Corporate Governance

The Criminal and Regulatory Framework, and Anti-Money Laundering Compliance Programs (Part 5)

This article is a continuation of our most recent corporate governance series. If you missed part 4, you can read it online here: Anti-Money Laundering Part 4

4. Transactions With Prohibited Persons, Groups, Entities and Countries: A number of federal laws impose severe restrictions and sanctions against various persons, groups, entities and countries considered to be terrorists, supporters or terrorist activity, or illegal narcotics "kingpins." These sanctions are implemented through regulations issued by the U.S. Treasury Department, Office of Foreign Assets Control ("OFAC") and apply to all "United States Persons."

Generally, a "United States Person" includes a national of the U.S. anywhere in the world, any resident alien, any person within the U.S., any entity composed principally of nationals or permanent resident aliens of the U.S., or any corporation organized under the laws of the U.S., any state, the District of Columbia, or any territory or possession of the U.S. Generally, for anti-money laundering and anti-terrorist financing purposes, the term does not include foreign subsidiaries of U.S. entities. However, the term does include, and the prohibitions do directly apply to, individual "United States Persons" located anywhere in the world, regardless of by whom they are employed.56

OFAC maintains a list foreign the persons, groups, entities and countries deemed to be supporters of terrorist activity, terrorists, of international narcotics "kingpins" subject to the sanctions. This is generally known as the "OFAC List" or the "SDN List" (SDN stands for "Specially Designated National").

Generally, the OFAC regulations prohibit any United States Person from engaging in any transaction or transfer of any funds or property of whatever with a SDN. They further generally require that all property and assets of "SDNs" be either "blocked" (that is, placed in an interest bearing account not accessible by the SDN), or that any transaction involving any property or funds belonging to a SDN rejected, and promptly reported to OFAC. However, the precise prohibitions imposed by OFAC regulations against SDNs, and the specific requirements imposed on United States Persons, vary according to the particular reason for including the person, group, entity or country on the OFAC List. The OFAC regulations, which are voluminous, are generally found at 31 C.F.R. 500 through 598.57 Since the specific sanctions, prohibitions and requirements imposed by OFAC regulations vary according to the reason a person, group, entity or country has been placed on the list, the names found on the List also refer to the particular reason for inclusion. It is thus important not only to identify SDNs, but also to know their specific designation in order to know the precise requirements and prohibitions imposed on United States Persons by the regulations.

As a general rule, it is illegal to conduct any business transaction, facilitate any business transaction, or provide any service to any person, group or organization on the OFAC List. Violations can be punished by severe fines and imprisonment, depending upon the statute and sanctions program involved, but civil fines imposed by OFAC against United States Persons violating OFAC regulations can be substantial, frequently involving hundreds of thousands of dollars and, in some cases, millions.

5. Special Rules for "Money Services Businesses": In addition to maintaining formal Anti-Money Laundering Programs and reporting "suspicious transactions," all "money services businesses are required to register with FinCEN.58 Failure to register is a federal felony punishable by fine and imprisonment for up to five years.59

In addition, many states also require money services businesses to register. Failure to register with a state, if required is required by state law, is a federal felony.60 It is, therefore, essential for every such business to not only comply with the federal registration regulations, but also to check the laws of each state in which it does business. In some cases, a money services business may have to file multiple registrations. Care must be taken to closely examine the definition of the term "money services business" under both the federal regulations and local state law, because they frequently differ. This can result in a business having to register in some states but not others, or with FinCEN but not with the state, or with the state but not with FinCEN.

Agents and branches of money services businesses are not required by federal regulation to register with FinCEN, although the business must report information about its branch locations or offices, and must maintain a list of its agents. This list must include each agent's name, address, telephone number, type of service provided by the agent, the agent's bank, the year the agent first became an agent, the number of branches or sub-agents the agent has, and a listing of the months in the preceding twelve months in which the agent's gross transaction amount exceeded $100,000.61

Registration is valid for a two-year period and a copy of the registration must be kept at a location in the United States for five years. If, however, the business is subject to a state registration requirement, then a change in control which requires re-registration with the state requires re-registration with FinCEN. In addition, the federal regulations also require re-registration with FinCEN if there is a transfer of more that ten per-cent of the voting power or equity interest of the business. Further, if the business experiences a more than fifty per-cent increase in the number of its agents during any registration period, the business must re-register with FinCEN. Re-registration must be done within 180 days of the event triggering the re-registration requirement.62


Anti-Money Laundering - Part 6

Our thanks to this article's author, Greg Baldwin of Holland & Knight.

Holland & Knight is a global law firm with more than 1,150 lawyers in 17 U.S. offices. Other offices around the world are located in Beijing and Mexico City, with representative offices in Caracas and Tel Aviv. Holland & Knight is among the world's 18 largest firms, providing representation in litigation, business, real estate and governmental law. Our interdisciplinary practice groups and industry-based teams ensure clients have access to attorneys throughout the firm, regardless of location.

Greg Baldwin practices in the areas of complex commercial litigation and white collar criminal defense. He specializes in the Foreign Corrupt Practices Act, U.S.A. Patriot Act, the Bank Secrecy Act, the Money Laundering Control Act, and OFAC regulations, as well as anti-money laundering and OFAC compliance program development and implementation. Mr. Baldwin is a Certified Anti-Money Laundering Specialist.

DISCLAIMER: This Corporate Governance article is provided as an informational resource and does not constitute legal advice. The information provided in this article is based on the laws in effect at the time the article was published. Laws related to this article's topics may change over the course of time. Visitors to this website should not rely upon or act upon this information without seeking professional legal counsel.

56 See generally, 18 U.S.C. § 3077(2). However, the specific OFAC regulations should be checked for the precise application of the OFAC regulations, as they may be different depending upon the sanction program involved.
57 A useful reference for finding the specific regulatory prohibitions and requirements for specific sanctions programs can be found at 31 C.F.R. 500, Appendix A to Chapter V, located immediately following 31 C.F.R. 598.
58 31 C.F.R. 103.41(a).
59 18 U.S.C. § 1960(a).
60 18 U.S.C. § 1960(b).
61 31 C.F.R. 103.41(d).
62 31 C.F.R. 103.41(b).


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