A Clean Sweep: Congress Overhauls Key Provisions of the Nation’s Money Laundering Laws

On January 1, 2021, the most significant anti-money laundering legislation since the USA PATRIOT Act became law. The Anti-Money Laundering Act of 2020 (AMLA or Act) will substantially overhaul the Bank Secrecy Act regulatory regime, aiming to modernize the fight against money laundering and terrorist financing. It redirects public and private resources towards updated national priorities and targets products and services considered high risk. Companies will confront new beneficial owner reporting requirements, increased whistleblower exposure, and slew of other changes to BSA enforcement led by a newly empowered FinCEN, and will need to be prepared.

Beneficial Owner Reporting Provisions Aimed at Shell Companies

Shell companies, hidden assets, and straw owners have long been a key concern of both the government and the financial industry. In 2018, FinCEN implemented a significant new requirement for banks known as the “CDD Rule” requiring banks to collect beneficial ownership information upon account opening. The AMLA takes another big step in that direction, now requiring that certain companies report beneficial ownership information directly to FinCEN, which will maintain it in a new central government database.

Once FinCEN enacts relevant regulations under the AMLA, certain specified business entities have two years to provide FinCEN with information on their beneficial owners, and new entities must provide such information upon formation. The Act exempts the following from reporting requirements: financial institutions; entities subject to annual reporting requirements, including SEC-registered persons, accountants, and insurance companies; non-profits; dormant businesses; and active businesses with over 20 employees and US$5 million in annual receipts and a physical presence in the United States. The Act thereby focuses on those business entities most likely to fit the profile of a shell company.

Generally, information in the database will be available only to authorized federal, state, local, and international governmental authorities. But, with consent from a company subject to the reporting requirement, the Act also authorizes financial institutions to query the database to verify beneficial ownership information—a provision that should streamline the due diligence process financial institutions must conduct when providing certain products and services to business entities.

As a complementary measure, the Act grants new authority to the Department of Justice to seize the funds of any foreign “politically exposed person” if he or she knowingly conceals or misrepresents to a financial institution the true ownership of deposited assets. The Act’s new reporting requirements will allow the Department of Justice to compare SAR filings, bank records, and other information with the Beneficial Ownership database to identify assets of foreign politically exposed persons that would be subject to seizure.

New Whistleblower Reward Program

While the BSA has long had a whistleblower award provision allowing for payment of up to US$150,000, the provision was not frequently used. The AMLA takes this basic reward provision and turns it into a full-blown whistleblower protection and award program akin to that managed by the SEC. For context, the SEC received over 6,900 whistleblower tips in 2020 alone, ultimately awarding approximately US$175 million to 39 individuals.

The new whistleblower provision authorizes the Secretary of Treasury to award up to 30 percent of any administrative or civil penalty imposed on a financial institution if the whistleblower provides “original information” leading to the penalty. Because awards previously had to be paid from FinCEN’s allocated budget—and the program had remained unfunded—authorizing awards from collected penalties is likely to increase FinCEN’s reliance on the program, with the potential to dramatically increase enforcement actions going forward. These awards are similarly available for IRS actions related to certain currency transaction and foreign account reporting requirement violations.

As the whistleblower provisions of the Act are effective immediately, financial institutions should review their compliance programs and potentially update them to further mitigate the risk from potential whistleblowers. To minimize the risk of a whistleblower complaint, now encouraged by a potentially lucrative government awards program, financial institutions should adopt an effective process for resolving confidential internal complaints. The resolution of such complaints can be difficult and require delicate coordination among legal, compliance, and human capital departments.

An effective program should include the following features:

• The program is in writing, well designed, with an effective process for investigating complaints and receiving anonymous complaints;
• Sufficient resources, at the staff and management level, are allocated to the program;
• Staff handling both intake and investigation of internal complaints are trained in issues of actual or potential retaliation;
• Procedures for submitting complaints are clearly and regularly communicated to all personnel in writing and through training;
• Procedures engender employee confidence in a confidential and non-retributive claim submission and investigation process;
• Employees are provided incentives for complying with the program and/or disincentives for failing to comply;
• Investigative steps and outcomes are documented and conclusions are supported;
• Substantiated findings are communicated to appropriate corporate management, root analysis is conducted, and necessary changes to operations are implemented and documented; and
• Processes exist for frequently auditing and adjusting the internal complaint and compliance program.

A Supercharged FinCEN

Finally, the AMLA substantially expands FinCEN’s authority, responsibility, and staffing, enhancing its role as the central federal agency for enforcing the BSA in the US and abroad. This development addresses the financial industry’s longstanding frustration that the BSA is applied inconsistently across financial institutions—indeed, there are at least ten different federal agencies or federally delegated self-regulatory organizations with authority to examine financial institutions for compliance with the BSA and assess penalties. The new legislation elevates FinCEN to the lead position, with authority to designate national priorities for anti-money laundering and the combatting of terrorist financing, and direct mandatory training for financial institution examiners employed by other federal agencies that supervise financial institutions.

The Act also gives FinCEN the lead in administering the two new areas described above: the central government database of beneficial ownership information and a considerably expanded whistleblower program.

Also of note, the law grants FinCEN broader authority over existing reporting obligations related to SARs, CTRs, FBARs, CMIRs, and 8300s. Using that authority, FinCEN will now have the power to create new reporting requirements to address money laundering threats without specific statutory authorization. For example, FinCEN could use this new authority to permanently require title insurance companies to report the beneficial ownership of certain purchasers of high-end real estate. Currently, this reporting is required under a temporary, repeatedly re-issued geographic targeting order known as the Real Estate GTO.

FinCEN will additionally oversee the Act’s changes to obligations imposed on financial institutions. While specific details will be included in regulations issued over the next year, some of those changes could offer increased efficiencies and cost savings to regulated institutions:

• Section 6101 of the Act will make explicit changes to the AML program requirement, providing that financial institutions should allocate resources based on areas of highest risk. Relatedly, section 6213 authorizes financial institutions to enter into collaborative arrangements to share compliance resources. The codification of these AML compliance concepts will provide more clarity for financial institutions, as industry moves away from informal guidance from regulators to specific statutory language that they can rely on in defending a balanced application of compliance resources.
• Section 6204 of the Act requires FinCEN to establish processes for automated SAR filings. The movement toward automated SAR filings began last September when OCC approved an automated SAR filing request for structuring SARs, which make up the majority of SAR filings and require significant resources to file. Congress has now codified that transition, likely recognizing that most of the relevant information in structuring SARs—the customer’s information and the structured transactions—can be automatically populated. The new processes FinCEN establishes may provide clarity and protection for institutions that follow its guidelines, potentially improving compliance and saving resources.

Conclusion

The full extent of the Act’s reach will unfold over time. But, it is already clear that the Act will substantially reshape the US regime for combatting money laundering. Banks, other financial institutions, and companies will need to stay on top of these developments—updating their procedures and policies to keep pace with new obligations and regulatory requirements.