Alexander Dill, an expert in financial markets and regulation, joins us today for an interesting posting on the recent AML Act of 2020. Alex can be reached at [email protected].

It would be the height of folly to claim that a single theme dominates the AML Act of 2020 (Act). The new law, enacted on January 1 of this year, is an extraordinarily wide-ranging and long overdue reform of the Bank Secrecy Act. It is a rare piece of bipartisan legislation advocated by a diverse group of stakeholders and informed commentators. It includes, among many other things, provisions for a centralized beneficial ownership database, compliance obligations for antiquities dealers, enhanced subpoena powers, bonus clawbacks, recidivist liability, and “chief innovation officers” tasked with advising regulators and firms on cutting edge RegTech compliance solutions. Nevertheless, one theme warrants attention because of its implications for AML/CFT compliance – the concept of “national AML priorities.”

The concept is poised to transform the BSA’s law enforcement objective of providing the government with actionable criminal investigative leads into a dynamically adaptive platform for detecting and preventing emerging national security threats and vulnerabilities. In so doing, it goes well beyond Section 5311’s previously limited stated purpose of requiring firms to create reports and records with “a high degree of usefulness” in criminal, tax, regulatory, and intelligence and counterintelligence activities.

Over the past few years, the Treasury Department has aggressively promoted and refined the longstanding concept of strategic national interests for BSA purposes in several pronouncements, particularly its 2020 National Strategy for Combatting Terrorist and Other Illicit Financing and its national money laundering and terrorist financing risk assessments of 2018 and 2020. Most significantly, in September 2020 FinCEN issued a concept release (an advance notice of proposed rulemaking) that dovetails with – and augments – in several significant ways the Act’s provisions on national priorities. Together, the concept release and the Act spell out the contours of a new AML/CFT compliance function that will take shape over the coming decade.

This dramatic policy initiative by Treasury and Congress occurs against a backdrop of what many commentators believe has been a generally ineffectual strategy in combatting the infiltration of illicit funds into the U.S. financial system. To achieve its law enforcement objective, Congress has imposed increasingly costly customer due diligence obligations on financial institutions, backed by criminal liability relating to BSA requirements, and complex, risk-based programmatic requirements. The BSA in effect obligates the private sector (“deputizes” it, as some have pointedly asserted) to carry out the first leg of a criminal investigation.

Moreover, the regime often conflicts directly and tangibly with firms’ business lines’ modes of generating high-margin profits from the financial services most at risk of facilitating suspect transactions. As a result, a strong tension has existed between regulatory obligations and these firms’ incentives to comply. This noncompliance is reflected in chronic underfunding of compliance and risk management capacity and in intentional, at times brazen, wrongdoing. Systemically deficient BSA compliance programs are a common denominator in many of the large bank prosecutions of the 2010s.

The Act marks a fundamental change in AML/CFT policy by seeking to systematically mitigate the business-compliance tension through a multiprong strategy. For example, it establishes an R&D platform to facilitate firms’ experimentation with innovative, cost-effective compliance solutions that reduce compliance costs while also enhancing the usefulness of SARs.

Here, the focus is on national priorities’ role in ameliorating the BSA’s tension with AML/CFT compliance. The Act promises to operationalize the newly branded law enforcement objective with considerable federal resources and new rules of engagement for both the private and public sectors. In this undertaking, the national priorities are to be messaged in a unified manner within a centralized governance framework. The following briefly highlights three of the several ways the legislative and rulemaking initiatives would achieve this objective. 

First and foremost, the Act mandates incorporation of national priorities into the BSA’s first compliance pillar – the policies, procedures, and internal controls that form the core infrastructure of a firm’s system of AML/CFT compliance and risk management. Relatedly, firms will now have to ensure that their policies and procedures reflect current national priorities by tailoring them to their unique risk exposures. To this end, FinCEN in its concept release defines an “effective compliance program” as one that integrates national priorities into policies and procedures, among other things. This is a notable departure from long-standing BSA policy – and financial regulation generally – of not spelling out just what “effective” compliance means.

Trying to make good on its alluring promise of a “private-public sector partnership,” the Act requires FinCEN to consider a no-action letter process for AML/CFT compliance. If implemented, BSA counsel will be able to request written comfort regarding potential liability that contemplated BSA Pillar I compliance processes and procedures pass regulatory muster. For decades, the SEC and CFTC have used the no-action process to great effect in helping regulated firms establish effective compliance practices. This is especially important in AML/CFT compliance since the risk-based approach is a highly complex undertaking in addressing compliance expectations. The Act also codifies previous guidance on a liability shield for innovative “sand-box” RegTech compliance approaches.  

Second, the Act seeks to ensure that all federal and state supervisors provide uniform compliance guidance centered around national priorities. Conveying consistent compliance expectations has been problematic in the AML/CFT space. FinCEN delegates supervisory authority to the banking and capital markets regulators, whose primary concerns (and where their expertise primarily resides) are prudential safety and soundness and fair, transparent, and efficient markets, respectively. The law enforcement objective does not easily fit within this supervisory system.

The Act requires firms’ primary regulators to incorporate national priorities into their examination programs and evaluate firms’ compliance on that basis. In addition, each banking and capital markets agency examiner is to receive annual training approved by the Treasury Department, alerting them to emerging criminal patterns and trends. The Act also requires the Treasury Secretary to establish and administer a personnel rotation program among the agencies and law enforcement authorities, further bolstering a consistent take on the priorities that FinCEN will periodically update.

In a word, the new regime makes national priorities a top-of-mind concern of federal and state regulators and examiners of financial institutions, the Department of Justice, the FBI, the Department of Homeland Security, other national security agencies, and – most importantly – the regulated firms themselves.

Finally, the Act will help to operationalize national priorities by promoting information-sharing and coordination, between regulators and the private sector, on the one hand, and among the financial firms themselves, on the other. These measures will help to integrate in real time information on emerging threats and vulnerabilities into compliance processes and practices.

Importantly, FinCEN will have an enhanced role in coordinating and promoting information flow among the various stakeholders. FinCEN will publish threat pattern and trend information about the preparation, use, and value of SARs and other reports. The Act moreover creates “domestic liaisons” reporting to FinCEN who will facilitate outreach to BSA officers and receive feedback from firms and examiners to promote consistency in compliance expectations.

The Act is one of the most ambitious policy initiatives in recent financial regulatory history, surpassed only by the Dodd-Frank Act of a decade ago. It requires a fundamental change in the public and private sectors’ habits of engagement. It seeks to achieve the paradoxical goal of enhancing prospects for achieving the law enforcement objective while simultaneously easing the compliance pain of financial firms. Success in realizing these aspirations will become apparent only after rulemaking is finalized and compliance practices come into alignment with the new compliance expectations.

This blog draws in part on the author’s research for his book in progress, Anti-Money Laundering Regulation and Compliance: Key Problems and Practice Areas (Edward Elgar, forthcoming June 2021).