May 28, 2013 –
U.S. Treasury issues Section 311 sanctions against nonbank entity

In yet another recent example of U.S. Treasury’s (the “Department”) campaign against financial crimes by non-bank entities, the Department today named Liberty Reserve S.A. as a financial institution of primary money laundering concern under Section 311 of the USA Patriot Act (“Section 311”). Importantly, this marks the first use of Section 311 authorities by Treasury against a virtual currency provider. (Notably, in published guidance issued in March of this year, the Department’s Financial Crimes Enforcement Network (“FinCEN”) opined that administrators or exchangers of virtual currency doing business within the United States are money services businesses (“MSB”) under FinCEN regulations, and therefore, are subject to MSB registration, reporting and recordkeeping regulations).

The Department’s Section 311 designation was issued in conjunction with the unsealing of an indictment by the U.S. Attorney’s Office for the Southern District of New York, which charged Liberty Reserve and seven (7) of its principals for their alleged roles in running a $6 billion money laundering scheme, a case which is believed to be the largest international money laundering prosecution in history. According to the Notice of Finding issued by the Department, Liberty Reserve’s system of internal accounts and network of virtual currency “is structured so as to facilitate money laundering and other criminal activity, while making any legitimate use economically unreasonable.”

Once the Department determines that a foreign financial institution is of “primary money laundering concern” under Section 311, FinCEN has the authority to require domestic financial institutions and financial agencies to take certain special measures against the entity determined to be a primary money laundering concern. These special measures range from requiring U.S. financial institutions to conduct additional due diligence and pay special attention to particular account transactions to prohibiting the opening or maintenance of any correspondent or payable-through accounts.

So far, FinCEN has issued a notice of proposed rulemaking (“NPRM”) that, if adopted as a final rule, would prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for foreign banks that are being used to process transactions involving Liberty Reserve. The NPRM also proposes to require covered financial institutions to apply special due diligence to their correspondent accounts maintained on behalf of foreign banks to guard against any transactions involving Liberty Reserve (i.e., such as notice to foreign correspondent account holders, among others). If adopted, these measures would effectively cut off Liberty Reserve from the U.S. financial system.

As a result of the foregoing, U.S. financial institutions may need to update and enhance their compliance programs to identify, detect, deter and report existing and future transactions involving Liberty Reserve. Moreover, financial institutions should consider notifying their foreign correspondent account relationships in conformance with the special due diligence requirements imposed by the NPRM.

Access the Notice of Finding against Liberty Reserve S.A.

Access the Notice of Proposed Rulemaking.

Access FinCEN’s ruling regarding the applicability of MSB rules and regulations to virtual currency providers.

Access the Liberty Reserve Indictment.

For more information regarding the applicability of FinCEN regulations to virtual currency providers, and/or the aforementioned Section 311 designation as well as the ensuing updates and enhancements to an institution’s compliance program that are required as a result thereof, please contact Andres Fernandez, Gabriel Caballero or Stephanie Quiñones.