- The U.S. Department of the Treasury's 2020 National Strategy for Combating Terrorist and Other Illicit Financing describes in great detail key priorities for the United States' Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regime.
- Review of the 2020 National Strategy will assist financial services organizations in identifying areas to exercise increased diligence and expect heightened scrutiny from regulators.
- Among the vulnerabilities discussed are customer due diligence relating to beneficial ownership of legal entities, perceived compliance weaknesses at financial institutions, and the evolving use and regulation of digital assets.
The 2020 National Strategy for Combating Terrorist and Other Illicit Financing was issued earlier this month by the U.S. Department of the Treasury. Prepared in consultation with regulators and law enforcement, including the U.S. Department of Justice (DOJ), U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Homeland Security (DHS), the 2020 National Strategy describes in great detail key priorities for the United States' Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regime. Review of the 2020 National Strategy will assist financial services organizations in identifying areas to exercise increased diligence and expect heightened scrutiny from regulators. Among the vulnerabilities discussed in the 2020 National Strategy are customer due diligence relating to beneficial ownership of legal entities, perceived compliance weaknesses at financial institutions, and the evolving use and regulation of digital assets.
Lack of Disclosure Obligations for Beneficial Ownership Information
The 2020 National Strategy identifies the lack of disclosure obligations for beneficial ownership information at company formation as among the primary weaknesses in the nation's AML/CFT regime. Although the Financial Crimes Enforcement Network (FinCEN) issued a Customer Due Diligence (CDD) Rule in May 2018 requiring financial institutions to identify and confirm the identities of beneficial owners of legal entity customers when an account is opened, there remains no requirement at the state or federal level for the disclosure of beneficial ownership information at the time of company formation. The 2020 National Strategy advocates for Congress to address this gap by legislating a national requirement for companies to report such information to the government. Legislation proposed to address this gap, such as the Corporate Transparency Act of 2019, bears watching. Creation of a national beneficial ownership database on which financial institutions could rely would ease the CDD burden for financial institutions during customer onboarding. This would be welcome development, as regulators continue to focus on this issue. For example, in its 2020 Fiscal Year Bank Supervision Operating Plan, the Office of the Comptroller of the Currency (OCC) indicates that customer due diligence and beneficial ownership compliance will be an emphasis in its supervisory strategy.
Compliance Program Weaknesses at Regulated Financial Institutions
Continuing financial institution compliance weaknesses are also identified as a source of vulnerability in the 2020 National Strategy, and the Treasury Department affirms that regulators' commitment to a risk-based focus on AML compliance is viewed as the key to improving effectiveness. Although the Treasury Department proclaims that "the expectation for AML/CFT compliance is not perfection" and that regulators will not take a "zero tolerance" approach, it is clear that the government will continue to scrutinize closely the efforts of financial institutions in this regard. For example, the director for Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Compliance Policy at the OCC recently proclaimed that it continues to see "risk assessments that are too narrowly focused [or] outdated," which may lead to "inadequate or incorrect customer risk identification or ratings." He added that in some cases, "banks have outgrown their monitoring systems," and urged institutions to "pause every once and awhile" and "assess how their risk profiles, customer bases and product offerings have changed, and adjust their compliance program as necessary."1 The emphasis on a risk-focused approach is consistent with prior agency guidance, such as the Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision issued jointly by the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), FinCEN, National Credit Union Administration (NCUA) and OCC in July 2019. The 2020 National Strategy's proclaimed "commitment" to an examination system focused on risk assessment reaffirms that regulated institutions should be prepared to demonstrate to examiners that they have implemented processes which effectively identify, measure, monitor and control risks.
After previously being identified as an "emerging threat" in the 2018 National Strategy, the Treasury Department now lists "digital assets" as an established vulnerability alongside more traditionally recognized threats. The Treasury Department recognizes "digital assets" as including not only digital currencies, but also digital assets that are securities, commodities and derivatives. The Treasury Department provides a useful summary in the 2020 National Strategy of the development of digital asset regulation by the government during the last several years, the potential role of national digital currencies, as well as examples of recent notable enforcement activity. In April 2019, for example, FinCEN imposed a civil monetary penalty and industry bar for BSA violations against an individual who exchanged digital currency for U.S. dollars, in some instances by coordinating wire transfers of funds through a depository institution. Noting that gaps in domestic and foreign supervision persist, the 2020 National Strategy states that regulators "expect all digital asset service providers to address consumer and investor protections, cybersecurity, and international efforts to counter tax evasion, money laundering, and the financing of terrorism concerns before bringing products or services to market."
For more information about regulatory compliance or questions about the 2020 National Strategy for Combating Terrorist and Other Illicit Financing, contact the authors.
1 ABA Banking Journal report on OCC Director's appearance at American Bankers Association/American Bar Association Financial Crimes Enforcement Conference, December 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.