By Robert RoweNew year, new anti-money laundering regime.
On Jan. 1, Congress passed the National Defense Authorization Act. Included in the law were several anti-money laundering provisions collectively known as the Anti-Money Laundering Act of 2020, or AMLA—the first significant changes to the Bank Secrecy Act since the USA Patriot Act was adopted nearly 20 years ago.
What’s remarkable is that while bipartisanship was often lacking in the last Congress, the AML reform provisions were advanced and ultimately adopted through true bipartisan efforts. Overall, the goal for the changes are to promote information sharing and coordination, modernize the system, encourage technological innovation, reinforce the risk-based approach and establish uniform beneficial ownership requirements. Importantly, many of the changes reflect longstanding ABA priorities and efforts.
A new federal registry
A core part of the revisions is the creation of a federal beneficial ownership registry to be managed by the Financial Crimes Enforcement Network. Efforts to establish a federal beneficial ownership registry go back many years, and a number of bills have been introduced in Congress over the years to create such a registry. The current efforts grew out of the Corporate Transparency Act introduced by Rep. Carolyn Maloney (D-N.Y.) and reflect many years of deliberations about what such a registry should be and how it should operate.
ABA has often pointed out that one of the challenges bankers face when collecting beneficial ownership information is that they have no way to verify the status of a beneficial owner, a point that we persuaded FinCEN to incorporate into the regulatory requirements. While ABA had hoped that the statute would let banks rely solely on the registry, Congress made clear that banks must still collect the information from our customers. However, once customers are familiar with the registry process, it should simplify the collection of beneficial ownership information. And banks will now have a way to verify the information, which is something customers will know, so it should help reduce potential disparities. ABA has encouraged Treasury to reach out to the public to ensure businesses are aware of this new requirement since this will be a major change for businesses. Fortunately, ABA was able to convince Congress that once a company is registered, they only need to file when there are changes, not every year. And, contrary to some myths that arose during the legislative process, companies will only be penalized for willful and deliberate failure to register.
For the time being, banks should continue to follow their existing procedures for collecting beneficial ownership information. Before anything changes, FinCEN will have to create the registry. The agency also must update its current regulation, a step ABA strongly advocated. In updating the rule, FinCEN is required to eliminate any duplicate or unnecessary steps and ABA has already started to discuss the changes with FinCEN.
One of the other major changes in the legislation is one that ABA has long advocated: greater information sharing and feedback from law enforcement. In fact, better feedback from law enforcement was a key element in recommendations from a blue-ribbon panel convened by ABA on BSA reform in 2008. There are several elements in the new law to promote information sharing and feedback from law enforcement.
One of the first steps to promote information sharing will be the creation of a set of law enforcement priorities designed to help bankers allocate resources to the highest risks. The goal with the priorities is to get away from the current scattershot approach to identifying suspicious activity and instead focus on areas where law enforcement has particular concerns, such as human trafficking, elder financial exploitation, or pandemic-related fraud. Another provision will require FinCEN to share threat pattern information with banks to help banks identify the types of red flags that indicates illicit activity. ABA has already been actively engaged in this process and will continue to work closely with FinCEN as it proceeds.
Another step that ABA supports is a program announced at our Financial Crimes Enforcement Conference several years ago: FinCEN Exchange. AMLA now codifies this program. The bankers who have participated in FinCEN Exchange have been enthusiastic about the program, although participation has been limited by FinCEN resources and ABA has been encouraging FinCEN to find ways to expand the program. Now there is a congressional mandate to do so. FinCEN Exchange brings together law enforcement officials, bankers, and FinCEN representatives in a local community to discuss illicit activities law enforcement has seen locally. The conversations are strictly confidential but help bridge the communication gap between law enforcement and the financial sector.
Another step to promote information sharing is also one ABA has long supported. Under AMLA, FinCEN must create a special pilot program to allow large banks with overseas subsidiaries to share
Suspicious Activity Report information within a financial group. Hopefully, this will streamline the process and give banks that operate internationally greater latitude when managing enterprise-wide risk.
The statute also requires the U.S. attorney general to analyze how law enforcement is using the data, something ABA has long recommended. Among the assessment factors that must be taken into account are how often BSA data was used to further law enforcement actions, how much time elapsed between when data was reported and when it was used, and the usefulness of the data to law enforcement. The information will be included in an annual report to Congress and FinCEN is required to use this information to consider whether to revise BSA reporting requirements.
Currency Transaction Reports and Suspicious Activity Reports
CTRs and SARs are the key mechanism for banks to report to FinCEN and, in turn, law enforcement. Although FinCEN has been evaluating the SAR process for some time, working with bankers, law enforcement, and banking regulators, the statute requires the agency to conduct a thorough analysis of SAR requirements to identify ways to streamline the system. For example, one of the steps being considered is whether a short-form SAR might be appropriate to report certain activities where time is of the essence.
Another provision in the AMLA requires FinCEN to undertake a thorough review of both SARs and CTRs, such as whether the use of exemptions can be expanded to eliminate unnecessary CTR filings. While ABA was unsuccessful in getting Congress to increase the thresholds for filing SARs and CTRs, FinCEN is required to conduct a careful and thorough analysis of the current thresholds and report to Congress on whether they should be adjusted. ABA will play an active role in these discussions.
FinCEN will also be required to solicit feedback from bank BSA officers on SAR filings and provide information to each financial institution one-on-one about the SAR data submitted by the bank, including information from the attorney general’s report on the use of BSA data. The goal is to give each bank more precise information about the SARs that have been filed and how that data is being used.
Innovation and technology
New technologies have been changing how banks conduct business and interact with their customers. Along with that, FinCEN has been working on steps to encourage the use of technologies to improve the effectiveness of efficiency of the AML regime. Congress has now given FinCEN a specific mandate to take a series of steps to encourage adoption and adaptation of new technologies to combat money laundering and terrorist financing. First, FinCEN must create a new subcommittee within the Bank Secrecy Act Advisory Group to focus on innovation and technology; FinCEN has already started the work to create the subcommittee and ABA is actively engaged in its development. Second, FinCEN and the federal functional regulators will be required to appoint “BSA innovation officers” to focus on new steps to improve the BSA process. Third, FinCEN is required to develop a rule on the use of new technologies to help guide banks as they consider adopting new systems, with special emphasis on the risk-based approach and the privacy of bank customers. And, FinCEN is required to create a Financial Crimes Technology Symposium to examine and consider how different technologies to combat financial crimes; the first steps to create the first symposium are already underway.
Other steps to improve the system
One step added by Congress that reflects a recommendation ABA has long advocated is to formalize a requirement that BSA examiners undergo annual training. More important, Treasury, which has the rulemaking authority for BSA regulations, would determine the training. The goal is to ensure examiners are annually trained on risk profiles, financial crime patterns and trends, the importance of AML compliance to provide information for law enforcement and derisking. This an important shift ABA supports that emphasizes detection and reporting of illicit financial activity and not technical compliance.
Several years ago, the banking agencies and FinCEN issued a statement encouraging banks, especially community banks, to share resources or employees to comply with BSA requirements. The challenge for banks has always been determining what was permissible and what was not, particularly with concerns about data confidentiality, proprietary information, and privacy. Congress, though, has now mandated FinCEN and the agencies to conduct outreach to help bankers understand steps they can take to share resources in the interests of efficiency without running afoul of other compliance requirements.
A number of other steps focus on the Department of Justice. Justice must track and report to Congress on the use of deferred and non-prosecution agreements as well as steps to provide Justice with access to information held by foreign financial institutions. AMLA also includes provisions to encourage whistleblowers and provides for claw-backs of bonuses from those who violate the BSA.
AMLA also mandates several studies that will give us insight on what else might be on the horizon for AML reform in the coming months and years. One raises concerns about derisking and banks excluding certain categories of customers, with an emphasis on considering steps to promote financial inclusion. Another focuses on the use of beneficial ownership data and whether it should be expanded to cover additional legal entities such as trusts. In addition to the Treasury study of CTR thresholds, the Government Accountability Office must also study CTR thresholds and the effectiveness of the data for supporting law enforcement efforts to combat illicit finance, money laundering, and terrorist financing. Other studies will examine human trafficking, trade-based money laundering, and efforts of authoritarian regimes to abuse the U.S. financial system.
Finally, bankers are familiar with the congressional mandate that requires the banking regulators to review their rules every ten year to eliminate any unnecessary or outdated requirements. Under AMLA, Treasury is required to review all BSA regulations within one year, a step that ABA encouraged. The intent is to ensure that the regulations protect the financial system, focus on useful information and identify outdated and redundant rules or those that do not promote the risk-based approach to BSA compliance.
As the implementation of these provisions moves forward in the coming months and years, ABA will work closely with our members to provide thoughtful and critical input to FinCEN on these changes.
Rob Rowe is VP and senior counsel for regulatory compliance and policy at ABA, where he works on anti-money laundering and Bank Secrecy Act issues.