On July 13, 2022, the House of Representatives (the “House”) adopted an amendment to the 2023 National Defense Authorization Act (“NDAA”) offered by Maxine Waters (D. CA), inserting into the NDAA a version of the “Establishing New Authorities for Business Laundering and Enabling Risks to Security Act,” otherwise more commonly known as the ENABLERS Act. If ultimately enacted as law, even a scaled-back version of this amendment could significantly alter the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulatory framework in the United States. Of course, the sweeping AML Act of 2020 was passed because it also was tucked into the massive defense spending authorization bill for that year—so backers of BSA/AML expansion appear to be reverting to tactics which previously bore fruit.
Arguably, this amendment is even more sweeping than the AML Act. As we will discuss, it applies the BSA to persons providing corporate formation, trust, third-party payment, or similar legal or accounting services. Although much digital ink will be spilled regarding the amendment’s application to lawyers—and we certainly emphasize here that potential sea change in AML regulation—the amendment’s application to third-party payment processors, depending upon how that term ultimately gets defined if the amendment becomes law, also could be a very significant development affecting many businesses and financial technology companies (“fintechs”). Currently, and depending on the facts, the BSA often does not apply to payment processors, who often fit into an exemption under the BSA’s definition of a “money services business,” or MSBs, subject to AML requirements. However, the amendment is “scaled back” from the original version of the ENABLERS Act, introduced last year, which had included investment advisors, art and antiquities dealers, and public relations firms. Finally, the ambitious agenda of the amendment does not appear to acknowledge the current reality of actual government resources: the fact remains that the Financial Crimes Enforcement Network (“FinCEN”), which implements the BSA, has been struggling to implement the huge array of tasks and deadlines already foisted upon it by Congress through the AML Act and the recently-passed Corporate Transparency Act (“CTA”)—and FinCEN has been stating repeatedly that it needs increased funding.
The amendment’s “findings” section catalogues various instances of alleged kleptocratic and corrupt behavior, including but not limited to: the disclosures of the Pandora Papers; a notorious instance of investigative journalism in which an investigator for a non-profit posed as an adviser to an apparent African kleptocrat and enticed, on audio and video tape, various New York lawyers to provide alleged advice on the use of so-called shell companies; a company owning a $15 million mansion in Washington, D.C. linked to an ally of Vladimir Putin; and the fact that the 2021 “United States Strategy on Countering Corruption” stressed AML deficiencies tied to lawyers, accountants, trust and company service providers, and incorporators. According to the amendment, it addresses these problems by providing “the authorities needed to require that professional services providers who serve as key gatekeepers to the U.S. financial system adopt anti-money laundering procedures that can help detect and prevent the laundering of corrupt funds.”
The New Gatekeepers
The amendment would broaden 31 U.S.C. § 5312(a)(2)(Z) to include a wide variety of individuals and entities under the definition of a “financial institution” covered by the BSA. Specifically, the amendment, which we block quote, would expand the BSA to apply to:
[A]ny person, excluding any governmental entity, employee, or agent, who engages in any activity which the Secretary determines, by regulation pursuant to section 5337(a), to be the provision, with or without compensation, of—
(i) corporate or other legal entity arrangement, association, or formation services;
(ii) trust services;
(iii) third party payment services; or
(iv) legal or accounting services that—
(I) involve financial activities that facilitate—
(aa) corporate or other legal entity arrangement, association, or formation services;
(bb) trust services; or
(cc) third party payment services; and
(II) are not direct payments or compensation for civil or criminal defense matters.
In other words, if you provide corporate formation, trust, third-party payment, or similar legal or accounting services, you could be considered a “financial institution” under the BSA, and therefore have various AML responsibilities including—possibly—the duty to maintain an AML program and file Suspicious Activity Reports (“SARs”) regarding your customers and clients.
But, it goes broader than that. Within a year of the bill’s enactment, the Secretary of the Treasury (the “Secretary”) “shall” issue a rule to determine which persons fall within Section 5312(a)(2)(Z) and prescribe appropriate AML requirements for those persons. Moreover, the amendment limits the typical discretion accorded to the Secretary and FinCEN in formulating regulations: the amendment provides that when determining which persons fall within Section 5312(a)(2)(Z), the Secretary “shall include” the following persons, as well as any persons who own, control, or act as agents or instrumentalities of such persons. Again, we block quote the amendment, which resists easy summarization:
(A) any person involved in—
(i) the formation or registration of a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
(ii) the acquisition or disposition of an interest in a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
(iii) providing a registered office, address or accommodation, correspondence or administrative address for a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
(iv) acting as, or arranging for another person to act as, a nominee shareholder for another person;
(v) the managing, advising, or consulting with respect to money or other assets;
(vi) the processing of payments;
(vii) the provision of cash vault services;
(viii) the wiring of money;
(ix) the exchange of foreign currency, digital currency, or digital assets; or
(x) the sourcing, pooling, organization, or management of capital in association with the formation, operation, or management of, or investment in, a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
(B) any person who, in connection with filing any return, directly or indirectly, on behalf of a foreign individual, trust or fiduciary with respect to direct or indirect, United States investment, transaction, trade or business, or similar activities—
(i) obtains or uses a preparer tax identification number; or
(ii) would be required to use or obtain a preparer tax identification number, if such person were compensated for services rendered; [and]
(C) any person acting as, or arranging for another person to act as, a registered agent, trustee, director, secretary, partner of a company, a partner of a partnership, or similar position in relation to a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity[.]
Clearly: if eventually passed, this amendment will change the landscape of professional service providers, including tax return preparers with foreign clients, and payment processors.
Here, the amendment does provide the Secretary and FinCEN with its typical discretion. When deciding what kind of BSA/AML requirements each newly defined “financial institution” must adhere to, the Secretary must require each type of financial institution to be subject to at least one (or more) of five typical BSA obligations: a customer identification program (“CIP”) and customer due diligence (“CDD”); the establishment of a “full” (and onerous) AML program under 31 U.S.C. § 5318(h); the filing of SARs; other potential record-keeping and reporting obligations; and enhanced due diligence for private banking and correspondent banking relationships with foreign persons. Thus, different gatekeepers could have different AML responsibilities. Presumably, the baseline requirement for almost every newly covered gatekeeper would be CIP and CDD. The notion that certain attorneys could be subject to SAR filing requirements regarding their clients will be controversial, to say the least.
In addition to widening the applicability of the BSA to so-called “gatekeepers,” the amendment—which provides that gatekeepers will be subject to the extraterritorial jurisdiction of the U.S.—states that the Secretary will enforce this amendment through “random audits.” Specifically, one year after the Secretary determines who falls into Section 5312(a)(2)(Z), “the Secretary shall conduct random audits [of those persons] . . . in a manner that the Secretary determines appropriate to assess compliance” with the amendment. After the random audits, the Secretary will submit reports to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. These reports will describe the results of the random audits and include recommendations for improving the requirements explained above.
This is arguably the most puzzling provision of the amendment. It provides no insight into how such random audits will occur, or who will perform them. Of course, financial institutions currently covered by the BSA are examined for AML compliance through an established and elaborate system involving multiple agencies, such as the OCC, the SEC and the IRS (another agency stretched thin due to budget constraints), executed through examiners who have at least some experience with BSA/AML compliance (a complex topic) and the particular industry regulated by their agency. It is unclear if Congress expects FinCEN to conduct these audits. FinCEN, however, does not actually conduct BSA/AML examinations of regulated businesses. Further, as noted at the very beginning of this post, FinCEN currently is underfunded and unable to meet the deadlines already imposed by the many obligations of the AML Act and CTA—not the least of which is the CTA’s establishment of a massive national database regarding the beneficial owners of companies.
For now, the amendment is obviously just proposed legislation that still would need to be accepted by the U.S. Senate. There is a national election coming up, so the amendment’s passage is hardly a pre-ordained conclusion. Nonetheless, and as exemplified by the AML Act and the CTA, proposed legislation that dies in its initial stages can return and become law a few years later.