Both the House of Representatives and Senate held hearings in late November on proposed legislation to update the 50-year-old Bank Secrecy Act (BSA), which is the primary law setting out anti-money laundering and counter terrorist financing (AML/CFT) rules for banks.  While the bills in each house vary, statements in the hearings echoed the same theme: the world has changed substantially since the BSA was updated in 2001 and gaps and strains in the AML/CFT system need to be addressed.  However, neither bill addresses the negative impacts of bank “derisking” (dropping accounts or limiting services) on nonprofit organizations (NPOs) or financial inclusion goals. The contradiction between the strict liability for violations in the current AML/CFT regime and the need for a proportionate, risk-based approach, cited by the Financial Action Task Force in 2016, was also not discussed. The move the update the BSA and related AML/CFT laws presents both opportunities and challenges for NPOs in 2018. The legislation and testimony is summarized below.

House of Representatives: Nov. 29, 2017 Joint Hearing entitled “Legislative Proposals to Counter Terrorism and Illicit Finance”

The Financial Services Committee’s subcommittees on Terrorism and Illicit Finance and Financial Institutions and Consumer Credit hearing heard from four witnesses on a draft “Counter-Terrorism and Illicit Finance Act.”  The majority staff memo includes a section-by-section summary that proposes changes to banks’ reporting requirements, information sharing between banks, increased transparency on “beneficial owners” of accounts and steps for Treasury to provide greater regulatory clarity.

The need to update the BSA

There was general agreement that the BSA should be updated, as both technology, globalization of commerce and rampant corruption have made many of its outdated requirements unduly cumbersome, costly and ineffective. Over time the current process has led banks to focus on technical compliance over the need to get useful information to agencies enforcing AML/CFT laws. This is largely due to lack of clarity on what regulators expect from banks, with informal guidance tending to morph into new requirements. As William J. Fox of Bank of America, testifying for the Clearinghouse, noted:

“We spend significant time collecting defined enhanced due diligence on broad categories of customers that have been deemed high risk in regulatory guidance manuals, while we know from our own activity monitoring their actual behavior that many of our customers that fall into those categories do not present high risk. Today compliance requires enhanced efforts relating to these broad categories that increase compliance costs and distract from those customers that present real risk.” [p.4]

Another witness, Daniel Bley of Webster Bank, testifying for the Mid-Size Bank Coalition of America, noted the need to “reintroduce the risk-based approach to supervision that has been missing in recent years…,” supporting an expanded role for the Treasury Department to steer supervision to “support a more transparent and consistent approach…” Stefanie Ostfeld of Global Witness emphasized gaps in current law, particularly around reporting beneficial owners of accounts and use of shell companies, as problems with current law that Congress should address.

C&SN submitted comments for the record December 19 for this hearing, outlining concerns about the BSA and bank derisking of nonprofit organizations.

Impact on Financial Access

John Byrne of the Association of Certified Anti-Money Laundering Specialists brought up the otherwise missing issue of the “collateral damage that can and does occur with confusion regarding risk in today’s AML regime.” He noted that “derisking” by banks is often a logical response to the uncertain regulatory environment, and “impacts access to the traditional banking sector and has harmed victims in conflict zones from receiving funding for water, utilities and other resources.” He said the subcommittees can provide a valuable service by adding an update on these challenges to existing reports. NPOs should pursue this suggestion with the subcommittees.

Specific proposals and potential impact on NPOs

The draft bill’s provisions supporting technical innovation generated several specific ideas on how this could be achieved. There were also a number of suggestions on how to improve information sharing between government agencies and between banks, including foreign banks. This is an area NPOs should look at closely, to ensure that privacy rights are protected and that governments that unduly restrict civil society do not get private information that could lead to retaliation or other action against civil society leaders.

The draft bill would delay the May 2018 implementation of Treasury’s Customer Due Diligence rule, which requires banks to collect and verify information on the “beneficial owners” of accounts. (See here  for information on the rule and its impact on NPOs.) The witnesses differed on whether or not delay is a good idea, but overall supported the need to collect this information. The current lack of a requirement encourages creation of shell companies, as seen in the Panama Papers,

The witnesses also differed on whether or not dollar thresholds for banks filing Suspicious Activity Reports and Customer Transaction Reports should be raised. As John Byrne noted, changing the threshold is unlikely to change the cost of the automated system banks use to comply with these requirements. Instead, he said it would be more useful to clarify the policies around exemptions. Fox noted that banks get no feedback from government on what kind of information is useful. This leads to over-reporting.

HR 2219, the “End Banking for Human Traffickers Act of 2017,” was also discussed, with Byrne noting that the banking sector’s existing efforts to combat human trafficking are substantial.

Senate: Nov. 28, 2017 Judiciary Committee hearing “Modernizing AML Laws to Combat Money Laundering and Terrorist Financing”

A hearing on S 1241, filed in May 2017 by Judiciary Committee Chair, Sen. Charles Grassley (R- IA), chair of the Senate Judiciary Committee, also focused on the need to update the BSA. S 1231, filed with bipartisan support, differs from the House draft bill in that it primarily addresses loopholes in existing law, focusing on technical procedures and stiffening criminal standards and penalties.

In his opening statement, Grassley said “It has been almost 15 years since Congress took significant action to update our anti-money laundering laws. The world has changed a great deal in that time…Unfortunately, our AML structure is now outdated.” In summarizing the bill, he noted the failure of the current system to prevent, trace and prosecute money laundering offenses. Hearing witnesses addressed specific changes, including support for requiring beneficial ownership information to be filed with FINCEN, the federal banking enforcement agency, rather than banks, and making it a crime to conceal or lie on such reports.