Are Legislative Changes to US AML Rules Finally on the Way? Some Thoughts on Tomorrow’s Subcommittee Hearing

Although the United States has been a leader in the fight against global corruption in some respects—particularly in its vigorous enforcement of the Foreign Corrupt Practices Act and, at least until recently, its diplomatic efforts—there is widespread agreement in the anticorruption community that the United States has not done nearly enough to address the flow of dirty money, much of it stolen by kleptocrats and their cronies, to and through the United States. Effectively addressing this problem requires updating the US legislative framework, a task made difficult by the checks and balances built into the federal legislative process, coupled with high levels of political polarization. Yet there are reasons for cautious optimism: Thanks in part to skillful lobbying efforts by several advocacy groups, and aided in part by the Democrats taking control of the House of Representatives in the most recent mid-term elections, it looks as if there’s a real chance that the current Congress may enact at least some significant reforms.

Three of the reform bills under consideration are the subject of a hearing to be held tomorrow (Wednesday, March 13, 2019) before the House Financial Services Committee’s Subcommittee on National Security, International Development, and Monetary Policy. That hearing will consider three draft bills: (1) a draft version of the “Corporate Transparency Act” (CTA); (2) the “Kleptocracy Asset Recovery Rewards Act” (KARRA); and (3) a draft bill that currently bears the unwieldy title “To make reforms of the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (which I’ll refer to as the Bank Secrecy Act (BSA) Amendments). The subcommittee’s memo explaining the three proposals is here, and for those who are interested, you can watch a live stream of the subcommittee hearing tomorrow at 2 pm (US East Coast time) here.

For what it’s worth, a few scattered thoughts on each of these proposals:

  • First, the CTA is the successor to the provisions of last year’s Counter Terrorism and Illicit Finance Act (CTIFA) that would have required that an applicant to form a corporation or limited liability company (LLC) to provide to the US Treasury, maintain, and regularly update information on the entity’s “beneficial owner(s),” where a beneficial owner is defined as a natural person (that is, a flesh-and-blood human being) who, directly or indirectly, exercises substantial control over the company or receives substantial economic benefits from the company’s assets. The CTIFA (and its companion bill in the senate) would also have subjected corporate formation agents to the suspicious activity reporting requirements of the BSA, and also contained a number of other controversial provisions. The CTA is a cleaner, more streamlined bill that just imposes the beneficial ownership reporting requirement. The case for that requirement seems so overwhelming that, one hopes, this “cleaner” bill may have an easier time getting through Congress, but of course there are no guarantees.
    • In particular, the American Bar Association (ABA), which emerged as one of the more vocal opponents of the CTIFA and other previous bills on ownership transparency (see here and here), should be hard-pressed to come up with a plausible argument as to why the CTA interferes in any way with attorney-client confidentiality. In contrast to the earlier bills, the CTA doesn’t impose reporting requirements on “corporate formation agents,” and indeed even the beneficial ownership reporting requirements just apply directly to the “applicant” seeking to form a legal entity. Attorneys would only be affected if they applied to form a corporation on behalf of a client; in that case the attorney, like any other applicant, would have to provide beneficial ownership information. But suggesting that requirement implicates the special duties lawyers owe their clients is just silly.
    • One potential sticking point, at least for those who want to oppose the CTA but may not want to state their real reasons out loud, is that the bill’s definition of “beneficial ownership” is framed in general, standard-like terms, not in terms of (for example) strict numerical ownership levels or anything similar. But as Hilary persuasively argued in a post last year, this is a sensible—perhaps the only sensible—way to approach this issue. Still, the ABA and other opponents may latch onto this issue to try to suggest that the bill, even in its current stripped-down form, is unduly burdensome, etc. etc.
    • Transparency advocates are likely to be disappointed that the CTA does not create a public beneficial ownership registry. Like previous US bills on this topic, the beneficial ownership information supplied by applicants would be available only to law enforcement (domestic and foreign), or to financial institutions performing due diligence on customers, with the customer’s consent. While that’s probably not ideal—I’ve argued before (see here and here) that a public registry has some important advantages over a confidential registry—it doesn’t seem to me that big of a deal. Getting a confidential registry in place would get us most of the way to where we want to go on ownership transparency, and once the confidential registry is in place and working tolerably well, we can have a conversation about the pros and cons of making it public.
    • One important feature of the CTA is that it’s retroactive: Not only does it apply to any new legal entity formed after the act goes into effect, but it also contains a provision that says, within two years of the final Treasury regulations implementing the act, existing corporations and LLCs also must comply with the requirements on beneficial ownership reporting. That seems like a big deal: It means that parties will not be able to evade the new disclosure rules by making use of existing anonymous companies.
  • As for KARRA, this legislation—which Jetson has written about before—would create a whistleblower rewards program for people who provide information that leads to the recovery of assets linked to foreign government corruption and the proceeds of such corruption. In general this seems like a really good idea, but the limitations that Jetson pointed out with respect to the 2018 version of KARRA continue to apply to this version (which seems, in all important respects, identical). Those drawbacks—as Jetson outlined in his post last year—are as follows:
    • (1) The rewards are too small, and too uncertain, to provide adequate incentives. While other programs guarantee eligible whistleblowers between 10-30% of the total recovery (assuming a recovery above a certain threshold), KARRA as drafted caps the reward at $5 million, and leaves both the amount of the award and whether an award will be paid at all to the sole discretion of the Treasury Secretary.
    • (2) KARRA doesn’t allow individuals who participated in or facilitated the foreign corruption at issue to receive an award under the program. While that might initially seem sensible, in practice it’s likely counterproductive, given that often the only people who know about foreign corruption schemes are those who participate in them in some way. Moreover, it seems like a good idea to sow distrust among the corrupt actors, and between those actors and the intermediaries whose assistance they require. A kleptocrat who knows that the banker he hires to launder his stolen assets could (secretly) turn him in and collect millions of dollars will be more distrustful of those intermediaries, and be more cautious. It makes sense to exclude from eligibility those participants in the scheme who only provided information after they themselves were under investigation, but a participant who comes to the US government on her own initiative (and surrenders any economic gains she received from her role in the scheme) should be eligible for an award.
    • (3) The protections against retaliation are too vague and left entirely to the discretion of the Treasury Secretary. Other statutes contain much stronger anonymity and anti-retaliation protections, which can and should be incorporated into KARRA. In their absence, a whistleblower trying to figure out if it’s worth the risk to come forward might be discouraged, especially if the whistleblower is a foreign national still resident in the country where the corruption took place.
  • The BSA Amendments contains so many different provisions that I won’t try to summarize, let alone comment on, all of them. But I did want to highlight a few encouraging features of this bill that might be easy to overlook.
    • First, the bill increases the compensation for officials in the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the unit with principal responsibility for anti-money laundering (AML) and related efforts. That’s no small thing, as an effective federal agency requires talented people with expertise in finance. The people with the right qualifications could command (much) higher salaries not only in the private sector, but could command (somewhat but non-trivially) higher salaries at other US government agencies. If AML is a priority, then the government needs to attract the best and the brightest to FinCEN, and paying a competitive salary is one important way to do that.
    • Second, the proposed BSA Amendments also contains a section upgrading the current provisions on whistleblower rewards and protections. The changes all seem sensible to me. Picking up on the comments above regarding KARRA, perhaps it would make sense to incorporate KARRA into this bill by expanding the whistleblower protection and rewards program amended by the BSA Amendments to include acts of foreign corruption. The draft definition of “whistleblower” in the BSA Amendments is “any individual who provides … information relating to a violation of laws enforced by FinCEN”; it seems to me that definition could simply be expanded (or clarified) to include those who provide information that leads (in the words of the current KARRA draft) to the restraint, forfeiture, or repatriation of “stolen assets in an account at a U.S. financial institution …, that come within the United States, or that come within the possession or control of any United States person.” This might be a better approach than enacting KARRA as a standalone statute, especially since the whistleblower provisions covered by the BSA Amendments provide for a 10-30% recovery, and does not prohibit recovery by someone who participated in or facilitated the wrongdoing (though it does prohibit recovery by a whistleblower who is convicted of a criminal violation related to the action for which the whistleblower could otherwise receive an award).
    • Third, the BSA Amendments would close some loopholes in the current AML rules, for example by applying these rules to art and antique dealers, and expanding the current Geographic Targeting Orders regarding beneficial ownership transparency in real estate transactions to cover commercial as well as residential real estate, and to in-kind purchases. It might be better to go even further, and simply subject real estate brokers to the same AML requirements that apply to financial institutions and would, under the proposal noted above, also apply to art dealers. It’s not clear to me why someone brokering the sale of a $1 million painting should be subjected to more stringent AML requirements than someone brokering the sale of a $10 million house.

Now, the fact that a congressional subcommittee is holding a hearing on these bills does not mean that it’s likely that they’ll become law. But the odds are looking better for action on these various fronts than they have in years, particularly on the beneficial ownership transparency reforms. We’ll continue to follow the issue, and hopefully we’ll have good news to report in the months to come.

10 thoughts on “Are Legislative Changes to US AML Rules Finally on the Way? Some Thoughts on Tomorrow’s Subcommittee Hearing

  1. Matthew, thanks for this quick and thoughtful review of the pending legislative hearing. A couple of points of information that might be useful.

    First, not to quibble, but the Corporate Transparency Act conceptually pre-dates the CTIFA. It is more or less similar to versions of the CTA that Rep Maloney has introduced in previous sessions of Congress. That said, this current version reflects changes that Congress made based on the debate generated by consideration of CTIFA last session. In that light, I’d agree this version of CTA could be seen as a follow-on from last year.

    Second, you may already know this, but the KARRA is actually an outgrowth of hearings held by a House Financial Services subcommittee on terrorism and illicit finance. They produced a report with recommendations in 2015 (and if I recall, a follow up report in 2016). That report might be a useful point of comparison to evaluate this bill.

    Third, on the real estate front, technically speaking, Congress doesn’t need to pass legislation to subject real estate professionals to AML requirements. Broadly speaking these requirements exist within the BSA revisions found in the PATRIOT Act. But, as many readers here know, the industry received a waiver from such requirements at the time the bill was passed, and that waiver has stood until today. Treasury could elect to rescind the waiver, and initiate a rule-making. That said, Congress could force the issue through legislation, and such political pressure may ultimately be necessary.

    • Mark, thanks so much for the quick reply and the helpful clarifications. One of the hazards of offering quick reactions to developments in fields that I only occasionally follow is that I may make some careless mistakes, and I’m grateful for the corrections and clarifications. On each of your three points:

      (1) On the history of the CTA and its relationship to the CTIFA, thanks for the reminder that legislative proposals in this vein didn’t just start last year. My understanding is that bills to mandate some form of beneficial ownership disclosure and/or transparency have been percolating in Congress for over a decade, though my impression was that last year’s CTIFA was the closest anything has yet come to passage. But I certainly didn’t mean to in any way minimize the significance of Rep. Maloney’s efforts (or anyone else’s)!

      (2) I didn’t know about the hearings and report that provided the impetus for KARRA. I’d love to see that report. Do you know if it’s online, and if so could you provide a link? I did a quick Google search but couldn’t find it.

      (3) Yes, I should have mentioned the waiver issue on the application of BSA requirements to the real estate sector. Treasury could fix the problem on its own. But it’s been 17 years since the “temporary” waiver for real estate, and so, as you say, the time may have come for Congress to act. It seems to me that if Congress is going to take the trouble to make important but relatively minor changes around the edges of the existing GTOs, it might as well go whole hog and eliminate the current waiver via legislation–which, unless I’m missing something, would render the current GTOs on real estate transparency basically obsolete (even if not technically redundant, since the GTOs apply to the title insurance companies rather than the brokers).

      • Matt, on your last point, very much agree – even proposed legislation to rescind the waiver, if not passed, could generate enough pressure for Treasury to act unilaterally. There has been some useful debate as to whether the permanent extension of the GTOs (which this bill doesn’t do, but does include the commerical sector) might be an incremental step towards full due diligence in the sector (indirectly, by making the whole notion more ‘real’ for those involved) and provide some valuable data and pressure in the meantime. Or, whether it’s a stop gap measure that might blunt momentum towards that goal. I think the jury is still out. On the House hearings, I will see if I can find them and post them here. ON CTIFA, I think you’re right that it was closest such legislation has come, and so important to note it’s introduction as a key benchmark. Definitely, didn’t think you were minimizing Rep. Maloney’s role – merely that you were eliding for brevity, which is totally fine.

  2. Professor, thanks for this. Do you have a sense of which of these proposed bills has the greatest chance of actually being passed? My sense is that there’s certainly some energy to reform the U.S. AML regime, but is there enough to get three separate pieces of legislation passed? Or could these bills eventually wind up combined into some sort of broader, more comprehensive reform package?

    • I don’t want to jinx it, but if I had to guess I’d say the CTA has a good chance of passage this time around. A more ambitious bill came very close to passage last time, but died at the last minute due to opposition to the AML provisions from some of the House Republicans. That bill had bipartisan support in the Senate, and the new version drops some of the more controversial provisions. So I’m cautiously optimistic that it will go through.

      I’m not sure if there’s any chance that all three of these bills will be rolled into one package, or if that would be a good idea. I wondered, when I saw a single hearing scheduled on all three bills, whether something like that might be in the works, but I really don’t know. Maybe some of our other readers who are following this issue more closely might have insight on this question?

  3. Pingback: This Week in FCPA-Episode 146 – Ides of March (formerly St. Patty’s Day) edition - Compliance ReportCompliance Report

  4. This is probably very obvious to the American readers, but I would like to allow myself to double check under the defense of being a foreigner. Does this mean that currently the US doesn’t have any corporate registry at all, or are these new reforms related only to that one form of legal persons? That cannot possibly be the case, right?

      • So this means that when incorporating a company, the shareholders are / may not be provided at all? (Or does this apply only to the ultimate beneficial owners?)

  5. Pingback: This Week in FCPA-Episode 146 – Ides of March (formerly St. Patty’s Day) edition | The Compliance Podcast Network

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