FinCEN Issues Proposed Rule to Strengthen and Modernize Anti-Money Laundering and Anti-Terrorist Financing Programs // Cooley // Global Law Firm

By the end of June 2024, the U.S. Treasury Department The Financial Crimes Enforcement Network (FinCEN) has published a proposed rule modernize anti-money laundering (AML) and counter-terrorism financing (CFT) program requirements for financial institutions by strengthening a risk-based approach to compliance. The proposed changes build on statutory amendments to the Bank Secrecy Act (BSA) implemented by the AML Act of 2020, including amendments intended to encourage the modernization of AML programs and the related AML compliance regime under the BSA. The proposed rule would amend FinCEN regulations that prescribe minimum AML/CFT program requirements for financial institutions, including banks, money services businesses (MSBs), brokers, dealers, and other types of covered financial institutions.

Key Highlights of the Proposed Rule

“Fight against the financing of terrorism”

The proposed rule refers to “countering terrorist financing” in addition to “combating money laundering” to describe a financial institution’s requirements to establish an applicable compliance program. However, FinCEN anticipates that this change will be primarily technical in nature, as financial institutions are already required to address terrorist financing risks under the USA PATRIOT Act.

Anti-money laundering and counter-terrorist financing programmes “effective, risk-based and reasonably designed”

The proposed regulations would require financial institutions to develop “effective, risk-based, and reasonably designed” anti-money laundering and counter-terrorism financing programs. To meet this requirement, the proposed regulations require financial institutions to “focus their resources and attention in a manner consistent with their risk profile” and to consider “both high-risk and low-risk customers and activities.” Elements of such an effective, risk-based, and reasonably designed anti-money laundering and counter-terrorism financing program include a risk assessment process, internal policies, procedures, and controls, a qualified anti-money laundering and counter-terrorism financing officer, ongoing employee training, periodic independent testing, and other elements, depending on the type of financial institution, such as customer due diligence program requirements.

These elements of the AML program are generally aligned with current compliance obligations, but they tend to be more specific. For example, MSBs such as money transmitters (including those engaged in virtual currency activities) are currently required to have in place a risk-based AML compliance program that is “reasonably designed to prevent the money services business from being used to facilitate money laundering and terrorist financing.” An MSB’s program is currently required to be in writing and must include policies, procedures, and internal controls that are reasonably designed to ensure compliance with the MSB’s obligations under the BSA. However, the proposed rule would expand these requirements by requiring, for example, that an MSB establish a risk assessment process that meets certain specific criteria (as described below) and then manage and mitigate those risks “through policies, procedures, and internal controls that are commensurate” with the risks and that ensure ongoing compliance with the BSA. In addition, the proposed rule would expressly require the MSB’s board of directors (as well as other types of financial institutions) to approve the AML/CFT program and each of its required components.

AML/CFT priorities

The proposed rule requires financial institutions (including MSBs) to consider FinCEN’s AML/CFT priorities when developing and updating AML/CFT compliance programs. The AML/CFT priorities focus on threats to the U.S. financial system and national security, as well as crimes related to money laundering, terrorist financing, and other risks associated with illicit financial activity. The inclusion of the AML/CFT priorities is intended to ensure that financial institutions understand their risk exposures while addressing areas of national significance and assisting financial institutions in developing more effective, risk-based, and reasonably designed AML/CFT programs. The proposed rule requires FinCEN to update the AML/CFT priorities at least once every four years; the most recent version of priorities was published by FinCEN in June 2021. The proposed rule’s requirements to integrate AML/CFT priorities into the risk assessment process will introduce new obligations for financial institutions, as described in more detail below.

Risk assessment

The proposed rule would require financial institutions to complete a written risk assessment that incorporates and addresses FinCEN’s anti-money laundering and counter-terrorist financing priorities. The risk assessment would also have to consider: the company’s risks of money laundering, terrorist financing, and other illicit financial activities, including risks related to its “products, services, distribution channels, customers, intermediaries, and geographic locations”; and reports filed by the financial institution with FinCEN pursuant to the BSA, such as suspicious activity reports (SARs) and currency transaction reports (CTRs). FinCEN’s commentary on the proposed rule states that these reports can help financial institutions detect patterns or trends that they can incorporate into their risk assessments and apply to their risk-based policies, procedures, and internal controls. The proposed rule would require financial institutions to periodically review and update their risk assessments, including, at a minimum, when there are material changes in the financial institution's risks of money laundering, terrorist financing, or other illicit financial activities.

U.S. Presence Requirements for Anti-Money Laundering and Anti-Terrorist Financing Programs

It should be noted that for many financial institutions that outsource or operate all or part of their AML/CFT operations from outside the United States, the BSA as amended by the AML Act provides that “[t]The duty to establish, maintain and enforce the AML/CFT programme must remain the responsibility of and be performed by persons in the United States that are accessible and subject to the oversight and supervision of FinCEN and the appropriate federal functional regulator (emphasis added), pursuant to 31 U.S. Code § 5318(h)(5). The proposed rule generally implements this statutory requirement verbatim, but FinCEN invites comment on whether “the inclusion of this statutory language in the rule, as proposed, [is] “sufficient” or whether it is “necessary to clarify its meaning in the rule”. It may be of particular interest to financial institutions to obtain confirmation that this provision only requires that persons responsible for The AML/CFT program must be based in the United States, not that all individuals who perform functions related to compliance with the AML/CFT program must be based in the United States. A broad interpretation of this provision could significantly disrupt the current practices of many financial institutions with respect to global AML/CFT programs.

And after?

MSBs and other financial institutions should consider how the requirements of the proposed rule could affect and require changes to their existing AML/CFT compliance programs, as well as whether clarification or other information from FinCEN regarding the proposal would help facilitate the implementation of a new or updated program under the final rule. Written comments must be received by September 3, 2024, which is 60 days after the proposed rule is published in the Federal Register on July 3, 2024.

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