Treasury Department’s 2020 National Illicit Finance Strategy: Aspirations for BSA/AML Modernization and the Combatting of Key Threats

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First in a Two-Post Series

The U.S. Department of Treasury (“Treasury”) has issued its 2020 National Strategy for Combating Terrorist and Other Illicit Financing (“2020 Strategy”). This document sets forth the key priorities of the U.S. government regarding enforcement of the Bank Secretary Act (“BSA”), and the furthering of the government’s Anti-Money-Laundering (“AML”) and Combating the Financing of Terrorism (“CFT”) goals in general. It is lengthy document addressing numerous issues – albeit in a relatively high-level fashion in regards to any specific issue.

In this post, we will summarize the findings and recommendations of the 2020 Strategy, and will highlight some topics this blog has followed closely – including calls for: increased transparency into beneficial ownership; strengthening international regulation and coordination, and modernization of the AML/BSA regime. Our next post will focus on the 2020 Strategy as it relates to combating money laundering relating to real estate transactions and “gatekeeper” professions, such as lawyers, real estate professionals and other financial professionals, including broker-dealers.

The 2020 Strategy also focuses on several other important issues which we will not discuss in this limited blog series, but on which we certainly have blogged before, including the role of money laundering in international trade, casinos, money services businesses and digital assets.

Purpose of 2020 Strategy

In a press release, the Treasury described the 2020 Strategy as identifying “key threats, vulnerabilities, and priorities for disrupting and preventing illicit finance activities within and transiting the U.S. financial system,” and providing “a roadmap to modernize” the AML/CFT regime. This strategy arrives as the U.S. marks the 50th anniversary of the BSA. The goal of the document is to asses “21st century illicit finance challenges and identify solutions.”

The three strategic priorities outlined in the press release include:

  1. Increasing transparency and closing gaps in the U.S. AML/CFT legal framework;
  2. Improving the efficiency and effectiveness of the U.S. AML/CFT regulatory and supervisory framework for financial institutions; and
  3. Enhancing current AML/CFT operational capabilities.

Key Findings of Greatest Vulnerabilities

The 2020 Strategy reviews in detail the “most significant vulnerabilities in the United States exploited by illicit actors.” The 10 areas of concern, which are overlapping in part, are:

  1. Beneficial ownership information at company formation
  2. Real estate professionals and other “gatekeeper professions”
  3. Correspondent banking
  4. Cash, including bulk cash smuggling and trade-based money laundering
  5. Complicit professionals
  6. Compliance weaknesses
  7. Digital assets
  8. Money services businesses
  9. Securities broker-dealers
  10. Casinos

Interestingly, the 2020 Strategy also states that FinCEN is working on promulgating a final rule, following up on a 2016 notice of proposed rule making, which would subject banks that lack a federal functional regulator, “including, but not limited to, private banks, non-federally insured credit unions, and certain state-chartered trust companies,” to AML program requirements under the BSA. The 2020 Strategy states that there are approximately 669 such companies in the U.S. which would be subject to this final rule.

Beneficial Ownership: Blind Spot and Recommendation

The “[m]isuse of legal entities to a hide a criminal beneficial owner or illegal source of funds continues to be a common, if not the dominant feature of illicit finance schemes.” As we have blogged, the U.S. has come under increasing international scrutiny for being perceived as having lax beneficial ownership laws. Congress has taken note and has proposed significant changes to the collection and use of beneficial ownership information (see here, here, here), including the requirement that beneficial ownership information be provided at the time of entity creation.

The 2020 Strategy emphasizes the challenges faced by law enforcement when the true beneficiaries of illicit proceeds are concealed by shell companies. Money laundering schemes often involve transactions conducted through multiple layers of shell corporate structures to evade detection, “much like a Matryoshka doll,” requiring significant time, resources, and expense to unpack.

The 2020 Strategy notes that the Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, gave the U.S. a “failing grade” as to beneficial ownership reporting in its 2016 Mutual Evaluation Report. To address this issue and related concerns, the Financial Crimes Enforcement Network (“FinCEN”) issued a Customer Due Diligence (CDD) Rule that now requires covered financial institutions to identify and verify the identities of beneficial owners of legal entity costumers at the time of opening and at certain points thereafter. Although the CDD Rule helps fill the gap, the lack of transparency into the beneficial ownership at the time of a company’s formation still hinders risk mitigation and law enforcement response to misuse and illicit financial transaction. This “drives significant costs and delays for both public and private sectors.”

The Treasury has no current authority to require disclosure of beneficial ownership at time of company formation. Therefore, the 2020 Strategy states that Treasury will work with Congress to support proposals to “require the collection of beneficial ownership information of legal entities” such as the Corporate Transparency Act. The stated goal is to have such legislation passed in 2020.

Strengthening International Regulation and Coordination

Although U.S. banks “significantly improved their ability to assess and mitigate risks associated with foreign correspondents,” due to scrutiny by U.S. law enforcement, “[n]ot all foreign correspondent banks” have “kept up.” The 2020 Strategy provides high-profile instances of these vulnerabilities regarding correspondent banking issues, and highlights the ongoing Danske Bank saga, in which foreign branches of the bank allegedly processed hundreds of billions of dollars of suspicious funds without detection. (see hereherehere and here).

To generally support global efforts at AML/CFT implementation, the 2020 Strategy proposes to continue to lead at FATF, the “global standard-setting body for combating AML/CFT.” The 2020 Strategy proposes to work to ensure that other countries “understand and incorporate the FATF standards to their domestic legal regime and that they are accountable for deficiencies in complying with these standards.” For example, in late 2019, as we previously blogged, FATF issued best practices guidance about beneficial ownership. Adoption of these recommendations would aid law enforcement agencies in combatting illicit financing internationally.

Some may regard this language in the 2020 Strategy about the U.S. continuing to lead FATF and chiding other countries for their lack of compliance with some skepticism or irony, given the fact that, as we previously noted, FATF has criticized the U.S. as lagging in the fight against money laundering in regards to beneficial ownership information. Indeed, several other international bodies have made similar criticisms, or have more affirmatively accused the U.S. of hypocritically inviting tax evasion and money laundering (as we have blogged here, here, here, here and here).

Modernization of the AML/CFT Regime

Congress has been contemplating various proposals for BSA/AML reform for some time (see here, here, here, here and here). The 2020 Strategy echoes calls for modernization, at least to the extent that they seek to “[l]everag[e] new technologies and other responsible innovative compliance approaches to more effectively and efficiently detect illicit activity.” Thus, the 2020 Strategy is entirely consistent with the fact that FinCEN representatives have made repeated public statements embracing technological innovation in AML/CFT compliance (see here, here, and here) – although FinCEN also has steadfastly opposed other outside calls for reform of the current AML/CFT regime which bemoan the high regulatory burden of BSA filing requirements.

The 2020 Strategy states the use of data analytics has demonstrable value to law enforcement. For example, the IRS has utilized data analytics to help identify areas of non-compliance through models and algorithms. The 2020 Strategy suggests the government continue to identify and apply data analytics to support efficiency of law enforcement.

The 2020 Strategy also suggests that modernization should include finding ways to utilize the BSA data collected by financial institutions and notes that FinCEN has undertaken a BSA Value project that attempts to quantify the value of BSA data and identify ways to increase that value. Again, although maximizing the value of information contained in BSA filings is certainly a laudable goal, the BSA Value project is also consistent with the government arming itself to defend the current BSA filing requirements and thresholds against any potential legislative changes.

The 2020 Strategy further highlights the FinCEN Innovation Statement, released December 2018, which proposes encouraging “industry to consider, evaluate, and where appropriate responsibly implement innovative approaches the AML/CFT obligations.” The goal is to encourage financial institutions to test new AML pilot programs by providing assurances that the new approaches by themselves will not result in supervisory criticism (if pilot unsuccessful), or supervisory action (if pilot exposes deficiencies in standard program) or additional regulation expectations.

Overall, the 2020 Strategy continues to emphasize the Treasury’s goal of responding to international calls for transparency, promoting efficient communications between private and public as well as international groups, and ensuring that law enforcement keeps pace with the technological changes in financial transactions. Much of the 2020 Strategy is aspirational; time will tell if these goals are realized.

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