By: Sam Finkelstein and Daniela Melendez, associates at the Volkov Law Group . Sam can be reached at [email protected] and Daniela can be reached at [email protected].

On June 28, 2024, the Financial Crimes Enforcement Network released a notice of proposed rulemaking. The purpose of the proposed rule is to strengthen and modernize Anti-Money Laundering and Countering the Financing of Terrorism (“AML/CFT”) processes for financial institutions (including, but not limited to, casinos, depository institutions, insurance industry, money services businesses, mortgage co/broker, precious metals/jewelry industry, and securities and futures dealers). 

While the requirement to maintain an AML/CFT program is not new, the proposed rule would amend existing regulations to require AML/CFT programs to be effective, risk-based, and reasonably designed, enabling financial institutions to focus their resources and attention in a manner consistent with their risk profiles. 

Under the proposed rule, financial institutions would be required to establish, implement, and maintain effective, risk-based, and reasonably designed AML/CFT programs. The proposed rule also requires financial institutions to review government AML/CFT priorities and to incorporate them into risk-based programs, as appropriate. Moreover, FINCEN proposed regulatory amendments to promote consistency and clarity in AML/CFT laws. 

What are the proposed changes? 

The most significant proposed change requires financial institutions to adopt a risk assessment process that identifies, evaluates and documents AML/CFT risks, and incorporates national AML/CFT priorities into their programs. 

The rule would also require financial institutions’ AML/CFT compliance programs to be approved by the Board of Directors (or its equivalent). Until now, this requirement only applied to certain institutions subject to the jurisdiction of the Bank Secrecy Act. Second, financial institutions will need to conduct a specific ML/TF risk assessment based on a continued evaluation of the products, services, geographic location, customers and intermediaries.

In essence, FINCEN would require financial institutions to:

• require financial institutions to review government-wide AML/CFT priorities and incorporate them, as appropriate, into risk-based programs, as well as provide for certain technical changes to program requirements; and
• promote clarity and consistency across FinCEN’s program rules for different types of financial institutions.

The proposed rule requires financial institutions to update the risk assessment whenever there is a “material change” that could impact the institution’s ML/TF risks. In parallel, the rule states that as a best practice, financial institutions should assign adequate resources and enact well-documented governance policies to carry out the AML/CFT program. 

The proposed rule also discourages the outsourcing of AML/CFT compliance program functions. While outsourcing may be cost effective, the rule reminds financial institutions that their duty “to establish, maintain, and enforce the AML/CFT program must remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by” federal regulators.

Closing thoughts

Regulators believe that the fight against money laundering and financing terrorism must be led by the government in conjunction with the private sector. Increased private sector cooperation will be necessary to protect U.S. national security and the integrity of the U.S. financial system. Commenting on the proposed rule, U.S. Deputy Secretary of the Treasury Wally Adeyemo emphasized “It has been an important priority for the Treasury to issue this proposed rule that promotes a more effective and risk-based regulatory and supervisory regime that directs financial institutions to focus their AML/CFT programs on the highest priority threats.”

After publishing the rule, the regulator granted 60 days for the public and other regulators such as the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration to comment. Therefore, it is likely that some elements will be subject to change with respect to the proposed version.

If enacted, the proposed rule will have significant and immediate implications for financial institutions’ AML/CFT compliance programs. Affected institutions should proactively review their AML/CFT procedures in anticipation of a final rule, which is expected later this year.