Insights

The Financial Crimes Enforcement Network (known as “FinCEN”) recently announced an assessment of a $250,000 civil money penalty against The Lower Sioux Indian Community, doing business as Jackpot Junction Casino Hotel of Morton, Minnesota. The casino, while not admitting or denying allegations brought by FinCEN, agreed to pay the penalty. Jackpot Junction Casino offers slots, blackjack, bingo, and poker.

The casino was assessed for violations of the anti-money laundering program and reporting requirements of the Bank Secrecy Act. The casino also failed to conduct adequate testing and training for employees, among other things. The casino is required by law to accurately complete and file forms called Currency Transaction Report by Casino and Suspicious Activity Report by Casino.

Keeping track of the hundreds of casinos in the United States and U.S. territories is not the only thing that FinCEN does. FinCEN is a bureau of the U.S. Department of the Treasury. Its purpose is to receive and maintain financial transaction data, analyze and disseminate that data for law enforcement purposes, and build global cooperation with counterpart organizations in other countries. FinCEN’s mission is to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems at home and abroad. FinCEN serves as the FIU (Financial Intelligence Unit) for the United States and is one of 120 FIUs making up the “Egmont Group,” an international entity focused on information sharing and cooperation among FIUs. An FIU is a central, national agency responsible for receiving, analyzing, and disseminating disclosures of financial information concerning suspected proceeds of crime and potential financing of terrorism.

FinCEN’s 2010 Annual Report to Congress spotlights its continued efforts to tackle two major conduits for problematic international money transfers – prepaid access to funds via cards or electronic devices and the cross-border electronic transmission of funds. The Annual Report also announced that the largest civil money penalty – $110 million – was levied against Wachovia Bank for having failed to effectively monitor for potential money laundering activity of more than $420 billion in foreign financial transactions. FinCEN also tracks financial transactions of depository institutions, money services businesses, securities and futures firms and traders, precious metals and jewelry traders, and the insurance industry. It investigates mortgage and real estate fraud and writes regulations for, and enforces, the Bank Secrecy Act. Of the more familiar, FinCEN adopted the “know your customer” rules. FinCEN also collaborates with the Financial Fraud Enforcement Task Force that President Obama established in November 2009 to hold accountable those who helped bring about the “great recession.” FinCEN fights home loan modification and foreclosure rescue scams, reverse mortgage scams against the elderly, fraud against TARP, and Medicare fraud.

Proposed Rules for Loan and Finance Companies

Back in 2003, FinCEN issued an Advance Notice of Proposed Rulemaking regarding anti-money laundering requirements for “persons involved in real estate closings and settlements.” Recognizing that numerous types of businesses could be involved, the agency conducted further studies over the years, but, in recognition of concern among regulators, law enforcement, and Congress “over abusive and fraudulent sales and financing practices in residential mortgage markets,” it issued another ANPR in July, 2009. The advance notice evidenced a desire to develop anti-money laundering and suspicious activity report requirements for a subset of loan and finance companies: non-bank residential mortgage lenders and originators.

In December 2010, FinCEN issued a Notice of Proposed Rulemaking as another incremental step. The notice focuses on anti-money laundering and suspicious activity report program requirements under the Bank Secrecy Act for businesses engaged in residential mortgage lending or origination. The adoption of program requirements for these businesses is seen as a complement to the nationwide licensing system and registry established by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.

While non-mortgage loan and finance companies are not yet subject to the anti-money laundering and suspicious activity report program requirements, it behooves such firms to pay attention to these developments. FinCEN reports that, in recent years, a significant percentage of suspicious activity reports have reported suspected fraud schemes involving real estate lenders, brokers, agents, appraisers, and other businesses associated with real estate finance and settlements. There is no reason to think that the non-mortgage side of the credit business is free of fraud and financial crimes. The notice states:

[T]he term “loan or finance company” is not defined or discussed in any FinCEN regulation, and there is no legislative history on the term. The term, however, could conceivably extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Loan and finance companies originate loans and leases to finance the purchase of consumer goods such as automobiles, furniture, and household appliances. ... They supply short- and intermediate-term credit for such purposes as the purchase of equipment and motor vehicles and the financing of inventories. In addition, specialized wholesale loan and finance companies provide liquidity that allows retail loan and finance companies, as well as banks and others, to service end users.

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Arguably, the absence of rules for these types of loan or finance companies might be exploited by criminals insofar as they may shift the focus of their criminal enterprises from residential to other consumer and commercial finance businesses. As noted in the 2009 ANPR, FinCEN is inclined to defer regulations for commercial real estate finance businesses and other types of consumer and commercial finance businesses until further research and analysis can be conducted to enhance our understanding of the number and kinds of businesses in their sector, their business operations and money laundering vulnerabilities.

Although the definition of “loan or finance company” would be limited at this time to residential mortgage lenders and originators, and anti-money laundering and suspicious activity report program requirements would be applied first to these businesses, there is an intent to expand the rules to all types of businesses in the future. The rules will cover such things as reporting suspicious transactions (aggregated funds or other assets of at least $5,000), possible immediate reporting to law enforcement, retention of records, prohibitions on disclosing suspicious activity reports, and the adoption of an anti-money laundering program that has minimum standards.

Checking the OFAC Specially Designated Nationals and Blocked Persons List

The Office of Foreign Assets Control administers and enforces economic sanctions programs primarily against countries (Cuba, Iran, Belarus, and Burma) and groups of individuals, such as terrorists and narcotics traffickers. OFAC is an “office” within the Department of the Treasury, whereas FinCEN is a bureau within Treasury.

As a reminder, loan and finance companies have an existing and continuing obligation to check the OFAC list before doing business with any person to ensure that there is no “match” with a person listed. There is also a continuing duty to “scrub” the names of persons with which a company does business against the OFAC list. A company or business must not do business with anyone on the list. For more information on OFAC obligations, go to: http://www.treasury.gov/resource-center/sanctions/Documents/abamag.pdf.

Elizabeth A. Huber is a partner in the California office of Hudson Cook, LLP. Liz can be reached at 310-686-5050 or by email at ehuber@hudco.com.