THE NEW MONEY LAUNDERING LAW & THE CORPORATE TRANSPARENCY ACT (CTA) IN THE U.S.

GuyChristian Agbor, LLM/PGCIT, PhD.

WHAT YOU NEED TO KNOW:

- In the U.S. the new federal requirements in the annual national defense budget reauthorization effectively will end anonymous U.S. shell companies by requiring businesses to disclose 25 percent owners and control persons to a newly created federal registry maintained by the U.S. Treasury Department.

- Therefore, the Biden administration will be responsible for implementing significant amendments to the U.S. AML regulatory regime adopted as part of this legislation.

- Additional law enforcement priorities in the bill include increased penalties, a new whistleblower program, and expanded information sharing to ease procedural burdens for both law enforcement and financial institutions.

THE LAW

U.S. Congress enacted significant anti-money laundering (AML) reforms in the Mac Thornberry National Defense Authorization Act (2021 NDAA). The 2021 NDAA advances the most significant changes to the U.S. Bank Secrecy Act since the USA PATRIOT Act was passed in the wake of 9/11. Over the next two years, the 2021 NDAA reforms will certainly be the subject of regulatory guidance and implementation by the new Treasury Secretary who will have a significant impact and the opportunity to develop and shape the scope of these reforms. Financial institutions, individuals, and businesses operating through the formation of U.S. legal entities will be seriously impacted.

Impact on Anonymous U.S. Shell Companies – Beneficial Ownership and the Financial System

The Corporate Transparency Act (CTA), included as part of the 2021 NDAA, establishes that through a federal beneficial ownership registry, anonymously owned and controlled companies will be eliminated in the United States. The CTA will limit bad actors to launder money, finance terrorism, and profit off tax fraud, human and drug trafficking, and other financial fraud.

Until the 2021 NDAA, the banking institutions were primarily on the front line as part of their customer due diligence for identification and diligence that required to identify and diligence each 25 percent or more beneficial owner and control persons. However, under the CTA, legal entities (including all legal structures) will be required to submit to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) beneficial ownership information regarding any person who owns 25 percent or more of, or who has “substantial control” over, the entity.

Filing beneficial ownership information with FinCEN will be required when a legal entity is formed or registered to do business in the United States. Further, existing entities also will be required to report this information within the next two years. The CTA includes periodic updating requirements and legal entities will be required to update any changes to the beneficial ownership information on the registry within one year of such a change. Required beneficial ownership information is similar to that currently collected by covered financial institutions under FinCEN regulations as part of customer due diligence and includes the name, date of birth, residential or business addresses, and a unique identifying number such as a driver’s license or passport for any such beneficial owners.

Accordingly, that information will be held in a non-public beneficial ownership registry, and subject to disclosure through certain legal channels that include receipt of a request from law enforcement, a federal agency on behalf of law enforcement, or a financial institution for compliance with due diligence requirements. Naturally, private financial institutions will have access and will be able to use this information to satisfy at least some KYC obligations. Regulations to be issued by FinCEN will clarify how such information will be gathered, distributed, accessed, used, and relied upon by financial institutions.

This new beneficial ownership registry will bring some conformity for the United States as the European Union, United Kingdom, and other developed countries have been implementing these internationally recognized standards. Unfortunately, the CTA falls short in terms of public disclosure of the collected beneficial ownership information through a centralized registry. Further, the exclusion of some entities, such as trusts, is unresolved. Additionally, the definition of “beneficial owner” includes someone who “exercises substantial control” over the entity or owns or controls at least 25% of the ownership interests in the entity; some might find the 25% threshold too high, particularly because proving substantial control may be difficult as well as the information that will remain confidential, accessible only to government agencies and financial institutions performing due diligence but not to the public.

Impacts for Banks and Financial Institutions

Defense Act Expands Scope of Foreign Bank Records U.S. Authorities Can Obtain

In substance, this new legislation gives U.S. investigators additional authority to subpoena records from foreign banks with U.S. correspondent accounts

The law applies to records held in the U.S. or abroad that are subject to federal criminal investigations or civil forfeiture actions.

Please note that previously, the U.S. government’s authority was limited to records related to the correspondent accounts, including those related to the deposit of funds into a foreign bank.

Under this new provision, if a foreign financial institution with a U.S. correspondent account is served with a subpoena, it would need to produce all requested records and authenticate the records without notifying any account holder. The financial institution can petition the relevant U.S. district court to modify or quash the subpoena, according to the law. The foreign bank can be held liable for monetary penalties and risk losing its corresponding relationship if it doesn’t comply with the subpoena, according to the law.

The beneficial ownership registry will significantly impact most financial institutions’ AML programs.

Financial institutions have customer identification and due diligence obligations and, since 2016, certain financial institutions have been required to identify and verify beneficial owners of legal entities as part of their AML compliance program. The non-public registry is supposed to reflect a new source of information to supplement and potentially replace some existing AML compliance processes.

Upgrading the Fight Against Money Laundering

Information Sharing: The 2021 NDAA aims to enhance information sharing, and the AML Act would create the “FinCEN Exchange”, a voluntary public-private information sharing partnership designed to expand communications between the federal government and financial institutions. The AML Act further directs the formation of a pilot program on sharing of information related to SARs with foreign branches, subsidiaries, and affiliates of a financial group.

Policy Planning: Under the AML Act, the Secretary of the Treasury, in consultation with the Attorney General, federal and state regulators, and national security agencies, is directed to publish new priorities for AML policies within 180 days of enactment of the 2021 NDAA. Treasury is further directed to update these priorities every four years.

Mandatory Innovation: The AML Act directs a study of the implementation of new technologies to modernize AML laws, including artificial intelligence, blockchain, and other emerging technologies. The AML Act aims to encourage new technological innovations and reinforce risk-based policies and procedures within financial institutions. It also directs the hiring of a FinCEN Bank Secrecy Act Innovation Officer, tasked with providing outreach to law enforcement and financial institutions on technological innovations, and implementation of new methods and technologies for Bank Secrecy Act compliance.

Reporting Obligations Re-Examined: This AML Act authorizes the Secretary of the Treasury to undertake a formal review of financial institution reporting requirements related to currency transaction reports and suspicious activity reports (SARs), and to reduce any unnecessarily burdensome requirements, as well as to determine whether existing dollar thresholds for reporting should be adjusted.

Support Staff for FinCEN: The AML Act provides for expanded FinCEN staffing, including domestic and international liaisons responsible for increasing coordination with federal regulators, financial institutions, foreign law enforcement agencies, and foreign governments, as part of the overarching plan to increase information exchanges and communication between AML authorities, foreign jurisdictions, and financial institutions.

Expanding AML Enforcement in the Virtual Currency and Art Markets: The AML Act identifies both the virtual currency and art markets as Congressional priorities, directing FinCEN to study and expand efforts to counter money laundering issues through the sale of antiquities and works of art, and through the use of virtual currencies.

AML Regulatory Guidance: The AML Act authorizes the Director of FinCEN to conduct an assessment on the feasibility and appropriateness of issuing no-action letters in response to AML inquiries.

Whistleblower Program: The AML Act’s whistleblower provision was modeled on the Dodd-Frank Act, and permits individuals with information on money laundering and violations of the Bank Secrecy Act to file anonymous and confidential reports to the Secretary of Treasury and qualify for monetary rewards “up to 30%” of the sanctions obtained from the U.S. government. The law also prohibits retaliation against some employees who report AML violations but excludes a majority of employees working in banks or credit unions. However, this law breaks with standard practices and requires Congress to make annual appropriations to pay whistleblowers, a process that is made to fail. One must note that the $741 Billion in federal spending approved in the NDAA does not include any money to compensate whistleblowers. By contrast, the Dodd-Frank Act established a fund to pay whistleblowers directly from the sanctions obtained from wrongdoers. In this manner, taxpayers are not implicated, the risks they took in becoming whistleblowers, and the ability of the United States to use their evidence to obtain a conviction or settlement. This is wrong and unlike other reward laws, such as the False Claims Act, the IRS reward law, the Auto Safety whistleblower law, and the Dodd-Frank Act, the AML Act does not require the Secretary of Treasury to make any minimum award. The worst here is that the decision to grant awards is discretionary and the Secretary can effectively deny any whistleblower a meaningful award, for any reason whatsoever, finally, no appeal is permitted in court because the law does not provide any realistic right for a whistleblower to obtain a reward the law will not work in practice, but on the contrary, it might mislead employees who think the rights contained in the AML Act are similar to the rights contained in all of the other modern reward laws. It is therefore vital and crucial for all professionals involved to warn whistleblowers of the problems with the AML Act, and advocate Congress to fix these issues.

Increased Penalties: Repeat violators of AML rules could face the greater of three times the profit gain or loss avoided as a result of the violation, or two times the existing maximum penalty under the law. “Egregious” violators of the Bank Secrecy Act, including those convicted of criminal acts and willful civil violations facilitating money laundering or terrorism financing, also can be barred from serving on the board of directors of a financial institution for 10 years after the conviction or judgment. Overall, the 2021 NDAA provisions are a path in the right direction to advance AML reform.

__________________________________________________________________________

DISCLAIMER: Nothing in these presentations should be interpreted as legal advice. These presentations are intended to help a person to understand the area of law to help ask the right questions with the attorney of their choice. Your time to act may be very limited and this could substantially reduce your rights and options. YOU CANNOT rely on anything contained herein. This information is not intended to substitute for professional legal advice and does not create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship. You should contact a lawyer in your area immediately, to assist you in any of these matters.??

Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.