These revisions to BSA reporting obligations and processes are welcome and probably long overdue.
The Anti-Money Laundering Act of 2020 (AML Act) aims to lessen the compliance and regulatory burden of financial institutions, but it may instead do the opposite. The full impact of this new legislation will not be fully known until the regulations required to be promulgated by the Secretary of the Treasury over the next year are adopted and implemented. However, it does appear that the Treasury and its enforcement arm, the Financial Crimes Enforcement Network (FinCEN), have been given additional powers and significant funds to target money launderers and the financing of terrorism, keeping financial institutions fully engaged on the “front line” of that war. Consequently, the regulatory burden financial institutions face will change and potentially increase in the coming years.
This legislation, part of the National Defense Authorization Act, was enacted on January 1, 2021, and presents the most significant change to the anti-money laundering structure since the Currency and Foreign Transactions Act of 1970, as amended by the Patriot Act of 2001, commonly referred to as the Bank Secrecy Act (the BSA). The AML Act seeks to:
- Strengthen the Treasury by expanding the scope of and modernizing the existing monetary transaction reporting requirements;
- Develop and improve interagency and financial institution cooperation and information sharing;
- Enhance enforcement powers; and
- Create a new uniform and confidential reporting system on the ownership of smaller entities that have historically served as vehicles for the movement of illicit funds that enable money laundering, drug trafficking and terrorism networks to successfully function.
Modernizing and Strengthening of FinCEN and Reporting on Suspicious Activity
The AML Act calls upon the Treasury, in consultation with the attorney general, federal and state regulators, and relevant national security agencies, to establish and make public priorities for anti-money laundering and countering the financing of terrorism and to promulgate regulations that will require financial institutions to be supervised consistent with those priorities. Funds are being appropriated to these ends and the legislation expressly gives FinCEN the ability to engage and maintain AML and terrorist financing investigations experts capable of identifying, tracking and analyzing financial crime networks and identifying emerging threats to support federal civil and criminal investigations. FinCEN will also be called upon to maintain emerging technology experts and to encourage the identification and development of emerging technology that can assist the U.S. government and financial institutions in countering money laundering and the financing of terrorism.
The AML Act expands the scope of existing federal monetary transaction reporting requirements toward higher-risk customers by expanding the reach of federal AML laws to services provided with respect to securities, futures, precious metals, stones and jewels, cryptocurrency, antiquities and potentially to dealers in fine art.
In an effort to balance the reporting burdens on financial institutions and the benefits derived by law enforcement agencies which counter money laundering and financial crimes, the Treasury, acting through FinCEN, will be required to establish streamlined and automated processes to permit the filing of simple, noncomplex categories of reports.
There will be greater integration between financial institution systems and the electronic filing systems to allow for automatic population of report fields and the automatic submission of transaction data for suspicious activity reports (SARs). Financial institutions can expect to receive more information and feedback from FinCEN, which is obligated by the new legislation to periodically disclose to each financial institution, in summary form, information on SARs filed that proved useful to law enforcement agencies. It is also hoped that the information will include data that can be used by the financial institutions to design algorithms to meet their obligations under the BSA.
Changes to the reporting threshold for SARs and currency transaction reports are expected to occur, including the dollar thresholds reportable on FinCEN Form 8300, Report of Cash Payments Over $10,000.
These revisions to BSA reporting obligations and processes are welcome and probably long overdue. However, they will naturally require each financial institution to relearn and retool, including reviewing and reassessing their systems, procedures, personnel, vendors and correspondent relationships. In addition, while the reporting process may be more automated and easier to complete, the regulatory follow up and obligation on the institution to “know its customer” may also increase as FinCEN becomes even more actively involved in winning the “war.” Additionally, Treasury will report to Congress on its success or failure in this arena, which is likely to add to the pressure banks face in complying with enhanced BSA procedures and safeguards, at least in the short run.
Dissemination and Review of Information
In order to facilitate streamlined and real-time reporting, the AML Act creates a temporary Subcommittee on Innovation and Technology to advise the Treasury. The subcommittee will consist of representatives of FinCEN, bank regulators and law enforcement, with “Innovation Officers” to provide outreach and technical assistance or guidance on compliance with the BSA requirements.
The AML Act establishes the “FinCEN Exchange,” which is designed to facilitate a voluntary public-private information sharing partnership among law enforcement agencies, national security agencies, financial institutions and FinCEN to combat money laundering, terrorism financing, organized crime and other financial crimes, including by promoting innovation and technical advances in reporting.
The act also establishes a FinCEN Office of Domestic Liaison as an outreach to BSA officers at financial institutions, including nonbank financial institutions, and to promote coordination and consistency of BSA supervisory guidance from FinCEN and bank regulators. A system for “no action” letters from FinCEN to assist banks in handling reporting will be considered and is likely to be implemented.
The focus on innovation includes a global sharing of ideas, with the Treasury to join the subcommittee to periodically convene a global anti-money laundering and financial crime symposium focused on how new technology can be used to more effectively combat financial crimes and other illicit activities on an international scale.
The AML Act will require new annual reporting by the attorney general to Treasury that will make its way to Congress containing statistics and other information on the number of currency transaction reports and SARs that actually led to law enforcement actions and the reaction time by those agencies. The intention is to keep the agencies accountable and adjust the reporting requirements to make them more effective in and relevant to stopping the illegal activities.
Enhancing Enforcement Powers
The act imposes increased civil penalties for financial institutions and persons violating the recordkeeping and reporting obligations along with additional damages for repeat BSA violations, including treble damages for any profit gained or loss avoided.
Individuals will be barred from serving on boards of directors of U.S. financial institutions if they are found to have committed an “egregious violation” of the BSA, defined as a conviction for a criminal violation with a maximum imprisonment term of more than one year, or a civil violation involving willfully facilitating money laundering or financing of terrorism.
Persons will also be fined an amount equal to the profit gained by the violation, and a partner, director, officer or employee of a financial institution may be required to repay any bonus received during the calendar year in which the violation occurred or the calendar year after which the violation occurred. Unlike typical clawback provisions, the offending financial institution insider would be forced to repay the full amount of the bonus regardless of the amount of the violation and any correlation to how the bonus was calculated.
The AML Act also provides for new criminal penalties for concealing or misrepresenting any material facts to a financial institution concerning the source of funds in a monetary transaction involving an entity found to be a primary money laundering concern.
Violation of the reporting obligations for beneficial owners of reporting companies (discussed below) subject the violator to criminal and civil penalties. A person who provides false or fraudulent beneficial ownership information or fails to report to FinCEN will be subject to a civil penalty of up to $500 per day, a $10,000 fine and up to two years’ imprisonment. Unauthorized disclosure or use of the information in the confidential database would subject the person to civil penalties of up to $500 a day and a fine of up to $250,000, as well as potential imprisonment of up to 10 years and fines of up to $500,000 should there be a pattern of illegal activity shown.
The AML Act increases potential payments to whistleblowers of up to 30 percent of the fine or forfeiture, adds criteria for the Treasury to determine the amount of the award, provides a legal process for whistleblowers to claim an award, and adds protections of whistleblowers from retaliation by employers.
The AML Act also focuses on enforcement with respect to foreign banks that maintain correspondent accounts in the United States. This section enhances subpoena powers regarding foreign bank records by expanding the subpoena power from just “records relating to the correspondent account” to also include records relating to “any account at the foreign bank” if pertaining to an investigation of a violation of a U.S. criminal law, an investigation of a violation of the anti-money laundering laws or a civil forfeiture action. And, the penalty for failure to terminate the correspondent relationship upon failure of the foreign bank to comply with a subpoena has been increased from up to $10,000 to up to $25,000 for each day the U.S. bank fails to terminate the account. Domestic institutions maintaining correspondent accounts for foreign banks must take the extra steps necessary to identify the foreign bank’s beneficial owners and amend their policies and procedures to reflect these enhanced subpoena powers.
The potential for a greater number of enforcement actions, civil penalties and criminal actions against a financial institution and/or its board and senior management, as well as the increased reputational risk, can be significant and very harmful even to the most well intentioned financial institution.
Reporting of Beneficial Ownership Information
The Corporate Transparency Act (CTA) is perhaps the most far-reaching and burdensome portion of the AML Act. It creates new uniform reporting of information regarding beneficial owners of certain entities to a confidential database maintained by FinCEN. This new requirement is likely to carry additional information gathering obligations for financial institutions. Financial institutions may find it necessary to regularly verify the information they have on the customer with FinCEN to confirm the accuracy of that information and that their “know your customer” procedures are working.
The CTA is correctly focused on preventing money launders, financers of terrorism, drug traffickers and other malignant actors from concealing their use of corporations, limited liability companies and other entities to facilitate their illegal activity. It is directed at “shell entities” that have been vehicles for bad actors to move their money within the United States without detection by law enforcement.
Through regulations to be promulgated by Treasury, the CTA will require the reporting of certain information regarding “beneficial owners” of “reporting companies” to FinCEN to be deposited in a confidential database with FinCEN. That information will be accessible only by specified government, intelligence and law enforcement agencies and financial institutions, subject to customer due diligence requirements with the consent of the reporting company. The intention is to lift the veil of anonymity that hides the ownership of smaller companies and allows them to operate illicit activities without detection.
While the intention is justifiable, the result is that every corporation, limited liability company or other entity formed in the U.S. under the laws of a state or Indian tribe or registered as a foreign entity to do business in the U.S., other than those specifically excepted as described below, will be required to submit a report to FinCEN containing certain information regarding the reporting company’s beneficial owners.
Every reporting company that was formed before the effective date of the enabling regulations must file the report within two years after that date and every reporting company that is formed after that date must file at the time of formation.
The focus is on shell companies, and as such, many entities that are already subject to regulatory oversight or reporting requirements are excluded from the reporting obligations to FinCEN, including:
- Companies reporting or with a class of securities registered with the SEC under the Securities Act of 1934;
- Banks, bank holding companies and credit unions; and
- Money transmitters, registered broker‑dealers, registered investment advisors and investment companies.
Inactive entities and entities that employ more than 20 employees, have reported gross receipts or sales to the Internal Revenue Service in excess of $5 million in the prior year, and have an operating presence in the United States are also exempt from the reporting requirements. This definition of a customer that is subject to due diligence under the applicable FinCEN rule is not the same as the definition of a reporting company in the CTA and some adjustment in FinCEN’s rule will be necessary to bring the two into alignment.
A beneficial owner of the reporting company under the CTA is (i) an individual who, directly or indirectly, exercises substantial control over an entity or (ii) owns or controls 25 percent or more of the ownership interest of an entity. What constitutes the exercise of “substantial control” is not specified in the CTA, but it is likely to include executive officers, managing members and general partners of the reporting company. This test essentially aligns with the definition under FinCEN’s current customer due diligence rule.
The reporting company will be required to provide the following information for each such beneficial owner:
- Full legal name;
- Date of birth;
- Current residential or business street address; and
- The identification number from an acceptable identification document (i.e., passport or state driver’s or identification document) or a new FinCEN identifier.
The report must be updated within one year after a change in the information previously reported. The FinCEN identifier will be issued upon request by the reporting company or the beneficial owner. A report must be filed by an exempt entity when the entity no longer qualifies for the exemption.
The FinCEN database is intended to establish and maintain a permanent system of standardized records that provides an auditable trail of each request for information. It will leave a record of what person, agency or entity requested the information, the date of request, the reason for the request and whether the request was accepted or denied, along with the basis for any denial.
While financial institutions have been required to conduct ongoing due diligence of their customers, the new beneficial ownership information reporting may cause them to enhance their “know your customer” procedures to make sure they maintain the most up-to-date information on the customer and that the information is consistent with that in the FinCEN database. This verification of the beneficial ownership information with FinCEN will require prior approval of the reporting company. This information gathering may need to be updated not only with the opening of deposit accounts but may become a necessary part of each loan underwriting, documentation and renewal. It is not clear what the reporting requirements and ramifications will be if the information maintained by the bank is not in sync with the information in the FinCEN database and what role bank regulators will play during examinations to confirm the accuracy of the beneficial owner information.
The desire for this centralized database on beneficial ownership has been on the agenda for some time and, as has been argued by FinCEN and bank regulators, has merit. However, the potential for abuse by persons gaining unlawful access to the database and/or using or improperly disclosing that private information along with the potential for increased burdens on financial institutions and their customers are also very real and, as such, this new data bank of information must be closely guarded.
It is clear by the adoption of the AML Act that the federal government is “taking its gloves off” in the war against money launderers and the financing of terrorism. The Treasury, particularly FinCEN, are being given additional powers, technology, systems, penalties and funds to address the ongoing threat these bad actors pose to the citizens of the United States. However, since financial institutions play such a significant role at the front line of the AML effort, as the new regulations roll out, it is likely that those new rules will bring changes to the banks’ BSA programs, procedures, personnel and expenses that may increase, not decrease, the burden for those institutions.
For More Information
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