“Modernized” and “Improved” Systems and Processes: How the Anti-Money Laundering Act of 2020 Changes the Landscape for Government Investigations

With bipartisan support and overriding (for the first and only time during the Trump presidency) a presidential veto, Congress passed the National Defense Authorization Act (“NDAA”) on January 1, 2021.¹  As part of the NDAA, Congress enacted the most comprehensive and substantial changes to the anti-money laundering and counter-terrorism financing laws, the Anti-Money Laundering Act of 2020 (“AMLA”), since the USA PATRIOT Act amended the Bank Secrecy Act (“BSA”) in 2001.  While the AMLA expressly addresses defense and national security concerns regarding money laundering and terrorism, the wide-ranging legislation, which expands the government’s enforcement and investigative authority, as well as its access to information, has significant implications for government investigations generally.

In particular, the government’s investigative resources have been enhanced by (1) the establishment, through the Financial Crimes Enforcement Network (“FinCen”), of a registry listing the “beneficial ownership” interests of broadly-defined mandated “reporting companies;” (2) expanded whistleblower provisions, including greater rewards and protections for whistleblowers; (3) new criminal offenses, including new BSA violations and increased penalties for violations; and (4) expanded subpoena authority for foreign bank accounts.  The broad scope of these measures makes it virtually inevitable that the government will use them to investigate and prosecute other criminal conduct, including tax evasion, sophisticated fraud schemes, Foreign Corrupt Practices Act (“FCPA”) violations, and other offenses associated with national security concerns.

Beneficial Ownership Reporting Requirements and FinCEN Registry

One of the most significant aspects of the AMLA is the new Corporate Transparency Act (“CTA”), which requires “reporting companies” to submit, as part of the company’s formation and registration process, a report to FinCEN that identifies each beneficial owner of the company by full legal name, date of birth, current business or residential address, and, either a unique identifying number from an acceptable identification document, or a FinCEN identifier based on the information provided.

A “reporting company” is defined as “a corporation, limited liability company, or other similar entity” that is registered in a state and/or is registered to do business in the United States.  While this definition includes certain exemptions, e.g., publicly traded companies, investment companies, financial institutions, insurance companies, partnerships, sole proprietorships, etc., many of these exempted entities are already required to disclose their beneficial ownership either publicly or to federal agencies.

A “beneficial owner” is anyone who “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise,” exercises “substantial control” over the entity, or “owns or controls” 25% or more of the entity.

The Act requires FinCEN to issue implementing regulations by January 2, 2022, and “reporting companies” that were already formed or registered prior to that date have two years from the effective date of the regulations to submit their beneficial ownership disclosures.  Companies formed or registered after the effective date of the regulations, however, must submit their beneficial ownership disclosures at the time they are formed or registered, while changes in beneficial ownership must be reported within a year of their effect.

Notably, the Act contains both civil and criminal penalties for providing false or fraudulent beneficial ownership information, or failing to provide complete or updated beneficial ownership information to FinCen.  Civil penalties range up to $500 for each day that the violation continues or is not remedied, while the criminal penalties include a fine of up to $10,000 and a possible term of imprisonment of up to two years.

While the Act further makes it unlawful with strict penalties for anyone to “knowingly disclose or knowingly use” beneficial ownership information submitted to FinCen, and requires FinCen to establish strict controls over the information,² it also allows for disclosure to: federal agencies engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity (emphasis added) and state, local and Tribal law enforcement agencies; foreign law enforcement agencies; financial institutions, and even in some circumstances, federal regulators.

Implementation of the CTA, particularly the beneficial ownership requirements, will require substantial rulemaking, and the effects of the regulations will not be visible for some time.  Nonetheless, while it is clearly aimed at small businesses, and shell companies, in particular, the legislation requires the full disclosure of ownership information, makes the information easily accessible to law enforcement in any investigation, not just money laundering and terrorism-related investigations, and adds new offenses and penalties (i.e., leverage) to the government’s charging decisions in a wide range of cases.

Expanded Whistleblower Provisions

The AMLA significantly enhances the whistleblower incentives and protections available under the BSA.  31 U.S.C. § 5323.  The amended provisions replace the previous award, which was discretionary and capped at $150,000, with a possible award of up to 30% of any monetary sanctions exceeding $1 million.  They also prohibit employers from retaliating or discriminating against suspected whistleblowers and allow whistleblowers who were retaliated or discriminated against to sue for compensatory damages, reinstatement, litigation costs and attorneys’ fees.

As anyone who has followed the explosive growth in whistleblower complaints under the Security and Exchange Commission’s (“SEC”) similar program or under the False Claims Act (“FCA”) can attest, these provisions are extremely likely to result in numerous tips to law enforcement, and an increase in financial fraud investigations.

Increased Penalties for Money Laundering and BSA Violations

The AMLA adds new prohibitions regarding the source of assets involved in monetary transactions to the BSA.  31 U.S.C. § 5335.  This addition to the BSA makes it a crime to “knowingly conceal, falsify, or misrepresent from or to a financial institution, a material fact concerning the ownership or control of assets involved in a monetary transaction,” if the person or entity who controls the assets is a senior foreign political figure, or a close family member or close associate of the senior foreign political figure, and the assets involved exceed $1 million.  The Act also makes it a crime to “knowingly conceal, falsify, or misrepresent from or to a financial institution, a material fact concerning the source of funds in a monetary transaction” that involves an entity found to be a primary money laundering concern.  The penalties in both instances are up to 10 years in prison and up to $1 million in fines, as well as the criminal forfeiture of proceeds involved in, and traceable to, the offense.

In addition to establishing new criminal offenses, Congress substantially increased the penalties for certain BSA violations.  Under the amended civil penalty provision, 31 U.S.C. § 5321, the government may impose an additional fine of up to the greater of three times the profit gained or lost as a result of the violation, or two times the maximum applicable penalty in cases of repeat BSA violations.  Under the amended criminal penalty provision, 31 U.S.C. § 5322, violators convicted of violating the BSA may be subject to a fine equal to the amount of the profit gained and, if the violator was a partner, director, officer, or employee, repayment to the financial institution of any bonus paid during the year in which the violation occurred or the year after.

Significantly, Congress also increased its oversight of the Department of Justice (“DOJ”), requiring the DOJ to submit annual reports listing the BSA-related deferred prosecution agreements (“DPAs”) and non-prosecution agreements (“NPAs”) entered into, amended, or terminated during the year; the justification for entering into, amending, or terminating each agreement; the factors that were taken into account in determining that the agreement should be entered into, amended, or terminated; and the extent of the coordination between the DOJ and other stakeholders in the decision.

Expanded Subpoena Authority for Foreign Bank Accounts

Previously, under 31 U.S.C. § 5318(k)(3), the government had the authority to subpoena “any foreign bank that maintains a correspondent account in the United States and request records related to such correspondent account, including records maintained outside the United States relating to the deposit of funds into the foreign bank.”³  The AMLA expands that authority to include “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside the United States,” and extends its scope beyond money laundering and terrorist financing crimes to include “any investigation of a violation of a criminal law of the United States; any investigation of a violation of the BSA; or a civil forfeiture action.  (emphasis added).   Thus, although the law targets money laundering and terrorism, its broadened scope indicates that the government will use it to target other criminal conduct, including bribery, tax evasion, false claims, fraud, FCPA violations, and other white collar crimes.

The AMLA includes strict provisions to ensure and enforce the bank’s compliance with the subpoena. Although a subpoenaed foreign bank may petition a federal district court to modify or quash the subpoena, the Act stipulates that foreign confidentiality laws may not be the only basis for quashing or modifying the subpoena.  If the bank fails to comply with the subpoena, the government may ask the district court to hold the bank in contempt, may require the termination of the correspondent account relationship, may impose penalties of up to $50,000 per day that the foreign bank fails to comply with the subpoena, and may seize funds held in the correspondent account to satisfy any penalties.⁴    

The bank is further prohibited from disclosing the existence or contents of any subpoena to any account holder involved or any person named in the subpoena.  Penalties for breach of this provision may include double the amount of the suspected proceeds sent through the correspondent account, or if proceeds cannot be identified, up to $250,000.

Conclusion

These substantial changes to the BSA and anti-money laundering laws and regulations are part of a larger framework designed to modernize and improve the government’s systems and processes for combatting money laundering and terrorist financing.  As part of this design, Congress has also significantly expanded the government’s investigative authority, resources, and access to information in conducting investigations generally.  Because many of these provisions require substantial rulemaking and include meaningful reporting obligations, the effects and implementation of the Act will likely occur over time.  In the interim, however, businesses and financial institutions should seek advice to determine whether, how, and when they will be affected.

[1] https://www.govinfo.gov/content/pkg/BILLS-116hr6395enr/pdf/BILLS-116hr6395enr.pdf

[2] While the unauthorized disclosure of beneficial ownership information is subject to the same $500 per day penalty, a criminal unauthorized disclosure may result in a fine of up to $250,000 and/or a possible term of imprisonment of up to five years.  If the unauthorized disclosure is made while violating another federal law, or as part of a pattern of illegal activity involving more than $100,000 over a 12-month period, the possible fine increases to $500,000 and the term of imprisonment to 10 years.

[3] Correspondent accounts enable foreign banks to conduct financial transactions through U.S. banks, even if the foreign banks have no physical presence in the United States.

[4] The AMLA also imposes fines of up to $25,000 per day for U.S. financial institutions that fail to terminate relationships with foreign banks that fail to comply with a subpoena.