FinCEN (the U.S. Financial Crimes Enforcement Network) Opens New Division Targeting Foreign Entities
On August 28, 2019, the U.S. Financial Crimes Enforcement Network(FinCEN) announced the launch of a new “Global Investigations Division”. Specifically, GID has been “tasked with implementing targeted investigation strategies rooted in FinCEN’s unique authorities under the Bank Secrecy Act (the “BSA”) to combat illicit finance threats and related crimes, both domestically and internationally.”
Combined with dramatically increased activity by lesser known US regulatory agencies such as The Committee on Foreign Investment in the United States (“CFIUS”) (something I plan to address directly in a future article) and the DOJ’s “China Initiative,” FinCEN’s enhanced powers should be on the radar screen for esall US and Chinese companies presently engaging in cross-border transactions.
Consider: Tariffs, currency issues and trade tensions are patently insufficient explanations as to why Chinese direct investment in the U.S. has dropped by a staggering 90% just since January of 2017. Something both new and carefully deployed to achieve maximum stealth is redrawing the landscape. Especially for companies and individuals from targeted countries (and who operate in sectors like tech, finance, communications, energy and real estate), weaponized regulation is increasingly the real game-changer when it comes to deciding when, where and how assets flow in and out of the U.S. economy.
Taxes and fees, for example, while onerous, are at least a known quantity. Anyone can do the math. In contrast, sudden developments like FinCEN’s shift in posture and the DOJ's so- called China initiative are (1) largely unpredictable; (2) driven by political agendas; and (3) invoke the very real specter of punishment that can cripple companies financially, literally eliminate their ability to conduct long-established operations in the U.S., and even send executives to jail — in some cases for violations where they had no awareness or direct participation.
The explanations that follow are certainly not intended to discourage legitimate and constructive transnational commerce. To the contrary, with the assistance of culturally knowledgeable counsel, proactive planning and heightened awareness, U.S.-China cross- border transactions remain enormously lucrative.
So, what's the story with FinCEN and GID?
Let’s start with what FinCEN says about itself – I’ll highlight some key sections – Then translate…
“The foundation of GID is FinCEN’s former Office of Special Measures (OSM), which was previously a part of FinCEN’s Enforcement Division. FinCEN’s strategic use of its Section 311 authority as well as its other information collection authorities, such as the geographic targeting order and foreign financial agency regulation authorities, have greatly expanded in recent years. FinCEN will now have one dedicated division focused on utilizing these authorities to maximum effect, building upon OSM’s prior work.” See FinCEN Press Release, August 28. 2019; See also “FinCEN Announces New “Global Investigations Division” Focused on Foreign Money Laundering Threats,” The National Law Review, 8/28/2019.
“GID will employ FinCEN’s authorities to detect and deter a wide range of potential threats to our national security and financial system, including those that have a nexus to the proliferation of weapons of mass destruction, rogue state actors, transnational organized crime, international narcotics trafficking, and terrorism.” See id.
Both the diversity and purposely vague nature of these objectives alone should be enough to give anyone pause. In simplest terms, the underlying messages look something like this:
Other information collection authorities: FinCEN (already a powerful entity) is going to increase cooperation with the FBI, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, the Financial Industry Regulatory Authority, CFIUS and international counterparts, primarily from Western Europe, Japan, Singapore and Israel).
Geographic targeting order: China is at the top of the list.
Foreign financial agency regulation authorities: Already explained above – But they seriously want to emphasize their point. These guys are NOT joking.
One dedicated division focused on utilizing these authorities to maximum effect: They have been ordered to substantially increase their number of investigations and enforcement actions. Think actual, but unstated, quotas.
Potential threats to our national security and financial system: Anything and anyone the US government doesn’t like.
Rogue state actors: Anything and anyone the US government REALLY doesn’t like.
Why does it matter? New agency divisions pop up all the time, don't they?
Not exactly. Consider just a few examples:
Cryptocurrency in the crosshairs: FinCEN assessed a $110 million civil penalty against BTC-e [a crpto-currency operator] for willfully violating anti-money laundering laws. [The foreign CEO] Vinnik was also individually assessed a $12 million penalty for his role in the violations. See “A Guide to U.S. Regulation of Cryptocurrencies and Cryptocurrency Exchanges,” Bloomberg Law – Tech and Telecom Journal, Q2 2017.
Expanded engagement with the intelligence community: Between 2014 and 2017, convicted Chinese spy Ron Rockwell Hansen's travel to China was monitored by the U.S. Customs and Border Protection and the FBI. During a June trip this year, Hansen failed to declare he was carrying in excess of $10,000 into the U.S. Although Hansen had been under suspicion for years, his failure to file FinCEN’s required Form 105 declaring the $19,222 in his possession turned out to be one of the most significant factors leading to his recent 10-year prison sentence. See “Convicted Chinese Spy Ron Rockwell Hansen Sentenced to 10 Years,” Clearancejobs.com, 9/25/2019.
Strong indications that all this is only the beginning: Just last week the Government Accountability Office urged FinCEN to further expand its cooperation and coordination with other enforcement regimes. In other words, if your business model involves securities, banking, money, foreign transactions or anything remotely related to national security, don’t be shocked if that surprisingly friendly guy sitting next to you on the plane turns out to work for FinCEN.
What should you be doing?
First, be prepared, not paranoid. U.S.-China cross-border business remains a deep reservoir of opportunity. When managing political and regulatory risk, stay focused on your fundamentals, create a compliance program so impressive it doubles as a marketing strategy, and be sure you’re collaborating with trusted local connections.
Even if it’s highly unlikely you’ll ever become a FinCEN target, make sure you’ve got a strong crisis management plan and that all your key players know their roles. Being proactive both limits downside and increases your odds of finding best-in-class counterparties.
Second, neither FinCEN nor the China initiative can change basic supply and demand. The U.S.-China trade exodus that began in 2017 didn’t occur because people suddenly wanted to stop conducting trans-Pacific business. With adequate preparation, you can enter, or reenter, a market now blessed with substantially less competition. Caution is rational. Preparing is rational. Hiding your money under the proverbial mattress most certainly is not.
Third, for all U.S. businesses currently active in China, and all Chinese businesses currently active in the U.S., watch closely as the new Global Investigations Division begins operating. Regularly refer to the guidance provided on their official website, which will most likely be changing over the coming months.See “Resources and Advisories,” Financial Crimes Enforcement Network, updated 8/29/2019.
Most importantly, remember that even seemingly small compliance failures and unintentional noncompliance are likely to be scrutinized harshly in the current political climate. When in doubt, consult legal counsel and invest in robust compliance measures. The risks of actual jail-time (among FinCen’s powers are FBI/DOJ referrals) and/or large monetary penalties, more than justify exercising an abundance of caution.
Fourth, it’s not all about you. Even if your company and employees are following every letter of the law, your best intentions may mean nothing in the event a third-party transaction goes wrong. Compliance is never a solo activity.
Working with your customers and counterparties to ensure they understand unfamiliar rules in a culturally appropriate context is never easy. Therefore, to the extent you do employ outside counsel, be certain they’re equally skilled in the arts of traditional advocacy and cross-cultural communication.
Finally, at least one thing is certain about today’s heightened political tensions: Because they’re political, they’re inherently temporary. When more sober-minded policies return, having an improved compliance posture, additional first-hand knowledge about your counterparties and a stronger internal due diligence system will remain valuable assets, likely to reap dividends for years to come.
To learn more about how JLG can assist with FinCEN, SEC, CFTC and DOJ compliance and provide related counsel during investigations or regulatory proceedings, you can schedule a free consultation online or contact us to make an appointment.
Updated on 10/23/2019.