Bates Research | 01-14-21
Significant Changes to Anti-Money Laundering Framework Enacted into Law
After Congress overrode a presidential veto, the omnibus FY2021 National Defense Authorization Act (“NDAA”)—and with it the Anti-Money Laundering Act (“AMLA”)—became law on January 1, 2021. AMLA is the most significant update to the Bank Secrecy Act (“BSA”) rules since the USA PATRIOT Act in 2001. It incorporates substantial changes to the laws governing the combatting of money laundering and terrorist financing. In previous reports, Bates Group described various reform provisions contained in proposed legislation (including from the Illicit Cash Act and the Corporate Transparency Act). Consistent with those proposals, the AMLA extends the “risk-based principle” approach to regulation and enforcement. In this article, we highlight the key final provisions that will lead to many changes in industry rules and practices going forward.
AMLA – Key Concepts
The AMLA will have a broad impact on enforcement. Many of the concepts it contains are familiar to market participants and have been discussed and debated in many forums over the past two years. Key concepts retained in the final Act include: (i) the establishment of a non-public federal database accessible by federal and local law enforcement that will require shell companies to disclose their beneficial owners; (ii) enhancements to the AML whistleblower program; (iii) promotion of innovation and the development of modern tools to support enforcement, particularly concerning suspicious activity reports (“SARs”); (iv) the expansion of authority to cover virtual currency and art; (v) increases in penalties for AML violations; and (vi) the establishment and dissemination of national AML examinations and supervision priorities.
AMLA Establishes Beneficial Ownership Database
The intent behind the creation of the beneficial ownership database is to prevent malign actors from using shell corporations to hide their illicit activities. AMLA requires “reporting companies” to provide identifying information for “beneficial owners.” The definition of “beneficial owner” includes individuals who exercise “substantial control” of or have at least a 25% ownership interest in the company. (The term “substantial control” will be, presumably, defined in future FinCEN regulation and be in line with the requirements of the Customer Due Diligence (“CDD”) Rule.) For those entities required to report, the Act imposes significant civil and criminal penalties for individuals and companies that provide false information or fail to report in a timely way.
That said, the reporting of beneficial ownership is primarily directed at smaller businesses or shell entities. The Act excludes certain financial institutions, publicly-traded companies, non-profits, government entities, and other entities that have (i) a physical operating presence in the U.S., (ii) more than 20 employees, and (iii) sales or gross receipts in excess of $5 million. Notably, those financial institutions already covered by FinCEN’s CDD Rule are not required to report beneficial ownership under the AMLA.
The database will be maintained by FinCEN and will not be available to the public. It will be accessible through FinCEN for law enforcement purposes and also to financial institutions (with the reporting company’s consent.) This latter accessibility may become a significant benefit for financial institutions who may be able to use information from the database to satisfy their beneficial ownership obligations under the CDD Rule. Under the AMLA, FinCEN must issue implementing regulations on beneficial ownership within one year. Subject to several conditions, qualifying “reporting companies” have two years to provide their information to FinCEN.
AMLA Incentivizes Whistleblowers
The AMLA significantly boosts the current whistleblower program by incentivizing the reporting of violations. The new law removes the prior cap on such awards (up to $150,000) and offers up to 30% of all monetary sanctions recovered in a BSA enforcement action. AMLA also prevents retaliation or discrimination against employees who report violations and permits employees to sue their employers for a host of damages and for reinstatement.
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AMLA Aims for Better Reports, More Sharing and Coordination
The AMLA requires FinCEN to consider numerous avenues to streamline the filing of SARs and other reports and to extract more law enforcement value from them. Specifically, Congress wanted FinCEN to consider: (i) expanding the use of technological processes for the filing of certain categories of non-complex SARs (e.g., on structured transactions and fund asset transfers); (ii) pushing out more information on threat patterns, typologies and other trends derived from SARs; (iii) encouraging innovation for financial institutions (in part, through the establishment of a public/private Subcommittee on Innovations and Technology); and (iv) assessing newly-required DOJ statistics, metrics, and other information on the use of SARs data. In addition, the Act requires FinCEN to review whether the reporting threshold amounts should be adjusted or indexed.
Further, Congress provided additional budgetary resources to hire FinCEN domestic liaisons, BSA “Innovation Officers” and “Information Security Officers,” six “Foreign Financial Intelligence Unit Liaisons.” The Act also creates a Treasury Financial Attaché Program for the purpose of increasing the communication and cooperation among enforcement and national security agencies, and it initiates a pilot program for sharing SARs data across international borders. This three-year pilot program is intended to allow financial institutions to share SARs with foreign branches, subsidiaries, and affiliates, for the “purpose of combating illicit finance risks.” The Innovation Officers will work to promote the use of new technologies like Artificial Intelligence to make AML programs more efficient. As a result, financial institutions can reallocate their resources to the higher-risk areas of their AML programs.
AMLA Expands Authorities to Cover Virtual Currency and Antiques
The AMLA expanded the definition of “financial institution” to cover modern forms of value that can be used in money laundering. Specifically, the AMLA redefined the term to include virtual currencies under the BSA. The Act also adds art and antiquities dealers, advisors and consultants to the BSA definition. Notably, Congress authorized a study (to be completed within a year) in anticipation of the difficult issues that will inevitably arise in an AML regulatory context.
AMLA Increases Penalties for BSA Violations
Among other penalty changes, individuals who have committed an “egregious violation” of the BSA are now barred from serving on the board of directors of a U.S. financial institution for 10 years; certain partners, directors, officers, or employees of financial institutions convicted of violating the BSA forfeit any bonuses paid during the calendar year the violation occurred; and repeat violators of BSA prohibitions are subject to additional civil monetary penalties, potentially as high as three times the profit gained (or loss avoided) by such person as a result of the violation.
AML Examination Priorities
The AMLA extends the “risk-based principle” approach to regulation and enforcement. Congress recognized that financial institutions will need to design and implement AML policies consistent with the Act and that the government has an interest in supporting those efforts. To provide critical guidance, the Act requires that the Treasury Department establish and publish National AML Priorities. Financial institutions will be required to include these priorities in their AML programs. It is anticipated that the priorities will be included in a financial institution’s BSA/AML risk assessment.
Conclusion
The passage of the AMLA is a singular achievement representing the largest enhancement to AML legislation since the USA PATRIOT Act and further aligns the U.S. with AML laws in other countries by incorporating Financial Action Task Force (“FATF”) recommendations. The expanding framework will require substantial attention to upcoming and related proposed rulemakings. Financial institutions will need to make significant changes to their AML programs by the future implementation dates. Bates will continue to monitor these developments.
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