Tucked into the $740 billion defense spending bill Congress approved Friday are several anti-money laundering (AML) provisions that could dramatically improve law enforcement’s ability to identify and prosecute criminals laundering money through the U.S. banking system.
The “National Defense Authorization Act for Fiscal Year 2021” (H.R.6395) contains a provision (Section 6403) that will require corporations to identify who owns and controls them (i.e., beneficial ownership) to the Financial Crimes Enforcement Network (FinCEN) at the U.S. Treasury. The bill also includes a provision (Section 6314) that creates a new Bank Secrecy Act (BSA) whistleblower program at the Treasury.
The bill passed the Senate by a bipartisan 84-13 vote after being approved by a similarly wide margin in the House earlier this week. It now heads to President Donald Trump, who has threatened a veto for unrelated provisions on shielding internet companies from being liable for what’s posted on their Websites and requiring military bases named after Confederate figures to be renamed.
The House and Senate votes each held veto-proof majorities, but should Trump veto the bill, it is unclear if Republicans in both chambers would vote to override his veto in the same numbers they voted to pass the bill.
AML experts are calling the beneficial ownership provision a historic step forward in the fight against money laundering—one that, if enacted, will tear away the anonymity of shell corporations that allow criminals to hide their true identities while committing fraud and funding terrorist activities via the U.S. banking system.
“This has been long overdue,” said Rick McDonell, executive director of the Association of Certified Anti-Money Laundering Specialists, the largest international membership organization for anti-financial crime professionals. “Up until now, the U.S. attempts to pass beneficial ownership (legislation) have been a long struggle.”
Gina Parlovecchio, a partner at Mayer Brown and a former federal prosecutor who specialized in narcotics and money-laundering cases, said the beneficial ownership law will be “tremendously helpful.”
“Money launderers are incredibly skilled in creating layers of insulation” between themselves and the money they launder through the banking system, she said. “The use of shell companies has been an incredibly large hurdle for law enforcement to overcome.”
The beneficial ownership provision would require new corporations to name anyone who owns at least 25 percent of the corporation or receives a “substantial economic benefit,” wording that would require further clarification from FinCEN and the Treasury.
Under the law, new corporations will have to report to FinCEN their beneficial owners’ name; date of birth; current address; and some form of identification, like a driver’s license or passport number. Existing corporations will have two years to comply, which takes effect 60 days after it is signed into law. Any company that is a federally regulated entity—e.g., banks and credit unions, insurance companies, investment firms, public utilities, and government entities—would be exempt.
The beneficial ownership law would largely require reporting from foreign-owned corporations.
Exempt from reporting are U.S.-based nonprofits, as well as any for-profit corporation that can show its beneficial owner is a U.S. citizen or permanent resident or derives the majority of its revenue from a U.S. citizen or permanent resident. Also exempt are corporations that employ at least 20 U.S.-based employees or that have filed U.S. tax returns with gross receipts of more than $5 million within the last year.
The beneficial ownership database would be held by FinCEN, which only law enforcement and financial institutions could access. A similar database in the United Kingdom is open to the public, McDonell said.
“It’s not just good for the U.S. AML fight,” he said of the requirements, noting the information would help law enforcement agencies internationally. “It’s good for the whole world.”
Cracks in façade of whistleblower program
Whistleblower advocates are less sure the proposed BSA whistleblower program will work as well as intended but welcome its creation as a good first step.
The program would offer whistleblowers who provide actionable information to law enforcement about violations of the BSA with awards of up to 30 percent of any fine over $1 million. But unlike other successful federal whistleblower programs operated by the Internal Revenue Service, Securities and Exchange Commission, and Commodity Futures Trading Commission, there is no minimum award set. The IRS offers at least 15 percent on fines over $1 million, and the SEC and CFTC each offer 10 percent on actions over $1 million.
“I’m happy they created this program in the bill,” said Stephen Kohn, a nationally known whistleblower attorney with the firm Kohn, Kohn & Colapinto and chairman of the board of the National Whistleblower Center. But Kohn is critical of some of its provisions, like the lack of a minimum award and the fact that whatever award amount the Treasury sets cannot be contested.
“A lot of whistleblowers won’t come forward if there’s no guarantee they’re going to get paid,” he said.
There is a BSA whistleblower program already in existence at the Treasury, but it caps awards at $150,000. Whistleblower attorneys say they rarely, if ever, advise tipsters with information on BSA violations to use it. Often, the violations also involve tax evasion, which would funnel those whistleblowers into eligibility under the IRS program.
Michael Ronickher, partner at the whistleblower firm Constantine Cannon, said many whistleblowers view the award “as a one-time, lump sum payment for the value of a lost career.” Whistleblowers need to know the value of their information will be rewarded by the government as they commit, as he called it, “career suicide.”
Another issue with the bill, Ronickher said, has to do with retaliation protections for whistleblowers.
Under the terms of the law, employees of entities insured under the Federal Deposit Insurance Act (banks) and the Federal Credit Union Act (credit unions) would be prohibited from suing for retaliation from their employer. In addition, employees of firms not regulated by those acts would first have to file a retaliation complaint with the Department of Labor, rather than directly with a court. If the DOL did not act within 180 days, then the whistleblower could file a retaliation lawsuit.
“You’re failing to encourage the very people who have access to key information about wrongdoing,” Ronickher said. “They’re really shooting themselves in the foot by setting it up this way.”
Sean McKessy, a partner at the firm Phillips & Cohen and the first chief of the SEC Office of the Whistleblower, said the BSA program as constructed does not allow for tipsters to provide independent analysis, which precludes anyone who might be able to piece together violations through research of public documents.
And unlike the SEC and CFTC whistleblower programs, there is no fund created that would be dedicated to pay out awards.
“All this uncertainty will make a whistleblower think twice about stepping up,” he said. “As a result, I don’t think it’s going to move the needle very much.”