Sep 9, 2024
Brandon Bontrager, Co-Founder and Chief Compliance Officer, Sandbar.ai Archana Bae, Founder and Chief Executive Officer, Porta Strategies
April 4 — The Financial Crimes Enforcement Network, or FinCEN as it’s known, is a U.S. Treasury Department agency charged with protecting America’s financial system from money laundering, terrorist finance, and exploitation by illicit actors. FinCEN collects, analyzes, and disseminates financial intelligence, furthering the national security mission.
The agency receives and maintains financial transaction data, analyzes the data for law enforcement purposes, and collaborates with foreign counterparts as well as international bodies. FinCEN operates primarily under the Bank Secrecy Act (BSA), the first and most comprehensive U.S. anti-money laundering and counter-terrorism financing (AML/CFT) statute.
FinCEN assists and supports law enforcement, policy makers, regulators, intelligence agencies, and the financial services industry. Primarily submitted by Financial Institutions, FinCEN’s BSA database receives and stores reports of suspicious activity via Suspicious Activity Reports (SARs), which law enforcement and intelligence agencies use for investigations and analysis.
To inform and educate the financial services community and commercial organizations about the methods illicit actors use to launder funds, evade detection, and conduct their operations, guidance is published by FinCEN. This includes advisories, geographic targeting orders, and other memoranda.
Late last month at the Financial and International Business Association (FIBA) annual AML conference, Andrea Gacki, Director of FinCEN and former Director of the Office of Foreign Assets Control (OFAC), reinforced FinCEN’s commitment to enhance transparency in the U.S. financial system. Transparency enables the public and private sector to understand the underlying parties to and purpose of a financial transaction. This, in turn, enables the detection, deterrence, and disruption of illicit activity. Gacki highlighted the launch of the beneficial ownership registry, an element within the Corporate Transparency Act, and two proposed rulemakings FinCEN released this year. The first relates to reporting requirements for investment and advisors, and the second to non-financed (all cash) residential real estate purchases. Let’s discuss these three developments and what they mean for your organization.
“Transparency improves enforcement, brings better accountability and trust in processes and institutions, and deters wrongdoing by increasing the risk of detection.”
Notice of Proposed Rulemaking: Investment Advisors
In the changing landscape of financial regulations, the role of Registered Investment Advisors (RIAs) is increasingly coming under the spotlight, with focus on their extent to curb illicit financial activities. RIAs hold a crucial position in the financial ecosystem as stewards of significant investment opportunities. Their dual role as advisors and fiduciaries is fundamental in guiding responsible investments. But it also can be helpful in safeguarding the financial sector from money laundering, corruption, and other forms of financial crime. Because of deep client relationships, RIAs understand not just their clients’ investment styles, but who they are and what is normal for them.
RIAs also have greater autonomy in adopting technological solutions; they can be instrumental in integrating systems that identify and mitigate risks of financial crime. This proactive stance is beneficial for their clients and vital for the financial system’s overall health and integrity. However, challenges such as the siloed nature of compliance teams within larger institutions often hinder effective monitoring. Compliance analysts who rarely interact with customers often contact a relationship manager or investment advisor to gain richer Know Your Customer (KYC) insights.
FinCEN recognized these vulnerabilities and has since proposed a rule that seeks to tighten the regulatory framework around RIAs. The Notice of Proposed Rulemaking (NPRM) aims to classify certain RIAs and Exempt Reporting Advisers (ERAs) as “financial institutions” under the Bank Secrecy Act (BSA). This classification is a significant step towards closing the regulatory gap, subjecting RIAs to stringent anti-money laundering (AML) and countering the financing of terrorism (CFT) requirements.
The NPRM outlines the necessity for these advisors to implement comprehensive AML/CFT programs tailored to the risks they encounter. These programs include effective internal controls, the appointment of a dedicated compliance officer, regular independent testing, and ongoing employee training on AML principles. Moreover, the NPRM emphasizes the importance of RIAs in maintaining detailed records and reporting suspicious activities through Suspicious Activity Reports (SARs), highlighting the critical role RIAs play in enhancing transparency and aiding in the detection and prevention of illicit financial flows.
This emphasis on rigorous AML/CFT measures for RIAs fortifies the financial sector against criminal exploits and serves as a cornerstone in the broader context of national security. It sets the stage for a discussion on how these regulatory efforts intersect with safeguarding national interests.
In addition to enabling money laundering and other financial crimes, the lack of supervision of RIAs has allowed sanctioned individuals and foreign adversaries to invest in U.S. securities and technologies to the detriment of U.S. national security. According to U.S. government reports, Russian oligarchs and the People’s Republic of China have exploited RIAs to obfuscate their ties to investments.
“Certain advisors managed billions of dollars ultimately controlled by sanctioned entities, including Russian oligarchs and their associates.”
The Federal Bureau of Investigations reports that the PRC routinely conceals its ownership or control of investments to disguise efforts to steal technology or knowledge and to avoid reporting foreign investment interests to U.S. authorities, such as the Committee on Foreign Investment in the U.S. (CFIUS). CFIUS is an interagency committee that reviews certain foreign investment transactions by foreign persons.
Increased oversight of and reporting from RIAs will aid U.S. law enforcement, intelligence, and policymakers in deterring illicit actors from endangering national security interests.
Notice of Proposed Rulemaking: Residential Real Estate
With its vast transactions in residential properties, the U.S. real estate market has long been a magnet for illicit financial activities, particularly money laundering. A notorious example can be traced back to Miami in the ’80s and ’90s, where drug cartels infamously parked their money by purchasing properties, leading to a glut of empty homes and a construction boom of unsellable buildings. This scenario underscored the sector’s vulnerability, echoed in more recent times with capital flight challenges, such as those from China. Despite initial countermeasures, like Geographic Targeting Orders (GTOs) which adjusted to local real estate values across various jurisdictions, the game of “whack-a-mole” with money launderers revealed the complexity and persistence of the issue.
Another significant hurdle is the prevalence of all-cash transactions, which traditionally evade the scrutiny applied to financed purchases, further obscured by the involvement of legal entities or trusts. This creates a transparency gap as analysts and law enforcement officials grapple with unraveling layers of ownership and the true identities behind transactions, a task complicated by the layered separation designed to mask the flow of illicit funds.
Recognizing these challenges, FinCEN has proposed a new rule aimed at enhancing transparency within the U.S. residential real estate sector. This particular NPRM targets non-financed, or “all-cash,” sales of residential real estate, a segment previously outside the purview of AML and Suspicious Activity Report (SAR) filing requirements under the BSA. This initiative marks a pivotal effort to close loopholes that have allowed money laundering to flourish within the real estate market.
The NPRM outlines a detailed framework for reporting specific types of non-financed real estate transactions. It calls on professionals involved in the closing or settlement process to report a wide array of information to FinCEN. This includes data on the beneficial owners of the acquiring legal entity or trust, the identities of individuals representing these entities, and comprehensive details about the transaction itself. By mandating the collection of this information, the NPRM aims to provide law enforcement with the necessary tools to link real estate transactions directly to individuals, entities, and trusts, enhancing the capacity to investigate and address money laundering activities.
Settlement agents, title insurance agents, escrow agents, and attorneys are primarily responsible for filing these reports, known as “Real Estate Reports.” A novel “cascade” method determines who among the professionals is responsible based on their role in the transaction, with an alternative arrangement allowing for a designated reporter through a mutual agreement, thus offering flexibility and aiming to minimize the operational impact on businesses.
This strategic move by FinCEN to increase transparency in the real estate sector is a critical step towards mitigating the risk of money laundering, reflecting a broader commitment to safeguarding the financial system against illicit activities. It aims to plug existing gaps and signifies a proactive approach to adapting regulatory measures in response to evolving threats, setting a precedent for future efforts to ensure the integrity of the U.S. financial landscape.
Corporate Transparency Act
Enacted in 2021 and as part of the Anti-Money Laundering Act (AMLA) of 2020, and approved within the National Defense Authorization Act (NDAA), the Corporate Transparency Act (CTA) expands the U.S. Government’s toolkit to further combat illicit activities such as money laundering, terrorism financing, tax fraud and other forms of misconduct facilitated through businesses. Designed to prevent corrupt actors from laundering illicit funds through anonymous companies, the CTA is designed to enhance transparency in entity structures and ownership in the U.S. by both domestic and foreign persons.
The CTA is a result of years of opacity about owners of limited liability companies (LLC), limited partnerships (LP), other non-publicly traded or regulated commercial operations in the U.S. The relative ease with which one can create these firms and the lack of insight into company owners and controllers — typically executive leaders in the C-suite and other decision makers — created an environment of permissibility for illicit flows of funds. Law enforcement and intelligence agencies as well as financial institutions would likely agree that this environment enabled illicit actors to easily disguise ill-gotten gains from the proceeds of drug sales, bribery payments, and fraudulent activity, to name a few.
The CTA’s enactment within the NDAA also speaks to another purpose: inhibiting the nation’s adversaries from setting up a business presence in the U.S. An estimated 30 million companies must report their beneficial ownership information (BOI) to FinCEN. This makes the U.S. a less hospitable environment to adversarial nations looking to collect intelligence in the U.S., evade sanctions, and influence the U.S. economy. The CTA adds scrutiny to foreign owners of small corporations and LLCs, which should give pause to adversaries who would have otherwise exploited the simplicity of starting a business entity in the U.S.
BOI information, which FinCEN began collecting on January 1 of this year, includes corporate filing details and underlying “natural persons” identifiers on who owns and/or controls a company. While this information can be relatively simple to report for very small businesses, complications arise for some companies, such as those with complex ownership structures, subsidiaries, and joint ventures.
FinCEN’s efforts to collect BOI will help law enforcement and other partners further efforts to disrupt illicit networks, equipping authorities with crucial information that would otherwise be unavailable or time-consuming to find.
BOI collection will also improve efficiencies at financial institutions seeking Know Your Customer (KYC) information. Depending upon the company size and complexity, new customer onboarding can take several months. Now, a financial institution can request access to a customer’s BOI from the Beneficial Ownership Registry. This is done with the customer’s permission and provides the institution with quicker, likely vetted information on their customer.
Not all corporations must file BOI. If you have questions about whether your firm is required to file, especially when dealing with subsidiaries, joint ventures, or other complex corporate structures, seeking advice from legal and compliance experts is critical.
FinCEN is pushing hard to strengthen the U.S. financial defense by tightening AML rules for investment advisors, shedding light on real estate deals, and establishing a system to track who really owns a business. This push towards transparency isn’t just about catching the bad guys; it’s about building a financial system everyone can trust. Going forward, it’s key that everyone from the big regulators to the banks on Main Street pull together. Our shared goal? A finance world that’s not only tougher on crime but also smarter and more transparent about facing future challenges.