New Federal Legislation Progressing on BSA, Beneficial Ownership and Cannabis Financing

{image_1}

{image_2}

Photo by Colin Watts on Unsplash

On September 26, a bipartisan group of Senators led by Tom Cotton, (R-AR) and Mark Warner (D-AR), formally introduced their bill to strengthen the authority of the Financial Crimes Enforcement Network (FinCEN) to fight money laundering. As Bates Group reported back in June, the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activities in Shell Holdings Act (“ILLICIT CASH Act”) would, among other things, establish federal reporting requirements that mandate all beneficial ownership information be maintained in a comprehensive federal database, accessible by federal and local law enforcement. The Act would also require the reporting of beneficial ownership information for domestic shell companies. A similar bill, sponsored by Congresswoman Carolyn Maloney, titled the Corporate Transparency Act (“CTA”), passed a vote in the House of Representatives this week, 249-173. 

The House of Representatives also passed its version of the Secure and Fair Enforcement Banking Act of 2019 ("SAFE Banking Act"). As described in a Bates Research article early this August, the SAFE Banking Act would remove legal uncertainty for regulated banks and credit unions that provide banking services to cannabis businesses. The bill provides a safe harbor from federal anti-money laundering and regulatory enforcement actions for insured depository institutions.

These bills have the potential to significantly impact AML/BSA compliance programs. Here’s a closer look.

The Illicit Cash and corporate transparency Acts

In a recent Bates Research article on FinCEN, we noted that Director Kenneth Blanco publicly appealed for legislators to overhaul the BSA and provide additional federal authority to close loopholes left open by the Customer Due Diligence (“CDD”) Rule. Director Blanco advocated for more efficient law enforcement access to personal identity information. In particular, he was seeking the authority to collect beneficial ownership information at the “corporate formation stage” to prevent “sophisticated criminals of all kinds, including terrorists,” from establishing shell companies that “mask and further their criminal activity, to invest and buy assets with illicit proceeds.”

The ILLICIT CASH Act and the CTA respond directly to Director Blanco’s concerns. As described in the official legislative summary, of the ILLICIT CASH Act, the bill “comprehensively updates the BSA for the first time in decades and provides a coherent set of risk-based priorities in statute.” The Act (i) establishes “a comprehensive federal database, with strict privacy protections, accessible by federal and local law enforcement” and (ii) requires shell companies to report their beneficial owners, in order to prevent “exploitation of U.S. companies.” Further, the bill (iii) requires and improves “routine coordination, communication and feedback among financial institutions, regulators, and law enforcement to identify suspicious financial activities;” (iv) encourages greater data sharing “so that patterns of suspicious activities can be more easily tracked and identified;” and (v) provides new processes to encourage innovation.

Other highlighted provisions of the Act concern:

• recruitment and retention of top talent and the creation of a “hub” of investigatory expertise at FinCEN;
• the hiring of a Treasury liaison to improve communications about AML rules, regulations, and examinations;
• the sharing of metrics on AML data and trends from financial institutions for law enforcement purposes;
• the periodic feedback by regulators to financial institutions on their suspicious activity reports;
• the protection of personally identifying information;
• new recordkeeping requirements on foreign banks and new rules that compel them to comply with subpoenas;
• updates to certain statutory definitions to include digital currency.

The House action on the CTA reflects real movement on the issue. Like the ILLICIT CASH Act, the CTA requires all corporations and LLCs to disclose their true “beneficial owners” to FinCEN and to create a federal database of beneficial owners. The proposed database is expected to be available to law enforcement agencies, and to financial institutions (with customer consent, consistent with “Know-Your-Customer” compliance obligations.)  Otherwise, the bill exempts those entities already covered under SEC or state regulation.

The formal introduction of the ILLICIT CASH Act in the Senate and the passage of the CTA in the House are significant developments. These bipartisan legislative successes will dramatically empower both state and federal law enforcement.

The SAFE Banking Act

The formal purpose behind the SAFE Banking Act is “to increase public safety by (i) ensuring access to financial services to cannabis-related legitimate businesses and service providers and (ii) reducing the amount of cash at such businesses.” The SAFE Banking Act accomplishes this by creating a safe harbor for depository institutions that provide banking services to state-licensed cannabis businesses. Further, under the SAFE Act, proceeds from such businesses would not be considered proceeds from illegal activity. This means that these loans, and collateral provided by financial institutions, are effectively protected from anti-money laundering laws and the risk of asset forfeiture.

As a consequence, the SAFE Banking Act serves as an open invitation for financial institutions to fully engage in providing financial products and services to cannabis businesses. For the cannabis businesses themselves, the Act allows them full access to capital outside of cash transactions—this serves the goal of reducing reliance on cash for these businesses.

Other notable provisions of the Act:

• prohibit regulators from taking adverse or corrective supervisory action on loans made to cannabis businesses, including their owners and employees, or real estate and equipment leased to them;
• protect from criminal, civil and administrative forfeiture any loans or other financial services provided to cannabis businesses or owners of real estate or equipment leased or sold to them;
• impose new obligations on FinCEN to provide written guidance and examination procedures for financial institutions that provide services to cannabis businesses;
• promote diversity and inclusion in the cannabis industry. 

The passage of the SAFE Banking Act by the House of Representatives is a major step toward the normalization of cannabis-related businesses. That said, the Act does not legalize cannabis, which remains a Schedule I drug under federal law—it merely carves out a safe harbor for state-licensed businesses.  Consequently, even after the SAFE Act becomes law, some risk remains that an institution may continue to be in violation of federal law. This remains a point of contention and a source for other legislative initiatives, but it does not diminish the opening up of the cannabis marketplace. 

Conclusion

“The bipartisanship exhibited with respect to the ILLICIT CASH Act and the SAFE Banking Act is notable,” said Bates AML and Financial Crimes Managing Director Edward Longridge. “Though these legislative efforts have not yet reached fulfillment, they do seem to be moving steadily down the path to becoming law. Until then, financial institutions must continue to comply with the prevailing AML frameworks.” Bates will keep you apprised as these and other legislative developments play out.

To learn more about Bates Group’s Financial Crimes and AML services, please contact Edward Longridge at elongridge@batesgroup.com.

 

For additional information, please follow the links below to Bates Group's Practice Area pages:

Anti-Money Laundering and Financial Crimes

Bates Compliance Solutions

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Consulting and Expert Testimony

{image_3}