United States: New Legislation Introduced In 2017 Signals The Beginning Of A Strong Push For AML Reform

There is universal acknowledgement that anti-money laundering ("AML") monitoring has become progressively costlier (both in terms of time and money) since the Bank Secrecy Act ("BSA") was passed nearly five decades ago, and that compliance has become increasingly burdensome, especially for smaller regional and community institutions. According to the Financial Crimes Enforcement Network ("FinCEN"), nearly one million suspicious activity reports ("SAR") were filed in 2016 (up from 669,000 in 2013). According to a 2016 report by the Heritage Foundation, the cost of compliance with current AML rules could be as much as $8 billion a year. Notwithstanding the tremendous resources spent on AML compliance, money laundering is still rampant. The U.N. has estimated that the amount of money laundered every year is between $800 billion and $2 trillion dollars. However, according to a 2011 report issued by the U.N. Office on Drugs and Crime, less than one percent of this amount is seized by law enforcement.

In 2017 there were multiple indications that AML reform may be imminent. Early last year, the Clearing House, a trade association representing the largest U.S. banks, issued a comprehensive set of recommendations for redesigning the U.S. AML and terrorism-financing compliance framework. In its report, the Clearing House argues that the current regulatory regime does not account for – let alone leverage – today's data mining technology, but is instead rooted "in the analog technology of the 1980s." The accompanying recommendations include:

  • Enacting legislation that requires the reporting of beneficial owner information at the time of incorporation;
  • De-prioritizing the investigation and reporting of activity of low law enforcement or national security consequence by raising the SAR dollar thresholds; and
  • Facilitating the flow of raw data from financial institutions to law enforcement (including raw data about the parties to a transaction, transaction history, and information on other counterparties).

2017 also saw the introduction of several draft bills currently under discussion in Congress, including the Counter Terrorism and Illicit Finance Act (the "CTIFA"). Like the Clearing House, CTIFA would require beneficial ownership and control disclosure at the time of incorporation; and would raise currency transaction reporting ("CTR") thresholds from $10,000 to $30,000 and SAR thresholds from $5,000 to $10,000.

In late 2017 and January 2018, the Senate Committees on the Judiciary and on Banking, Housing, and Urban Affairs, respectively, held hearings to discuss the need to modernize the United States AML regulatory paradigm. Many hearing witnesses discussed the viability of the Clearing House recommendations and the CTIFA. Main topics included the collection of beneficial ownership information at the time of incorporation and the need to increase SAR and CTR reporting thresholds.

Heather Lowe, Legal Counsel and Director of Government Affairs for Global Financial Integrity, encouraged Congress to adopt the Clearing House recommendation to collect beneficial ownership information at the time of incorporation. She noted that the European Union recently adopted legislation which requires all 28 EU Member States to create registers of beneficial ownership information and for that information to be made available to the public, including law enforcement and financial institutions. Furthermore, the UK already has such a public registry in place, and countries such as Ghana, the Ukraine, Afghanistan, Kenya, and Nigeria are in the process of establishing similar registers. Ms. Lowe also endorsed the Clearing House recommendation to transfer raw banking data from banks to FinCEN to analyze (but stressed the need for Banks to continue this analysis as well). Notably, Ms. Lowe also identified a security gap in the current AML enforcement regime created by focusing exclusively on financial institutions and excluding other actors that handle large sums of money, such as persons involved in real estate transactions, escrow agents, investment advisors, lawyers, corporate service providers, and accountants.

Kenneth A. Blanco, Deputy Assistant Attorney General of the Department of Justice Criminal Division, similarly noted that the paucity of federal laws requiring identification of beneficial owners creates significant challenges for law enforcement. For example, a common critique of FinCEN's CDD Rule, effective May 2018, which requires financial institutions to verify the personal information of the individuals who own, control, and/or profit from companies when those companies open bank accounts, is that the rule permits financial institutions to rely on the information given to them by the account opener, absent a reasonable determination that the information is not reliable.

While no one proposal has been uniformly adopted, it seems likely that beneficial ownership and CTR and SAR reporting thresholds have just as much a chance as any. There is undoubtedly increasing (even bipartisan) consensus over the necessity for these reforms. During the Banking Committee hearing, Senator Elizabeth Warren (D-MA) voiced support for increased beneficial ownership disclosure and increasing the SAR thresholds, two proposals included in the Republican-sponsored CTIFA. 2018 may well see significant movement by lawmakers to institute reforms that modernize the dated AML framework without overburdening financial institutions.

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