In response to global trends and the recommendations of the Financial Action Task Force (FATF), the US Congress passed an overhaul of anti-money laundering (AML) laws in a New Year’s Day 2021 vote. The reforms include a beneficial ownership register and statutory recognition of the FinCEN Exchange. These are encouraging developments. The new AML laws make it easier to identify criminal actors who hide behind shell companies. Strengthened anti-money laundering policies will lower corruption and security risks in the global financial system.
The size of the US economy and the centrality of the US dollar to global financial transactions ensures the updated laws will have a large impact on emerging markets. This impact can be better appreciated in the context of previous US AML laws passed over the past few decades. This year’s update to those laws do not fully eliminate the kind of financial exclusion of emerging market citizens that resulted from previous US laws, but they do leave open the possibility of more inclusive US policies in the future.
The Previous US AML Regime
As illustrated in the timeline below, the US AML regime has developed through several congressional acts beginning in 1970. These laws progressively refined US financial regulations and added new transaction and customer due diligence requirements to help fight financial crime. One of the first was the requirement to file Form 8300 under the 1970 Bank Secrecy Act (The BSA). This rule required banks to report cash payments over $10,000 in a single transaction or series of transactions in a trade between entities since the large amounts involved can indicate a risk of money laundering.
Beginning in 2001, banks and other financial institutions were also required to fill out Suspicious Activity Reports (SARs) for transactions that exhibited potential criminal violations such as terrorist financing. Mandatory Know Your Customer policies passed in 2001 led to the adoption of Customer Identification Programs, adding for the first time the requirements for banks to properly verify customers’ names, addresses, dates of birth and taxpayer identification numbers before allowing them to open new accounts.
Overall, the previous US AML system successfully established reasonable registration and monitoring procedures in financial institutions. However, financial institutions still struggled to accurately identify criminal actors due to inadequate information requirements and data-sharing programs.
The AML Act 2020
In 2021, the US reformed its AML laws by amending the Bank Secrecy Act through the Anti-Money Laundering Act of 2020 (AML Act 2020), which was passed as part of the National Defense Authorization Act (NDAA Act 2021). The act itself is made up of some new regulations, amendments to existing regulations, and commissions for new studies that will help direct US AML policies moving forward. A one-page summary of the act, prepared by James Richards of RegTech Consulting, is available here. The two highlights of the act are the creation of a non-public ultimate beneficial ownership registry and the promotion of collaboration on information sharing between the public and private sector by the statutory formalization of the FinCen Exchange.
Importantly, AML Act 2020 requires new and existing business organizations incorporated in the US to report beneficial owners to FinCEN. This information is stored in a private database that will be accessible by law enforcement officials. Meanwhile, the public and private sector are encouraged to collaborate in identifying and disclosing illicit finance threats through the FinCEN Exchange.
De-risking under the AML Act
A less-discussed impact of the new US AML regime are the administrative costs associated with complying with its requirements. These costs, such as filing currency reports and SARs, are felt most acutely by customers in emerging markets and can lead to the financial exclusion of people in high-risk locations. It isn’t uncommon for banks that are unable to accurately identify individual risky actors to engage in a practice known as de-risking.
De-risking occurs when financial institutions withdraw their financial services on a wholesale basis for fear of harsh penalties for AML non-compliance. This happens most often in geographic areas labeled as high-risk for money laundering such as in emerging markets in Africa, the Caribbean, and Central Asia.
To tackle de-risking, the FATF has recommended that financial institutions adopt a form of risk-based AML compliance that promotes financial inclusion of regular citizens in high-risk locations while minimizing costs. The FATF’s supplemental guidelines advise financial institutions to adopt enhanced measures where the risks are higher. For instance, greater compliance would be required of sophisticated corporations while simplified measures would be accepted where the risks are lower, such as for rural farmers or entrepreneurs who may find it more difficult to get the needed documentation for verification.
A 2021 National Law Review article notes that the AML Act 2020 attempts to address the topic of de-risking by commissioning a study on the topic. While this does not eliminate de-risking itself, it does create a formal process by which new, more inclusive financial requirements could be identified and incorporated into future legislation.
With its reforms, the US took a major step towards modernizing its AML policies to track ownership of shell companies and improve information sharing between the public and the private sector. The centrality of the US dollar and of American financial policies to the global economy mean these reforms have consequences around the world.
Nonetheless, the evolving AML compliance framework is still costly, which can be a detrimental side-effect for developing economies. Organizations like CIPE may be able to support programs that help reduce the cost of AML compliance in emerging markets. Over time, more robust US AML regulations may be able to help reduce global corruption while promoting financial inclusion.
Afia Poku is a Legal Analysis Intern with the Anti-Corruption and Governance Center at CIPE.
Image: Creative Commons