The second instalment in Jim Richards’ Renewing the BSA Series.
On January 1, 2021 the United States Senate approved the National Defense Authorization Act (NDAA), and with it, the most significant legislation addressing the U.S. Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regime since 2001 — the Anti-Money Laundering Act of 2020 (AMLA). The AMLA may usher in profound changes, including advancements for Suspicious Activity Reports (SARs) with important industry implications. Here, I explore how the landmark AMLA may progress the SAR regime, highlighting key considerations for financial institutions.
SAR Utility: Refining the Purpose of the BSA
The usefulness of SARs in providing actionable information to law enforcement has been an important industry challenge; without feedback on the quality of the SARs filed, institutions could not know if their reports were, in fact, useful. The burden of filing a single SAR is estimated to range from 25 to 315 minutes, and the Financial Crimes Enforcement Network (FinCEN) determined that, for 2019 SAR filings, “nearly three quarters of original SARs filed by depository institutions report only up to two subjects involved in up to five suspicious activities, described in a narrative that does not exceed one page, and on their face do not appear complex.” In other words, institutions often spend a significant amount of time on simple SAR reports.
The AMLA will contribute to much needed SAR reform. The additions to the “purpose” section of the Bank Secrecy Act (BSA) include the following refinements to the original (post-2001) purpose (note, the blue font in this blog indicates a change or addition to the language):
“Require certain reports or records where they have a high degree of usefulness that are highly useful in – (A) criminal, tax, or regulatory investigations, risk assessments, or proceedings; or (B) intelligence or counterintelligence activities, including analysis, to protect against international terrorism.” (31 USC s. 5311)
These adjustments to the original BSA purpose have important ramifications for the current SAR regime, as reflected elsewhere in the Act. For instance, the AMLA includes provisions to improve the usefulness of SARs in providing actionable intelligence to law enforcement, such as Section 6203(b) which requires that FinCEN shall periodically disclose to each financial institution, in summary form, information on SARs filed that proved useful to law enforcement and to the Department of Justice.
Similarly, as explained in the NDAA’s accompanying Joint Explanatory Statement, the conference agreement further requires that the Secretary of the Treasury must consider, when imposing SAR reporting requirements, the benefits and burdens of specific requirements and whether the reporting is likely to be “highly useful” to law enforcement and national security efforts.
Changes to the Reporting of Suspicious Transactions
The AMLA also makes changes to the SAR regime in 31 USC s. 5318(g) commensurate with the BSA’s refined “purpose.” This includes provisions to streamline and automate aspects of suspicious activity reporting, deliver feedback on SAR utility, and to introduce a pilot program allowing U.S. institutions to share SAR-related information internationally. Specifically, the changes include:
- (g)(1) – gives the Secretary the ability to issue regulations to require financial institutions to report suspicious transactions
- (g)(2) – Notification Prohibited – A filing financial institution and any officer, director, or employee of a filing financial institution cannot notify or disclose to any person involved in a reported suspicious transaction that the transaction has been reported or otherwise reveal any information that would reveal that the transaction has been reported
- (g)(3) – Liability for disclosure of SAR
- (g)(4) – Single designee for SARs (FinCEN)
- (g)(5) – Establish streamlined, including automated, processes to, as appropriate, permit the filing of noncomplex categories of SARs (added by s. 6202)
- (g)(6) – FinCEN shall share threat pattern and trend information at least semiannually to provide meaningful information about the preparation, use, and value of BSA reports. It shall include typologies, including data that can be adapted in algorithms, if appropriate on emerging money laundering and terrorist financing threat patterns and trends (added by s. 6206)
- (g)(7) – Rules of construction (added by s. 6206)
- (g)(8) – Pilot program within one year to allow a US financial institution to share SAR-related information with its foreign branches and affiliates (added by s. 6212)
Item (g)(5) in particular is similar to provisions raised in FinCEN’s September 16, 2020 Advance Notice of Proposed Rulemaking (ANPRM), another key initiative targeting AML reform. Subsection (g)(8) is also noteworthy, as it closes (albeit with a pilot program rather than a permanent change) an anomaly in the law and regulation where foreign banks operating in the U.S. could share SAR information with their home-country head office, but U.S. banks could not share SAR information with their foreign branches and affiliates. However, exceptions were included for prohibited jurisdictions (specifically China and Russia), any state sponsor of terrorism, any jurisdiction subject to sanctions, and any jurisdiction determined by the Secretary that cannot reasonably protect the security and confidentiality of such information.
The AMLA also calls for a review of the contents, forms, and thresholds of SARs and Currency Transaction Reports, in Sections 6204 and 6205.
Considerations for Financial Institutions
The AMLA will modernize the SAR regime: FinCEN shall solicit feedback from a cross-section of BSA Officers on their financial institution’s SARs and trends observed by FinCEN; FinCEN will provide that information to the institution’s regulator and; FinCEN shall periodically disclose to financial institutions relevant information on SARs filed that proved useful to law enforcement and the Department of Justice.
While the AML Act of 2020 signals a new era in the evolution of the BSA/AML regime, the changes to regulatory reporting may take years to unfold, as regulatory development, revisions to the FFIEC BSA/AML Examination Manual, and regulator training are required. During this period of change, financial institutions will need to be mindful of, and even anticipate, these regulatory developments as they build out their policies, procedures, processes, and technologies. It has never been more important to be engaged and active with peers, trade organizations, and your regulators.