The new year rings in the most significant changes in U.S. anti-money laundering (AML) law since the enactment of the USA PATRIOT Act and its implementing regulations in 2001.1 The National Defense Authorization Act (NDAA) for fiscal year 2021, highlighted in the press for Congress’ override of a veto by the President of the United States, included the Anti-Money Laundering Act of 2020 (AML Act). The AML Act will have a substantial impact on financial institutions with AML program requirements as well as certain legal entities such as limited liability companies established within the United States.2
The AML Act is designed to sharpen the tools available to the U.S. government in curbing money laundering, terrorist financing, and other financial crimes. In the coming months, financial institutions and U.S. companies should pay close attention to the implementation of the new AML laws by the Secretary of the Treasury along with the Financial Crimes Enforcement Network (FinCEN).
While there is a host of changes designed to help the U.S. government curb money laundering, terrorist financing, and financial crimes, there are some particularly notable changes to which financial institutions and U.S. companies should pay close attention. Specifically, the AML Act includes
- a federal database of beneficial ownership for certain “reporting companies”
- expansion of the definition of financial institutions and money services businesses to include the exchange or transmission of virtual currencies
- expanded statutory authority for the U.S. law enforcement to seek documents from foreign financial institutions, and heightened penalties for Bank Secrecy Act (BSA) violations
- establishment of an enhanced AML whistleblower law
Federal Database for Collection of Beneficial Ownership Requirements for Reporting Companies
U.S. financial institutions required to maintain AML programs under U.S. laws have long advocated for a better mechanism for the U.S. government to obtain reliable beneficial ownership information for corporations and legal entities in an effort to lessen the burden placed on financial institutions to collect that information. Indeed, FinCEN’s 2016 customer due diligence (CDD) requirements, which clarified the obligations of financial institutions with respect to collecting beneficial information for certain legal entity clients, generally solved little in terms of reducing the burden on financial institutions.3
The AML Act provides a significant change in the allocation of responsibility between state-level Secretary of State offices and the federal government when it comes to collecting beneficial ownership information from companies established in the U.S. Historically, that responsibility was borne entirely at the state level, with very uneven results, and the ultimate burden falling on financial institutions, which were saddled with CDD obligations but no uniform state or federal databases to assist in performing those obligations. Under the AML Act, FinCEN will maintain a nonpublic beneficial ownership database. This database will be the result of new requirements that certain “reporting companies” provide beneficial ownership information to FinCEN. This requirement is separate from state requirements for making filings related to corporations and other legal entities such as limited liability companies. Although the requirement exempts most regulated entities, publicly traded companies, nonprofits, inactive companies, and operating businesses over certain size limits, a typical new state LLC or LLP would be required to file information with FinCEN.4
Although the AML Act provides that FinCEN may disclose a reporting company’s beneficial ownership information when a financial institution is seeking to comply with CDD efforts, it remains unclear how financial institutions with AML program requirements truly will be able to benefit from the FinCEN database. Financial institutions should pay close attention to how FinCEN implements access to the information in the database to financial institutions. Depending on the mechanisms that FinCEN determines can be used to provide such information to financial institutions, financial institutions should prepare to integrate appropriate procedures to align with those mechanisms.
AML Act Supports FinCEN’s Authority to Institute AML Program Requirements for Certain Virtual Asset Activities
While FinCEN and other regulators have issued a number of advisories and/or policy statements asserting their jurisdiction over conduct involving the exchange of virtual assets, such as cryptocurrencies, the AML Act seeks to close the door on the issue of whether BSA requirements apply to certain business activities associated with virtual assets. Specifically, the AML Act now includes in the definition of “financial institution” currency exchanges, money transmitters, and/or money services businesses and entities that exchange or transmit something of value that substitutes for currency or funds. Moreover, the AML Act gives the Secretary of the Treasury the authority to define the value that substitutes for currency or funds as a “monetary instrument” subject to U.S. AML program requirements. The Secretary will likely interpret the breadth of this definition to provide the baseline authority to regulate a host of virtual assets. Indeed, FinCEN will likely rely on this new authority to support its current rulemaking efforts described in our recent Sidley Update FinCEN Proposes Tracking and Reporting Virtual Currency Transactions Involving Unhosted Wallets.5
Expanded Statutory Authority for U.S. Law Enforcement Officials to Seek Documents from Foreign Financial Institutions, and Heightened Penalties for BSA Violations
The AML Act significantly amends the U.S. government’s authority to subpoena records from a foreign financial institution that maintains a correspondent bank account in the United States. Previously, federal law authorized law enforcement officials to subpoena “any foreign bank that maintains a correspondent account in the United States” and to “request records related to such correspondent account, including records maintained outside the United States relating to the deposit of funds into the foreign bank.”6 While courts traditionally have construed the authority to seek records relating to correspondent accounts broadly, the AML Act specifically expands that authority to allow investigators to seek “any records relating to the corresponding account or any account at the foreign bank, including records maintained outside the United States ... ”7 so long as the records are relevant to at least one of several enumerated types of investigations. And while the AML Act does create a mechanism for allowing subpoenaed banks to seek relief from such subpoenas, it expressly notes that “[a]n assertion that compliance with [such] a subpoena ... would conflict with a provision of foreign secrecy or confidentiality law shall not be a sole basis for quashing or modifying the subpoena.”8 This language clearly conveys the Congress’s view that U.S. law enforcement investigations should not be stymied by the demands (and potential conflicts of law) posed by bank secrecy laws and increasingly assertive foreign data privacy and data protection legal regimes, including in Europe and in China. The AML Act authorizes the Attorney General to seek contempt sanctions in the event of noncompliance and can require a correspondent bank to end its customer relationship within 10 days after notice that the foreign bank failed to comply with a subpoena. Separate provisions of the Act also increase potential punishments for certain BSA violations, including (in the case of repeat civil violators) the imposition of significant additional fines9 and (in the case of criminal violations) the imposition of mandatory monetary penalties.10
New AML Whistleblower Program Presents New Opportunities for the Government to Tackle Money Laundering and Financial Crimes
The AML Act creates an AML Whistleblower Program closely mirroring the whistleblower programs established as a result of the Dodd-Frank Act. The AML Whistleblower Program provides potentially large purses for whistleblowers where the resulting monetary sanctions are greater than $1 million recovered by the Treasury (through FinCEN) or the U.S. Department of Justice (DOJ). Similar to the Dodd-Frank whistleblower programs, there is also a number of built-in protections for the whistleblower under the current AML Act. One notable difference, however, relates to the source of the awards. The AML laws provide that the Secretary of Treasury “may, subject to amounts made available in advance by appropriations acts, use monetary sanction amounts recovered based on the original information with respect to which the award is being paid” (emphasis added). As a result, the AML laws provide that the source of award funding will rely on an appropriations process.
While there is significant potential for this whistleblower program to be a key mechanism in the U.S. government’s fight against money laundering, terrorist financing, and financial crimes, it will be interesting to see whether appropriations will be made consistent with the goal of the program. Prior attempts to establish an AML whistleblower program appeared to lack sufficient enticements; thus, this legislation attempts to provide the necessary incentives. However, without sufficient annual funding, potential whistleblowers may not have an incentive to find their way to DOJ or FinCEN.
The AML Act passed as part of the NDAA serves as a significant effort to provide the U.S. government with additional tools to combat money laundering, terrorist financing, and other financial crimes. Some of the changes, including those listed above, could affect financial institution AML programs. In the coming months, we can expect to see a number of key regulations to implement the legislation by the Treasury Department and FinCEN, in coordination with the financial regulators.
What Do Defense Appropriations Have to Do with the Securities Laws? Click here to view a 10-minute discussion with Sidley SecReg lawyers about the SEC enforcement provisions in the NDAA.
1 See 31 U.S.C. §§ 5311, et seq.
2 The AML Act is Division F of the William M. (Mac) Thornberg National Defense Authorization Act for fiscal year 2021.
3 See 81 Fed. Reg. 29398 (May 11, 2016).
4 See AML Act § 6403.
5 The new act also imposes AML requirements on antiquities dealers and requires FinCEN to study expanding these requirements to all art dealers.
6 31 U.S.C. § 5318(k)(3)(A)(i) (2014).
7 AML Act § 6308 (amending 31 U.S.C. § 5318(k)(3)(A)) (emphases added).
9 AML Act § 6309 (amending 31 U.S.C. § 5321).
10 AML Act § 6312 (amending 31 U.S.C. § 5322).
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