We are pleased to present Covington’s quarterly update on U.S. legal and regulatory anti-money laundering (“AML”) developments for global financial institutions. This Summer 2021 update covers: the U.S.’s recently published government-wide AML and countering the financing of terrorism (“CFT”) priorities; FinCEN’s proposed no-action letter process; the AML implications of the U.S. government’s recent Xinjiang and Hong Kong Business Advisories; and the June 2021 update to the Increased Monitoring list (i.e., the “grey” list) maintained by the Financial Action Task Force (“FATF”).
We hope you find this report useful as you navigate evolving U.S. AML priorities for the international financial system. 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.
Note: Please see our previous Spring 2021 update and our client alert on the U.S. Anti-Money Laundering Act of 2020 (“AMLA”) for legislative and regulatory updates related to AMLA that continue to be relevant to global banks.
I. AML/CFT National Priorities
On June 30, 2021, the Financial Crimes Enforcement Network (“FinCEN”) released its first set of government-wide AML/CFT priorities (the “Priorities”). Our key takeaways from the Priorities are summarized in our client alert, here.
FinCEN developed the Priorities pursuant to Section 6101 of AMLA, which contemplated that the Priorities would guide U.S. financial institutions on how they should allocate resources within their AML control programs. As required by AMLA, FinCEN consulted with the federal banking agencies, the U.S. Department of Justice, and other government agencies prior to publishing the Priorities.
FinCEN’s release identifies eight Priorities, reflecting both long-standing and newer concerns: (i) corruption and kleptocracy; (ii) cybercrime, including as it relates to cybersecurity and virtual currency; (iii) international and domestic terrorist financing; (iv) fraud; (v) transnational organized crime; (vi) drug trafficking; (vii) human trafficking and smuggling; and (viii) arms proliferation. The Priorities identify a number of AML issues as bearing on U.S. national security, and it is particularly likely that the U.S. will seek to understand and investigate cross-border money laundering in these areas. Among other things:
- The Priorities recognize global anti-corruption efforts as “a core national security interest” and further reinforce Covington’s view that Foreign Corrupt Practices Act (“FCPA”) and related anti-corruption enforcement will increase in the years ahead. Since January 2020, the U.S. government has instituted at least two enforcement actions against non-U.S. banks for criminal violations of the U.S.’s AML laws in connection with foreign corruption schemes, and the U.S. government also announced a major corruption-related resolution against a U.S. bank early this year.
- The Priorities emphasize the risks associated with cybercrime, cybersecurity as well as the illicit use of virtual currencies. This includes the use of virtual currencies by some of the “highest-priority [cyber] threat actors,” such as those linked to North Korea.
- The Priorities note that fraud schemes, which are increasingly internet-enabled, continue to “generate the largest share of illicit proceeds in the United States.” Fraud is defined broadly to include schemes conducted by foreign state actors to fund influence campaigns in the U.S.
- The Priorities emphasize that transnational criminal organizations are “threats due to the crime-terror nexus and [their] engagement in a wide range of illicit activities.” The Priorities also discuss access to the financial system by drug traffickers, human traffickers, and smugglers, highlighting FinCEN’s observation of “a substantial increase in complex schemes to launder proceeds from the sale of narcotics by facilitating the exchange of cash proceeds from Mexican [drug trafficking organizations] to Chinese citizens residing in the United States.”
- Emphasizing weapons of mass destruction and other arms proliferation activities involving Iran, North Korea, and Syria, the Priorities identify global correspondent banking as “a principal vulnerability and driver of proliferation financing risk within the United States due to its central role in processing U.S. dollar transactions.”
Under forthcoming rules, expected to be promulgated pursuant to AMLA within the next 180 days, U.S. financial institutions will be required incorporate the Priorities into their AML control frameworks, including the AML controls they apply to their foreign correspondent bank relationships. It is an open question, however, whether the Priorities are sufficiently specific and defined to allow for the type of targeting contemplated by the U.S. Congress when it passed AMLA.
II. FinCEN Assessment of No-Action Letters
AMLA also required FinCEN, in consultation with the Department of Justice and others, to conduct an assessment on whether to establish a process for the issuance of no-action letters in response to inquiries from financial institutions subject to AML regulations. On June 30, 2021, FinCEN published the findings of this assessment, and concluded that such no-action letters “would be a useful complement to its current forms of regulatory guidance and relief.”[1]
A FinCEN no-action letter process, once finalized, would allow FinCEN to determine that it will not take an enforcement action against a financial institution for engaging in the specific conduct described in a request for no-action relief. The no-action letter process, which is used by other regulators including the Securities and Exchange Commission, may give regulated firms some assurance that they can, for example, pursue a new regulatory technology or adopt an innovative AML surveillance approach without facing regulatory enforcement for doing so.
FinCEN did not indicate its timeline for instituting a no-action letter process, and suggested that it may need additional resources to support the handling of no-action letter requests. It also left some room for ambiguity on how no-action letters would be coordinated with the Department of Justice and financial and markets regulatory agencies that have overlapping authority to enforce the BSA. Promisingly, however, FinCEN did indicate in general terms that it would follow a consultative process with other agencies prior to issuing no-action letters. While this could slow the issuance of no-action letters, it could also ultimately make such letters a more useful tool.
III. AML Implications of the Xinjiang and Hong Kong Business Advisories
On July 13 and 16, 2021, multiple U.S. government agencies issued advisories highlighting legal risks associated with supply chains that run through Xinjiang, and with the Hong Kong operations of U.S. companies. Our client alert on the Xinjiang advisory is here, and our alert on the Hong Kong advisory is here.
The Xinjiang Business Advisory, which updated a prior July 2020 advisory, was framed in stark terms, and warned that “businesses and individuals that do not exit supply chains, ventures, and/or investments connected to Xinjiang could run a high risk of violating U.S. law” — including, in particular, laws related to forced labor, sanctions, and export controls. The Advisory included a discussion of the U.S. Bank Secrecy Act, underscoring the obligations of U.S. financial institutions to “assess their potential exposure to the risk of handling the proceeds of forced labor on behalf of their clients,” and to “include in their suspicious activity reports . . . all relevant indicia of human trafficking identified in financial transactions . . . .”
The Hong Kong Business Advisory, which was published contemporaneously with an Office of Foreign Assets Control (“OFAC”) release sanctioning seven Chinese central government officials in Hong Kong, highlighted risks arising under Hong Kong’s National Security Law, as well as risks for businesses with exposure to sanctioned Hong Kong or mainland China persons.
Ultimately, both advisories are likely to prompt U.S. banks to more closely scrutinize the extent to which their non-U.S. financial institution affiliates, partners, and customers are exposed to Xinjiang, and to sanctioned Chinese parties more generally. In a recent Interagency Briefing on the Business Advisories, a representative from the U.S. Department of the Treasury reiterated the link between human trafficking, forced labor, and money laundering, referencing a State Department paper that emphasized the role that U.S. financial institutions are required to play in identifying and reporting transactions associated with such activity.
IV. FATF Identifies Jurisdictions with AML/CFT and Counter-Proliferation Deficiencies
On June 25, 2021, FATF updated its list of Jurisdictions under Increased Monitoring (its “grey” list), as well as reaffirming without change its list of High-Risk Jurisdictions Subject to a Call for Action (i.e., it’s “black” list, which currently includes only Iran and North Korea).
Notably, FATF added Haiti, Malta, the Philippines, and South Sudan to its list of Jurisdictions under Increased Monitoring. Conversely, Ghana was removed from the grey list for “significant progress in improving in its AML/CFT regime.”
The removal of Ghana will be welcome news for firms investing and doing business in West Africa, particularly in light of the addition of Senegal to the grey list in February 2021. The Philippines, which has the largest economy of the countries added to the list, has committed to undertake reforms in an attempt to exit the list by 2023. This may, among other things, require greater scrutiny of the Philippines’s casino sector, which was allegedly used to launder proceeds stolen from a foreign central bank in 2016.
As it typically does, FinCEN has reinforced that financial institutions should take into account FATF’s black and grey lists as part of their AML control programs. At the same time, FinCEN noted that a country’s inclusion on the grey list “should not . . . put into question a financial institution’s ability to maintain or otherwise continue appropriate relationships with customers or other financial institutions, and should not be used as the basis to engage in wholesale or indiscriminate de-risking.”
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As busy as the last few months have been in U.S. AML regulation, the pace of change will increase in coming months with the publication and finalization of rulemakings under AMLA. Covington would be pleased to discuss these AML developments with you, and to address questions about how they affect your specific business and risk environment.
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.
[1] Current forms of regulatory guidance and relief include administrative rulings, and exceptive or exemptive relief. No-action relief may be more flexible, as it involves the exercise of enforcement discretion rather than solely the interpretation of laws and regulations.
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