US FinCEN’s First Enforcement Action for Violation of a Geographic Targeting Order

On March 31, 2022, FinCEN imposed a $275,000 civil penalty against a perfume store for willful violations of the Bank Secrecy Act (“BSA”) and its implementing regulations.¹ The perfume seller was subject to reporting and recordkeeping obligations imposed on certain nonfinancial trades and businesses located in the Los Angeles fashion district by a Geographic Targeting Order (“GTO”) issued by FinCEN, and the business admitted that it failed to report more than $2 million in high-risk currency transactions, as required by the GTO. This was FinCEN’s first enforcement action for failure to comply with a GTO and may have implications for other recipients of GTOs.

Background

The BSA authorizes the Director of FinCEN to issue GTOs² that impose additional recordkeeping and reporting requirements on domestic nonfinancial institutions or a group of domestic nonfinancial trades or businesses located in a specific geographic area to prevent evasion of the BSA.³ For example, as discussed below, over the past several years, FinCEN issued a series of GTOs aimed at anti-money laundering (“AML”) gaps related to “all-cash” residential real estate transactions. The Director may impose civil penalties for violations of the BSA or orders issued thereunder, including a GTO.

Real Estate GTO

Since 2016, FinCEN has issued a series of GTOs that require US title insurance companies to identify the natural persons behind legal entities (US and non-US) used in certain “all-cash” purchases of residential real estate.⁴ “All-cash” residential real estate transactions often do not involve the participation of a financial institution that is required to maintain an AML compliance program, such as a bank or mortgage lender, decreasing the likelihood that anyone will have performed identity verification or due diligence on a purchaser or will be monitoring the transaction for suspicious activity. To mitigate the risk posed by this AML vulnerability, the GTOs require title insurance companies to report such persons and purchases to FinCEN.⁵

LA Fashion District GTO

On September 26, 2014, FinCEN issued a GTO to certain trades and businesses located in the Los Angeles fashion district, an area in downtown Los Angeles (the “LA Fashion District GTO”).⁶ FinCEN and the Department of Justice were concerned that businesses in this location could be engaged in money laundering on behalf of Mexican and Colombian drug cartels, as evidenced by a large-scale federal law enforcement effort in September 2014 targeting businesses in the location for laundering tens of millions of dollars in narcotics proceeds.⁷ To combat such money laundering schemes, FinCEN issued an order directing certain businesses in the Los Angeles Fashion District to report any instances of receiving currency in excess of $3,000 in one transaction or two or more related transactions in a 24-hour period by filing a Form 8300.⁸

FinCEN LA Fashion District GTO Enforcement Action

A&S World Trading, Inc., d/b/a Fine Fragrance (“A&S”), operated a perfume store called Fine Fragrance that was based in the Los Angeles Fashion District. Therefore, A&S was a nonfinancial trade or business that was covered by the LA Fashion District GTO.⁹ A&S engaged in predominately cash-based retail and wholesale business transactions, and about 85 percent of its sales were wholesale transactions conducted with other businesses.

In September 2015, the Internal Revenue Service (“IRS”) commenced an examination of A&S to assess its compliance with the LA Fashion District GTO.¹⁰ During its examination, the IRS discovered that, since receiving a copy of the LA Fashion District GTO, A&S had processed $4,646,211 of sales in which it received currency. During this time, A&S failed to file a single report as required under the GTO, and the IRS found that there were 114 instances of non-compliance.

After the IRS examination, A&S attempted to submit Forms 8300 for the 114 transactions. However, the IRS found that late reports were not electronically filed, were sent to the wrong agency and were substantially incomplete. For example, all of the reports were missing customer information, and none of them indicated whether the cash payment was made on behalf of another person or business. The IRS rejected these submissions and referred the matter to FinCEN. On March 31, 2022, following FinCEN’s review, FinCEN determined that A&S failed to comply with the requirements of the LA Fashion District GTO and issued a consent order in which it imposed a $275,000 civil penalty.

FinCEN Enforcement Rationale

In assessing whether to impose a penalty and the size of the penalty, FinCEN considered all of the factors outlined in the Statement on Enforcement of the BSA issued August 18, 2020.¹¹ The following factors were particularly relevant in its disposition of this matter.

• Nature and Seriousness of the Violation. One of FinCEN’s main rationales for the penalty appears to be that the large number (114) and high value (totaling around $2,330,000) of the unreported transactions may have significantly harmed the public and deprived FinCEN of valuable financial intelligence. FinCEN emphasizes that this intelligence could have assisted law enforcement in combatting money laundering activity on behalf of drug traffickers.
• Pervasiveness of Wrongdoing within the Entity. Despite the fact that A&S had received a copy of the LA Fashion District GTO, it continued to process transactions without reporting transactions required under the GTO and failed properly to remedy the situation even after the IRS examination. FinCEN considered management to be complicit in the violation, and it was not moved by the CEO’s claim that he was unaware of the GTO and the related requirements.
• Presence of Prompt, Effective Action. FinCEN mentions that A&S’s late-filed reports lacked significant information.
• Timely and Voluntary Disclosure. FinCEN considered how A&S did not make a voluntary disclosure to FinCEN; the violations only became apparent after the IRS investigation.
• Cooperation with Agencies. However, FinCEN did note that A&S provided substantial cooperation throughout the course of FinCEN’s investigation.

GTO recipients should consider each of these rationales when completing reporting requirements. Specifically, those subject to GTOs should ensure that they respond to GTOs in a timely manner, understand the requirements of the GTO and, if there are compliance failures, mitigate by remediating any compliance requirements and voluntarily disclosing such failures to FinCEN.

Takeaways

• Although this is only FinCEN’s first enforcement action against a GTO recipient, other GTO recipients are now on notice that FinCEN takes these requests to non-financial entities as seriously as compliance obligations on financial institutions.
• This enforcement action also demonstrates that a FinCEN enforcement action can take time to develop. Even though this penalty relates to a 2014 GTO and involves a 2015 examination, it took until 2022 for FinCEN to finalize a penalty. Although FinCEN has a six-year statute of limitation beginning on the date of the violation to assess a fine, this means that we can expect FinCEN to pursue these types of actions in the future against other GTO recipients, even if the relevant GTOs are long-expired.¹²

 

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¹ Press Release, FinCEN Assesses $275,000 Civil Money Penalty against A&S World Trading for Violating Geographic Targeting Order, (Apr. 1, 2022), https://www.fincen.gov/index.php/news/news-releases/fincen-assesses-275000-civil-money-penalty-against-world-trading-violating.

² 31 U.S.C. § 5326(a). Such orders require that the targeted businesses:

• obtain information around any transaction in which the business is involved in the payment, receipt or transfer of funds greater or equal to the total amount prescribed by the order and any other person participating in the transaction;
• maintain this information for the amount of time required by the order; and
• file a report as required by the order.

³ 31 U.S.C. § 5326(a).

⁴ See e.g. Press Release, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016), https://www.fincen.gov/news/news-releases/fincen-takes-aim-real-estate-secrecy-manhattan-and-miami; Press Release, FinCEN Renews Real Estate Geographic Targeting Orders for 12 Metropolitan Areas, (Oct. 29, 2021), https://www.fincen.gov/news/news-releases/fincen-renews-real-estate-geographic-targeting-orders-12-metropolitan-areas.

⁵ For more information, please refer to our previous Legal Update: Alex A. Lakatos, David L. Beam, and Matthew Bisanz, FinCEN Adds Virtual Currency to High-End Real Estate Reporting Regime, (Nov. 20, 2018), https://www.mayerbrown.com/en/perspectives-events/publications/2018/11/fincen-adds-virtual-currency-to-highend-real-estat.

⁶ FinCEN, Geographic Targeting Order, (Sept. 26, 2014), https://www.fincen.gov/sites/default/files/shared/LA_GTO_Order9-25-14.pdf.

⁷ Press Release, Large-Scale Law Enforcement Effort Targets Downtown Los Angeles Businesses Linked To Money Laundering For Drug Cartels, (Sept. 10, 2014), https://www.justice.gov/usao-cdca/pr/large-scale-law-enforcement-effort-targets-downtown-los-angeles-businesses-linked-money.

⁸ Press Release, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels, (Oct. 2, 2014), https://www.fincen.gov/news/news-releases/fincen-issues-geographic-targeting-order-covering-los-angeles-fashion-district.

⁹ 31 U.S.C. § 5312(a)(4). The term “nonfinancial trade or business” means any trade or business other than a financial institution that is subject to the reporting requirements of section 5313 and regulations prescribed under that section.

¹⁰ FinCEN, Memorandum of Understanding and Delegation of Authority to Examine Nonfinancial Trades and Businesses, (Apr. 10, 2015), https://www.irs.gov/irm/part4/irm_04-026-001#idm140293838660512 (FinCEN delegates to the IRS the authority to examine nonfinancial trades or businesses for compliance with the requirements of the BSA and its implementing regulations).

¹¹ FinCEN, Financial Crimes Enforcement Network (FinCEN) Statement on Enforcement of the Bank Secrecy Act, (Aug. 18, 2020), https://www.fincen.gov/sites/default/files/shared/FinCEN Enforcement Statement_FINAL 508.pdf.

¹² There is generally a six-year statute of limitations for violations of a GTO beginning on the date of the transaction unless the target of the investigation agrees to toll the applicable statute of limitations, as A&S did here. See 31 U.S.C. § 5321(b); In re A&S World Trading Incorporated, No. 02-2022, at 8 (Mar. 31, 2022), https://www.fincen.gov/sites/default/files/enforcement_action/2022-04-01/AS World Trading Consent Order FINAL.pdf.