The Biden Administration’s United States Strategy on Countering Corruption sets forth the Administration’s five key pillars in its efforts to combat corruption: (i) modernizing, coordinating, and resourcing US government efforts to fight corruption; (ii) curbing illicit finance; (iii) holding corrupt actors accountable; (iv) preserving and strengthening the multilateral anti-corruption architecture; and (v) improving diplomatic engagement and leveraging foreign assistance resources to advance anti-corruption policy goals.
The Strategy, released in December as part of the Administration’s effort to curb illicit finance, intends to implement heightened reporting obligations and penalties for those professionals and service providers – including lawyers, accountants, and trust and company service providers – who serve as gatekeepers to the US financial system.
In this alert, we take a look at the implications of the Strategy for those gatekeepers.
Expansion of AML reporting requirements to lawyers, accountants, trust and company service providers, investment advisers and other private equity funds
As noted in our prior client alert, one of the key objectives of the Administration under the Strategy is to address the deficiencies in the US Anti-Money Laundering (AML) regime. The Strategy intends to do so by, among other things, expanding the reach of the existing AML framework to embrace professionals and service providers who serve as access points to the US financial system.
These professionals are not currently legally required to understand the nature or source of income of their clients or prospective clients, unlike banks and other regulated entities which have long been required to comply with rigorous “Know Your Customer” regulations and other requirements of the Bank Secrecy Act. The Strategy highlights that it will work with Congress “to expand authorities where necessary, to make sure that key gatekeepers to the financial system – including lawyers, accountants, and trust and company service providers – cannot evade scrutiny.”
Strategy generally endorses the proposed ENABLERS Act
This particular aspect of the Strategy supports bipartisan efforts to extend the existing AML regime to US gatekeepers who facilitate the flow of foreign assets into the US through passage of a pending piece of legislation entitled the Establishing New Authorities for Business Laundering and Enabling Risks to Security (the ENABLERS Act). This proposed new legislation, which came in the wake of the Pandora Papers’ revelations, seeks to close the loopholes that kleptocrats and other wrongdoers use to launder money in the US by extending the existing AML regime to lawyers, accountants, and other service providers
Under this act, for the first time, those who could purportedly enable the flow of illicit proceeds through the US financial markets – such as trust companies, lawyers, art dealers, investment advisors, traders marketing advisors and payment processors – would be required to investigate foreign clients seeking to move money and assets into the US financial system.
Specifically, the proposed ENABLERS Act would require the US Department of Treasury to create a basic due diligence framework for those US-based gatekeepers that facilitate financial transactions of foreign entities. If enacted, this bill would amend the BSA and would be the most significant change to AML rules since September 11, 2001.
Specifically, the proposed legislation would amend the existing definition of “financial institution” to include:
- A person engaged in the business of providing investment advice for compensation
- A person engaged in the trade in works of art, antiques, or collectibles, including a dealer, advisor, consultant, custodian, gallery, auction house, museum, or any other person who engages as a business in the solicitation or the sale of works of art, antiques, or collectibles
- An attorney, law firm, or notary involved in financial activity or related administrative activity on behalf of another person
- A trust or company service provider, including: (i) a person involved in forming a corporation, limited liability company, trust, foundation, partnership, or other similar entity or arrangement; (ii) a person involved in acting as, or arranging for another person to act as, a registered agent, trustee, or nominee to be a shareholder, officer, director, secretary, partner, signatory, or other similar position in relation to a person or arrangement; (iii) a person involved in providing a registered office, address, or other similar service for a person or arrangement; or (iv) any other person providing trust or company services, as defined by the Secretary of the Treasury
- A certified public accountant or public accounting firm
- A person engaged in the business of public relations, marketing, communications, or other similar services in such a manner as to provide another person anonymity or deniability and
- A person engaged in the business of providing third-party payment services, including payment processing, check consolidation, cash vault services, or other similar services designated by the Secretary of the Treasury.
Under the proposed legislation, Treasury would have until December 2023 to create AML rules for the above-listed US-based gatekeepers, and a new national security task force would oversee the effort. Practically, these changes would require that the above-listed US-based gatekeepers:
- Report suspicious transactions
- Establish an AML compliance program;
- Establish due diligence policies, procedures and controls to satisfy their AML-related obligations and
- Identify and verify their account holders.
Strategy further proposes to extend AML requirements to investment advisers and other private equity funds
The Strategy notes that certain investment professionals and entities are currently not covered by the BSA, which “may allow corrupt actors to invest their ill-gotten gains in the US financial system through hedge funds, trusts, private equity funds, and other advisory services or vehicles offered by investment advisers that focus on high value customers.” This lack of regulatory oversight, the Strategy notes, has allowed money launderers to evade scrutiny by operating through investment advisers rather than through broker-dealers or banks directly.
The Strategy has therefore tasked Treasury to re-examine the Notice of Proposed Rule Making (NPRM) FinCEN issued in 2015 (the 2015 NPRM), which sought to “prescribe minimum standards for AML to be established by certain investment advisers and to require such investment advisers to report suspicious activity to FinCEN pursuant to the BSA.”
The 2015 NPRM proposed three main regulatory changes:
- Including investment advisers within the general definition of “financial institution” in the regulations implementing the BSA and adding a definition of investment adviser
- Requiring investment advisers to establish AML programs and
- Requiring investment advisers to report suspicious activity.
The 2015 NPRM proposed to define an “investment adviser” as “[a]ny person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(a).”
In addition to revisiting the 2015 NPRM, the Strategy also directs the Treasury to consider whether to extend the existing AML regime to private placement funds, including investment offered by hedge funds and private equity funds. The Strategy thus previews potential expansion of AML reporting obligations to other types of investment advisers, such as state-regulated investment advisers or investment advisers that are exempt from SEC registration, that are found to present risks to the US financial system.
Expansion of beneficial ownership information reporting obligations to new entities
As noted in our prior alert, the Strategy delegates significant authority to FinCEN, the financial intelligence component of the Treasury Department. Among other things, FinCEN has been tasked with issuing new regulations aimed at effectively collecting beneficial ownership information.
In April 2021, FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting public comments on questions related to the implementation of the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA). The CTA became law in January 2021, the result of years of efforts to require beneficial ownership reporting for certain categories of business entities, with a particular emphasis on ratcheting up enforcement as to anonymous shell companies, viewed as the vehicles of choice for money launderers and other criminals.
On December 7, 2021, six months after receiving the comments it had solicited, FinCEN issued a notice of proposed rulemaking (NPRM) regarding the implementation of the CTA. This NPRM came in the immediate wake of the Strategy’s release (two days earlier), previewing the creation of a beneficial ownership database to implement the CTA, and noting that “corrupt actors frequently use opaque legal structures to hide and launder the proceeds of their crimes.”
Entities subject to beneficial ownership information reporting requirements under the NPRM
Under the NPRM, domestic and foreign entities, including corporations, limited liability companies (LLCs), and other entities created by or registered by filing a document with a Secretary of State or similar state or tribal office will be required to file reports with FinCEN that identify the true beneficial owner of the entity. The NPRM exempts 23 categories of entities – including, for example, entities registered with the SEC, certain types of insurance companies, et cetera – from the reporting requirement and appears to target entities that are currently not subject to federal or state regulations.
Beneficial ownership information to report under the NPRM
As proposed by the NPRM, each non-exempt reporting entity will be required to submit to FinCEN a report identifying and certifying each beneficial owner and “company applicant.”
As defined by the NPRM, beneficial owners include all individuals who either exercise substantial control over the entity or who own or control at least 25 percent of the ownership interest of the entity. A company applicant is the individual who files the document that forms the entity for a domestic entity or the individual who files the document that first registers the entity to do business in the US for a foreign entity.
Such reports must include each individual’s: (1) full legal name; (2) date of birth; (3) current residential or business street address; and (4) unique identifying number from an acceptable identification document (eg, passport or FinCEN identifier). In addition, each non-exempt reporting entity must report its name, any alternative names through which the entity is engaging in business (d/b/a names), its business street address, its jurisdiction of formation or registration, as well as a unique identifier number such as the Taxpayer Identification Number (TIN), Dun & Bradstreet Data Universal Numbering System (DUNS) number, or Legal Entity Identifier (LEI).
The database that will collect this information would not be accessible to the public. The CTA requires Treasury to take the necessary steps to maintain the security and confidentiality of the information.
However (and it is a big “however”), pursuant to 31 U.S.C. § 5336(c)(2)(B)(i)(II), FinCEN may disclose the information upon “request” from federal law enforcement or intelligence agencies, as well as upon a court-authorized request from state, local, or tribal law enforcement agencies in a criminal or civil investigation with “request” including a grand jury subpoena or civil investigation demand. Federal agencies may make similar requests on behalf of foreign law enforcement agencies. There are other authorized disclosures, including disclosures to financial institutions (with the consent of the reporting company).
Expansion of reporting requirements to non-financed (that is, all-cash) real estate transactions
As part of its efforts to remedy the deficiencies in the current AML framework, the Strategy also proposes to “promulgate regulations targeting those closest to real estate transactions to reveal when real estate is used to hide ill-gotten cash or launder criminal proceeds.” 
Real estate transactions subject to current AML reporting obligations
Currently, financial institutions such as banks, non-bank residential mortgage lenders and originators, and housing-related government sponsored enterprises have to report certain types of suspicious transactions by filing suspicious activity reports (SARs) and maintain appropriate AML programs to detect illicit activities, such as money laundering and terrorism financing.
However, the current regulatory framework only covers financed residential and commercial transactions (and all-cash residential real-estate transaction over $300,000 in certain US metropolitan areas). As a result, approximately 20 percent of all real estate transactions have fallen outside the scope of the current regulatory framework.
The December 2, 2021 advanced notice of proposed rulemaking (the Real Estate ANPRM) issued by FinCEN and the Treasury aims to close the existing gap by expanding the reporting obligations to cover all cash real estate transactions.
Real estate transactions contemplated by the Real Estate ANPRM
Under the Real Estate ANPRM, financial institutions are expected to adhere to certain reporting requirements for all-cash real estate transactions by both domestic and foreign entities, regardless of their geographic location and transaction value threshold. This means all-cash real estate transactions of any value at any location would be subject to the expanded reporting requirements. The Real Estate ANPRM further sought comments regarding the following entities potentially to be included in the proposed reporting requirements:
- Shell companies: Because shell companies – which have no active business operations or significant assets and exist only on paper – are frequently used to obscure the ultimate owner of real estate, FinCEN believes that these entities should likely be covered in any proposed regulations.
- Trusts: Several high-profile DOJ enforcement actions have involved the use of a trust to conduct corrupt and illicit real estate transactions. FinCEN believes consideration of any proposed rule should also include the risks presented by US and foreign trusts.
- Natural persons: FinCEN is concerned about real estate money laundering risks involving the use of nominees or “straw-man” purchasers. It is interested in comments addressing the most appropriate way to treat natural persons in regulations addressing money laundering through real estate transactions.
Reporting entities contemplated by the Real Estate ANPRM
As alluded to above, beginning in November 2020, FinCEN began issuing Geographic Targeting Orders (GTOs) for multiple major metropolitan areas. These GTOs required US title insurance companies to identify the natural persons behind shell companies used in all-cash purchases of residential real estate above a threshold of $300,000.
Currently, these real estate GTOs require reporting only from title insurance companies. However, title insurance is not mandatory in all US jurisdictions; some entities have reportedly declined to purchase title insurance as a way to evade the reporting requirement.
FinCEN is aware that real estate closing transactions may involve several participants, including brokers for both buyer and seller, attorneys, title insurance companies, closing agents, appraisers, and inspectors. It is therefore seeking comment on which types of entity would be in the best position to collect information, maintain records, and report information regarding all-cash real estate transactions. FinCEN noted that, to address money laundering concerns, the recordkeeping and reporting requirement should attach to some entity involved in every all-cash transaction.
FinCEN specifically invites comments on two proposed regulatory frameworks:
- Specific reporting requirement for certain classes of domestic financial institutions to maintain appropriate procedures, including the collection and reporting of certain information as the Treasury may require and
- More general requirement for certain persons involved in all-cash real estate closings and settlement by requiring such persons to file SARs.
Comments to the ANPRM must be received on or before February 7, 2022.
The Strategy on Countering Corruption and recent FinCEN announcements foreshadow a greater involvement of the US Department of Treasury in strengthening and expanding the reach of the applicable AML framework to key gatekeepers in an effort to combat corruption.
The Strategy’s proposed expansion of the scope of the AML regime to the “gatekeepers” to the US financial system underscores the Administration’s efforts to strengthen the fight, not only against those who engage in corrupt activities, but also against those who facilitate such activities.