On January 1, 2021, Congress voted to override then-President Trump’s veto and passed the National Defense Authorization Act of 2021, H.R. 6395 (the “NDAA” or the “Act”). Included within the omnibus bill, primarily intended to authorize appropriations for military and defense activities, were several significant reforms to U.S. anti-money laundering (“AML”) and Bank Secrecy Act (“BSA”) laws.
Division F of the NDAA, known as the Anti-Money Laundering Act of 2020 (“AMLA”) is the most significant reform of U.S. AML laws in 20 years (since the USA PATRIOT Act of 2001). Among other things, the AMLA expands beneficial ownership reporting requirements for smaller companies, enhances AML whistleblower protection and rewards for information concerning BSA/AML violations, and increases penalties for violations.
The Act was supported by law enforcement and financial industry interests alike, seeking reforms designed to reduce regulatory burdens while improving law enforcement access to important financial data. In addition, in 2016, the Financial Action Task Force (“FATF”) found that “[l]ack of timely access to adequate, accurate and current beneficial ownership (BO) information remains one of the fundamental gaps in the U.S. context,” and recommended that the U.S. “[t]ake steps to ensure that adequate, accurate and current BO information of U.S. legal persons is available to competent authorities in a timely manner, by requiring that such information is obtained at the Federal level.” FATF Executive Summary. The AMLA advances all of these important goals and addresses the FATF recommendations by creating a centralized database and increasing information sharing and access to financial data among financial institutions (“FIs”), regulators, law enforcement, and the international bodies involved in the fight against money laundering and terrorist financing.
Below are some of the most significant provisions of the AMLA.
The most significant part of the AMLA is the enactment of the Corporate Transparency Act of 2019 (“CTA”) which requires that covered entities disclose beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”). Despite the 2019 moniker, the bill was passed in 2021 as part of the NDAA.
By way of background, FinCEN regulations have long required FIs to collect beneficial ownership information as part of their customer due diligence requirements. Now the burden will shift to a covered, “reporting company” to affirmatively disclose such information to FinCEN. The CTA defines reporting companies to include any “corporation, limited liability company, or other similar entity” that is “(i) created by the filing of a document with a U.S. state or Indian Tribe or (ii) formed under the law of a foreign country and registered to do business in the United States….” See NDAA Section 6403, adding a new section 5336 to Title 31 of the U.S. Code. The CTA contains a long list of exempt entities, however, including entities that already file reports with other agencies or that are considered lower risk (e.g., publicly traded companies or issuers that already file relevant information with the SEC, larger, private companies that report more than $5 million in yearly revenue to the IRS and have a physical presence in the U.S., banks, credit unions, registered public accounting firms, public utilities, non-profit organizations, etc.). A beneficial owner of an entity is defined as: “an individual who, directly or indirectly … (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” NDAA Section 6403.
Specifically, when covered entities first apply to form a corporation or LLC, they must file beneficial ownership information with FinCEN. Additionally, certain existing corporations and LLCs must file beneficial ownership information with FinCEN within two years of the implementation of the final regulations. FinCEN will use the reports to create a private, central, beneficial ownership registry, which will be used to detect “money launderers and others involved in commercial activity [who] intentionally conduct transactions through corporate structures in order to evade detection,” and to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.” NDAA Section 6402.
The Act also outlines new criminal and civil penalties for reporting violations and unauthorized disclosure of beneficial ownership information. A willful failure to report beneficial ownership information, or the submission of a false or fraudulent report, is subject to a $500 per day civil monetary penalty, a fine up to $10,000, and/or up-to 2 years imprisonment. Unauthorized disclosure of beneficial ownership information (the FinCEN database is non-public but provides access to law enforcement and to FIs if the legal entity consents) is subject to the same civil monetary penalties in addition to fines up to $250,000 and/or five-years imprisonment. Thus, U.S. companies and foreign companies operating in the U.S. should carefully review the CTA to determine whether they are subject to the reporting requirement. In addition, FIs should ensure that their compliance programs sufficiently address the risk of disclosure of beneficial ownership information and how to handle a covered legal entity’s refusal to consent to verify beneficial ownership in FinCEN’s central database.
Expanded Whistleblower Protections and Awards
The AMLA (NDAA Section 6314/CTA Section 206), by amending 31 U.S.C. § 5323, significantly expands the Treasury Department’s whistleblower program. If a covered judicial or administrative action results in a penalty of over $1 million, the Treasury Department “shall pay” an award of up to 30% of collections to whistleblowers who provided “original information” that led to the enforcement action. The old whistleblower program provided for discretionary awards (“may” pay as opposed to “shall” pay). In addition, the old rule authorized a significantly smaller award — up to the lesser amount of 25% of the fine or $150,000. The amount of the award under the new rule remains discretionary but is potentially much larger.
The new law also includes important anti-retaliation protections and provides broad relief for whistleblowers who suffer retaliation. Under the new scheme, whistleblowers may file a complaint with the Department of Labor and then in federal district court. Whistleblowers have a right to a federal jury trial and are afforded a six-year statute of limitations (or three years from discovery). The old rule provided for a more restrictive 2-year statute of limitations and, although it provided for “other appropriate actions to remedy any past discrimination,” it did not expressly provide for litigation costs and attorneys’ fees. See former rule 31 U.S.C. § 5328. By contrast, the new rule (31 U.S.C. § 5323(d) and 5323(g)(3)(C)(iii)) now explicitly provides that whistleblowers may be represented by counsel and “relief” for retaliation includes compensatory damages, including “compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.” This could be a real gamechanger because attorneys are much more likely to pursue claims on behalf of whistleblower clients when there is a chance of recovering their fees and litigation costs from the defendant in addition to mandatory and larger awards.
Companies should review and expand their complaint, triage, and investigation policies and procedures to ensure that whistleblower complaints are reviewed by appropriate members of the legal, compliance, human resources and management teams. As part of this process, companies, and especially FIs, should encourage internal reporting, reinforce the importance of anti-retaliation policies and conduct training on these issues to ensure overall awareness of whistleblower protections.
New and Increased Criminal Penalties
The AMLA creates a new criminal offense for concealment or misrepresentation of a material fact from a FI concerning the ownership or control of assets in transactions over $1 million involving a senior foreign political figure, close family member or other close associate (Section 6313, amending 31 U.S.C. § 5335). A second criminal provision applies to a person who conceals or misrepresents a material fact from a FI concerning the “source of funds” in a transaction that is a primary money laundering concern. Id. The penalty for violating either provision is up to 10 years’ imprisonment and/or $1 million fine. Id.
In addition to these new offenses, the AMLA enhances penalties for various violations that increase potential fines for persons employed at FIs, for example requiring the violator to repay the amount of any bonus paid to the violator (Section 6312, amending 31 U.S.C. § 5322). The new law also bars individuals who commit an “egregious” violation from sitting on the board of a U.S. financial institution for 10 years (Section 6312, amending 31 U.S.C. § 5321). Repeat offenders are now subject to additional civil penalties of up to “3 times the profit gained or loss avoided by such person as a result of the violation,” or “2 times the maximum penalty with respect to the violation.” Section 6309, amending 31 U.S.C. § 5321.
Expanded Law Enforcement Resources and Access to Foreign Information
The AMLA contains a number of provisions to increase resources for government regulators and investigators and to improve coordination among foreign and domestic law enforcement agencies. To assist law enforcement investigations, the AMLA broadens DOJ and Treasury’s subpoena powers to obtain account information at foreign financial institutions and provides for penalties and sanctions for foreign banks that fail to comply (Section 6308). Finally, the AMLA creates a pilot project for FIs to share information related to Suspicious Activity Reports (“SARs”) with foreign branches and affiliates (except in China, Russia and sanctioned countries). Section 6212.
Applying BSA to Nontraditional Value Assets – Cryptocurrency and Antiquities
In light of the rapid development of digital currencies and the need to clarify application of the BSA to cryptocurrencies that facilitate money laundering, the AMLA expands the definition of financial institution and money transmitting businesses involved in an exchange or transfer of “value that substitutes for currency.” Section 6102(d). This new definition ensures that the BSA applies to cryptocurrency. Section 6110, by adding a provision to 31 U.S.C. § 5312, also ensures that the BSA also applies to “dealers in antiquities.” It is common for beneficial owners to establish shell companies to conceal their identity in the antiquities trade. This new rule will tighten the scrutiny of the antiquities market and provide transparency. FinCEN will issue final rules to define the size and geographic location of the antiquity business, identify purchasers, intermediaries, dealers, advisors, consultant, or other persons engaged in the trade of antiquities and require them to file SARs. The Act also provides for “a study of the facilitation of money laundering and the financing of terrorism through the trade in works of art,” at Section 6110(c).
Review of SAR and CTR Filing Process
The unique alliance of financial institutions and law enforcement was best exemplified in their support of a broad re-examination of SARs and Currency Transaction Reporting (“CTR”) requirements. Banks have often complained that the filing requirements are too burdensome and law enforcement at the same time has complained that filings are over-inclusive and often unhelpful.
The current CTR threshold, set in 1970, is a currency transaction of $10,0000 or more. Similarly, the SARs standard for filing is reasonable suspicion. These reporting thresholds have resulted in more than 2 million SARs being filed each year (https://www.fincen.gov/reports/sar-stats). The AMLA (at Sections 6204-06) provides for a thorough review of CTRs and SARs including the reporting standards/thresholds, the electronic submission process, the content of reports, the costs of compliance, conformance to international norms, the effect on law enforcement, intelligence, national security and homeland security agencies, and several other factors, all aimed at streamlining and improving the reporting process and facilitating the sharing of critical information.
With these sweeping changes and focus on AML enforcement, not to mention the huge infusion and disbursement of stimulus funds under the CARES Act and Paycheck Protection Program, including small business loans administered by FIs (with more funds coming soon … likely to be in the trillions of dollars) we expect to see significant investigation and enforcement activity cracking down on money-laundering in the foreseeable future.