FinCEN Issues Advisory To Financial Institutions Regarding SAR Confidentiality

On March 2, 2012, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury issued an advisory to counsel of financial institutions advising them of the requirement to maintain the confidentiality of Suspicious Activity Reports (“SARs”). FinCEN issued the advisory because of a growing concern that private parties who are not authorized to know of the existence of a filed SAR are seeking information on SAR filings for a variety of purposes including civil litigation. FinCEN believes that unauthorized disclosure could undermine its investigations by tipping off suspects and threaten the safety and security of financial institutions and personnel who file such reports. A copy of FinCENs advisory can be read here.

Pursuant to the Bank Secrecy Act, codified partially at 31 U.S.C. §§ 5311-5332, the Secretary of the Treasury is authorized to require financial institutions to keep records and file reports that the Secretary determines to have a high degree of usefulness in criminal and tax matters as well as counter-terrorism and anti-money laundering compliance. One such report is the SAR. Generally speaking, a SAR is a report prepared by a financial institution regarding suspicious activity which may be indicative of a possible violation of law or regulation. See 31 U.S.C. § 5318 (g). Financial institutions submit completed SARs to FinCEN, the organization responsible for implementing the BSA. More information on FinCEN and its use of SARs can be found on its website here.

The unauthorized disclosure of a SAR is a violation of federal law. More specifically, financial institutions and their current and former directors, officers, employees, agents, and contractors are prohibited from disclosing: 1) that a SAR has been filed and 2) any information that would reveal the existence, or non-existence, of a SAR. Thus, financial institutions must be aware that the scope of potential unauthorized disclosures is broad. Violators can be subject to both civil and criminal liability.  31 U.S.C. § 5321 provides for civil penalties of up to $100,000 for each violation. See also 31 C.F.R. § 1010.820. Criminal penalties include fines of up to $250,000 and/or imprisonment of up to 5 years. See 31 U.S.C. § 5322; 31 C.F.R. § 1010.840. In addition, financial institutions can be subject to civil money penalties for anti-money laundering (“AML”) compliance program deficiencies that led to the unauthorized disclosure of up to $25,000 for each day the AML program deficiency existed or continues.

FinCEN advises that financial institutions provide information relating to the requirement and scope of confidentiality of SAR and SAR related information as part of the institutions employee training programs. In addition, FinCEN advises that financial institutions take other risk reducing measures to reduce the risk of unauthorized disclosure including: 1) limiting access to SARs, 2) logging access to SARs, 3) using cover sheets on SAR and SAR relating information, and 4) providing electronic notices that highlight confidentiality requires before a person can access or disseminate the information. FinCEN also advises that if a financial institution or its counsel receives a subpoena or other request for a SAR from anyone other than an authorized government authority or a self-regulatory organization, then counsel should contact FinCENs Office of Chief Counsel.

If you have questions pertaining to SAR confidentiality, the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

11th Circuit Court of Appeals Decision Regarding “Act of Production” Doctrine Has Implication for Bank Secrecy Act and Foreign Bank Account Report (FBAR) Cases

On February 23, 2012, the 11th Circuit Court of Appeals reversed an order of the U.S. District Court for the Northern District of Florida holding in contempt the target of a grand jury (“John Doe) who had asserted his Fifth Amendment privilege after receiving a grand jury subpoena.

The relevant facts are as follows.  On April 7, 2011, John Doe was served with a subpoena duces tecum requiring him to appear before a Northern District of Florida grand jury and produce the unencrypted contents located on the hard drives of his laptop computers and five external hard drives. Doe informed the United States Attorney for the Northern District of Florida that, when he appeared before the grand jury, he would invoke his Fifth Amendment privilege against self-incrimination and refuse to comply with the subpoena. Because the Government considered Does compliance with the subpoena necessary to the public interest, the Attorney General, exercising his authority under 18 U.S.C. § 6003, authorized the U.S. Attorney to apply to the district court, pursuant to 18 U.S.C. §§ 6002 and 6003, for an order that would grant Doe immunity and require him to respond to the subpoena.

18 U.S.C. section 6002 can be found here. 18 U.S.C. section 6003 can be found here.

On April 19, 2011, the U.S. Attorney and Doe appeared before the district court. The U.S. Attorney requested that the court grant Doe immunity limited to “the use [of Does] act of production of the unencrypted contents” of the hard drives. Thus, Does immunity would not extend to the Governments derivative use of contents of the drives as evidence against him in a criminal prosecution.  The court accepted the U.S. Attorneys position regarding the scope of the immunity to give Doe and granted the requested order. The order “convey[ed] immunity for the act of production of the unencrypted drives, but [did] not convey immunity regarding the United States [derivative] use” of the decrypted contents of the drives.

After the hearing adjourned, Doe appeared before the grand jury and refused to decrypt the hard drives. The U.S. Attorney immediately moved the district court for an order requiring Doe to show cause why Doe should not be held in civil contempt. The court issued the requested order, requiring Doe to show cause for his refusal to decrypt the hard drives. In response, Doe explained that he invoked his Fifth Amendment privilege against self-incrimination because the Governments use of the decrypted contents of the hard drives would constitute derivative use of his immunized testimony which was not protected by the district courts grant of immunity. An alternative reason Doe gave as to why the court should not hold him in contempt was his inability to decrypt the drives. The court rejected Does alternative explanations, adjudged him in contempt of court, and ordered him incarcerated.

The 11th Circuit held that Does decryption and production of the hard drives contents would trigger Fifth Amendment protection because it would be testimonial, and that such protection would extend to the Governments use of the drives contents. According to the 11th Circuit, the district court therefore erred in two respects. First, it erred in concluding that Does act of decryption and production would not constitute testimony. Second, in granting Doe immunity, it erred in limiting his immunity under 18 U.S.C. §§ 6002 and 6003 to the Governments use of his act of decryption and production, but allowing the Government derivative use of the evidence such act disclosed.

This ruling is significant to those individuals who are currently under IRS and/or U.S. Department of Justice Investigation for failure to comply with the Bank Secrecy Acts requirement that U.S. Taxpayers who have foreign bank accounts with more than $10,000.00 must file Form TD 90.22-1, commonly referred to as an FBAR.  A copy of an FBAR can be found here.

The 11th Circuits decision appears to support Taxpayers position that a grand jury subpoena requiring them to identify (and produce bank statements of) foreign bank accounts in which they have signatory authority over or a financial interest in, is in violation of the 5th Amendment.  As the 11th Circuit put it:  “What is at issue is whether the act of production may have some testimonial quality  sufficient to trigger Fifth Amendment protection when the production explicitly or implicitly conveys some statement of fact.”  Slip op. at 13.  “An act of production can be testimonial when that act conveys some explicit or implicit statement of fact that certain materials exist, are in the subpoenaed individuals possession or control, or are authentic.”  Slip op. at 20.

A full copy of the decision can be found here.

In respect to FBAR cases, the act of production of the foreign bank account statements conveys an explicit statement that the taxpayer has a financial interest in, or signatory authority over, an undisclosed foreign bank account; the bank statements are within the taxpayers possession or control; and that the bank statements (and the information contained therein) is authentic.  This case present a potential arrow in the quiver of taxpayers that are currently (or may be soon to be) litigating against the government.  However, a timely challenge to a grand jury subpoena is crucial, as a failure to timely assert the 5th Amendment may  result in waiving this valuable constitutional right.

The attorneys at Fuerst Ittleman, PL have experience contesting grand jury subpoenas issued to taxpayers for their foreign bank account information.  Senior Tax Associate, Joseph A. DiRuzzo, III, is currently counsel of record in one case in Florida where the government has sought foreign bank records of taxpayers through the use of a grand jury subpoena.  You can contact an attorney by calling us at 305.350.5690 or by email at contact@fidjlaw.com.

FinCEN Issues Advisory To U.S. Financial Institutions Regarding Providing Financial Services to Foreign-Located MSBs

On February 15, 2012, the Financial Crimes Enforcement Network (“FinCEN”) issued an Advisory to U.S. financial institutions advising them of their obligations under the Bank Secrecy Act (“BSA”) when dealing with foreign-located money services businesses (“MSBs”). A copy of FinCENs advisory can be read here.

The advisory comes several months after FinCEN implemented new rules defining which businesses qualify as MSBs subject to the anti-money laundering regulations of the BSA. As we previously reported, on July 21, 2011, FinCEN published a final rule which amended the definition of “money services business” under 31 C.F.R. § 1010.100(ff) to clarify that it is the activities performed within the U.S. by a business which will cause it to be classified as a MSB regardless of the businesss physical location. The rule change arose out of the recognition that the Internet and other technological advances make it increasingly possible for businesses to offer MSB services in the U.S. from foreign locations.

The definition of MSB has been rephrased to state: “[a] person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States” as a currency dealer, currency exchanger, check casher, money transmitter, and/or a seller, issuer, and redeemer of travelers checks, money orders, or prepaid access cards. As a result of this change, foreign-located businesses engaging in MSB activities within the U.S. are subject to the rigorous requirements of the BSA, even if the foreign based MSB has no physical presence in the U.S. The final rule also required each foreign-located MSB to appoint a person residing in the U.S. as an agent for service of legal process.

In its Advisory, FinCEN advises U.S. financial institutions to reevaluate their own anti-money laundering (“AML”) programs if they provide financial services or engage in financial transactions with foreign-located MSBs. FinCEN further suggests that U.S. financial institutions look to its earlier guidances, such as FinCENs 2005 Intra-agency Interpretive Guidance on Providing Banking Services to MSBs Operating in the U.S. and FinCENs 2010 Advisory on Informal Value Transfer Systems, in order to ensure that the foreign-located businesses they are dealing with are not operating as unregistered or unlicensed MSBs. FinCEN also reminded financial institutions that provide services to foreign-based MSBs of their obligations to file Suspicious Activity Reports (“SARs”) should they become aware that their customers are operating as unregistered or unlicensed MSBs.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

FinCEN Final Rule Requires AML Programs and SAR Filing for Non-Bank Mortgage Lenders and Originators

On February 7, 2012, the Financial Crimes Enforcement Network (“FinCEN”) announced final rules requiring non-bank residential mortgage lenders and originators to establish anti-money laundering (“AML”) programs and comply with suspicious activity report (“SAR”) regulations. The final rule will be effective 60 days after its publication in the Federal Register. A copy of the final rule can be read here.

As we previously reported, prior to the finalization of this rule, the only mortgage originators that FinCEN regulations required to file SARs were banks and insured depository institutions. However, FinCEN mortgage fraud reports have shown that non-bank mortgage lenders and originators initiated many of the mortgages that were the subject of bank SAR filings. By extending AML and SAR requirements to non-bank mortgage lenders and originators, FinCEN hopes to mitigate and minimize the risks and vulnerabilities that have been exploited by criminals in the past including false statements, straw buyers, fraudulent flipping, and identity theft. As explained by FinCEN, “the new regulations likely will significantly increase the number of mortgage related SAR filings; give law enforcement and regulators more comprehensive data on specific crimes; and provide government and industry a more complete perspective on mortgage related crime trends nationwide.”

The new rules come as part of a broader effort by FinCEN and multiple federal agencies to combat mortgage fraud. Since 2009, the Financial Fraud Enforcement Task Force has coordinated multiple federal agencies, the Department of Justice and State and local law enforcement partners in collaborative efforts to prosecute mortgage fraud and financial crimes. On November 3, 2011, FinCEN announced a proposal to extend AML and SAR compliance requirements to Fannie Mae, Freddie Mac, and Federal Home Loan Banks. Most recently, in January 2012, the Department of Justice announced the creation of the joint DOJ and SEC Residential Mortgage-Backed Securities Working Group which will focus its efforts on prosecuting abuses in the residential-mortgage backed securities market.

The compliance date for the new rule is six months after its publication in the Federal Register. If you have questions pertaining to FinCEN regulations, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance, contact Fuerst Ittleman PL at contact@fidjlaw.com.

Bill Introduced In Florida House Of Representatives Is Designed to Combat MSB Facilitated Workers’ Compensation Fraud

On February 1, 2012, the Florida House of Representatives Insurance and Banking Subcommittee approved HB 1277 which is designed to combat MSB facilitated workers compensation fraud in Florida. Over the past year, MSB facilitated workers compensation fraud has been in the crosshairs of the Florida government.

As we previously reported, on August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation (“OFR”) issued a report to Governor Rick Scott and his Cabinet regarding workers compensation fraud in the State of Florida. The cabinet report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers compensation insurance market. A complete overview of the fraud scheme can be read here.

At the time of our prior report on this matter, Florida C.F.O. Jeff Atwater announced the creation of the “MSB Facilitated Workers Compensation Fraud Workgroup” to develop comprehensive reforms to combat the fraud scheme. The efforts of the Workgroup culminated with its report and recommendations which were presented to the Insurance and Banking Subcommittee on November 2, 2011. A summary of the Workgroups report and recommendations can be read in our previous report here.

Many of the Workgroups recommendations were adopted by the Subcommittee in drafting HB 1277. First, HB 1277 would allow the Office of Financial Regulation (“OFR”) to make unannounced visits to inspect MSBs. This change would eliminate the requirement under § 560.303, Fla. Stat. that state regulators give check cashers 15 days notice before conducting an examination of their records. The goal of this revision is to prevent those MSBs that are facilitating the fraud from hiding, destroying, or tampering with records and evidence prior to an OFR inspection.

Second, HB 1277 eliminates the requirement that new MSB licensees be inspected by OFR within six months of the issuance of its license. However, the bill still requires that all MSBs undergo an examination every five years. The hope is that by eliminating the mandatory six-month inspection, OFR can better allocate its resources to investigating suspected fraudulent and high risk MSBs first then moving on to investigate lower risk MSBs at a later time.

HB 1277 also adopted two other recommendations of the Workgroup requiring that check cashers deposit all checks into a single commercial bank account maintained at a federally insured financial institution, and eliminating the ability of companies to cash third-party checks in check cashing facilities. The Workgroup believes that these changes will enhance fraud detection because the Workgroup perceives banks to be in a stronger position to monitor and filter out unlawful transactions. The bill will now proceed to the House floor for reading and debate.

Fuerst Ittleman will continue to monitor the progress of HB 1277 with a keen eye as the passage of HB 1277 will result in changes to regulatory compliance for the Florida MSB industry. If you have questions pertaining to HB 1277, the Florida Office of Financial Regulation, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

New Iranian Sanctions May Lead to Uncertainty for Foreign Financial Institutions Engaging in Business in Iran

On December 31, 2011, President Barack Obama signed into law the National Defense Authorization Act. Among the various provisions included within the $662 billion defense spending bill are new sanctions that focus on foreign financial institutions which engage in financial transactions with the Central Bank of Iran and those which engage in financial transactions for the purposes of purchasing oil and petroleum products. However, because the new sanction provisions provide for several exceptions and waivers it is uncertain what effect, if any, they will have on foreign financial institutions engaging in business in the United States.

As we have previously reported, Iran is already subject to broad and sweeping sanctions which are administered by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury. The Iranian Transactions Regulations (“ITR”), which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act and are administered by OFAC. General information regarding economic sanctions against Iran can be found at OFACs website here.

The new sanctions go further than those previously in place by prohibiting the opening of any correspondent account or payable-through account in the US by foreign financial institutions which “knowingly conducted or facilitated any significant financial transactions with the Central Bank of Iran.” Additionally, the new sanctions “shall apply with respect to a foreign financial institution owned or controlled by government of a foreign country, including a central bank of a foreign country, only insofar as it engages in a financial transaction for the sale or purchase of petroleum or petroleum products to or from Iran.” The practical effect of these sanctions would be to prohibit many countries, including allies of the US, from purchasing petroleum from Iran.

The broad language of the Act originally raised fears that the sanctions would drive oil prices up and alienate US allies that currently depend upon Iran for its oil supplies. However, Congress and the White House hoped to quash those fears by giving the President flexibility in his implementation of the sanctions program.

First, the statute provides that the sanctions scheme will not take effect until the President determines “that there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.” The President must make an initial determination within 90 days of the enactment of the Act and every 180 days thereafter. As a result, the President has the flexibility of delaying the ultimate implementation of the Act.

Second, once the sanctions take effect, the Act gives the President the authority to grant exemptions to foreign financial institutions that are located in countries which “significantly reduced its volume of crude oil purchases from Iran” in the prior 180 days. Finally, the Act provides that the President may waive the imposition of sanctions on a foreign financial institution “if the President determines that such a waiver is in the national security interest of the United States.”

Given the broad discretionary powers of the President in implementing the new Iranian sanction scheme, it is possible that foreign financial institutions may see little to no changes in their business dealings with Iran in the near future. Fuerst Ittleman, PL will continue to watch for developments in the implementation of the new Iranian sanctions program with a keen eye. For more information regarding the Iranian Sanctions Program, the Iranian Transaction Regulations, OFAC and for strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com

Absolute Poker Co-Owner Pleads Guilty To Conspiracy To Violate UIGEA, Wire Fraud, And Mail Fraud In Connection With Internet Poker Site Operation

On December 20, 2011, Brent Beckley, co-owner of Absolute Poker, an internet poker website, pled guilty to conspiracy to violate the Unlawful Internet Gambling Enforcement Act (“UIGEA”), mail fraud, and wire fraud in connection to his operation of the internet poker website. In pleading guilty before Magistrate Judge Ronald Ellis of the United States District Court for the Southern District of New York, Beckley admitted his wrongdoing: “I knew that it was illegal to accept credit cards from players to gamble on the internet.”

While internet pay-for-play poker remains very popular, generating $5.1 billion in revenues last year alone, Beckley’s prosecution stems from a larger effort by Federal prosecutors to target internet gambling websites for violations of federal law. Although the law does not specifically address internet pay for play poker sites, UIGEA defines “unlawful internet gambling” as: 1) placing, receiving or transmitting a bet, 2) by means of the Internet, even in part, 3) but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made. However, since UIGEA’s passage, debate has raged over whether pay for play poker actually violates federal law with poker sites and federal prosecutors reaching opposite conclusions. Internet poker site operators have argued that UIGEA does not apply because poker should be classified as a game of skill, not a game of chance, and thus beyond the reach of UIGEA.

As we previously reported, on April 15, 2011, federal prosecutors indicted eleven people, including Mr. Beckley, in connection with their involvement in running internet poker websites PokerStars, Full Tilt Poker, and Absolute Poker. Prosecutors alleged that after the passage of a 2006 law which prohibited banks from processing payments to offshore gambling websites, the defendants engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred by using third party payment processors to make funds appear as payments for goods and services to non-existent online merchants and fake companies.

Beckley is scheduled to be sentenced on April 19, 2012 and is expected to receive between 12 and 18 months imprisonment as punishment. If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittleman’s experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

Two Attorneys Arrested and Charged with Structuring Transactions to Avoid Bank Secrecy Act Reporting Requirements

On November 4, 2011, two New Jersey attorneys, Goldie Sommer and Edward Engelhart, were charged with conspiring to violate and violating the Bank Secrecy Acts (“BSA”) by “structuring” attorney trust account deposits in order to evade BSA reporting requirements. A copy of the criminal complaint can be read here.

Generally speaking, the BSA, 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to 31 C.F.R. § 1010.313, “multiple currency transactions shall 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.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

According to the complaint, between August 13, 2010 and September 22, 2010, Sommer and Engelhart structured a series of deposits into their attorney trust account totaling $118,000. The government alleged that most of these deposits included even dollar amounts each under $10,000 and occurred on the same day or within a short period of time. However, when taken in the aggregate, the deposits should each have exceeded the $10,000 threshold, thus requiring the filing of a report. Additionally, the government alleged that during the same period of time similarly structured deposits were placed into the personal accounts of Sommer, Engelhart and “other individuals associated with [them].” Checks were then drawn from the personal accounts and placed in the defendants trust account. In total, authorities allege that $354,000 was structured into the trust account.

The complaint further alleged that during a June 16, 2011 meeting with the IRS both Sommer and Engelhart admitted that they had agreed to structure the deposits into the trust account. Additionally, the complaint alleges that Sommer and Engelhart admitted to receiving the currency from a client of their firm for the purchase of real estate and “inferred that the client wished that the funds would be deposited into a bank without the filing of any forms with the [IRS].” If convicted of structuring, Sommer and Engelhart can face up to five years in prison, a $250,000 fine and forfeiture of the structured funds.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com

Congressmen Call For Investigation of Two U.S. Companies for Possible Syrian Sanctions Violations

On November 10, 2011 several U.S. Congressmen sent letters to the Departments of State and Commerce urging them to investigate two U.S. IT companies, NetApp, Inc. and Blue Coat Systems, Inc. (“Blue Coat”), for possible violations of U.S. trade sanctions against Syria. The alleged violations stem from the exporting or re-exporting of the companies technology for use in internet surveillance projects by the Syrian government.

Generally speaking, the sanctions program in place against Syria prohibits U.S. persons from engaging in transactions with the Government of Syria and separately prohibits the exportation, reexportation, sale, or supply, directly or indirectly, by a United States person, wherever located, of any services to Syria. More information regarding the sanctions against Syria can be found on the Office of Foreign Assets Controls (“OFAC”) website here.

According to a recent Bloomberg report, Area SpA, an Italian surveillance company, is working with the Syrian government to create an internet surveillance system designed to “intercept and catalog virtually every e-mail that flows through the country.” As part of this massive project, it is alleged that Area SpA is using NetApps hardware and software technology to create four petabytes of storage for archiving e-mails. (By comparison, a database with four petabytes of storage space can store more than 15 times the amount of data stored in the online archives of the Library of Congress.) Additionally, it is alleged that the Syrian government has been using Blue Coats technology to censor and filter website content within Syria.

NetApp and Blue Coat have come under criticism not only because their activities may violate the sanctions scheme in place against Syria, but also because of concerns that the purpose of the Syrian surveillance programs is to suppress activists and dissidents opposed to the totalitarian Assad regime. Since March of 2011, the Syrian government has engaged in a brutal crackdown of dissidents resulting in the deaths of more than 3,000 Syrian citizens.

Both companies have denied wrongdoing. NetApp has stated that it is not aware of any of its products being sold to Syria. However, a November 4, 2011 Bloomberg report reported that the NetApp structured its contract in a way to avoid direct dealing with Syria or Area SpA. According to the report, NetApps Italian subsidiary sold its products to a authorized vendor which then re-sold NetApps technology to Area SpA for use in the Syrian surveillance program. Blue Coat has also denied violating U.S. sanctions claiming its products were illegally transferred to the Syrian government. Blue Coat has launched an internal investigation to determine how its web filtering technology was transferred to Syria.

This situation provides an important reminder to businesses which engage in international trade. Because of the breadth and complexity of these regulatory schemes, although businesses may not directly engage in trade with Syria, they may still unknowingly violate OFAC sanctions because of the nature of their relationships with foreign businesses who do. Examples of this can be read in our previous reports here and here. If you have questions pertaining to the OFAC sanctions on trade with Syria, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

Office of Financial Regulation’s MSB Facilitated Workers’ Compensation Fraud Work Group Issues Report and Recommendation to Florida House; Draws Criticism from Legislators.

On November 2, 2011, Floridas Office of Financial Regulations “MSB Facilitated Workers Compensation Fraud Workgroup” presented its much anticipated report and recommendations to the Florida House of Representatives Insurance and Banking Subcommittee. The report focused on recommendations for combating workers compensation fraud facilitated by Florida check-cashers. A copy of the report and recommendations can be read here.

As we previously reported, on August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation (“OFR”) issued a report to Governor Rick Scott and his Cabinet regarding workers compensation fraud in the State of Florida. The cabinet report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers compensation insurance market. A complete overview of the fraud scheme can be read here.

At that time, Florida C.F.O. Jeff Atwater announced the creation of a workgroup to study the issue of MSB facilitated workers compensation fraud and to make recommendations to combat the issue. Over the next several months, the workgroup met four times to analyze ways to combat the fraud scheme and develop comprehensive reforms. The November 2, 2011 presentation of the workgroups report and recommendations was the product of these meetings.

The workgroup provided several consensus recommendations to combat MSB facilitated workers compensation fraud. First, the workgroup called for the creation of a real-time database for check cashing transactions above $1,000. The workgroup reasoned that because shell corporations which drive workers compensation fraud incorporate and dissolve quickly, time is of the essence in detecting a fraud scheme. A real-time database would provide the OFR with the amount of the cashed check, the cashing entitys workers compensation policy number and other information currently required to be within a check cashers electronic logs. OFR would then compare this information with the amount of payroll reported to the insurer, thus indicating potential fraud schemes when reported payroll and total amounts of checks cashed differed.

The workgroup also recommended that that OFR be given the authority to make unannounced visits to inspect MSBs. Currently, Florida law prohibits unannounced visits and requires that OFR provide at least 15 days notice prior to inspection. See § 560.109, Fla. Stat. As explained by the workgroup, “the announcement of an exam or investigation allows unscrupulous licensees to hide, destroy, or otherwise tamper with the evidence that the [OFR] may collect in the course of the visit.”

The workgroup also recommended that the Legislature require licensed check cashers to provide the workers compensation policy number, under which a corporate payment instrument is cashed, to the OFR. This requirement would allow the OFR to compare estimated payroll reported on the policy with the amount and number of checks that are cashed for a policyholder and will enable regulators to more readily identify premium avoidance schemes.

Other consensus workgroup recommendations included: 1) requiring the Division of Workers Compensation to include payroll information of policy holders on its proof of coverage website; 2) modifying the check cashing statute, found at § 560.303, Fla. Stat. et seq., to require licensees to maintain a depository bank account for the purpose of negotiating all cashed checks in order to simplify audit trails; and 3) eliminating the mandatory six-month examination of new licensees, but still require examination “as soon as practicable” to allow OFR to focus regulatory resources on high priority cases.

The workgroup also provided several other recommendations which were not fully supported by the workgroup. The non-consensus recommendations included: 1) eliminating the ability to cash checks when the payee is a corporate entity or a third-party or set a threshold limit for the dollar amount allowable for such checks to be eligible for cashing; and 2) changing how certificates of insurance are issued by requiring that certificates be issued by the OFR.

Although the workgroup presented a host of recommendations, its inability to reach consensus on all recommendations drew criticism from subcommittee members. Additionally, the workgroups report drew criticism from some subcommittee members because the representatives did not feel the recommendations went far enough.

Fuerst Ittleman will continue to monitor this situation with a keen eye as implementation of the workgroups recommendations could result in changes to regulatory compliance for the Florida MSB industry. If you have questions pertaining to Floridas Office of Financial Regulations, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com