Money laundering trends in the US

February 2022  |  SPECIAL REPORT: CORPORATE FRAUD

Financier Worldwide Magazine

February 2022 Issue

Over the past year, US regulators have been particularly active in the development of anti-money laundering (AML) regulations and priorities. Given the flurry of regulatory activity, combatting illicit finance is, and will continue to be, a top priority for the Biden administration. In this article we look at four key developments in US money laundering regulation and discuss the impact on the AML landscape in 2022.

Beneficial ownership registry. In January 2021, Congress passed the Corporate Transparency Act (CTA), which required the Financial Crimes Enforcement Network (FinCEN) to create a registry of beneficial ownership information for companies created in the US or non-US companies registered to do business in the US. Prior to the CTA, the primary way that beneficial ownership information was collected was through the current customer due diligence (CDD) rule, which required financial institutions (FIs) to establish procedures to identify beneficial ownership of their customers. Those records were not kept in a central repository, but the CTA changes this by requiring essentially all private, unregulated businesses to report their beneficial ownership to a central US regulator – FinCEN – and to update that information as warranted.

In December 2021, FinCEN gave the first glimpse into how the registry would be implemented when it issued a proposed rule that will govern what information companies will have to report. The proposed rule is a significant expansion of how beneficial ownership has been reported in the US in the past under the CDD rule and could foreshadow similar changes to the CDD rule in 2022. Instead of reporting a “single individual with significant responsibility to control, manage, or direct” as is required under the CDD rule, a company will have to report all individuals who exercise substantial control over the company, including senior officers of the reporting company, those with authority over the appointment or removal of senior officers, those who direct, determine, decide or exercise substantial influence over important matters affecting the company, or those who exercise “any other form of substantial control over the reporting company”. In addition, the new proposed rule expands the definition of ownership to include non-equity ownership and expands what must be reported about ownership interests held in trust.

For FIs, the CTA and FinCEN’s proposed rule portends two big shifts for AML compliance. First, FinCEN is expected to revise the CDD rule in 2022 and will likely expand the information that FIs must collect from customers to align the CDD rule with the beneficial ownership registry regulations. On the other hand, the CTA also permits FinCEN to disclose beneficial ownership information from the registry to FIs to facilitate the customer due diligence process so long as the reporting company consents. The details of that process will be ironed out through additional regulations from FinCEN in 2022 as well, but ultimately the ability to get customer due diligence information directly from FinCEN will likely streamline the due diligence process.

Increased transparency in US real estate transactions. In recent years, US regulators also placed an increased focus on the vulnerability of the US real estate market to money laundering. Since 2016, FinCEN has issued geographic targeting orders to title insurance companies requiring them to identify the natural persons associated with legal entities used in all-cash purchases in certain high-risk jurisdictions. On 8 December 2021, FinCEN signalled an expansion of those geographic targeting orders when it sought public comment on a potential rule that would impose nationwide record keeping and reporting requirements on certain real estate transactions. As FinCEN explained, the notice seeks input on the approach it should take with respect to both the residential and commercial real estate sectors, with the goal of balancing the need to address the vulnerabilities of the real estate market with any potential costs such measures may impose. In particular, FinCEN seeks comment on the general money laundering risks involved in US real estate transactions, which real estate transactions should be the subject of reporting requirements, which types of persons should be covered by real estate transaction reporting requirements, what information should be included in the reports and what are the potential costs of new reporting requirements. Given that the comment period remains open through at least 8 February 2022, and that FinCEN plans to then use this information to craft new regulations, this regulatory process is closer to the beginning than the end. Nonetheless, it seems likely that the US AML regulators will be paying much closer attention to the risks posed by both residential and commercial real estate transactions.

Focus on regulation of cryptocurrencies. As the use of virtual currencies continues to grow, the AML concerns of US regulators have grown correspondingly. On 23 December 2020, FinCEN proposed new rules under which banks and money services businesses (MSBs) would be required to submit reports, keep records and verify the identity of customers in relation to transactions above certain thresholds involving wallets for convertible virtual currency (CVC) or digital assets with legal tender status (LTDA). The focus of the regulation was on CVC and LTDA wallets not hosted by an FI, also known as ‘unhosted wallets’, or CVC or LTDA wallets hosted by an FI in certain jurisdictions identified by FinCEN. According to the US Treasury, the proposal seeks “to aid law enforcement by increasing transparency in digital currencies and closing loopholes that malign actors may exploit”.

The proposed rule would add reporting requirements for CVC and LTDA transactions exceeding $10,000 in value. Pursuant to the proposed rule, banks and MSBs will have 15 days from the date on which a reportable transaction occurs to file a report with FinCEN. Further, this proposed rule would require banks and MSBs to keep records of a customer’s CVC or LTDA transactions and counterparties, including verifying the identity of their customers, if a counterparty uses an unhosted or otherwise covered wallet and the transaction is greater than $3000. Reportable information includes the name and address of the FI’s customer and the counterparties to the transaction, the amount of digital currency involved in the transaction, and the value of the transaction. The comment period was eventually extended through 29 March 2021. Many of the comments suggested the rules would be burdensome and could push cryptocurrency transactions outside of the US. In June 2021, FinCEN announced that a final rule was expected in the autumn of 2021.

Other important AML developments related to the use of cryptocurrency included FinCEN’s August 2021 assessment of a $100m civil penalty against BitMEX, one of the oldest and largest convertible virtual currency derivatives exchanges, for violations of the Bank Secrecy Act (BSA) and FinCEN’s implementing regulations. The penalty stemmed from failures in its compliance department to monitor and report suspicious cryptocurrency transactions, according to US regualtors. In addition, in October 2021, the DOJ announced the creation of a National Crypto Enforcement Team, which will work with the Money Laundering and Asset Recovery Section and the Computer Crime and Intellectual Property Section to investigate and prosecute misuses of cryptocurrency, in particular misconduct by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors. And both the US Treasury’s Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC) have also previewed increased enforcement against the unlawful use of cryptocurrency in connection with other crimes, using the tax and securities laws respectively.

US strategy on countering corruption. In December 2021, the Biden administration released the first ever US Strategy on Countering Corruption (SCC), which “lays out a comprehensive approach for how the United States will work domestically and internationally, with governmental and non-governmental partners, to prevent, limit, and respond to corruption and related crimes”. The SCC establishes “five mutually reinforcing pillars” of actions to be taken by the US government, including “curbing illicit finance” by addressing “vulnerabilities in the US and international financial systems”. The SCC is a clear announcement by the Biden administration that it will be focused on addressing deficiencies in the US AML regime through increased transparency and enforcement. In addition to the need to obtain beneficial ownership information from US shell companies and new reporting requirements associated with real estate transactions, the SCC contemplates re-evaluating US regulations prescribing minimum standards for AML programmes and suspicious activity reporting for certain investment advisers, and whether to extend those requirements to private placement funds, including hedge funds and private equity firms.

 

Timothy P. O’Toole is a member and Ian Herbert is counsel at Miller & Chevalier. Mr O’Toole can be contacted on +1 (202) 626 5552 or by email: totoole@milchev.com. Mr Herbert can be contacted on +1 (202) 626 1496 or by email: iherbert@milchev.com.

© Financier Worldwide

BY

Timothy P. O’Toole and Ian Herbert

Miller & Chevalier

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