July 2, 2020

Volume X, Number 184

July 02, 2020

Subscribe to Latest Legal News and Analysis

July 01, 2020

Subscribe to Latest Legal News and Analysis

June 30, 2020

Subscribe to Latest Legal News and Analysis

June 29, 2020

Subscribe to Latest Legal News and Analysis

AML/BSA Focus by U.S. Senate Committee Testimony – From Beneficial Ownership to Cryptocurrency

This week, the U.S. Senate Committee on the Judiciary and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings focused in part on Anti-Money Laundering  (“AML”) and the Bank Secrecy Act (“BSA”).  We discuss highlights of the testimony of the Chairpersons of the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”), as well as testimony from a senior official at the Justice Department and a representative of the U.S. Chamber of Commerce, concerning upcoming changes to beneficial ownership requirements and the current regulatory landscape of the cryptocurrency industry.

Beneficial Ownership Disclosures

On February 6, Acting Deputy Assistant Attorney General M. Kendall Day of the Department of Justice, Criminal Division, testified before the Senate Committee on the Judiciary regarding the various ways in which the alleged misuse of corporate structures may undercut the U.S.’s AML laws.

Of particular note was Mr. Day’s statement that “[t]he pervasive use of front companies, shell companies, nominees, or other means to conceal the true beneficial owners of assets is one of the greatest loopholes in this country’s AML regime.”  Indeed, the Financial Action Task Force (“FATF”) recently scored the U.S. as non-compliant—the lowest possible score—in connection with its ability to determine the true owners of such companies. Mr. Day thus promoted FinCEN’s Customer Due Diligence (“CDD”) rule as a “critical step” in enhancing law enforcement’s ability to combat money laundering.  Beginning in May 2018, the CDD rule will require, in part, financial institutions to collect and verify the identities of the beneficial owners who own or control legal entities when those entities open new accounts (to view our practical guide and general discussion of the CDD rule, please see, respectively, here and here).

Following Mr. Day’s testimony was that of Brian O’Shea, appearing on behalf of the U.S. Chamber of Commerce. In his testimony, Mr. O’Shea spoke in opposition to the various legislative proposals aimed at beneficial ownership.  In particular, Mr. O’Shea testified that such proposals are “overly broad” and “unworkable,” and “would do far more to impede law abiding small and medium-sized business than to hamper the use of so-called ‘shell-companies’ to facilitate illicit activity.”  Mr. O’Shea spent considerable time discussing S. 1454, the True Incorporation Transparency for Law Enforcement (“TITLE”) Act, which is a companion bill to the Corporate Transparency Act (see here and here).  The TITLE Act would, among other things, require the States to enact systems requiring corporations and legal liability companies to disclose beneficial ownership during formation.

Virtual Currency and AML

Also on February 6, the Chairpersons of the SEC and the CFTC testified before the Senate Committee on Banking, Housing and Urban Affairs about the agencies’ regulatory efforts concerning the cryptocurrency industry (for the Chairpersons’ respective prepared testimony, see here and here). The Senate hearing comes on the heels of a period of heightened enforcement activity at both agencies and, as expected, the agency heads asked Congress to consider stricter federal oversight with respect to cryptocurrency trading.  Both highlighted AML concerns regarding cryptocurrency.

Jay Clayton, the Chairperson of the SEC, testified that “[t]he currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind.” Both Mr. Clayton and Christopher Giancarlo, the chairperson of the CFTC, described the current state as a patchwork of regulations issued by various agencies.  Such an approach, Mr. Giancarlo implied, leaves much to be desired.  In regards to AML considerations, Mr. Giancarlo stated that “the current approach of state-by-state money transmitter licensure . . . leaves gaps in protection for virtual currency traders and investors. Any proposed Federal regulation of virtual currency platforms should be carefully tailored to the risks posed by relevant trading activity and enhancing efforts to prosecute fraud and manipulation.”  Accordingly, he noted that “appropriate Federal oversight” could include AML and “know your customer” protections, in addition to data reporting requirement, capital requirements, cyber security standards, and measures to prevent fraud and price manipulation. As we have blogged, virtual currency exchangers already are subject to the Bank Secrecy Act and AML regulations because they represent money services businesses.

Similarly, Mr. Clayton warned that brokers, dealers and other market participants that allow for payments in cryptocurrencies or allow customers to purchase cryptocurrencies “should exercise particular caution,” including by “ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.” More generally, Mr. Clayton also stressed that, to date, no Initial Coin Offering (“ICO”) has registered with the SEC.

Fittingly, Mr. Giancarlo stated during this testimony that U.S. Treasury Secretary Steven Mnuchin has organized a virtual currency “task force”—of which FinCEN, the CFTC, the SEC and the Federal Reserve will participate—aimed at coordinating the various agencies’ “policing” of the cryptocurrency industry.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 39

TRENDING LEGAL ANALYSIS


About this Author

Bradley Gershel, Ballard Spahr Law Firm, New York, Securities and White Collar Litigation Attorney
Associate

Mr. Gershel's practice focuses on white-collar criminal defense, internal and regulatory investigations, and complex civil litigation. He has represented corporate and individual clients in a wide range of matters at all phases of litigation, and practices in both state and federal court. Mr. Gershel also has an extensive pro bono practice, with a particular focus on representing individual clients in federal courts and agencies in immigration matters. He is a frequent contributor to Money Laundering Watch, Ballard Spahr's blog focused exclusively on money...

646-346-8034