U.S. Congress Passes Sweeping Overhaul of Anti-Money Laundering Regime
The U.S. Congress recently passed the National Defense Authorization Act of 2021 (“NDAA”) by super-majority votes and, with it, sweeping changes to current federal anti-money laundering ("AML") laws. Although President Trump vetoed the bill on unrelated grounds, Congress overrode that veto by substantial majorities, thus passing the NDAA into law.
The NDAA represents the first major overhaul of U.S. AML laws in many years and includes significantly enhanced tools to regulate, investigate, and ultimately punish AML violations. Some of the key changes include: (i) new beneficial ownership disclosure rules for corporate entities; (ii) granting the U.S. Treasury and Department of Justice (“DOJ”) the power to subpoena bank records held outside the U.S.; (iii) the creation of a whistleblower reward program for alleged Bank Secrecy Act (“BSA”) violations; and (iv) increased penalties for money laundering and related violations. Each of these new changes is discussed further below:
Disclosure of beneficial ownership
The NDAA provides the federal government with a powerful new weapon in its arsenal: a requirement that most companies, including those “formed under the law of a foreign country and registered to do business” in the U.S. (subject to certain exceptions, discussed below), reveal their beneficial owners to the Treasury Department. Currently, the U.S. is one of the only countries left in the world that still permits the creation of anonymous entities and shell companies, making it an attractive money laundering destination for all types of bad actors who often purchase U.S. real estate to launder illicit funds. The NDAA defines a beneficial owner as anyone who exercises “substantial control” over an entity, as well as individuals owning 25% or more of the ownership interests of an entity, but does not include, among others, individuals acting solely as an employee. The NDAA would create a significant dent in these actors’ ability to access American financing, by establishing a government registry of beneficial ownership to be held by the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Both civil and criminal penalties are permitted for reporting violations.
As indicated above, exceptions to certain requirements of the beneficial ownership disclosure rules are available to a number of persons and entities, including, among others:
- issuers with securities registered under Section 12 of the Securities Exchange Act of 1934 ("Exchange Act"), or that are required to file periodic reports under Section 15(d) of the Exchange Act;
- banks, Federal and State credit unions, and bank holding companies or savings and loan holding companies;
- brokers and dealers registered under Section 15 of the Exchange Act;
- exchange or clearing agencies registered under Section 6 or 17A of the Exchange Act;
- companies registered as an investment company or an investment adviser, if they are also registered with the SEC under the Investment Company Act of 1940;
- venture capital fund advisers that have filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV with the SEC;
- insurance companies;
- certain pooled investment vehicles; and
- companies that (a) have more than 20 full-time employees in the U.S., (b) report more than US$5m in yearly revenue to the Internal Revenue Service, and (c) have an operating presence at a physical office within the U.S.
Stronger subpoena power
The NDAA grants the Treasury Secretary and the Attorney General the power to issue subpoenas to foreign banks for records maintained abroad, so long as the bank holds a correspondent account within the U.S. and the subpoena seeks records that are the subject of an investigation of a violation of U.S. criminal law, an investigation of a violation of the NDAA, or a civil forfeiture action, among others. The subpoena power circumvents the mutual legal assistance treaty (“MLAT”) process and should thus expedite the time in which the government is able to obtain relevant evidence. Although a party served with such a subpoena can move to have it modified or quashed, the NDAA provides that foreign secrecy or confidentiality laws and blocking statutes are not valid bases to raise an objection.
Larger whistleblower awards
The NDAA would bolster the current financial incentives for whistleblowers to reveal BSA violations. The existing regulatory regime provides whistleblowers with 25% of the penalty or US$150k (whichever is less), and grants the Treasury Department discretion regarding the amount of any award. The bill would provide whistleblowers not only protection from retaliatory employment actions, but also up to 30% of financial penalties if they exceed US$1m. While the bill provides the Treasury Secretary discretion in determining the amount of the award, he or she is required to take into consideration several factors, including the degree to which the information provided is useful “to the success of the covered judicial or administrative action.”
The NDAA provides more severe penalties for repeat offenders of the BSA. Additional civil fines for repeat offenders are imposed by the Treasury Secretary and are either “if practicable to calculate, 3 times the profit gained or loss avoided. . . as a result of the violation; or. . . 2 times the maximum penalty with respect to the violation,” whichever is greater.
Overall, the NDAA is a major overhaul of the current U.S. anti-money laundering regulatory scheme and gives the government considerable new tools to fight related crimes. Although it will be crucial to carefully analyze all of the new changes in the NDAA, companies should think critically about their current compliance programs, consider whether any improvements are necessary or prudent, and determine how they can adapt quickly now that the NDAA has become law.