What is AML Compliance?
As part of the U.S. Treasury Department, the Financial Crimes Enforcement Network (FinCEN) is responsible for issuing regulations under the Bank Secrecy Act (BSA), which requires financial institutions to establish an anti-money laundering (AML) program that includes:
- A system of internal controls to ensure compliance
- Independent testing of the program
- A designated BSA compliance office or officer
- BSA/AML training for all appropriate staff
- A customer identification program (CIP)
- Ongoing risk-based customer due diligence (CDD), including for legal entity beneficial ownership
Who is Responsible for Complying with AML?
After the attacks of Sept. 11, 2001, the USA PATRIOT Act expanded the definition of financial institution beyond traditional banks to include other industries that face a higher risk of money laundering and sanctions screening violations. The following entities, which include those using financial technology to offer and provide bank-like products and services, must have adequate AML safeguards in place:
- Automobile, boat and airplane dealers
- Casinos and gaming establishments
- Charities and non-profits
- Depository institutions
- Insurance companies
- Money services businesses (MSBs)
- Mortgage companies and brokers
- Precious metal and gem dealers
- Securities, commodities and futures brokers and dealers
- Travel agencies
Recent Updates to AML Compliance
AML compliance casts a wide regulatory net on organizations that fall under its jurisdiction. And these regulations are constantly evolving, attempting to keep up with the digital channels businesses use to conduct business today.
Here are some of the top AML updates of 2021 you should know about.
FinCEN’s AML Priorities
Up until now, financial institutions mostly had to guess which specific issues were top priorities on the national radar. In that scenario, they may not focus on the AML areas of greatest concern to overall national security or priority, which could lead to problems at exam time, as well as contribute to the inefficient use of resources.
FinCEN has proposed publishing its Strategic AML Priorities. By doing so, it will:
- Inform an institution’s risk assessment depending on its size, complexity, customers, geographic footprint, products and services
- Enhance the ability of institutions to provide information with a high degree of usefulness to law enforcement and government authorities
- Allow law enforcement to better understand and address risks in specific areas
- Improve information sharing, including public/private forums
As FinCEN seeks to provide clarity on existing guidance, a recent update to Section 314(b) of the USA PATRIOT Act, which allows financial institutions to share information about suspicious activity related to money laundering and terrorist financing.
In addition to rescinding previous guidance, FinCEN issued a new 314(b) Fact Sheet to strengthen this provision and empower financial institutions to fight financial crime.
Updates to Section 314(b) include:
- A financial institution may share information specific to activities it suspects involve the proceeds of a suspicious unlawful activity (SUA).
- Financial institutions may share information about activities that are suspected to involve terrorist financing or money laundering, even without specific information that the suspected activities directly relate to proceeds of an SUA.
- A financial institution may share information related to suspicious activities even if the activities do not constitute a transaction, meaning information about attempts to engage in a transaction can be shared.
Though participation in Section 314(b) is voluntary, it is considered a critical component of a robust AML program for any institution, and these recent clarifications will serve to further facilitate compliance with regulatory requirements.
The Corporate Transparency Act
The Corporate Transparency Act (CTA), built within the Anti-Money Laundering Act of 2020, or the AML Act, is gaining steam. The AML Act—which is a component of the National Defense Authorization Act (NDAA)— provides sweeping reform to the BSA and other AML regulations, including bolstering transparency efforts to mitigate the threat of illicit activities. The CTA will create a beneficial ownership database at FinCEN and require “reporting companies” to disclose information about their “beneficial owners.”
Though various exemptions exist, a reporting company is broadly defined in the CTA as any corporation, limited liability company or other similar entity created in a U.S. state or Indian tribe, as well as a foreign entity registered to conduct business in the U.S.
At present, the responsibility of identifying and verifying customers’ beneficial owners, pursuant to the BSA’s due diligence requirements, falls to financial institutions. Under the new requirement, reporting companies must identify and disclose their own beneficial owners. It’s important to note that this updated beneficial ownership reporting requirement does not currently override or rescind the existing regulations within the Beneficial Ownership/ Customer Due Diligence Rule, which requires financial institutions to implement procedures for identifying and verifying beneficial owners of legal entity customers.
According to the CTA, a beneficial owner is “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”
The CTA requires reporting companies to submit the following information about their beneficial owners to FinCEN:
- Date of Birth
- Unique Identifying Number
Financial institutions already obtain similar information for BSA compliance, but this new regulation will help prevent the use of shell companies to obscure the identity of reporting companies’ beneficial owners. By modernizing AML regulations with provisions such as the CTA, financial institutions will have enhanced tools to combat emerging money-laundering and terrorist-financing threats.
Adverse Media Screening
Although not explicitly required by AML regulators, the Financial Action Task Force (FATF) recommends using adverse media screening best practices to lessen an institution’s AML risk.
The Cost of AML Non-Compliance: AML Fines
Financial institutions that fail to modernize and streamline their AML compliance programs face a number of potential financial consequences. The most obvious is falling victim to financial crime. PwC’s 2020 Global Economic Crime and Fraud Survey revealed that 56% of respondents representing U.S. companies experienced fraud in the past 24 months for a total of $6.5 billion in fraud-related losses.
There is also the genuine risk of regulatory fines. Here’s a snapshot of recent BSA/AML-related civil money penalties:
- $390 million to a traditional bank
- $60 million to the CEO of a bitcoin-related firm
- $38 million to a securities firm
- $22.5 million to a gaming establishment
In addition to the revenue impact of falling victim to financial crime or receiving a regulatory fine, financial institutions face reputational harm as a result of both of these circumstances.
Finally, there’s a cost to not aligning AML technology investments to your actual needs. If you select an automated AML solution without first understanding what you require, you risk one of two things: paying too much for a system that provides more than you need versus paying too little for a system that leaves gaps to be back-filled by labor-intensive manual processes or additional technology.
Given the relative affordability and AI-embedded sophistication of today’s AML solutions, there’s no need to cede the AML battle to financial criminals and every reason to take the fight to them.
Looking for the Ultimate Guide to AML Compliance?
Knowing the regulations behind AML compliance is only half the battle: your organization needs to modernize your AML program to meet the new challenges of a digital world. Download our AML Compliance Guide today to find out how your institution can leverage innovative technologies to streamline and strengthen your AML compliance program.
Guy Cope serves as a product manager for CSI.