Shot in the arm for AML: Congress passes NDAA

April 2021  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

April 2021 Issue

In a historic move, the US Congress recently passed the National Defense Authorization Act of 2021 (NDAA) by supermajority vote and, with it, brought sweeping changes to existing federal anti-money laundering (AML) laws. Though president Trump vetoed the bill on unrelated grounds, Congress overrode that veto by a substantial majority, thus passing the NDAA into law. The NDAA represents the first major overhaul of US AML laws in many years and includes significantly enhanced tools to regulate, investigate and ultimately punish AML violations.

Coming into force on 1 January 2021, the Anti-Money Laundering Act of 2020 (AMLA) passed both chambers of Congress as part of the NDAA. The Act is the first landmark piece of AML legislation to be enacted since the USA PATRIOT Act in 2001. It also amends the Bank Secrecy Act (BSA) for the first time since 2001.

Turning tide

For many reasons, the US is attractive to money launderers and other financial criminals. In terms of financial transparency, some believe the country has lagged behind other major jurisdictions for years. While the US Foreign Account Tax Compliance Act (FATCA) requires foreign governments to reveal American accounts abroad, the US was under no legal obligation to share information on non-Americans opening accounts in the US. The Boston Consulting Group estimates that there is $800bn of offshore wealth in the country.

However, the tide appears to be turning as the Biden administration accelerates AML efforts. Janet Yellen, the new treasury secretary, has already committed to improving corporate transparency and addressing money laundering. Ms Yellen referred to the use of shell companies as a “very important problem” for the US. “The act that was recently passed by Congress gives us an enormous potent tool to address this problem, we will try to get up and running as quickly as possible and devote ourselves to building that database, so that we can address these issues and we will be certainly looking to give this very high priority,” she said.

Beneficial ownership

Until the Act’s implementation, the US had been one of the only countries left in the world that still permitted the creation of anonymous entities and shell companies, making it appealing to bad actors who would purchase US real estate to launder illicit funds, for example. Company formation has been run at the state level, rather than federal, and proved lucrative. According to the Wall Street Journal, the state of Delaware made around $1.3bn annually from its company formation process. Further, the anonymous shell company industry has accounted for about a quarter of Delaware’s annual budget in recent years.

Perhaps the most powerful element of the Act relates to beneficial ownership. For over a decade the US has been divided on the issue of whether to make disclosure of beneficial ownership mandatory under legislation. Lobbying by businesses, financial institutions, anti-corruption groups, non-governmental organisations (NGOs), law enforcement agencies and others have finally facilitated a change in policy.

Under the AMLA, many US companies — including corporations, limited liability companies and foreign companies registered to do business in the US, subject to certain exceptions — are for the first time required to disclose to the government their beneficial owners. They must submit this information to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), which is responsible for creating and maintaining a database of beneficial owner information. The Act defines beneficial owners to include any individual who exercises ‘substantial control’ over a company or owns or controls not less than 25 percent of the entity’s ownership interests.

Required information for beneficial owners includes their name, date of birth, address and unique identifying numbers, such as a passport or driver’s licence number. Newly formed companies would report such information at the time of incorporation. An individual or entity which provides beneficial ownership information can request a ‘FinCEN identifier’ for use in reports to FinCEN. Reporting companies that subsequently experience a change in beneficial ownership would have to provide FinCEN with updated information within one year. Reporting violations may carry both civil and criminal penalties.

The Act does include exemptions for public companies, as well as other companies that: (i) have more than 20 full-time employees; (ii) report more than $5m in yearly revenue to the Internal Revenue Service (IRS); and (iii) have an operating presence at a physical office within the US. Other excluded entities include banks, credit unions, bank holding companies, savings and loan holding companies, FinCEN-registered money transmitters, SEC-registered broker-dealers, SEC-registered investment companies and investment advisers, and insurance companies. Pooled investment vehicles are also excluded if they are operated or advised by a bank or credit union, an SEC-registered broker-dealer, or an SEC-registered investment company or investment adviser.

Under the new system, beneficial ownership information reported to FinCEN will not be made public, but will be available to law enforcement and, with reporting companies’ consent, to financial institutions.

Cross-jurisdictional collaboration

In addition to beneficial ownership, the NDAA also provides stronger subpoena powers. Under the NDAA, the treasury secretary and the attorney general can issue subpoenas to foreign banks for records maintained abroad, provided the bank holds a correspondent account within the US and the subpoena seeks records that are the subject of an investigation into a violation of US criminal law, an investigation into a violation of the NDAA, or a civil forfeiture action, among others.

The subpoena power bypasses the mutual legal assistance treaty (MLAT) process and should thus expedite the time in which the US government is able to obtain relevant evidence. Though the AMLA allows parties to open proceedings to have the subpoena modified or quashed, it states that foreign secrecy or confidentiality laws and blocking statutes are not valid grounds to raise an objection.

International cooperation

The AMLA also promotes an international approach to AML enforcement efforts. Notably, it formalises the US Treasury’s Financial Attaché Program, which helps foreign governments meet the legislative and regulatory standards set by the Financial Action Task Force (FATF), the international policymaking body established by the G-7 to counter money laundering and terrorist financing.

Going forward, international cooperation will be a priority. As such, the Act will create foreign financial intelligence unit liaisons to establish relationships with their foreign counterparts for the purpose of engagement on AML and counter terrorist financing (CTF) regulatory frameworks. It will also provide around $60m per year between 2020 and 2024 to the Treasury to provide technical assistance to foreign countries with the goal of promoting compliance with international standards and best practices for establishing effective AML and CTF programmes globally.

The Act also contains several provisions designed to improve information sharing and cooperation with foreign AML CFT regulatory and enforcement authorities. For example, it directs the secretary of the treasury to work with a number of international organisations, including the FATF, the International Monetary Fund (IMF), the World Bank, the Egmont Group of Financial Intelligence Units, the Organization for Economic Co-operation and Development (OECD), the Basel Committee on Banking Supervision and the United Nations (UN), to encourage countries to introduce stronger AML frameworks and to enforce existing AML laws.

Elevated FinCEN

FinCEN will also be bolstered by the Act, becoming the central federal agency for enforcing the BSA, both in the US and abroad, with greatly expanded authority, responsibility and staffing.

This is significant for a number of reasons, not least because it seeks to remedy inconsistent application of the BSA, which has been a source of frustration for the financial services industry. Previously there were at least 10 different federal agencies or federally delegated self-regulatory organisations with the authority to examine financial institutions for compliance with the BSA and to assess penalties.

The new legislation also grants FinCEN the authority to designate national priorities for AML and combatting terrorist financing, as well as the ability to direct mandatory training for financial institution examiners employed by other federal agencies that supervise financial institutions.

Violations and penalties

The AMLA provides a long overdue update to the BSA, significantly increasing potential fines and penalties for violations and better correlating them to wrongful compensation or institutional profits.

Any person convicted of violating the BSA may receive an additional fine equal to the profits they gained. A director, officer or employee of a financial institution found to have violated the BSA may be forced to repay bonuses received during the calendar year in which the breach occurred.

Repeat violators will be subject to additional damages in an amount equal to the greater of three times the profits gained, or loss avoided, as a result of each violation, or two times the maximum penalty with respect to a violation. The AMLA also imposes a 10-year ban on serving on boards of financial institutions for individuals convicted of a felony related to money laundering.

In addition, the AMLA imposes up to a 10-year prison sentence and a $1m penalty for any person who conceals, falsifies or misrepresents material facts concerning the ownership or control of assets involved in a monetary transaction if the person owning or controlling the asset is a senior foreign political figure, a family member of such a person, or a close associate of such a person, and the aggregate value of the assets is at least $1m.

Whistleblower reward programme

The Act creates a whistleblower reward programme with new incentives and protections for the reporting of potential BSA and AML violations to the US government. It is generally similar to the Securities and Exchange Commission’s (SEC’s) whistleblower programme established under the Dodd-Frank Act, but with a few key differences.

The AMLA defines a whistleblower as any individual who reports a violation, including those who report violations “as part of their job duties”, which does not exclude compliance officers, auditors or counsel, who often learn of violations during the normal course of business, from benefitting from the whistleblower provisions.

Under the AMLA, any individual, or two or more individuals acting jointly, who provide original information relating to a violation of AML laws to an employer, the secretary of the treasury or the attorney general resulting in a successful enforcement action under the BSA with monetary sanctions over $1m may be eligible for an award of not more than 30 percent of the monetary sanction imposed in the action or related actions. This provision updated the previous AML whistleblower programme, which capped whistleblower awards at $150,000.

Landmark

The introduction of the AMLA is a landmark in the fight against money laundering and financial crime in the US. Though the full magnitude of the Act’s reach may not be clear for some time, the outlook for financial crime in the US has clearly changed.

To be sure, the US AML regime will be reshaped and reinvigorated by the Act. And there is increased pressure on the US to accept its position at the forefront of combatting financial crime. For example, Transparency International recently released a report, ‘Combating Global Corruption: A Bipartisan Plan’, which sets out a 21-point agenda for the new US administration to crack down on money laundering and financial secrecy. Recommendations include increased protections for whistleblowers, clamping down on abuses of ‘golden visa’ programmes, and better monitoring and more international cooperation around cross-border financial transactions.

Given the increased focus on money laundering in the US, it is imperative that companies and financial institutions familiarise themselves with the AMLA and factor its provisions into their compliance programmes. The Act’s new obligations are likely to keep organisations on their toes.

© Financier Worldwide

BY

Richard Summerfield