On November 4, 2011, two New Jersey attorneys, Goldie Sommer and Edward Engelhart, were charged with conspiring to violate and violating the Bank Secrecy Act’s (“BSA”) by “structuring” attorney trust account deposits in order to evade BSA reporting requirements. A copy of the criminal complaint can be read here.

Generally speaking, the BSA, 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to 31 C.F.R. § 1010.313, “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCEN’s website.

According to the complaint, between August 13, 2010 and September 22, 2010, Sommer and Engelhart structured a series of deposits into their attorney trust account totaling $118,000. The government alleged that most of these deposits included even dollar amounts each under $10,000 and occurred on the same day or within a short period of time. However, when taken in the aggregate, the deposits should each have exceeded the $10,000 threshold, thus requiring the filing of a report. Additionally, the government alleged that during the same period of time similarly structured deposits were placed into the personal accounts of Sommer, Engelhart and “other individuals associated with [them].” Checks were then drawn from the personal accounts and placed in the defendant’s trust account. In total, authorities allege that $354,000 was structured into the trust account.

The complaint further alleged that during a June 16, 2011 meeting with the IRS both Sommer and Engelhart admitted that they had agreed to structure the deposits into the trust account. Additionally, the complaint alleges that Sommer and Engelhart admitted to receiving the currency from a client of their firm for the purchase of real estate and “inferred that the client wished that the funds would be deposited into a bank without the filing of any forms with the [IRS].” If convicted of structuring, Sommer and Engelhart can face up to five years in prison, a $250,000 fine and forfeiture of the structured funds.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fuerstlaw.com

On November 10, 2011 several U.S. Congressmen sent letters to the Departments of State and Commerce urging them to investigate two U.S. IT companies, NetApp, Inc. and Blue Coat Systems, Inc. (“Blue Coat”), for possible violations of U.S. trade sanctions against Syria. The alleged violations stem from the exporting or re-exporting of the companies’ technology for use in internet surveillance projects by the Syrian government.

Generally speaking, the sanctions program in place against Syria prohibits U.S. persons from engaging in transactions with the Government of Syria and separately prohibits the exportation, reexportation, sale, or supply, directly or indirectly, by a United States person, wherever located, of any services to Syria. More information regarding the sanctions against Syria can be found on the Office of Foreign Assets Control’s (“OFAC”) website here.

According to a recent Bloomberg report, Area SpA, an Italian surveillance company, is working with the Syrian government to create an internet surveillance system designed to “intercept and catalog virtually every e-mail that flows through the country.” As part of this massive project, it is alleged that Area SpA is using NetApp’s hardware and software technology to create four petabytes of storage for archiving e-mails. (By comparison, a database with four petabytes of storage space can store more than 15 times the amount of data stored in the online archives of the Library of Congress.) Additionally, it is alleged that the Syrian government has been using Blue Coat’s technology to censor and filter website content within Syria.

NetApp and Blue Coat have come under criticism not only because their activities may violate the sanctions scheme in place against Syria, but also because of concerns that the purpose of the Syrian surveillance programs is to suppress activists and dissidents opposed to the totalitarian Assad regime. Since March of 2011, the Syrian government has engaged in a brutal crackdown of dissidents resulting in the deaths of more than 3,000 Syrian citizens.

Both companies have denied wrongdoing. NetApp has stated that it is not aware of any of its products being sold to Syria. However, a November 4, 2011 Bloomberg report reported that the NetApp structured its contract in a way to avoid direct dealing with Syria or Area SpA. According to the report, NetApp’s Italian subsidiary sold its products to a authorized vendor which then re-sold NetApp’s technology to Area SpA for use in the Syrian surveillance program. Blue Coat has also denied violating U.S. sanctions claiming its products were illegally transferred to the Syrian government. Blue Coat has launched an internal investigation to determine how its web filtering technology was transferred to Syria.

This situation provides an important reminder to businesses which engage in international trade. Because of the breadth and complexity of these regulatory schemes, although businesses may not directly engage in trade with Syria, they may still unknowingly violate OFAC sanctions because of the nature of their relationships with foreign businesses who do. Examples of this can be read in our previous reports here and here. If you have questions pertaining to the OFAC sanctions on trade with Syria, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fuerstlaw.com.

On November 2, 2011, Florida’s Office of Financial Regulation’s “MSB Facilitated Workers’ Compensation Fraud Workgroup” presented its much anticipated report and recommendations to the Florida House of Representatives Insurance and Banking Subcommittee. The report focused on recommendations for combating workers’ compensation fraud facilitated by Florida check-cashers. A copy of the report and recommendations can be read here.

As we previously reported, on August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation (“OFR”) issued a report to Governor Rick Scott and his Cabinet regarding workers’ compensation fraud in the State of Florida. The cabinet report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers’ compensation insurance market. A complete overview of the fraud scheme can be read here.

At that time, Florida C.F.O. Jeff Atwater announced the creation of a workgroup to study the issue of MSB facilitated workers’ compensation fraud and to make recommendations to combat the issue. Over the next several months, the workgroup met four times to analyze ways to combat the fraud scheme and develop comprehensive reforms. The November 2, 2011 presentation of the workgroups report and recommendations was the product of these meetings.

The workgroup provided several consensus recommendations to combat MSB facilitated workers’ compensation fraud. First, the workgroup called for the creation of a real-time database for check cashing transactions above $1,000. The workgroup reasoned that because shell corporations which drive workers’ compensation fraud incorporate and dissolve quickly, time is of the essence in detecting a fraud scheme. A real-time database would provide the OFR with the amount of the cashed check, the cashing entity’s workers’ compensation policy number and other information currently required to be within a check casher’s electronic logs. OFR would then compare this information with the amount of payroll reported to the insurer, thus indicating potential fraud schemes when reported payroll and total amounts of checks cashed differed.

The workgroup also recommended that that OFR be given the authority to make unannounced visits to inspect MSBs. Currently, Florida law prohibits unannounced visits and requires that OFR provide at least 15 days notice prior to inspection. See § 560.109, Fla. Stat. As explained by the workgroup, “the announcement of an exam or investigation allows unscrupulous licensees to hide, destroy, or otherwise tamper with the evidence that the [OFR] may collect in the course of the visit.”

The workgroup also recommended that the Legislature require licensed check cashers to provide the workers’ compensation policy number, under which a corporate payment instrument is cashed, to the OFR. This requirement would allow the OFR to compare estimated payroll reported on the policy with the amount and number of checks that are cashed for a policyholder and will enable regulators to more readily identify premium avoidance schemes.

Other consensus workgroup recommendations included: 1) requiring the Division of Workers’ Compensation to include payroll information of policy holders on its proof of coverage website; 2) modifying the check cashing statute, found at § 560.303, Fla. Stat. et seq., to require licensees to maintain a depository bank account for the purpose of negotiating all cashed checks in order to simplify audit trails; and 3) eliminating the mandatory six-month examination of new licensees, but still require examination “as soon as practicable” to allow OFR to focus regulatory resources on high priority cases.

The workgroup also provided several other recommendations which were not fully supported by the workgroup. The non-consensus recommendations included: 1) eliminating the ability to cash checks when the payee is a corporate entity or a third-party or set a threshold limit for the dollar amount allowable for such checks to be eligible for cashing; and 2) changing how certificates of insurance are issued by requiring that certificates be issued by the OFR.

Although the workgroup presented a host of recommendations, its inability to reach consensus on all recommendations drew criticism from subcommittee members. Additionally, the workgroup’s report drew criticism from some subcommittee members because the representatives did not feel the recommendations went far enough.

Fuerst Ittleman will continue to monitor this situation with a keen eye as implementation of the workgroup’s recommendations could result in changes to regulatory compliance for the Florida MSB industry. If you have questions pertaining to Florida’s Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fuerstlaw.com

On October 24, 2011, the United States Court of Appeals for the Second Circuit issued its decision in United States v. Banki overturning the conviction of Mahmoud Reza Banki for violating trade sanctions with Iran and operating an unlicensed money-transmitting business. In this case, authorities alleged that Banki violated the ITR and 18 U.S.C. § 1960, which prohibits the operation of unlicensed money-transmission businesses, for his role in 56 money transfers to Iran through the informal money transmission system known as “hawala” which is widely used throughout the Middle East and South Asia. In the hawala system funds are transferred from one country to another through a network of hawala brokers known as “hawaladars.”

As previously reported, the ITR, which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC.  31 C.F.R. § 560.204 prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States persons, of any goods, technology, or services to Iran unless “otherwise authorized” in 31 C.F.R. part 560. Pursuant to 17 U.S.C. § 1705, persons who willfully violate the ITR are subject to criminal penalties.

There are numerous forms of hawala but the two discussed by the Court were the “paradigmatic” system and the “match” system. The “paradigmatic” system works as follows: person 1 located in country A who wants to send money, for example $100, to person 2 in country B would contact a hawaladar located in country A and would pay the country A hawaladar the $100. Next the country A hawaladar would contact a country B hawaladar and ask the country B hawaladar to pay $100 in country B’s currency, minus any fees, to person 2. In the future, when country B hawaladar needs to send money to country A, he will then contact the country A hawaladar, with whom he now has a credit because of the previous transaction, and the country A hawaladar will complete the transaction. Normally, a number of transactions must be completed in order to balance the books between the two hawaladars and periodic settlement of the imbalances occurs via wire transfers or more formal money transmission methods. In this way, people can remit money to others without any actual money crossing the border between country A and country B.

The “match” system works on a similar premise. Under the match system, country A’s hawaladar seeks out a country B hawaladar looking to transmit money to a third party in country A. Once a “match” occurs, country B’s hawaladar would pay person 2 and then, upon knowledge of payment to person 2, country A’s hawaladar would pay the third party. Hawaladars derive their profits from the difference in the “buy” and “sell” exchange rates on completed transactions.

The use of the hawala system in the United States to remit funds to and from Iran is problematic for several reasons. First, transferring funds through a hawala qualifies as “money transmitting” under 18 U.S.C. § 1960. Therefore, hawaladars, which typically operate without licenses, are operating illegal money transmitting businesses and are thus in violation of 18 U.S.C. § 1960. As such, U.S. patrons of hawaladars may also be charged for using hawala in the U.S. Second, because money transmission is considered a “service” under the ITR, it is a violation of the Iranian sanctions to transfer money to Iran unless the transfer arises as part of an underlying transaction that is not prohibited.

In Banki’s case, authorities alleged that Banki’s family members in Iran engaged in 56 money transfers using a match hawaladar to transfer assets to Banki in the United States. Authorities further alleged that for each deposit made into Banki’s U.S. bank account, a corresponding payment was sent to Iran for a third party. Additionally, although the funds being transferred into Iran were not Banki’s, authorities alleged that Banki knew that for each deposit he received there was a corresponding payout in Iran. Thus, based on this knowledge, authorities alleged that Banki facilitated an American hawaladar in violating the IRT and in operating an unlicensed money-transmitting business.

Authorities charged Mr. Banki with: 1) conspiring to violate the ITR and operate an unlicensed money-transmitting business; 2) violating or aiding and abetting the violation of the IRT; 3) conducting or aiding and abetting the conduct of an unlicensed money-transmitting business; and 4) two counts of making materially false representations in response to an OFAC administrative subpoena. In May of 2010, Banki was found guilty of all counts and was sentenced to 30 months imprisonment and ordered to forfeit $3.4 million.

On appeal, Banki argued his conviction should be overturned for several reasons. First, Banki argued that executing money transfer to Iran on behalf of others only violates the ITR if undertaken for a fee. Second, he argued that even if hawala transfers are considered a service, non-commerical remittances, including family remittances like the ones in this case, are exempt from the service ban. Third, Banki argued his aiding and abetting of an unlicensed money transmitting business should be overturned because the trial court failed to instruct the jury that participation in a single, isolated transmission of money does not constitute a money transmission business.

In its decision, the Second Circuit provided a detailed analysis of Banki’s arguments which will guide future IRT and 18 U.S.C. § 1960 cases. First, the Court found that because the IRT was designed to be a broad and overinclusive sanctions scheme designed to isolate Iran, “the transfer of funds on behalf of another constitutes a ‘service’ even if not performed for a fee.”

Although money transmittal for no fee is still considered a “service” under the ITR, the Court went on to find that 31 C.F.R. § 560.516, which provides that non-commercial remittances, such as family remittances, are exempt from the services ban, is ambiguous as to whether it applies to all instances of non-commercial remittances or only those which take place in depository institutions. In so holding, the Court found that the government’s argument that U.S. depository institutions have exclusive authority to process family remittances is inconsistent with the language of the regulation. However, the Court also found that, based on the statutory and regulatory sanctions scheme in place, Banki’s argument that anyone, including hawalas, could process a non-commercial remittance is inconsistent with the ITR scheme as a whole. Thus, based on the ambiguity of the breadth of the non-commercial remittance exemption, the Court overturned Banki’s convictions for conspiracy and violations of the ITR.

The Court also vacated Banki’s conspiracy and aiding and abetting of an unlicensed money transmitting business and remanded for a new trial. In so ruling, the Court agreed with Banki and stated that “to find a defendant liable for operating [or aiding and abetting] an unlicensed money transmitting business, a jury must find that he participated in more than a ‘single, isolated transmission of money.’” The Court found that because the evidence presented at trial only showed Banki’s knowledge of “match” funds moving to Iran in one transaction, a jury instruction stating that participation in a single, isolated transmission of money does not constitute a money transmission business was appropriate. The trial court’s failure to provide the jury with such an instruction was reversible error.

The Second Circuit further held that the lower court also erred in instructing the jury that hawala is both an informal money transfer system and a money transmitting business. The Court found that by so instructing the jury, the district court relieved the government of its burden of proving that Banki had knowledge that more than one transmission had occurred. As explained by the Court, “by later instructing the jury that ‘a hawala is a money transmission business,’ the district court arguably was instructing the jury that if it found that Banki operated a hawala, then he necessarily operated a money transmitting business, thereby taking the latter issue away from the jury.” Thus, the Second Circuit’s opinion distinguishes between the use of a system of money transmission and the operation of a money transmission business.

Although the Court overturned Banki’s convictions for conspiracy and aiding and abetting, it disagreed with Banki’s argument that he was entitled to an “mere customer or beneficiary” instruction. In his appeal, Banki argued that he should not be held liable for conspiracy or adding and abetting because he was “mere customer or beneficiary” and thus exempt from criminal liability. However, the Court found that Banki was charged with aiding and abetting the facilitation of funds to Iran and not with receiving funds from Iran. Thus, because Banki was charged as the facilitator of the transfer he was an intermediary, not a customer, and thus the instruction would be inappropriate. As explained by the Court, “put simply, where the crime charged is transmitting money to Iran without a license, the ‘customer’ is the wire originator and/or the intended recipient” not the intermediary.

The opinion is noteworthy not only because it is illustrative of the potential criminal charges Iranian sanction violators may face, but also because of the Court’s detailed analysis of the Iranian Transactions Regulations (“ITR”) and the federal money transmitting laws. If you have questions pertaining to the OFAC sanctions on trade with Cuba and Iran, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fuerstlaw.com.

On August 25, 2011, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury announced that it had reached a settlement with JPMorgan Chase Bank, N.A. for alleged violations of multiple sanctions programs related to doing business with Cuba, Iran, Sudan, and Liberia as well as sanctions programs designed to prohibit the support of terrorism and the proliferation of weapons of mass destruction. As part of the settlement agreement, JPMorgan has agreed to remit $88,300,000 to OFAC. The settlement is the largest ever paid by a U.S. financial institution for sanctions violations. A copy of OFAC’s press release can be read here.

Of the numerous violations alleged to have been committed by JPMorgan, OFAC determined that three were “egregious.” The egregious violations included violations of the Cuban Assets Control Regulations, the Weapons of Mass Destruction Proliferators Sanctions Regulations, and the Reporting, Procedures, and Penalties Regulations. The Cuban Assets Control Regulations (“CACR”) generally prohibits U.S. banking institutions from accepting transfers of credits and funds of a Cuban national’s Cuban assets. See 31 C.F.R. § 515.201. (More information about the CACR can be found on OFAC’s website here.) OFAC alleged that between December 12, 2005 and March 31, 2006, JPMorgan processed 1,711 wire transfers of approximately $178.5 million for Cuban nationals in violation of the CACR. Additionally, OFAC alleged that JPMorgan was alerted by another financial institution of possible violations as early November 2005. OFAC alleged that JPMorgan investigated, found that the transfers were in fact in violation of the CACR and failed to self-report the violations to OFAC and take steps to prevent violations from recurring.

OFAC also alleged violations of the Weapons of Mass Destruction Proliferators Sanctions Regulations (“WMD Sanctions”). Under the WMD Sanctions program, all property and interests in property of persons and businesses who have been identified by regulation, that are in the United States, are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in. See 31 C.F.R. § 544.201. According to OFAC, JPMorgan violated the WMD Sanctions when it made a loan of $3 million to a bank that then used the borrowed funds to issue a line of credit to purchase a vessel affiliated with the Islamic Republic of Iran Shipping Lines, which is subject to WMD Sanctions and therefore blocked. OFAC found this violation to be egregious because, despite voluntarily self disclosing to OFAC, JPMorgan withheld its self-disclosure for over 3 months from the time it learned of the violation and received repayment of the loan after its self-disclosure without OFAC authorization.

The final “egregious” violation was a violation of the Reporting Procedures and Penalties Regulations (“RPPR”). The RPPR, found at 31 C.F.R. Part 501, establishes the standard reporting and recordkeeping requirements, as well as the procedures governing transactions pursuant to the various economic sanctions programs operated by OFAC. OFAC alleged that between November 8, 2010 and March 1, 2011, JPMorgan failed to produce numerous documents in its possession in response to an OFAC administrative subpoena and repeatedly asserted that no such documents were in its possession. However, OFAC investigations, which included communications with third-party financial institutions, revealed multiple responsive documents that were still in JPMorgan’s possession that had not been turned over. As a result of OFAC’s investigation, JPMorgan subsequently produced more than 20 additional responsive documents. Similar to its CACR violation, JPMorgan did not self disclose the violation to OFAC.

In determining that JPMorgan’s violations were egregious, OFAC determined as follows: “JPMorgan is a very large, commercially sophisticated financial institution, and [its] managers and supervisors acted with knowledge of the conduct constituting the apparent violations and recklessly failed to exercise a minimal degree of caution or care with respect to [its] U.S. sanctions obligations.”

The JPMorgan settlement provides an illustrative example of the multiple complex sanctions schemes with which financial institutions must comply. If you have questions pertaining to the numerous OFAC sanctions programs, or for questions on how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fuerstlaw.com.

On August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation issued a report to the Governor and his Cabinet regarding workers’ compensation fraud in the State of Florida. The report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers’ compensation insurance market. Money Services Businesses are regulated by the Office of Financial Regulation pursuant to Chapter 560, Florida Statutes. A copy of the Office of Financial Regulation’s report can be read here.

According to the report, the scheme is designed to allow uninsured subcontractors to procure contracting jobs while avoiding paying workers’ compensation insurance premiums and payroll taxes on the money earned. (Florida law requires that subcontractors possess a valid workers’ compensation policy in order to obtain contracts from a general contractor).

The scheme works as follows: First, individuals, known as “facilitators” incorporate “shell” companies, i.e. companies with no business operations, labor force, or physical location other than a P.O. Box, designed to appear as subcontractors on paper. Often times, the facilitator’s identity is completely unknown as fictitious owners are listed as the owners and officers of the corporation. Next, the shell company obtains a minimal workers’ compensation insurance policy. Once the shell company has obtained insurance, it proceeds to “rent” its certificate of insurance to uninsured subcontractors. The facilitators allow the uninsured subcontractor to use the shell company’s name and workers’ compensation policy in return for a fee. Uninsured subcontractors who have “rented” the shell company will then have paperwork that appears to be compliant with state law, thus allowing them to enter into construction contracts with General Contractors.

The MSB’s involvement in the fraud scheme occurs upon completion of the contract between the subcontractor and the general contractor.  Once the work is completed by the uninsured subcontractor, payment is made to him by the general contractor via check made payable to the “rented” shell company. It is at this stage where an MSB, often a check casher, enters into the scheme because, unlike banks, which normally require that checks made payable to a business or third party be deposited directly into the payee’s account, a check casher will pay out business-to-business checks, if cashed by persons authorized by the payee. According to the report, “these ‘authorized’ persons are usually the facilitator, and others designated by the facilitator, introduced to and known by the owner/operator of the MSB.”

Upon cashing the check in the name of the shell corporation, two fees are taken out. First, the check casher takes 1.5 to 2% for itself as the fee for cashing the check. Next, a 6-8% fee for the facilitator is taken out as the “rent” paid by the uninsured subcontractor for using the shell company’s name and insurance policy. The remaining goes to the uninsured subcontractor as payment for his services. In some cases, the check casher is unaware that its actions are part of a larger fraudulent scheme. Often times in such situations, the check casher becomes an unknowing part of the scheme because of a lack of due diligence in its AML compliance programs.

However, the report also indicated that in some cases the facilitators are actually the MSB owners themselves who act in concert with contractors to find uninsured subcontractors for construction contracts. Additionally, the report noted that in some cases complicit MSBs would falsify Currency Transaction Reports in order to protect the identity of the facilitator by naming the fictitious owners in the CTR. In accordance with the Bank Secrecy Act and its implementing regulations, an MSB is required to file a CTR for every transaction in currency in excess of $10,000. The failure to file a CTR or the falsifying of a CTR violates both state and federal law. More information on BSA requirements for MSBs can be found on FinCEN’s website here.

As a result of this scheme, “rent” paid to the shell company is not reported to the shell’s insurance carrier and is not subject to payroll taxes because the payments appear on paper as legitimate contractor-to-insured-subcontractor payments. Additionally, because uninsured subcontractors save money by avoiding workers’ compensation insurance premiums, they are able to charge a significantly cheaper rate for their services to their co-conspiring general contractors. These general contractors are then able to lower their bid prices and win construction contract jobs away from legitimate businesses. The report estimates that contractors who participate in the “renting” scheme are able to charge up to 20% less then competition for the same work. The practical effects are far reaching. First, legitimate contractors have difficulty winning bids on construction jobs because they cannot quote prices as low as the conspiring contracting companies. Second, none of the ill-gotten gains are assessed workers’ compensation insurance premiums or payroll taxes, resulting in a loss of revenue for the state.

Additionally, this scheme makes clear the importance of MSBs having robust AML compliance programs in place so that the MSB does not become an unknowing facilitator of fraud. MSBs must ensure that they maintain detailed and up to date records as required by law. MSBs must also ensure that their employees are properly trained in AML compliance in order to spot suspicious transactions and activities.

If you have questions pertaining to the Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fuerstlaw.com.

As Venezuela continues to destabilize, anti-money laundering and Bank Secrecy Act compliance officers must take notice of the increased risks associated with doing business with corporations and banks located in the there. A destabilized Venezuela could result in a litany of AML and regulatory compliance issues ranging from money laundering to Iranian and Cuban Sanctions programs violations. On July 16, 2011, World-Check, one of the largest and most well respected business risk intelligence services in the AML community, issued a newsletter highlighting some of the greatest areas of concern and urging those in AML compliance to exercise “enhanced due diligence” when transacting business with Venezuela. A copy of World-Check’s newsletter can be read here.

As World-Check described in its report, the Venezuelan government recently announced that it will be selling $1.5 billion worth of dollar denominated bonds to the public. According to World-Check, the bond sale poses several risks for regulatory compliance officers. The bonds provide an easy way for money launderers to turn ill-gotten and illicit criminal proceeds, often in Bolivars or other South American currencies, into financial instrument that can be redeemed for US Dollars. As a result, there is a heightened risk that US dollars that make their way from Venezuela to US financial institutions will be the proceeds of criminal activity. World-Check advises that US financial institutions which accept US dollars from Venezuela must ensure not only that their AML compliance programs are designed to face such threats, but also that their employees are properly trained to ensure that these transactions receive increased due diligence.

Another cause for concern stems from Venezuela’s close relationships with Cuba and Iran. Iran and Cuba are subject to U.S. economic sanctions which prohibit or severely restrict trade and business with both countries. For example, the Iranian Transaction Regulations not only prohibit U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran, but also prohibit U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person. See 31 C.F.R. §§ 560.206, 560.208. Additionally, the Cuban Assets Control Regulations prohibit the purchase, transport, import, or dealing in any merchandise: 1) of Cuban origin; or 2) is or has been located in or transported from or through Cuba; or 3) is made or derived in whole or in part of any article which is the growth, produce, or manufacture of Cuba. See 31 C.F.R. § 515.204. The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury administers and enforces economic sanctions programs.

On July 20, 2011, World-Check addressed a new concern for AML compliance officers when evaluating the risks of doing business with Venezuela: the potential for Cuban nationals to obtain fake Venezuelan passports. As explained by World-Check: “If American bankers open accounts for a Cuban national, relying upon a bogus Venezuelan passport, they violate OFAC sanctions in force against Cuba. Cuba is on the US list of State Supporter of Terrorism, and American companies and individuals cannot conduct any transactions with its nationals or entities.” World-Check’s July 20, 2011 newsletter can be read here.

As a result of the breadth and complexity of these regulatory schemes, although businesses may not directly engage in trade with Iran or Cuba, businesses may unknowingly violate OFAC sanctions because of the nature of their relationships with Venezuelan businesses who do. Examples of this can be read in our previous reports here and here. If you have questions pertaining to the OFAC sanctions on trade with Cuba and Iran, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fuerstlaw.com.

On July 18, 2011, the Financial Crimes Enforcement Network of the United States Department of the Treasury (“FinCEN”) issued a final rule amending the Bank Secrecy Act (BSA) implementing regulations regarding Money Services Businesses (“MSBs”). The rule clarifies which businesses qualify as MSBs and are thus subject to the anti-money laundering regulations of the BSA. A copy of FinCEN’s press release can be read here.

Under current BSA regulations, businesses that meet one or more of the definitions of a MSB must comply with applicable BSA requirements. Businesses which qualify as MSBs under BSA regulations include: currency dealers, currency exchangers, check cashers, money transmitters as well as sellers issuers and redeemers of traveler’s checks, money orders, or stored value.

The rule makes several changes to MSB regulations starting with the definition of an MSB itself. The definition of MSB has been rephrased to state: “[a] person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States” in one or more of the capacities listed above. The new rule clarifies that it is the activities performed by a business within the US which will cause it to be classified as an MSB regardless of that businesses location.

Additionally, the new rule makes foreign-located businesses engaging in MSB activities within the US subject to BSA regulation. As a result, even foreign based MSBs with no physical presence in the US can be classified as an MSB and thus subject to the rigorous requirements of the BSA. However, foreign banks as well as foreign financial agencies that engage in activities that if conducted in the US would require them to be registered with the SEC or CFTC are excluded from the definition of an MSB. As noted in the rule, “To permit foreign-located persons to engage in MSB activities within the United States and not subject such persons to the BSA would be unfair to MSBs physically located in the United States and would also undermine FinCEN‘s efforts to protect the U.S. financial system from abuse.”

The rule also replaces the terms “currency dealer or exchanger” with “dealer in foreign exchange” and clarifies what services will qualify for this MSB category. Although the BSA uses the term “currency exchange,” FinCEN has interpreted the Act as intending to cover the underlying activities involved in foreign exchange services, including the exchange of instruments other than currency. As a result, “dealer in foreign exchange” will be defined as: “A person that accepts the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more countries in exchange for the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more other countries in an amount greater than $ 1,000 for any other person on any day in one or more transactions, whether or not for same-day delivery.” This new term and definition makes clear that exchanges within the US of currency, funds, or monetary instruments wholly between foreign currencies still classify a business as an MSB and subject to BSA regulation.

FinCEN’s new rule also provides for several changes to the definition of “check casher” in an effort to more accurately describe which activities are covered. First, the rule splits the definition of “check casher” into two paragraphs, the first defining what activity is considered “check cashing” and the second listing exclusions from the definition. Second, FinCEN has now incorporated the redeeming of monetary instruments into its definition of “check cashing.” As a result businesses engaged in redeeming monetary instruments, including money orders and traveler’s checks, will be considered a check casher if it also redeems checks for currency or a combination of currency and monetary or other instruments. “Check cashing” is now defined as: “A person that accepts checks (as defined in the [UCC]), or monetary instruments in return for currency or a combination of currency and other monetary instruments in an amount greater than $1,000 for any person on any day in one or more transactions.”

The new rule amends existing MSB regulations by separating the provisions concerning stored value from those concerning issuers, sellers, and redeemers of traveler’s checks and money orders. FinCEN separated out the stored value provisions in anticipation of additional changes to be made regarding stored value in FinCEN’s Prepaid Access Rulemaking. See our previous report for more information regarding FinCEN’s Prepaid Access Rulemaking. The rule also combines the previously separate categories of issuer of traveler’s checks and money orders and seller of traveler’s checks and money orders into one category.

The rule also provides for several changes to the definition of “money transmitter” and exclusions from its coverage. While substantive, these changes incorporate years of FinCEN issued guidance and administrative rulings regarding examples of activities which would not classify a business as a money transmitter, even though the business engaging in such activities may be involved in accepting and transmitting funds. A complete copy of the new rule can be read here.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fuerstlaw.com.

On June 29, 2011, the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury announced that it had reached a settlement with General Reinsurance Corporation (“General”) over alleged violations of the Iranian Transaction Regulations (“ITR”). The alleged violations of the IRT highlight the broad reach and complexity of the sanctions on trade with Iran. General information regarding economic sanctions against Iran can be found at OFAC’s website here.

The ITR, which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC. 31 C.F.R. § 560.206 prohibits U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran. Additionally, 31 C.F.R. § 560.208 prohibits U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person.

Similar to our previous reports of IRT settlement agreements, although General did not directly engage in business with Iran, due to the nature of its business relationships with other entities who were engaged in business in Iran, General was found to be in violation of the IRT. OFAC alleged that the violations consisted of two reinsurance claim payments to the Steamship Mutual Underwriting Association Limited for losses arising from vessel operations of the National Iranian Tanker Company which Steamship Mutual insured. According to OFAC, General made these excess of loss claim payments pursuant to its facultative reinsurance obligation to Steamship Mutual for the coverage period of June 16, 1998 to February 20, 2002. (Reinsurance is an insurance policy taken out by an insurance company on an insurance policy. Reinsurance is usually purchased by the original insurer to mitigate its own risks associated with payment of policies. The reinsurance is used to cover and pay the original policy. In a facultative reinsurance agreement the reinsurer assumes all or part of the risks associated with a particular policy.) Consequently, due to the broad reach of the IRT, and even though General had no direct business relationships with any Iranian business, General’s reinsurance activities were deemed by OFAC to be a violation.

OFAC announced that General has paid $59,130 in penalties for its violations. According to OFAC enforcement guidelines, the base penalty associated with such a violation is $131,424. However, this penalty was lowered because: 1) General voluntarily disclosed its violations and substantially cooperated with OFAC; 2) General is the largest reinsurer in the United States; 3) the violations were the result of personnel violating General’s policies and procedures; and 4) General has not previously been subject to OFAC penalties. Additionally, General has installed enhanced sanctions compliance software and implemented new training programs regarding sanctioned transactions. A copy of OFAC’s announcement can be read here.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fuerstlaw.com

On June 23, 2011, the Consumer Financial Protection Bureau (“CFPB”) announced a Notice and Request for Comment regarding the expansion of its nonbank supervision program. A copy of the U.S. Department of the Treasury press release can be read here.

Created with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, CFPB, which begins operations on July 21, 2011, was tasked with the responsibility of regulating both banks and nonbank institutions which offer financial products or services to ensure that these institutions comply with federal consumer financial protection laws. Under the Dodd-Frank act, CFPB is authorized to supervise all banks with more than $10 billion in assets as well as all sizes of nonbank mortgage companies, payday lenders, and private education lenders.

Dodd-Frank also grants CFPB the power to regulate nonbank institutions in other consumer financial services markets. However, prior to the expansion of the nonbank supervision program into other financial services markets, the agency must first define by regulation who qualifies as a “larger participant” in the market, thus making them subject to regulation. Dodd-Frank requires that CFPB promulgate its initial rule defining which “large participates” of nonbank consumer financial market services it intends to regulate by July 21, 2012.

In its Notice and Request for Comment, CFPB seeks comments on the six nonbank financial services markets it intends to regulate: 1) debt collection; 2) consumer reporting; consumer credit and related activities; 4) money transmitting, check cashing, and related services; 5) prepaid cards; and 6) debt relief services. CFPB also seeks comment on the criteria to be used to determine whether a company will qualify as a large participate including: 1) the thresholds for inclusion, 2) what data should be used to set these thresholds, and 3) whether a single test or market specific tests should be adopted to determine a large participant. A copy of the Notice and Request for Comment can be read here. The initial comment period will run for 45 days from the date of publication in the Federal Register.

Fuerst Ittleman will continue to closely monitor this issue for the latest developments from CFPB. If you have questions pertaining to how Dodd-Frank and the creation of CFPB will affect your business or how to ensure that your business maintains regulatory compliance at both the state and federal levels please contact us at contact@fuerstlaw.com.