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From Banking and Finance Law Daily, May 7, 2015

FinCEN’s Shasky Calvery seeks greater transparency in financial market

By Lisa M. Goolik, J.D.

Speaking at the West Coast Anti-Money Laundering (AML) Forum, Financial Crimes Enforcement Network Director Jennifer Shasky Calvery described the efforts FinCEN is undertaking to achieve “an appropriate level of transparency” in the financial system, including the agency’s focus on real estate transactions, third-party money launderers, beneficial owners, and the virtual currency market.

Money laundering through real estate. Shasky Calvery talked at length about FinCEN’s focus on ensuring transparency in the area of real estate. FinCEN continues to see the use of shell companies by criminals to purchase luxury residential real estate in cash. The criminals will direct an individual involved in the settlement and the closing in the United States to put the deed to the property in the name of the shell company, hiding the identity of the owner, explained Shasky Calvery.

While FinCEN has established AML requirements for non-bank lenders and originators that issue mortgage-backed securities, it has not issued rules for the broader category of “persons involved in real estate closings and settlements.” Thus, real estate purchases that do not involve a mortgage are not subject to the Bank Secrecy Act, although the transactions may be covered by criminal money laundering statutes.

Shasky Calvery noted that FinCEN has considered whether to issue such rules, going so far as to issue an advance notice of proposed rulemaking in 2003 soliciting public comment on appropriate AML requirements that would likely cover settlement and closing attorneys and agents, appraisers, title search and insurance companies, escrow companies, and possibly mortgage servicers and corporate service providers. However, based on comments from the advance notice, FinCEN decided not to move forward.

Rather, FinCEN shifted its focus to achieving greater transparency in the area of beneficial ownership of corporate entities.

Third-party money launderers. Similarly, third-party money launderers, referred to as “3PMLs,” also threaten the transparency of the financial system, Shasky Calvery said. Criminal organizations may use the services of a complicit third party, which can include professional gatekeepers such as attorneys, and accountants, to obtain access to financial institutions. The 3PMLs also add “an aura of legitimacy” to criminals using the service.

“FinCEN will pursue financial institutions that we believe facilitate third-party money laundering activity, said Shasky Calvery. “We cannot permit institutions and their associated 3PMLs to act as gateways to the U.S. financial system for criminal and other bad actors.”

Beneficial owners. Shasky Calvery also provided an updated on FinCEN’s efforts to address beneficial ownership, particularly as it relates to money laundering through real estate and third-party money launderers. The policy issue is the first issue that she has been involved with from start to finish.

In July 2014, FinCEN proposed to amend existing BSA regulations 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. The rule is intended to clarify and strengthen customer due diligence obligations of banks and other financial institutions, adding 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.

According to Shasky Calvery, FinCEN received 126 comments. The comments came from trade associations, law firms, consulting firms, research institutes, banks, financial institutions, federal regulatory agencies, and individuals. Some commenters requested greater clarification on questions of scope and key definitions, while others proposed more significant revisions to the rule. FinCEN is currently in the process of reviewing, discussing, and considering the issues that were raised by those that commented.

Virtual currency efforts. Shasky Calvery also highlighted FinCEN’s recent scrutiny of the virtual currency market. In collaboration with examiners at the Internal Revenue Service, FinCEN recently launched a series of supervisory examinations of businesses in the virtual currency industry. “Where we identify problems, we will use our supervisory and enforcement authorities to appropriately penalize non-compliance and drive compliance improvements,” she warned.

Just so, on May 5, 2015, FinCEN announced a $700,000 civil money penalty against virtual currency exchanger Ripple Labs Inc. and its wholly-owned subsidiary XRP II, LLC for violating the Bank Secrecy Act (see Banking and Finance Law Daily, May 6, 2015). FinCEN charged the companies with failing to register with FinCEN as a money services business and failing to implement adequate AML safeguards.

“Virtual currency exchangers—like all members of regulated industry—must bring products to market that comply with our anti-money laundering laws. 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,” said Shasky Calvery.

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