United States: What AML Bill Could Mean For Firms, Funds And FinCEN

Congress may once again use the National Defense Authorization Act, which sets annual spending and policy priorities for the US Department of Defense and is considered a must-pass bill for Congress, as a means to enact significant changes to the Bank Secrecy Act and related anti-money laundering laws-collectively, the BSA.

Congress used the same legislative vehicle at the beginning of 2021 to enact sweeping AML reform, voting to override the president's veto of the NDAA for fiscal year 2021 and enacting the Anti-Money Laundering Act of 2020. ¹

Now, Congress is seeking to enact additional AML reform by expanding the list of financial institutions subject to the BSA, adding a new category of what are referred to as gatekeepers.

As discussed below, this would potentially extend the requirements of the BSA to a host of new industries, including certain law firms, accounting firms, investment funds, and other professional services providers that offer certain services, which Congress believes act as gatekeepers to the US financial system.

Legislative History of the Enablers Act

On June 22, the US House Committee on Armed Services attached the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act, also known as the Enablers Act, to the National Defense Authorization Act for fiscal year 2023 by voice vote. ²

The Enablers Act is a bipartisan bill sponsored by Reps. Tom Malinowski, D-N.J., and Joe Wilson, R-S.C., that was drafted to address perceived weaknesses in the current US AML regime. It was also drafted in part as a response to the Pandora Papers investigation, and to assist the enforcement of Russian sanctions and other anti-money laundering and anti-corruption measures. ³

On July 13, during floor consideration of the bill, the House adopted an amendment to the Enablers Act sponsored by Rep. Maxine Waters, D-Calif., chairwoman of the House Committee on Financial Services. ⁴

The House passed the NDAA with the amended Enablers Act on July 14.

The drafters of the amended Enablers Act make their intent clear by providing six pages of findings describing significant kleptocracy prosecutions and the use of US gatekeepers in various schemes, referencing the "United States Strategy on Countering Corruption," which includes "curbing illicit finance" as a strategic pillar.

Further, they expressly state that the act is intended to provide the US Department of the Treasury with the authorities needed to require "professional service providers who serve as gatekeepers to the US financial system" to adopt AML procedures to detect and prevent laundering of illicit funds into the US.

The exact universe of newly covered entities will be subject to determination by the Financial Crimes Enforcement Network, a bureau of the Treasury Department. But, at minimum, the legislation would generally require that FinCEN include any person involved in, among other things:

• Forming or registering a legal entity or trust;
• Acquiring or disposing of an interest in a legal entity or trust;
• Managing, advising or consulting with respect to money or other assets;
• Sourcing, pooling, organizing or managing of capital in association with the formation, operation or management of, or investment in, a legal entity or trust; and
• Acting as or arranging for another person to act as a trustee or principal of a legal entity or trust.

Compliance Obligations for Newly Covered Financial Institutions

Under the BSA, financial institutions are required to establish and maintain written AML compliance programs commensurate with the risks presented to the financial institution.

Historically, the BSA has imposed AML compliance program obligations on traditional depository institutions, or banks, but over time the rules have been expanded to impose AML compliance program obligations on other types of financial institutions, such as casinos and card clubs, dealers in precious metals, and, most recently, certain state-chartered trust companies.

AML compliance program obligations for covered financial institutions are onerous and require a variety of components, such as internal controls to assure compliance with the BSA and to detect and report suspicious activity; written procedures for conducting ongoing customer due diligence and collecting beneficial ownership information; independent testing; and periodic training for appropriate personnel.

The Enablers Act would provide FinCEN some flexibility to determine what entities fall within the scope of the act and to prescribe tailored AML compliance program requirements to minimize the burden on newly covered financial institutions.

However, recent history suggests that the requirements may still be quite burdensome. In 2020, FinCEN exercised its existing authority to impose AML program requirements on certain state-chartered trust companies that had previously been exempted, such as family trust companies in Nevada, and proceeded to impose the full panoply of AML compliance program requirements.

Accordingly, if the Enablers Act is enacted as part of the NDAA, newly covered entities, such as law firms, trust companies, and private equity and venture capital funds, could be required to develop and maintain bank-like AML compliance programs.

Implications

Enactment of the Enablers Act would add to FinCEN's already busy rulemaking schedule and present challenging issues regarding how to appropriately tailor AML compliance program requirements for newly covered financial institutions.

For example, FinCEN would need to address how lawyers and accountants could meet AML program reporting obligations without jeopardizing their respective ethical duties of confidentiality, as well as other professional conduct duties, to their clients.

The American Bar Association has been active on these issues. The ABA sent letters to the House and Senate in July requesting that Congress remove the Enablers Act from the NDAA because, by requiring lawyers to report privileged and other protected client information to the government, it would jeopardize attorney-client confidentiality and undermine fundamental principles of the rule of law.⁵

We anticipate significant attention and input from newly affected groups that offer covered services, including law firms and accountants, but also other entities that provide covered services, such as investment offices involved in establishing trusts, or funds involved in sourcing and pooling capital. ⁶

In addition, two issues in particular highlight the complexity of the task ahead of FinCEN if Congress passes the Enablers Act with the NDAA.

First, an extraterritoriality provision has been added that could present challenges at the time of enforcement. This provision will require clarification from FinCEN on how it would apply to the covered services provided either by international actors with US clients, or vice versa.

Even with explicit extraterritorial jurisdiction, a number of issues may arise during enforcement-namely, due process challenges and international comity arguments.

Both issues appear more likely to be considered by courts if enforcement is sought against countries where the US has poor diplomatic relations or where corruption is a widespread issue.

It is foreseeable that a number of the issues attendant with the USA Patriot Act, and USA Patriot Act subpoenas, could arise if the Enablers Act passes and is subsequently challenged when enforced.

Second, the rule of construction in the bill provides that privilege, ethics, confidentiality, privacy or related matters should not limit or impede the covered parties' obligations to comply with the Enablers Act.

As discussed above, FinCEN would need to address how lawyers and certified public accountants could address AML program reporting obligations without jeopardizing their respective ethical duties of confidentiality and other professional conduct responsibilities to their clients.

And with the extraterritoriality provision, a conflict could arise for foreign professionals who are subject to their own country's professional responsibility requirements.

The implication of this provision is that compliance with federal obligations should prevail over other territorial, state and local laws when a conflict arises between a lawyer or accountant's obligations.

Legislative Outlook

It is not known at this time whether these new AML requirements will ultimately be presented to the president for enactment.

As discussed, the bill passed by the House on July 14 includes the Enablers Act, which represents the House negotiating position when the House and Senate seek to reconcile-in legislative terms, "conference"-the bodies' respective views.

On July 18, Senate Committee on Armed Services Chairman Jack Reed, D-R.I., and Ranking Member Jim Inhofe, R-Okla., introduced the Senate version of the NDAA as approved by the committee in June and, as expected, it does not include the Enablers Act.

As soon as this month, the Senate may take up its version of the NDAA on the Senate floor, which means that it is subject to amendment by any member of that body.

If, for example, the Enablers Act were added during the Senate floor debate, it would almost certainly be part of a final compromise bill that is presented to the president. If, however, Senate consideration is silent on the Enablers Act, it will be one of a number of items to be addressed in conference.

Even absent advocacy during Senate consideration and conference, there are important reasons to believe that the Enablers Act might not be dropped in conference and instead survive to enactment.

First, the Enablers Act, as part of the NDAA is the House position as adopted in committee, not a floor amendment accepted during debate that could be quietly dropped in conference.

Second, the House Committee on Financial Services signed off on using the NDAA to make important changes to laws within its jurisdiction.

Finally, just two years ago, the House and Senate agreed to use the NDAA as a vehicle to carry significant changes to the BSA.

For these reasons, it is likely that the Enablers Act will be included in the final version of this must-pass bill. The Senate floor process and NDAA conference negotiations this fall are the last opportunities to amend the legislation before final passage. ⁷

* This article was published in Law360 on September 14, 2022

Footnotes

1. For additional information on BSA/AML reform, including FinCEN's efforts under the AML Act, please visit the Arnold & Porter's BSA/AML Reform Resource Center.

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