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Regulatory Efficiency and Effectiveness - 2010
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In mid-January, FinCEN released the 13th edition of The SAR Activity Review - By the Numbers. The report's findings indicated some moderation in previously reported suspected fraudulent activities and significant increases in other areas. SAR filings for the first 6 months of 2009 indicated mortgage fraud leveling off at a high level and check fraud increasing. Four percent of the increase in filings by the securities and futures industries was due to increased filings by the insurance industry. FinCEN also issued Insurance Industry Suspicious Activity Reporting - An Assessment of the Second Year of Suspicious Activity Report Filings. This assessment, the second to be produced for the insurance industry, examines trends, highlights observed suspicious activities, and offers feedback on the quality of reports provided by that industry.
On February 4, 2010, Director Freis testified before the Senate Homeland Security and Government Affairs Committee, Permanent Subcommittee on Investigations to provide FinCEN's perspectives on Politically Exposed Persons (PEPs), and the degree to which those who are suspected of being involved in foreign corruption may be using the U.S. financial system and other professional services to funnel illicit proceeds.
The following day, FinCEN announced a final rule to conform its successful "314(a) program" with agreements with certain foreign jurisdictions, specifically the Agreement on Mutual Legal Assistance between the United States and the European Union (U.S.-EU MLAT). The regulation allows law enforcement agencies of such jurisdictions to submit information requests concerning significant money laundering or terrorist finance investigations to U.S. financial institutions through FinCEN. Expanding the program greatly benefits the United States by granting U.S. Federal law enforcement agencies reciprocal rights to obtain information about suspect accounts in EU member states. The regulation also permits U.S. State and local law enforcement agencies to have the same access to the program that previously has only been available to Federal law enforcement agencies.
In mid-February, Director Freis addressed the Florida International Bankers Association's 2010 Anti-Money Laundering Conference. His remarks focused on trade finance and money laundering, as well as how fraud and money laundering are interconnected, and FinCEN's ongoing work in the fraud area. He also announced the issuance of an advisory to financial institutions on filing Suspicious Activity Reports regarding trade-based money laundering, and the release of FinCEN's latest Mortgage Loan Fraud Update, a new analysis of suspicious activity related to possible mortgage loan fraud reported in the third quarter of 2009. The report also discusses the types of suspected fraud occurring in the foreclosure rescue fraud area as a result of FinCEN's "red flags" guidance on foreclosure rescue scams, issued in April 2009.
Just a week later, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to amend the Bank Secrecy Act (BSA) implementing regulations regarding the Report of Foreign Bank and Financial Accounts (FBAR). The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries.
FinCEN, together with the Federal Banking Agencies, the SEC, CFTC, and IRS, issued guidance in early March 2010 to financial institutions regarding their regulatory obligations with respect to beneficial ownership. The guidance represents an important step in clarifying and consolidating existing U.S. regulatory expectations for obtaining beneficial ownership information for certain accounts and customer relationships.
On March 17, FinCEN announced the assessment of a civil money penalty in the amount of $110 million against Wachovia Bank. The action represents the largest penalty action to date against a financial institution by FinCEN for violations of the Bank Secrecy Act. The investigation and resulting civil money penalty by FinCEN was part of a coordinated effort with the U.S. Attorney's Office for the Southern District of Florida, the Office of the Comptroller of the Currency, the Drug Enforcement Administration, and the Internal Revenue Service - Criminal Investigation Division.
FinCEN also issued two advisories based on statements from the Financial Action Task Force (FATF) on jurisdictions that have strategic weaknesses in their regimes regarding anti-money laundering and the counter-financing of terrorism. The FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. In developing the advisories, FinCEN worked closely with staff from Treasury's Office of Terrorist Financing and Financial Crimes.
Just a few days later, FinCEN issued guidance to financial institutions on the money laundering threat involving the Republic of Uzbekistan. FinCEN withdrew Advisory FIN-2008-A004, issued on March 20, 2008, based on the developments referred to in another FATF statement, particularly on Uzbekistan's significant progress in improving its anti-money laundering and counter-financing of terrorism regime, and the fact that Uzbekistan has addressed the AML/CFT deficiencies that the FATF had identified in February 2008.
FinCEN issued a final rule, replacing 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 (Currency Transaction Report, or CTR), which is standard for financial institutions. Both forms document a transaction in currency above $10,000, but differ in some technical aspects. The new rule increases efficiency and effectiveness by bringing the mutual fund industry into greater conformity with the rest of the financial industry, which currently files CTRs.
FinCEN continues to encourage financial institutions to electronically file Bank Secrecy Act (BSA) reports, and has issued a brochure highlighting the benefits of using the Bank Secrecy Act Electronic Filing System (BSA E-Filing). BSA E-Filing is a free, Web-based system that allows financial institutions subject to BSA reporting requirements to electronically file a variety of BSA forms. Electronically filing these forms makes them available to and searchable by law enforcement in 2 days, rather than up to 11 days if filed on paper. E-Filing BSA information increases the timeliness of data availability, reduces the cost of paper processing, and improves data quality. FinCEN is committed to working with financial institutions to increase their understanding of the value that E-Filing provides, accomplishing joint efforts to get important information relating to money laundering and terrorist financing to law enforcement in the quickest manner possible. FinCEN's recent enhancements to BSA E-Filing support the Department of the Treasury's flagship initiative of moving toward a paperless Treasury. BSA E-Filing provides cost savings for the government and improved response to customers.
Just over a week later, FinCEN issued an advisory to financial institutions highlighting potential reverse mortgage fraud schemes related to the Federal Housing Administrationís Home Equity Conversion Mortgage (HECM) program, so that financial institutions may better assist law enforcement when filing Suspicious Activity Reports. FinCEN is working closely with the Department of Housing and Urban Developmentís Office of the Inspector General to raise awareness of an apparent increase in fraudulent activity associated with some HECM loans.
At the end of April, Director Freis testified before the House Committee on Financial Services at an oversight hearing into recent GAO audits requested by the committee on the usefulness of Suspicious Activity Reports (SARs) and FinCEN's support to domestic law enforcement.
FinCEN and the Federal Deposit Insurance Corporation (FDIC) announced the assessment of concurrent civil money penalties of $25,000 against Eurobank, San Juan, Puerto Rico, for violations of the BSA. Eurobank, without admitting or denying the allegations, consented to payment of the civil money penalties, which was satisfied by a single payment of $25,000 to the Department of the Treasury. Eurobank failed to implement an adequate anti-money laundering program and monitor accounts for suspicious activity, relative to the types of products and services, volume of business, and nature of customers at the bank. The civil money penalty is the result of deficiencies and transactions that occurred at the bank between April 2005 and December 2008.
On May 12, 2010, Director Freis hosted the semi-annual plenary of the Bank Secrecy Act Advisory Group (BSAAG), the congressionally established forum for industry, regulators, and law enforcement to communicate about how law enforcement agencies use Bank Secrecy Act reports and how recordkeeping and reporting requirements can be improved. During the plenary, he announced the release of the most recent version of The SAR Activity Review - Trends, Tips & Issues, which provides information about the preparation, use, and value of Suspicious Activity Reports (SARs) filed by financial institutions. The SAR Activity Review reflects FinCEN's commitment to collaboration with its regulatory, law enforcement, and industry partners. This 17th issue of the report focuses on the casino and gaming industry.
Just a week later, Deputy Director Steele testified before the House Committee on Ways and Means regarding the casino industry. Deputy Director Steele offered some perspectives on potential money laundering vulnerabilities in the traditional, brick-and-mortar gambling industry, which FinCEN has been regulating and proactively analyzing for 15 years.
On May 20, 2010, Director Freis provided remarks to the Institute of International Bankers 2010 Anti-Money Laundering Conference. He discussed the alignment of goals between FinCEN's work and the proposals to strengthen the regulatory framework of the nation. He emphasized that FinCEN's current regulatory requirements already are consistent with many of the key principles identified in contemplating reform.
FinCEN announced June 3 the assessment of a civil money penalty of $1 million against Pamrapo Savings Bank, S.L.A., of Bayonne, N.J. for violating requirements under the Bank Secrecy Act (BSA). Pamrapoís lack of internal controls combined with unqualified BSA compliance personnel, relatively non-existent training, and deficient independent testing resulted in a wholly ineffective BSA compliance program which, in turn, resulted in the failure to file a substantial number of currency transaction and suspicious activity reports in an accurate and timely manner. Pamrapo Savings Bank, without admitting or denying the allegations, consented to payment of the civil money penalty.
On June 17, FinCEN released its first analysis of suspicious activity reports (SARs) containing information about potential foreclosure rescue scams. The report, Loan Modification and Foreclosure Rescue Scams Ė Evolving Trends and Patterns in Bank Secrecy Act Reporting, involved an analysis of more than 3,500 SARs filed from 2004 through 2009, of which the great majority (3,000) were filed last year. Additionally, FinCEN provided updated guidance to the financial industry concerning new scam techniques to which financial professionals should be alert. FinCEN issued the advisory to supplement the guidance in its advisory of April 6, 2009, regarding loan modification and foreclosure rescue scams.
That same day, Director Freis participated in a press conference to announce the results of a months-long mortgage fraud sweep by the Financial Fraud Enforcement Task Force, known as ďOperation Stolen Dreams." FinCEN has made mortgage fraud a primary focus over the last 4 years, starting with fighting loan origination fraud, to pulling together national resources to combat loan modification scams, and more recently in developing the methodology to combat fraud in reverse mortgages.
Also that day, Deputy Director Steele led a FinCEN delegation to Chicago for a town hall-style meeting with approximately 20 area banks with less than $5 billion in assets. The meeting was held in conjunction with FinCENís ongoing outreach initiative to learn more about the business practices of financial institutions, how their anti-money laundering programs operate, and the challenges of implementing these programs. The outreach initiative also enhances FinCENís ability to ensure the consistent application of, examination for, and enforcement of the Bank Secrecy Act.
In an attempt to address regulatory gaps that have resulted from the proliferation of prepaid innovations over the last 10 years and their increasing use as accepted payment methods, FinCEN issued a Notice of Proposed Rulemaking regarding prepaid access. The proposed new rules would establish a more comprehensive regulatory framework for non-bank prepaid access. The proposal is mandated under the Credit Card Accountability, Responsibility, and Disclosure Act of 2009.
In response to the promulgation of new regulations by the Mexican Ministry of Finance to severely limit the ability of Mexican banks to accept for deposit and to conduct transactions in U.S. currency, FinCEN issued an advisory to U.S. financial institutions concerning the types of increased suspicious activity they may expect to see as a result.
Just a few days later, FinCEN released the 14th edition of The SAR Activity Review Ė By the Numbers, assessing suspicious activity reports (SARs) filed in calendar year 2009. The publication shows that the total number of all SARs filed by financial institutions declined to 1.28 million, down from the 1.29 million SARs filed in 2008 Ė the first time since 1996 that the total number of SARs annually submitted declined.
FinCEN strives to provide useful guidance to the financial industries subject to the recordkeeping and reporting requirements of the Bank Secrecy Act. In support of this, FinCEN issued two pieces of guidance for the casino industry regarding risk-based approaches to the development of BSA compliance programs and the factors that card clubs or casinos may need to consider in assessing the effectiveness of their programs.
Emphasizing its commitment to providing written feedback to affected financial industries within 18 months of the effective date of a new regulation or change to an existing regulation, FinCEN released an assessment of the impact of amendments to the CTR exemption rules implemented last year. The assessment shows fewer CTR filings are made on transactions of limited or no use to law enforcement, while higher value CTRs are becoming easier to identify. Overall, CTR filings fell nearly 12 percent from 15.5 million in 2008 to 13.7 million in 2009, but certain classes of valuable filings increased.
"This study, issued 18 months after the rule went into effect, offers substantial evidence that FinCEN's efforts to address CTR filing issues have been effective and the result being financial institutions continue to provide even more useful and targeted information to assist law enforcement," said FinCEN Director James H. Freis, Jr. in announcing the study.
Later in the month, Director Freis led a FinCEN delegation to Minnesota for a town hall-style meeting with approximately 25 Minnesota area depository institutions with under $5 billion in assets. The meeting was held in conjunction with FinCENís ongoing outreach initiative to learn more about the business practices of financial institutions, how their anti-money laundering programs operate, and the challenges of implementing these programs. The outreach initiative also enhances FinCENís ability to ensure the consistent application of, examination for, and enforcement of the BSA. Additional meetings are scheduled throughout the remainder of the year.
As part of its industry-by-industry outreach approach, FinCEN is committed to addressing the many issues dealing with MSB oversight and MSB access to banking services. As such, FinCEN released a report announcing the findings of a months-long outreach campaign to the industry. The report is based on information gathered from FinCENís site visits to MSBs.
FinCEN also announced the availability of the Spanish-language version of its valuable Bank Secrecy Act/Anti-Money Laundering Examination Manual for Money Services Businesses. Similar to the English-language version, the new manual enhances BSA examiners' ability to perform risk-based examinations of MSBs, provides a resource to enhance the consistency of BSA examination procedure, and provides a summary of BSA compliance requirements and exam procedures to the industry.
In July 2010, FinCEN also added Somali language brochures to its list of resources for MSBs. These brochures are intended to facilitate MSBsí ability to more easily comply with the requirements of the BSA. The materials cover BSA compliance obligations, currency transaction reporting, and suspicious activity reporting. They are in addition to outreach materials for MSBs that are already available in English and the following seven foreign languages: Spanish, Chinese, Vietnamese, Korean, Arabic, Farsi, and Russian. These materials are intended to enhance FinCEN's outreach efforts to communities with significant numbers of MSBs.
FinCEN concluded the month of July by issuing additional feedback on SARs reporting mortgage loan fraud. Analysis found that the number of mortgage fraud SARs filed in 2009 grew 4 percent compared with the number of mortgage fraud SARs filed in 2008. During the fourth quarter of 2009, mortgage fraud SAR filings increased 6 percent over the same period in 2008. The report supports the efforts of the Financial Fraud Enforcement Task Force (FFETF), established by President Obama in November 2009 to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. Additionally, FinCEN efforts are being further developed as part of the FFETFís anti-mortgage fraud initiative to provide information sharing based on SAR data, in particular to target organized criminal activity as well as to support law enforcement investigations and prosecutions.
In September 2010, FinCEN announced a proposed rulemaking that would require certain depository institutions and MSBs to affirmatively provide records to FinCEN of certain cross-border electronic transmittals of funds (CBETF). Current regulations already require that these financial institutions maintain and make available, but not affirmatively report, essentially the same CBETF information. The proposal will produce valuable data for law enforcement agencies by having first-in and last-out depository institutions report all such transmittals of funds. MSBs that conduct CBETF will be required to report international transactions equal to or in excess of $1,000. FinCEN estimates that fewer than 300 depository institutions and 700 MSBs will be subject to this requirement.
FinCEN also proposed to require an annual filing by all depository institutions of a list of taxpayer identification numbers of accountholders who transmitted or received a CBETF. This additional information will facilitate the utilization of the CBETF data, in particular as part of efforts to combat tax evasion by those who would seek to hide assets in offshore accounts.
FinCEN conducted an extensive study of the technical feasibility to the government of imposing such a requirement, and in January 2007, FinCEN published a congressionally mandated report that affirmed the feasibility of the reporting system. With the participation of both the financial services industry and law enforcement, FinCEN conducted a follow-on study to determine and quantify both the benefits to the public of the system and the costs to parties affected by any such potential regulatory requirement.
In direct support of FinCENís BSA Efficiency and Effectiveness Initiative to make regulations more intuitive, FinCEN announced the pending publication of the reorganization of its rules and regulations by centralizing them in their own new Chapter X of Title 31 of the Code of Federal Regulations (CFR). The rule streamlines the BSA regulations into general and industry-specific parts, ensuring that a financial institution can identify its obligations under the BSA in a more organized and understandable manner. FinCEN has not made any substantive changes to the BSA rules. FinCEN will implement the new Chapter X on March 1, 2011 and until that time, the regulations remain under 31 CFR Part 103. FinCEN has also made available a Web tool to facilitate making the transition from the former structure to the new Chapter X. The tool, Chapter X Citation Translator, will provide an automated way for financial institutions to translate a regulatory citation from 31 CFR Part 103 to 31 CFR Chapter X and vice versa.
Also in October, FinCEN released a new study analyzing SARs citing identity theft. The study showed that while suspected cases of identity theft are on the rise, vigilant financial institution employees are reportedly rejecting over half of fraudulent vehicle or student loans facilitated by identity theft prior to funding. The report, Identity Theft - Trends, Patterns, and Typologies Reported in Suspicious Activity Reports (SARs) Filed by Depository Institutions, shows the number of SARs characterized as identity theft rose 123 percent between 2004 and 2009, out-stripping the rise of total SARs filed by depository institutions, which increased 89 percent during the same 5 years.
During November 2010, FinCEN issued a final rule and accompanying guidance regarding the confidentiality of SARs. The rule reiterates the confidential nature of SARs, noting that a SAR (and information that would reveal the existence of a SAR) cannot be disclosed by government officials as well as reporting financial institutions. The guidance makes it easier for financial institutions to share information related to SARs with affiliates as long as those affiliates are linked under a common ownership structure.
The regulations clarify the scope of the statutory prohibition against disclosure by a financial institution or by a government agency of a SAR or any information that would reveal the existence of a SAR.
The related advisory, Maintaining the Confidentiality of SARs, is intended for all BSA stakeholders: Federal and State regulatory agencies, law enforcement, self-regulatory organizations, and financial institutions. The advisory emphasizes the importance of confidentiality for maintaining a vigorous suspicious activity reporting regime, and intends to help focus BSA stakeholders to be vigilant in managing information sharing
Find FinCENís responses to public comments received on the guidance as it was proposed and additional information regarding the effective date and the rationale for the guidance in FinCENís Notice of Availability of Final Interpretative Guidance.
In December 2010, FinCEN announced a proposal that non-bank residential mortgage lenders and originators establish anti-money laundering (AML) programs and comply with SAR regulations. Under current FinCEN regulations, the only mortgage originators that are required to file SARs are banks and insured depository institutions. The proposal would close a regulatory gap that allows other originators, such as mortgage brokers and mortgage lenders not affiliated with banks, to avoid having AML and SAR filing obligations. FinCEN believes that new regulations requiring non-bank residential mortgage lenders and originators to adopt AML programs and report suspicious transactions would be consistent with their due diligence and information collection processes to assess creditworthiness in lending, and could augment FinCEN's initiatives in this area.