It’s Not Just the Corporate Transparency Act: Other Reasons To Welcome the Passage of the U.S. NDAA

Last week I posted about the Corporate Transparency Act (CTA), the new law requiring companies to provide the government with information about their ultimate beneficial owners. The CTA, which was passed (over President Trump’s veto) as part of the National Defense Authorization Act (NDAA), has been getting a lot of attention in the anticorruption and anti-money laundering (AML) community, and rightly so. The product of decades of tireless and shrewd advocacy, the CTA—despite its limitations and imperfections—will make it substantially harder for kleptocrats, terrorists, organized crime groups, and others to abuse corporate structures to facilitate their crimes and hide their loot. But the CTA is not the only part of the NDAA that may have a substantial positive impact on the fight against corruption and money laundering. And while it’s entirely understandable that most of the attention (and celebration) in the anticorruption community has focused on the CTA, I wanted to use today’s post to highlight several other provisions in the NDAA that may also prove important in combating corruption and money laundering.

  • First, the NDAA includes (in Title LXIII, Sec. 6313, codified at 31 U.S.C. § 5335) a new prohibition on knowingly concealing, falsifying, or misrepresenting to a financial institution a material fact concerning the ownership or control of assets involved in a monetary transaction of over $1 million if the party with an ownership or control interest is a senior foreign political figure, or the immediate family member or close associate of such an official, or involves an entity that has been identified under federal regulations as a money laundering risk. (The provision also prohibits attempts, meaning that a violation occurs even if the financial institution is not actually misled.) The statute provides for substantial penalties for violation, including fines of up to $1 million, imprisonment of up to ten years, and forfeiture of the property involved in the offense. This is potentially a big deal because it will make it harder for kleptocrats and others to evade heightened due diligence from financial institutions by operating through intermediaries who conceal the true source of the funds. As I read the statute, the intermediary him- or herself could be personally liable for lying on behalf of the foreign public official, which (one hopes) would make those intermediaries think twice. Of course, we’ll have to wait and see whether in practice this turns out to be an effective tool, but it certainly sounds promising. I could certainly imagine that, after a money laundering scandal comes out (for example), prosecutors could take a long hard look at all of the agents and facilitators who assisted a corrupt foreign official with U.S. transactions to see if any of those agents engaged in misrepresentations when doing things like opening U.S. bank accounts or arranging large purchases of U.S. assets when a financial institution was involved.
  • Second, the NDAA contains a provision (found in Title XCVII, Subtitle A) called the Kleptocracy Asset Recovery Rewards Act (KARRA), which establishes a whistleblower rewards program for those who provide information that leads to the seizure, forfeiture, and/or repatriation of stolen assets that come within the United States or within the possession of a U.S. person. Admittedly, the KARRA is limited in many ways. As Jetson Leder-Luis pointed out in a 2018 post on an earlier but quite similar version of the KARRA, the rewards offered under this program are rather modest in light of the assets potentially recovered, and the risks incurred by the potential whistleblower. (No individual payment may exceed $5 million without personal authorization from the Secretary of the Treasury after concluding that exceptional circumstances require a higher payment, and total payouts in any one calendar year may not exceed $25 million unless the President provides a written waiver.) The KARRA also authorizes the Secretary to reduce the award or withhold the award altogether if the whistleblower participated in or facilitated the actions that led to the assets being stolen in the first place—which seems sensible at first, but might erode the incentives of co-conspirators or facilitators to sell out their kleptocratic boss, thus reducing the powerful deterrent effect that KARRA might have otherwise. Also, the version of KARRA included in the NDAA is only a “pilot” program, which will expire after three years if it’s not reauthorized. (The statute requires Treasury to provide Congress with a report on KARRA’s operation after three years, and—if the statute is renewed—for every three years afterwards. Presumably the first of these reports will have a significant impact on the Congressional decision whether to renew the statute.) One might reasonably worry whether three years is enough time for the KARRA to have a meaningful effect. Still, the inclusion of the KARRA in the NDAA seems like a potentially significant expansion of whistleblower rewards systems into the anti-kleptocracy space, and if the statute is renewed in three years, there will also be opportunities to revise and strengthen it.
  • Third, the NDAA (in Title LXI) extends the requirements of the Bank Secrecy Act (BSA) to antiquities dealers (or, more precisely, to any “person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities”). As previous posts on this blog have discussed (see here and here), the trade in art and antiquities has a very high money laundering risk, in part because of the secrecy of these markets and in part because the fair price of an individual piece may be hard to determine. For this reason, some advocates have urged that the BSA’s reporting requirements be extended to art and antiquities dealers (though others have questioned the wisdom of this move for various reasons). It seems that advocates didn’t get everything they wanted: While the NDAA extends BSA requirements to antiquities dealers, the bill calls for the Treasury Department, in collaboration with the FBI and the Department of Homeland Security, to conduct a study of money laundering through trade in works of art. As with the study of the KARRA pilot program, presumably the resulting report will have an impact on subsequent legislative debates about whether to further expand the BSA’s coverage to include art dealers.
  • Fourth, a couple of short but potentially important provisions of the NDAA jack up the penalties for institutions and individuals who violate BSA rules. Title LXIII of the NDAA amends 31 U.S.C. § 31 to provide that a person (including an institution) convicted of a BSA violation must disgorge the gain from the violation (in other words, this NDAA provision codifies a disgorgement remedy in the context of BSA violations), and furthermore, if a person convicted of a BSA violation was a partner, director, officer, or employee of a financial institution at the time of the violation, then that person must also repay to the financial institution any bonus that individual received during the calendar year after which the violation occurred. Title LXIII further amends 31 U.S.C. § 31 to provide for enhanced penalties on repeat BSA violators—penalties of up to three times the profit gained (or loss avoided) from the BSA violation, or double the maximum penalty from the violation, whichever is greater. While I tend to favor these stiffer penalties, I do confess a bit of skepticism as to how much difference they will make in practice, particularly with respect to individuals. I’m by no means an expert, but as I’ve discussed previously, my understanding is that the main problem with effective enforcement of the BSA—especially against individuals—is the difficulty of proving a violation. Heightened penalties don’t matter much if the government isn’t able to convict. Also, though BSA violations do occur (and some banks are indeed repeat offenders), my understanding is that the larger problem is that the BSA mainly imposes reporting requirements, and a bank can be entirely in compliance with those requirements yet still repeatedly help kleptocrats and other bad actors with their dodgy transactions. (That, indeed, seems to be the main lesson of the so-called “FinCEN Files” leak.) Still, this NDAA provision seems like a welcome step in the right direction.
  • Fifth, the NDAA contains (in Title LXIII) some helpful provisions strengthening and clarifying a provision originally enacted in 2001 as part of the USA PATRIOT Act (and (codified at 31 U.S.C. § 5318(k)), that empowers U.S. enforcement agencies to subpoena records from foreign banks that have correspondent accounts with U.S. banks, and to require the U.S. banks to terminate those accounts in the event that the foreign bank does not comply. After consulting with a couple of actual experts on this topic, I gather that the changes effected by the NDAA are not all that dramatic, though that doesn’t make them unimportant. The original version of the provision left open certain questions of legal interpretation, and the NDAA amendments address many of those questions, generally closing what might have seemed like potential loopholes or eliminating possible grounds for resisting a subpoena. (The amendments, for example, specify that the fact that complying with the subpoena might violate the bank’s home country laws on confidentiality or secrecy is not by itself grounds for quashing or modifying a subpoena. I’m not sure any court had ever quashed a subpoena on this ground, but apparently the idea was out there, and the NDAA amendment takes that off the table.)

This is by no means an exhaustive list of the NDAA provisions that might be important to the anticorruption and AML agenda. There are also, for example, provisions on strengthening the Treasury Department’s existing whistleblower system, on improving inter-agency coordination, and on providing technical assistance to foreign countries to improve their AML systems. So, while the CTA is rightly getting a ton of attention, that’s not the only victory in the NDAA worth celebrating. The bill contains a number of potentially important measures, and even though several of these may fall short of the ideal, they may provide a foundation on which to build in advocacy efforts over the next few years.

2 thoughts on “It’s Not Just the Corporate Transparency Act: Other Reasons To Welcome the Passage of the U.S. NDAA

  1. Pingback: Episode 235 – the Impeachment edition | The Compliance Podcast Network

  2. Pingback: This Week in FCPA-Episode 235 – the Impeachment edition - Compliance ReportCompliance Report

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