Legislators, regulators and enforcement officials are providing a glimpse of what is likely to be a formidable year in the development of a new anti-money laundering (AML) framework. Recent AML activities, summarized last month by Bates Research, included new FINRA compliance guidance for member firms and the launch of the FinCEN “Exchange” program to facilitate greater information sharing between the public and private sectors. Since the first of the year, the U.S. Senate has held hearings on several core AML reforms, the Treasury Secretary alerted financial service firms that AML and know-your-customer (KYC) rules apply to crypto-currencies, and the Comptroller of the Currency and the N.Y. Department of Financial Services (DFS) imposed substantial AML penalties against two large institutions. Here are some details.
Though the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 and the Corporate Transparency Act of 2017, covered by Bates Group here, failed to become law in the 114th Congress, elements of the two bills continue to be the focus of possible legislation. In its first hearingof the year, the Senate Banking Committee discussed potential reform of the current U.S. regulatory framework for combating money laundering and other forms of illicit financing. Committee Chair Mike Crapo (R-Idaho) urged legislators and regulators to address “decades-old” Bank Secrecy Act (BSA) and AML requirements in order “to sharpen the focus, sustainability and enforcement of a modernized, more efficient U.S. counter-threat-finance architecture.”
Testimony by Clearing House Association President Greg Baer, the former Chief of the FBI Financial Crimes Program Dennis Lormel, and Legal Counsel for Global Financial Integrity Heather A. Lowe (see here, here and here respectively) covered a host of pre-existing AML reform topics including raising the mandatory reporting thresholds for currency transactions and suspicious activity, requiring the collection of beneficial ownership information for U.S. companies, and requiring greater information sharing among financial institutions and the government.
The attention now being paid to updating the BSA/AML regulatory regime is gaining momentum and experiencing bipartisan support. At the Senate Banking hearing, lawmakers acknowledged numerous concerns about the efficacy of the current law, the “box checking mentality” of regulators, and the compliance burdens on financial institutions. Legislators expressed support for reforms such as efforts to improve suspicious activity reporting (SARs) and better guidance by law enforcement for financial institutions.
Witnesses urged legislators to embrace a “risk-based approach” that moves away from an emphasis on quantifiable metrics, such as the number of filed SARs, towards a focus on assessing the risk of banking practices that may enable illegal financings. Mr. Lormel advocated greater use of artificial intelligence and machine learning to “revolutionize” AML programs. He testified that less than ten percent of the currently-filed SARs are reviewed by law enforcement and suggested that banks may be better off providing raw transaction data directly to law enforcement for mining.
There was consensus among legislators around the need to collect and store information on the identities of the beneficial owners of U.S. companies, rather than relying on financial institutions’ customer due diligence procedures. (Note: the FinCEN customer due diligence rule will go into effect on May 11th, which will require banks to identify and verify the "real people" behind ownership of at least 25% of a company and the people that control it. See Bates AML/BSA Expert Susan Berger’s alert on the new CDD Rule.) While many of these proposals were contained in bills that never made it to the President’s desk, there is a clear interest across the aisle in updating the AML framework.
The Office of the Comptroller of the Currency (OCC) and the New York Department of Financial Services (DFS) levied steep penalties on financial institutions for BSA and AML violations. Announced on January 4, 2018, the OCC assessed a $70 million civil monetary penalty against Citibank, N.A. in late December for AML compliance shortcomings in connection with corrective actions required by a 2012 Order. And, Western Union agreed to pay a $60 million fine as part of a consent order with DFS in connection with violations of New York BSA/AML laws and AML program deficiencies from 2004-2012.
Speaking before the Economic Club of Washington last week, Treasury Secretary Steven Munchin described a concern that is getting high-level consideration. He warned traders and firms offering services related to cryptocurrencies that AML and KYC rules also apply to them. The issue is front and center for regulators at the Financial Stability Oversight Council, which set up a working group to examine the market. It is also a subject of discussions with foreign regulators. Secretary Mnuchin stated: “one of the things we are working very closely with the G-20 on is making sure that this [bitcoin] doesn't become the Swiss numbered bank account."
Legislators, regulators and government officials are continuing to alter the shape of the AML landscape. As they do, Bates will continue to track these changes and bring you the latest developments.