IELR Blog

Official Blog of the International Enforcement Law Reporter

Spanish Court Advises Banco de Chile to Set Aside $103M for Money Laundering from Pinochet Expropriations

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On July 29, 2021, the Seventh Court of Guarantee of Santiago (El Séptimo Juzgado de Garantía de Santiago) reopened an investigation into whether the Banco de Chile helped the former dictator Augusto Pinochet launder money.  It notified the Supreme Court of Chile of the reopening of the case and advised the bank, whose ownership in related to the Pinochet family, to set aside $103 million.[1]

The Spanish Court’s Decision

The plaintiffs are led by the President Allende Foundation, named after the former President Salvador Allende, whom Pinochet overthrew in a coup.  The Foundation represents more than 20,000 victims of the Pinochet dictatorship.  The plaintiffs allege the funds were obtained by illegal expropriations by General Pinochet and his associates and transferred to personal offshore accounts.  The complaints allege that the transfers constituted acts of tax evasion and money laundering, which the Banco de Chile assisted.[2]

In 1998, Spanish judge Baltasar Garzon ordered Pinochet detained for crimes against humanity.  Spain requested Pinochet’s extradition from England.  Although the English courts ordered him extradited, the British Home Office ordered that he not be extradited due to humanitarian considerations, namely his age and failing health.  General Pinochet died under house arrest in Chile in 2006 without being tried.

Banco de Chile, the Alleged Enabler, and the Luksić Family

Banco de Chile successfully claimed for years that Chile rather than Spain has jurisdiction to investigate the allegations.  In 2013, the Chilean judiciary closed a money laundering investigation without charging the general or anyone else.  A study commissioned by the Chilean Supreme Court stated only $2 million of the $21 million identified as Pinochet’s personal wealth could be considered clean.

In 2018, Chile’s Supreme Court ordered the return of $1.6 million of Pinochet’s assets.  It convicted three of his former generals for fraud connected to public money.  Banco de Chile paid Chilean authorities $3.1 million in 2009 for administrative irregularities concerning General Pinochet’s money.  However, the bank was never indicted.[3]

Although the court told Banco de Chile it should set aside $103 million to cover potential payments to the victims, it has not yet ordered it to do so.  Banco de Chile has deposits in around ten countries, six in the European Union.

Quiñenco is the majority owner of the Banco de Chile.  The Luksić family has Quiñenco as its holding company.  Vladimir Luksić was the brother-in-law of Augusto Pinochet.

Prosecutor José Morales has also charged Anita María Pinochet Ribbeck, the spouse of former army general, Juan Miguel Fuente-Alba, and Fuente-Alba, with money laundering.[4]

Morales claims that a report of the Financial Intelligence Agency shows the pair increased their wealth more than 280% between 2010 and 2016 by hiding and falsify the illegal source of their funds.  The defendants, represented by Cuatrecasas, one of the largest Spanish firms specializing in tax and money laundering, tried unsuccessfully to dismiss the case.[5]

Analysis

Spain has extraterritorial jurisdiction for Spanish victims.  Already the Spanish courts imposed a penalty against Riggs Banks for alerting General Pinochet’s to move the money in his accounts in London ahead of Garzon’s request that Britain to freeze his accounts.[6]

This case should be watched for its efforts to hold accountable Banco de Chile, the alleged enabler, almost 23 years after the initial charges in Spain.

Spain’s wide-ranging tax collection and enforcement and mutual assistance agreements with the EU countries may play an important role in this case.

The case illustrates the use of extraterritorial jurisdiction when a court believes a foreign court, although exercising jurisdiction, have not properly adjudicated the case.

The current issue of the IELR will have a more comprehensive discussion of the case.

[1]    Raphael Minder, Spain Reopens Pinochet Inquiry Into Tax Evasion and Laundering, N.Y. Times, July 31, 2021, at A7, col.1.

[2]    Spanish court targets Chilean bank linked to Pinochet, July 30, 2021 https://www.hebergementwebs.com/europe/spanish-court-targets-chilean-bank-linked-to-pinochet.

[3]    Id.

[4]    They Decide on a Bond for Ana Maria Pinochet, spouse of the Former General Fuente-Alba, after the Money Laundering Charges (Decretan arraigo para Ana María Pinochet, esposa del ex general Fuente-Alba, tras ser formalizada por lavado de dinero, El Mercurio, July 29, 2021).

[5]    Id.

[6]    Spanish court targets Chilean bank linked to Pinochet, supra.

Biden Administration Declares Anti-Corruption a “Core U.S. National Security Interest”

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On June 3, 2021, the Biden Administration released a memorandum establishing combating corruption as a core United States national security interest, thereby stimulating several international anti-corruption initiatives.

The memorandum promises to make the fight against corruption a core U.S. national security interest.  The Biden Administration promises to “lead efforts to promote good governance; bring transparency to the United States and global financial systems; prevent and combat corruption at home and abroad; and make it increasingly difficult for corrupt actors to shield their activities.”

The memorandum directs Assistant to the President and National Security Advisor, in coordination with the Assistant to the President for Economic Policy and the Assistant to the President for Domestic Policy, to conduct an interagency review process.  The interagency review process will include the Office of the Vice President and fourteen agencies.

Strategy Components

The above-mentioned persons and agencies are directed to develop a Presidential strategy.  The strategy is to modernize, increase, coordinate, resource and improve the ability of key agencies to promote good governance and prevent and combat corruption, including, as required, by proposing relevant legislation to the Congress.

Another component of the strategy is to combat all forms of illicit finance in the U.S. and international financial systems, including by robustly implementing Federal law requiring U.S. companies to report their beneficial owner or owners to the Treasury Department; reducing offshore financial secrecy; improving information sharing; and, as necessary, identifying the need for new reforms.

The strategy will hold accountable corrupt individuals, transnational criminal organizations, and their facilitators, including by identifying, freezing, and recovering stolen assets through increased information sharing and intelligence collection and analysis, criminal or civil enforcement actions, advisories, and sanctions or other authorities , and where possible and appropriate, returning recovered assets for the benefit of the citizens harmed by corruption.

According to the memorandum, the strategy participants must strengthen the capacity of domestic and international institutions and multilateral bodies focused on establishing global anti-corruption norms, asset recovery, promoting financial transparency, encouraging open government, strengthening financial institutions’ frameworks to prevent corruption in development finance projects, and combating money laundering, illicit finance, and bribery, including, where possible, addressing the demand side of bribery.

A goal is to support and enhance the capacity of civil society, media, and other oversight and accountability actors to conduct research and analysis on corruption trends, advocate for preventative measures, investigate and uncover corruption, hold leaders accountable, and inform and support government accountability and reform efforts, and provide those actors a safe and open operating environment domestically and internationally.

The strategy will work with international partners to counteract strategic corruption by foreign leaders, foreign state-owned or affiliated enterprises, transnational criminal organizations, and other foreign actors and their domestic collaborators, including, by closing loopholes exploited by these actors to interfere with democratic processes in the U.S. and abroad.

Increasing efforts to quickly and flexibly enhance U.S. and partner resources of investigative, financial, technical, political, and other assistance to foreign countries that indicate the will to reduce corruption are part of the strategy.

The strategy will help and enhance the capacity of domestic, including State and local, authorities and institutions, as well as partner and other foreign governments at all levels, to implement transparency, oversight, and accountability measures, which will counter corruption and provide their citizens with accessible and usable information concerning government programs, policies, and spending.

A goal is to promote partnerships with the private sector and civil society to advocate for anti-corruption measures and act to prevent corruption.

A final priority is to develop best practices and enforcement mechanisms such that foreign assistance and security cooperation activities have built-in corruption prevention measures.

Analysis

The Memorandum states that, by effectively preventing and combating corruption and showing the advantages of transparent and accountable governance, the U.S. government can obtain a critical advantage for the U.S. and other democracies.   In his recent speeches President Biden has set as a challenge for the U.S. its battle with autocracies and dictatorships.

The Memorandum mentions the possibility of the inter-agency group supporting new legislation when appropriate.  In this regard, on February 4, 2021, U.S. Senators Ben Cardin (D-MD) and Roger Wicker (R-MS) introduced legislation to create a global anti-corruption action fund at the State Department to strengthen  the rule of law abroad and counter transnational corruption. The Countering Russian and Other Overseas Kleptocracy (CROOK) Act (S.158) – would fund programs by utilizing large  fines imposed under the Foreign Corrupt Practices Act against U.S. and foreign companies caught bribing foreign officials. In January 2021, Representatives Bill Keating (D-MA) and Brian Fitzpatrick (R-PA) introduced a companion draft (H.R.402) in the House.

The Memorandum prioritizes combating all forms of illicit finance in the U.S. and implementing Federal law requiring U.S. companies to report their beneficial ownership to the Treasury Department.  In this regard, the Corporate Transparency Act, enacted as part of the Anti-Money Laundering Act of 2020, requires the reporting of beneficial ownership information to Treasury’s FinCEN.  Although FinCEN has issued an Advance Notice of Proposed Rule-making, it may be 2023-24 before the regulations become effective.

The current issue of the IELR will have a more comprehensive discussion of the implications of the Memorandum.

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.

Congress Passes Anti-Money Laundering Act over President’s Veto

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On January 1, 2020, the Senate voted to override President Trump’s veto of the annual military policy bill (the National Defense Authorization Act – NDAA).  Division E of the Act is the Anti-Money Laundering Act of 2020 (the AMLA or Act), which contains a number of international enforcement elements.  This post discusses selected international enforcement aspects, except for the beneficial owner/entity transparency provisions that were discussed in the December 2020 issue of the International Enforcement Law Reporter.

Increased Authority to Issue and Enforce Correspondent Account Subpoenas

The Act increases the ability of the Department of Justice (DOJ) and Treasury’s authority to issue and enforce correspondent account subpoenas under 31 U.S.C. § 5318(k).  Before, the DOJ and Treasury could issue such subpoenas to any foreign bank with a correspondent account in the United States and could “request records related to such correspondent account.”[1]  The Act widens this authority to permit DOJ to request “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States,” if the records are the subject of an investigation concerned a violation of U.S. criminal laws, a violation of the Bank Secrecy Act (BSA), a civil forfeiture action, or a Section 5318A investigation.[2]

If a foreign financial institution does not comply, the Act authorizes the Attorney General to seek contempt sanctions from a court, and the Attorney General or Secretary of the Treasury may direct covered U.S. financial institutions to end their correspondent relationships with the non-compliant foreign financial and impose penalties on those institutions that fail to do so.[3]

Pilot Project to Share SAR Information Internationally

FinCEN has promulgated guidance allowing sharing of Suspicious Activity Reports (SARs) information internationally with foreign parent organizations or U.S. affiliates in other countries.[4]   The Act requires the Treasury within one year after the enactment of legislation to issue rules that establish a pilot program for financial institutions to share information related to SARS “with the institution’s foreign branches, subsidiaries, and affiliates for the purpose of combating illicit finance risks.”[5]

The Act allows the Secretary of the Treasury to prohibit sharing with certain jurisdictions, such as state sponsors of terrorism, states subject to sanctions imposed by the U.S. government, or those the Secretary has determined cannot reasonably protect the security and confidentiality of such  information.[6]

Provisions on Cryptocurrency and Antiquities Dealers, Advisors, and Consultants

The Act adds to the definition of financial institution and money transmitting businesses under the BSA, which are subject to anti-money laundering due diligence, businesses engaged in the exchange of transmission of “value that substitutes for currency.” [7]   The Act also expands the definition of financial institution to include antiquities dealers, advisors, and consultants.

The Act requires Treasury to prepare a study within one year that evaluates money laundering and terrorist financing through the art trade, including the markets that should be subject to regulation, the extent to which the regulations, if any, should target high-value trade in works of art, and “the need, if any, to identify persons who are dealers, advisors, consultants, or any other persons who engage as a business in the trade in works of art.”[8]

Foreign Financial Intelligence Unit Liaisons (FFIUL)

  • 6108 of the Act requires the appointment of not more than six FFIULs, co-located in a U.S. embassy, U.S., or a foreign government facility, among other things, to facilitate capacity building and outreach on AML/CFT regulatory and analytical frameworks; and coordinate with representatives of the DOJ at US Embassies.[9]

International Coordination

  • 6112 of the Act requires the Secretary of the Treasury to work with foreign counterparts, including bilateral contacts, the Financial Action Task Force, the IMF, the World Bank, the Egmont Group of FIUs, the OECD, the Basel Committee on Banking Supervision, and the UN, to promote stronger AML frameworks.

Financial Services De-Risking

  • 6213 of the Act states Congress supports effective measures to stop the flow of illicit funds and promote AML/CFT and sanctions goals, and AML/CFT and sanctions policies that do not unduly hinder or delay the efforts of legitimate humanitarian organizations to fulfill the needs of humanitarian crisis, prevent or alleviate human suffering. § 6213(c) requires the GAO to conduct a de-risking analysis and evaluate the effect of AML/CFT on individuals and entities, including charities, embassy accounts, money-service businesses, and correspondent banks that have been subject to categorical de-risking by financial institutions operating in the U.S. and or otherwise have difficulty accessing or maintaining certain financial services in the U.S. and evaluate the consequences of financial institutions de-risking entire categories of relations with individuals and entities mentioned above in this section. The GAO should propose changes to those requirements resulting in de-risking.

GAO Study on Fighting Illicit Networks and Detecting Human Trafficking and Drug Trafficking

  • 6504(c) of the Act requires the GAO to study how a range of payment systems and methods, including virtual currencies in online marketplaces, are employed to facilitate human trafficking and drug trafficking.

Treasury Study and Report on Trade-Based Money Laundering

  • 6505 of the Act requires Treasury to conduct a conduct a study, in consultation with appropriate private sector stakeholders, academic and other international trade experts, and Federal agencies, on trade-based money laundering and proposed strategies to combat trade-based money laundering.

Treasury Study and Strategy on Money Laundering by the PRC

  • 6506 of the Act requires the Treasury to conduct a study, relying substantially on information obtained through the trade-based money laundering analyses of the GAO, on, inter alia, the extent and effect of illicit finance risk relating to the PRC Government and Chinese firms, and a strategy to counter Chinese money laundering.

Treasury Study on Efforts of Authoritarian Regimes to Exploit the Financial System of the U.S.

  • 6507 of the Act requires the Treasury Secretary and Attorney General, in consultation with the heads of other relevant national security, intelligence, and law enforcement agencies, to conduct a study for Congress on how authoritarian regimes in foreign countries and their proxies use the financial system of the U.S., inter alia, to: “(1) conduct political influence operations; (2) sustain kleptocratic methods of maintaining power; (3) export corruption; (4) fund nongovernmental organizations, media organizations, or academic initiatives in the United States to advance the interests of these regimes; and (5) otherwise undermine democratic governance in the United States and the partners and allies of the United States.” The study should make recommendations for legislative or regulatory action, or regulatory action, or steps to be taken by U.S. financial institutions that would address exploitation of the financial system of the U.S. by foreign authoritarian regimes.

Kleptocracy Assets Recovery Reward Act

  • § 9701-03 of Division H of the NDAA establishes the Kleptocracy Asset Recovery Rewards Program in the Department of the Treasury, and authorizes appropriations for the purpose of paying rewards under the program.

Combating Russian Money Laundering

  • § 9711-9714 of Division H of the NDAA requires a report if the Secretary of the Treasury determines that certain institutions, transactions, or money laundering activities require domestic financial institutions or domestic financial agencies to take special measures described in 31 U.S.C. § 5318A(b), and permit implementation of such special measures.  These provisions would enable Treasury to impose special measures on transactions emanating from Russia, certain Russian financial institutions, and/or certain categories of transactions.

The current issue of the IELR will have a more comprehensive discussion of the AMLA and related provisions.

[1]    31 U.S.C. § 5318(k)(3)(A).

[2]    AMLA, § 6308 (31 U.S.C. § 5318(k)(3)(A)(i) as revised).

[3]    AMLA, § 6308 (31 U.S.C. §5318(k)(D), as revised).

[4]    FinCEN, FIN-2010-G006, Sharing Suspicious Activity Reports by Depository Institutions with Certain U.S. Affiliates (Nov. 23, 2010), https://www.fincen.gov/sites/default/files/shared/fin-2010-g006.pdf.  FinCEN, Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices and Controlling Companies, January 20, 2006 https://www.fincen.gov/resources/statutes-regulations/guidance/interagency-guidance-sharing-suspicious-activity-reports.

[5]    AMLA, § 6212 (adding 31 U.S.C. § 5318(g)(8)(B)(i).

[6]    AMLA, §6212 (adding 31 U.S.C. § 5318(g)(8)(C).

[7]    AMLA, § 6102(d).

[8]    AMLA, § 6111(e).

[9]    AMLA, § 6108, adding  31 U.S.C. § 310(h).

U.S. Secretary of State Makes Historic Visit to Suriname and Guyana and Promises More Law Enforcement Assistance

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On September 17-18, 2020, U.S. Secretary of State Michael Pompeo made the first visit to Suriname and Guyana.  It coincided with promises that the U.S. would increase its technical assistance with respect to law enforcement and national security issues in both countries.

   Suriname

With respect to Suriname Secretary Pompeo traveled there on September 17 and met with President Chandrikapersad “Chan”  Santokhi , and key members of his cabinet. Santokhi was elected in July.

As part of his travel, the State Department issued a statement underscoring existing U.S. assistance to combat narcotics trafficking.  The statement noted that Suriname participates in various programs funded by the State Department’s Bureau of International Narcotics and Law Enforcement (INL) in an effort to stop the use of Suriname as an intermediary jurisdiction for drugs and other contraband.

The State Department has engaged in training for Suriname’s Port Control Unit, which seized more than 3000 kg. of cocaine in 2019, including a 2,300 kg seizure, one of the largest in Suriname’s history.

In addition, the U.S. government has committed more than $600,000 towards an anti-money laundering risk assessment, which identifies vulnerabilities in Suriname’s anti-money laundering (AML) regime.  The Financial Action Task Force requires a national risk assessment by each country because at both country and financial institution levels  AML must be conducted on a risk-based assessment (RBA).  The RBAs by financial institutions must depend on the national risk assessment.  Although Suriname is comparatively small in population and economy, it has a large territory and multiple sources of risks of laundering, such as informal gold mining, narcotics and gold smuggling from Venezuela and other neighboring countries, human trafficking, and the use as casinos in Suriname as a vehicle to launder.

The State Department has congratulated the fact that Suriname voted in free and fair elections and has apparently shown it wants to take a new direction based on transparency, rule of law, and democracy.  To support the new direction, the U.S., in addition to increasing trade and investment, is deepening its security relationship and supporting Suriname’s economic growth.  The State Department says it is prepared to help Suriname and its engagement with the international Monetary Fund and other international financial institutions.  In early February, it was revealed that $100 million in private citizens’ savings had disappeared from the Central Bank of Suriname (CBvS).[1]

The new Surinamese President is a former justice minister and police commissioner.  The loser of the election, president Desiré “Desi” Bouterse took power through a coup.  He has been convicted of narcotics trafficking in the Netherlands and is convicted in Suriname for ordering the execution of political opponents in 1982.[2]

The U.S. State Department has recognized that Suriname’s leaders and civil society must establish sustainable models to extract natural resources transparently and safely and use the resources to benefit the Surinamese people.  According to the State Department’s press release, U.S. investment in Suriname’s gold sector offers a model.  The State Department aims to work with Suriname to combat corruption.

In a brief press conference the two leaders fielded questions mainly concerning potential U.S. political and military pressure on Venezuela and the role of China in the region.

Guyana

On September 17, 2020, Secretary Pompeo also visited Guyana. After much controversy over the election of March 2 between incumbent David Granger, and Irfaan Ali, Granger challenged the results for months.  Granger eventually relinquished his challenged after the U.S. imposed sanctions on members of Granger’s administration for undermining democracy.[3]

The State Department issued a statement for the Guyana visit.  Pursuant to the Caribbean Basic Security Initiative, the U.S. provides technical assistance to Guyana on law enforcement professionalization, strengthening the rule of law, and combating transnational crime.  In particular, the assistance has focused on increased training for crime scene investigators, forensic video analysis, trial advocacy, and the development of a curriculum for continuing education programs for magistrates.  The program also focuses on training prosecutors and magistrates on implementing maritime security law.  The training has resulted in more criminal prosecutions and convictions and faster adjudications.

The State Department has assisted in training Guyana’s Port Control Unit to combat the trafficking of cocaine and other illicit goods through Guyana.  The U.S. Coast Guard provides training and mentoring to the Maritime Administration Department (MARAD) in order to improve port security.  The U.S. military trains the Guyana Defense Forces personnel annually.  The training includes a current student at the U.S. Coast Guard Academy.

After Secretary Pompeo’’s visit, a bilateral Shiprider Agreement will come into force, enabling joint maritime and airspace patrols to interdict narcotics.  The U.S. government has recently given $200,000 in equipment and interceptor boat parts to strengthen Guyana’s ability to patrol its territorial waters.

The U.S. has helped the development of Guyana’s energy sector through technical partnership on best practices for energy sector policy, regulation, and revenue management.  The U.S. Department of the Treasury’s Office of Technical Assistance supports training and development within the Guyana Revenue Authority’s Large Taxpayer Division. These recommendations will help Guyana.

Early in Ali’s administration racial tensions have arisen.  On September 6, badly mutilated bodies of two cousins, Isiah and Joel Henry, both black teenagers, were discovered in a field. Thereafter, in an apparent reprisal killing a 17-year-old Indo-Guyanese boy was found chopped and beaten to death.[4]

Meanwhile, overhanging the visit are mounting tensions between Venezuela, the neighbor of Guyana and Suriname.  Guyana and Venezuela have had a 120-year dispute over their boundary and now the matter is in the International Court of Justice (ICJ).  Two years ago Venezuela seized Guyanese ships and disputes jurisdiction of the ICJ.[5]  The disputed Essequibo area represents about two-thirds of Guyana’s 83,000 square miles.[6]

In the recent past U.S. initiatives towards the Caribbean have been in response to U.S. national security: in the 1980s the civil wars in Central America, the leftist administration of Maurice Bishop in Grenada, narcotics trafficking; more recently, counter-terrorism, money laundering, and human trafficking.  The next issue of the IELR will discuss these developments in more detail.

[1]    Dr. Scott MacDonald, Suriname and the Need for Good Governance March 10, 2020, CSIS, https://www.csis.org/analysis/suriname-and-need-good-governance.

[2]    Jacqueline Charles, Pompeo makes history as first U.S. secretary of state to visit Suriname and Guyana, Miami Herald, Sept. 16, 2020.  With Pompeo trip, oil boom raises focus on Guyana, Suriname, France24, Sept. 17, 2020.

[3]    With Pompeo trip, oil boom raises focus on Guyana, Suriname, supra.

[4]    Charles, supra.

[5]    Molly Quell, Border Dispute Between Guyana, Venezuela Hits UN Court, Courthouse News Service, June 30, 2020.

[6]    Charles, supra.

EU Publishes AML/CFT Action Plan

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On May 7, 2020, the European Commission issued an Action Plan to provide concrete measures over the next 12 months. It will strengthen its enforcement, supervision and coordination of the EU’s rules to combat money laundering and terrorist financing.

The Commission issued what it characterized as a more transparent, refined methodology to identify high-risk third countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing  (AML/CFT) regimes.   The methodology is meant to enhance its engagement with third countries and bring more cooperation with the Financial Action Task Force (FATF).

The Commission also issued a new list of third countries with strategic deficiencies in their AML/CFT frameworks.

The Action Plan has six pillars.  Each is designed to improve the EU’s overall effort to combat ML and TF, and to strengthen the EU’s global role in this area.  The six pillars are intended to better harmonize and make  the EU regime more effective.

Six Pillars of the Action Plan

The six pillars are as follows:

  1. Effective application of EU rules: The Commission will continue to monitor closely the implementation of EU rules by EU Members to ensure that national rules are consistent with the highest possible standards.  The plan encourages the European Banking Authority (EBA) to use its new powers to combat money laundering and terrorist financing.  The timeline is ongoing.
  2. A single EU rulebook: The integration of the EU’s internal market and financial system should be matched by a single set of AML/CFT rules.   Diverging interpretations of the rules cause loopholes in its systems.  Criminals can exploit the loopholes. The Commission will propose rules in Q1 of 2021.
  3. EU-level supervision: In the first quarter of 2021, the Commission will propose to establish an EU-level supervisor. At present, each EU Member individually supervises EU AML/CFT rules.  The Commission will propose rules in Q1 of 2021.
  4. A coordination and support mechanism for EU Member Financial Intelligence Units (FIUs): FIUs in EU Members play a critical role in identifying transactions and activities that could be linked to criminal activities. The Commission will propose rules in Q1 of 2021.
  5. Enforcing EU-level criminal law provisions and information exchange: Rapid and trustworthy information-exchange is crucial.  EU rules facilitate cooperation and exchanges of information between law enforcement authorities.  The future Financial Crime Center of Europol will promote combating money laundering and terrorist financing.  The Commission will issue guidance on the role of public-private partnerships to clarify and enhance data sharing.  The Commission will issue guidance in Q1 of 2021.
  6. The EU’s global role: The EU is determined to increase its efforts to that it is a single global actor in the AML/CFT area.  The EU will adjust its approach to third countries with deficiencies in their regime concerning AML/CFT.  Pending  the application of its new methodology issued with its Action Plan, the updated EU list ensures better alignment with the latest FATF list.

The Commission initiated a public consultation when it issued its Action Plan.  Authorities, stakeholders and citizens have until July 29 to provide their feedback.

Updated List

The EU Anti-Money Laundering Directive requires the Commission to identify high-risk third countries with strategic deficiencies in their regime regarding AML/CFT.  The Commission issued a new list, The list is supposed to be better aligned with the lists published by the FATF.

Countries which have been listed are: The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe.

Countries which have been delisted are:  Bosnia-Herzegovina, Ethiopia, Guyana, Lao People’s Democratic Republic, Sri Lanka and Tunisia.

Background

The Commission’s Anti-Money Laundering Package of July 2019 underscored various weaknesses in the EU AML/CFT framework. The Package motivated the Action Plan.

Analysis

The EU announcement underscores a major problem with blacklists. On subjects such as AML/CFT there are multiple sources of listing.  They include informal groups, such as FATF, and even individual countries.  In addition, significant overlap exists in the subject matter of the OECD’s Global Forum on Tax Transparency and Exchange of Tax Information.   The OECD, FATF, the EU, the World Bank Group, and governments make small jurisdictions spend a disproportionate amount of time meeting their engagement and evaluation schemes.

Given the scandals and/other problems that have occurred recently with Danske Bank, Swedbank, Banca Privata d’Andorra, FBME in in Cyprus, conducting supervision at an EU-level makes sense.

The next (May) issue of the IELR will have a more comprehensive discussion of the Action Plan.

ABA Issues Opinion Confirming Obligations of Lawyers to Avoid Counseling or Assisting in a Crime or Fraud in Non-litigation Matters

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On April 29, 2020, the American Bar Association’s Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 491 on “Obligations Under Rule 1.2(d) to Avoid Counseling or Assisting in a Crime or Fraud in Non-Litigation Settings.”

Model 1.2(d) prohibits a lawyer from advising or assisting a client in conduct the lawyer “knows” is criminal or fraudulent.  A lawyer or bar trying to discipline a lawyer will infer from the circumstances  such  knowledge, including a lawyer’s willful blindness to or conscious avoidance of facts.    Hence,  if facts known to the lawyer show a high probability that a client seeks to use the lawyer’s services for criminal or fraudulent activity, the lawyer has an obligation to make addition inquiring in order to avoid advising or assisting such activity.

Even if information obtained in the course of a preliminary interview or during a representation is not adequate to establish “knowledge” under Rule 1.2(d), other rules may require the lawyer to make more inquiries to help the client avoid crime or fraud, to avoid professional misconduct, and to advance the client’s legitimate interests.  These include the duties of competence, diligence, communication, and honesty under Rules 1.1, 1.3, 1.4, 1.13, 1.16, and 8.4.

If the client or prospective client refuses to provide information necessary to determine the legality of the proposed transaction, the lawyer must ordinarily decline the representation or withdraw under Rule 1.16.

The  issuance of the opinion comes in the content of  media reports adverse to the reputation of lawyers, disciplinary proceedings for assisting clients in criminal activities, such as money laundering, criminal proceedings, and increased reports about the involvement of lawyers in efforts by foreign corrupt officials to launder money into the United States.

The opinion highlights the need of lawyers to meet their obligation to inquire when they have a client who may be seeking to use the lawyer’s services in a transaction to commit a crime or fraud.  The opinion concedes that determining whether a client seeks to use the lawyer’s services for prohibited activities can be sensitive.  Lawyers generally must believe their clients and investigating the client’s intention can be both expensive and time-consuming.  The opinion discusses a lawyer’s obligation to inquire when faced with circumstances giving rise to suspicions about a prospective or existing clients activities is required by authority interpreting Rule 1.2(d) and in the rules on competence, diligence, communication, honesty, and withdrawal.

The opinion explains failure of a lawyer to make a reasonable inquiry is willful blindness punishable under the actual knowledge standard of the Rule.  Whether the lawyer must inquire further depends on the circumstances.  Rule 1.2(d) states that a lawyer “shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”  Even where Rule 1.2(d) does not require further inquiry, other Rules may.

These Rues include the duty of competence under Rule 1.1., the duty of diligence under Rule 1.3, the duty of communication under Rule 1.4, the duty to protection the best interests of an organizational client under Rule 1.13, the duties of honesty and integrity under Rules 8.4(b) and (c), and the duty to withdraw under Rule 1.16(a).    Making further inquiry ensures that the lawyer will be able to give the informed advice and assistance to which the client is entitled, that the representation will not result in professional misconduct, and that the representation will not involve counseling or assisting a crime or fraud.

National Strategy for Combating Terrorist and Other Financing Highlights Gatekeeper Problems

In February 2020, the U.S. Government issued its National Strategy for Combating Terrorist and Other Illicit Financing (“2020 National Strategy”).  It identifies and analyzes the threats and vulnerabilities to the U.S. anti-money laundering and counter-financial terrorism (AML/CFT) system.   The 2020 Strategy discusses as a major illicit financing risk attorneys, who need not understand the nature or source of income of their clients or potential clients.  Attorneys advise on structuring transactions to avoid tax or other implications.  In this regard in 2016, the Department of Justice alleged in a civil forfeiture case that lawyer trust accounts held by two large law firms helped launder almost $600 million stolen from the Malaysian government into the U.S. financial system.

OECD Mandatory Disclosure Rules for Addressing CRS Arrangements and Offshore Structures

An area of potential risk to lawyers is inbound investment by investors from countries that participate in OECD automatic exchange of information, known as the Common Reporting Standard (CRS). The OECD has developed mandatory disclosure rules for addressing CRS Avoidance arrangements and offshore structures.  Each participating member should have penal or dissuasive sanctions to sanction violations.  The 2017 UK Criminal Finances Act illustrates a law implementing the mandatory disclosure rules and imposes criminal sanctions extraterritorially for intermediaries who help taxpayers plan or implement structures violating the Act.

Formal Opinion 491, in addition to heralding the likelihood of new disciplinary proceedings for lawyers failing to make sufficient inquiries for clients who engage in criminal activities, is likely to open the door to prosecutions against U.S. lawyers both by prosecutors in the U.S. and abroad.

 

 

COVID-19 ADDS PRESSURE TO DETENTION, TAX CONTROVERSY, AND FACILITATES FRAUDULENT SCHEMES

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Covid-19 has impacted several domestic and international enforcement efforts in the U.S.  This piece discusses detention battles, the work of the IRS, and the Department of Justice, the latter in trying to stop the incidence of Covid-19 fraud

  1. DETENTION BATTLES

As a result of the coronavirus, there is much litigation concerning pre-trial detention.  In this regard, on March 19, 2020, U.S. Magistrate Judge Thomas S. Hixson, U.S. District Court N.D. Ca. issued a 4-page opinion, ordering  the release of Alejandro Toledo Manrique, saying he was persuaded that the 74-year old former head of state was in serious risk of death or serious injury unless released.  Peru has requested his extradition on corruption-related offenses.  Toledo was detained in the San Mateo County jail.  Magistrate Judge Hixson observed the absence of testing kits at the jail.  Hixson imposed various conditions to mitigate the potential that Toledo may try to flee.

On April 3, 2020, the Attorney General, issued a “Increasing Use of Home Confinement at Institutions Most Affected by COVID-19”.

On March 26, 2020, the Attorney General, issued a memo “Prioritization of Home Confinement As Appropriate in Response to COVID-19 Pandemic”.

    2. INTERNAL REVENUE SERVICE (IRS)

On April 3, 2020, due to the coronavirus pandemic, the IRS issued an evacuation notice directing that nearly all of its employees work from home on mandatory telework starting Monday, March 30.  Only employees performing “mission-critical duties” will be permitted to come into the office.  Access to IRS offices will be restricted, with employees allowed only to pick up work files and mail.  Affected employees were instructed to take home whatever they needed to work remotely for the foreseeable future.

This may present a problem for tax confidentiality.  Due to confidentiality, most IRS officials refuse to allow communication by email.

The IRS has not communicated about whether call centers would continue to be staffed, or whether mail sent to service centers would be opened and processed.  Clearly communication with the IRS, already difficult even for practitioners, will become more challenging.

The IRS has already extended the filing deadline for income tax returns from April 15 to July 15.

The IRS is in charge of distributing economic impact payments.  On March 30, the IRS announced it will start in the next three weeks and will be distributed automatically, with no action required for most individuals. However, some seniors and others who do not file returns will need to submit a simple tax return to receive the stimulus payment.

On March 23, The United States Tax Court issued a press release announcing that more trial sessions have been cancelled in light of the COVID-19 pandemic.  The Court has cancelled all trial sessions through the end of June 2020.

The IRS will have difficulty making progress in its audits and enforcement cases.  It already suffered due to the federal shutdown in January and now because of the need to prioritize its resources in sending economic impact payments.

3. DEPARTMENT OF JUSTICE

The DOJ has issued an alert about criminals trying to exploit COVID-19 worldwide through a variety of scams.  There have been reports of:

“• Individuals and businesses selling fake cures for COVID-19 online and engaging in other forms of fraud.

  • Phishing emails from entities posing as the World Health Organization or the Centers for Disease Control and Prevention.
  • Malicious websites and apps that appear to share virus-related information to gain and lock access to your devices until payment is received.
  • Seeking donations fraudulently for illegitimate or non-existent charitable organizations.

Criminals will likely continue to use new methods to exploit COVID-19 worldwide.”  https://www.justice.gov/coronavirus

AML experts are warning banks and financial institutions to exercise due diligence to not process suspicious payments that may reflect scams.  Financial institutions must exercise more due diligence during the pandemic.

Disclaimer

Nothing in this blog constitutes or is intended to constitute legal advice. Neither transmission nor receipt of such materials creates an attorney-client relationship. Blog readers and subscribers should consult with an attorney. This blog may be considered attorney advertising under the rules of some states. The hiring of an attorney is an important decision that should not be based solely upon advertisements. Prior results do not guarantee similar outcomes.

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