On 6 February 2020, the U.S. Department of the Treasury (“Treasury”) issued their 2020 National Strategy for Combating Terrorist and Other Illicit Financing (“2020 Strategy”). According to Treasury, the “2020 Strategy identifies key threats, vulnerabilities, and priorities for disrupting and preventing illicit finance activities within and transiting the U.S. financial system, and builds upon and updates the 2018 National Strategy for Combating Terrorist and Other Illicit Financing, pursuant to the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA).” It is arguably, its own “state of the union” for the U.S. financial system.
The 2020 Strategy builds on the 2018 National Strategy for Combating Terrorist and Other Illicit Financing (“2018 Strategy”) and its three supporting national risk – or threat – assessments on money laundering, terrorist financing, and proliferation financing. It is structured to cover the key aspects of its proposed reform or “whole-of government approach” as Secretary Mnuchin explained in his Thursday press release. The 2020 Strategy is broken into two parts. The first part provides background on the threats to and vulnerabilities of the U.S. financial system to illicit funds. The vulnerabilities are a combination of the usual suspects (i.e. correspondent banking, cash, money service businesses) and specific deficiencies highlighted in the U.S.’s 2016 Financial Action Task Force (“FATF”) Mutual Evaluation Report (“MER”).
Notably is the absence of beneficial ownership requirements at company formation in the U.S. financial system. In 2018, FinCEN attempted to address an aspect of this vulnerability with the Customer Due Diligence (“CDD”) rule requiring – among other things – that covered financial institutions identify and verify the beneficial owners of their customers at account openings and at designated, risk-based, intervals thereafter. While the CDD rule is a step in the right direction, it does not address the information gap surrounding companies that are formed and may not conduct business through a covered financial institution. Since this deficiency is largely attributable to the United States’ failing grade in their 2016 MER, Congress took their own step with the introduction of the Corporate Transparency Act.
The Corporate Transparency Act will – among other things – “require certain new and existing small corporations and limited liability companies to disclose information about their beneficial owners. A beneficial owner [being defined as] an individual who (1) exercises substantial control over a corporation or limited liability company, (2) owns 25% or more of the interest in a corporation or limited liability company, or (3) receives substantial economic benefits from the assets of a corporation or limited liability company.” By the end of the 2019, the Bill had been passed in the House of Representatives, it has now moved to the Senate where it awaits debate and a vote.
In the second part of the 2020 strategy, Treasury discusses in detail the manner in which they propose to strengthening the U.S. AML/CFT Framework. Simply, the U.S. government will pursue three key priorities:
- Modernize the legal framework to increase transparency and close regulatory gaps;
- Continue to improve the efficiency and effectiveness of our regulatory framework for financial institutions; and
- Enhance current AML/CFT operational framework.
Throughout the last sixteen pages of the 2020 strategy, Treasury details the road map for the “whole-of government” approach that will help ensure the success of the three key priorities. For the first priority, the Government will focus on closing the beneficial ownership gap and tightening regulation for real estate, designated non-financial businesses and professions (i.e. investment advisers and attorneys), and digital assets.
To improve effectiveness of regulation, the Government aims to focus on reporting obligations, risk-based supervision, and encourage responsible innovation for the prevention and detection of the three threats. Finally, under the third priority, Treasury proposes success through the improved communication, expanded use of AI and data, organize more targeted prevention tactics, boost public-private partnerships (i.e. 314(a) and 314(b) type models), and continue to encourage international cooperation in the anti-money laundering and counter-terrorism financing fight.
As the 50th anniversary of the Bank Secrecy Act of 1970, the United States’ first AML/CFT law approaches, the U.S. financial system is due an update that will ensure regulators are equipped to tackle the challenges on the 21st century.
“These are all vulnerabilities that reflect certain gaps in law…that need to be addressed,” said an administration official in a briefing call on the report. “We are, over the coming year, going to work on a bipartisan basis with Congress and with the private sector to undertake mitigation measures across the full spectrum of the topics that are covered in our strategy.”