Second Post in a Two-Post Series on the ILLICIT CASH Act

A discussion draft of legislation recently introduced in the Senate, the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act (the “Act”), seeks to modernize federal anti-money laundering (AML) and combating the financing of terrorism (CFT) laws. The Act’s bipartisan drafters assert that the “US AML-CFT laws have not kept pace with the growing exploitation of the global financial system to facilitate criminal activities.” The proposed legislation – which is 102 pages long – would update and expand the tools available to regulators and law enforcement and overhaul domestic AML-CFT policies.

In part one of this series, we blogged about the Act’s proposed new reporting requirements for beneficial ownership information. This post focuses on the Act’s many other proposals for improving the resources available to the Financial Crimes Enforcement Network (FinCEN) and facilitating increased communication between law enforcement, regulators and financial institutions, including provisions regarding “no action” letters by FinCEN and “keep open” letters sent by law enforcement to financial institutions.

No-Action Letters from FinCEN

Section 303 of the Act would require FinCEN and the Federal functional regulators to issue joint regulations to establish a no-action letter process for inquiries regarding the application of the BSA “or any other anti-money laundering and counter terrorist financing law (including regulations) to specific conduct, which shall include a statement as to whether FinCEN or any relevant Federal functional regulator has any intention of taking an enforcement action against the person with respect to such conduct.” Persons covered by the no-action letter would include any person involved in the specific conduct that is the subject of the no-action letter, or any person involved in conduct that is “indistinguishable in all material aspects from the specific conduct that is the subject of the no-action letter.”

This proposal is taken straight from The New Paradigm, published by The Clearing House. In a guest blog here, Greg Baer, the President of The Clearing House, explained:

A no-action letter process could be effective in enhancing communication and transparency, in an efficient manner, between FinCEN and the industry. In this manner, FinCEN could provide a shield from liability on questions posed by banks.  We believe that this is a practical way to reduce de-risking, whereby banks exit correspondent relationships out of fear of regulatory criticism – given their role as gatekeepers of the financial system.

Safe Harbor for Adhering to Government “Keep Open” Letters

Law enforcement officials who are investigating an individual or entity which maintains an account at a financial institution sometimes send “keep open” letters to the financial institution, requesting – but not requiring – the institution to keep the account open. Law enforcement does this because they know that if the financial institution becomes aware that a customer is using an account to potentially commit a crime, the institution often will close the account – which may impair the ongoing investigation by law enforcement. Although financial institutions often want to honor the wishes of law enforcement, such letters can create a predicament for an institution because it puts the institution on notice that a customer might be using the account to commit a crime. Such knowledge, coupled with continued use of the account, can create issues for the institution with regard to its regulator, or, much more likely, any third-party targets of the customer’s illegal conduct (for example, investors being defrauded by the customer’s scheme).

Sections 103 and 207 of the Act seek to ameliorate this situation by creating a “safe harbor” for financial institutions which honor such “keep open” letters. Specifically, if the financial institution maintains the account “consistent with the parameters” of the “keep open” letter, it shall not be liable under the BSA, and “no Federal or State department or agency may take any adverse supervisory action under this chapter with respect to the financial institution for maintaining that account or transaction consistent with the parameters of the request.” However, the institution still must comply with its requirement to file Suspicious Activity Reports (SARs).

Although the above provisions are potentially helpful, they do not necessarily solve the full predicament, because the safe harbor provision makes the financial institution “not . . . liable under this chapter.” But there is no private cause of action under the BSA. To the extent that third parties may be inclined to sue the financial institution under state tort law theories, based on the conduct of its customer and the institution’s alleged conduct, the provisions should go further, and make clear that the financial institution enjoys a total safe harbor from all potential civil liability.

Strengthening FinCEN Resources

The Act aims to retain and build talent within the AML/CFT regime. Proposed changes include putting FinCEN employees on a pay scale comparable to that of federal financial regulators, creating a hub of financial expert investigators at FinCEN to investigate potential AML/CFT activity in collaboration with other federal government agencies, and establishing a team of FinCEN technology experts to further the development of new technologies that can assist financial institutions and law enforcement in efforts to combat money laundering and terrorist financing. Section 105 of the Act would establish an interagency AML/CFT personnel rotation program among FinCEN, the Department of the Treasury, the Department of Justice (DOJ) and the Federal Bureau of Investigation in order to develop staff expertise and advance interagency cooperation.

Improving AMT/CFT Communication, Oversight and Process

The Act seeks to strengthen the AML/CFT regime through increasing communication and feedback among financial institutions, regulators and law enforcement.

The Act would require the Treasury to establish and make public annual national exam and supervision priorities that would guide financial institutions on how to design and maintain risk-based AML/CFT detection programs. These priorities would guide regulators and law enforcement oversight activities. In addition to providing written guidance, Section 104 of the Act would facilitate communication by establishing a Treasury financial institution liaison who would seek and receive comments from financial institutions regarding AML/CFT rules, regulations, and examinations. The Act would also establish a process for financial institutions and vendors to present and obtain FinCEN approval of transaction monitoring software and new technologies.

New procedures would be established regarding SARs, including requiring DOJ to provide the Treasury with annual reports on the usefulness of SARs from financial institutions for law enforcement purposes, as well as data on the past and current trends identified by DOJ from AML/CFT information. The Act would require law enforcement to coordinate with financial regulators to provide periodic feedback to financial institutions on their SARs, including informing the financial institution on what action has been taken based upon a filed SAR and any information on trends observed. These proposed procedures track previously-proposed legislation, the Counter Terrorism and Illicit Finance Act (“CTIFA”), and channel ongoing critiques regarding the usefulness of SARs. (As we have blogged, the current SAR filing regime has been criticized by some as producing over time an ever-increasing barrage of SAR filings by risk-adverse financial institutions inclined to engage in “defensive filing,” which is costly to the institutions and can lead to SARs of limited value to law enforcement.) However, the Act does not replicate provisions of the CTIFA which would have raised the monetary threshold for filing a SAR on a transaction from $5,000 to $10,000. Proposals to raise the filing thresholds for SARs and Currency Transaction Reports have proven more contentious than the more cautious proposals focused on the gathering of data and metrics regarding the utility of BSA filings.

Similarly, the Act also would require the Treasury, DOJ, and federal regulators to review and streamline SAR reporting requirements, reporting fields, report types and thresholds to determine if updates are necessary. The proposal would require public comment as part of the review and require that the Treasury provide a report on its review to Congress within a year including all findings and proposals regarding outdated or unnecessary regulations and guidance.

The Act also would require that FinCEN, DOJ, and regulators coordinate orders and penalties imposed for actual or alleged Bank Secrecy Act violations.

Other notable reforms proposed include:

• Establishing a process for financial institutions to share AML/CFT information when personal identifiers are removed or protected.

• Requiring foreign banks to produce records in a manner that establishes their authenticity and reliability for evidentiary purposes, and compelling them to comply with subpoenas.

• Authorizing contempt sanctions for foreign banks that fail to comply.

• Updating the definition of “coins and currency” to include digital currency.

Many of the proposals identified above, such as facilitating collaborations among banks, providing financial institutions a process to present innovative technology to FinCEN, and increased communication among regulators, law enforcement and financial institutions are consistent with FinCEN internal reform efforts about which we have previously blogged here and here, as well as the ongoing legislative efforts to reform the BSA.