Fifth Post in an Extended Series on Legislative Changes to BSA/AML Regulatory Regime

As we have blogged, the Anti-Money Laundering Act of 2020 (“AMLA”) makes major changes to the Bank Secrecy Act (“BSA”) and the U.S. approach to money laundering, anti-money laundering (“AML”), counter-terrorism financing (“CTF”) and protecting the U.S. financial system against illicit foreign actors.  For example, the AMLA requires covered businesses to report beneficial ownership information to a central federal database; broadens the stated purpose of the BSA; expands the options and protections for whistleblowers alleging AML violations; and expands the U.S. government’s authority to subpoena information from foreign financial institutions with U.S. correspondent bank account relationships.

In addition to these changes, Congress also has used the AMLA as a tool to gather information on complex issues involving money laundering risks and BSA/AML compliance by requiring many studies and reports.  In this post, we focus on two important issues for which Congress has required reports from the Government Accountability Office (“GAO”):  human trafficking and de-risking.

The willingness to address these problems through the AMLA shows that Congress is aware of the nexus between money laundering and human rights violations—and more importantly, appears ready to leverage the information gathered by the GAO in order to potentially address that nexus through future legislation.  Congress is not alone in its concern.  For example, the United Nations issued a report earlier this month on how transnational financial crime can impair sustainable development across the globe, worsen inequality, and fuel instability.

GAO Report on Human Trafficking – A Look at “Gatekeepers”

The GAO is a non-partisan agency of the legislative branch, headed by the Comptroller General, whose primary function is to provide information to Congress upon its request. Because GAO reports are a neutral way to assess government spending and efficiencies, GAO serves as an important internal auditor for the U.S. government.

The Comptroller General has been tasked with conducting two separate studies into human trafficking, and submitting those findings to committees in both the Senate and House.  These reports are consistent with a growing effort to identify and combat human trafficking by policing the financial system and stopping the illicit flow of funds. In October 2020, the Financial Crimes Enforcement Network issued an updated advisory on human trafficking which reported that human trafficking is one of the most profitable and violent forms of international crime, generating an estimated $150 billion worldwide per year. Likewise, and as we have blogged, the Financial Action Task Force and the Asia/Pacific Group on Money Laundering published in 2018 the Financial Flow from Human Trafficking Report, which observed that human trafficking remains one of the fastest growing and most profitable forms of international crime affecting nearly every country in the world.

The first GAO study is focused on stopping trafficking and exploitation itself. It asks about major trafficking routes used by criminal organizations worldwide, and to what extent the respective trafficking routes for people, drugs, weapons, and cash are interrelated. This study also should shed light on the methods that financial institutions and governments are currently using to identify and report financial activity tied to trafficking. Finally, the report should address whether gatekeepers, such as lawyers, accountants and investment advisors, are actually facilitating trafficking networks.

To answer these questions, the Comptroller General is encouraged to consult with other stakeholders, including law enforcement, other Federal agencies, financial institutions, data and technology companies, academic organizations, and survivor and victim advocacy organizations.

The second study is focused on detection of trafficking networks: How are bad actors staying hidden, what channels do they use to hide illicit funds, and what are the best tools to uncover and expose them. Essentially, Congress wants to know how this “dirty money” is moving, and how deep these trafficking networks go.

Critically, both studies will address the role that emerging technologies—such as distributed ledger technologies, virtual assets, cryptocurrency exchanges and online marketplaces—play in allowing or even enabling trafficking to occur. Specifically, Congress wants more information on:

• how online marketplaces, including the dark web, may be used as platforms to buy, sell, or facilitate the financing of goods or services associated with human trafficking or drug trafficking, specifically, opioids and synthetic opioids, including fentanyl, fentanyl analogues, and any precursor chemical associated with manufacturing fentanyl or fentanyl analogues, destined for, originating from, or within the United States;
• how financial payment methods, including virtual currencies and peer-to-peer mobile payment services, may be utilized by online marketplaces to facilitate the buying, selling, or financing of goods and services associated with human trafficking or drug trafficking destined for, originating from, or within the United States; [and]
• how virtual currencies may be used to facilitate the buying, selling, or financing of goods and services associated with human trafficking or drug trafficking, destined for, originating from, or within the United States, when an online platform is not otherwise involved[.]”

As we have blogged, there is already a strong link between virtual currency and child exploitation. In December 2019, IRS CI and other law enforcement agencies uncovered largest darkweb child pornography website in history. Although visitors who paid with virtual currency presumably believed their identities would remain anonymous, the IRS used digital forensic tracking to locate the server.  Dozens of children were located and rescued in the ensuing investigation, and hundreds of the website’s visitors were charged with serious crimes.

GAO Report on De-Risking

In the AMLA, Congress has shown a heightened degree of sensitivity to the issue of de-risking. As we have blogged, de-risking occurs when financial institutions limit, restrict or close the accounts of clients perceived as high risk for money laundering or terrorist financing abuse.

De-risking is a multifaceted issue with wide implications for the global economy. De-risking frequently impacts smaller and poorer countries with limited financial markets. These countries can be perceived as the most “at-risk” because they have not built up a substantial compliance infrastructure—whether that’s due to government corruption, poverty, or volatility in the region. Not only can de-risking prevent certain countries from taking full advantage of the global markets, but it can have a direct impact on humanitarian efforts: the World Bank has reported that humanitarian organizations have lost access to financial services, which then prevents them from giving humanitarian assistance to refugees from political conflicts or natural disasters.  As we have blogged, the U.S. Treasury Department previously attempted to allay the fears driving the phenomenon of de-risking by (i) suggesting that U.S. banks have overreacted to concerns over AML/BSA enforcement by unnecessarily terminating correspondent banking relationships with foreign banks; (ii) noting that these relationships are crucial to the global economy; and (iii) stating that reflexive de-risking could destabilize or disrupt access to U.S. financing, hinder international trade, cross-border business, charitable activities, and make claim remittances harder to effectuate.

There is an entire provision of the AMLA that addresses these very concerns. This provision lists eleven key components of the de-risking problem, four of which are excerpted below:

“It is the sense of Congress that—

• providing vital humanitarian and development assistance and protecting the integrity of the international financial system are complementary goals;
• without access to timely and predictable banking services, nonprofit organizations, including international development organizations, cannot carry out essential humanitarian activities critical to the survival of those in affected communities;
• the financial exclusion caused by de-risking can ultimately drive money into less transparent, shadow channels through the carrying of cash or use of unlicensed or unregistered money service remitters, thus reducing transparency and traceability, which are critical for financial integrity, and can increase the risk of money falling into the wrong hands; [and]
• anti-money laundering, countering the financing of terrorism, and sanctions policies are needed that do not unduly hinder or delay the efforts of legitimate humanitarian organizations in providing assistance to—

(A)   meet the needs of civilians facing a humanitarian crisis, including enabling governments and humanitarian organizations to provide them with timely access to food, health, and medical care, shelter, and clean drinking water; and

(B)   prevent or alleviate human suffering, in keeping with requirements of International humanitarian law[.]”

Congress has tasked the GAO with conducting an analysis on de-risking and submitting a report to Congress within one year. The analysis should rely on previous de-risking reports conducted by the GAO, while also providing recommendations for combating the issue. Congress wants the GAO to identify real options for financial institutions to toe the line between opening accounts for high risk clients and mitigating money laundering risks.

This report will not be the first time the GAO tackles de-risking.  In April 2020, the GAO emphasized the issue of de-risking by writing to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) to follow up on a series of “high priority” recommendations it had previously issued on topics related to, among other things, de-risking. The GAO’s letters to the Federal Reserve and FDIC are available here and here, respectively.  Further, in June 2018, the GAO issued a statement to Congress regarding the perils of de-risking.

Because de-risking is such a complex problem with no easy solutions, is unclear how much the GAO report will resolve, or what it may lead to. For example, financial institutions already have immense compliance burdens when engaging with correspondent bank account relationships with foreign financial institutions seeking to participate in the U.S. financial system. For U.S. financial institutions, the costs of conducting individual risk assessments on members of “risky” populations sometimes can far outweigh the benefits. Indeed, Congress is sending some mixed messages on de-risking because the AMLA simultaneously cracks down on money laundering risks presented by correspondent banking: as we blogged, the AMLA expands the authority of the DOJ and Treasury to subpoena records of “any account at the foreign bank (emphases added)” which maintains a correspondent bank account in the U.S. In other words, the AMLA encourages heightened BSA/AML scrutiny of correspondent bank accounts by U.S. financial institutions, which further exposes them to the vulnerabilities of servicing such accounts.

Nonetheless, Congress seems serious about attempting to balance the compliance and humanitarian concerns presented by de-risking.  In addition to the requested GAO study, the AMLA also amends the BSA at 31 U.S.C. § 5318(h) by adding the following as a factor that Treasury and the federal functional regulators must consider when prescribing AML compliance standards, and when supervising and examining a financial institution’s AML program: “The extension of financial services to the underbanked and the facilitation of financial transactions, including remittances, coming from the United States and abroad in ways that simultaneously prevent criminal persons from abusing formal or informal financial services networks.”  Congress therefore has made the consideration and protection of the underbanked a statutory mandate.

Conclusion

At first blush, these mandated GAO reports reveal the priorities of Congress and areas subject to reform. However, the topics of the reports already have been researched quite extensively – including by none other than the GAO.  Thus, the question remains whether Congress is actually poised to take action, or it is just posturing and buying time.  Does Congress want to pass substantive measures, or does it merely want to punt to the GAO for additional studies and reports?

Perhaps the current Congress falls somewhere in the middle of this spectrum: it wants to take action, but the sense of urgency is limited given the many severe demands facing Congress.  It is still encouraging to see Congress take concrete steps forward to address humanitarian issues like human trafficking and de-risking in a targeted and practical way. Often, advocacy groups and social justice organizations are the loudest voices for change, but have very limited resources to work on a global scale. That is partly why addressing these cross-border issues in the context of financial crime legislation could be so powerful, because such legislation ideally could muster all of the resources of the U.S. government and financial institutions, hopefully working in conjunction with foreign governments and institutions, to collect data and track down bad actors.