On January 1, 2021, the US Senate voted to override President Donald Trump’s veto of H.R. 6395, the National Defense Authorization Act for Fiscal Year 2021 (NDAA).1 As part of the NDAA, the Anti-Money Laundering Act of 2020 (AML Act) will become law and will amend the Bank Secrecy Act (BSA) for the first time since 2001.
The BSA provides the framework for the prevention and detection of money laundering and the financing of terrorism. The AML Act is intended to modernize the BSA, derail attempts by bad actors to evade detection by using shell companies, address emerging financial threats, improve coordination and information sharing, and encourage technological innovation. To that end, the AML Act mandates creation of an ultimate beneficial ownership register and AML law enforcement priorities, strengthens the government’s ability to seek foreign bank records, updates the BSA’s whistleblower program, and may precipitate other changes affecting how financial institutions comply with the BSA.
Corporate Transparency Act
Congress enacted the Corporate Transparency Act—which is part of the AML Act—to curtail bad actors’ use of shell corporations to avoid detection while committing fraud, funding terrorism, or engaging in other illicit activity. Section 6403 requires corporations, limited liability companies, and similar entities to file reports with and keep current information about their beneficial ownership with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Notably, many financial institutions, including registered issuers, federal and state credit unions, broker dealers, and qualifying larger companies, are exempt from this reporting requirement, which is directed at smaller businesses and shell companies.
The reports must include the full name, date of birth, residential or business address, and information from an identification document or FinCEN identifier number for beneficial owners, which are defined as those who “exercise substantial control over the entity” or who own or control at least 25% ownership interests. FinCEN will maintain this information in a non-public beneficial ownership database and will have the ability to disclose the information to financial institutions, with the reporting company’s consent.
Those who willfully provide false information or fail to report complete or fail to timely update information about beneficial owners may be subject to a civil penalty of up to $500 for each day the violation continues, or a criminal penalty of up to $10,000 and/or two years’ imprisonment.
Foreign bank records
The AML Act provides a new mechanism that will help the US Department of Treasury (Treasury) and the US Department of Justice (DOJ) obtain foreign bank records during criminal investigations and in civil forfeiture actions. Section 6308 permits the Treasury and the DOJ to issue a subpoena to any foreign bank that maintains a correspondent account in the United States. However, this subpoena power is not limited to records related to the correspondent account, which is the limitation that existed previously—rather, the subpoena can request records related to any account at the foreign bank, including records maintained outside of the United States. The AML Act prohibits courts from quashing or modifying the subpoena on the sole ground that compliance would conflict with foreign bank secrecy or confidentiality laws.
Foreign banks may be liable for a civil penalty up to $50,000 for each day that they fail to comply with the subpoena, and there may be additional penalties if the foreign bank fails to comply for more than 60 days. Furthermore, the Treasury and the DOJ may require financial institutions to terminate correspondent relationships with a foreign bank that fails to comply with a subpoena.
Section 6308’s expansion of the subpoena power strengthens the ability of the Treasury and the DOJ to conduct investigations involving foreign banks and to pursue enforcement actions, as they will now have an easier path to the access and use of documents that previously were difficult to obtain.
The AML Act also updates and strengthens the BSA’s whistleblower program. The BSA currently provides for whistleblower awards of the lesser of $150,000 or 25% of the penalties imposed in a related enforcement action. These incentives have been said to be insufficiently attractive to generate the interest of potential whistleblowers. Under the AML Act, the whistleblower program has more teeth: persons who voluntarily provide actionable information regarding BSA violations to the Treasury or DOJ are eligible for up to 30% of collected fines in a related enforcement action imposing more than $1 million in monetary sanctions.
The whistleblower program in the AML Act is modeled after the program implemented by the US Securities and Exchange Commission (SEC) following the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. That program has led to the SEC’s recovery of more than $2 billion in monetary sanctions due to whistleblower tips. The whistleblower program in the AML Act may have a similarly far-reaching impact.
Modernization and evolving threats
One of the AML Act’s stated purposes is to modernize anti-money laundering laws to respond “to new and emerging threats.” In pursuit of that goal, Section 6216 requires the Treasury to conduct a formal review of the BSA regulations to ensure current requirements continue to be appropriate and beneficial and identify regulations that may be outdated or otherwise may not comport with the risk-based anti-money laundering compliance structure. The Treasury must solicit public comment in the course of this review and report its findings to Congress within one year of the AML Act’s enactment.
The AML Act also aims to encourage technological innovation and financial institutions’ use of new technology to combat new threats related to money laundering and the financing of terrorism. Section 6207 creates a Subcommittee on Innovation and Technology tasked with encouraging and supporting technological innovation, which will include representatives from financial institutions subject to the BSA. There also will be Innovation Officers, who will be responsible for outreach to regulators, law enforcement agencies, and financial institutions and for providing technical assistance and guidance related to financial institutions’ implementation of new technologies.
The AML Act expressly recognizes that financial institutions use private funds to establish policies, procedures, and controls that “protect the United States financial systems from illicit finance risks.” The AML Act reiterates that financial institutions should implement reasonably designed risk-based programs that “direct its resources to its higher-risk customers and activities, consistent with the risk profile of a financial institution.”
To assist in this assessment, Section 6101 requires the Treasury, along with the Attorney General, federal and state financial regulators, and national security agencies, to establish formal law enforcement priorities for anti-money laundering and countering the financing of terrorism. The public establishment of these priorities is intended to communicate evolving risks to financial institutions and help them appropriately allocate available compliance resources. The AML Act also formalizes the FinCEN Exchange program, launched in 2017, which may enhance this type of information sharing between government agencies and financial institutions.
In additional to the formalization of the FinCEN Exchange, the AML Act includes other provisions aimed at increasing information sharing. For example, Section 6212 requires the Treasury to issue rules establishing a pilot program that allows financial institutions to share information contained in suspicious activity reports with its foreign branches, subsidiaries, and affiliates to combat money laundering and the financing of terrorism. However, financial institutions still may not share this information with affiliates in China, Russia, states subject to US sanctions, state sponsors of terrorism, and other states designated by the Treasury.
The AML Act also includes other provisions that may affect the investigation and enforcement of potential BSA violations. For instance, the AML Act:
- requires an assessment of whether the Treasury should formalize the no-action process (Section 6305);
- provides harsher penalties for repeat violators (an additional civil penalty not more than the greater of three times the profit gained or loss avoided by the person, or two times the maximum penalty with respect to violations) (Section 6309);
- provides that if a violator is a director, officer, partner, or employee of a US financial institution at the time the violation occurred, then such person must repay any bonus paid out during the calendar year in which the violation occurred or the following calendar year (Section 6312); and
- expands congressional oversight over deferred and non-prosecution agreements related to BSA violations, requiring the Attorney General to submit annual reports on the justification for and factors considered when entering into each deferred and non-prosecution agreement (Section 6311).
Financial institutions should carefully review these and the other provisions in the AML Act to ensure that they are adequately prepared for the changes. The AML Act will affect many aspects of how financial institutions interact with federal and state regulators, enforcement agencies, and other companies, and how they comply with the BSA. For example, financial institutions may need to restructure their policies, procedures, and controls to incorporate checks against the contemplated beneficial ownership database and prepare for a potential rise in enforcement stemming from whistleblower reports.
In addition, an increase in the number of proposed rules related to anti-money laundering is likely, as several sections of the AML Act require or permit public comment. Financial institutions should stay apprised of the proposed rules and may wish to submit comments for consideration.
1. “William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021,” H.R. 6395 available at https://www.govtrack.us/congress/bills/116/hr6395/text.