General climate and recent developments
State of legal development
In general terms, how developed are the laws on money laundering, terrorism financing and fraud in your jurisdiction?
Federal anti-money laundering and combating the financing of terrorism (AML/CFT) laws in the United States are highly developed, mature and complex. They originated with passage of the Bank Secrecy Act 1970 (31 USC Sections 5311-67), which imposed extensive record-keeping, reporting and procedural compliance obligations on US financial institutions in order to prevent and detect money laundering and terrorist financing. In 1986 the United States enacted the Money Laundering Control Act (18 USC Sections 1956-57) and became the first nation to make money laundering a criminal offence. Since then, the scope of US AML/CFT law and regulation has continuously expanded – most significantly with the passage of the USA PATRIOT Act 2001 (31 USC Sections 5301 and following). Title III of the USA PATRIOT Act, captioned “International Money Laundering Abatement and Antiterrorist Financing”, amended the Bank Secrecy Act by:
- requiring financial institutions to adopt and implement risk-based policies and procedures for the detection, prevention and reporting of money laundering or terrorist financing activities;
- increasing the extraterritorial scope of US AML/CFT laws; and
- expanding the powers of law enforcement authorities with respect to AML/CFT measures.
Most terrorism financing prosecutions in the United States are brought under 18 USC Section 2339B, which was enacted in 1996 and prohibits the knowing provision of “material support or resources” to a foreign terrorist organisation.
In addition, individual states have enacted and enforce money laundering statutes. The most prominent is New York State, which prohibits money laundering under Article 470 of the New York Penal Law.
Federal law in the United States also criminalises many different types of fraud, including wire fraud, mail fraud, securities fraud, bank fraud and tax fraud. These and other fraud crimes are predicate offences to money laundering under US law.
Have there been any notable recent developments in relation to anti-money laundering, terrorism financing or fraud law and enforcement, including any regulatory changes, case law and convictions?
In recent years – and particularly following the 2016 disclosure of the Panama Papers, which revealed the rampant use of offshore shell companies to commit tax fraud and other illicit activities – regulators in the United States have made efforts to obtain greater transparency regarding the use of legal entities to conduct banking and other activities.
In May 2016 the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued the final version of its long-awaited customer due diligence (CDD) rule under the Bank Secrecy Act. The CDD rule imposes a new requirement on covered financial institutions – which include banks, broker-dealers, mutual funds and futures commission merchants and introducing brokers in commodities – to identify the beneficial owners which control certain legal entity customers when a new account is opened. This includes:
- each individual, if any, who directly or indirectly owns 25% or more of the equity interests of the legal entity customer (the ‘ownership prong’); or
- a single individual with significant responsibility to control, manage or direct a legal entity customer (the ‘control prong’).
In addition, the CDD rule amends the AML/CFT programme requirements for covered financial institutions to include risk-based procedures for conducting ongoing customer due diligence. Financial institutions subject to the CDD rule must update their AML/CFT compliance programmes accordingly by 11 May 2018.
Similarly, since January 2016, FinCEN has issued and regularly renewed a number of temporary geographic targeting orders, which require title insurance companies to identify the natural persons behind limited liability companies and other legal entities that are used to purchase high-end residential real estate without bank financing. These geographic targeting orders apply to select high-end markets in the United States, including New York City, Miami, Los Angeles, San Francisco, San Diego, San Antonio and Honolulu. They are an indicator of FinCEN’s interest in identifying AML/CFT risks inherent in the purchase of luxury residential real estate through shell companies and may be a preview of broader and more permanent scrutiny of title insurance companies, lenders and the attorneys and agents who advise them.
Legal and enforcement framework
What primary and secondary legislation applies to money laundering, terrorism financing and fraud in your jurisdiction?
The primary anti-money laundering and combating the financing of terrorism (AML/CFT) laws in the United States are the:
- Bank Secrecy Act 1970;
- Money Laundering Control Act 1986;
- Anti-drug Abuse Act 1988;
- Annunzio-Wylie Anti-money Laundering Act 1992;
- Money Laundering Suppression Act 1994;
- Money Laundering and Financial Crimes Strategy Act 1998;
- USA PATRIOT Act 2001;
- Suppression of the Financing of Terrorism Convention Implementation Act 2002; and
- Intelligence Reform and Terrorism Prevention Act 2004.
Regulatory authority relating to AML/CFT is set out primarily at 31 CFR Chapter X and in institution-specific regulations, rules and guidance.
To whom does the legislation apply? May both individuals and organisations be held liable under the legislation? Does the legislation have extraterritorial effect?
The criminal prohibitions on money laundering set forth in 18 USC Sections 1956-1957 apply to both individuals and legal entities. The requirements of the Bank Secrecy Act apply to “financial institutions”, which includes banks, broker-dealers, casinos, futures commissions merchants, money services business, mutual funds and other persons. Both financial institutions and their partners, directors, officers and employees can be held liable for violations of the Bank Secrecy Act.
The criminal prohibitions on terrorism financing apply to individuals. Legal entities may be held civilly liable under the terrorism financing statutes.
Many, but not all, of the US AML/CFT laws have extraterritorial effect. This means they apply to persons conducting activities in, with, or involving the United States, US persons acting outside the United States and transactions in US dollars or other currencies that clear or otherwise take place – at least in part – in or through the United States. US law also provides for extraterritorial jurisdiction over persons providing material support to a designated foreign terrorist organisation.
Is your jurisdiction a party to any international cooperation agreements to combat money laundering, terrorism financing and fraud?
The United States is a member of the Financial Action Task Force and has played a leading role with the United Nations and other organisations that support the adoption and implementation of AML/CFT legal regimes around the world. The United States is party to several multilateral agreements that include AML/CFT provisions, including the:
- International Convention for the Suppression of Terrorist Bombings;
- International Convention for the Suppression of the Financing of Terrorism;
- International Drug Control Conventions;
- United Nations Convention against Transnational Organised Crime;
- United Nations Convention against Corruption; and
- United Nations Security Council Resolution 1373.
The United States has also entered into a number of bilateral mutual legal assistance treaties to facilitate exchanges of banking and other financial records in money laundering cases involving other countries.
Which government authorities enforce the law on anti-money laundering, terrorism financing and fraud, and what is the extent of their powers?
The US Department of Justice prosecutes criminal violations of the Bank Secrecy Act and other federal AML/CFT laws. The Department of Justice includes the Federal Bureau of Investigation, which has primary responsibility to investigate AML/CFT offences.
The US Department of the Treasury possesses general authority for issuing regulations implementing the Bank Secrecy Act. It delegates most of its duties with respect to AML/CFT enforcement to two subordinate bureaus. The Financial Crimes Enforcement Network (FinCEN) is responsible for issuing and enforcing regulations with respect to AML/CFT laws, and facilitates information sharing among law enforcement agencies and the federal financial regulatory authorities. The Office of Foreign Assets Control administers and enforces economic and trade sanctions against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities relating to the proliferation of weapons of mass destruction and other threats to the national security, foreign policy or economy of the United States.
The federal financial regulators exercise the authority to examine US financial institutions for compliance with the Bank Secrecy Act and its implementing regulations and to enforce their terms. These regulators include the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, FinCEN, the Commodity Futures Trading Commission and the National Credit Union Administration. The securities industry self-regulatory organisations – most significantly the Financial Industry Regulatory Authority and the National Futures Association – have also adopted various rules which mandate the establishment of AML/CFT compliance procedures.
Statute of limitations
What is the limitation period for bringing actions in relation to money laundering, terrorism financing and fraud offences?
The statute of limitations for bringing prosecutions under the federal money laundering laws and for criminal violations of the Bank Secrecy Act is five years. The statute of limitations for assessment of a civil penalty under the Bank Secrecy Act is six years. There is no statute of limitations under the federal terrorism financing laws.
How are ‘money laundering’, ‘terrorism financing’ and ‘fraud’ legally defined in your jurisdiction?
Federal law generally prohibits three types of money laundering:
- Conducting (or attempting) financial transactions with knowledge that the transaction involves the proceeds of “specified unlawful activity” with either:
- the intent to promote that activity or to violate certain tax laws; or
- knowledge that the transaction is designed either to conceal or disguise the location, source, ownership or control of the proceeds of “specified unlawful activity”, or to avoid a transaction reporting requirement under federal or state law (see 18 USC Section 1956(a)(1)).
- Moving funds across the US border with either:
- the intent to promote “specified unlawful activity”; or
- knowledge that the funds represent the proceeds of some form of unlawful activity and that the movement is designed to conceal or disguise the nature, location, source, ownership or control of the proceeds of “specified unlawful activity” or avoid a transaction reporting requirement under federal or state law (see 18 USC Section 1956(a)(2)).
- Conducting (or attempting) monetary transactions with knowledge that the transaction involves “criminal derived property” with a value greater than $10,000, if the property is derived from “specified unlawful activity” (see 18 USC Section 1957).
Conspiring to commit any of the above offences is also separately defined as money laundering (see 18 USC Section 1956(h)).
Most terrorism financing prosecutions in the United States are brought under 18 USC Section 2339B, which was enacted in 1996 and prohibits knowingly providing “material support or resources” to a foreign terrorist organisation. The term “material support or resources” – which was amended by the USA PATRIOT Act – includes cash or securities, financial services, lodging, training, expert advice or assistance, safehouses, false documentation or identification, equipment, weapons and virtually any other type of asset. Individuals and entities are identified and included on the list of designated foreign terrorist organisations by the secretary of state, in consultation with the attorney general and the secretary of the treasury.
Principal and secondary offences
What are the principal and secondary offences in relation to money laundering, terrorism financing and fraud?
US anti-money laundering and combating the financing of terrorism (AML/CFT) laws do not use the terms ‘primary’ and ‘secondary’ to describe various offences. However, the laws do distinguish between money laundering and terrorism financing on the one hand, and the failure to implement required programmes to prevent money laundering and terrorism financing on the other hand. Although any individual may be prosecuted for money laundering or terrorism financing, only ‘financial institutions’ (as defined in the Bank Secrecy Act) must implement programmes to prevent money laundering and terrorism financing. When a financial institution that is required to implement such a programme fails to do so, it is liable for a violation of the Bank Secrecy Act. Whether such a financial institution has also engaged in money laundering and terrorism financing depends on whether the financial institution engaged in the financial transaction at issue, and its role in the transaction or with the clients conducting it.
How are predicate offences defined?
Predicate offences to money laundering are referred to as “specified unlawful activity” and are defined broadly at 18 USC Section 1956(c)(7). That statute defines ‘specified unlawful activity’ as including a wide range of white collar and other crimes including racketeering activity, acts constituting a criminal enterprise, environmental crimes and a broad list of more than 170 separate US crimes ranging from fraud to sanctions violations. The statute also includes tax evasion, terrorism financing and a limited number of offences against foreign nations as predicate offences to money laundering.
To be subject to criminal liability under the federal money laundering statutes, a participant in the activity must know that the property involved in the transaction represents the proceeds of “some form of unlawful activity”; it is not necessary to prove that a defendant knew the property represented the proceeds of a particular “specified unlawful activity”. Under US law, evidence of intent can be circumstantial evidence or proof that the actors under investigation consciously avoided learning the true nature of the proceeds at issue.
De minimis rules
What de minimis rules apply to money laundering, terrorism financing and fraud offences?
The general offence of money laundering has no de minimis amount and applies no matter how small the transaction (see 18 USC Section 1956). The money laundering offence set out in 18 USC Section 1957 requires a transaction in an amount greater than $10,000 sent by, through or to a financial institution. The prohibition against terrorism financing has no de minimis rule.
Penalties and plea agreements
What penalties can be brought against a person in relation to a money laundering or terrorism financing offence?
The maximum penalty for a criminal violation of 18 USC Section 1956 is imprisonment for 20 years and a fine of $500,000 or twice the value of the property involved in the transaction, whichever is greater. The maximum penalty under 18 USC Section 1957 is imprisonment for 10 years and a fine of twice the value of the criminally derived property. The government may also impose civil penalties in the amount of $10,000 or the value of the property involved in the transaction, whichever is greater.
Under the Bank Secrecy Act, a financial institution may receive a criminal or civil fine for each day and for each office, branch or place of business where a violation occurs. The amount charged per day and per office ranges from $10,000 for a failure to report a foreign financial agency transaction to $1,000,000 for a failure to establish enhanced due diligence policies, procedures, and controls designed to detect money laundering through private banking and correspondent banking accounts involving foreign persons.
In addition to any civil or criminal penalties, any person, whether an individual or legal entity may be ordered to forfeit funds or property involved in illegal activity. If the funds or property are no longer available, US law allows for other assets of the person to be substituted as forfeited property.
Are plea agreements available? If so, how often are they used and what rules, standards and procedures apply?
Plea agreements are routinely used in US courts to resolve criminal cases without a trial. Plea agreements may be favoured by both the prosecution and defence in order to avoid the cost and uncertainty of a trial. In federal courts, plea agreements are governed by Federal Rule of Criminal Procedure 11(c) and are available for both individual and corporate defendants. Defendants may enter into plea agreements only if they committed the crime charged against them and admit to doing so in court (unless the court allows the parties to disclose the plea agreement in camera). Under a plea agreement, the prosecutor may agree to a reduced sentencing recommendation, but ultimately the court determines the defendant’s sentence.
In some cases – particularly where the indictment of a corporate defendant could have significant collateral consequences – federal prosecutors may consider agreeing to a non-prosecution or deferred prosecution agreement. Such agreements typically include specific conditions designed to ensure ongoing compliance with applicable laws and regulations.
What defences are available in your jurisdiction to parties accused of money laundering, terrorism financing or fraud?
Under US law, a defendant is presumed innocent. The government always has the burden of proving all elements of the offence beyond a reasonable doubt. Thus, cases are defended by challenging whether the government has met this burden. Beyond such challenges, complete defenses to criminal charges include duress, entrapment, and the statute of limitations.
Record keeping, disclosure and compliance
Record-keeping and disclosure requirements
What record-keeping and disclosure requirements apply to companies and relevant individuals under the anti-money laundering, terrorism financing and fraud legislation?
The Bank Secrecy Act and its implementing regulations require financial institutions to maintain records of all transactions, and to file reports with the Financial Crimes Enforcement Network (FinCEN) about cash transactions aggregating to more than $10,000 (known as ‘currency transaction reports’). In addition, financial institutions are required to maintain records of information collected when identifying customers and monitoring customers’ activity.
Financial institutions also are required to file a report with FinCEN (known as ‘suspicious activity reports’) when a transaction involving the bank aggregates to at least $5,000 and the bank knows or has reason to suspect that the transaction:
- relates to illegal activity;
- is designed to evade a reporting requirement;
- has no business or apparent lawful purpose; or
- is not of the sort in which the customer would normally be expected to engage.
What internal compliance measures are required and/or advised for companies in relation to the anti-money laundering, terrorism financing and fraud legislation?
The Bank Secrecy Act and its implementing regulations require financial institutions to implement a broad range of compliance measures designed to prevent money laundering and terrorism financing. A Bank Secrecy Act compliance programme is described as having five pillars:
- the development of internal policies, procedures, and controls;
- the designation of a compliance officer;
- an ongoing employee training programme;
- an independent audit function to test programmes; and
- risk-based customer due diligence policies and procedures.
Financial institutions must identify and assess anti-money laundering and combating the financing of terrorism risks presented by their customers, products and services, geographic exposure and delivery channels and put in place mitigation measures that are commensurate with the risks identified. A frequent concern is the possibility that a financial institution will be subject to regulatory action when its regulator disagrees about whether particular risk ratings and mitigation measures are appropriate in a given situation.
What customer and business partner due diligence is required and/or advised for companies in relation to the anti-money laundering, terrorism financing and fraud legislation?
The Bank Secrecy Act requires financial institutions to apply risk-based customer due diligence policies and procedures. Financial institutions must both identify customers and verify information provided by the customer. In addition, under new customer due diligence rules effective 11 May 2018, financial institutions must identify the individuals who own or control legal entities that are customers.
US financial institutions may be able to rely on a third-party business partner to conduct some of its Bank Secrecy Act obligations, but only where such reliance is reasonable and generally where appropriate due diligence is conducted on the business partner’s Bank Secrecy Act compliance programme.
Can private actions be brought in your jurisdiction for damages arising from money laundering, terrorism financing or fraud? If so, who may file such actions and what filing procedures apply?
The Bank Secrecy Act and other US anti-money laundering and combating the financing of terrorism (AML/CFT) laws do not create a private cause of action. However, AML/CFT violations may give rise to liability under other laws and regulations. For example, financial institutions have been sued under securities laws for making allegedly false and misleading statements in their public filings for investors regarding compliance with AML/CFT requirements.
How are damages calculated?
As noted above, the US AML/CFT laws do not create a private cause of action, and therefore no damages may be recovered under these laws. In the case of materially false or misleading disclosures under securities laws, monetary damages generally are calculated based on plaintiffs’ actual economic loss.
What other remedies may be awarded to successful claimants?