Four takeaways on BSA/AML reform under the Anti-Money Laundering Act of 2020
A little over six months since the passage of the Anti-Money Laundering Act of 2020 (AMLA 2020), part of the massive National Defense Authorization Act (NDAA), the full implications of the legislation are still emerging. What is clear is that the act broadens the scope of enforcement and reporting requirements. As the most significant overhaul of the nation’s bank secrecy and anti-money laundering regime since the USA PATRIOT Act of 2001, the AMLA 2020 represents a significant evolution in financial crimes legislation.
Among its key provisions, the act:
- Establishes a beneficial ownership database
- Expands BSA/AML into the trade of antiquities and art
- Broadens law enforcement subpoena powers
- Emphasizes the use of new technologies
The goal of BSA/AML reform in the 2021 NDAA
The key goal of BSA reform under the AMLA 2020 is to allow for more effective efforts in combating financial crimes. Under the BSA, financial entities have an obligation to provide government authorities with useful, actionable information. Suspicious activity reports (SAR) have been a focus of the original law.
The AMLA 2020 sharpens the emphasis on identifying and managing risk versus chiefly just reporting on suspicious activity, notes Chip Poncy of K2 Integrity in a Thomson Reuters webinar on the new law. The act also codifies many practices relating to information sharing across the Financial Crimes Enforcement Network (FinCEN), financial institutions and FinCEN Exchange, the voluntary public-private partnership among law enforcement, financial institutions, and FinCEN.
FinCEN rulemaking will shape BSA/AML regulatory reform
The AMLA 2020 authorizes processes that will require numerous rulemakings from the FinCEN. Financial institutions can expect issuances and draft regulations on the government’s financial crime priorities to arrive this summer, with the industry’s opportunity to comment and have input on how aspects of the act will be implemented to closely follow.
Consistent with previous regulatory efforts, much of the focus of the AMLA 2020 is on facilitating information sharing between the public and private sectors in order to strengthen the AML system and better protect the financial system from abuse. The AMLA also expands FinCEN’s role, giving it the task of creating and managing a new corporate ownership registry. This spring, the Biden Administration proposed a 50% boost in the network’s budget to support this work
Beneficial ownership reporting
The establishment of a new beneficial ownership database represents the most critical component of BSA reform. As part of the effort to unveil shell companies, many companies will be required to report ownership information to FinCEN for recording in the database.
With a beneficial ownership registry in place, enforcement agencies will be able to access the information with a court order. Financial institutions, with the permission of their corporate customers, will also be able to access this data from FinCEN, giving banks potential access to independent documentation for corroborating ultimate ownership information. Publicly traded organizations, nonprofits, and business with a U.S. office location or more than 20 employees are exempt from the reporting requirement.
Commentators have noted the new law raises questions about how FinCEN will govern law enforcement access to the registry and what expectations will be established relating to its access.
FinCEN seeks input on beneficial ownership registry
Before the AMLA 2020 was signed into law, financial institutions were required to identify and verify the identities of the beneficial owners of corporate and legal entities that opened financial accounts in the United States or abroad under global standards. In some cases, customers may not have known what a beneficial owner is or why this information was required, leaving financial institutions to educate them.
Under the AMLA 2020, that awareness can start at the company’s inception, when corporations, limited liability companies, and other legal entities will be required to provide FinCEN with beneficial ownership information as part of the company formation process.
This change to mutual beneficial ownership reporting could provide opportunities for efficiencies or, on the other hand, more complications for financial institutions, Poncy says. The new guideline could alleviate or exacerbate the reporting burden on financial institutions, depending on how FinCEN implements rulemaking relating to the extraction of beneficial ownership information.
If banks are to use a similar form or even the same form FinCEN requires of companies, companies will be reporting the same information to both the government and their financial institutions. However, Poncy says if the form financial institutions use is fundamentally different, financial institutions could find that they need to take additional steps to verify that the information they collect is consistent with the information FinCEN received.
BSA/AML reform set to change the antiquities trade and art market
The reformed BSA covers antiquities and art dealers, including the antiquities trade and art market. This sector now shares responsibility in anti-money laundering compliance. Government agencies have placed a high value on the SAR financial institutions file relating to antiquities and art dealers, and now financial institutions will have a partner in assessing and managing money laundering risks in these markets.
At the same time, the new law raises policy questions about who is ultimately responsible for vetting antiquities and art dealers for compliance with AML programs, Poncy says. This sector currently lacks a functional federal regulator. In the past, banks have become de facto regulators of this industry, Poncy says, potentially creating added responsibilities for banks when onboarding these customers.
New rulemaking will need to address these issues. “It's going to be important as this rule moves forward to clarify what the expectations are for (those) banking these dealers and then ensuring that they have de facto correspondent-like controls without making the banks the regulators,” Poncy says.
BSA/AML reform expands subpoena powers
The AMLA 2020 also establishes a broader set of authorities to keep up with the challenge of combating financial crime in an increasingly globalized economy. Under the new law, law enforcement agencies have the power to subpoena international financial institutions that hold correspondent accounts in the U.S.
Section 319(b) of the earlier PATRIOT Act covered powers to subpoena foreign banks with correspondent U.S. accounts for information on transactions processed through these accounts. Law enforcement, in conjunction with other national agencies, used this authority to aggressively combat various forms of financial crime.
However, these actions gave rise to litigation over the scope of that authority and whether it was restricted to information on transactions linked to these correspondent accounts in the U.S. or whether subpoenas could target more broadly. The AMLA 2020 answers that question by empowering enforcement agencies to subpoena information from foreign banks with correspondent accounts in the U.S., whether or not the information sought relates to a correspondent account.
Whether an expansion or clarification of existing law, the extended subpoena power falls in line with U.S. policy positions maintaining that, to combat a more complex set of threats in an increasingly multifaceted global environment, law enforcement needs extended powers.
Automation technology will drive the future of BSA/AML compliance
In addition to formalizing information sharing between government and financial institutions, the reformed BSA/AML places a renewed emphasis on the use of data and new technologies in identifying financial crimes and in clarifying fraud-detection priorities. It also calls for training regulators in what to look for in AML programs monitoring for threats.
Changing regulatory expectations may have discouraged some financial institutions and government agencies from investing in emerging technologies, says Poncy, noting that such system upgrades are costly and should answer ongoing compliance needs. Nevertheless, new technologies will figure in evolving compliance programs. "I do think making tech a centerpiece of the modernization and the reform discussion and rulemaking is essential," he says.
The focus on information technologies may reflect current developments. Brett Wolf, senior financial crime correspondent for Thomson Reuters Regulatory Intelligence and speaker at the webinar, has found in his reporting a growing acceptance of the solutions: “Financial institutions, as a result of COVID and the inability to see customers face to face, have adopted new technology, AI machine learning, for onboarding and for other purposes.”
Technology solutions that can aggregate and synthesize information, weed out false positives, and allow investigators to see patterns and collaborate will play an important role in financial institutions’ AML efforts. Already, tech has allowed law enforcement to identify bad actors around the world. Moving forward, innovation in compliance systems and the introduction of new applications will require industry stakeholders to consider the long game.