Some Commentary on the Unfortunate Relationship Between Crisis and Fraud
The Financial Crimes Enforcement Network (“FinCEN”) released today an update (“Update”) on its March 16, 2020 COVID-19 Notice, on which we previously blogged, for the stated reason of assisting “financial institutions in complying with their Bank Secrecy Act (BSA) obligations during the COVID-19 pandemic, and announc[ing] a direct contact mechanism for urgent COVID-19-related issues.” Further, the Update states that “FinCEN is committed to promoting the success of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including the need to facilitate expeditious disbursal of CARES Act funds.” This post will summarize briefly the Update, and make a few preliminary high-level comments.
The COVID-19 pandemic — pernicious, unpredictable and continually evolving — resists facile pronouncements. With that caveat, it is rational to predict that many financial institutions subject to the BSA will face significant issues in the very near future because of the unfortunate confluence of increased fraud schemes seeking to capitalize on the pandemic, coupled with the fact that many BSA/AML compliance teams will be straining in this age of “social distancing” and enforced working remotely to maintain an adequate amount of staff and degree of communication needed to catch and report suspicious activity, among other obligations under the BSA. Stated otherwise, we are entering a time of maximum fraud and a reduced capacity to stand guard. Further, as the pandemic continues and then recedes, the previously existing fraud schemes will come to light — just like during the financial crisis of 2008, when the Bernie Madoffs of the world were exposed — because desperate investors will be demanding their cash back, and some soon will discover that their money actually was stolen a while ago. Investigations, prosecutions and litigations will ensue.
Turning to the Update by FinCEN, we summarize here greatly. In our view, the Update does not provide much concrete guidance.
In the Update, FinCEN declares that it “expects financial institutions to continue following a risk-based approach, and to diligently adhere to their BSA obligations,” although FinCEN also “appreciates that financial institutions are taking actions to protect employees, their families, and others in response to the COVID-19 pandemic, which has created challenges in meeting certain BSA obligations, including the timing requirements for certain BSA report filings.”
The Update then engages in a technical but limited discussion regarding the collection of beneficial ownership information for existing customers, noting that “[o]ne of the primary components of the CARES Act is the Paycheck Protection Program (PPP). For eligible federally insured depository institutions and federally insured credit unions, PPP loans for existing customers will not require re-verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance.”
Next, the Update discusses the fact that “FinCEN has heard from certain financial institutions and trade associations for financial institutions about difficulties in meeting certain BSA obligations, including the timing requirements for certain BSA report filings.” Although the Update broadly states that “FinCEN recognizes that certain regulatory timing requirements with regard to BSA filings may be challenging during the COVID-19 pandemic and that there may be some reasonable delays in compliance,” and although such general concerns are certainly widespread, the actual “relief” provided by the Update is strangely narrow, and pertains only to the suspension of certain Currency Transaction Report obligations involving certain sole proprietorships and entities operating under a “doing business name.”
Importantly, the Update provides that “FinCEN has created a COVID-19-specific online contact mechanism, via a specific drop-down category, for financial institutions to communicate to FinCEN COVID-19-related concerns while adhering to their BSA obligations.” Further, although “[s]uch COVID-19-related communications are strongly encouraged but not required,” FinCEN states that it “encourages financial institutions to contact their functional regulator(s) or other BSA examining authority as soon as practicable if a financial institution has BSA compliance concerns because of the COVID-19 pandemic.”
Finally, and according to the Update, “FinCEN encourages financial institutions to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their BSA/anti-money laundering compliance obligations, in order to further strengthen the financial system against illicit financial activity and other related fraud.” Although the Update then invites financial institutions to implement innovative efforts to combat money laundering, it provides no further details or guidelines regarding how to do so in a concrete fashion.