Be prepared for the changes of the Anti-Money Laundering Act of 2020 (AMLA)

The AML Act represents a significant development in U.S. anti-money laundering laws and priorities and one of it’s primary objectives is for financial institutions to spend time doing what is truly necessarily for detecting criminal activity. Learn what financial institutions and BSA professionals need to know about the changes and when they will happen.

Introduction

With a new administration in Washington, D.C., the antimoney laundering (AML) regulatory climate has already seen significant impacts. On January 1, 2021, the Senate voted to override former President Trump’s veto of the National Defense Authorization Act (NDAA). Within the NDAA, the Anti-Money Laundering Act of 2020 (AMLA) became law and amends the Bank Secrecy Act for the first time in nearly two decades. The Bank Secrecy Act (BSA), adopted in 1970, has not had a significant overhaul since the USA PATRIOT Act (commonly known as the Patriot Act) in 2001 in response to the September 11 terrorist attacks on the United States. The AML Act represents a significant development in U.S. anti-money laundering laws and priorities, and financial institutions must be prepared for the changes.

Many steps, most of which fall on the Financial Crimes Enforcement Network (FinCEN), are required before the extensive law can be implemented. These include conducting studies, writing regulations, and publishing guidance. Meanwhile, BSA professionals understandably have questions about what the changes will look like and when they will happen, given the law’s magnitude and importance. One-third of BSA professionals responding to a recent poll by Abrigo said they don’t know how their institutions will be affected by the AMLA.

FinCEN and other regulatory bodies have long understood the need to re-adjust and streamline AML priorities, and the passing of the AMLA signals that Congress is paying attention. The AMLA aims to encourage a stronger partnership between law enforcement and financial institutions, using scarce resources more effectively. The intention of the BSA is to detect and report criminal financial activity and deter criminals from flowing illicit gains through the U.S. financial system. One of AMLA’s primary objectives is for financial institutions to spend time doing what is truly necessarily for detecting criminal activity and not spin their wheels with policies and procedures on tasks that bring no benefit to law enforcement.

Change Highlights

The following recap outlines the key components of the AMLA, but it is important to remember that there are still many unknowns until the guidance is fully rolled out.

Risk-Based AML/CFT Programs

The financial crimes industry has been working under the guidance of a risk-based BSA/AML program for several years. The Federal Financial Institutions Examination Council’s (FFIEC) BSA exam manual recently clarified the risk-based program, but the AMLA goes further by codifying that an AML/BSA program should be risk-based and designed to detect money laundering and the financing of terrorism.

Prior to the AMLA, there was no clear definition of “riskbased.” The law gives financial institutions language to understand expectations. For example, the AMLA includes the following directives that have long been requested by the industry:

1. Attention and resources directed toward higherrisk customer and activities consistent with the risk profile of the institution, rather than lower-risk customers and activities
2. Enhanced examiner training relating to AML activities and financing of terrorism, including:
   • Highlighting why the BSA exists
   • Potential risk profiles and warning signs that an examiner may encounter during examinations
   • Financial crime patterns and trends High-level context regarding the importance of AML/CFT programs to law enforcement and the risks those programs seek to mitigate
   • De-risking and its effect on the financial services industry

Beneficial Ownership Registry

Embedded within the AMLA is the Corporate Transparency Act, which requires certain U.S. companies to disclose beneficial owners to the federal government and creates a non-public federal registry for beneficial ownership. FinCEN is charged with collecting and maintaining the reported beneficial owner information. Financial institutions will not be permitted to search the database, although many compliance professionals had hoped for access. Access and use of the registry are limited to law enforcement for investigative purposes only. Even so, this is a critical first step in closing shell company loopholes and satisfying global pressure for the U.S. to implement stronger know your customer regulations, particularly from the Financial Action Task Force (FATF).

This section of the AMLA will require future FinCEN rule-making and guidance to fully implement the Corporate Transparency Act, and financial institutions should continue to monitor. For now, it is important that current beneficial ownership rules are followed when collecting this important information. The AMLA maintains the definition of beneficial ownership as an individual who directly or indirectly exercises substantial control over the entity or owns or controls not less than 25% of the reporting company’s ownership interests. In addition, changes in beneficial ownership must be reported within one year of the change. Once FinCEN develops and implements rules surrounding the registry, it will be the repository where companies will provide the beneficial ownership information. This change is expected to take some of the burden off financial institutions, which currently must collect beneficial ownership information for owners with at least a 25% stake whenever a new relationship begins.

Suspicious Activity and Currency Transaction Reporting Reform

The AMLA requires FinCEN to establish streamlined, automated processes for filing non-complex categories of suspicious activity reports (SARs) and review thresholds for both SARs and currency transaction reports (CTRs).

According to FinCEN, U.S. financial institutions spend approximately $25 billion each year to maintain their financial crime (FinCrime) compliance programs, much of which centers on the filing of SARs. In 2019, financial institutions filed 1.1 million SARs, with only a small percentage reviewed by law enforcement. FinCEN is charged by the AMLA to conduct a formal review of the SAR and CTRs with the purpose of:

• Streamlining and automating processes
• Reviewing and updating data content, including form revisions
• Updating and modernizing thresholds
• Increasing transparency between FinCEN and financial institutions

The AMLA also added firm language making it unlawful to reveal any information on a reported transaction. This addition was precipitated by the disclosure of FinCEN information in several high-profile situations in the past few years, including the Panama Papers and the FinCEN files. Virtual Currency The AMLA expands several BSA definitions to include anything of value that substitutes for currency – a direct response to the growing virtual currency market. Virtual currencies and digital assets will be defined as monetary instruments, meaning they will most likely be regulated as money services businesses, but that will be determined in later guidance and regulations. With regulatory requirements around these types of mediums of exchange, financial institutions should have better knowledge as to what may be illicit use of virtual currency and what is legitimate use.

AML/CFT Model Validations

The AMLA requires a review by FinCEN of whether and how model validation applies to AML/CFT. This topic has been an ongoing frustration within the FinCrime industry, as the guidance currently used for FinCrime models was written in 2011 by the Office of the Controller of the Currency (OCC) and the Federal Reserve Board (FRB) and meant for credit and market risk. Following the review, new standards would be put into regulation and incorporated into the FFIEC BSA Exam Manual.

The standards to be written by FinCEN will center on technology and related internal processes:

• Use of innovative approaches such as machine learning or other enhanced data analytics
• Risk-based testing, oversight, and other risk management approaches
• Specific criteria for when and how risk-based testing against existing processes should be considered to test and validate the effectiveness of relevant systems
• Requirements for appropriate data privacy and information security
• Stipulation that the system configurations, including any applicable algorithms and any validation of those configurations, be disclosed upon request to FinCEN and the federal functional regulator

Antiquities Dealers

Dealers in art and antiquities have historically been a part of money laundering typologies on a global scale, with the illicit movement of funds flowing through these channels. The AMLA expands the scope of BSA programs and SAR filing requirements to include antiquities dealers, which are now within the definition of financial institutions.

Furthermore, the AMLA requires a study to be performed on art dealers to determine if they should be brought into the BSA. Many financial institutions, particularly those with a domestic footprint, are not familiar with these channels of money laundering. It is never too early to bump up your knowledge in these areas and prepare for new antiquities (and possibly art) red flags to be required as part of your overall suspicious monitoring program.

Penalty Enhancements

The AMLA has given federal law enforcement and financial regulators many new AML/CFT enforcement tools to take more aggressive enforcement action for egregious or systemic program issues, keeping in line with the Biden Administration’s promises. These enhanced penalties confirm the continued importance of the FinCEN culture of compliance guidance and should be stressed during your board of director’s training. The language in the AMLA provides new direction to financial institutions that they have adequate resources in technology and staff to appropriately address the FinCrime risk to the institution. This part of the AMLA is crucial to share now with your board and senior management to ensure they understand the consequences if it is not followed.

Penalties Around Politically Exposed Persons

Political corruption and kleptocracy is a growing concern globally and domestically alike. Politically Exposed Persons (PEPs) are high-profile individuals in a unique position to be entrusted with a prominent public function. PEPs pose a higher risk of money laundering or financing of terror, using funds illicitly obtained through their position. The FATF has issued extensive guidance in this area. Certainly, not all PEPs are criminals or kleptocrats, but It is important that financial institutions perform ongoing monitoring on their higher risk PEPs and understand the source of funds flowing through their financial institutions. The AMLA increases penalties around concealing a PEP’s source of funds, and the increased scrutiny is a direct indication that financial institutions should enhance policies and procedures around PEPs.

Whistleblower Program

Similar to the Dodd-Frank requirements, the AMLA establishes an enhanced whistleblower program strongly encouraging informants to step forward. This program also significantly expands rewards and safe harbor for those who do step forward. Whistleblowers may be aware of fraud within an institution, corruption, systemic program deficiencies, or even lack of strengthening programs as expected by regulators. A whistleblower could prevent serious regulatory penalties if issues are uncovered in time. What this will mean for an internal difference of opinion on SAR filing is yet to be seen. In any event, an addition of a whistleblower policy mirroring the AMLA should be part of an institution’s AML/BSA program going forward.

Subpoenas to Foreign Banks and Information Sharing

The AMLA expands government subpoena power and authorizes subpoenas to foreign banks that maintain correspondent accounts in the United States. The Act also allows for information sharing, through what may become like the 314(b) process, with foreign institutions. These changes will make it easier for federal prosecutors to get information in investigations that include a foreign component.

Safe Harbor for Keeping Accounts Open

The AMLA created a safe harbor in the case that law enforcement asks an institution to keep an account open. Financial institutions have struggled to strike a balance between assisting law enforcement in a suspicious activity investigation by keeping subject accounts open and wanting to stop the illicit funds from flowing through their institutions. This section helps to address the gap in this area that financial institutions believed left them exposed to regulatory or reputational risk.

Greater Resources for FinCEN

The AMLA creates more responsibilities for FinCEN, but it also provides more resources. FinCEN has been strapped for sufficient resources to administer the BSA, and this addition to the AMLA provides much-needed relief. Much of the AMLA requires studies, regulations, guidance, and ongoing reporting/performance by FinCEN, which would not be possible without greater resources.

Foreign Threats

While this may appear to be an unusual inclusion in such an act, the AMLA requires FinCEN to pe.     rform a study on money laundering risk posed by China. China has remained the major focus of the U.S. in its use of sanctions due to escalating tensions from targeted intellectual property theft, cyber espionage, and deteriorating human rights. The FATF has also cited deficiencies in money laundering controls within China. The AMLA also includes sanctions language for Russia and the Middle East but emphasizes China as a global threat. The new administration has indicated the need to curtail the influence of the government of China, particularly given human rights and democracy-related concerns. There is bipartisan domestic support for this move, as well as global concerns regarding recent activity in China.

Conclusion

The FinCrime industry has hoped for AML/BSA reform to reduce the regulatory burden of BSA reporting. The codification and clarification of the term “risk-based” for an institution’s BSA/AML program solidifies expectations between financial institutions and regulators, creating more alignment going forward. On the flip side, the enhanced penalties brought by the AMLA makes accuracy even more important. Achieving accuracy requires starting with a thorough, well-analyzed, and documented risk assessment followed by updated policies, procedures, and processes. Institutions should modernize their BSA/AML programs with appropriate risk-based innovative solutions to streamline those processes and use resources efficiently and effectively.

Institutions can expect FinCEN to write and release regulations and guidance, which will take considerable time. However, the complexity and breadth of forthcoming changes warrant attention and action by financial institutions starting now. AML/BSA programs should align with new expectations and requirements as they roll out. What can a financial institution do to prepare? Below are a few suggestions to get an institution started:

• Keep your board of directors and senior management apprised of the AMLA and subsequent regulations and guidance. No one likes surprises of a regulatory nature.
• Evaluate BSA/AML processes for innovative technology needed for streamlining. Use the AMLA to develop a business case that will pay for itself in time saved.
• Develop an AML Act action plan and update it as regulations and guidance are written.
• Update policies, procedures, and processes with what is currently known, such as adding whistleblower language to your BSA/AML program.
• Continue to be proactive and make the time to set up alerts and follow the AMLA’s progress.

Passing the AML Act is an important first step in overhauling the BSA, but there are many details yet to be determined. FinCEN has been charged with much of the development and implementation, which will likely come in fits and starts. It is more important than ever that financial institutions stay informed on the latest progress. The next few years will be busy, but the hope is the changes will ease some of the burden on financial institutions and will provide more value to law enforcement for what’s important: detecting and deterring money laundering and the financing of terror.

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Additional Resources

Whitepaper: The PEP and AML Risk: Identifying a Politically Exposed Person and Mitigating Related Risks

Whitepaper: BSA Compliance Training – Guide for Successful BSA/AML Programs

Webinar: BSA Exam Preparation 101: Hot Topics to Expect During Your Next Exam

Webinar: Politically Exposed Persons and Your Institution: Identifying, Handling, and Banking

About the Expert

Terri Luttrell

CAMS-Audit Compliance and Engagement Director

Abrigo.com

Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry. Luttrell has worked in both medium and large community and commercial banks, ranging from $2 billion to $330 billion in asset size. She has successfully worked with institutions in developing BSA/OFAC programs, optimizing various automated solutions and streamlining processes while ensuring all regulatory requirements are met.

As the Compliance and Engagement Director at Abrigo Luttrell provides insights that contribute and support long-term banking strategies based on analysis of market and industry trends, competitor developments, and financial and regulatory technology changes. She is an audit-certified anti-money laundering specialist and a board member of the Central Texas chapter of the Association of Certified AntiMoney Laundering Specialists (ACAMS).

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