AMLA: The Gamechanger

0
303

The Anti-Money Laundering Act of 2020 (AMLA)―included within the 4,517-page-long conference report on the National Defense Authorization Act for Fiscal Year 2021 (NDAA)1―is widely considered the most comprehensive change to the U.S. anti-money laundering and counter-terrorist financing (AML/CTF) regime since the USA PATRIOT Act (PATRIOT Act). The NDAA was issued on December 3, 2020, by the U.S. Senate and House of Representatives and signed into law on January 1, 2021. A breakdown of the AMLA sections included in the NDAA can be found in Table 1 below.

Passage of this modernizing legislation has been years in the making and came at one of the more pivotal times in the U.S. AML/CTF regime. The COVID-19 pandemic, information leaks such as the Financial Crimes Enforcement Network (FinCEN) Files, increased cybercrime and advances in technology have made transparency, information sharing, innovation and regulatory reform imperative. Thus, the AMLA is an important piece of the puzzle for countering financial crimes as a global community.

AMLA Background

The AMLA, found in Division F of the NDAA, is made up of five titles with 56 sections. Many of the reforms are outlined in other similar proposed legislation and touch on nearly every area of financial crime including supporting innovative technologies, enhancing FinCEN’s budget and staffing, and requiring feedback and actionable intelligence to financial institutions (FIs) on trends and the usefulness of suspicious activity reports (SARs).

The main point of the AMLA is to modernize the AML/CTF regime and there are three key themes that resonate throughout—transparency, collaboration and innovation. This is further made clear by statements made on page 4,456: “…Currently, there is no clear mandate for BSA stakeholders…to provide routine, standardized feedback to one another…[which] provides a clear mandate for innovation.”

Purpose

The AMLA focuses on the following purposes:

  • Improving coordination and information sharing amongst all the stakeholders2 (collaboration and transparency)
  • Modernizing the anti-money laundering (AML) and 25 counter-terrorist financing (CTF) laws to adapt the public-private response to new and emerging threats (innovation and collaboration)
  • Encouraging technological innovation and adoption of new technology (innovation)
  • Reinforcing that FI AML/CTF policies, procedures and controls should be risk-based (innovation)
  • Establishing uniform beneficial ownership reporting requirements (transparency)
  • Establishing a beneficial ownership database at FinCEN (transparency)

Declaration of Purpose

The Bank Secrecy Act (BSA) originally had a singular declaration of purpose that was expanded on by the PATRIOT Act.3 The AMLA changes the original Declaration of Purpose and adds four new ones:

  • The original purpose changes reports and records with a “high degree of usefulness” to those “that are highly useful.” Also, it added in “risk assessments” and removes “international” from “international terrorism.”
  • Establishment by FIs of reasonably designed risk-based programs to combat and prevent money laundering and terrorist financing
  • Facilitating the tracking of money sourced through criminal activity to promote criminal or terrorist activity
  • Assessing money laundering, terrorist financing, tax evasion and fraud risk to FIs, products or services
  • Establishing frameworks for information sharing amongst stakeholders

FinCEN Levels Up

The AMLA greatly expanded FinCEN’s purpose, power, budget and staffing

FinCEN’s role as the U.S.’ financial intelligence unit (FIU) is critically important. Increasing the bureau’s oversight and authority is crucial in modernizing the AML/CTF regime and realizing information sharing/collaboration in a meaningful way. As such, the AMLA greatly expanded FinCEN’s purpose, power, budget and staffing; codified some existing work; granted five new duties and powers bringing the total to 15; and added seven new subsections. The following are some highlights:

  • Implementing exam and supervision priorities of BSA programs
  • Explaining exam and supervision priorities regularly to stakeholders
  • Giving and receiving feedback from the private sector as well as state bank and credit union supervisors
  • Maintaining AML/CTF experts to support federal civil and criminal investigations
  • Maintaining emerging technology experts
  • Adding at least six domestic and six foreign liaisons, along with a chief of domestic liaison
  • Introducing analytical experts for FinCEN’s “analytical hub”
  • Adopting new regulations to ensure compliance with the AMLA

Technology and Innovation

In 2018, the federal functional regulators issued a joint statement4 encouraging banks to experiment with innovative technologies, without the fear of reprisal, to build more effective BSA programs and better identify financial crime. This was one of the first times the industry received such direct regulatory guidance on this topic. The guidance trend continued during the next two years, including creation of the FinCEN Innovation Hours5 in May 2019.

The Bank Secrecy Act Advisory Group (BSAAG)―which played an advisory role in FinCEN’s Advance Notice of Proposed Rulemaking6 that to an extent mirrors the AMLA―gained some new responsibilities:

  • Subcommittee on innovation and technology: Supporting technological innovation and reducing obstacles to innovation due to existing regulations, guidance and examination
  • Subcommittee on information security and confidentiality: Focusing on information security and confidentiality implications of regulations, guidance, information sharing and the examination for compliance with the BSA
  • Financial crime technology symposium: Promoting greater international collaboration around anti-financial crime and facilitating the investigation, development and timely adoption of new financial crime prevention and detection technologies

The following are new corresponding technology positions:

  • BSA innovation officers: Appointed within FinCEN, each regulator is responsible for outreach to stakeholders regarding innovative methods and technologies as well as exploring public-private partnership opportunities
  • BSA information security officers: Appointed within FinCEN, each regulator and the IRS will consult on many topics such as information-sharing policies and development of new information security technologies

The Treasury Secretary will be responsible for completing a financial technology assessment that analyzes and provides recommendations on the impact of technology on financial crime compliance and detection. In addition, the Treasury Secretary will issue a rule on the standards for FIs to test technology and internal technology processes. Standards may include an emphasis on machine learning, risk-based testing and oversight, when and how risk-based testing should be considered, and risk governance framework standards.

Feedback and collaboration top the list of things anti-financial crime professionals have been wanting for many years

Finally―in what many would consider close to a genie granting a wish―a review of whether, and even how, model validation applies to AML technology is required. Any new standards will be included in the Federal Financial Institutions Examination Council’s “Bank Secrecy Act/Anti-Money Laundering Examination Manual.”

Collaboration and Information Sharing

Feedback and collaboration top the list of things anti-financial crime professionals have been wanting for many years. To this degree, there has been and will be more progress:

  • FinCEN will semi-annually publish threat pattern and trend information sourced from BSA reports and typologies
  • Ongoing issuance of AML/CTF strategic priorities from relevant stakeholders
  • Annual report from the attorney general on the use of BSA reports, including if the reports contained actionable intelligence and the extent to which arrests, indictments and convictions result
  • The FinCEN Exchange, created in 2017 to foster public-private cooperation, is officially “formalized” and FinCEN will issue an ongoing report to Congress analyzing the efforts undertaken by FinCEN Exchange and the extent and effectiveness of those efforts
  • Codifies sharing compliance resources originally described in regulator guidance7
  • Information sharing and public-private partnerships are encouraged and stakeholders will be brought together to examine strategies to increase that cooperation
  • Feedback loop to FIs
    — Solicitation by FinCEN of feedback from a cross-section of BSA officers to review their SARs, discuss trends and provide that information to regulators
    — Disclosing the usefulness of SARs to law enforcement and the Department of Justice (DOJ)
  • FinCEN to establish a pilot program on sharing BSA reports with U.S. FIs’ foreign branches, subsidiaries and affiliates

If done right, all of this will help the industry put less focus on broad AML/CTF monitoring and detection that result in high false positive alert volumes and put more focus on specific threats.

Regulators and the Risk-Based Approach

Notably, there were a couple of key requirements focused on regulators that seek to address some frustrations from the private sector. First, annual training for federal examiners is required. Training will focus on compliance with the BSA, risk profiles and warning signs, financial crime patterns and trends, why AML/CTF programs are necessary and de-risking impacts. Second, it is required to at least use a risk-based approach for AML/CTF programs and for examining compliance with those standards. The focus should be on ensuring AML/CTF programs are “reasonably designed” to comply with the BSA and that more attention and resources, based on the FI’s risk profile, are “directed toward higher-risk customers and activities.”

Furthermore, the AMLA seeks to codify the elusive “risk-based” approach that is sprinkled throughout the legislation via requirements such as highly useful reports/records, reasonably designed risk-based programs, national priorities, risk-based examination standards and SARs “guided by” an FI’s AML/CTF program and risk assessment process.

SARs and Currency Transaction Reports (CTRs)

The AMLA begins to take concrete steps toward addressing burdens on both FIs and law enforcement regarding the volumes and questionable usefulness (i.e., defensive filings) of SAR and CTR volumes. This includes items such as permitting the filing of noncomplex BSA reports through streamlined and automated processes; a review of potential adjustments to SAR and CTR thresholds, continuing activity SARs and SAR/CTR fields; addressing adverse de-risking consequences; and expansion of CTR exemptions.

Table 1: AMLA Titles and Sections

Awards, Protections, Penalties and Safe Harbor

Whistleblowers generally pay a significant personal and professional price for exposing financial crime. Under the AMLA, whistleblowers are incentivized to report violations of the AML/CTF laws and can receive up to 30% of the monetary sanctions that exceed $1,000,000. The AMLA also provides new protections for whistleblowers, including coverage for internal whistleblowing and retaliation from employers or the government.

New penalties are also added for concealing a senior foreign political figure’s source of funds and concealing funds in a transaction that involves a primary money laundering concern entity. In addition, there are damages for repeat offenders, bans on certain violators from serving as directors, and a clawback provision for certain profits and bonuses.

Finally, FIs receive safe harbor from adverse regulatory action and BSA liability for continuing to maintain accounts open based on the receipt of a “keep open” letter received from law enforcement.

New BSA Requirements

The AMLA brought two previously unregulated industries under the purview of the BSA regulations, specifically “dealers in antiquities” and “virtual currencies,” by adding them under the definition of a “financial institution” while also expanding other definitions. For dealers in antiquities, this change covers advisors, consultants and any person involved in the solicitation or sale of antiquities and requires the Treasury Secretary to propose rules implementing this provision by January 1, 2022, after consulting with the DOJ, FBI and other agencies regarding the scope of such rules.

For virtual currencies, now described as “value that substitutes for currency,” the definition covers foreign persons providing these services, currency exchangers that exchange virtual currency for fiat currency or funds, and codification that transmitters of virtual currency are considered money transmitters requiring registration with FinCEN. In addition, the Treasury has the authority to expand the definition of “monetary instruments” to include value that substitutes for currency or funds, allowing for potentially broad application and potential regulation of various virtual assets.

While a step in the right direction to bring more industries under the AML/CTF regime, the AMLA did not go as far as many wanted in requiring certain other unregulated industries to be subject to the BSA, such as attorneys and accountants. Is the U.S. closer to following its peers in Europe in subjecting these industries to the BSA? Hard to say at this point. But the fact the AMLA was passed gives hope these loopholes can be closed.

International Impact

In the continued spirit of broad collaboration, the AMLA also looks to strengthen foreign AML/CTF relationships. In addition to FinCEN’s existing foreign liaisons, the Treasury Secretary gained a Treasury Financial Attaché Program that will focus on U.S. financial and economic policy, the international fight against money laundering and terrorist financing, and work with foreign counterparts. Funding was appropriated to increase technical assistance to foreign countries and foreign FIs. This assistance promotes compliance with international AML/CTF standards and best practices.

The Treasury will work with foreign counterparts and bilateral contacts (e.g., the Financial Action Task Force, the Basel Institute on Governance) to promote stronger AML/CTF frameworks and enforcement. Finally, greater authority to seek documents from foreign FIs that maintain a correspondent account in the U.S. was granted.

There should be ongoing communication of the AMLA changes and potential needs to the board and senior management

Lastly, the Treasury or DOJ now have greater authority to issue a subpoena to foreign FIs that maintain correspondent accounts in the U.S. This authority covers “any records relating to the correspondent account or any account at the foreign bank,” including use of the account and records maintained outside the U.S.

Studies and Reports

There are several studies and reports that will be tasked to the Government Accountability Office, the Treasury Secretary, FinCEN and the DOJ over the course of the next several years. These cover topics such as feedback loops, human trafficking, BSA “no-action letters,” deferred prosecution agreements and de-risking.

What Comes Next

There are a whole host of due dates by various federal agencies to implement the many actions required under the AMLA. The majority are due by December 31, 2021, but extend all the way until 2025. The most immediate and pressing due dates cover the FinCEN Financial Technology Assessment (April 1, 2021) and publishing AML/CTF priorities and FinCEN’s first semi-annual SAR review (June 30, 2021).

But the most important regulations are the ones that FinCEN and regulators will need to promulgate. While it is unclear what these regulations will look like yet, words matter, so rest assured that the stakeholders will work hard to get them right because the interpretation and implementation of these regulations needs to be absolutely clear and concise. It would be a misstep to back the AML/CTF regime into another checkbox environment where regulatory interpretation is frustrating, and effectiveness and collaboration is hampered.

Finally, FIs should not sit idle and will need to begin preparing for the upcoming changes. There are many actions an FI can take, but the following are some ideas for consideration:

  1. Risk assessments can start to be adjusted to focus on threats and typologies detailed in documents such as the “2018 National Money Laundering Risk Assessment”8
  2. With an emphasis on technology and innovation, FIs that have not done so already should start to move toward next generation AML/CTF technologies―ideally built collaboratively with peers and law enforcement―that focus on all aspects of financial crime including, but not limited to, transaction monitoring, customer risk rating and AML/CTF strategic priorities (e.g., human trafficking, money mule activity).
  3. There should be ongoing communication of the AMLA changes and potential needs to the board and senior management. If this information is socialized as early as possible, FIs will be in the best position to implement required changes.

Conclusion

As a wise uncle once told a lost kid that had also gained new superpowers, “With great power comes great responsibility.” All stakeholders have a significant opportunity to do something truly important and impactful. Not only for the U.S. AML/CTF regime, but with their global partners who are and have been taking similar steps in their own AML/CTF regimes. As such, meaningful and broad collaboration between the stakeholders will be crucial.

To paraphrase a comment from an FI stakeholder that summarizes many of the frustrations from the past two decades, “I always wonder when I will finally be able to put all my focus back on catching the bad guys.” With the passage and implementation of AMLA, the AML industry is at the precipice of refocusing efforts toward that goal.

Chris Bagnall, CAMS-FCI, CFE, Sojourn Technologies, Bagnall@sojourn-technologies.com

  1. “H.R. 6395 (116th): National Defense Authorization Act for Fiscal Year 2021,” docs.house.gov, January 1, 2021, https://docs.house.gov/billsthisweek/20201207/CRPT-116hrpt617.pdf
  2. Stakeholders include, but are not limited to, Federal functional regulators, law enforcement authorities, financial institutions, technology experts, intelligence community, etc.
  3. “Declaration of Purpose,” United States Code Title 31 – Money and Finance, https://www.govinfo.gov/content/pkg/USCODE-2011-title31/pdf/USCODE-2011-title31-subtitleIV-chap53-subchapII-sec5311.pdf
  4. “Interagency Statement on Sharing Bank Secrecy Act Resources,” Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, Office of the Comptroller of the Currency, October 3, 2018, https://www.fincen.gov/sites/default/files/2018-10/Interagency%20Statement%20on%20Sharing%20BSA%20Resources%20-%20%28Final%2010-3-18%29%20%28003%29.pdf
  5. “FinCEN Innovation Hours Program,” Financial Crimes Enforcement Network, https://www.fincen.gov/resources/fincens-innovation-hours-program
  6. “Anti-Money Laundering Program Effectiveness,” Financial Crimes Enforcement Network, September 17, 2020, https://www.federalregister.gov/documents/2020/09/17/2020-20527/anti-money-laundering-program-effectiveness
  7. “Interagency Statement on Sharing Bank Secrecy Act Resources,” Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, Office of the Comptroller of the Currency, October 3, 2018, https://www.fincen.gov/sites/default/files/2018-10/Interagency%20Statement%20on%20Sharing%20BSA%20Resources%20-%20%28Final%2010-3-18%29%20%28003%29.pdf
  8. “National Money Laundering Risk Assessment,” U.S. Department of the Treasury, December 20, 2018, https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf

The post AMLA: The Gamechanger appeared first on ACAMS Today.