March 26, 2021

U.S. Anti-Money Laundering Laws Get an Upgrade: Enhanced Authorities, New Regulations, Impact on Correspondent Accounts, Whistleblower Changes, and New Transparency Requirements

8 min

The Anti-Money Laundering Act of 2020 (AML Act), enacted as Division F1 of the National Defense Authorization Act (NDAA) of 2021, substantially modifies the U.S. anti-money laundering (AML) laws. The most comprehensive reform of the Banks Secrecy Act (BSA) since the USA PATRIOT Act in 2001, the AML Act seeks to modernize the U.S. approach to AML and will impact more than just U.S. financial institutions. Here we highlight several of the most significant provisions of the AML Act—corporate transparency/beneficial ownership requirements, subpoena power over foreign banks with U.S. correspondent accounts, enhanced incentives for whistleblowers, and AML modernization.

Beneficial Ownership Requirements

The Corporate Transparency Act (CTA)(Title LXIV) brings a version of the European Union's beneficial ownership register to the United States and generally codifies the Financial Crimes Enforcement Center (FinCEN) beneficial ownership (25% or more) 2016 rule,2 while placing the disclosure burden on "reporting companies." Once regulations are adopted, FinCEN will collect and store the beneficial ownership information of reporting companies for law enforcement and regulatory use. We initially addressed the AML Act as it awaited the president's signature.

"Reporting companies" is defined to include companies created in the United States and foreign companies doing business in the United States. But there are two broad categories of exceptions: (1) numerous classes of publicly traded, regulated, nonprofit, and government entities, as well as companies owned or controlled by those entities; and (2) companies that (i) employ more than 20 full-time employees in the United States, (ii) annually report more than $5 million in gross receipts or sales to the Internal Revenue Service, and (iii) have an operating presence at a physical office within the United States. In other words, the CTA is directed at requiring "shell" companies, ones with no office, assets, or business activity, to report their ownership.

A beneficial owner is any individual who (i) owns a 25% equity stake or (ii) exercises "substantial control" over the reporting company. The CTA does not define "substantial control," and reporting companies should monitor future implementing regulations and guidance issued by FinCEN on the subject. In this regard, certain individuals are expressly excluded from the definition of "beneficial owner," including (i) individuals acting as agents, intermediaries, or custodians on behalf of another; (ii) an employee of a reporting company whose control or economic benefit with respect to the entity is derived solely from employment; and (iii) creditors of the reporting company (unless the creditor meets either the "substantial control" prong or owns or controls 25% or more of the reporting company). Coming regulations will refine these terms.

FinCEN will disclose beneficial ownership information to facilitate customer due diligence (CDD) requirements placed on financial institutions. With penalties for misuse and unauthorized disclosure of this information, financial institutions will need to develop processes to manage beneficial ownership information.

Correspondent Accounts

Section 6308 of the NDAA greatly expands the USA PATRIOT Act's provision intended to give the U.S. Departments of Treasury and Justice authority over correspondent bank accounts.3 The expanded authority includes:

  1. Requesting any "records relating to the correspondent account or any account at the foreign bank." This phrase allows U.S. law enforcement to ask for records from any financial institution having a correspondent account in the United States, regardless of whether the records have anything to do with the correspondent account. In short, if a foreign financial institution (FFI) has a correspondent account in the United States, the FFI's account records, of any kind and location, may be subject to being produced to U.S. law enforcement.
  2. The ability to request records that are the subject of "any investigation of a violation of a criminal law of the United States; any investigation of a violation of this subchapter; a civil forfeiture action; or an investigation pursuant to section 5318A."4 The highlighted language removes the USA PATRIOT Act focus on anti-money laundering crimes and opens the use of subpoenas for an investigation of any crime under U.S. law.
  3. Providing, as a matter of law, that responding to a subpoena with a claim that compliance would violate the law of the country where the records are located "shall not be a sole basis for quashing or modifying a subpoena."
  4. Greatly enhanced penalties for failing to comply with a subpoena (from $10,000 to $25,000 per day) and continuing the Treasury Secretary's and attorney general's authority to force a U.S. bank to terminate an FFI's correspondent accounts for failure to comply with a subpoena.

The breadth of this new law may well invite challenges to both personal jurisdiction over the FFI and the scope of U.S. courts' extraterritorial reach. In both areas, there are a number of decided cases that may limit the reach of these new powers.5

In addition to jurisprudence potentially limiting the scope of the U.S. government's reach into FFI account records, there is an established procedure for seeking records located outside of the United States. This process is governed by the Justice Manual, 9-13.500, the internal operating manual of the Department of Justice, and requires consultation with the Office of International Affairs at Justice, as well as, in some cases, the U.S. Department of State. These consultations, bringing in traditional notions of comity and international law, may have the effect of circumscribing the scope of a request for records located outside of the United States, such as those at an FFI, under this new law.6

Enhanced Whistleblower Provisions

The AML Act significantly expands existing BSA whistleblower provisions by incentivizing reporting. Specifically, where a whistleblower ("informant," under the previous statutory language) voluntarily provides "original information" that leads to an AML enforcement action brought by the U.S. Treasury Department or the Department of Justice resulting in monetary sanctions over $1 million, Treasury shall pay an award to the whistleblower of up to 30% of what it collected. (Note: This mandatory language is tempered by statutory language stating that the amount of the award is in the discretion of the Treasury Secretary and is subject to judicial review.)

The AML Act also includes new anti-retaliation provisions protecting a whistleblower from discharge, suspension, demotion, blacklisting, and harassment. With the substantial increase in awards, the fact that awards are no longer discretionary (while amounts are), and the enhanced protections, financial institutions can expect an increase in employee reporting and possibly enforcement actions. Treasury, in consultation with the Justice Department, is authorized to issue implementing regulations. Financial institutions should review their AML programs with these enhanced provisions in mind.

AML Modernization

The AML Act touches upon almost every aspect of the U.S. AML program, including strengthening FinCEN, internal U.S. agency cooperation, and international AML activities through financial attachés and financial intelligence units, expanding the definition of "financial institution" to include dealers in antiquities and, potentially, art, and changing the definition of "monetary instruments" to capture "value that substitutes for currency." More broadly, it requires the modernization of the U.S. AML and countering the financing of terrorism systems.

In ordering this modernization, the AML Act seeks to change the U.S. approach to anti-money laundering (AML) and counter-terrorism financing (CFT). In doing so, it begins by broadening the BSA's declaration of purpose far beyond recordkeeping and reporting to include adapting the U.S. AML regime to respond to emerging threats, encouraging technological innovation, reinforcing the risk-based foundation of AML/CFT programs, assisting national security and intelligence agencies, and protecting U.S. national security.

To carry the modernization program into effect, the AML Act directs the Secretary of the Treasury, in consultation with every federal agency involved in regulating financial services and enforcing the AML laws, including the Director of National Intelligence, the Secretary of Homeland Security, and the Commissioner of Internal Revenue, to "undertake a formal review of the regulations implementing the Bank Secrecy Act and guidance related to that Act."

This review, begun in 2020 by FinCEN and summarized in an earlier alert, has several purposes:

  1. Ensure the Treasury Department provides "appropriate safeguards" to protect the financial system from threats, money laundering, financing terrorism, and financial crime;
  2. Ensure that the Treasury Department continues to produce reports useful in countering financial crime;
  3. Identify outdated regulations and ones that do not meet international standards for combating money laundering, financing of terrorism, serious tax fraud, or other financial crimes; and
  4. Improve the efficiency of the U.S. AML system.

The Secretary of the Treasury is to report on the modernization process, in writing to Congress, on or before January 1, 2022. Both before and after this date, we will see a large number of regulatory rulemakings that should be monitored closely for their impact on the financial system and on the private sector's compliance obligations.

Please contact the authors if you would like to learn more about the AML Act. We will continue to provide updates as the AML modernization process evolves.

* Ms. Biddle and Mr. Wilson are partners at Venable LLP and work in the financial services area.

[1] Titles LXI-LXV of the NDAA of 2021.

[2See 81 Fed. Reg. 29298 (May 11, 2016).

[3] A correspondent account, as defined by the Federal Financial Institutions Examination Council's BSA/AML InfoBase:

a "correspondent account" is an account established by a bank for a foreign bank to receive deposits from, or to make payments or other disbursements on behalf of the foreign bank, or to handle other financial transactions related to the foreign bank. An "account" means any formal banking or business relationship established to provide regular services, dealings, and other financial transactions. It includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit (31 CFR 1010.605(c)).

[4] As § 6308 amends 31 USC § 5318, the "subchapter" referenced in this quote includes 31 USC §§5311-32, Records and Reports on Monetary Instruments Transactions, including electronic funds storage devices and transfers.

[5See, e.g., Silvia B. Penera-Vazquez, Extraterritorial Jurisdiction and International Banking: A Conflict of Interest, 43 U. Miami Rev. 449 (1988).

[6See D. Edward Wilson, Jr., A Bank's Response to a U.S. Subpoena for Documents Located Abroad and Avoiding a Contempt Citation, Dept. Justice Manual, 9-2.162A, 1991-1 Supp.