2020 was a most significant year in anti-corruption enforcement; from Airbus to Goldman Sachs and numerous matters in between. Further there were two significant pieces of information from the US government in the form of the 2020 Update to the Evaluation of Corporate Compliance Programs and FCPA Resource Guide 2nd edition. In the anti-money laundering (AML) arena, we had even bigger news the last week of the year with the passage of the National Defense Authorization Act and as part of that legislation, the enactment the Anti-Money Laundering Act of 2020 (“AMLA”) into law. The AMLA is the most comprehensive set of reforms to the anti-money laundering laws in the United States since the USA PATRIOT Act was passed in 2001, in response to 9/11.
Over this week, I will break down the changes to the Bank Secrecy Act (BSA) and changes in enforcement authority to Financial Crimes Enforcement Network (FinCEN) in the AMLA. For this exploration, I visited with Chip Poncy, Global Co-Head Financial Crimes Risk Management practice and member of K2 Integrity’s Board and Gail Fuller, Managing Director at K2 Integrity.
- Company Formation Reform
We began with the problem the NDAA was trying to correct around company formation. Poncy said, “the issue of company formation reform begins with recognition that bad guys who want to use our financial system. They will more often than not dress up in the form of a legal entity whose ownership is not understood and get access to financial services markets and relationships that they otherwise would not. This is an anonymizing technique for illicit actors of all stripes. It goes to all different types of compliance: anti-corruption, AML, trade sanctions as well as national security issues such as the financial of terrorism and proliferation of WMDs.”
The key reform in the area of company formation is identifying the ultimate beneficial owner (UBO), is straight forward. The beneficial ownership of a company is different than the legal ownership or the nominal ownership of a company. Poncy explained, “what this law does is it requires anyone forming a company in the United States to disclose the beneficial owner or owners of that company or those companies. You can no longer form a company in the United States for purposes of masking the ownership interests behind the company. A person applying for a company has to disclose the beneficial owner or owners and that information current must be kept current.”
Companies need to know with whom they are doing business and who owns them. This means a counter-party will have to disclose their beneficial owners, as defined in the law itself, as a natural person who owns or controls the company. Poncy clarified, “if you are a bank and it onboards a US company, the bank is already required to ask that company about UBOs and to obtain beneficial ownership information from that company. Similarly, if you were to open up a bank account and foreign financial centers based on global standards that have been promulgated and been a part of as a global financial system for several years, banks all over the world will be required and expected to understand and obtain beneficial ownership information from their legal and any customers.” Now in order to, to form a company itself you will have to disclose beneficial ownership information and keep it current.
Poncy cautioned that this introduces a question about the consistency of the relationship between financial institutions that have this obligation and then jurisdictional authorities where these companies are created. He believes, “ideally they should be as similar as possible, but they won’t necessarily be identical because the interests are a little bit different. This where it will be interesting to watch the rulemaking that Department of Treasury will be pushing to implement this requirement.”
2. Changes to Governance
Poncy believes that the changes in the NDAA under the governance mechanisms “clarify expectations and better align all of the efforts of our financial institutions, regulators and law enforcement to spend more time chasing bad guys and combating risk and less time fighting over what good risk management looks like.” It does so in a couple of ways. First, it is through better inner agency coordination, better cooperation and, at the end of the day, better information sharing.
These groups include the regulators who are charged with making sure that our financial institutions follow the laws and regulations associated with AML and combating terror financing. There are law enforcement agencies charged with investigating, prosecuting and confiscating assets associated with financial crime; policymakers who do attempt to bridge these gaps and national intelligence and a security community. This means there are “lots of moving parts to coordinate those efforts on an inter-agency basis; this act begins, in my view, with the right spot of what is the risk, what are the challenges, what are the threats that we’re facing and requiring. From there we turn to reporting from the Department of Justice and the greater law enforcement community, to the Treasury, to see where are our priority threats and risks.” It is an important place to start with a risk-based approach based on “what are the risks that we worry about and why? So that’s a great starting point.”
We then turned to the sharing of compliance resources. It is an area that regulators have opened up through inter-agency guidance to allow five institutions to share compliance resources, in ways that allow for more effective and sustainable resources. The NDAA codifies the sharing of resources in ways that represent another governance model that, “I think is really worth exploring, because it pulls us in the direction of utility models. Under these models financial institutions not only share costs but share risk management responsibilities when there are common customers, common markets, common products and services and common delivery channels.” Poncy believes this is important because it means, “we can free up resources to look at others risks, more effectively and ultimately bringing together different parts of what is a balkanized financial system or transactional relationship into a platform of common interests.”
Poncy concluded that he believes “this is the future, without taking responsibility away from the risk-based approach and in the institutions on the front lines.” To support these efforts through the use of these utility models that can collectivize risk management on the back of shared data, compliance officers and shared compliance resources. All of which can assist institutions to have a better understanding and managing risk on a continuous basis.
Join me tomorrow where I look at the whistleblower provision in the new law.
For additional K2 Integrity Resources on the AMLA check out their Dedicated Online Financial Integrity Network (DOLFIN) by clicking here.
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