The Bank Secrecy Act & Beyond: Currency and Monetary Reporting Requirements

Transcription

1 The Bank Secrecy Act & Beyond: Currency and Monetary Reporting Requirements Jason B. Freeman, J.D., CPA Freeman Law, PLLC 2595 Dallas Pkwy., Suite 420 Frisco, Texas (214) Copyright Freeman Law, PLLC. All rights reserved. 1

2 Jason B. Freeman, J.D., CPA Phone (214) Toll-free (855) Mr. Freeman is the managing member of Freeman Law, PLLC, a tax, white-collar, and litigation boutique law firm based in the Dallas-Fort Worth Metroplex with clients throughout the world. He is a tax attorney and adjunct professor at SMU s School of Law, as well as a licensed CPA. Mr. Freeman handles federal and state tax controversies and white-collar civil and criminal matters, as well as advises clients in tax planning and compliance matters. Mr. Freeman has been recognized multiple times by D Magazine as one of the Best Lawyers in Dallas for tax law, and by Super Lawyers and Texas Monthly magazine. He is the President of the North Texas chapter of the American Academy of Attorney-CPAs, serves on the Executive Board for the Texas Society of CPA's, and sits on the Board of Directors for the Dallas Society of CPAs. JASON B. FREEMAN 2

3 What is the Bank Secrecy Act? 3

4 What is the Purpose of the BSA? The stated purpose of the BSA is to require certain reports or records where they have a high degree of usefulness in: criminal, tax, or regulatory investigations; or to protect against international terrorism. See 31 U.S.C

5 Common Reports Under the BSA Form Filed by Legal Authority Suspicious Activity Report (SAR) FinCEN Report 111 Financial Institution Mandatory electronic filing 31 U.S.C Currency Transaction Report (CTR) FinCEN Report 112 Financial Institution Mandatory electronic filing 31 U.S.C Report of Cash Payment Over $10,000 In a Trade or Business Form 8300 Recipient of payments Electronic filing strongly encouraged 31 U.S.C U.S.C Report of International Transportation Of Currency or Monetary Instruments (CMIR) Anyone entering or departing the U.S., or shipping, mailing or receiving monetary instruments exceeding $10,000 at one time 31 U.S.C Report of Foreign Bank and Financial Accounts (FBAR) FinCEN Report 114 U.S. Person with a financial interest in or signature authority over a foreign financial account Mandatory electronic filing 31 U.S.C

6 BSA - AML Under the BSA, 31 U.S.C. 5318(h): Each financial institution shall establish anti-money laundering programs, including, at a minimum: (A) the development of internal policies, procedures, and controls; (B) (C) (D) the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs

7 Implementing an Effective BSA/AML Program Although instituting an AML program is an independent obligation, AML programs are designed to ensure compliance with the reporting, identification, and record-keeping requirements of the BSA. Failure to sufficiently minimize the risk of violating specific BSA obligations is itself a violation. 31 U.S.C. 5318(h), 5322,

8 Polling Question The Bank Secrecy Act requires certain financial institutions to file Currency Transaction Reports and Suspicious Activity Reports when appropriate? True False? 8 8

9 Who Regulates Compliance with the BSA? FinCEN Internal Revenue Service Comptroller of the Currency Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation Federal Home Loan Bank Board National Credit Union Administration Securities and Exchange Commission Commodity Futures Trading Commission Bureau of Customs and Border Protection 9 9

10 Current Enforcement Trends Heightened regulatory and prosecutorial scrutiny Everybody s getting in on the action DOJ, OCC, FRB, FDIC Have seen a number of recent high-profile enforcement actions for BSA/AML compliance deficiencies In the past, BSA violations were addressed with regulatory orders; but in recent cases, seeing Deferred Prosecution Agreements and large fines Prevention-minded approach Federal agencies are increasingly looking to senior management personally for BSA/AML compliance failures

11 Examples of Recent BSA Enforcement JP Morgan Chase Bank, N.A. In January of 2014, FinCEN assessed a $461 million civil money penalty against J.P. Morgan for violating the Bank Secrecy Act. Total monetary fines topped $2 Billion. J.P. Morgan Chase allegedly failed to report suspicious transactions arising out of Bernard Madoff s fraudulent investment scheme

12 More Examples of Recent BSA Enforcement HSBC In December 2012, HSBC entered into a Deferred Prosecution Agreement with DOJ in which it agreed to pay $1.9 billion to settle charges involving BSA violations. HBSC allegedly failed to implement an adequate compliance program for monitoring suspicious transactions and to adequately assess the risks associated with its financial services in certain regions. ING Bank Forfeited $619 million for OFAC violations for facilitating the movement of funds on behalf of Cuban and Iranian interests. (cont d)

13 Other Enforcement Examples Trump Taj Mahal Casino Resort Ripple Labs Virtual currency; money services business ( MSB ) Thomas Haider $1 million civil money penalty for BSA violations Jack Miller President of private, closely-held bank charged; Bank of Mingo Small bank with 48 employees; $4.5 million civil money penalty and Deferred Prosecution Agreement Lone Star National Bank Milenium Cash Exchange $10,000 civil money penalty against NMCE and owner 13 13

14 Keys to Compliance Reporting Record-keeping Anti-Money Laundering ( AML ) Program 14 14

15 Polling Question A financial institution subject to the BSA must designate a compliance officer in order to implement a compliant AML Program? Yes No 15 15

16 BSA Reporting Currency Transaction Reports ( CTRs ) Form 8300 Suspicious Activity Reports ( SARs ) Report of International Transportation of Currency of Monetary Instruments (CMIR) Report of Foreign Bank and Financial Accounts (FBAR) 16 16

17 Currency Transaction Reports, FinCEN Form 112 Financial institutions must file FinCEN Form 112 Currency Transaction Report ( CTR ) to report: any deposit or withdrawal that involves a transaction in currency in excess of $10,000 Note: There are certain excepted transactions that are not subject to the CTR filing requirement. CTRs must be filed within 15 calendar days of the reported transaction(s) 17 17

18 Financial Institution Banks Brokers and dealers in securities Money service businesses Future commission merchants Introducing commodities brokers Telegraph companies An operator of a credit card system An insurance company A dealer in precious metals, stones, or jewels. A pawnbroker Casinos Card clubs Gaming establishments with gross annual revenue in excess of $1 million per year Any person subject to supervision by any state or federal bank supervisory authority And others

19 Money Service Business As a general rule, businesses offering check cashing, money orders, travelers checks, money transfers, foreign currency exchange, and pre-paid access products are Money Services Businesses and are subject to BSA reporting and recordkeeping requirements. With few exceptions, each money services business must register with the Department of the Treasury by filing FinCEN Form

20 Virtual Currencies Virtual currency FinCEN defines as a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. Under FinCEN Guidance, exchangers and administrators are considered to be money transmitters unless a limitation or exemption from the definition of money transmitter applies. See FIN-2013-G

21 Transaction For purposes of the CTR filing requirements, the phrase transaction in currency means: Physical transfer of currency from one person to another It does not include a transfer of funds by means of a bank check, bank draft, wire transfer, or other written order, which does not include the physical transfer of currency Multiple transactions in currency must 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

22 Currency Currency is defined to include: Coin and paper money of the U.S. or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance Currency includes U.S. silver certificates, U.S. notes, Federal Reserve notes, and foreign bank notes. It does not include negotiable instruments, such as checks 22 22

23 Examples of Currency Transactions that Require a CTR Filing Cash withdrawals Cash deposits Cash or purchase of checks Foreign currency exchange Cash payment Cash purchase of monetary instruments 23 23

24 Hypothetical - CTRs If a person deposits $7,000 and later, on the same day, withdraws $4,000, does this trigger a CTR filing obligation? 24 24

25 Poll Question Is a Money Services Business considered a financial institution subject to the BSA? Yes No? 25 25

26 Structuring Transactions to Avoid a Currency Report Is a Crime 31 U.S.C provides that no person shall, for the purpose of evading the reporting requirements of 5313: (1) Cause or attempt to cause a financial institution not to file a CTR; (2) Cause a financial institution to file a CTR that contains a material omission or misstatement; or (3) Structure or attempt to structure a transaction to avoid a reporting requirement

27 Civil & Criminal Penalties for Structuring A civil penalty of up to the amount of currency involved in the transaction is imposed on anyone who causes or attempts to cause a bank to fail to file a CTR. 31 U.S.C. 5321(a)(4) A criminal fine of not more than $250,000 and/or imprisonment of not more than 5 years may also be imposed. 31 U.S.C. 5324(d)(1) The criminal fine can be increased to $500,000 and/or imprisonment of 10 years in cases involving the violation of other laws or a pattern of activity involving more than $100,000 in a 12 month period. 31 U.S.C. 5324(d)(2) 27 27

28 Criminal Prosecutions For criminal prosecutions under 5324, the government only has to prove that the defendant: knowingly structured a currency transaction knew of the reporting requirement structured the transaction to evade the report The government does not have to prove that the defendant knew that structuring was illegal

29 Poll Question True or false? It is legal to structure one s cash deposits to avoid triggering the bank s obligation to file a CTR? (For example, by depositing in amounts of $10,000 or below.) 29 29

30 Form 8300: Reports of Currency Received in a Non-Financial Trade or Business 26 U.S.C. 6050I requires that: (1) Any person who is engaged in a trade or business, and (2) Who, in the course of such business, receives more than $10,000 in coins or currency in 1 transaction (or 2 or more related transactions), shall file a report with respect to such transaction. Form

31 Parallel Reporting Requirement under Title U.S.C contains an identical reporting requirement. 31 USC 5331 and 26 USC 6050I can both be satisfied by filing the FinCEN / IRS Form

32 Definitions Related to Form 8300 Trade or Business has the same meaning as it does under 26 U.S.C If the receipt of currency is not in the course of the person s trade or business, a Form 8300 is not required Transaction includes (but is not limited to) the sale of (a) goods or services, (b) real or personal property, and (c) intangible property 32 32

33 Definitions Related to Form 8300 Currency includes the coin and currency of the U.S. or of any other country which are customarily used and accepted as money in the other country In addition, solely for purposes of Form 8300, currency also includes: A cashier s check, bank draft, traveler s check or money order having a face amount of less than $10,000 that is: (a) (b) received ina designated reporting transaction, or received in any other transaction in which the recipient knows that the instrument is being used in an attempt to avoid reporting the transaction

34 Designated Reporting Transaction A designated reporting transaction is a retail sale of a consumer durable, a collectable or a travel or entertainment activity 34 34

35 Example Designated Reporting Transaction Taxpayer is a coin dealer. Customer buys gold coins from Taxpayer for $13,200. Customer pays for them with $6,200 in U.S. currency and a cashier's check having a face amount of $7,000. The cashier's check is treated as cash. Taxpayer has received more than $10,000 cash and must file Form 8300 for this transaction

36 Example Designated Reporting Transaction Taxpayer is a boat dealer. Customer buys a boat from Taxpayer for $16,500. Customer pays for it with a cashier's check payable to Taxpayer in the amount of $16,500. The cashier's check is not treated as cash because its face amount is more than $10,000. Taxpayer does not have to file Form 8300 for this transaction

37 Related Transactions Related transactions means any transaction conducted between a payer (or its agent) and a recipient of currency in a 24-hour period In addition, transactions conducted between a payer (or its agent) and a currency recipient during a period of more than 24 hours are related if the recipient knows or has reason to know that each transaction is one of a series of connected transactions 37 37

38 Example of Related Transactions An attorney agrees to represent a client in a criminal case with the attorney's fee to be determined on an hourly basis In the first month in which the attorney represents the client, the bill for the attorney's services comes to $8,000 which the client pays in currency In the second month in which the attorney represents the client, the bill for the attorney's services comes to $4,000, which the client again pays in currency 38 38

39 Example of Related Transactions John attends a one-day auction and purchases, in currency, two items for $9,240 and $1, The transactions are related transactions under 31 CFR (c)(12)(ii) because the auction house knows or has reason to know that each transaction is one of a series of connected transactions The auction house is required to report the aggregate amount of currency received from the related sales (i.e. $10,972.50), even though the auction house accounts separately on its books for each item sold and presents the purchaser with separate bills for each item purchased 39 39

40 Filing Requirements Form 8300 must be filed within 15 days after currency is received in the reportable transaction. 26 CFR 6050I-1(e)(1) Receipt of multiple payments: The Form 8300 must be filed within 15 days of the date on which the total payments received exceeds $10,000 If the initial payment is $10,000 or less, then the recipient must aggregate the initial payment and all subsequent payments made within one year and the report must be filed within 15 days of the date on which the payment that causes the total aggregate payment to exceed $10,000 is received 40 40

41 Notification to Person Identified on Form 8300 The business that files Form 8300 must notify any person who was identified on the form of the filing. 26 USC 6050I(e). The notification must be furnished to the person on or before January 31 of the year following the calendar year for which the form was required

42 Anti-Structuring Laws Related to Form 8300 No person shall for the purpose of evading the return requirements of this section: (A)cause or attempt to cause a trade or business to fail to file a Form 8300, (B)cause or attempt to cause a trade or business to file a Form 8300 that contains a material omission or misstatement of fact, or (C)structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more trades or businesses, to avoid the Form 8300 reporting requirement. 26 USC 6050I(f)(1) 31 USC 5324(b) 42 42

43 Civil Penalties Relating to Form 8300 $250 per form for failure to file a timely and/or correct Form Maximum fine of $3,000,000 per calendar year for all transactions. 26 U.S.C. 6721(a) Negligent violations: Civil penalty of not more than $500 If there is a pattern of negligent activity, an additional fine of up to $50,000 may be imposed. 31 U.S.C. 5321(a)(6) Willful failure to file: Civil penalty of not more than the greater of the amount (not to exceed $100,000) involved in the transaction (if any) or $25, U.S.C. 5321(a)(1) Intentional disregard: The greater of (a) $25,000 or (b) the amount of cash received up to $100, U.S.C. 6721(e)(2)(C) 43 43

44 Criminal Penalties Relating to Form 8300 Willful failure to file a Form 8300 is a felony punishable by a maximum of 5 years in prison and/or a fine of $25,000 ($100,000 in the case of a corporation) may be imposed. 26 U.S.C Filing a false Form 8300 or assisting in the filing of a false Form 8300 are felonies punishable by a maximum of 3 years in prison and/or a fine of $100,000 ($500,000 for a corporation) may be imposed. 26 U.S.C Title 31 carries separate penalties for willfully violating Form 8300 reporting requirements and can result in: A criminal fine up to $250,000 and/or imprisonment of 5 years, or A fine up to $500,000 and/or imprisonment of up to 10 years in aggravated cases involving the violation of other laws or a pattern of activity involving more than $100,000 in a 12 month period 31 U.S.C

45 Suspicious Activity Report ( SAR ) Generally, a SAR must be filed by a financial institution if: A transaction is conducted through the institution and the transaction involves or aggregates to at least $5,000 (less in the case of certain persons), and The institution has reason to suspect that the transaction: Involves funds derived from illegal activities; Is designed to evade the BSA reporting requirements; Has no business or apparent lawful purpose; or Involves the use of a business to facilitate criminal activity Safe-Harbor: Federal law provides banks with a safe harbor for all reports of suspicious activity to authorized parties. Generally, the safe harbor provides protection from civil liability to the bank and its directors, officers, employees, and agents

46 SAR s Are an Independent Requirement The fact that a bank also filed a CTR for a transaction does not relieve it from the independent responsibility to file a SAR under required circumstances

47 SAR s and Confidentiality A SAR filer may not notify anyone involved in the reported transaction, and must notify FinCEN of any request that it disclose a SAR or the information contained in a SAR. Safe-harbor against liability for refusing to notify a subject of the SAR about the fact that a SAR was filed. The so-called 314(b) rule allows financial institutions to share voluntarily certain types of SAR information with other financial institutions

48 SAR s and AML Program Maintaining an effective AML program, as required by 31 U.S.C. 5318(h), is critical to the ability of the financial institution to file appropriate SAR s. As part of its AML program, a financial institution is required to have policies and procedures to evaluate and identify suspicious activity. The Federal Financial Institutions Examination Council has promulgated a lengthy and nonexhaustive list of red-flag examples that indicate suspicious activities, including: Customers who provide insufficient or suspicious information; Efforts to avoid reporting or record-keeping requirements; Activity inconsistent with the customer s business; Shell company activity 48 48

49 CMIR Report of International Transportation of Currency or Monetary Instruments, FinCEN Form 105 Must file to report the transportation, mailing, or shipping of currency or monetary instruments over $10,000 into or out of the country. Must be filed by recipient under certain circumstances Monetary Instrument is defined to include currency; traveler s checks in any form; all negotiable instruments, including personal checks in bearer form, endorsed without restriction, or made out to a fictitious payee; securities or stock in bearer form or in such form that title passes upon delivery 49 49

50 Report of Foreign Bank and Financial Records ( FBAR ) United States persons are required to file an FBAR if: The United States person had a financial interest in or signature or other authority over at least one financial account located outside of the United States; and The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year

51 Polling Question True or False? All foreign financial accounts of United States persons must be reported to the Department of Treasury

52 Person Person means: (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust Note: Applies to SMLLC s that are a DRE under

53 Financial Account Financial account includes: Bank account Checking, savings, deposit Brokerage account Insurance policy with cash value (whole life) Mutual Fund or similar pooled fund Any type of account with a foreign financial institution 53 53

54 Financial Interest A person has a financial interest in the foreign account in two situations (1) Owner of record or has legal title of the account (2) If the owner of record or holder of legal title of the account is: a person acting as an agent on behalf of the U.S person a corporation in which the U.S. person owns directly or indirectly more than 50 percent of the total value of shares of stock a partnership in which the U.S. person owns an interest in more than 50 percent of the capital or profits a trust in which the U.S. person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income, or or any other entity (other than excepted entities) in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits

55 Signature or Other Authority Generally, signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained

56 Common Fact Patterns Example: Megan, a United States resident, has a power of attorney on her elderly parents accounts in Canada, but she has never exercised the power of attorney. Answer: Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement. Example: Diana, a United States citizen, is a grantor of a Foreign Asset Protection Trust but does not control trust assets nor does she receive distributions from the trust. Answer: Diana, as grantor and deemed owner of the trust assets for federal tax purposes, is required to report the trust s foreign financial accounts. Example: Domestic LLC is a DRE, and has a foreign financial account. Answer: Even though Domestic LLC is a DRE for Title 26 purposes, Domestic LLC must file an FBAR for Title 31 purposes

57 Penalties Related to the FBAR Non-willful violations - A penalty up to $10,000 per violation Reasonable cause defense is available. Willful violations - The greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation. Also a criminal violation up to $500,000 and 10 years. U.S. v. Williams, 489 Fed. Appx. 655, (4th Cir. 2012) Note: Both civil and criminal penalties can apply simultaneously. It is possible to assert civil penalties for FBAR violations in amounts that exceed the balance in the foreign financial account. See United States v. Zwerner 57 57

58 Maintaining Records Records related to foreign accounts: Maintained for 5 years Must contain: (1) the name of the account holder (2) the number of the account (3) the name and address of the foreign bank or other person who maintains the account, and (4) the maximum value of the account during the reporting period 58 58

59 BSA Recordkeeping Credit extension >$10,000 (excluding loans secured by real estate) Signature card for deposit accounts Statement or other record for deposit accounts Check, draft, or money order drawn on MIB in an amount > $100 Records of customer account debits or credits >$100 A record of any request made or instructions received or given regarding a transfer of currency or other monetary instruments, checks, funds, investment securities, or credit greater than $10,000 to or from any person, account, or place outside the United States Records to reconstruct deposit account transactions and trace a check in excess of $100 Records of certificates of deposit purchased or presented including name, address, TIN, date of the transaction, description of the certificate of deposit, and method of payment Funds transfer records in amounts >$3,

60 BSA Recordkeeping (Cont d) Customer Identification Program information for new customers beginning October 1, 2003 A record of the TIN of any person opening an account Currency Transaction Reports Suspicious Activity Reports and supporting documentation 314(a) proof of compliance (log or actual requests) 314(b) certification form if applicable Evidence of filed CMIRs JASON B. FREEMAN 60

61 Concluding Remarks and Questions 61 61

62 DISCLAIMER The information included in these slides is for discussion purposes only and should not be relied on without seeking individual legal advice