Bates Research - 12-13-17
FINRA, Treasury and Legislators Push AML Back to the Forefront
Legislators and regulators continue their uneven path toward a more comprehensive and inclusive framework to combat international money laundering. In the past few weeks, FINRA provided new anti-money laundering (AML) guidance to member firms as it issued a first-of-its-kind public summary of an examination of broker-dealer compliance programs. The U.S. Treasury Undersecretary for Terrorism and Financial Intelligence (TFI) announced the launch of a new FinCEN Exchange to encourage cooperation within “the compliance community” and to support the TFI's approach to Bank Secrecy Act (BSA) requirements. In addition, regulatory and legislative initiatives that broaden the scope of authority for law enforcement agencies moved forward in the U.S. and the U.K.
FINRA Gets Specific
As covered in more detail in this Bates Group Practice Alert, FINRA issued a Notice on November 21st providing guidance regarding new member firm obligations under FinCEN’s 2016 Customer Due Diligence Rule. (See also, FinCEN’s FAQs on CDD Final Rule). Members must be in compliance by May 11, 2018. In general, the guidance described new obligations required to satisfy a “fifth pillar” of compliance, including performing customer identification and verification (CIP); performing beneficial ownership identification and verification; understanding the nature and purpose of the customer relationship to develop a risk profile of the customer; and monitoring for suspicious transactions and maintaining customer information.
FINRA underscored the importance of its recent AML guidance (and other priorities) by releasing, for the first time, a public summary of its examination of broker-dealer compliance programs. One commenter reinforced the importance of the AML priority stating: “FINRA issues more enforcement decisions for AML failures than any other U.S. regulator.”
The results of the examination were sobering. FINRA observed instances where firms (i) failed to establish and implement an AML program reasonably designed to detect, and cause the reporting of, suspicious activity; (ii) did not have an appropriate understanding of what monitored activities required escalation; (iii) had deficient monitoring systems due to gaps in data feeds; and (iv) did not ensure that independent testing included a review of AML program implementation. FINRA also identified deficiencies caused by firms’ failure to provide adequate resources to AML departments. In addition, FINRA found that some firms did not ensure the independence of the testing, or had not completed tests on an annual calendar year basis where the firm’s business warranted regular testing.
FINRA observed that broker-dealer “firms with effective AML programs actively tailor their risk-based AML program to the firm’s business model and associated AML risks as opposed to simply implementing a more generic program.” These firms sampled customer accounts to test whether the firm “was collecting and verifying customer identification information” and whether it was adequately monitoring for and investigating potentially suspicious activity.
Treasury Undersecretary Announces New AML Initiative
Treasury Undersecretary for Terrorism and Financial Intelligence Sigal Mandelker announced an initiative called the “FinCEN Exchange,” a new public-private information sharing program that will bring financial institutions, FinCEN and law enforcement together to facilitate greater information sharing between the public and private sectors. In a speech delivered at the American Bankers Association and American Bar Association Financial Crimes Enforcement Conference, Ms. Mandelker described the new initiative and offered an ambitious agenda.
She shared that TFI is (i) engaging with financial institutions to promote more efficient information sharing among institutions, and between institutions and regulators (see here, for more on the launch of the FinCEN Exchange), (ii) reviewing the Bank Secrecy Act to identify and address areas in need of improvement; (iii) engaging with businesses in the FinTech and RegTech sectors to foster innovation and leverage financial and regulatory technology, and (iv) “enhancing public-private partnerships that expose, address, and eliminate vulnerabilities.”
Ms. Manelker described TFI’s use of “powerful tools” to fight money laundering, including sanctions, enforcement actions, foreign engagement, intelligence and analysis, private sector partnerships, and global and domestic collaborative initiatives. Her main message, however, was to encourage “the compliance community to be continually vigilant in helping to supplement these tools and authorities.” In her appeal, she stated:
“The safeguards that our financial institutions put in place, and the information that you provide to us about terrorist financiers, proliferators, human rights abusers, and cyber and other criminals, are what helps prevent malign actors from abusing our financial system.”
Finally, Ms. Manelker insisted that the efforts she described to improve the AML framework will not impose additional regulatory burdens.
More Attention Paid to AML by Lawmakers
Bates’ last review of AML legislative activity noted the bipartisan support for the Combatting Money Laundering, Terrorist Financing and Counterfeiting Act. The bill proceeded apace this past week when it was taken up at a hearing before the Senate Judiciary Committee. Senators met with law enforcement from Treasury, Department of Justice and Homeland Security to review both the scope of the problem (see here) and proposed expansions of authority for law enforcement (see here for a summary of the provisions.)
The meteoric rise in Bitcoin prices did not escape notice at the hearing. The bill is now receiving significant pushback from the cryptocurrency industry. Some of the language used to define financial institutions in the bill could potentially “criminalize anyone intentionally concealing ownership or control of a digital currency or exchange account.” Cryptocurrency advocates note the possibility that the bill may require the filing of “federal registration forms for tax disclosure, quarterly reporting and more.” (See this analysis from the Bitcoin Foundation.)
The recent decision by several U.S. exchanges to start trading in Bitcoin futures is garnering additional international AML regulatory attention as well. The British Finance Ministry reemphasized last week that recent regulatory changes will “bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation.”
There is broad activity across the anti-money laundering landscape. Though it may be uncoordinated, the activity suggests a continuing march toward a more comprehensive and inclusive global AML regulatory and enforcement framework. Bates will continue to track the issues as they evolve in 2018.
Editor's Note: Bates Research will be off for the next 2 weeks. We wish you a happy holiday season!