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Official Blog of the International Enforcement Law Reporter

GAO Publishes Report on Trafficking and Money Laundering Required by Corporate Transparency Act

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GAO Publishes Report on Trafficking and Money Laundering Required by Corporate Transparency Act

On December 23, 2021, the General Accountability Office (GAO) published  Report on Trafficking and Money Laundering Strategies Used by Criminal Groups and Terrorists and Federal Efforts to Combat Them (GAO-22-104807 53 pp.).

The GAO reviewed how transnational criminal organizations and terrorist groups traffic goods such as illegal drugs, engage in human trafficking, and launder money.

Reasons for and Goals of the Report

Congress  included a  provision  in  the  Money Laundering Act of 2020, which was part of the National  Defense Authorization  Act  for  Fiscal  Year  2021, for the  GAO  to  review  trafficking and related  money  laundering  and  create federal efforts  to  combat  them.

The goals of the report are to describe  what  is  known  about  the money  laundering  strategies  of transnational  criminal  organizations and  terrorists  and  information-sharing efforts  among  federal  agencies  to combat  trafficking.

Findings- Money Laundering Techniques

Federal agencies, international organizations, and other commentators, such as non-governmental organizations, have reported that money laundering strategies used by transnational criminal organizations and terrorist groups include sophisticated techniques such as phony trade transactions or purchase and resale of real estate or art.

The techniques can involve the services of professional money laundering networks or service providers in legitimate professions, such as law and accounting. For example, lawyers or accountants can create shell companies (entities with no business operations) to help criminals launder illicit proceeds. Transnational criminal organizations and terrorist groups also continue to smuggle cash in bulk or transmit money electronically across borders.  The report also mentions the role of real estate agents, company service providers, and art and antiquities dealers.

Federal Efforts to Combat Trafficking and Money Laundering

Federal  efforts  to  combat  trafficking  and  money  laundering  incorporate  multiple collaborative  and  information-sharing  mechanisms  and  include  the  private  sector.

  • Law enforcement  agencies  cooperate  through  task  forces  in  which  they share  information  and  analytical  resources  to  aid  in  the  investigation  and prosecution  of  drug  and  other  trafficking-related  crimes.
  • Federal  agencies  share  intelligence  with  foreign  counterparts.  In particular, the  Financial  Crimes  Enforcement  Network  (FinCEN),  a  bureau  of  the Department  of  the  Treasury,  shares  information  with  more  than  160 international  financial  intelligence  agencies.
  • FinCEN collaborates  with  law  enforcement  agencies  to  share  information with  financial  institutions  on  “red  flags”  for  trafficking,  which  institutions  can use  to  identify  and  report  suspicious  transactions.
  • Under Sec. 314(b) of the USAPATRIOT Act, FinCEN also  coordinates  a  voluntary  program  that  allows  financial  institutions to  share  information  with  one  another  to  better  identify  and  report  suspicious activities  that  may  be  related to  money  laundering  or  other  illicit  financing.

Efforts of the Federal Government to Improve Institution Reporting and Enhance Data Analysis

The report discusses efforts by federal  agencies to undertake initiatives  to  make information from financial  institutions  more available  or  more useful  for  trafficking-related investigations, and to enhance agencies’  ability  to analyze such information.

FinCEN Advisories –  FinCEN  attempts to improve the quality  of the SAR data it receives  from  financial  institutions  by  issuing advisories, which include descriptions  of trafficking  strategies, “red  flag”  indicators, and other  guidance developed in collaboration with law  enforcement agencies. The advisories are designed to help institutions better understand  what transactions  or customer activities to report to law enforcement.

Information sharing between  federal agencies and financial institutions.

FinCEN and law enforcement agencies  have programs  to share details  about how  financial  institutions  could better  identify  and report data for  disrupting  money  laundering, terrorist financing, and other financial  crimes.  However, the information generally is shared among limited audiences.  For example, in 2017, FinCEN created the FinCEN Exchange.  This is a public-private program to enhance information sharing with financial institutions so that FinCEN and law enforcement agencies can receive information that will help them disrupt money laundering and other financial crimes.

Information sharing among financial institutions.

FinCEN coordinates a voluntary program for financial institutions  to  share information with each other. The goal of the sharing is  to help financial institutions  better  identify  and report activities  they  suspect may  involve money  laundering or  terrorist activities. The program, which is  authorized by  Section 314(b)  of the USA  PATRIOT Act, allows  financial  institutions  to share normally  private information about customers  or  transactions  when the institutions  suspect  money  laundering or  terrorist financing.

Analysis

The GAO Report does not provide analysis or recommendations, but furnishes an opportunity to reflect on the recently enacted Corporate Transparency Act.  While it proffers a positive way forward to start catching up with international standards, it obviously falls below in several ways.

The collection of data is limited to those entities which must file with the Secretary of State.  As a result, it will miss private trusts and other entities that do not need to file with the Secretary of State.

It remains to be seen whether the way in which FinCEN obtains and maintains the information will be in a standard format internationally so that it can be easily shared with other law enforcement and regulators.

The proposed beneficial ownership regulations under the CTA does not require verification of the information.  In addition, contrary to the EU and other systems, the information is not accessible to the public.  The lack of verification requirement and the inability of watch-dog non-government organizations and investigating journalists to access the information will deprive the data of a high degree of accuracy.[1]  Law of accuracy will diminish its utility.

Even without the analysis and recommendations, the GAO is especially useful in showing how U.S. law enforcement collaborates to scrutinize Suspicious Activity Reports and other data of a beneficial ownership nature to develop criminal investigations and prosecutions.

 

 

 

[1]    For a useful survey of the beneficial ownership best practices of six countries and their implications, see Kathy Nicolaou-Manias and Yuchen Wu, Beneficial Ownership and Transparency: Learning from Best Practices, 2021 TNTI 248-11, Dec. 29, 2021.

 

EU Commission Proposes Major Revisions for Countering Money Laundering and Terrorism Financing

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On July 20, 2021, the European Commission presented a significant set of legislative proposals to strengthen the EU’s anti-money laundering and countering terrorism financing (AML/CFT) rules.  The proposal will establish a new EU authority to combat money laundering.  The proposals aim to improve the detection of suspicious transactions and activities, and to shut the loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system.

The proposals improve the existing EU framework by responding to emerging challenges linked to technological innovation.  They take into account virtual currencies, more integrated financial flows in the Single Market and the global nature of terrorist organizations.  The proposals bring convergence in the AML/CFT rules and establish a more consistent framework to ease compliance for operators subject to AML/CFT rules, especially for those active in cross-border transactions.

The Four Legislative Proposals

The initiatives consist of four legislative proposals:

New EU AML Authority (AMLA) Proposed

The initiatives will establish a new EU Authority (AMLA) to transform AML/CFT supervision in the EU and improve cooperation among Financial Intelligence Units (FIUs).  The AMLA will serve as the central authority coordinating national authorities to ensure the private sector correctly and consistently applies EU rules.  AMLA will also furnish support to FIUs to improve their analytical capacity around illicit flows and make financial intelligence a key source for law enforcement agencies.

The AMLA will:

  • create a single integrated system of AML/CFT supervision throughout the EU, based on common supervisory methods and convergence of high supervisory standards;
  • directly supervise some of the riskiest financial institutions that operate in a large number of EU Members or require immediate action to respond to imminent risks;
  • monitor and coordinate national supervisors responsible for other financial entities, as well as coordinate supervisors of non-financial entities;
  • support cooperation among national FIUs and facilitate coordination and joint analyses between them, to better detect illicit financial flows of a cross-border nature.

One EU Rulebook for AML/CFT

The Single EU Rulebook for AML/CFT will harmonize AML/CFT rules across the EU, including, for instance, more detailed rules on Customer Due Diligence, Beneficial Ownership and the authorities and task of supervisors and FIUs.  The initiatives will connect existing national registers of bank accounts, furnishing faster access for FIUs to information on bank accounts and safe deposit boxes.  The Commission will also supply law enforcement authorities with access to this system, accelerating financial investigations and the recovery of criminal assets in cross-border cases.  Access to financial information will be subject to strong safeguards in Directive (EU) 2019/1153 on exchange of information.

Extending AML/CFT Rules to the Crypto Sector

Currently EU AML/CFT rules apply to only certain types of crypto-asset service providers.  The proposed initiatives will extend these rules to the entire crypto sector, obliging all service providers to conduct due diligence on their customers.  The proposals will ensure full traceability of crypto-asset transfers, such as Bitcoin, and will permit prevention and detection of their possible use for money laundering or terrorism financing.   Additionally, the proposals will fully apply EU AML/CFT rules to the crypto sector and prohibit anonymous crypto asset wallets.

Limit Cash Payments to € 10,000

The Commission has proposed an EU-wide limit of €0,000 on large cash payments.  The limit is high enough not to question the euro as legal tender and recognizes the important role of cash.  In about two-thirds of EU Members limits already exist, but the amounts vary.  National limits under  € 10,000 can remain in place.  Limiting large cash payments makes it more difficult for criminals to launder money.  Additionally, the proposes forbid anonymous  crypto-asset wallets, similar to the prohibition of anonymous bank accounts.

“Black-Lists” and “Grey-lists” for Third Countries

The EU will continue to use a “black-list” and a “grey-list.”  In addition to using the FATF list for its own listing, the EU will have its own list based on an autonomous assessment.

Future

The Commission proposals are in the hands of the European Parliament and Council.  The future AML Authority should be operational in 2024 and will start its work of direct supervision slightly later, once the Directive has been transposed and the new regulatory framework starts to apply.

Analysis

The AMLA with direct authority over institutions with cross-border activities or institutions with problems will contribute significantly to stronger compliance.   The AMLA will help establish a single integrated system of AML/CFT through common supervisory methods and convergence of high supervisory standards.  It will also facilitate cooperation among FIUs and more convergence with respect to their operation.

The extension of AML/CFT rules to crypto-asset service providers and prohibition of anonymous crypto asset wallets will plug a gap in the use of virtual currency to circumvent AML/CFT regulation.

The connecting of existing national registers of bank accounts along with the national beneficial ownership registers for companies and trusts will facilitate financial investigations and asset recovery.

Unfortunately, the use of its own grey and black lists will contribute to the proliferation of such lists internationally, causing more limits and closures of correspondent bank accounts and financial exclusion for persons in small jurisdictions.

For additional information see Questions and Answers:  AntiMoney Laundering and Countering Financing of Terrorism (AML/CFT)  and Factsheet: Stronger EU rules to fight financial crime, Anti-money laundering and countering the financing of terrorism legislative package, and Proposal on centralised bank account registeries.

The next issue (August) of the IELR will have a more comprehensive discussion of the EU Commission’s AML/CFT initiatives.

U.S. and EU Progress on Several International Enforcement issues at Justice & Home Affairs Ministerial Meeting in Lisbon

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On June 22, 2021, the Portuguese Presidency of the Council of the European Union hosted the EU-U.S. Ministerial Meeting on Justice and Home Affairs in Lisbon and made progress on count-terrorism, violent extremism, Passenger Name Record (PNR) data exchange.  They also discussed developing bilateral and multilateral instruments to combat cybercrime, using artificial intelligence,  and developing well-managed and humane migration policies.

Overview

They underscored the need to cooperate against terrorism, including prevention, permanent vigilance, adaptation, and resilience from all relevant actors.

The U.S. and EU underscored their strong concern with the rise of violent extremism.  They cited crimes inspired by hate speech, racism and xenophobia both in Europe and the U.S.  Violent extremism constitutes a direct threat to democratic societies.  It requires renewed attention by law enforcement, judicial authorities, the private sector and civil society.  The U.S. and EU pledged to expand their information exchanges on violent extremist groups, especially those with transnational linkages.

The U.S. and EU underscored the importance of the Passenger Name Record (PNR) data exchange to prevent, detect, investigate and prosecute terrorism, combat serious crime, including child exploitation, and protect the safety of citizens.

Digital Aspects and Cybercrimes

The U.S. and EU discussed the need to cooperate to shape a digital future based on their shared democratic values.  They acknowledged the potential benefits and risks of suing Artificial Intelligence technologies for law enforcement and the judiciary.  They discussed the need to develop and use such technologies in a trustworthy way in conformity with human rights obligations.

They discussed current and upcoming EU efforts on combating illegal content online, including  the need to improve the cooperation between the authorities and online platforms to detect ongoing criminal activity.  The U.S. and  EU pledged to continue cooperating to most effectively exercise their lawful authorities to combat  serious crime both online and offline.

The two sides will focus on combating ransomware, including through law enforcement action, raising public awareness on how to protect networks, the risks of paying criminals responsible, and encouraging those states that have not cooperated to arrest and extradite or effectively prosecute criminals on their territory.

Concerning bilateral and multilateral instruments to combat cybercrime, the U.S. and EU reinforced their commitment to negotiate as soon as possible an Eu-U.S. agreement facilitating access to e-evidence to cooperate in criminal matters.  They welcomed the recent approval by the Committee of State Parties to the Budapest Convention of the draft text of the Second Additional Protocol of the Budapest Convention, which is the main instrument for international cooperation on cybercrime.   They observed the framework of negotiations on a possible future United Nations international legal instrument on cybercrime and committed to continue to closely coordinate their respective positions.

Migration and Travel

The two sides underscored the importance of well-managed and humane migration and discussed their respective efforts to develop comprehensive and enduring migration and asylum policies.  Humanitarian protection should be available to qualifying persons.  Unmeritorious claims must be detected quickly, including through information sharing and modern identity management techniques.  Unmeritorious claims must be prevented from overwhelming migration systems or public confidence in them.

The agenda requires cooperation with third countries of origin, transit and destination.  These jurisdiction also have a responsibility to discourage people from enlisting smugglers and traffickers and endangering  the lives of migrants who take dangerous, irregular journeys.  Both sides reaffirmed their interest in expanding the transatlantic dialogue on migration and mobility, focusing on sharing lessons learned, exploring complementary pathways to migration, addressing the root causes of migration, improving the return and readmission of irregular migrants and enhancing cooperation in and combatting migrant smuggling.

The U.S. and EU continued to endorse safe and secure mobility and the exchange of information on their respective measures towards the gradual resumption of non-essential international travel.  Both sides pledged to restart secure travel between the U.S. and EU as soon as possible, based on the principles of mutual cooperation, efficient operation of the international travel system and scientific evidence.

Analysis

The initial meeting of the Justice and Home Affairs Ministers of the two sides during the Biden Administration went quite well.  Clearly, the priority of the Biden Administration for bilateral and multilateral cooperation contrasted with the America 1st unilateral approach of the Trump Administration.  The visit of President to the NATO meeting and the EU itself as well as his removal of tariffs and support for the minimum global taxation and other initiatives of the OECD and EU were well received.

The threats of terrorism, organized crime, extremist and hate groups, cybercrime, and illegal migration are common to both sides.

The current issue of the IELR will have a more in depth discussion of the implications of the meeting.

 

 

G7 Vows to Act on Corruption, Ransomware, Forced Labor, and Illicit Financing

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On June 13, 2021, at the conclusion of its meeting the G7 announced in its Communiqué joint action against several criminal and international enforcement matters.

Corruption, Illicit Financial Activities, and Misuse of Shell Companies

The Communique recognizes “the need action on corruption, including by sharing information on illicit financial activities, tacking the misuse of shell companies, and curtailing the ability of illicit actors to hide wealth.”

As part of its G7 Fact Sheet the Biden Administration underscored how on June 3, 2021 President Biden declared efforts to combat corruption a “core U.S. National interest,” and issued a National Security Student Memorandum on the Fight Against Corruption to elevate this effort.

The G7 Fact Sheet states the U.S. will tackle “the misuse of shell companies, limiting the ability of bad actors to launder dirty money in real estate purchases, improving corruption-related information sharing, and reforming foreign assistance to focus on anticorruption as a cross-cutting priority.” [1] The Fact Sheet says the U.S. welcomes the G7 commitment to take collection action in combatting corruption.

Ransomware

The Communique states the G7 reiterates its interest in stable and predictable relations with Russia.  In that regard, it states that it will “identify, disrupt, and hold to account those within its borders who conduct ransomware attacks, abuse virtual currency to launder ransoms, and other cybercrimes.”[2]   The Biden Administration’s G7 Fact Sheet states the transnational criminal enterprises committing ransomware leverage infrastructure, virtual currency, and money laundering networks.  They target victims worldwide, often operating “from geographic locations that offer a permissive environment for carrying out such malicious cyber activities.”

The G7 Fact Sheet states the international community –both governments and private sector actors – must cooperate to ensure that “malicious cyber activity is investigated and prosecuted, that we bolster our collective cyber defenses, and that States address the criminal activity taking place within their borders.”

Removing Forced Labor from Global Supply Chains

The Communique expresses concern about the use of all forms of forced labor in global supply chains, including state-sponsored forced labor of vulnerable groups and minorities and supply chains of the agricultural, solar, and garment sectors – the main supply chains of concern in Xinjiang, China.

G7 leaders agreed to uphold human rights and international labor standards, and protecting individuals from forced labor.  Hence, they commit to ensuring all global supply chains are free from the use of forced labor.  They propose to identify areas for increased cooperation and collective efforts to eradicate the use of all forms of forced labor in global supply chains, in accordance with international and national law.[3]

International Human Rights Concerns

The Communique mentions concerns about international human rights violations in Russia, Belarus, Myanmar, and Ethiopia’s Tigray region.

Analysis

The commitments in the G7 Communique to stronger international enforcement initiative are importance for setting and reinforcing international enforcement cooperation.  The nature of the G7 meetings and communiques limit the commitments to broad policy statements.  The follow up comes from action by international organizations, such as the EU, the OECD, the World Bank Group, and national governments. The limits of the Communiques are inability to implement the broad policy decisions, including when governments and policies change from time to time.

 

[1]   G7 Communique, paragr. 48.

[2]   G7 Communique, paragr. 51.

[3]    G7 Communique, paragr. 29.

ANOM: A global covert investigation conducted through an encrypted app trap

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Sara Kaufman[1]

On June 8, 2021, the Federal Bureau of Investigation (FBI) and Australia’s Federal Police (AFP) publicly announced the arrests of more than 800 individuals utilizing a FBI-controlled encrypted platform to facilitate their criminal activities.[2]  ANOM, a highly popular encryption platform amongst criminals worldwide, was secretly used as a surveillance tool in an investigation known as “Operation Trojan Shield” in order to discreetly observe and curtail the criminal activities in Australia and beyond.[3]

As technology has grown over the years, criminals have utilized hardened encrypted devices as a tool to obstruct any federal investigations against them.  Encrypted devices are tools that both send and retrieve encrypted electronic communications, allowing criminals to openly discuss their activities with confidence that their contents will remain secure.[4]  For many years, contents in encrypted devices did in fact remain secure; communication was often limited to a self-selected group of individuals using the same encryption platform.  Law enforcement agents therefore would be unable to collect evidence regarding the conversations that criminals were having on their encrypted devices.

Companies that provided these encrypted devices were generally aware that their target audience is utilizing their products for criminal activity; in March 2018, the CEO of Phantom Secure, Vincent Ramos, and four other principals of the company were indicted for aiding and abetting the distribution of cocaine.  During his plea hearing in October 2018, Ramos admitted that Phantom Secure laundered drug trafficking proceeds, as well as aided and abetted the importation, exportation, and distribution of illegal substances across international borders.[5]  Phantom Secure was not the first, nor would it be the last, of the many encrypted devices to appear on the black market to plan and executive criminal activity.

 

Operation Trojan Shield

While the FBI previously dismantled hardened encryption companies utilized amongst criminals to communicate – such as Phantom Secure – new platforms would emerge as substitutes for their predecessors.  In “Operation Trojan Shield,” various European law enforcement agencies, the FBI and AFP collaborated with a confidential source to construct, market, and upkeep the next encrypted communication platform to arise on the black market.[6]

The devices themselves were encrypted but the FBI, AFP, and the confidential source collaborated to build a master key into the existing encryption system.[7]  This allowed law enforcement to decrypt and store messages as they were transmitted.  For devices located outside of the U.S., an encrypted “BCC” of each sent message is routed to an “iBot” server located outside of the U.S.  The message is then decrypted with the master key and then immediately re-encrypted with the FBI encryption code.  The newly encrypted message is then passed to a second FBI-owned iBot server to be decrypted for viewing within the U.S.[8]  Given the high level of technical care and expertise needed to set up this master key process, the collaboration between the FBI, AFP, confidant, and other European law enforcement agencies was needed to ensure that ANOM could be launched effectively and discreetly within criminal networks.

ANOM could only be used on devices sold within the black market and were stripped of the ability to make calls or send emails.  In order to get a hold of an ANOM-encrypted device, each criminal had to be green-lighted by another criminal who was already using the software.[9]  Each ANOM user was identified by a Jabber Identification – similar to a smartphone PIN – was chosen by each user to identify themselves as opposed to using their real names.[10]  The high level of exclusivity and security behind ANOM increased the confidence that users that their communications would remain private.

Results of the investigation

As high-profile criminals such as Hakan Ayik praised ANOM and encouraged its use to their associates, thousands of criminals worldwide began utilizing ANOM devices to openly discuss their activities.  Between October 2019 and May 2021, a total of 11,800 ANOM devices were registered in over 90 countries, with the highest number of users based in Germany, the Netherlands, Spain, Australia, and Serbia.[11]

Considering the strong reputation that ANOM had amongst criminals, plans to import, export, or distribute drugs were sent between encrypted devices without the use of coded language.[12]  Text messages shown in a search warrant affidavit filed May 18, 2021, display open conversation regarding cocaine hidden in French diplomatic packages or underneath layers of bananas in shipping trucks.[13]

Through the surveillance of ANOM users, law enforcement agencies from the U.S., Australia, and the European Union were able to seize numerous tons of drugs and millions of dollars in cash.[14]  Australian police officers also claim to have acted on 20 “threats to kill,” thereby protecting many innocent civilians who may have otherwise lost their lives.[15]

Although the criminals that utilized ANOM encrypted devices strongly advocated for their high level of security, this could not be further from the truth.  The review of messages sent on ANOM devices has opened numerous high-level public corruption cases internationally, as well as investigations of distributors for money laundering, international drug trafficking, and obstruction of justice.[16]

While new encrypted platforms used to emerge once their predecessors were taken down by the FBI, Operation Trojan Shield severely damages the trusted foundation of encrypted devices for communications amongst criminal actors.  Though the use of new technology such as encryption devices has allowed discreet criminal activity to go undetected, law enforcement across the globe has proven that, with joint efforts, they can utilize the same tools for their benefit.

The current issue of the IELR will have a more comprehensive discussion of the law enforcement initiative and its implications.

[1] Legal assistant, Berliner Corcoran & Rowe LLP; B.A., Amherst College.

[2] Rachel Pannett and Michael Birnbaum, FBI-controlled ANOM app ensnares scores of alleged criminals in global police sting, The Washington Post, June 7, 2021, https://www.washingtonpost.com/world/2021/06/08/fbi-app-arrests-australia-crime.

[3] Cheviron Aff. ¶ 14, May 18, 2021. https://www.justice.gov/usao-sdca/press-release/file/1402426/download.

[4] Cheviron Aff. ¶ 9, supra.

[5] Cheviron Aff. ¶ 10, supra.

[6] Ben Westcott, For years, the underworld thought its phones were safe. They fell for an encrypted app trap, CNN, June 9, 2021, https://www.cnn.com/2021/06/08/australia/afp-fbi-ANOM-app-operation-ironside/index.html.

[7] Cheviron Aff. ¶ 13, supra.

[8] Id.

[9] Ben Westcott, supra.

[10] Cheviron Aff. ¶ 14, supra.

[11] Cheviron Aff. ¶ 19, supra.

[12] Cheviron Aff. ¶ 29, supra.

[13] Cheviron Aff. ¶ 14, supra.

[14] Ben Westcott, supra.

[15] ANOM: Hundreds arrested in massive global crime sting using messaging app, BBC.COM, June 8, 2021, https://www.bbc.com/news/world-57394831.

[16] Cheviron Aff. ¶ 20, supra.

U.S. Tax Court Rules Against Constitutional Challenge to Passport Denial for Delinquent Taxpayers

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On March 30, 2021, the United States Tax Court granted summary judgment to the Internal Revenue Service with respect to a taxpayer debtor/physician’s constitutional challenge to the IRS’ certification of the delinquent tax debt under IRC, § 7345.  The taxpayer’s outstanding tax balance was close to $500,000 and so the IRS turned to a new tool in its collection toolbox – § 7345.1.  Under this section, the IRS certified that Robert Rowen, the taxpayer, had a seriously delinquent tax debt to the Treasury secretary, who then transmitted the certification to the State Department.  The IRS notified Rowen of the certification.  At the time of the suit and the Tax Court’s opinion, the State Department had not taken any action concerning Rowen’s passport.  Nevertheless, Rowen petitioned the Tax Court, challenging the IRS’s certification as unconstitutional and a violation of the Universal Declaration of Human Rights (UDHR).

Opinion

The court held that the certification does not deny his right to travel or his rights under the UDHR.

Judge Emin Toro authored the court’s opinion and observed that this is the first time the court has considered the merits of certification under 26 U.S. § 7345.  Judge Toro observed that §7345 was enacted as part of the Fixing America’s Surface Transportation Act (FAST Act).   The opinion explains that the IRS certifies the delinquent tax debt and sends it to the Treasury secretary, who must then transmit the certification to the State Department.  The State Department can revoke, deny, or limit a tax delinquent individual’s passport.

The opinion rejected Rowen’s argument that § 7345 violates his due process rights under the Fifth Amendment since it forbids international travel.  Rowen claimed such travel is a fundamental right.  The opinion ruled that claim was meritless since the plain text of the statute does not prohibit international travel.  The opinion observed that § 7345 only certifies that an individual has a serious tax delinquency.  Thereafter, the State Department makes any passport-related decisions.    The opinion also rejected Rowen’s claim that §7345 violates his right to travel under the UDHR, since the statute does not impose a limit on the right to travel.

According to the opinion, Rowen’s procedural due process and statute of limitations claims do not have merit because he did not make such arguments in his summary judgment motion.  In addition, Rowen to not introduce evidence establishing that the period of limitations has elapsed.  The opinion found that the IRS’s certification was not erroneous and that the IRS met the requirements for certification under § 7345.  Hence, the IRS was entitled to summary judgment.

Judge Paige Marvel wrote a concurring opinion, stating that the court’s opinion does not foreclose a constitutional challenge in a future case with appropriate facts and squarely presented arguments to the entire tax collection mechanism created by FAST.

Analysis

Clearly the taxpayer’s petition and request for summary judgment were flawed in their efforts to challenge one of the new mechanisms to collect taxes.

The current issue of the IELR will discuss the implications of the case in more detail.

FinCEN Starts Beneficial Ownership Regulation Comment Period and Announces Staff Changes

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On April 1, 2021, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) to request public comment on a wide range of questions related to the implementation of the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA).

Advance Notice of Proposed Rulemaking

This ANPRM is the first in a series of regulatory actions that FinCEN will undertake to implement the CTA, which is included within the Anti-Money Laundering Act of 2020 (AML Act).  The AML Act is part of the FY 2021 National Defense Authorization Act, which became law on January 1, 2021.

The CTA amended the Bank Secrecy Act.  The CTA requires corporations, limited liability companies, and similar entities to report certain information about their beneficial owners (the individual natural persons who ultimately own or control the companies).  This new reporting requirement will enhance the national security of the United States by making it more difficult for malign actors to exploit opaque legal structures to launder money, finance terrorism, proliferate weapons of mass destruction, traffic humans and drugs, and commit serious tax fraud and other crimes that harm the American people.

Pursuant to the CTA, FinCEN  must  maintain the reported beneficial ownership information in a confidential, secure, and non-public database.  In addition, the CTA authorizes FinCEN to disclose beneficial ownership information subject to appropriate protocols and for specific purposes to several categories of recipients, such as federal law enforcement. Under the CTA, FinCEN must revise existing financial institution customer due diligence regulations concerning beneficial ownership to take into account the new direct reporting of beneficial ownership information.

FinCEN encourages all interested parties, particularly those that would be affected by the beneficial ownership information reporting provisions or would seek access to reported beneficial ownership information, to submit written comments.  The comments can come from interested persons outside the U.S.   Such written comments will help inform FinCEN’s implementation of all aspects of the beneficial ownership reporting rulemaking.

Comments should be submitted by May 5, 2021.

This ANPRM seeks comment on FinCEN’s implementation of certain provisions in Section 6403 of the CTA. Section 6403 requires reporting companies (corporations, limited liability companies (LLCs), and similar entities, subject to certain statutory exemptions) to submit to FinCEN specified information on their beneficial owners—the individual natural persons who own or control them—as well as specified information about the persons who form or register those reporting companies. Section 6403 further requires FinCEN to maintain this information in a confidential, secure, and non-public database, and it authorizes FinCEN to disclose the information to certain government agencies for certain purposes specified in the CTA, and to financial institutions to assist in meeting their customer due diligence obligations. In both cases, these disclosures are subject to appropriate protocols to protect confidentiality. This ANPRM seeks comment on numerous questions as FinCEN begins to develop proposed regulations implementing these provisions.

While only the regulations implementing the reporting requirements must be promulgated by January 1, 2022, with an effective date to be determined. FinCEN also requests comment on its implementation of the related database maintenance use and disclosure provisions. Section 6403 requires that the final rule on customer due diligence requirements for financial institutions be revised will be the subject of a separate rulemaking, about which the public will receive notice and opportunity to comment.

Staff Changes

Today, FinCEN announced a change in staff. Director Kenneth A. Blanco announced he will depart FinCEN on April 9, after serving as the organization’s director since December 2017. Michael Mosier, former FinCEN Deputy Director and current Counselor to the Deputy Secretary of the Treasury, will return to FinCEN as Acting Director. AnnaLou Tirol, former Associate Director of FinCEN’s Strategic Operations Division, is serving as FinCEN Deputy Director.

Mr. Mosier most recently served as Counselor to the Deputy Secretary of the Treasury, a role he assumed last month after serving as FinCEN’s Deputy Director and first Digital Innovation Officer. Mr. Mosier previously worked at the cryptocurrency analytics, compliance, and investigations firm Chainalysis, where he was Chief Technical Counsel. Prior to FinCEN and Chainalysis, Mr. Mosier was an Associate Director at Treasury’s Office of Foreign Assets Control. Mr. Mosier has also served as a Deputy Chief in the Department of Justice’s (DOJ’s) Money Laundering & Asset Recovery Section. He also served a tour at the White House National Security Council as Director for Transnational Organized Crime. Mr. Mosier began his public service as a prosecutor with the Manhattan District Attorney’s Office, and has served as an Adjunct Professor of Law at Georgetown University Law Center. He previously worked at a law firm representing technology, media, and financial services clients.

Ms. Tirol is now serving as Deputy Director. In this capacity, she assists in overseeing FinCEN’s wide-ranging work to enhance the national security of the United States. Ms. Tirol joined FinCEN in September 2019, serving as Associate Director of the Strategic Operations Division, where she worked extensively to promote FinCEN’s strategic partnerships with government and private industry stakeholders, both domestically and internationally. Ms. Tirol came to FinCEN after overseeing DOJ’s Public Integrity Section prosecuting public corruption matters. She began her public service as an Assistant U.S. Attorney in San Diego, and has served overseas tours for DOJ in Belgrade, Serbia, focusing on anti-corruption issues, and in Panama City, Panama, focusing on anti-money laundering and countering the financing of terrorism. Ms. Tirol is an Adjunct Professor of Law at Georgetown University Law Center.

Director Ken Blanco will depart on April 9th to Citi to lead Financial Crimes Compliance

 

 

FinCEN Will Require Persons to Report Virtual Currency as Part of Foreign Bank and Financial Accounts and Will Require Recordkeeping for Transfers into Crypto Wallets

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FinCEN is moving rapidly for reporting crypto currency and assets.

Reporting Virtual Currency on FBARs

On December 31, 2020, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) in a notice stated it intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR)  on IRS FinCEN Form 114 to include virtual currency as a type of reportable account under 31 C.F.R. § 1010.350.

At present, FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account.[1]  As a result, a person with a foreign account holding virtual currency need not report such as holding on the FBAR unless it is a reportable account under 31 C.F.R. § 1010.350 because it holds reportable assets in addition to virtual  currency.

It remains to be seen how virtual currency will be reported on the FBAR.  Because FBAR penalties may be as high as 50 percent of an account’s highest balance per violation, the stakes are high.

Meanwhile, the Internal Revenue Service 2019 Form 1040 Schedule 1 added a question, inquiring whether taxpayers received, sold, sent, exchanged, or acquired a financial interest in virtual currency.  The recordkeeping for tax purposes alone on virtual currency is very challenging.

On December 31, 2020, the IRS issued draft instructions  on what constitutes reportable virtual currency transactions.  The instructions provide more guidance than did the previous version released October 23, 2020.  However, many tax attorneys have criticized the new guidance.[2]

Recordkeeping on Crypto Wallets

FinCEN will propose to amend the regulations implementing the Bank Secrecy Act (BSA) concerning reports of  foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

On December 23, 2020,  FinCEN issued a notice of proposed rulemaking requesting public comments on a proposal to require banks and money service businesses (“MSBs”) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status (“legal tender digital assets” or “LTDA”) held in unhosted wallets  or held in wallets hosted in a jurisdiction identified by FinCEN. FinCEN is proposing to adopt these requirements pursuant to the Bank Secrecy Act (“BSA”).

FinCEN proposes to prescribe by regulation that CVC and LTDA are “monetary instruments” for purposes of the BSA. However, FinCEN does not propose  to change  the regulatory definition of “monetary instruments” or otherwise alter existing BSA regulatory requirements applicable to “monetary instruments” in FinCEN’s regulations, including the existing currency transaction reporting (“CTR”) requirement and the existing transportation of currency or monetary instruments reporting requirement.

FinCEN is providing a 15-day period for public comments with respect to this proposed rule.

Analysis

Although there are many important technical and procedural issues, including whether Treasury is affording sufficient time for comments on the new regulations, the bottom line is that Treasury and other law enforcement agencies believe significant amount of crime is occurring due to the lack of transparency surrounding virtual currencies and digital assets, especially in international transactions.

The current issue of the IELR will have a more comprehensive discussion of these two regulatory initiatives.

[1]    See 31 CFR 1010.350(c).

[2]    Kirstin Parillo, New Draft 1040 Instructions Add More Crypto Details, Tax Notes Today  Int’l 2021 TNTI 5-3, Jan. 8, 2020.

U.S. Attorney General Issues Notice that UK-US CLOUD Act Takes Effect July 8, 2020

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On March 3, 2020, U.S. Attorney General William Barr, in accordance with the Clarifying Lawful Overseas Use of Data Act (“CLOUD Act”), relating to an executive agreement governing access by a foreign government to electronic data, gave notice that he has determined, and has submitted a written certification of such determination to Congress, that the U.S.-U.K. CLOUD Agreement satisfies the requirements of the CLOUD Act.

On November 27, 2019, the Attorney General certified that he had determined that the U.S.-U.K. CLOUD Agreement satisfies the requirements of the CLOUD Act. On January 10, 2020, the Attorney General completed the process of providing his certification to Congress. The U.S.-U.K. CLOUD Agreement will enter into force not earlier than July 8, 2020, unless Congress enacts a joint resolution of disapproval, in accordance with the CLOUD Act.

On March 23, 2018, the CLOUD Act was signed into law. Public Law 115-141, Div. V, 132 Stat. 1213-25. The CLOUD Act removes certain restrictions under U.S. law on companies disclosing electronic data, in response to qualifying, lawful orders in investigations of serious crime, directly to a qualifying foreign government with which the United States has entered into an executive agreement governing access by the foreign government to covered data. Id. at 132 Stat. at 1213-17.

Before an agreement can go into effect, the Attorney General, with the concurrence of the Secretary of State, must determine that the considerations outlined in 18 U.S.C. 2523(b) have been met. The Attorney General must then submit a written certification of his determination to Congress, including an explanation of each consideration required by 18 U.S.C. 2523(b), not later than 7 days after the date on which the Attorney General certifies the executive agreement. 18 U.S.C. 2523(d) (1).

The executive agreement will enter into force not earlier than 180 days after the date the Attorney General notifies Congress, unless Congress enacts a joint resolution of disapproval, in accordance with the CLOUD Act. 18  U.S.C. 2523(d)(2). Under 18 U.S.C. 2523(g), the Attorney General’s determination or certification under 18 U.S.C. 2523(b) must be published in the Federal Register..

Determination and Certification Pursuant to Section 2523(b)

On October 3, 2019, the Home Secretary of the United Kingdom and  the Attorney General of the United States signed the U.S.-U.K. CLOUD  Agreement. A copy of the U.S.-U.K. CLOUD Agreement is available at:  https://www.justice.gov/dag/cloudact. On November 27, 2019, the Attorney General certified his determination that the U.S.-U.K. CLOUD  Agreement satisfies the requirements of 18 U.S.C. 2523(b). The Attorney  General’s determination was based on the considerations in paragraphs  (1), (2), (3), and (4) of 18 U.S.C. 2523(b), as explained in the “Explanation of Each Consideration in Determining that the Agreement Satisfies the Requirements of 18 U.S.C. 2523(b),available at: https://www.justice.gov/dag/cloudact. Secretary of State. Pompeo concurred with the Attorney General’s determination.

The Department of Justice (“Department”) transmitted the U.S.-U.K. CLOUD Agreement certification to the Committee on the Judiciary and the Committee on Foreign Relations of the Senate on December 4, 2019.  Due to a clerical error the Committee on the Judiciary and the Committee on Foreign Affairs of the House of Representatives did not receive notice until January 10, 2020.

Non-Reviewable Determination and Certification

In accordance with 18 U.S.C. 2523(c), the determination and certification by the Attorney General described in this notice are not subject to judicial or administrative review.

The Way Forward

The U.S. has also signed a CLOUD Act Agreement with Australia.  The U.S. and the Ministers of Justice of the European Union have held discussions over a CLOUD Act Agreement.  The U.S. hopes to sign many CLOUD Act Agreements.

Many privacy groups, such as Electronic Privacy Information Center, and human rights groups have opposed the CLOUD Act agreements. They oppose it, among other reasons, because it gives foreign authorities access to information without any judicial authorization, no notice is given to the data subject and no remedies, and unequal minimization and targeting protections exist for U.K. and U.S. citizens

 

U.S. and Australia Start Negotiations over CLOUD Act Agreement and Host Roundtable on Trusted Technology Ecosystems

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On October 7, 2019, the United States and Australia announced they have entered into formal negotiations for a bilateral agreement under the U.S. Clarifying Lawful Overseas Use of Data Act (the CLOUD Act).  The two governments also hosted a roundtable on trusted technology ecosystems.

Negotiations of a CLOUD Act Agreement

United States Attorney General William Barr and Australian Minister for Home Affairs, Peter Dutton, announced the negotiations during a meeting.

Supported  by Australian legislation yet to be introduced, a bilateral CLOUD Act agreement would enable Australian law enforcement to serve domestic orders for communications data needed to combat serious crime directly on U.S.-based companies, and vice versa.

On October 3, 2019, the United States and United Kingdom concluded the first ever CLOUD Act Agreement. It will permit U.S. and British law enforcement agencies, with appropriate authorization, to demand electronic data concerning serious crime, including terrorism, child sexual abuse, and cybercrime, directly from tech companies based in the other country, without legal barriers.

The announcement of U.S.-Australian negotiations of a CLOUD Act Agreement  provides additional momentum to the  U.S. government efforts of having an expedited process for directly obtaining access to electronic evidence from the platform providers.

Roundtable on Trusted Technology Ecosystems

Also on October 7, Attorney General William P. Barr and Australian Minister for Home Affairs Peter Dutton hosted a government-industry roundtable discussion titled, “Shaping a Trusted Technology Ecosystem,” with more than a dozen representatives from the tech-industry landscape.

A Department of Justice press release characterized the dialogue as a critical step in jointly addressing complex supply chain challenges faced by both nations.  The collaborative discussion presented an opportunity for industry, Australia and the United States to work together on solutions to ensure an open marketplace, achieve a diverse range of secure technology options, and enhance global technology markets characterized by trust, transparency, and fair competition.  One issue is whether to try to prevent Huawei from developing for the Western countries and the world in general the 5G network.  The U.S. does not trust  Huawei from a national security perspective because it believes that the Chinese government will control Huawei’s practices and enable the Chinese government to obtain surveillance periodically.  Until now, Australia has cooperated with the U.S. on the initiative to block Huawei even though Australia is increasingly subject to Chinese economic and foreign policy pressure due to China’s growing role in Australia and the region.  The issue of trusted technology ecosystems also concerns the Internet and data privacy.

 

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