US to reform AML rules

The United States is set to reform its 50-year-old anti-money laundering framework, introducing a new beneficial ownership registration regime for shell companies, after both houses of Congress passed a bill including the measures by a veto-proof margin.

The US Senate passed the reforms on 11 December as part of the National Defense Authorisation Act (NDAA) by 84 votes to 13. The Senate’s passage came three days after the US House of Representatives also passed the legislation by 335 votes to 78.

Although the US$740 billion bill is principally aimed at funding the country’s enormous defence budget, titles LXI to LXV include almost 200 pages of reforms to the Bank Secrecy Act (BSA)’s anti-money laundering (AML) measures.

The reforms introduce new reporting requirements, obliging potential “shell” companies to provide information about their beneficial ownership to the US Financial Crimes Enforcement Network (FinCEN). The requirements would apply to companies with no physical office in the US that have less than US$5 million in annual revenue and fewer than 20 employees.

The beneficial ownership information would not be publicly available, but FinCEN will be able to share it with US federal law enforcement, and obtain court approval to share it with law enforcement at other levels of government. With a company’s consent, FinCEN will also be able to share the information with financial institutions.

The reforms also promise to increase penalties for repeat violations of the BSA and AML rules, allowing penalties to reach either three times the profit to be gained from a violation or twice the otherwise maximum penalty. Individuals determined to have engaged in “egregious” violations would be barred from serving on financial institutions’ boards of directors for 10 years.

The NDAA also expands the BSA’s whistleblower incentive programme to one that more closely resembles the Sarbanes-Oxley regime governing whistleblower protections at the Securities & Exchange Commission (SEC). The new regime allows whistleblowers to receive as much as 30% of monetary penalties exceeding US$1 million, and creates a new private right of action for whistleblowers suffering retaliation.

The legislation includes a prompt to the US Treasury to consider streamlining its AML reporting requirements, requiring the department to formally review its requirements for currency transactions and suspicious activity, and propose revised regulations within a year of the act’s enactment. The department will also be required to re-evaluate its reporting thresholds twice over the next 10 years.

It also places greater emphasis on international enforcement. US embassies abroad will gain attachés from the Treasury, along with Foreign Financial Intelligence Unit liaisons from FinCEN, as part of a broader effort under the act to work with foreign law enforcement authorities.

The reforms to the BSA come just over 50 years after then-President Richard Nixon signed the legislation into law on 26 October 1970. The legislation has seen some expansion since, including in the post-9/11 anti-terrorism measures included in the 2001 Patriot Act, but it has not been substantially revised and recent years have seen intense lobbying to update the act.

The Bank Policy Institute (BPI), an advocacy group, says the framework under the BSA is now “outdated and ill-suited to apprehending criminals and countering illicit financial activity”.

The BPI’s chief executive officer Greg Baer, who testified before the Senate banking committee on the shell company aspects of the law, said global law enforcement will “reap enormous benefits from anti-money laundering policy that stops bad actors using shell companies to shepherd crime across international borders”.

Outgoing US President Donald Trump has threatened to veto the NDAA, for reasons unrelated to the AML provisions. The president has demanded that the bill remove a provision that would rename US military bases bearing the names of rebel generals in the country’s 19th-century civil war, and that it also repeal a statutory libel liability shield enjoyed by social media companies.

But it now appears the veto threat will either not be carried out or will have no effect, as the two-thirds margin by which both houses passed the legislation would be sufficient to override any presidential veto.

Speaking to GBRR, Covington & Burling partner Nikhil Gore says the beneficial ownership registry “helps make sure that banks, which are very much invested in deterring financial crime, have a single trustworthy government source for information on the ownership of potential shell companies. So it’s gained broad support in the industry and bipartisan support in Congress”.

“There are questions over how it’s going to work in practice,” he adds, “including provision of information from state authorities to FinCEN – there will be some operationalising to do there.”

Gore says the reforms will also better calibrate “out of date” BSA requirements “that have in some cases turned more into checkbox compliance exercises rather than steps really able to target the modalities of money-laundering”. But he also says the bill’s new risk-based approach “will require further interpretation and application”.

He also predicts the studies commissioned by the bill, for the streamlining of reporting provisions and adaptations to new technology, will gain attention. “That’s going to set the agenda for the next round of regulation,” he says.


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