The long arm of the law US anti-money laundering reforms and their implications
28 April 2022
28 April 2022
Australian financial institutions should familiarise themselves with the AMLA, particularly the DOJ's significantly enhanced powers to subpoena foreign bank records, and the potential availability of monetary rewards for blowing the whistle on AML non-compliance.
The AMLA, enacted on 1 January 2021 (although some of the regulations supporting certain elements of its reforms are still pending), is regarded as the most important anti-money laundering legislation passed by the US Congress in the last 20 years.
The AMLA amends and expands upon the Bank Secrecy Act 1970, the primary anti-money laundering law in the US, broadening its scope to combat financial crime and terrorist financing. The Bank Secrecy Act and the AMLA are administered by FinCEN.
In this update we look at three key reforms instituted by the AMLA likely to be of interest to Australian financial institutions with a US nexus: expanded subpoena powers, requirements to report information about beneficial ownership of certain companies registered in the US, and enhanced whistleblower incentives and protections.
A correspondent account is an account established by a US financial institution for a foreign financial institution (such as an Australian bank) to receive deposits from, or to make payments on behalf of, the foreign financial institution.
The significantly expanded powers of the DOJ and the US Treasury enable them to "request any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States" in connection with certain types of investigations, including a potential violation of US criminal law. Previously, the DOJ and the Treasury could only subpoena records relating to the correspondent account (that is, the account held at the US financial institution).
Legal obligations of secrecy or confidentiality in non-US jurisdictions will not operate to excuse compliance with the subpoena.
If a bank does not comply with the subpoena requirements under the AMLA, significant penalties can apply. Noncompliance may result in:
Sections 6401 to 6403 of the AMLA, entitled the Corporate Transparency Act, have been introduced to require certain companies registered in the US to provide more detailed information on their ultimate beneficial owners.
The Corporate Transparency Act requires certain "reporting companies" to submit a report to FinCEN disclosing specified information about their beneficial owners. "Reporting company" is generally defined to be a corporation, limited liability company or similar entity (including foreign entities) registered to do business in the United States. Certain types of entities (including publicly-traded companies, securities issuers, banks, charitable organisations and companies with a physical US presence with more than 20 full-time employees and US$5 million in sales) are exempt from the reporting requirements.
Subject to certain narrow exceptions, "beneficial owner" encompasses an individual who directly or indirectly exercises "substantial control" over an entity, or controls not less than 25 percent of "the ownership interests of the entity". "Substantial control" is not defined under the Corporate Transparency Act; FinCEN has foreshadowed in its draft regulations (released in December 2021 for comment, but not yet implemented) that the concept is intended to be broad enough to capture persons exercising either legal or actual control, as well as persons exercising control in novel or unorthodox ways.
Penalties for wilfully providing false information or wilfully failing to report or update beneficial ownership information to FinCEN are substantial, and range from civil penalties of up to US$500 per day so long as the violation continues, to criminal penalties of up to US$10,000 per day and imprisonment for up to two years for individuals.
While financial institutions are not the intended target of this particular reform, Australian individuals and corporations with entities registered in the US may be subject to the new beneficial ownership reporting requirements. To the extent that such reporting discloses something of interest to US authorities, it may inform the exercise of other US long-arm powers impacting Australian entities, such as the subpoena power discussed above. Domestic financial institutions can seek to minimise the burden of potential future US regulatory enquiries through the diligent application of "Know Your Client" principles at the outset of any client relationship.
Also of note is that FinCEN will maintain a database of the reported information, expected to be accessible by US and foreign law enforcement and regulators, and by US financial institutions seeking to comply with their own AML compliance obligations. Comments received from banking industry associations on FinCEN's proposed regulations have recognised the opportunity to reduce regulatory burdens by use of that database, with one advocating that financial institutions should be permitted, but not required, to rely on the database to fulfill their own customer due diligence requirements, and encouraging FinCEN to take steps to validate the information provided.
In order to incentivise tip-offs from potential whistleblowers to enforcement agencies, the AMLA has also enhanced the incentives and protections afforded to individuals who provide information about contraventions of the AMLA.
The AMLA defines a "whistleblower" as an individual who provides information relating to certain violations of the AMLA, including persons such as auditors, compliance officers and counsel, who may learn of violations during the normal course of their employment. That is, the reform explicitly contemplates that compliance officers of financial institutions may use information obtained through their work to pursue a whistleblower reward.
AMLA whistleblowers may be entitled to rewards of up to 30% of all monetary sanctions recovered in an anti-money laundering enforcement action that results from their tip-off (excluding forfeiture, restitution and victim compensation), provided that the sanctions exceed US$1,000,000. Previously, such rewards were capped at US$150,000.
The AMLA regime prohibits employers from retaliating or discriminating against employees who report suspected money-laundering conduct to their employer, or to the Attorney General, Secretary of Treasury, regulators and others. It also allows whistleblowers to sue their employers for reinstatement, compensatory damages and other relief including litigation costs. Previously, protections were only afforded to whistleblowers who reported violations to a federal supervisory agency, not to an employer.
Importantly from an Australian perspective, whistleblowers do not have to hold US citizenship or residency in order to benefit from the new reforms (including the rewards available). Moreover, the illegal conduct the subject of the whistleblowing does not have to have taken place in the United States; it could have taken place in any jurisdiction.
While many of the newly enacted AMLA whistleblower protections find analogues in the Australian regime (applicable to a range of suspected misconduct, not only AML issues) contained within Part 9.4AAA of the Corporations Act 2001 (Cth) – in terms of what constitutes a "protected disclosure", the circumstances in which it will be "protected", and the nature of the "protections" afforded – the US regime differs markedly from Australia's in the way in which it incentivises employees to blow the whistle. Whether potential access to incentives in the US may lead to an increased incidence of whistleblower activity in Australian financial institutions with a nexus to the US remains to be seen, but this should be considered a real and not remote possibility given the long-arm reach of the US regime, and the potentially generous rewards on offer.
Authors: Rani John, Partner; Peter Richard, Counsel; Phimister Dowell, Lawyer and Carla-Rose Brett, Lawyer.