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Bates Research  |  02-24-22

FinCEN Roundup: Recent Developments, Rulemakings on Anti-Money Laundering

Image © [kentoh] /Adobe Stock

On January 1, 2021, the Anti-Money Laundering Act (“AMLA”), became law. The far-reaching legislation expanded the Bank Secrecy Act regulatory framework by, among other things, establishing a beneficial non-public ownership database and reporting requirements under AMLA’s Corporate Transparency Act (“CTA”); promoting technology and other innovation to support enforcement, particularly concerning suspicious activity reports (“SARs”); expanding enforcement authority over art, antiquities and real estate; and increasing penalties for AML violations. (See the Bates review of AMLA’s key concepts here.) The story of FinCEN’s regulatory efforts since the passage of AMLA is the story of the agency working to effectuate those mandates. In this post, Bates looks at where we are in that story with the following regulatory developments.

FinCEN’s Proposed Rule on Beneficial Ownership Reporting (and Reminder of an Upcoming Rule on Access to the Reports)

On April 1, 2021, FinCEN solicited public comment in an Advanced Notice of Proposed Rulemaking about AMLA directives for beneficial ownership. (See Bates article here.) On December 8, 2021, FinCEN published the proposed rulemaking along with a detailed fact sheet. The proposed rules implement the CTA requirement within AMLA “that a reporting company submit to FinCEN a report containing beneficial owner and company applicant information (“BOI”). The proposed rule defines: (1) who must file, (2) when they must file, and (3) what information they must provide. The proposal states that this information would enable “law enforcement, the intelligence community, and other key stakeholders” to “diminish the ability of malign actors to obfuscate their activities through the use of anonymous shell and front companies.”

The comment period on the proposed rulemaking closed this week (February 7, 2022). FinCEN reported receiving more than 230 comments.

Among the comments was a submission by two Senators instrumental in the passage of AMLA: Ron Wyden (D-OR), Chair of the Senate Finance Committee, and Sheldon Whitehouse (D-RI), Chair of the Finance Subcommittee on Taxation and Internal Revenue Service (“IRS”) Oversight. Their comments give a flavor of the complexities involved as FinCEN navigates the CTA provisions of AMLA. For example, the Senators applauded (1) “the proposal’s comprehensive and clear definitions for beneficial owner and applicant;” (2) how the rule covers “each individual who exerts substantial control, whether directly or indirectly, over an entity;” and (3) how it broadly defines “other similar entities” required to report BOI. The Senators expressed concerns, however, over a possible loophole about exemption language concerning “wholly owned” subsidiaries. The Senators suggested amending the proposal to clarify that the “exemption applies only to entities that are ‘wholly controlled or wholly owned’ by certain exempt entities and not to “any entity whose ownership interests are even partially owned by a criminal, kleptocrat, or terrorist, so long as some of such entity’s voting rights are controlled by certain other exempt entities.”

The regulatory processes on reporting and the database of beneficial ownership are far from complete. In announcing the close of the comment period on beneficial reporting, FinCEN reminded stakeholders that the reporting proposal is only the “first in a series of rulemakings” that FinCEN will undertake to implement the CTA. Later this year, another rulemaking is expected on access to the information reported. In their comments, the Senators also noted FinCEN’s efforts to revise customer due diligence requirements for financial institutions (the “CDD Rule”). The Senators encouraged FinCEN to “ensure that any new CDD rule (1) adopt the definition of beneficial owner included in the CTA, and (2) requires financial institutions to verify the beneficial ownership information of each legal entity customer, regardless of whether such entity is covered by the CTA’s definition of reporting company.”[1]

FinCEN’s Proposed Rule on SARs Sharing Pilot Program

On January 24, 2022, FinCEN proposed a new rule to establish a limited-duration pilot program for sharing SARs pursuant to the AMLA. The AMLA limited the pilot to 3 years after the law’s enactment date (i.e., January 1, 2024). The proposed program would allow a financial institution to share SARs with its foreign branches, subsidiaries, and affiliates. Such sharing would be (1) undertaken “under standards and requirements regarding data security and the confidentiality of personally identifiable information,” (2) limited by the requirements of federal and state law enforcement, and (3) with consideration for the concerns of the intelligence community. AMLA prohibits financial institutions with a foreign branch, subsidiary, or affiliate located in the People’s Republic of China, the Russian Federation, or any jurisdiction that is a state sponsor of terrorism from sharing SARs or related information. Comments are due by March 28, 2022.

 


[1] It should be noted that the SEC is also proposing to update its reporting rules on beneficial ownership. In a proposed rulemaking issued on February 10, 2022, the SEC proposed amendments to its regulations to (1) accelerate the filing deadlines for beneficial ownership reports from 10 days to 5 days and require that amendments be filed within 1 business day; (2) expand the application of its beneficial ownership reporting to certain derivative securities; (3) clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; (4) provide new exemptions “to permit investors to communicate and consult with each other, jointly engage with issuers, and execute certain transactions without being subject to regulation as a group;” and (5) require beneficial ownership filings to use a structured, machine-readable data language. See also, the newly issued Fact Sheet accompanying the proposal.

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FinCEN’s Pre-Proposed Rule on Real Estate Transactions

On December 8, 2021, FinCEN issued an advanced notice of proposed rulemaking (“ANPR”) “to address the vulnerability of the U.S. real estate market to money laundering and other illicit activity.” Though the advanced notice is a precursor to an actual rulemaking, FinCEN makes clear that it is seeking input on proposing nationwide “recordkeeping and reporting requirements on certain persons participating in transactions involving non-financed purchases of real estate.” Under prior authority, FinCEN imposed specific Geographic Targeting Orders (see here, for example) requiring transaction reporting by title insurance companies.

The ANPR—which makes several references to the BSA framework as changed by the AMLA—seeks input on (1) persons who should be subject to the requirements, (2) the types of real estate transactions to be covered, (3) the reporting information required, and (4) reporting dollar-value thresholds. The close of the comment period was supposed to be February 7, 2022. Last week, however, FinCEN extended the comment deadline until February 21, 2022.

One to Watch: Potential Regulation on Money Laundering in the Art Market

Mandated by the AMLA, a study on the facilitation of money laundering and the financing of terrorism through the trade in works of high-value art was published on February 4, 2022. The Department of the Treasury found that “most art market participants, including some entities that provide financial services within the high-value art market, are not subject to anti-money laundering/countering the financing of terrorism (“AML/CFT”) obligations.”

The study found that the art market is particularly attractive to illicit actors because of “the high-dollar values of single transactions, the ease of transportability of works of art, the long-standing culture of privacy in the market (including private sales and transactions), and the increasing use of art as an investment or financial asset.” The study concludes with a number of regulatory recommendations for consideration, including potential “targeted recordkeeping and reporting requirements to support information collection and money laundering activity analyses” and the application of “comprehensive AML/CFT measures to certain art market participants” – though it did not recommend the latter at this time. This initiative could also impact the evolving NFT market.

Conclusion

FinCEN has taken significant regulatory steps to effectuate the AMLA and CTA mandates. The proposed reporting rules, the anticipated proposed rules on BOI report access (expected later this year), the SARs-sharing pilot, anticipated rules on non-financial real estate transactions, potential action on the art markets—all these have enormous compliance consequences for financial institutions. And those rules do not include what may result from FinCEN’s general Request for Information (“RFI”) issued in December that seeks input on ways to “streamline, modernize, and update” the entire AML/CFT regime post-AMLA. (Note: All comments are due by February 14, 2022). Bates will keep you apprised.

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