SARs Filed on Unregistered/Unlicensed MSBs

An initial analysis of suspicious activity reporting by depository institutions identifying potentially unregistered/unlicensed MSBs underscores the need for further guidance on characteristics that may indicate MSB activity through account relationships.

In 1999, the Financial Crimes Enforcement Network (FinCEN) extended the BSA regulatory regime to MSBs, that is, certain non-bank financial institutions that engage in a variety of financial services. A person or other entity that qualifies as an MSB, whether or not licensed as such by a State, must register with FinCEN and, as part of that registration, maintain a list of any agents. In addition, each MSB is required to establish and implement an anti-money laundering program. Most MSBs are required to (and others are encouraged to voluntarily) file a SAR regarding any transaction or pattern of transactions conducted or attempted by, at, or through the MSB that is suspicious and involves or aggregates funds or assets of at least $2,000 if the MSB knows, suspects, or has reason to suspect that the transaction or transactions; is derived from illegal activity or intended to hide or disguise funds or assets derived from illegal activity; is designed to evade the requirements of the BSA, whether through structuring or other means; serves no business or apparent lawful purpose and the MSB knows of no reasonable explanation for the transaction after examining all available facts; or involves use of the MSB to facilitate criminal activity.

Given the growth in number of MSBs, including the ancillary provision of such services, we are working to ensure that these businesses comply with federal registration, anti-money laundering program, and recordkeeping and reporting requirements. To that end, we have begun to study relevant SARs so that we may understand how, and the extent to which, banks and other financial institutions identify potentially unregistered MSBs. The first phase of this study examined depository institution SARs filed between January 1, 2002 and April 30, 2005. The findings from that study, involving 1,214 SARs, are presented herein.

On April 26, 2005, FinCEN, along with the federal banking agencies, issued interagency interpretive guidance to depository institutions on providing banking services to MSBs operating in the United States (Interagency Guidance). In that guidance, we specifically directed depository institutions to file SARs on businesses that are unregistered or unlicensed MSBs. We also stated that the guidance was not ?a directive to banking organizations to conduct immediately a review of existing accounts for known MSBs for the sole purpose of determining licensing or registration status.? FinCEN and the federal banking agencies? expectations have not changed in this regard. The Interagency Guidance has been incorporated into the Federal Financial Institutions Examination Council?s (FFIEC?s) 2005 BSA/Anti-Money Laundering Examination Manual.

Preliminary research reveals that between May 1, 2005 and February 28, 2006, depository institutions filed an additional 2,934 SARs related to suspected unregistered MSB activities. The filing volume during this ten-month period reflects a 142 percent increase over the more than three-year period of January 1, 2002 through April 30, 2005 (e.g., prior to the issuance of the guidance). We are continuing to analyze the May 1, 2005 through February 28, 2006 filings to identify specific individuals and entities operating as unregistered MSBs for possible regulatory follow-up action or, if necessary, referral to law enforcement. We plan to use information from both studies to continue developing guidance for financial institutions that contributes to better identification and reporting of unregistered MSBs. The results of our further study will be published in a subsequent edition of The SAR Activity Review.

Depository Institutions--Types of Activities Observed
FinCEN?s research identified 1,214 relevant depository institution SARs filed between January 1, 2002 and April 30, 2005. Analysis of these documents identified 1,017 businesses and 305 individuals apparently engaged in unregistered MSB-related activities.

Analysis of the narrative sections of the relevant depository institution SARs found reference to at least 13 different types of MSB-related activities.8 When studying these SAR narratives for patterns, the sampling revealed check cashing?both over $1,000 for a customer on any day and nonspecific? as the activity most often reported, followed by money transmission (as illustrated in Table 1 below). Most notably, 15 SARs involved either indictments or arrests for alleged criminal behavior associated with the operation of the MSB or concerned activities strongly suggesting specific criminal activities.

For example, three SARs filed by three separate depository institutions reported the indictment of a corporation for acting as an unlicensed funds transmitter. This corporation sent over $3.2 billion from shell companies to offshore accounts over a five-year period beginning in 1997.

Another SAR narrative described a company whose owner was arrested in late 2004 for operating as an unlicensed money transmitter. This individual made frequent deposits to his company?s account, usually through several small checks. The owner subsequently sent two or three funds transfers a month to beneficiaries located in India, Hong Kong, and South Africa. Indications are that this was a hawala-type operation involved in sending money either directly to India, or alternately to Hong Kong or South Africa to purchase gold to be subsequently smuggled into India.

A third SAR narrative described a customer?s use of two different business accounts to transfer hundreds of thousands of dollars. The bank believed that the pattern of funds transfers indicated a fraudulent investment scheme. Bank research determined the customer had been arrested in the early 1990s on fugitive warrants from three different states for fraud-related charges.

Table 1 -- Types of Reported Activities
Activity Occurrences Percentage of Total Reported Activities Check cashing (Over $1,000 aggregate for any person on any day) 345 27.87% Check cashing (Non-specific) 339 27.38% Money transmission 309 24.96% Money services businesses activities (Nonspecific) 131 10.58% Informal Value Transfer Systems (Including hawala) 49 3.96% Arrests, indictments, and illicit activities associated with the operation of unregistered money services business 15 1.21% On Money Services Business Registration List without authorization date 13 1.05% No apparent money services business activity 13 1.05% Money laundering 12 0.97% Currency exchange 7 0.57% Black Market Peso Exchange-like activity 2 0.16% Exchange of cashed third-party checks with related business for cash 2 0.16% Registered money services business facilitating transfers for related unregistered money services business 1 0.08% TOTALS 1,238 100.00%

Check Cashing and Money Transmitting
Table 2 identifies the top 15 states where subjects were identified as unregistered check cashers whose check cashing transactions exceeded $1,000 per day for any person, singly or in aggregate. This table also displays the top 15 states where suspects engaged in unregistered money transmission, as measured by numbers of SARs filed.

Table 2: Top 15 Filer States
State Number of Check Cashers
(>$1,000) Percentage of total reports of checks cashers
(>$1,000) Number of money transmitters Percentage of total reports of money transmitters Alabama 7 2.03% 6 2.02% Arizona 12 3.48% California 18 5.22% 80 26.94% Colorado 11 3.19% Connecticut 6 2.02% Delaware 6 2.02% Florida 9 2.61% 12 4.04% Georgia 7 2.03% Illinois 19 5.51% 9 3.03% Indiana 11 3.19% Massachusetts 11 3.70% Michigan 34 9.86% New Jersey 23 7.74% New York 15 4.35% 22 7.41% Ohio 64 18.55% 11 3.70% Oregon 8 2.69% Tennessee 22 6.38% 8 2.69% Texas 32 9.28% 19 6.40% Virginia 9 3.03% Washington 11 3.19% 23 7.74% Wisconsin 8 2.32% TOTALS 280 81.19% 253 85.17%

Results of this analysis revealed unregistered check cashers to be most concentrated in the central United States (Ohio, Michigan, Texas, Tennessee, and Illinois), whereas unregistered money transmitters were found to be most concentrated on the East and West coasts (California, Washington, New Jersey, New York, and Florida).

Informal Value Transfer Systems
A total of 49 SARs were identified which described activities consistent with hawala and other informal value transfer systems. One SAR was the latest in a series of SARs filed on a purported student who made numerous cash deposits totaling over $1.1 million during an eight-month period beginning in 2004 and then sent periodic wire transfers to an apparent relative in the Far East.

In another instance, an individual deposited numerous $500 money orders into his account and subsequently wrote checks totaling over $300,000, which were then negotiated in a Middle Eastern country.

Probable Money Laundering?Narratives Indicate Individuals Suspected of Engaging in Structuring and/or Unlicensed/Unregistered Money Transmitting
Table 1 references 12 unregistered MSB-related SARs that concern activities linked to suspected money laundering. One reported an individual who received over $500,000 in wire transfers on a specific date in early 2005 and also purchased cashier?s checks totaling $450,000. The next day he redeposited one of the checks for $200,000 and issued 21 checks for $9,000 all to the same payee. These actions may be evidence of possible tax evasion or laundering of illicit proceeds. Issuance of the $9,000 checks also suggests they were intended to be cashed in a structured manner to evade currency transaction reporting requirements.

Another SAR reported an individual who structured cash deposits into a personal account to transact same-day wire transfers to the same beneficiary located in Central America. The deposits totaled more than $100,000 and the wire transfers exceeded $145,000. The money was allegedly for craft items; however, a site visit to the individual?s business by employees of the reporting institution cast doubt on whether the business activity could support the volume of purchases. In addition to the possibility of operating as an unregistered money transmission business, the business may also be engaged in laundering illicit receipts from unidentified sources.

Multiple Financial Institutions Reporting Suspicious Activities on the Same Suspect
In several instances, multiple financial institutions reported suspicious activities by the same or possibly the same suspect. Two SAR narratives described a Southwest-based food market that was reported by two financial institutions located in different states outside the region. Each bank filed a SAR indicating funds transfers from one country in the Middle East to another.

In another instance, a bank filed a SAR on and closed the account of an individual who admitted to acting as an unregistered funds transmitter. Apparently undeterred by the closure of the account, the individual continued to operate as an unregistered funds transmitter. Subsequently, another bank filed a SAR identifying an individual with the same name as having been indicted for operating an unregistered MSB. This is a good example of the potential value of SAR narratives to law enforcement. The first bank?s filing may have provided a lead to law enforcement and helped establish the level of the suspect?s awareness of the legality of the activities that the suspect was conducting.

In the same vein, another bank reported that the signer on a business account admitted that the business was operating as an unregistered funds transmitter. Significantly, another bank reported later that the same business continued to engage in this activity.

Bank Secrecy Act Compliance
FinCEN is continuing to assess the impact of the Interagency Guidance. Initial statistics from the post-guidance portion of the study suggest that, while the Interagency Guidance may have caused a significant increase in filings, the largest 15 filers continued to produce approximately the same percentage of filings (68 percent pre-guidance and 66.25 percent post-guidance).

The study found that SAR narratives written by 13 of these 15 depository institutions appeared clear and detailed. Of the two remaining institutions, one did not provide sufficient information to determine whether customers engaging in check cashing were breaching the $1,000 per person per day check cashing threshold. The other institution failed to specifically identify any activities that would qualify the subject of the report as an unregistered MSB.

Conclusion
The relatively small number of SARs filed between January 1, 2002 and April 30, 2005 that identified potentially unregistered MSBs was one factor, among many, for including a clear statement in the Interagency Guidance on the need for banks to file SARs on unregistered MSBs. We believe that there continue to be MSBs operating without required registration or licensing and that such businesses need banking services to operate.

Additional guidance focusing on ways to recognize potentially unregistered MSBs is one of a number of approaches that may help to address the issue. While we believe the Interagency Guidance provides evidence that this approach is useful, it is difficult to draw conclusions about direct causality between the Interagency Guidance and the increased volume of SARs reporting unregistered MSBs filed subsequent to the Interagency Guidance. Evidence suggests that the increase in filings may be more indicative of banks addressing a range of BSA compliance issues as a result of ongoing dialogue between industry and regulators, which resulted in a look-back and reporting of previously unidentified or unreported suspicious activity. Further, increased filings may be attributable to institutions strengthening their compliance programs through improved training and to an improvement in monitoring systems because of technological innovations.

FinCEN will continue to study this issue and will report the results from the recent analytical study of those filings in Issue 11 of The SAR Activity Review ? Trends, Tips & Issues. We also will continue to develop appropriate guidance designed to assist financial institutions in identifying and reporting potentially unregistered MSBs.


Excerpted from SAR Activity Review Issue 10, page 5