United States: Important Government Enforcement Provisions contained in 2021 National Defense Authorization Act

Corporate Transparency Act’s Anonymous Shell Company Prohibition

One of the most significant provisions of the NDAA is the Corporate Transparency Act (CTA), which is designed to address the abuse of anonymous shell companies for purposes of money laundering. The CTA requires corporations and limited liability companies (LLCs), at the time of formation, to identify their beneficial owners by providing the beneficial owner’s name, address, date of birth, and driver’s license or other identification number and to update this information upon any change. The information will be reported to the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department and will also be available to federal and state law enforcement. Financial institutions that have legally mandated anti-money laundering obligations will also have access to the information provided that they obtain customer consent. While the CTA applies broadly, it contains exemptions for certain businesses including those that already file reports containing similar information with other agencies, such as the SEC, and those that are at lower risk for money laundering. Willful violations of the CTA are subject to criminal penalties, including up to two years incarceration.

SEC Disgorgement and Statute of Limitations

Also buried in the latter part of this 1480-page national defense legislation is a curiously out-of-place Section 6501: “Investigations and Prosecution of Offenses for Violations of the Securities Laws.” Section 6501 appears to have been strategically inserted into the NDAA, with little or no public debate or discussion. Section 6501 gives the SEC explicit authority to pursue disgorgement in federal court, along with a five year statute of limitations on those claims, thus generally confirming the United States Supreme Court’s decision in Liu v. Securities and Exchange Commission, 591 US___ (2020), which held, with some important caveats, that the SEC can seek disgorgement in federal court civil enforcement actions. However, Section 6501 also provides an extended 10 year statute of limitations on a disgorgement claim where scienter is a required element of the underlying violation of law. This 10 year statute of limitations for scienter-based claims expressly overrides — in part — the ruling in Kokesh that the SEC’s ability to obtain disgorgement is limited to the five year statute of limitations in 28 U.S.C. §2462. Although the NDAA’s intent on the statute of limitations question is clear, it does nothing to resolve questions about what fair game for a disgorgement claim is. Specifically, the NDAA requires “disgorgement under paragraph…of any unjust enrichment by the person who received such unjust enrichment as a result of such violation”, but does not define what “disgorgement” or “unjust enrichment” mean. Therefore, in light of Liu’s mandate that actual expenses be offset against the disgorgement amount, the fact-intensive question of calculating disgorgement amounts and offsets will be subject to a case-by-case determination at the district court level. Finally, through a very subtle, but significant, change, Congress removed the requirement that disgorgement “be appropriate or necessary for the benefit of investors.” This seems to be a direct response to questions raised by Liu of whether disgorgement would ever be appropriate to order disgorgement unless it was distributed to investors.

The SEC’s win here goes beyond disgorgement. Congress also expressly provided the SEC with a 10 year statute of limitations in which it can bring a claim for any equitable remedy, “including for an injunction or for a bar, suspension, or cease and desist order”, which appears to have been intended to clear up a host of court rulings that reached different results on whether and to what extent the SEC’s claims for this relief were subject to a five year statute of limitations. All of these dates begin to run on “latest date on which a violation that gives rise to the claim occurs”, providing the SEC with the maximum amount of time to bring its claims. Also, the NDAA does not impact in any way the SEC’s current right to seek and obtain disgorgement in administrative proceedings or the five year statute of limitations applicable to the SEC’s right to seek civil penalties.

Anti-Money Laundering Act of 2020

The NDAA includes the Anti-Money Laundering Act of 2020 (AMLA or “Act“), which contains a number of provisions that amend the US Bank Secrecy Act of 1970 (BSA), the primary US statute prescribing the anti-money laundering/countering the financing of terrorism (AML/CFT) framework in the US With the exception of the USA PATRIOT Act of 2001, the BSA had not previously undergone significant reform since its inception. AMLA is intended to effect “comprehensive reform and modernization” of the BSA to address the modern money laundering and terror financing threat.

The provisions of the Act reflect a number of themes, each an important component of the intended US AML/CFT framework redesign, including the following:

• Increased BSA Whistleblower Bounties and Retaliation Protections. The AMLA significantly enhanced the whistleblower bounties that a reporter can receive for providing actionable information that leads to an enforcement action for Bank Secrecy Act violations. Prior to the AMLA, the BSA provided for an award of USD 150,000 or 25% of the penalties imposed in a related enforcement action, whichever was lower. The AMLA significantly increased those incentives — essentially bringing BSA bounties in line with those that can be awarded in SEC or CFTC cases under Dodd-Frank. Specifically, anyone who voluntarily provides significant information that leads to an enforcement action by the Treasury Department or DOJ under the BSA resulting in USD 1 million or more in monetary sanctions is eligible for an award of up to 30% of the amount collected in any related enforcement action. The AMLA also includes a private right of action for whistleblowers who have been retaliated against because of their reporting. In addition, the Kleptocracy Asset Recovery Rewards Act, which is also part of the NDAA, allows the Treasury Department to provide rewards to whistleblowers who provide information which results in the restraining, seizure, forfeiture, or repatriation of stolen assets linked to foreign government corruption that come within the US or within the control of a US person. It also authorizes the Treasury Department to provide protection for such reporters, if appropriate.
• Codification of a Risk-Based Approach to AML/CFT Compliance. Guidance from federal functional regulators and the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has provided for a risk-based approach to AML/CFT compliance for financial institutions covered under the BSA. The Act generally codifies this guidance and states that AML/CFT programs should be: (i) “reasonably designed to assure and monitor compliance with the requirements” of the BSA and regulations promulgated by FinCEN; and (ii) “risk-based, including that more attention and resources of financial institutions should be directed toward higher-risk customers and activities, consistent with the risk profile of a financial institution, rather than toward lower-risk customers and activities.” Although these amendments will not have a significant impact on the approach taken by financial institutions to AML/CFT compliance in light of existing guidance and regulatory expectation, they do reflect a shift in the statutory framework and should at least provide financial institutions with some flexibility in the design of their AML/CFT compliance programs.
• Modernization of the US AML/CFT Framework. Commentators have long criticized the BSA and its implementing regulations as outdated and ineffective in addressing current threats. The Act seeks to address this issue in a number of areas. An area of significant emphasis is the review and adjustment of the Suspicious Activity Report (SAR) filing regime. The Act includes a requirement for FinCEN to establish streamlined processes to facilitate the filing of non-complex SARs and requires a formal review of Currency Transaction Report (CTR) and SAR reporting requirements to consider modifications to value thresholds for different categories of activities, simplification of SAR narratives for certain customer and transaction types, and consideration of consequences of de-risking. Significantly, AMLA expands the definition of “financial institution” in the BSA to include antiquities dealers. And consistent with previously published guidance from FinCEN with respect to virtual currency services providers, the Act authorizes amendment to the definition of “monetary instrument” to include “value that substitutes for currency.”
• Coordination Among Key Stakeholders to Facilitate Information Sharing. The Act includes several measures designed to enhance information sharing among regulators, agencies, law enforcement, and financial institutions in an effort to enhance the national effort to combat money laundering and terrorist financing. Specifically, the duties of the FinCEN Director will be amended to facilitate communication with federal functional regulators, financial institutions, and state banking authorities. Further, the Act addresses a frequent criticism of financial institution AML/CFT compliance personnel, and requires FinCEN to provide feedback to financial institutions on the usefulness of SARs filed by such financial institutions in law enforcement investigations.
• Expanded Subpoena Power. The AMLA provides DOJ with a significant new weapon in its pursuit of criminal activity abroad. Previously, 31 U.S.C § 5318(k) permitted DOJ (and the Department of the Treasury) to subpoena documents from foreign financial institutions that maintain a correspondent bank account in the United States. The information requested, however, was limited to “records related to the correspondent account.” Now, DOJ and Treasury may seek from foreign financial institutions who maintain a US correspondent account “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States” if the records are the subject of an investigation related to a violation of US criminal laws, a violation of the Bank Secrecy Act, a civil forfeiture action, or a Section 5318A investigation. Thus, the subpoena power under section 5318(k) is expanded to any records, not just those related to the correspondent account, and clearly applies to any crime. With DOJ increasingly using money laundering and more broadly the use of the US financial system as jurisdictional hooks to prosecute crimes committed abroad, such as the FIFA and kleptocracy prosecutions, this expanded subpoena power can only help fuel similar investigations. The AMLA amendments also prohibit the foreign financial institutions from notifying the account holders about the subpoena and increases civil penalties for an institution’s failure to comply. Adding further teeth to the amendments, foreign blocking statutes and data privacy laws cannot be the sole reason for quashing or modifying the subpoena. It remains unclear, however, how these expanded powers will interact with MLAT obligations or whether any internal strictures will be put on section 5318(k) subpoenas, similar to those applying to Bank of Nova Scotia subpoenas.

AMLA is the culmination of years of debate among the legislative, regulatory, and financial institution communities regarding the necessity for changes to the US AML/CFT regulatory framework and should serve to increase the effectiveness of the US regime while allowing financial institutions some flexibility to more effectively address AML/CFT risk.

Certain Cryptocurrency Businesses are a “Financial Institution” under the BSA

AMLA significantly reforms the BSA and other anti-money laundering (AML) laws already on the books to expressly cover crypto-currency transactions for the first time. AMLA does so by expressly modifying several key BSA definitions to include “value that substitutes for currency,” including the definitions of “financial institution,” “money transmitting business,” and “money transmitting service.” This definitional modification effectively results in the BSA regime being extended to a wide swath of businesses that effect transactions for others in cryptocurrency. Notably, the expansion also codifies existing FinCEN guidance requiring virtual currency businesses to register with FinCEN as money transmitters. Along with other key provisions of AMLA increasing the severity of penalties for BSA/AML violations, introducing an AML whistleblower bounty program, and significantly increasing the degree of government resources devoted to BSA/AML enforcement, the expansion of the enforcement framework to expressly include crypto-currency transactions promises to have dramatic effects on the enforcement landscape for financial crimes.

Art and Antiquities Dealers

The NDAA also extends BSA requirements to persons “engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or sale of antiquities” and also requires the Treasury to study and report on, the potential of the art market to be abused for purposes of money laundering and terrorist financing. These provisions are, in part, the result of a 2020 report by the Senate Subcommittee on Investigations entitled “The Art Industry and US Policies That Undermine Sanctions” which documented several cases in which art transactions were used to evade sanctions and highlighted the potential for abuse in the art market. Based on these findings, the Senate report recommended that the BSA be amended to include art dealers as “financial institutions” subject to AML obligations under the BSA. However, the NDAA implements this recommendation only with respect to antiquities dealers. Depending on the outcome of the Treasury report mandated by the NDAA, BSA requirements could subsequently be extended to art dealers as well.

Treasury/FINCEN Foreign Liaisons

The NDAA also creates two new Treasury programs designed to enhance US cooperation with foreign financial intelligence and law enforcement.

First, it requires FINCEN to appoint at least six “Foreign Financial Intelligence Unit Liaisons” who will be stationed at US Embassies to, among other things, “facilitate capacity building and perform outreach with respect to anti money laundering and countering the financing of terrorism regulatory and analytical frameworks” “establish and maintain relationships with officials from foreign intelligence units, regulatory authorities, ministries of finance, central banks, law enforcement agencies, and other competent authorities;” “participate in industry outreach engagements with foreign financial institutions and other commercial actors on anti-money laundering and countering the financing of terrorism issues; and “coordinate with representatives of the Department of Justice at United States Embassies who perform similar functions on behalf of the United States Government.”

Second, it requires Treasury to appoint at least six “Treasury Financial Attaches” who will also be stationed at US Embassies to, among other things, “establish and maintain relationships with foreign counterparts, including employees of ministries of finance, central banks, international financial institutions, and other relevant official entities…conduct outreach to local and foreign financial institutions and other commercial actors” and “coordinate with representatives of the Department of Justice at United States Embassies who perform similar functions on behalf of the United States Government.”

As a result of these programs, we can expect to see closer cooperation and more information sharing between US and foreign law enforcement in combatting money laundering and other forms of financial crime.

Combating Russian Money Laundering Act

The NDAA also includes the “Combating Russian Money Laundering Act” (CRMLA) which allows the Treasury Department to impose special measures on domestic financial institutions and financial agencies “if the Secretary of the Treasury determines that reasonable grounds exist for concluding that one or more financial institutions operating outside of the United States, or 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States, or 1 or more types of accounts within, or involving, a jurisdiction outside of the United States is of primary money laundering concern in connection with Russian illicit finance.” The special measures may include prohibition of certain transactions, enhanced due diligence, and identification of beneficial ownership of anonymous companies. This authority is duplicative of the authority already available to the Treasury Department at Section 311 of the USA PATRIOT Act which provides for the application of special measures to target specific money laundering and terrorist financing threats. However, the CRMLA reflects a clear direction to FinCEN to place greater emphasis on illicit financial transactions involving Russia and to consider whether the imposition of Section 311-type measures might be appropriate. To that end, the CRMLA also requires the Treasury Department to provide, within one year, a report “that shall identify any additional regulations, statutory changes, enhanced due diligence, and reporting requirements that are necessary to better identify, prevent, and combat money laundering linked to Russia, including related to establishing a permanent solution to collecting information nationwide to track ownership of real estate.”

As a result of the CRMLA, US financial institutions and real estate businesses that engaged in business with Russia, or Russia-linked individuals or entities, should expect enhanced scrutiny from the Treasury Department and US law enforcement.