• Proposed legislation targets current gaps in U.S. financial crime law and enforcement
  • Bi-partisan Senate legislation would likely expand compliance obligations for banks and others in financial services industry
  • Proposed legislation is in line with U.S. and international efforts to fight terrorism and trafficking through economic sanctions and anti-money laundering (AML) rules

On May 25, 2017, Sen. Chuck Grassley (R-IA) introduced the “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017” (the “Act”).  The full text of the bill is available here.

As its title indicates, the Act is intended to update anti-money laundering statutes and promote transparency in the U.S. financial system.  The bill was cosponsored by Sen. Dianne Feinstein (D-CA), who stated that it “adopts many of the recommendations made by the Justice Department to ensure that transnational criminal organizations, including terrorist groups, face consequences for laundering illicit funds, evading laws and promoting criminal activity.”

As summarized below, while the Act may impose new compliance burdens on banks and others in the financial services industry, it seems to be in keeping with a developing consensus about best practices for combatting terrorism finance, money laundering and other financial crimes.

Background.  In December 2016, the Financial Action Task Force (FATF) – the international standard-setting body for AML and countering the financing of terrorism (AML/CFT) – published a Mutual Evaluation Report of the United States (the “FATF Report”).  The FATF regularly conducts mutual evaluations, i.e., peer reviews, to ensure compliance with the standards.

Among other things, the FATF Report gave the United States the lowest possible rating for efforts to prevent criminals from using legal entities to hide and move money or carry out illicit schemes.  The low rating was a result of the United States’ failure to require companies to provide beneficial ownership information upon formation.

The findings in the FATF Report mirror the views of the U.S. Justice Department, which has pushed for legislation to require companies to provide beneficial ownership information upon formation.  The Obama Administration also proposed legislation that would require companies formed within the United States to file beneficial ownership information with the Treasury Department, or face penalties for failure to comply.  To date, however, that legislation has not been introduced in Congress.

Details of the Act.  The Act would establish or clarify government authority in a number of areas, including the following:

  • S. correspondent accounts. The Act would obligate foreign banks or businesses with correspondent accounts located in the United States served with subpoenas to produce certified records, prohibit such foreign banks from disclosing the existence of such subpoenas, and authorize the government to seek contempt for non-compliance with such subpoenas.  In addition, the Act would allow the government to seek civil penalties against a U.S. financial institution that fails to terminate its correspondent relationship with a foreign bank if the foreign bank does not comply with or successfully challenge the subpoena.
  • Beneficial ownership / control. The Act would make it an offense for an individual to knowingly conceal from, or falsify or misrepresent to a financial institution, a fact concerning the ownership or control of an account or assets held in an account.  Similarly, the Act would authorize the government to criminally pursue individuals who conceal, falsify or misrepresent the involvement of an entity identified as a “primary money laundering concern” under the USA PATRIOT Act or a foreign “politically exposed person” in a monetary transaction by or with a U.S. financial institution.
  • Expanding money laundering offenses. The Act would make it a violation to transfer funds into or out of the United States with the intent to violate U.S. income tax laws.  The Act would also amend a portion of the “concealment” money laundering statute (18 U.S.C. 1956) to make it easier to charge a clandestine courier of funds.  And the Act would impose new obligations and penalties for noncompliance on parties dealing with monetary instruments (including funds stored in digital format such as “stored value cards”), carrying bulk cash, or withdrawing funds from accounts linked to criminal activity, when the monetary instrument, cash or funds are in an amount of $10,000 or more, including in aggregate transactions.
  • Broadening government authority. The Act expands the government’s authority in a number of ways, including by:
    • Authorizing the government to charge a series of related money laundering offenses with a single violation;
    • Expanding the definition of conspiracy with respect to financial crimes;Authorizing the government to freeze accounts held by a person arrested for offenses involving the movement of funds in or out of the United States;
    • Restoring the government’s ability to obtain wiretapping authority for suspected currency reporting, illegal money services businesses, and other financial crimes; and
    • Expanding the availability of administrative subpoenas for criminal investigations involving money laundering activities, activities of illegal money services businesses, and activities aimed at avoiding certain currency transaction reporting requirements.
  • Clarifying current law. The Act clarifies certain elements of current law, including that:
    • A financial transaction includes proceeds of specified unlawful activity if it is part of “a set of parallel or dependent transactions, any one of which involves the proceeds of specified unlawful activity, and all of which are part of a single plan or arrangement” that involves such proceeds; and
    • The general intent requirement applies to charges for both sending criminal proceeds abroad and sending “clean” funds abroad to promote ongoing future criminal activity there.
  • Counterfeiting. The Act would expand the scope of potential offenses related to counterfeiting, including penalizing the possession of any materials, tools, machinery, paper, or security features that can be used to counterfeit U.S. or currency.

Analysis.  It is, of course, impossible to predict whether the Act will become law, and if so, in what form.  Nonetheless, we think it is likely that some version of the Act will be enacted.  The Act has bipartisan support and seems to address legitimate areas of concern in terms of mitigating the risk of terrorist financing and money laundering more generally.

Indeed, just about a week prior to the introduction of the Act, Rep. Kathleen Rice (D-NY) introduced a bill to direct the Department of Homeland Security to develop and disseminate a threat assessment regarding terrorist use of virtual currency.  (That bill has an even more unwieldy name: the Homeland Security Assessment of Terrorists Use of Virtual Currencies Act.)

Both bills appear to be representative of an ongoing effort to ramp up efforts in the United States and abroad to counter money laundering and terrorist financing.  The effort appears motivated by a number of recent developments, including multi-year investigations into HSBC, one of Europe’s largest banks, for alleged money laundering and economic sanctions violations, and the investigation and prosecutions related to FIFA, the international soccer governing body.

This international effort is also an apparent response to the so-called “Panama Papers” – 11.5 million documents belonging to a Panamanian law firm that contained information regarding offshore entities, some of which were used to commit fraud, tax evasion, and to avoid international sanctions.  As many readers will recall, the Panama Papers were leaked in 2015 and included the names of a number of current and former world leaders, celebrities and other high-profile individuals and entities.  There is some debate about whether the Panama Papers evidence any specifically illegal conduct, but it is beyond dispute that the documents demonstrate the global prevalence of evasion and obfuscation to disguise assets and ownership interests.

We also see evidence of the effort to look behind ownership interests and transactions in how the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) administers U.S. sanctions regulations.  In particular, OFAC established the 50 percent rule to establish that a party owned 50 percent or more by one or more prohibited parties is itself a prohibited party under U.S. law.  This means that companies have an expanded due diligence requirement to understand customers’ and other business partners’ ownership structures.

We think “Know Your Customer” requirements – including determining who truly owns an entity – is the new normal.  Even if the Act is not passed, companies would do well to consider whether their diligence processes ensure they really know and understand their business partners.  The penalties for failing to do so are significant and are likely to increase in the future.

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Photo of Thad McBride Thad McBride

Thad McBride advises public and private companies on the legal considerations essential to successful business operations in a global marketplace. He focuses his practice on counseling clients on compliance with U.S. export regulations (ITAR and EAR), economic sanctions and embargoes, import controls (CBP)…

Thad McBride advises public and private companies on the legal considerations essential to successful business operations in a global marketplace. He focuses his practice on counseling clients on compliance with U.S. export regulations (ITAR and EAR), economic sanctions and embargoes, import controls (CBP), and the Foreign Corrupt Practices Act (FCPA). He also advises clients on anti-boycott controls, and assists companies with matters involving the Committee on Foreign Investment in the United States (CFIUS). Thad supports international companies across a range of industries, including aviation, automotive, defense, energy, financial services, manufacturing, medical devices, oilfield services, professional services, research and development, retail, and technology. Beyond advising on day-to-day compliance matters, Thad regularly assists clients in investigations and enforcement actions brought by government agencies, including the U.S. Department of Justice (DOJ), the U.S. Treasury Department Office of Foreign Assets Control (OFAC), the U.S. State Department Directorate of Defense Trade Controls (DDTC), Customs and Border Protection (CBP), the U.S. Commerce Department Bureau of Industry & Security (BIS), and the Securities & Exchange Commission.