Anti-Money Laundering Advisory: FinCEN Clarifies Customer ID Rules for Broker-Dealers and Issues Reports on Mortgage Fraud and Insurance Suspicious Activity
5/2/2008
FinCEN Eases ID Requirements on Securities Broker-Dealers Acting As Clearing Firms
Customer Identification Program (CIP) rules have been waived for broker-dealers acting as “clearing firms,” according to a notice published on March 4, 2008 by the Financial Crimes Enforcement Network (FinCEN).
Introducing firms and clearing firms regularly enter into clearing agreements, “under which the functions of opening and approving customer accounts and directly receiving and accepting orders from the introduced customer will be allocated exclusively to the introducing firm and the functions of extending credit, safeguarding funds and securities, and issuing confirmations and statements will be allocated to the clearing firm.”
As a result of the waiver, only the introducing firm in such an arrangement will be required to comply with the CIP rules imposed by 31 C.F.R. § 103.122.
However, FinCEN reminded broker-dealers that, regardless of the new CIP rules when acting as clearing firms, they retain an ongoing duty to apply a risk-based anti-money laundering program to clients acquired from any source, and that additional rules may apply under the USA PATRIOT Act where clients are acquired from foreign firms.
Mortgage Loan Fraud Suspicious Activity Reports Jump 44% in One Year
Financial institutions are getting better at identifying mortgage fraud: over 37,000 suspicious activity reports (SARs) were filed because of suspected mortgage loan fraud in 2006, a 44% increase over the preceding year, according to an April FinCEN report. Fraud was detected before loan disbursement in 31% of cases, a 50% improvement over the preceding ten years.
The most common activities reported were misrepresentation of income, assets, and debts; forged documents; occupancy fraud; and appraisal fraud. Additionally, FinCEN identified a few notable trends:
- Over one quarter of SARs listed mortgage brokers as participants in the suspected fraud.
- Nearly 13% of SARs involved appraisers, underscoring “the value of independent verification of appraisal documents.”
- Fraud by identity theft increased 95%; fraud in “cash-out refinance loans” increased 53%; and fraud in “stated income, low or no document loans” increased 69%.
FinCEN highlighted a few “notably elaborate” schemes. In one scheme, “rescuers” would falsely tell homeowners facing foreclosure that “if they signed a quit claim deed for the benefit of the rescuer, the mortgage would be paid and the homeowner could continue living in the house with the promise that the property would be deeded back when the homeowner was able to obtain refinancing. The rescuer recorded the quit claim deed and then sold the property.”1
Based on its analysis, FinCEN listed a set of protective measures for lending institutions:
- Perform independent due diligence and document verification on borrowers submitted by brokers.
- Watch for red flags such as large increases in year-to-year income or higher than normal occupational income.
- Ensure reported Social Security and Medicare withholdings do not exceed legal limits.
- Watch for buyers purchasing a “primary residence” outside their home state.
- Watch for multiple loan applications involving the same parties, such as mortgage brokers or borrowers who always use the same appraiser.
- Compare signatures on all documents and ask for photo identification.
- Use the loan settlement statement to check for unexplained disbursements of funds.
Massachusetts, New York Lead
in Insurance Industry Suspicious
Activity Reporting
The insurance industry filed 641 SARs, indicating potential terrorism financing or money laundering, in the year after they became mandatory, according to an April FinCEN report.
Suspicious activity reporting became mandatory for insurance companies offering certain covered products on May 2, 2006. “Covered” products include:
- “a permanent life insurance policy, other than a group life insurance policy;
- an annuity contract, other than a group annuity contract; and
- any other insurance product with cash value or investment features.”
The majority of the SARs filed were produced in Massachusetts, New York, and Ohio. The bulk of the SARs were generated by a single large institution in each state. FinCEN speculated that these firms may have found success adapting their existing anti-money-laundering programs from their investment entities to their insurance products.
Suspected fraud or money laundering was usually discovered only after the application was forwarded to the insurance company’s central processing center. FinCEN encourages front-line “agents and brokers [to] remain alert to suspicious activity involving the products they sell.” Analysis of the SARs revealed that subjects engaging in suspicious activity primarily resided in New York, California, Florida, New Jersey, and Texas.
Based on its analysis, FinCEN recommends that insurance companies monitor for red flags such as multiple money orders or checks, early or excessive borrowing against policies, and termination shortly after issuance. While such practices are not illegal, they indicate that the company should further evaluate the transaction for reportable suspicious activity.
FinCEN reminded insurance companies to follow the instructions for filing a SAR:
- use form SAR-SF rather than SAR-DI;
- file only a single SAR even if multiple subjects are involved in a suspicious transaction;
- add “SAR-IC” after the company name;
- begin the narrative with the term “Insurance SAR”; and
- avoid extraneous legal disclaimers in the narrative, which “neither absolve insurance companies of monitoring and due diligence requirements nor provide them any protection.”
Additional findings from the report:
- The most common products implicated in the SAR filings were life insurance contracts and annuities.
- Most of the subjects (552) had a direct relationship to the life policy or annuity, either as applicant or beneficiary. Only 92 were industry insiders or gatekeepers.
- Companies voluntarily filed 16 SARs solely on non-covered products (mostly term life policies).
- Three SARs were filed after subjects asked if their policies “would pay if [they] were killed in a suicide bombing.”
- The most prolific filer submitted 143 reports, 22% of the total for the year.
FinCEN continues to delay implementation of an insurance-specific SAR form, even though it acknowledges that the form should ease the filing process and increase the quality of collected data.
Endnotes
1 Financial Crimes Enforcement Network, Mortgage Loan Fraud: An Update of Trends Based Upon an Analysis of Suspicious Activity Reports, April 2008 at p. 14.
For more information, please contact one of the attorneys in Mintz Levin's Anti–Money Laundering Compliance
and Counseling Practice Group.
William “Mo” Cowan, Chair
(617) 348-3003
WMCowan@mintz.com
David Barres
(212) 692-6776
DLBarres@mintz.com
Robert Mark Chamberlin
(617) 348-1840
MChamberlin@mintz.com
Peter Chavkin
(212) 692-6231
PChavkin@mintz.com
Cynthia Larose
(617) 348-1732
CJLarose@mintz.com
Jeffrey Robbins
(617) 348-1722
JSRobbins@mintz.com
Bridget Rohde
(212) 692-6883
BMRohde@mintz.com
Elissa Flynn-Poppey
(617) 348-1868
EFlynn-Poppey@mintz.com
Susan L. Foster
+44 (0) 20 7776 7330
SFoster@mintz.com
