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A New Anti-Money Laundering Regime for a New Century

The landscape of AML regulations is scattered, with its primary legislative supports coming from 1970, 1996, and 2001. This article discusses the proposed bill, its bipartisan support as identified by hearings already conducted on the subject, and its implications for financial institutions if enacted.

In 1970, a Big Mac cost $0.49,[1] and the average new car cost about $3,500.[2] Today, a Big Mac costs $5,[3] and a new car costs $35,000.[4] In contrast, in 1970, banks were required to file a currency transaction report (CTR) for cash transactions greater than $10,000. Forty-eight years later, that threshold is still $10,000.

The CTR requirement was a component of the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970, commonly referred to as the Bank Secrecy Act (BSA), which was enacted into law in 1970. It was the first major regulation for the modern Anti-Money Laundering/Terrorist Financing (AML/TF) industry, but not the last. In addition to the BSA, there have been eight major pieces of AML/TF legislation.[5] Similar to the CTR requirement, they have been sparsely (if at all) modified since their passage. The result is an inefficient regulatory regime which does not provide financial institutions the flexibility and encouragement needed to truly tackle money laundering and terrorist financing. There are modern methods of laundering money and funding terrorism which were not contemplated until a few years ago. However, that could change soon.

The Counter Terrorism and Illicit Finance Act, (CTIFA)[6] is working its way through the committee structure in the U.S. Senate[7] and promises to be the biggest overhaul for the AML Regulatory framework in a generation. From increasing reporting thresholds to promoting technological advances, it is the clearest evidence of real commitment from Congress and regulators to work with financial institutions and shift away from the heavy-handed enforcement model in recent years.

Details of the CTIFA

The current iteration of the bill is 38 pages long and has a number of clauses salient to the AML industry. The most relevant ones are discussed here.

Firstly, the draft bill recommends increasing the CTR threshold to $30,000 from $10,000 and increasing the Suspicious Activity Reporting (SAR) threshold to $10,000 from $5,000. For reference, if the BSA had been tied to inflation starting in 1970, these thresholds would be roughly $60,000 for CTR filing and $30,000 for SAR filing.

The draft bill opens with a recommendation for the Secretary of the Treasury to “undertake a formal review of the current financial institution reporting requirements” to ensure that the information provided by financial institutions to the federal government is of a “high degree of usefulness” to law enforcement.

The bill goes on to discuss the specifics of the above review, requiring it to study the timing of the SAR filing, collapsing the CTR and SAR forms into one and tying future threshold increases to inflation, among other elements.

The bill broadens the topics under which financial institutions can share details about a customer and their transactions with another financial institution. Under Section 314b of the USA PATRIOT Act, safe harbor is given to financial institutions that disclose otherwise confidential information on customers and transactions in an effort to combat “terrorist or money-laundering activities.” CTIFA broadens that language to include ‘”terrorist activities, money-laundering activities or a specified unlawful activity.”

Other noteworthy items of CTIFA include: establishing a no-action letter policy specific to BSA/AML laws and regulations; establishing and making public priorities for anti-money laundering and combatting the financing of terrorism (AML/CFT); and providing legal certainty to financial institutions that use technological innovation in AML programs.

Impact on the AML Industry

Those with working knowledge are eagerly awaiting CTIFA or some similar regulation.

The possibility of collapsing CTR and SAR filings into one form promises to streamline operations. The broadening of the safe harbor provision of 314b of the USA PATRIOT Act will allow investigators more freedom to chase meaningful leads of potentially suspicious activity.

The renewed spirit of providing reports which are “useful” to law enforcement will help to remove the rigid filing requirements and allow investigators to better leverage their judgment in finding truly suspicious activity. The legal certainty about the use of new technologies will allow financial institutions to innovate ways to better capture suspicious activity and lessen operational burdens.

In an industry where SARs are constantly filed out of an irrational abundance of caution, the formula provided by CTIFA will reduce the volume of defensive SAR filings — thus increasing the usefulness of the average SAR reviewed by law enforcement.

Moving Forward

The legislation was drafted by Rep. Steve Pearce (R-New Mexico) and Rep. Blaine Luetkemeyer (R-Missouri), but it shows real bipartisan support. Senator Elizabeth Warren, one of the most high-profile financial watchdogs in Washington, has demonstrated her support for AML reform. “[Senator] Warren said she supported [..] changing the threshold for reporting suspicious transactions in order to make life easier for small lenders and law enforcement.”[8]

It is unlikely that anything will happen soon, however. Midterm elections loom large, and it’s unlikely that both parties will willingly abandon their ideological entrenchment before the next Congress is gaveled into session. But as one of the few areas with bipartisan support, optimism from AML industry stakeholders is not misplaced.

 

Thanks and credit to Charles (Chuck) Pine for providing thought leadership on this piece. Chuck is a Managing Director in BDO’s USA Financial Services, Investigations and Consulting practice. He has over 32 years of financial investigative and law enforcement experience dealing with complex and high-profile criminal investigations involving money laundering, tax evasion, international and domestic bank related crimes, mortgage fraud and other criminal activity where there is a financial nexus or motive. He can be contacted at [email protected].


[1] https://www.reviewjournal.com/business/12-fast-food-prices-then-versus-now/

[2] http://articles.chicagotribune.com/1996-06-16/travel/9606160132_1_family-income-car-prices-household

[3] https://www.reviewjournal.com/business/12-fast-food-prices-then-versus-now/

[4] https://mediaroom.kbb.com/2018-02-01-Average-New-Car-Prices-Rise-Nearly-4-Percent-For-January-2018-On-Shifting-Sales-Mix-According-To-Kelley-Blue-Book 

[5] https://www.fincen.gov/history-anti-money-laundering-laws

[6] https://financialservices.house.gov/uploadedfiles/bills-115hr-pih-ctifa.pdf

[7] https://financialservices.house.gov/uploadedfiles/061418_fc_markup_memo.pdf

[8] https://www.reuters.com/article/us-usa-senate-moneylaundering/senator-warren-says-u-s-needs-to-rethink-money-laundering-laws-idUSKBN1EY28B?il=0


Alex Feldman

Alex Feldman is a Manager in BDO’s Risk and Regulatory Advisory practice. Mr. Feldman has 5 years of experience working within, developing, and testing anti-money laundering compliance programs. He has extensive experience in numerous elements of AML Compliance including Know Your Customer (KYC), Client Due Diligence (CDD), Transaction Monitoring, Suspicious Activity Reporting (SARs), and AML Training.

Mr. Feldman has a strong knowledge base from on working with/for financial institutions with a wide variety of products and services such as retail banking, correspondent banking, trade finance, political exposure, credit cards, remote deposit capture, and securities. Mr. Feldman has experience working with a number of AML compliance software programs including but not limited to; Norkom, Scion, Unified Case Management, Actimize, CAMP.

Mr. Feldman has significant experience working with/for institutions with an international focus Prior to joining BDO, Mr. Feldman worked within HSBC Bank USA in their Financial Crime Compliance Division. He contributed to the efforts of organizational redevelopment which satisfied regulators and released HSBC from its Deferred Prosecution Agreement. In his time with HSBC, he served secondments to HSBC Hong Kong and HSBC Bermuda. This skillset has further developed while at BDO, with Mr. Feldman working with several domestic branches of foreign financial institutions.

Recent projects with BDO include; the developing of a model AML Manual for the domestic branch of a foreign financial institution, advising on and documenting the data governance and system tuning efforts of a large pre-paid card processor, an assessment of a fintech institution’s AML program, and a data in/data out validation effort. He is presently writing an article on a new regime of AML regulation and its operational impacts.

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