Money Transmittal Issues
Regarding Federal and State Criminal Investigations
By John Teakell Attorney-At-Law
Dallas, Texas
I. Introduction
There are several categories of potential federal offenses and state offense regarding money transmissions businesses or money transmittal issues.
First, it is illegal to operate a money-transfer business without a license (state and federal) under 18 U.S.C.A. §1960 and Tex.Fin.Code §§301 - 405.
Second, the government might argue that international money transfers violate federal statutes and U.S. Treasury Department regulations regarding trade or transfers with a prohibited country, such as Iran (the IEEPA (50 U.S.C.A. §§ 1701-1705) and 31 C.F.R. § 560.101 et seq.). The prohibition of transactions with Iran is used as an example herein.
The third might involve money-laundering under 18 U.S.C.A. §§ 1956 and 1957.
Finally, there might be ancillary violations (e.g. failing to report ownership in foreign bank accounts when operating this business, illegal structuring of transactions to avoid reporting requirements, etc.). Some cases also mention the Patriot Act while dealing with operation of hawalas (a system of payments without utilizing wire transfers or checks wherein parties keep a series of ledgers; this system has been and is currently used by persons in the Middle East).
A. Failure to Obtain License for Money Transmittal Business, Regardless of Where the Money is Transmitted:
It looks like the statute (18 U.S.C.A. §1960) does not require knowledge of the licensing requirement to violate the licensing provision. In the pre-Patriot Act era, there used to be a defense if the defendant did not know of the unlicensed operation of the transmittal business (or at least, did not intentionally violate the statute. The post-Patriot Act revisions of 18 U.S.C.A. §1960 now mandate that the mere operation an unlicensed money transmitting business is a violation of the statute, without regard to whether the defendant knew that his conduct was a violation of the licensing statutes. The statute contains both civil monetary penalties and a criminal penalty of up to 5 years in prison. The federal statute is worded such that failing to obtain a state money transmitting license, when the failure to do so is a misdemeanor or felony, also constitutes a violation of the federal law. Texas makes the failure to obtain this license a third degree felony.
The Iranian prohibited transaction regulations have their own civil and criminal penalties, which are more serious (up to 20 years in prison, and/or $50,000/violation fine). Another interesting point is that the statute's mens rea requirements have been modified a few times over the years. At one point, it was a defense to prosecution if the defendant did not know or intentionally operate the unlicensed money transmitting business (pre-Patriot Act in 2001). So, if the conduct occurred prior to the enactment of the Patriot Act, we would have a good defense there. In the post-Patriot Act era, an unlicensed money transmitting business is defined to include anyone that operates an unlicensed business, even if they did not know that a license was required. But, if you look back at the liability provision in subparagraph (a), you have to knowingly operate an unlicensed money transmitting business in order to be prosecuted. This may have been a mistake on Congress' part. In other words, it is no defense that you did not know of licensing requirements to qualify as an unlicensed business, but the liability provision seems to require knowing operation of the unlicensed money transmittal business.
Also worth mentioning is that 18 U.S.C.A. § 1960 is up for amendment in the Senate. See 2007 CONG US S.B. 473, 110th CONGRESS, 1st Session, (Feb 01, 2007), along with a comprehensive revision of the money laundering statutes in an effort to combat the terrorist financing.
B. Engaging in Prohibited Transactions With Iran Without the Required License:
The violation of the International Emergency Economic Powers Act ("IEEPA"), and the Iranian Trade Restriction ("ITR") regulations promulgated thereunder (31 C.F.R. § 560.101 et. seq.), by consummating transactions with Iran, is more serious. This is an independent violation that has no bearing on operating an unlicensed money transmitting business. If you engage in a prohibited transaction with Iran (or through other countries and the ultimate transaction is designed to be with Iran), without a license to engage in such transaction, it is a violation of the IEEPA and ITR provisions. So there is also a "licensing" provision here, unrelated to the license required to operate a money transmitting business. The civil monetary penalty for an IEEPA/ITR violation is up to $50,000 per violation, and the criminal penalty is up to 20 years in prison. However, it appears that there may be a defense. It appears that the violation must be willful. This means that if Defendant did not willfully violate a regulation under the IEEPA or ITR (although there was nevertheless a violation), it appears that he can defeat a criminal prosecution (although he still may have to pay a $50,000 civil fine-see 50 U.S.C.A. 1705). See U.S. v. Quinn, 403 F.Supp.2d 57 (D.D.C. 2005). It is important to note that the defense is not related to willfully failing to get a license to conduct a prohibited transaction, it is for willfully engaging in the transaction in the first place. The criminal does not have to exactly know what provision he is violating to be criminally responsible; just that he knows generally that his conduct is probably prohibited is sufficient to support criminal liability. U.S. v. Elashi, 440 F.Supp.2d 536, 548 n.10 (N.D.Tex. 2006).
II. Statutes
A. Texas State Money Transmission License Provisions
Tex. Fin. Code §§ 151.301-.405 (along with other provisions in Chapter 151).
Tex. Fin. Code Ann. § 151.707. Administrative Penalty
(a) After notice and hearing, the commissioner may assess an administrative penalty against a person that:
(1) has violated this chapter or a rule adopted or order issued under this chapter and has failed to correct the violation not later than the 30th day after the date the department sends written notice of the violation to the person;
(2) if the person is a license holder, has engaged in conduct specified in Section 151.703;
(3) has engaged in a pattern of violations; or
(4) has demonstrated wilful disregard for the requirements of this chapter, the rules adopted under this chapter, or an order issued under this chapter.
(b) A violation corrected after a person receives written notice from the department of the violation may be considered for purposes of determining whether a person has engaged in a pattern of violations under Subsection (a)(3) or demonstrated wilful disregard under Subsection (a)(4).
(c) The amount of the penalty may not exceed $5,000 for each violation or, in the case of a continuing violation, $5,000 for each day that the violation continues. Each transaction in violation of this chapter and each day that a violation continues is a separate violation.
(d) In determining the amount of the penalty, the commissioner shall consider factors that include the seriousness of the violation, the person's compliance history, and the person's good faith in attempting to comply with this chapter, provided that if the person is found to have demonstrated wilful disregard under Subsection (a)(4), the trier of fact shall recommend that the commissioner impose the maximum administrative penalty permitted under Subsection (c).
(e) A hearing to assess an administrative penalty is considered a contested case hearing and is subject to Section 151.801.
(f) An order imposing an administrative penalty after notice and hearing becomes effective and is final for purposes of collection and appeal immediately on issuance.
(g) The commissioner may collect an administrative penalty assessed under this section:
(1) in the same manner that a money judgment is enforced in court; or
(2) if the penalty is imposed against a license holder or a license holder's authorized delegate, from the proceeds of the license holder's security in accordance with Section 151.308(e).
Tex. Fin. Code Ann. § 151.708. Criminal Penalty
(a) A person commits an offense if the person:
(1) intentionally makes a false statement, misrepresentation, or certification in a record or application filed with the department or required to be maintained under this chapter or a rule adopted or order issued under this chapter, or intentionally makes a false entry or omits a material entry in the record or application; or
(2) knowingly engages in an activity for which a license is required under Subchapter D [FN1] or F [FN2] without being licensed under this chapter.
(b) An offense under this section is a felony of the third degree.
(c) If the commissioner has reason to believe that a person has committed an offense under this section or any other state or federal law, the commissioner may file a criminal referral with the district attorney of Travis County or an appropriate prosecuting attorney of the county in which the offense is alleged to have been committed.
(d) Nothing in this section limits the power of the state to punish a person for an act that constitutes an offense under this or any other law.
B. Federal Statutes:
18 U.S.C.A. §1960. Prohibition of unlicensed money transmitting businesses - if the state requires a license, and the penalty is a misdemeanor or felony, and the defendant does not have a state license (even though he has a federal license), this statute makes it a violation of federal law. Violating this statute has a civil monetary penalty, or up to a 5 year prison sentence, or both. The Iranian prohibited transaction regulations have their own civil and criminal penalties, which are more serious (up to 20 years in prison, and/or $50,000/violation fine). Another interesting point is that this statute has gone through several mens rea modifications. At one point, it was a defense to prosecution if the defendant did not know or intentionally operate the unlicensed money transmitting business. Now, an unlicensed money transmitting business is defined to include anyone that operates an unlicensed business, even if they did not know that a license was required. But, if you look back at the liability provision in subparagraph (a), you have to knowingly operate an unlicensed money transmitting business in order to be prosecuted. This may have been a mistake on Congress' part. In other words, it is no defense that you did not know of licensing requirements to qualify as an unlicensed business, but the liability provision seems to require knowing operation of the unlicensed money transmittal business.
(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.
(b) As used in this section--
(1) the term "unlicensed money transmitting business" means a money transmitting business which affects interstate or foreign commerce in any manner or degree and--
(A) is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable;
(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section; or
(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to be used to promote or support unlawful activity;
(2) the term "money transmitting" includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier; and
(3) the term "State" means any State of the United States, the District of Columbia, the Northern Mariana Islands, and any commonwealth, territory, or possession of the United States.
50 U.S.C.A. § 1705. Penalties - This is for a violation of the IEEPA or ITR
(a) A civil penalty of not to exceed $50,000 may be imposed on any person who violates, or attempts to violate, any license, order, or regulation issued under this chapter.
(b) Whoever willfully violates, or willfully attempts to violate, any license, order, or regulation issued under this chapter shall, upon conviction, be fined not more than $50,000, or, if a natural person, may be imprisoned for not more than twenty years, or both; and any officer, director, or agent of any corporation who knowingly participates in such violation may be punished by a like fine, imprisonment, or both.
III. Regulations (from 31 C.F.R.)
Sec. 501.801 Licensing Procedure
A. Recordkeeping and mandatory record production provisions
Sec. 501.601 Records and recordkeeping requirements.
Except as otherwise provided, every person engaging in any transaction subject to the provisions of this chapter shall keep a full and accurate record of each such transaction engaged in, regardless of whether such transaction is effected pursuant to license or otherwise, and such record shall be available for examination for at least 5 years after the date of such transaction. Except as otherwise provided, every person holding property blocked pursuant to the provisions of this chapter or funds transfers retained pursuant to Sec. 596.504(b) of this chapter shall keep a full and accurate record of such property, and such record shall be available for examination for the period of time that such property is blocked and for at least 5 years after the date such property is unblocked.
Sec. 501.602 Reports to be furnished on demand. Notice that this section seems to mandate the turnover of any and all records and reports. The statute is very broad. Failing to turn over the documents might invite civil and criminal prosecution, both in the administrative and federal district courts. But the regulation does not mention how the 5th Amendment interplays with this requirement to turn over the records.
Every person is required to furnish under oath, in the form of reports or otherwise, from time to time and at any time as may be required by the Director, Office of Foreign Assets Control, complete information relative to any transaction, regardless of whether such transaction is effected pursuant to license or otherwise, subject to the provisions of this chapter or relative to any property in which any foreign country or any national thereof has any interest of any nature whatsoever, direct or indirect. The Director may require that such reports include the production of any books of account, contracts, letters or other papers connected with any such transaction or property, in the custody or control of the persons required to make such reports. Reports with respect to transactions may be required either before or after such transactions are completed. Except as provided in parts 596 and 597, the Director may, through any person or agency, conduct investigations, hold hearings, administer oaths, examine witnesses, receive evidence, take depositions, and require by subpoena the attendance and testimony of witnesses and the production of all books, papers, and documents relating to any matter under investigation, regardless of whether any report has been required or filed in connection therewith.
B. Pertinent Substantive Violations: Conducting transmittal of money to Iran without a license (this is different than the general license one must have to transmit money; this license is one specific to Iran).
Sec. 560.204 Prohibited exportation, re-exportation, sale or supply of goods, technology, or services to Iran.
Except as otherwise authorized pursuant to this part, including Sec. 560.511, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation, re-exportation, sale, or supply of any goods, technology, or services to a person in a third country undertake n with knowledge or reason to know that:
(a) Such goods, technology, or services are intended specifically for supply, transshipment, or re-exportation, directly or indirectly, to Iran or the Government of Iran; or
(b) Such goods, technology, or services are intended specifically for use in the production of, for commingling with, or for incorporation into goods, technology, or services to be directly or indirectly supplied, transshipped, or re-exported exclusively or predominantly to Iran or the Government of Iran.
Sec. 560.206 Prohibited trade-related transactions with Iran; goods, technology, or services.
(a) Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, no United States person, wherever located, may engage in any transaction or dealing in or related to:
(1) Goods or services of Iranian origin or owned or controlled by the Government of Iran; or
(2) Goods, technology, or services for exportation, re-exportation, sale or supply, directly or indirectly, to Iran or the Government of Iran.
(b) For purposes of paragraph (a) of this section, the term transaction or dealing includes but is not limited to purchasing, selling, transporting, swapping, brokering, approving, financing, facilitating, or guaranteeing.
Sec. 560.208 Prohibited facilitation by United States persons of transactions by foreign persons.
Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, no United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States.
Sec. 560.701 Penalties.
(a) Attention is directed to section 206 of the International Emergency Economic Powers Act (the ``Act'') (50 U.S.C. 1705), which is applicable to violations of the provisions of any license, ruling, regulation, order, direction or instruction issued by or pursuant to the direction or authorization of the Secretary of the Treasury pursuant to this part or otherwise under the Act. Section 206 of the Act, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L. 101-410, as amended, 28 U.S.C. 2461 note), provides that:
(1) A civil penalty of not to exceed $50,000 per violation may be imposed on any person who violates any license, order, or regulation issued under the Act;
(2) Whoever willfully violates any license, order, or regulation issued under the Act shall, upon conviction be fined not more than $50,000, or, if a natural person, may be imprisoned for not more than twenty years, or both; and any officer, director, or agent of any corporation who knowingly participates in such violation may be punished by a like fine, imprisonment or both.
(b) The criminal penalties provided in the Act are subject to increase pursuant to 18 U.S.C. 3571.
(c) Attention is also directed to 18 U.S.C. 1001, which provides that whoever, in any matter within the jurisdiction of any department or agency of the United States, knowingly and willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statement or representation or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined under title 18, United States Code, or imprisoned not more than five years, or both.
(d) Attention is directed to 18 U.S.C. 2332d, as added by Public Law 104-132, section 321, which provides that, except as provided in regulations issued by the Secretary of the Treasury, in consultation with the Secretary of State, a U.S. person, knowing or having reasonable cause to know that a country is designated under section 6(j) of the Export Administration Act, 50 U.S.C. App. 2405, as a country supporting international terrorism, engages in a financial transaction with the government of that country, shall be fined under title 18, United States Code, or imprisoned for not more than 10 years, or both.
(e) Violations of this part may also be subject to relevant provisions of the Customs laws and other applicable laws.
IV. Cases
A. Cases dealing with "Hawalas" and 31 C.F.R.
1. U.S. v. Esfahani, 2006 WL 163025 (N.D.Ill. Jan 17, 2006)
2. U.S. v. Anvari-Hamedani, 378 F.Supp.2d 821 (N.D.Ohio Jul 25, 2005) - I attached this opinion. It addresses various arguments that we would make in a criminal prosecution.
B. Cases dealing with "Hawalas" Generally, the most important of which are Habbal and Bariek
1. U.S. v. Muse, 2007 WL 391563 (S.D.N.Y. Jan 30, 2007)
2. U.S. v. Rahman, 417 F.Supp.2d 725 (E.D.N.C. Jan 20, 2006) (involves operating an unlicensed money transmitting business, but it was decided under the pre-Patriot Act revision of 18 U.S.C.A. 1960, so it does not really help us).
3. U.S. v. Calimlim, 2005 WL 2922193 (E.D.Wis. Nov 04, 2005)
4. U.S. v. Habbal, 2005 WL 2674999 (E.D.Va. Oct 17, 2005). I attached this opinion. This case cites several statutes that might provide considerations of other violations that might occur (e.g. failing to disclose ownership interest in foreign bank accounts on tax returns, improper structuring of transactions to avoid federal reporting requirements under 31 U.S.C. § 5324). The case was a sentencing case where D operated a Hawala business properly under the federal registration requirements, but not under the state requirements. He ended up with 12 months imprisonment and 2 years probation.
5. U.S. v. Bariek, 2005 WL 2334682 (E.D.Va. Sep 23, 2005) (called into doubt on other grounds by, U.S. v. Mapp, 2007 WL 485513 (E.D.Mich. Feb 09, 2007)). I attached the Bariek opinion. This is another sentencing case like Habbal, with an even better explanation. The facts are close to our case. D complied with the federal requirements, but not the state requirements. It was a hawala, and money was sent to Iran, Pakistan, and Afghanistan. But, the court did not discuss the 31 C.F.R. 560 regulations and violations. The only alleged wrongdoing was the unlicensed operation of the money transmitting business under state law as a violation of federal law.
6. U.S. v. Uddin, 365 F.Supp.2d 825 (E.D.Mich. Apr 11, 2005) (distinguished by Rahman)
7. Global Relief Foundation, Inc. v. New York Times Co., 390 F.3d 973, 33 Media L. Rep. 1001 (7th Cir.(Ill.) Dec 01, 2004) (this case seems to really be a defamation case and not that important).
8. U.S. v. Talebnejad, 342 F.Supp.2d 346 (D.Md. Sep 28, 2004), Reversed in Part, Appeal Dismissed in Part by, 460 F.3d 563 (4th Cir.(Md.) Aug 21, 2006), Certiorari Denied by, 127 S.Ct. 1313, 75 USLW 3437 (U.S. Feb 20, 2007) (declined to follow by Uddin, supra, and U.S. v. Keleta, 441 F.Supp.2d 1 (D.D.C. Jun 28, 2006))
C. Cases discussing the meaning of willful in terms of an ITR/IEEPA violation:
U.S. v. Quinn, 403 F.Supp.2d 57 (D.D.C. 2005) - This case involves violations of the ITR and IEEPA, but did not involve hawalas or money transmitting. It involved the transfer of goods and machine equipment. But it discusses the defense under 18 U.S.C.A. 1705.
U.S. v. Elashi, 440 F.Supp.2d 536 (N.D.Tex. 2006) (this case cites Quinn for the proposition that willful means that the violator need only know the general nature of the offense and not its specifics. "Surely neither Congress in passing IEEPA nor the Executive Branch in promulgating the [Iranian Transaction Regulations] intended to foreclose prosecution of persons who knew the gist, but not the exact details, of the law they are accused of violating.").
D. Cases citing other relevant provisions of the CFR
Kashani v. Tsann Kuen China Enterprise Co., Ltd., 118 Cal.App.4th 531, 13 Cal.Rptr.3d 174 (Cal. App. 2 Dist.2004).
