WASHINGTON — The good news for financial services firms is Congress moved a step closer Monday to reforming anti-money-laundering rules. But left behind in the effort is the reform most coveted by the industry.
After months of negotiations on AML reform, Sens. Mark Warner, D-Va., Doug Jones, D-Ala., Tom Cotton, R-Ark., and Mike Rounds, R-S.D., released draft legislation to strengthen coordination on fighting AML threats, require law enforcement to report metrics on the use of financial institutions' AML reporting, establish a new beneficial ownership standard, and ensure that digital currency is included AML enforcement of payment systems, among other things.
The senators' announcement — one day before the House Financial Services Committee is scheduled to mark up its own beneficial ownership bill — was the clearest sign yet that an AML reform bill has bipartisan momentum.
“It’s a big deal in this day and age when any group of bipartisan senators comes to an agreement on a critical issue,” said Aaron Klein, economic studies policy director at the Brookings Institution. “Momentum is clearly building for Congress to address this. Particularly when you see senators like Tom Cotton and Mark Warner who have strong positions in the intelligence communities. So it’s a very positive day.”
However, even though the legislation would attempt to update an AML regulatory landscape that bankers have complained is outdated, the bill is also a sign bankers will not win any relief from suspicious activity reports and currency transaction reports. In a victory for law enforcement, neither House nor Senate members have backed higher thresholds for SAR and CTR filings.
Here are key takeaways from the Senate bill proposal:
AML reform has never been closer
A number of obstacles still stand in the way of AML reform becoming law, including a tight congressional calendar just months before attention shifts almost entirely to the 2020 election. But a bipartisan Senate proposal on the heels of House members moving closer on a beneficial ownership bill could be seen as a breakthrough.
If Congress can enact just a beneficial ownership law, it would be a significant victory for banks. Currently, federal rules require financial institutions to collect beneficial owner information when a business opens an account, but both bills in the House and Senate would shift that burden to the businesses themselves.
“Clearly the good news here with respect for AML beneficial ownership is that we now have bipartisan support in both chambers,” said Greg Baer, CEO of the Bank Policy Institute. “So it is a good day for AML reform. I think it adds to the momentum. The notion that the Senate is focused on it and this is not an issue that’s going to pass the House and go away.”
Banks won’t get SAR and CTR threshold changes
Bankers have long asked for Congress to raise the thresholds in which they have to report suspicious activity reports and currency transaction reports.
Last year, legislation was proposed would triple the dollar threshold for filing currency transaction reports to $30,000, and double it for suspicious activity reports to $10,000. Those thresholds have been unchanged since 1970 and 1996, respectively. But the bill didn’t move past the House Financial Services Committee.
Part of the pushback to changes in the thresholds has come from law enforcement, which has said the data is still valuable.
The Senate legislation doesn’t touch the thresholds but only directs the Treasury Department to review them and determine if they need to be updated.
The exclusion of reforms for the financial industry's AML reporting requirements in the Senate bill has frustrated the industry and experts.
“I was disappointed that it was not included,” said J.W. Verret, a law professor at George Mason University and former chief economist for the Financial Services Committee.
Verret cast doubt on the argument that the AML filings help law enforcement catch terrorists and other criminals, arguing that bad actors typically try to funnel money outside of the banking system. “The vast majority of SARs reporting goes nowhere and I think the terrorism link is a canard. I think most terrorism funding is through cash transactions.”
But Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, said he is hopeful that the language directing Treasury to examine the thresholds opens the door for changes.
“I think it opens an opportunity to look at the thresholds,” Merski said. “They really want to examine what the appropriate thresholds are, so I think it’s a good opportunity to look at where the thresholds are and what changes may be offered to the thresholds.”
DOJ would provide metrics on AML reporting data
In a perhaps a consolation prize for the industry, the Department of Justice would still have to provide more transparency into how its uses suspicious activity report information and currency transaction report information. The Justice Department would have to report annually to Treasury on the use of AML reporting by law enforcement.
Specifically, the Justice Department would be required to provide metrics on the frequency in which AML data from financial institutions contains useful information to further law enforcement’s purposes, the extent to which such data leads to investigations of bad actors, and emerging patterns and threats in the AML landscape.
Baer said the new metrics would help modernize the anti-money-laundering regulatory framework.
“I think there’s broad recognition that transaction monitoring is an area that is terrifically ripe for modernization,” Baer said. “BPI had done a survey a few months ago indicating some of the shortfalls in how the system is working. That’s really the only public data put forward. We think if law enforcement and Fincen could provide the metrics that would be more workable moving forward.”
Klein said the data reporting provision by the Justice Department is likely related to determining law enforcement’s priorities.
“The theory behind BSA data is that, to use a metaphor, that criminals are swimming at the bottom of the sea. … AML data helps law enforcement find the bubbles,” Klein said, referring to the Bank Secrecy Act. "What are the true priories? Is it terrorists? Is it human traffickers? Is it tax evasion?”
Verret added that he thinks the AML reporting data would be helpful because there have been a lot of questions about the usefulness of the data to law enforcement.
“I think that reporting can be very useful because the history of AML is that it’s been incredibly costly and it’s provided very little benefit to law enforcement,” Verret said.
Beneficial ownership costs would shift away from financial institutions
The financial industry has long been asking Congress to move the onus for reporting beneficial ownership information away from the banks, arguing that it is too costly.
The bill would require companies that have already incorporated to file information about their true owners to the Financial Crimes Enforcement Network within two years. Any new companies looking to incorporate after the bill’s enactment would provide beneficial ownership information to Fincen at the time of incorporation.
Upon a change in incorporation, companies must report updated information within 90 days, pursuant to a rule by the Treasury Department.
Companies that willfully violate reporting requirements would face stiff penalties, but companies that take reasonable steps to update minor errors would be exempt. The bill would also impose stiff penalties for the misuse of the beneficial ownership data.
The information would be housed in a comprehensive federal database at Treasury, and Fincen would be bolstered with the creation of a hub of financial expert investigators to collaborate with other federal regulators. The pay scale for Fincen staff would also be updated to be competitive with other financial regulators.
Some have argued that a beneficial ownership requirement would be overly burdensome for small businesses, and a new government database wouldn’t adequately prevent illicit finance.
“The banking industry here is just trying to impose their costs on small businesses and entrepreneurs,” said J.W. Verret, a law professor at George Mason University and former chief economist for the Financial Services Committee. “And I think it’s a classic take of passing the hot potato. … One of the hallmarks of a healthy economy is the ease with which businesses can be incorporated.”
But Klein said that argument is the view of a minority of people.
“Banks need this information anyway to comply with AML, so it will actually be less costly for business,” Klein said. “There are some opponents to beneficial ownership that hide behind small business coming up with scenarios to strike fear in lawmakers’ hearts. The reality is businesses of all shapes and sizes regularly disclose information. If you want to run a small law firm, you have to be in the bar.”
