Top 10 Financial Institution Considerations for 2016: #2 – Bank Secrecy Act/Anti-Money Laundering and OFAC Compliance

Locke Lord LLP

In our initial article announcing our top 10 considerations for financial institutions in 2016, which can be found here, our second consideration was Bank Secrecy Act/anti-money laundering (BSA/AML) and OFAC compliance in 2016. Compliance with the BSA/AML rules and economic sanctions rules remains atop the mantle of financial institution focus areas. With new rules on customer due diligence, the implications of the Financial Action Task Force review of the U.S. early in the year, the implementation of new rules for investment advisors from the Financial Crimes Enforcement Network (FinCEN), ongoing sanctions compliance requirements, and state anti-money laundering rules, financial institutions will be challenged to keep up with new and emerging compliance requirements under the BSA/AML and OFAC regimes.

Perhaps the biggest elephant in the room facing financial institutions and BSA/AML compliance programs is what FinCEN is going to publish as the final rule on Customer Due Diligence and beneficial ownership requirements. The proposed rule, released in 2014, if finalized would require financial institutions to collect beneficial owner information on the natural persons behind legal entity customers in order to identify and verify such beneficial owners under a new, separate legal requirement. The proposed rules would also add explicit requirements with respect to understanding the nature and purpose of customer relationships and conducting ongoing monitoring as components in each covered financial institution’s core BSA/AML program.   

We hoped that this final rule would be issued before the Financial Action Task Force (FATF) came to the U.S. to evaluate its implementation of the FATF Recommendations, which include recommendations on obtaining beneficial ownership information, but a final rule has yet to be published. See FATF Recommendation 10 on Customer Due Diligence. Since the FATF began its review, the timing for the release of new beneficial ownership rules by FinCEN is less clear, but is still expected in 2016.   

The FATF, an international standard setting body created by the G-7, sets standards and promotes implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and related threats. As part of its activities, the FATF assesses the progress in implementing the FATF Recommendations across the world, which is why the FATF is currently visiting the U.S.   

In another significant development, on August 25, 2015, FinCEN issued a notice of proposed rulemaking that would bring certain investment advisers under the umbrella of FinCEN’s Bank Secrecy Act and anti-money laundering regulations. While registered advisers have long had certain anti-money laundering obligations under some securities regulations, these proposed rules owe their genesis largely to the Dodd-Frank Act’s changes to the Investment Advisers Act of 1940 and previously proposed rulemakings for investment advisers in 2002 and 2003, which were never finalized. The rules proposed the following three changes. First, the rules amend the definition of “financial institution” to include investment advisers, and add a definition of “investment adviser,” which amounts to an SEC-registered investment adviser. Second, the rules require such investment advisers to establish AML programs akin to what is required of banks, broker-dealers, insurance companies and other financial institutions. Finally, such investment advisers would be required to report suspicious activity to FinCEN pursuant to the BSA.

With regard to OFAC compliance, financial institutions need to continue diligently checking new and existing customers against the OFAC Sanctions and Specially Designated Nationals (SDN) lists. These lists are constantly updated with new names, institutions, and perhaps countries. OFAC also requires specific reports after transactions are blocked as well as an annual report on blocked property. Because every transaction that a U.S. financial institution engages in is subject to OFAC regulations, compliance with the OFAC programs remains a critical and constant demand on financial institutions.   

Finally, at the state level, New York recently proposed a new set of anti-terrorism and anti-money laundering rules which would, among other things, include a Sarbanes-Oxley style requirement that a senior financial executive certify that their institution has sufficient systems in place to detect, weed out, and prevent illicit transactions.1 The rules also include the requirement to establish a Transaction Monitoring Program and a Watch List Filtering Program. These rules were proposed on December 1, 2015 with a comment period that ended January 15, 2016. New York financial institutions will likely have some new anti-money laundering requirements to add to the growing list of compliance obligations in BSA/AML and OFAC compliance.   


1 Locke Lord QuickStudy: Newly Proposed Anti-Money Laundering Regulations in New York Signal Increasing Personal Criminal Liability for AML/BSA Compliance Officers (December 11, 2015). See also Locke Lord QuickStudy: Pitfalls for the Unwary: Long Arm Jurisdiction of State Enforcement of Money Transmittal Company Laws (January 22, 2016).

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