Assessment Gives “Thumbs Up” to No-Action Letters but Notes Logistical Challenges
As required by the Anti-Money Laundering Act (“AML Act”), the Financial Crimes Enforcement Network (“FinCEN”) issued on June 30, 2021 its 14-page assessment regarding the feasibility of FinCEN issuing so-called “no-action” letters to financial institutions (the “Assessment”). FinCEN issued this Assessment on the same day that it issued the first government-wide list of national priorities for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”), as we have blogged. In arguable contrast to the AML priorities, FinCEN’s Assessment is full of specific, concrete details and offers interesting insights into how no-action letters may (or may not) work in practice.
Ultimately, the Assessment posits that no-action letters are a desirable step, but that practical challenges remain – including sufficient funding for FinCEN. According to the Assessment, no-action letters will be the subject of future regulations promulgated by FinCEN. Although the details of a no-action letter process will be a debated topic, the Assessment gives reassurance that FinCEN takes the issue seriously and that no-action letters likely will occur in some form.
The Assessment defines a “no-action” letter as “a form of an exercise of enforcement discretion wherein an agency issues a letter indicating its intention not to take enforcement action against the submitting party for the specific conduct presented to the agency.” Further, “such letters [generally] address only prospective activity not yet undertaken by the submitting party.” Not surprisingly, industry has desired “no-action” letters from FinCEN for many years because such they could help provide regulatory clarity, reduce risk, and enhance communication and transparency, in an efficient manner, between FinCEN and industry.
Industry finally may get its wish, although any actual “no action” letter process may be slow and cumbersome. The first paragraph of the Assessment nicely summarizes its findings and caveats:
This Report concludes that FinCEN should undertake a rulemaking in order to establish a no-action letter process to supplement the existing forms of regulatory guidance and relief that may currently be requested from FinCEN. FinCEN believes that a no-action letter process would likely be most effective and workable if it is limited to FinCEN’s exercise of its own enforcement authority, as opposed to also addressing other regulators’ exercise of their distinct enforcement authorities. FinCEN anticipates, however, that for such a process to be effective, FinCEN would likely need to incorporate into its process an opportunity for consultation among FinCEN and other relevant regulators, departments, and agencies, as appropriate.
A footnote placed in the above paragraph also makes a point that is a recurring theme in the Assessment – FinCEN needs a bigger budget and more staff for a no-action letter process to work.
The Assessment explains that FinCEN consulted with numerous regulators, including the Office of the Comptroller of the Currency, the SEC, the CFPB, the IRS, the Attorney General, the Commodity Futures Trading Commission (“CFTC”), and state bank and credit union supervisors. Of the parties that responded to FinCEN’s invitation to consult on the Assessment, only the SEC, CFPB, CFTC and Idaho Department of Finance currently issue no-action letters. Ultimately, most of the consulted agencies agreed that FinCEN should issue no-action letters because such a process would promote a productive dialogue with the public, spur innovation by financial institutions, and enhance the culture of compliance in regards to the application and enforcement of the Bank Secrecy Act (“BSA”).
The agencies opposed to FinCEN no-action letters – and one likely can infer which agencies those were – “expressed concerns about FinCEN’s ability to fully appreciate the facts and circumstances underlying a request for a no-action letter as compared to, for example, Federal functional regulators, due to their supervision and examination responsibilities[.]” Some agencies also raised concerns – perhaps not very realistic – that a no-action letter process could undermine enforcement and criminal prosecution if financial institutions obtain no-action letters through misrepresentations. And, some “expressed concerns that FinCEN will struggle to implement an effective program due to the lack of adequate funding for FinCEN by Congress” – a concern that FinCEN, as noted, echoes throughout the Assessment (FinCEN’s 2021 budget request is here).
Cross-Regulator No-Action Letters
The Assessment first considers the prospect of “cross-regulator no-action letters.” After observing that such a system would have the benefit of enabling applicants to obtain certainty on AML/CFT enforcement from a single agency, rather than from several different agencies, the Assessment concludes that cross-regulator no-action letters are not feasible for the government because
- Even though FinCEN is the administrator of the BSA, it still lacks the authority to administer or enforce all AML/CFT laws that are administered or enforced by other government agencies. FinCEN therefore would not have the ability to prevent another agency from bringing an enforcement action under that agency’s own authority regarding the topic of a FinCEN no-action letter. Indeed, and foreshadowing the practical limits of any future no-action letter process and the comfort that it may bring to the recipient of a letter, the Assessment notes that “[s]everal of the Consulting Parties were opposed to and raised concerns with any process that involved FinCEN issuing statements of no-action on their behalf without their own consideration of the request and express concurrence.” The Assessment frequently notes the fact that different agencies can have overlapping, parallel or distinct authorities when it comes to administering and enforcing the BSA, which can create logistical challenges (and, the reader infers, inter-agency turf squabbles).
- Cross-regulator no-action letters would raise significant logistical challenges, including the need to establish complex processes for coordination and final approval.
- Cross-regulator no-action letters would result in an especially slow process, particularly because regulators which already issue no-action letters “explained that they sometimes find an initial submission to be incomplete or otherwise deficient on its face, potentially requiring multiple rounds of communication with the submitting party in order to obtain additional information and arrive at a submission that can be evaluated.”
Nonetheless, the Assessment goes on to conclude that FinCEN should consult with other regulators, “as needed and appropriate,” when issuing no-action letters with respect to its own enforcement authority. The Assessment notes the competing values of efficiency – a laborious consultation process could be extremely slow and cumbersome – and coordination. As to the latter value, all of the agencies consulted by FinCEN wanted to be consulted or at least notified in some capacity regarding FinCEN no-action letters, which could have practical consequences for the enforcement efforts of other agencies. Some agencies expressed a fear that an applicant “that is engaging in criminal activity may seek to obtain a no-action letter (on misrepresented facts or otherwise) to use as a defense in a criminal investigation or to criminal charges.” Finally, consultation could help industry by reducing the degree of conflicting regulatory requirements.
Timeline for No-Action Letters
As required by the AML Act, the Assessment sets forth an anticipated timeline for responding to no-action letters; the timeline involves seven general steps. Under any scenario, the timeline won’t be short: “the timeline could be as short as 90 to 120 days for cases that do not present novel, complex or sensitive issues,” but other requests could take several months to over a year to process. The Assessment describes factors that might impact timing:
- Whether FinCEN and other agencies disagree on whether FinCEN should issue a no-action letter, the scope of any such letter, or both;
- Whether the applicant fails to provide sufficient facts upon which to make a determination, or the request fails to conform to the rules and regulations that will surround such requests; and
- Whether FinCEN receives more resources to process no-action letter requests. “Absent additional resources, FinCEN would not be able to process no-action letter requests within a reasonable timeframe without redirecting resources away from important enforcement, compliance or other FinCEN mission-related work.”
Current Processes and Potential Improvements
The Assessment explains that FinCEN already provides regulatory guidance or relief in two forms: (i) administrative rulings, which can be either public (and therefore binding on FinCEN) or non-public (and therefore non-precedential), and (ii) exceptive or exemptive relief. The Assessment identifies four potential improvements to these current processes that could be incorporated into the development of a no-action letter process:
- “[A]longside the implementation of a new no-action letter process, FinCEN could publicly and more clearly define the mechanisms available to parties for obtaining regulatory guidance and relief and explain the difference between the no-action letter process and existing processes[,]” including through new regulations and publication of comprehensive guidance.
- “[C]urrent processes for existing relief could include more meaningful and involved consultations with other relevant regulators that would also be incorporated prior to FinCEN’s final determination on a request for a no-action letter.”
- “[F]uture issuance of no-action letters and the other forms of regulatory relief could be expedited, but only with additional resources.”
- “[M]any Consulting Parties noted that a no-action letter process would aid in a dialogue with parties. For example, financial institutions looking to innovate may be reluctant to embrace new business models and engage with FinCEN on these issues if they lack sufficient certainty about how FinCEN would apply the law to novel or unique scenarios. Changes in current processes, to include the implementation of a new, well-resourced no-action letter option, could encourage parties to engage with FinCEN, and thus may improve this dialogue.”
Whether No-Action Letters Would Mitigate or Accentuate “Illicit Finance Risk”
Finally, and as required by the AML Act, the Assessment analyzes whether no-action letters would “help to mitigate or accentuate illicit finance risks in the United States[.]” FinCEN wisely concludes that because a no-action letter process generally spurs dialogue between a regulator and the party it regulations, and because it is faster than issuing administrative rulings and exceptive relief, such a process generally would mitigate illicit finance risks. FinCEN rejected fears from some other agencies that no-action letters (already issued by several other agencies) could accentuate illicit finance risk by creating a defense for violators of the BSA in a criminal or regulatory action, if applicants misrepresent facts to FinCEN or obtain letters based on accurate information but then use the letters as shields against regulatory scrutiny of additional conduct not contemplated initially by FinCEN. The Assessment dryly observes that “FinCEN does not typically see requests for regulatory guidance or relief in which the submitting party seeks permission to violate core requirements of the BSA, such as requests for permission not to file suspicious activity reports (SARs) for a customer or class of customers.” Moreover, any actual criminal investigation will uncover and focus on any misrepresentations by an applicant. FinCEN also notes that risks that the process could be abused can be reduced through procedural safeguards, such as making a no-action letter revocable; requiring the applicant to attest under penalties of perjury that the information in a submission is accurate and complete; clearly documenting the information relied upon for a no-action letter; and predicating any no-action letter upon the precise facts represented by the applicant.