U.S. Cross-Border AML Update Spring 2021

We are pleased to present Covington’s Spring 2021 quarterly update on U.S. anti-money laundering (“AML”) trends and expectations for global financial institutions.

In a previous update, we outlined five of the key provisions for foreign banks in the U.S. Anti-Money Laundering Act of 2020 (the “2020 AMLA”). This quarter, we: summarize certain of the key dates for implementing the 2020 AMLA; address the increased regulatory focus on art and antiquities market participants and investment advisers, including private equity and hedge fund managers; and highlight some of the incoming leaders at the U.S. Treasury Department and Department of Justice, who will be responsible for developing and implementing cross-border AML policy over the next few years.

We hope you find this report useful as you navigate evolving U.S. AML expectations and priorities for the international financial system. If you have any questions about the matters discussed here, please reach out to your Covington contact or any of the lawyers listed at the end of this update. 

I. Timelines for Key Rulemakings Under AMLA

As indicated in our prior alerts, many of the key provisions in the 2020 AMLA establish frameworks that will need to be built out in detailed rules to be published by FinCEN and other agencies. Of particular importance for foreign banks with U.S. operations are rules governing: FinCEN’s beneficial ownership database; related amendments to financial institution customer due diligence processes; the updating of AML programs to ensure they are effective and risk-based; and the possible streamlining of suspicious activity and currency transaction reporting requirements. In addition, the publication of the U.S. government’s first set of formal AML/CFT priorities, and of regulatory studies on de-risking and China-related AML, will also be of interest.

The graphic at the end of this update summarizes key dates on the regulatory agenda.

II. AML Scrutiny of Art and Antiquities, and Private Funds

We expect the passage of the 2020 AMLA, and the priorities of the incoming Biden Administration, to result in an increased focus on AML in two areas that have previously been viewed as containing gaps for the U.S. AML regime: the art and antiquities market, and private funds. Both areas involve substantial cross-border financial flows, and implicate a range of banking businesses, including wealth management, cash management and, in the case of private funds, market-facing and brokerage businesses.

With respect to art and antiquities, building on a July 2020 report by the Senate Permanent Subcommittee on Investigations (“PSI”) and prior legislative and executive branch attention to art and antiquities-related AML, the 2020 AMLA amended the Bank Secrecy Act (“BSA”) to provide FinCEN with the authority to regulate for AML purposes persons “engaged in the trade of antiquities.” While art dealers (as opposed to antiquities dealers) are not yet subject to such regulation, the 2020 AMLA calls for a study on the extent to which the art market is used to facilitate money laundering and terrorism financing, which may be a precursor to legislative or regulatory designation of art market participants as regulated entities (as is the case under, for example, the European Union’s Fifth Anti-Money Laundering Directive). Unless and until art dealers become subject to AML regulation in the U.S., FinCEN will likely have to delineate in regulation what constitutes “art dealing,” what constitutes “antiquities dealing,” and how to regulate entities that deal in both.

In anticipation of greater AML attention to art and antiquities, FinCEN on March 9 issued a notice to banks and other traditional financial institutions that, among other things, asked financial institutions to specifically identify art- and antiquities-related suspicious activity reports (“SARs”) by using a defined reference code and filing type. The notice also requested that institutions provide certain specific details in such SARs. The implication is that FinCEN, and perhaps other agencies, will be closely analyzing SAR filings in this area. While FinCEN leadership have indicated that the focus of such analysis will be to inform the study and rulemaking processes under the 2020 AML Act, it would not be surprising if the heightened attention also results in investigations and enforcement actions.

With respect to the private funds industry, FinCEN in 2015 proposed a rule that would have required registered investment advisers (“RIAs”) to maintain AML compliance programs under the BSA and file SARs. Many private equity and hedge funds are advised by RIAs.

The 2015 rulemaking was not finalized, and subsequently became subject to the Trump Administration’s regulatory freeze. However, there are indications that a similar rule may be implemented under the new Administration. First, civil society groups are advocating for the rule to be finalized. Second, government and inter-governmental organizations are focused on the absence of private fund AML regulation as a substantial gap in the AML regime, and regulation of RIAs would help close this perceived gap. And third, while the 2020 AMLA does not directly address AML regulation of RIAs, it contains certain provisions that may increase the importance of regulating them, such as provisions that effectively rely on RIA fund managers to vet the beneficial ownership of fund investors. Notwithstanding these indications, FinCEN’s ability to finalize a rule on AML regulation of RIAs may be delayed by the immediate need to meet the rulemaking deadlines in the 2020 AMLA.

Over the long term, there may be benefits to banks from direct AML regulation of RIAs, as that may reduce the regulatory pressure on banks (and other financial institutions, such as broker dealers) to vet the AML policies and records of their RIA clients. In the short term, however, the increased regulatory focus could naturally lead to greater investigation and enforcement risk for bank businesses that service RIAs and private funds.

III. New Personnel Responsible for AML Policy and Enforcement

With the Biden Administration taking office in January, there has been broad change in the leadership of the Treasury Department, the Department of Justice, and at the Financial Crimes Enforcement Network (“FinCEN”), the Treasury Department agency that coordinates many aspects of U.S. AML policy.

At the Treasury Department, newly confirmed Secretary Janet Yellen has emphasized that implementation of the 2020 AMLA will be a “very high priority.” She has indicated that the department has a “hiring plan” to expand staff to and will seek to obtain the “significant resources” needed to implement the Act, and establish the federal beneficial ownership registry that it requires. The Deputy Secretary, Wally Adeyemo, made similar statements during his confirmation hearing. While Yellen, Adeyemo, and other senior leaders at the Treasury Department are career government officials with limited industry experience, they are also in many cases perceived as experienced policymakers and careful listeners who may be sensitive to concerns raised by the private sector. At more junior levels, reports indicate that Treasury and FinCEN are seeking to hire staff with expertise in data analysis, cryptocurrency, and other technology-focused areas.

Like Treasury, the Justice Department will also be led by officials who have spent most of their careers in the public sectors, including Attorney General Merrick Garland (a former federal prosecutor, appellate judge, and Supreme Court nominee) and Deputy Attorney General Lisa Monaco (a former federal prosecutor and homeland security official). Both are likely to see financial crime issues as closely linked to national security. For example, echoing themes in the 2020 AMLA itself, Deputy Attorney General Monaco indicated during her confirmation hearings that investigations into economic and other conduct by China and state-linked Chinese corporations would be a top priority, and those investigations have in the past involved “following the money” by seeking information on financial flows from global banks. The financing of groups and platforms that facilitate domestic terrorism will be another priority — and another driver for a broad focus on financial crime compliance.

Financial institution prosecutions and investigations are often coordinated within the Money Laundering and Asset Recovery Section (“MLARS”) of the Justice Department’s Criminal Division. MLARS will continue to be led by experienced, career prosecutors with substantial experience in global investigations. The Criminal Division as a whole will be led by Ken Polite. He, too, has spent much of his career in the public sector, but has also spent several years in private practice representing financial institutions and other corporate clients, and so has likely had exposure to the compliance challenges faced by banks.

If you have any questions about the matters discussed in this report, please reach out to your Covington contact or any of the lawyers in our global compliance and investigations team.

Selected Deadlines in Implementing the 2020 AMLA