October.08.2020
Anti-money laundering authorities are proposing a significant revision to the federal AML regulatory scheme with the aim of making it more effective while providing greater clarity to covered institutions. To that end, on September 16, 2020, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM or “Proposed Rule”) seeking public comment on the proposed changes to the regulations enforcing the Bank Secrecy Act (BSA).[1] According to FinCEN Director Kenneth Blanco, the ANPRM “publicly recognizes a conversation that many [industry leaders] know has been taking place behind the scenes, behind closed doors . . . for years.”[2]
The ANPRM stems from the movement in recent years to reform the BSA to “increase the efficiency and effectiveness of the nation’s AML regime.”[3] Industry leaders have called for changes to AML programs aimed at increased flexibility, more meaningful industry collaboration with law enforcement, and innovation in response to novel financial threats.[4] In response to these industry calls, since 2019, the Anti-Money-Laundering Effectiveness Working Group—a subsection of the Bank Secrecy Act Advisory Group consisting of federal regulators, law enforcement, and financial sector professionals subject to BSA regulations—has been developing recommendations to initiate such BSA reform. The newly issued ANPRM is intended to be a step toward implementation of those recommendations and a chance to address long-awaited reforms, according to Director Blanco.[5]
As described below, the core proposals are: 1) to define an “effective and reasonably designed” AML program; 2) to create an explicit risk-assessment requirement; and 3) for FinCEN to publish a list of FinCEN’s national AML priorities at least every two years. FinCEN seeks public comment on all the proposed reforms, including any impacts on covered financial institutions’ abilities to comply with applicable AML regulations.
Existing regulations contain a variety of similar AML program requirements for different financial institutions, including banks, broker-dealers, and others. The regulations generally require an AML program to be “effective” and “reasonably designed” to identify and thwart illicit financial activity.[6] However, “‘effectiveness’ . . . has no specific, consistent definition in existing regulation.”[7] The Proposed Rule would change that and define an AML program that is “effective and reasonably designed” as one that:
The proposed definition is intended to provide clarity by transforming existing, implicit expectations into explicit requirements and “implement[ing] a common understanding between supervisory agencies and their supervised financial institutions on the necessary AML program elements.”[9] The definition also seeks to add “minimal additional burden” for compliant AML programs while allowing covered financial institutions to allocate AML resources to more effectively address regulatory program requirements.[10]
The proposed changes also include a risk assessment requirement. Currently, there is no explicit regulatory requirement that covered financial institutions have risk-assessment programs. In spite of this, virtually all covered financial institutions currently undertake some form of institutional or customer risk assessment, a critical component of any effective and compliant AML program, without which it is virtually impossible to know how much scrutiny to apply to a transaction or customer.[11] Indeed, existing regulations require that any AML program be “reasonably designed”—meaning the program has assessed the risk profile of the particular institution or customer and tailored the program appropriately—and supervising agencies will typically find AML programs to be deficient if they lack risk assessments.[12]
The proposed regulations would require:
[E]stablishment of a risk-assessment process that includes the identification and analysis of money laundering, terrorist financing, and other illicit financial activity risks faced by the financial institution based on an evaluation of various factors, including its business activities, products, services, customers, and geographic locations in which the financial institution does business or services customers.[13]
FinCEN also seeks comment about whether the director of FinCEN should publish a list of national AML priorities every two years or more frequently, as priorities change (“Strategic Anti-Money Laundering Priorities”). Financial institutions could use the proposed priorities list and incorporate those priorities into their risk assessment processes. The change would allow institutions to “reallocate resources from other lower-priority risks or practices to manage and mitigate higher-priority risks, including any identified as Strategic AML Priorities.”[14]
FinCEN acknowledges that the list would not be exhaustive, and covered financial institutions would still be required to consider other risks that are more tailored to the risk profile of their particular business model and/or customers. However, the list would provide institutions with greater insight into current areas of focus for regulators, allowing covered financial institutions to more effectively allocate resources and identify emerging risks. Having FinCEN identify a list of AML priorities would also inform the covered institutions about what categories of information law enforcement would find most useful—an advantage consistent with the proposed definition of “effective and reasonably designed AML program,” which, as discussed, requires covered financial institutions to provide information with a high degree of usefulness to law enforcement.
This latest reform effort is one of several pushes for AML regulatory reform over the last several years through both legislation and lobbying by industry leaders.[15] Legislative attempts have included the Illicit Cash Act,[16] which, among other reforms, attempted to alleviate some compliance burdens by having startup companies report their beneficial owners; and The Counter Terrorism and Illicit Finance Act,[17] which included attempts to modernize reporting requirements by increasing the dollar threshold amounts that trigger reporting obligations, encouraging innovation in AML programs, and allowing financial institutions to more easily share information with overseas affiliates. However, these efforts have largely yielded few results and a frustrated industry.[18]
Other suggested reforms have included calls for greater clarity about regulatory requirements, increased ability to combat money laundering in innovative ways, more flexibility in AML programs, and additional insight and transparency regarding law enforcement’s AML priorities. Some industry professionals have also noted the extraordinary cost and effort involved in maintaining effective AML programs,[19] while there arguably has not been commensurate progress on achieving the goals of the BSA, namely preventing money laundering.[20]
On September 29, 2020, Director Blanco acknowledged the validity of many of those calls for reform in light of today’s evolving illicit finance landscape, stating that the suggested reforms in the ANPRM are a response to calls for reform articulated by industry leaders [21] For example, the proposed ANPRM responds to industry complaints that, with no existing definition of a compliant AML program, covered institutions are forced to demonstrate to examiners and regulators that they have effective compliance programs by showing a lack of illicit finance activity. This burden can shift an AML program’s focus onto recordkeeping, and creating an audit trail for regulators, rather than on programs and efforts that identify genuine risks and devote compliances resources to areas that are of the greatest strategic AML value. By defining an “effective and reasonably designed” AML program, FinCEN seeks to give covered financial institutions clarity about whether they are meeting regulatory obligations and allow them to tailor their resources to the most critical components of their compliance programs. Similarly, the existing lack of clarity about law enforcement priorities may be improved through publication of a list of FinCEN AML priorities, allowing covered institutions to more efficiently align resources and spending to areas with the most law enforcement benefit.
Director Blanco has also made it clear that this ANPRM is intended to make AML programs more modern, effective, and efficient, while avoiding “impos[ing] additional burden” on the industry.[22] Such a goal seems consistent with the Department of Treasury’s recently published list of top priorities for 2020,[23] which include “increas[ing] economic growth through tax and regulatory reform” and combating illicit finance activity.[24] If the ANPRM turns out to be effective, it could advance the Treasury’s priorities by allowing more efficient use of compliance resources while simultaneously making AML programs more effective at combating money laundering and providing useful information to law enforcement.
In response to the recommendations by the Anti-Money-Laundering Effectiveness Working Group and other calls for reform, FinCEN seeks public comment from relevant stakeholders on the proposed AML regulations described above. The proposed changes have the potential to clarify regulatory ambiguities, make explicit long-understood and regulator-expected compliance practices, and introduce useful new tools into the AML compliance landscape. Interested parties should submit comments on the Federal E-rulemaking Portal or through the mail.[25] Comments are due by November 16, 2020.
[1] Anti-Money Laundering Program Effectiveness, 85 Fed. Reg. 58023 (proposed Sept. 17, 2020) (to be codified at 31 C.F.R. pt.1020), https://www.federalregister.gov/documents/2020/09/17/2020-20527/anti-money-laundering-program-effectiveness.
[2] Kenneth A. Blanco, Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered virtually at the ACAMS AML Conference, FinCEN (Sept. 29, 2020), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-virtually-acams-aml.
[3] Anti-Money Laundering Program Effectiveness, 85 Fed. Reg. at 58025.
[4] See, e.g., A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement, Clearing House (Feb. 2017), https://www.theclearinghouse.org/~/media/TCH/Documents/TCH%20WEEKLY/2017/20170216_TCH_Report_AML_CFT_Framework_Redesign.pdf [hereinafter A New Paradigm]; Kenneth A. Blanco, Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference, FinCEN (Dec. 10, 2019), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-american-bankers.
[5] See Blanco, supra note 2.
[6] Anti-Money Laundering Program Effectiveness, 85 Fed. Reg. at 58026.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] FFIEC, BSA/AML Examination Manual, “BSA/AML Risk Assessment” FFIEC 290 (Mar. 2020), https://bsaaml.ffiec.gov/docs/manual/03_BSAAMLRiskAssessment/01.pdf (stating that during an examination of a bank, examiners should “revie[w] the bank’s BSA/AML risk assessment during the scoping and planning process. This section is designed to provide standards for examiners to assess the adequacy of the bank’s BSA/AML risk assessment process”).
[12] Anti-Money Laundering Program Effectiveness, 85 Fed. Reg. at 58026.
[13] Id.
[14] Id. at 58027.
[15] See, e.g., A New Paradigm, supra note 4; Kenneth A. Blanco, Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference, FinCEN (Dec. 10, 2019), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-american-bankers.
[16] S.2563, 116th Cong. (2019).
[17] H.R. 6068, 115th Cong. (2018).
[18] See Brett Wolf, Reform in U.S. anti-money laundering rules grows more likely, but could take time, Thomson Reuters (May 23, 2019), https://blogs.thomsonreuters.com/answerson/anti-money-laundering-rules-reform/.
[19] See Explore the True Cost of AML Compliance, LexisNexis, https://risk.lexisnexis.com/insights-resources/research/2019-true-cost-of-aml-compliance-study-for-united-states-and-canada (last visited Sept. 30, 2020) (“[AML] compliance costs for the United States and Canadian financial institutions totaled $31.5 billion [in 2019]”).
[20] See, e.g., Noam Scheiber and Emily Flitter, Banks Suspected Illegal Activity, But Processed $2 Trillion Anyway, N.Y. Times, Sept. 21, 2020, at B8 (discussing a recent leak of over 2100 SARs over the past twenty years); Richard Milne and Daniel Winter, Danske: anatomy of a money laundering scandal, Financial Times (Dec. 19, 2018), https://www.ft.com/content/519ad6ae-bcd8-11e8-94b2-17176fbf93f5 (describing an alleged massive global money laundering scandal involving Danske Bank and several U.S. correspondent banks).
[21] See Blanco, supra note 2.
[22] See Id.
[23] See Steve Mnuchin, Top Priorities, U.S. Dep’t Treasury, https://home.treasury.gov/policy-issues/top-priorities (last visited Oct. 1, 2020).
[24] Id.
[25] See Anti-Money Laundering Program Effectiveness, “ADDRESSES,” Fed. Reg. (Sept. 17, 2020), https://www.federalregister.gov/documents/2020/09/17/2020-20527/anti-money-laundering-program-effectiveness (providing instructions for submitting comments).