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FATF’s AML Evaluation of the US: Will it Drive More Regulatory Changes?

On December 1, 2016 the Financial Action Task Force (FATF) released its Mutual Evaluation Report of the US Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) Measures. While the report was generally favorable, it did point out a few areas that need to be improved – some of which could be catalysts for new changes in US policy.

As we know, in the US (and globally) not everyone is a fan of increased banking regulations – in fact some are adamantly opposed to it.  As a result, change is slow and difficult to make happen. However, there are sometimes things that occur to help push a regulatory change over the goal line.  For example, earlier this year FinCEN (US Financial Crimes Enforcement Network) enacted a new Customer Due Diligence (CDD) Rule which focused on beneficial ownership due diligence requirements. Before becoming final this rule, which was proposed in July 2014, had been in limbo for almost two years.  Serendipitously, the Panama Papers were originally leaked in early April 2016, highlighting to the world the necessity for understanding beneficial ownership of companies to stymie the hiding of funds.  Within roughly a month, the July 2014 proposed rule became final in May 2016.  The timing of those two events is no coincidence and one can see how a similar path is about to unfold based on FATF’s recent report.

Prior to this year’s review, FATF had not done a review of the US AML program since 2006.  Two of the key deficiencies that were pointed out in the 2016 report were:


  • “Significant gaps” in the AML/CTF regulatory coverage of certain institutions and designated non-financial businesses and professions (DNFBPs). Included within this gap of coverage are investment advisors, lawyers, accountants, etc.


  • Fundamental gaps due to “[l]ack of timely access to adequate, accurate, and current beneficial ownership information.”


Now that we know what is lacking, how can this create quick (relatively speaking) regulatory changes in the US? Well, there are a few existing outstanding items that are awaiting finality that would directly address FATF’s concerns.


1.          Proposed rule for application of certain AML requirements to Registered Investment Advisors (RIAs)

Announced in September 2015, the proposed rule would require that investment advisors registered with the Securities and Exchange Commission implement the core features of an AML program as well as monitor and report suspicious activity and cash transactions, and share information under Section 314 of the USA PATRIOT Act. It is interesting to note that customer identification program and customer due diligence program requirements are not included in the proposed rule.


2.         Proposed rule for application of certain federal AML requirements to non-federally regulated banks

Announced in September 2016, this rule would affect private banks, state chartered non-depository trust companies, non-federally insured credit unions, non-federally insured state banks and savings association, and international banking entities. These institutions would be required to maintain customer identification programs and customer due diligence requirements, including those announced in FinCEN’s CDD rule earlier this year.


  3.       Outstanding proposed Beneficial Ownership Registration Requirements

While FinCEN’s new CDD rule has partially addressed the beneficial ownership problem identified by FATF (the report covered the state of the regulatory environment in January/February 2016, prior to the enactment of the new CDD rule in May 2016), there is still more to be done to effectively address the beneficial ownership dilemma in the US. When the new CDD rule was announced by FinCEN, Treasury Secretary Lew also sent proposed beneficial ownership requirements to the US Congress to “require companies to know and report adequate and accurate beneficial ownership information at the time of the company’s creation” to the US Department of the Treasury.


Ultimately, these three proposals would help address the deficiencies identified by FATF. Passing the two proposed rules would fill part of the significant AML regulatory coverage gap identified by FATF and meaningful beneficial ownership registration legislation would bring the US in line with the EU and meet FATF’s recommendations.  Ultimately, FATF’s findings won’t usher in all of these changes at once but maybe they can “coincidentally” precede the finalization of at least one.


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