised concerns about the current level of compliance with the obligations to guard against structuring. The BSA requires casinos to implement a compliance program, file reports, and maintain certain records. A casino's compliance program must be reasonably designed to manage the risk of illicit activity and ensure compliance with BSA requirements, including an obligation to detect and report evidence of structuring violations on FinCEN Form 102, Suspicious Activity Report by Casinos and Card Clubs.
As part of its efforts to provide more value in the feedback products created for the financial industry, FinCEN released the 12th issue of the SAR Activity Review - By the Numbers. The report shows a continued overall rise in SAR filings, including an increase in depository institution filings related to all seven areas of suspected fraud listed on the SAR form. In 2008, the total volume of all SARs filed revealed a 3 percent increase as compared to a 16 percent increase the prior year. SARs filed by depository institutions increased by 12.85 percent as compared to 2007. The report also revealed that of the 20 different violation types tracked, seven of the categories relate specifically to fraud and all seven showed an increase in SAR filings during the year. While these categories represent one-third of the possible violation types, they accounted for nearly half of the increase in total SAR filings from 2007 to 2008, with all of the fraud categories seeing double-digit increases in percentage of filings in 2008. These categories were: check fraud, mortgage loan fraud, consumer loan fraud, wire transfer fraud, commercial loan fraud, credit card fraud, and debit card fraud.
Following the release of By the Numbers, Director Freis addressed the Association of Certified Fraud Examiners at its annual fraud conference. In his speech, Director Freis told fraud examiners that their interests in deterring, detecting, holding accountable, and seeking restitution from those who perpetrate fraud are directly aligned with FinCEN's mission. He also accepted the association's Cressey Award for achievement in the detection and deterrence of fraud.
Furthering its efforts to root out fraud and protect the integrity of the global financial system, FinCEN issued advance notice of proposed rulemaking to solicit public comment on a wide range of questions pertaining to the possible application of anti-money laundering program and SAR regulations to non-bank residential mortgage lenders and originators. In April, the Department of the Treasury and FinCEN coordinated an inter-agency effort with the U.S. Department of Justice (DOJ), the Department of Housing and Urban Development (HUD), the Federal Trade Commission (FTC), and state officials to announce new initiatives to target foreclosure rescue scams and loan modification fraud. These initiatives are helping to coordinate information and resources across agencies to maximize targeting and efficiency in fraud investigations, alert financial institutions to emerging schemes, step up enforcement actions and educate consumers to help those in financial trouble avoid becoming the victims of a loan modification or foreclosure rescue scam. This coordinated effort combined with the announcement that FinCEN is considering applying AML program and SAR regulations to non-bank residential mortgage lenders and originators comes when millions of vulnerable homeowners are seeking assistance under the Administration's Making Home Affordable program. These initiatives will help prevent criminal actors from perpetrating predatory schemes.
"As primary providers of mortgage finance who generally deal directly with consumers, these lenders and originators are in a unique position to assess and identify money laundering risks and possible mortgage fraud while directly assisting consumers with their financial needs and protecting them from the abuses of financial crime," Director Freis said.
FinCEN posted to its Web site August 13 an administrative ruling regarding the treatment of deposits by armored cars for currency transaction reporting purposes. The matter involved unrelated companies contracting with an armored car to make deposits that collectively exceeded $10,000 in currency at a bank.
In another effort to increase the efficiency and effectiveness of its administration of the BSA, FinCEN issued guidance to help banks determine whether a customer is eligible for exemption from currency transaction reporting requirements. The guidance provides examples and answers to commonly asked questions regarding the final rule that FinCEN issued in December 2008, which amended CTR exemption requirements. In February 2008, the Government Accountability Office (GAO) issued a report concluding, among other things, that the information provided on CTRs provides unique and reliable information essential to a variety of efforts, including law enforcement investigations, regulatory, and counter-terrorism matters. In this same report, the GAO recommended several changes to the exemption requirements, which FinCEN addressed in the final rule. The GAO also concluded that additional Web-based guidance was necessary to help banks determine eligibility for exemption, which FinCEN is addressing in this guidance document.
At the end of August, Director Freis traveled to the United Kingdom, where he delivered remarks to the Cambridge International Symposium on Economic Crime. His remarks focused on FinCEN's role in the U.S. Government's initiatives to combat foreclosure rescue scams and loan modification fraud. While in the United Kingdom, Director Freis also met with senior officials from foreign regulatory and law enforcement agencies.
On September 17, Treasury Secretary Tim Geithner hosted FinCEN Director Jim Freis, Attorney General Eric Holder, HUD Secretary Shaun Donovan, FTC Chairman Jon Leibowitz, and attorneys general from 12 states to discuss emerging trends and strategies to combat fraud against consumers in the housing markets as well as best practices to bolster coordination across State and Federal agencies. Treasury, FinCEN, DOJ, HUD, and the FTC are committed to curbing abuse by coordinating information and focusing resources in their fraud investigations. At the event, the FTC announced developments in pending mortgage-related actions, several of which have involved coordinated case work from FinCEN.
On Friday, October 2, FinCEN published 25 new Frequently Asked Questions (FAQs) to assist the casino and gaming industry in complying with its responsibilities under the Bank Secrecy Act (BSA). These FAQs are part of FinCEN's ongoing and coordinated educational efforts to better inform the industry by providing gaming interests the latest information they need to comply with the BSA and, ultimately, to help law enforcement identify illicit activity.
Topics covered include: which gaming establishments are "casinos" under the BSA; whether or not a casino or card club must have an internal control for chip redemptions; reporting and record retention rules governing casinos and card clubs; the treatment of floor persons, chip runners, and hosts in currency transaction reports for casinos (CTRCs); information sharing by casinos under Section 314(b) of the USA PATRIOT Act; rules governing casino and card club reporting of suspicious transactions through the filing of suspicious activity reports for casinos (SARCs); and what information a casino or card club may disclose in response to a subpoena, summons or other process issued in civil litigation.
FinCEN continues to engage in a variety of initiatives to ensure that our mission as administrator of the BSA is carried out in the most efficient and effective manner possible. This outreach assists in FinCEN's ongoing work with the financial industry as financial institutions strive to comply with their responsibility to report certain financial information and suspicious activities to FinCEN, as well as our responsibility to ensure this useful information is made available to law enforcement, as appropriate. In furtherance of these goals, FinCEN has initiated an outreach effort with representatives from a variety of industries that fall under BSA regulatory requirements. FinCEN will publish reports to share information gathered as part of its outreach initiative.
At the annual American Bankers Association / American Bar Association annual Money Laundering Enforcement Conference, Director Freis delivered remarks, announcing the release of FinCEN's report on outreach to large depository institutions. He also announced a new outreach program to the nation's depository institutions with less than $5 billion in assets.
The following day, Director Freis chaired the 32nd semi-annual plenary session of the Bank Secrecy Act Advisory Group (BSAAG), which was established by Congress to serve as a forum for industry, regulators, and law enforcement to communicate about how Bank Secrecy Act reports are used by law enforcement, and how recordkeeping and reporting requirements can be improved. At the meeting, Director Freis announced the release of the sixteenth issue of The SAR Activity Review - Trends, Tips & Issues, which is published under the auspices of the BSAAG, and provides information to FinCEN's stakeholders about the preparation, use, and value of SARs.
FinCEN also released an advisory to financial institutions on filing suspicious activity reports regarding TARP-related programs.
FinCEN continues to emphasize the importance of strong international partnerships to achieve the common goal of countering criminal abuse of the global financial system. Director Freis emphasized this while addressing the Association of Mexican Banks 11th Anti-Money Laundering and Financing of Terrorism International Seminar on October 22.
Further emphasizing the importance of partnerships and collaboration, Director Freis addressed the Tennessee Bankers Association's Bank Security and Risk Management Conference. He discussed FinCEN's efforts to combat fraud, as well as the next phase of FinCEN's outreach program to the financial industry.
In mid-November, FinCEN issued a notice of proposed rulemaking (NPRM), intended to conform FinCEN's information sharing program (under Section 314(a) of the USA PATRIOT Act) with U.S. agreements going into effect in 2010 with certain foreign jurisdictions by allowing the law enforcement agencies of such jurisdictions to submit information requests of financial institutions through FinCEN. The proposed rule would also permit State and local law enforcement agencies to do the same, consistent with their treatment under other Bank Secrecy Act provisions. Such information requests would enable these agencies to know whether a financial institution has established an account or conducted a transaction with a person reasonably suspected, based on credible evidence, of engaging in terrorist activity or significant money laundering.
In further steps toward efficiency and effectiveness, FinCEN issued a final rule amending its process for BSA administrative ruling notifications. FinCEN determined that publishing administrative rulings on its Web site distributes information to the public more broadly and more expediently than publication in the Federal Register.
On November 17, the Departments of Justice, Treasury, Housing and Urban Development (HUD), and the Securities and Exchange Commission (SEC) announced the establishment of an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime. The task force's leadership, along with representatives from a broad range of Federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets, and recover proceeds for victims. In prepared remarks for a news conference regarding the task force, Treasury Secretary Geithner announced that FinCEN has pursued more than 100 cases, partnering with 31 state attorneys general who are aggressively cracking down on mortgage fraud and are shutting down suspect companies.
At the end of November, FinCEN made available in Spanish its educational pamphlet on the currency transaction reporting requirement. Earlier this year, FinCEN issued the brochure "Notice to Customers: A CTR Reference Guide" as a resource for financial institutions to help address questions frequently asked by their customers regarding the BSA requirement to report transactions in currency that exceed $10,000. In May 2009, FinCEN also released a similar CTR brochure specifically for use by casinos.
Continuing its commitment to efficiency and effectiveness, FinCEN implemented the second phase of the BSA E-Filing SAR Acknowledgements and Validations process. Phase I was implemented in September 2009 and provided BSA E-Filers with an acknowledgement of receipt for a submitted SAR. Phase II applies data quality checks and provides filers with information on the quality of their submissions for electronically filed SARs of all types. In addition, FinCEN issued guidelines to assist users of the BSA E-Filing System in correcting errors in batch-filed SARs.