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Report Offers Weak Insight on Causation but Lists Steps that Treasury Can and Should Take

The Department of Treasury (“DOT”) recently released its first ever strategy report (the “Strategy”) on the topic of de-risking, taking the form of a 54-page document that combines a summary of the problem of de-risking with an overview of recommended steps to solve it. While the Strategy is the first document of its kind issued by the U.S. government, it is not unexpected – Section 6215 of the Anti-Money Laundering Act of 2020 (“AMLA”) requires the DOT to develop a strategy to mitigate the adverse effects of de-risking after conducting interviews with regulators, non-profit organizations and other public and private stakeholders.

As we’ve discussed over the years, “de-risking” is a practice taken by financial institutions (FIs) to restrict certain categories of customers from accessing their services – typically due to the perception that the compliance risk associated with such customers would outweigh the benefits, financial or otherwise, of servicing them. It is important to note that the concept of de-risking is not about a customer’s individual risk profile; rather, de-risking involves a FI making a wholesale or indiscriminate determination about a category of customers, and failing to use an individualized risk-based approach favored by the anti-money laundering/countering the financing of terrorism (AML/CFT) regulatory framework.  As we have discussed, and as global watchdog groups have noted, de-risking often has a disproportionate impact on developing countries.  The Strategy itself notes that de-risking “prevent[s] low- and middle-income segments of the population, as well as other underserved communities, from efficiently accessing the financial system[.]” Thus, the issue of de-risking is intertwined with concerns regarding economic and ethnic disparities. 

As the Strategy notes, de-risking also can undermine development, humanitarian and disaster relief funds flowing to other countries.  Finally, de-risking can threaten the U.S. financial system because driving funds outside of the regulated financial system makes it harder to detect and deter illicit finance, and increases the risk of sanctions evasion. 

According to the Strategy, the profit motive of FIs is the main driver behind the ongoing problem of de-risking:  because the cost of compliance for risky categories of customers would be too high, FIs cannot justify providing services to them from a profitability perspective.

Arguably, this claim in the Strategy suffers from, at best, a certain lack of self-awareness and, at worst, a degree of hypocrisy, used to deflect a Congressional demand that the DOT address and ameliorate the problem of de-risking. Increasingly onerous BSA/AML regulations, the occasionally haphazard enforcement of those regulations, and the practical disconnect between the expectations of AML examiners and law enforcement agents arguably represent the true source of the compliance-related fears and costs that drive FIs to de-risk.  If banks and other FIs are rejecting certain customers wholesale, it’s often because they fear that they will get “dinged” during a regulatory examination for servicing such customers if perceived problems develop after the application of 20/20 hindsight, and because the compliance hoops can range from the onerous to the practically impossible.  Similar considerations are partially why FIs now file over four million Suspicious Activity Reports (“SARs”) annually, regardless of whether any given SAR is actually helpful to law enforcement: no one has been subjected to an enforcement action for filing too many SARs.…

Continue Reading  Department of Treasury Issues Strategy on De-Risking

Enforcement Trends, Crypto, Regulatory Developments — and More

I am very pleased to co-chair again the Practicing Law Institute’s 2023 Anti-Money Laundering Conference on May 16, 2023, starting at 9 a.m. in New York City (the event also will be virtual). 

I am also really fortunate to be working with co-chair Elizabeth (Liz) Boison…

On March 30, 3023, the Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis focusing on business email compromise (BEC) trends and patterns in the real estate sector (referred to as “RE BEC”). The report is required under Section 6206 of the Anti-Money Laundering Act of 2020 (AMLA). This section of AMLA requires FinCEN…

As we have blogged (here, here, here, here and here), the Anti-Money Laundering Act of 2020 (“the AMLA”) amended the Bank Secrecy Act (“BSA”) to expand whistleblower incentives and strengthen whistleblower protections.  At a high level, the AMLA amended 31 U.S.C. § 5323 to provide that if the government recovers…

With Guest Speaker Matthew Haslinger of M&T Bank

We are extremely pleased to offer a podcast (here) on the legal and logistical issues facing financial institutions as they implement the regulations issued by the Financial Crimes Enforcement Network (FinCEN) pursuant to the Anti-Money Laundering Act of 2020 (AMLA) and the Corporate Transparency Act…

First Post in a Two-Post Series on the CTA Implementing Regulations

On September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued its final rule, Beneficial Ownership Information Reporting Requirements (“Final Rule”), implementing the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”). 

FinCEN’s September 29, 2022 press release is here; the Final Rule is here; and a summary “fact sheet” regarding the rule is here.  The Final Rule largely tracks the December 8, 2021 Notice of Proposed Rulemaking (the “Proposed Rule”), on which we blogged here and here. 

The Final Rule requires many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information (“BOI”) about their beneficial owners — the persons who ultimately own and control the company — to FinCEN.  This information will be housed within the forthcoming Beneficial Ownership Secure System (“BOSS”), a non-public database under development by FinCEN. 

The Final Rule takes effect on January 1, 2024.  In a nutshell, (1) companies subject to the BOI reporting rules (“reporting companies”) created or registered before the effective date will have one year, until January 1, 2025, to file their initial reports of BOI and (2) reporting companies created or registered after the effective date will have 30 days after creation or registration to file their initial reports.  In addition to the initial filing obligation, reporting companies will have to file updates within 30 days of a relevant change in their BOI.  And, as we discuss, covered companies also will have to report their “company applicants,” which could include lawyers, accountants or other third-party professionals.

The Final Rule will have broad effect.  FinCEN estimates that over 32 million initial BOI reports will be filed in the first year of the Final Rule taking effect, and that approximately 5 million initial BOI reports and over 14 million updated reports will be filed in each subsequent year.  We summarize here the key provisions of the Final Rule.  In our next blog post, we will discuss the Final Rule’s broad definition of the “control” prong regarding who represents a “beneficial owner,” which will result in an expansion of the definition of “beneficial owner” under the existing Customer Due Diligence (“CDD”) rule applicable to banks and other financial institutions (“FIs”).…

Continue Reading  FinCEN Issues Final Rule on Beneficial Ownership Reporting Requirements

How effective is the current framework for filing Suspicious Activity Reports, or SARs?  The AML Act mandates that federal law enforcement agencies provide statistics to assist Congress, regulators, and financial institutions answer this question.  Specifically, it requires the Department of Justice (“DOJ”) to annually produce a report to the Secretary of the Treasury containing statistics, metrics and other information on the use of Bank Secrecy Act (“BSA”) reports.  It further requires the Financial Crimes Enforcement Network (“FinCEN”), to the extent possible, to periodically disclose to financial institutions summary information on SARs that proved useful to law enforcement; it also requires FinCEN to review SARs and publish information on threat patterns and trends.

Yet, on August 25, 2022, the United States Government Accountability Office (“GAO”) published a report, Action Needed to Improve DOJ Statistics on Use of Reports on Suspicious Financial Transactions, describing how the DOJ has not fulfilled that statutory mandate.  The GAO’s report sets forth two recommendations: (1) the DOJ should include data on the use of BSA reports in its ongoing agency-wide efforts to improve data collection; and (2) involve its Chief Information Officer and Statistical Official in the design of its annual BSA statistical report. 

Arguably, the most eye-catching observation of the report is that FinCEN itself “cannot currently provide comprehensive feedback on the impact of BSA reports [to the DOJ] because agencies do not provide FinCEN with comprehensive data on their use of those reports or the effect they had.”  Accordingly, and despite ongoing calls for FinCEN to provide meaningful feedback (now, a statutory requirement under the AML Act), FinCEN “cannot connect their data on report searches to the impact of those reports on case outcomes.”…

Continue Reading  GAO Report: DOJ Cannot Provide Meaningful Feedback on SAR Use

Amendment Focuses on Professional “Gatekeepers” – Lawyers, Accountants, Payment Processors, and Those Providing Corporate Formation and Trust Services

On July 13, 2022, the House of Representatives (the “House”) adopted an amendment to the 2023 National Defense Authorization Act (“NDAA”) offered by Maxine Waters (D. CA), inserting into the NDAA a version of the “Establishing New Authorities for Business Laundering and Enabling Risks to Security Act,” otherwise more commonly known as the ENABLERS Act. If ultimately passed into statute, even a scaled-back version of this amendment could significantly alter the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulatory framework in the United States.  Of course, the sweeping AML Act of 2020 was passed because it also was tucked into the massive defense spending authorization bill for that year—so backers of BSA/AML expansion appear to be reverting to tactics which previously bore fruit.

Arguably, this amendment is even more sweeping than the AML Act. As we will discuss, it applies the BSA to persons providing corporate formation, trust, third-party payment, or similar legal or accounting services.  Although much digital ink will be spilled regarding the amendment’s application to lawyers—and we certainly emphasize here that potential sea change in AML regulation—the amendment’s application to third-party payment processors, depending upon how that term ultimately gets defined if the amendment becomes law, also could be a very significant development affecting many businesses and financial technology companies (“fintechs”).  Currently, and depending on the facts, the BSA often does not apply to payment processors, who often fit into an exemption under the BSA’s definition of a “money services business,” or MSBs, subject to AML requirements.  However, the amendment is “scaled back” from the original version of the ENABLERS Act, introduced last year, which had included investment advisors, art and antiquities dealers, and public relations firms.  Finally, the ambitious agenda of the amendment does not appear to acknowledge the current reality of actual government resources: the fact remains that the Financial Crimes Enforcement Network (“FinCEN”), which implements the BSA, has been struggling to implement the huge array of tasks and deadlines already foisted upon it by Congress through the AML Act and the recently-passed Corporate Transparency Act (“CTA”)—and FinCEN has been stating repeatedly that it needs increased funding.…

Continue Reading  Closing the Gate:  House Adopts ENABLERS Act Amendment to 2023 NDAA

On June 3, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued an Advance Notice of Proposed Rulemaking (“ANPRM”) that seeks public comment on the implementation of a “no-action letter” process at FinCEN.  The “no-action letter” is “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.”  These no-action letters “address only prospective activity not yet undertaken by the submitting party.” 

This proposal has been slowly winding its way through the agency rulemaking process.  The Anti-Money Laundering Act of 2020 (“AMLA”) directed FinCEN to assess the feasibility of no-action letters.  In July 2021, FinCEN issued an assessment (the “Assessment”) of a no-action letter process (which we covered here), finding in part that FinCEN should conduct a rulemaking to create such a process.  Now nearly a year later, FinCEN is seeking public comment on myriad questions involving the specific of no-action letters.  Currently, the public comment period closes August 5, 2022. 

As we discuss, the ANPRM grapples with how to make the no-action letter process efficient, by avoiding the potential delays of consulting with its regulator counterparts, and effective, by establishing an advisory process that does not yield inconsistent results between regulators.…

Continue Reading  FinCEN Seeks Public Comments on No-Action Letters

Enforcement Trends, Crypto, the AML Act — and More

We are very pleased to be moderating, once again, the Practising Law Institute’s 2022 Anti-Money Laundering Conference on May 17, 2022, starting at 9 a.m. This year’s conference will be both live and virtual — and it will be as informative, interesting and timely as always. …