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New U.S. AML Legislation — Five Provisions for Foreign Banks to Watch

January 13, 2021, Covington Alert

On January 1, 2021, the United States Congress enacted the Anti-Money Laundering Act of 2020 (the “AMLA”), as part of the National Defense Authorization Act (the “Act”). The AMLA includes extensive and fundamental reforms to anti-money laundering (“AML”) laws in the United States, including the Bank Secrecy Act (“BSA”). We described the principal reforms — including new beneficial ownership disclosure rules and modernized AML program requirements — in a previous client alert. In this note, we consider five provisions that have attracted less attention, but may significantly impact foreign banks with correspondent banking relationships in the United States, or with U.S. branches or agencies.

1. Expanded Reach of Subpoenas to Foreign Banks With U.S. Correspondent Accounts

Prior to passage of the AMLA, the Departments of the Treasury (“Treasury”) and Justice (“DOJ”) had authority to subpoena foreign banks with correspondent accounts in the United States for “records related to such correspondent account,” including records held in a foreign country.[1] The AMLA expands this authority, such that Treasury and DOJ will now be able to subpoena foreign banks for “records related to [their U.S.] correspondent account or any account at the foreign bank,” including records held in a foreign country.[2] In other words, if a foreign bank maintains a correspondent account in the United States, Treasury and DOJ may now subpoena that bank for records related to any account at the bank, not only its U.S. correspondent account.[3] Subpoenas may be issued in connection with any U.S. criminal investigation or civil forfeiture action, including but not limited to federal money laundering investigations.

The procedural provisions of the AMLA put foreign banks subject to local data and financial privacy laws in a challenging position. The AMLA introduces new and more far-reaching prohibitions on the ability of foreign banks that receive such subpoenas to directly or indirectly notify account holders or any person named in the subpoena about the subpoena’s existence or contents. The foreign bank may petition a court to modify or quash the subpoena and the prohibition on disclosure. But, notably, the AMLA specifically states that an “assertion that compliance with a subpoena” would conflict with a foreign bank secrecy or confidentiality law cannot form the “sole basis” for modifying or quashing the subpoena. It remains to be seen whether an evidentiary showing that there is a conflict between the subpoena and foreign law (rather than a mere “assertion” of such conflict) may provide grounds to quash the subpoena.

The expanded reach of Treasury and DOJ’s subpoena authority under the AMLA may present constitutional issues related to the limits of U.S. jurisdiction, particularly as applied to foreign banks that do not have operations in the United States. Foreign banks with U.S. branches or agencies are already subject to broad subpoena authorities and are typically required to consent to at least some forms of U.S. jurisdiction as part of the Federal Reserve’s licensing process; however, the AMLA provides for potentially more expansive subpoena power, and additional enforcement mechanisms, even as to these banks.

2. Assets Belonging to Senior Foreign Officials or Involving Institutions of Primary Money Laundering Concern

The AMLA creates a new prohibition on knowingly concealing, falsifying, or misrepresenting to a financial institution a material fact concerning ownership or control of assets involved in monetary transactions totaling more than $1 million if “the person or entity who owns or controls the assets is a senior foreign political figure, or any immediate family member or close associate of a senior foreign political figure.”[4] The AMLA contains a similar prohibition for transactions involving a financial institution subject to a so-called section 311 prohibition (i.e., an order from the Treasury department restricting or imposing conditions on the institution’s ability to access the U.S. correspondent banking system). The AMLA creates penalties for violations, including fines, imprisonment, and forfeiture.

Notably, unlike the existing federal criminal anti-money laundering statutes, the new prohibitions do not require knowledge that the assets involved in the transaction are related to criminal activity. In other words, a person or entity (potentially including a foreign bank) may violate the AMLA by knowingly concealing, falsifying, or misrepresenting the fact that assets involved in a transaction are owned or controlled by a senior foreign official, or his or her family or associates, or involve a designated financial institution, regardless of whether the assets are derived from criminal activity.

3. Sharing U.S. SARs With Non-U.S. Affiliates

Of particular relevance to foreign banks with U.S. branches, agencies, and affiliates, the AMLA directs Treasury to create a pilot program to expand the ability of financial institutions to share U.S. suspicious activity information — including suspicious activity reports (“SARs”) filed in the United States — with foreign branches, subsidiaries, and affiliates.[5] Currently, U.S. branches, agencies, or other affiliates of foreign banks are typically permitted to share SAR information with their head office or controlling entity, but not other foreign offices. The pilot program to expand SAR sharing will run for between three and five years.

The AMLA specifies that Treasury generally may not allow SAR information to be shared with branches, subsidiaries, or affiliates in the People’s Republic of China, the Russian Federation, or any country that is a state sponsor of terrorism, is subject to U.S. sanctions, or has been determined to be unable to protect the security and confidentiality of SAR information. Treasury may make case-by-case exceptions to permit the sharing of SAR information with financial institution affiliates in China or Russia. The AMLA also establishes that foreign SARs are subject to the same confidentiality protections in the U.S. that apply to U.S. SARs, which may encourage foreign regulators to permit foreign financial institutions to share suspicious activity information with their U.S. affiliates.

4. Strategy to Reduce De-Risking

As AML and counter-terrorist financing (“CTF”) enforcement actions have increased, some banks have engaged in “de-risking” by terminating or restricting relationships in certain jurisdictions or with categories of clients in order to limit legal exposure. Taking notice of this, Congress expressed concern that de-risking (1) limits the ability of nonprofit organizations, particularly those engaged in international development efforts, to access financial services; (2) results in under-banking of people and entities in some jurisdictions preventing, for example, the free and secure flow of remittances from people in the United States to family in other countries; and (3) “drive[s] money into less transparent, shadow channels.”

Because of these concerns, the AMLA includes a number of provisions that may, in the future, result in policy changes that mitigate the effects of de-risking.[6] Among other things, the AMLA requires the U.S. Government Accountability Office (“GAO”) to analyze and report on de-risking, including drivers of de-risking efforts and alternative means for financial institutions to handle transactions or accounts for high-risk categories of clients. After considering GAO’s report, Treasury will review reporting requirements for financial institutions and propose changes to reduce unnecessarily burdensome reporting requirements and develop ways to promote financial inclusion, particularly with respect to developing countries, while maintaining compliance with the Bank Secrecy Act. Specifically, the AMLA directs Treasury to consider policy options to more effectively tailor enforcement actions and penalties, and reduce compliance costs. Following Treasury’s review, Treasury, state and federal bank regulators, and other public- and private-sector stakeholders will “develop a strategy to reduce de-risking and adverse consequences related to de-risking.”

5. Expanding Foreign Cooperation and AML Capacity

The AMLA includes a number of programmatic and resource enhancements designed to emphasize and build capacity for cross-border AML enforcement. Notably, the AMLA creates new “Treasury attachés” and “foreign financial intelligence unit liaisons,” who will be embedded in foreign embassies or foreign government facilities and will coordinate with existing DOJ representatives in foreign embassies.[7] The attachés and liaisons will be tasked with building AML and CTF capacity and maintaining relationships with foreign regulators, law enforcement agencies, and financial intelligence units.

The attaché and liaison programs may result in increased coordination with foreign law enforcement and regulators, and may ultimately lead to more enforcement activity involving foreign banks. The attachés and liaisons will also, however, be instructed to participate in industry outreach efforts with foreign financial institutions, and could serve as a resource for foreign banks seeking to navigate U.S. AML requirements.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Financial Services and White Collar Defense and Investigation practices.

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[1] 31 U.S.C. § 5318(k)(3).

[2] Act at § 6308.

[3] U.S. courts have interpreted the existing subpoena provision in the BSA to cover at least some “records of transactions that do not themselves pass through a correspondent account,” including “transactions […] in service of an enterprise entirely dedicated to obtaining access to U.S. currency and markets using a U.S. correspondent account.” See In re: Sealed Case, 932 F.3d 915, 930 (D.C. Cir. 2019).

[4] Act at § 6313.

[5] Act at § 6212.

[6] See, e.g., Act, §§ 6204, 6215, 6307.

[7] Act, §§ 6106, 6108.

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