[Federal Register Volume 89, Number 128 (Wednesday, July 3, 2024)]
[Proposed Rules]
[Pages 55428-55493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14414]
[[Page 55427]]
Vol. 89
Wednesday,
No. 128
July 3, 2024
Part III
Department of the Treasury
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Financial Crimes Enforcement Network
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31 CFR Parts 1010, 1020, 1021, et al.
Anti-Money Laundering and Countering the Financing of Terrorism
Programs; Proposed Rule
Federal Register / Vol. 89 , No. 128 / Wednesday, July 3, 2024 /
Proposed Rules
[[Page 55428]]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010, 1020, 1021, 1022, 1023, 1024, 1025, 1026, 1027,
1028, 1029, and 1030
RIN 1506-AB52
Anti-Money Laundering and Countering the Financing of Terrorism
Programs
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: FinCEN is proposing a rule to strengthen and modernize
financial institutions' anti-money laundering and countering the
financing of terrorism (AML/CFT) programs pursuant to a part of the
Anti-Money Laundering Act of 2020 (AML Act). The proposed rule would
require financial institutions to establish, implement, and maintain
effective, risk-based, and reasonably designed AML/CFT programs with
certain minimum components, including a mandatory risk assessment
process. The proposed rule also would require financial institutions to
review government-wide AML/CFT priorities and incorporate them, as
appropriate, into risk-based programs, and would provide for certain
technical changes to program requirements. This proposal also further
articulates certain broader considerations for an effective and risk-
based AML/CFT framework as envisioned by the AML Act. In addition to
these changes, FinCEN is proposing regulatory amendments to promote
clarity and consistency across FinCEN's program rules for different
types of financial institutions.
DATES: Written comments may be submitted on or before September 3,
2024.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal E-rulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. Refer to Docket Number
FINCEN-2024-0013.
Mail: Policy Division, Financial Crimes Enforcement
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2024-0013.
Please submit comments by one method only.
FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section
at 1-800-767-2825 or electronically at [email protected].
SUPPLEMENTARY INFORMATION:
I. Scope
The proposed rule would amend FinCEN's regulations that prescribe
the minimum requirements for AML/CFT programs for financial
institutions (known as ``program rules'').\1\ For the purposes of the
program rules, ``financial institutions'' include: banks; casinos and
card clubs (casinos); money services businesses (MSBs); brokers or
dealers in securities (broker-dealers); mutual funds; insurance
companies; futures commission merchants and introducing brokers in
commodities; dealers in precious metals, precious stones, or jewels;
operators of credit card systems; loan or finance companies; and
housing government sponsored enterprises.\2\
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\1\ The program rules are located at 31 CFR 1020.210 (banks),
1021.210 (casinos and card clubs), 1022.210 (money services
businesses), 1023.210 (brokers or dealers in securities, or broker-
dealers), 1024.210 (mutual funds), 1025.210 (insurance companies),
1026.210 (futures commission merchants and introducing brokers in
commodities), 1027.210 (dealers in precious metals, precious stones,
or jewels), 1028.210 (operators of credit card systems), 1029.210
(loan or finance companies), and 1030.210 (housing government
sponsored enterprises).
\2\ See 31 CFR 1010.100(t) and (ff) for a list of financial
institutions defined by FinCEN with AML/CFT program requirements. On
February 15, 2024, FinCEN proposed certain Bank Secrecy Act (BSA)
requirements for investment advisers that, among other things, would
add investment advisers in the definition of ``financial
institution'' under the BSA and impose BSA program, reporting, and
recordkeeping requirements. The proposed rule for certain investment
advisers does not generally reflect proposals contained in this
doument and instead reflects current program requirements for
financial institutions engaged in activity that is similar to,
related to, or a substitute for activities of investment advisers.
See Anti-Money Laundering/Countering the Financing of Terrorism
Program and Suspicious Activity Report Filing Requirements for
Registered Investment Advisers and Exempt Reporting Advisers, 89 FR
12108 (Feb. 15, 2024), available at https://www.federalregister.gov/documents/2024/02/15/2024-02854/financial-crimes-enforcement-network-anti-money-launderingcountering-the-financing-of-terrorism.
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II. Background
A. The Bank Secrecy Act
Enacted in 1970 and amended several times since, the Currency and
Foreign Transactions Reporting Act, generally referred to as the Bank
Secrecy Act (BSA),\3\ is designed to combat money laundering, the
financing of terrorism, and other illicit finance activity risks
(collectively, ML/TF). To fulfill the purposes of the BSA, Congress has
authorized the Secretary of the Treasury (Secretary), among other
things, to administer the BSA and require financial institutions to
keep records and file reports that, among other purposes, ``are highly
useful in criminal, tax, or regulatory investigations, risk
assessments, or proceedings,'' or in the conduct of ``intelligence or
counterintelligence activities, including analysis, to protect against
terrorism.'' \4\ The Secretary has delegated the authority to
implement, administer, and enforce compliance with the BSA and its
associated regulations to the Director of FinCEN (Director).\5\ Through
the exercise of this delegated authority, FinCEN is authorized to
require each financial institution to establish an AML program to
ensure compliance with the BSA and guard against ML/TF.\6\
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\3\ Certain parts of the Currency and Foreign Transactions
Reporting Act, its amendments, and the other statutes relating to
the subject matter of that Act, have come to be referred to as the
BSA. These statutes are codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-
1960, 18 U.S.C. 1956, 18 U.S.C. 1957, 18 U.S.C. 1960, and 31 U.S.C.
5311-5314 and 5316-5336 and notes thereto.
\4\ 31 U.S.C. 5311(1).
\5\ Treasury Order 180-01 (Jan. 14, 2020), Paragraph 3,
available at https://home.treasury.gov/about/general-information/orders-and-directives/treasury-order-180-01.
\6\ 31 U.S.C. 5318(a)(2), (h)(1), and (h)(2).
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Since its original enactment, Congress has expanded the BSA to
address other aspects of AML/CFT compliance. In 1992, the Annunzio-
Wylie Anti-Money Laundering Act \7\ gave the Secretary authority to
require financial institutions, as defined in the BSA regulations, to
``carry out'' AML programs and to prescribe minimum standards for such
programs, including: ``(A) the development of internal policies,
procedures, and controls, (B) the designation of a compliance officer,
(C) an ongoing employee training program, and (D) an independent audit
function to test programs.'' \8\ Later, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (USA PATRIOT Act) further amended the
BSA, reinforcing the framework established earlier by the Annunzio-
Wylie Anti-Money Laundering Act, to require, among other things,
customer identification program requirements and the expansion of AML
program rules to cover certain other industries (e.g., credit unions
and futures commission merchants).\9\ The USA PATRIOT Act also made it
mandatory for financial institutions to maintain AML programs that meet
minimum prescribed standards.\10\ Over
[[Page 55429]]
time, FinCEN incorporated these standards and implemented additional
requirements for certain financial institutions, such as customer due
diligence (CDD) requirements, into the program rules.\11\ Finally, the
BSA was further amended by the AML Act and codified at 12 U.S.C. 1829b,
12 U.S.C. 1951-1960, 18 U.S.C. 1956, 18 U.S.C. 1957, 18 U.S.C. 1960,
and 31 U.S.C. 5311-5314 and 5316-5336 and notes thereto.
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\7\ Section 1517 of the Annunzio-Wylie Anti-Money Laundering
Act, Public Law 102-550, 106 Stat. 3672 (Oct. 28, 1992).
\8\ 31 U.S.C. 5318(h)(1), as added by section 1517(b) of the
Annunzio-Wylie Anti-Money Laundering Act, Public Law 102-550 (Oct.
28, 1992).
\9\ 31 U.S.C. 5312(a)(2)(E) and 31 U.S.C. 5312(c), as added by
section 321 of the USA PATRIOT Act, Public Law 107-56, 115 Stat. 272
(Oct. 26, 2001).
\10\ 31 U.S.C. 5318(h), as added by section 352 of the USA
PATRIOT Act (Pub. L. 107-56).
\11\ See Customer Due Diligence Requirements for Financial
Institutions, 81 FR 29398 (May 11, 2016).
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B. The AML Act
On January 1, 2021, Congress enacted the William M. (Mac)
Thornberry National Defense Authorization Act for Fiscal Year 2021
(FY21 NDAA), of which the AML Act was a component.\12\ Congress noted
in its Joint Explanatory Statement (JES) of the Committee of Conference
accompanying the FY21 NDAA that: ``the current [AML/CFT] regulatory
framework is an amalgamation of statutes and regulations that are
grounded in the [BSA], which the Congress enacted in 1970. This
decades-old regime, which has not seen comprehensive reform and
modernization since its inception, is generally built on individual
reporting mechanisms (i.e., currency transaction reports (CTRs) and
suspicious activity reports (SARs)) and contemplates aging, decades-old
technology, rather than the current, sophisticated AML compliance
systems now managed by most financial institutions.'' \13\ Congress
further stated that the AML Act ``comprehensively update[s] the BSA for
the first time in decades and provide[s] for the establishment of a
coherent set of risk-based priorities.'' \14\ Among other objectives,
Congress intended for the AML Act to require ``more routine and
systemic coordination, communication, and feedback among financial
institutions, regulators, and law enforcement to identify suspicious
financial activities, better focusing bank resources to the AML task,
which will increase the likelihood for better law enforcement
outcomes.'' \15\ The AML Act also notes in section 6002 that one of its
purposes is ``to encourage technological innovation and the adoption of
new technology by financial institutions to more effectively counter
money laundering and the financing of terrorism.'' \16\
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\12\ Public Law 116-283 (Jan. 1, 2021).
\13\ H.R. Rep. No. 6395 (2020) at pp. 731-732 (Joint Explanatory
Statement of the Committee of Conference), available at https://docs.house.gov/billsthisweek/20201207/116hrpt617-JointExplanatoryStatement.pdf.
\14\ Id.
\15\ Id. See also Government Accountability Office (GAO) report,
``Anti-Money Laundering: Better Information Needed on Effectiveness
of Federal Efforts'' (Feb. 2024), available at https://www.gao.gov/products/gao-24-106301, for further description of outcomes of
illicit finance investigations by Federal law enforcement agencies.
\16\ AML Act, section 6002(3) (Purposes).
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With respect to financial institutions' AML/CFT programs, section
6101(b) of the AML Act makes several changes to the BSA's AML program
requirements.
First, section 6101(b) amends the BSA at 31 U.S.C. 5318(h)(2)(B)
with the following, ``[i]n prescribing the minimum standards for [AML/
CFT programs], and in supervising and examining compliance with those
standards, the Secretary of the Treasury, and the appropriate Federal
functional regulator (as defined in section 509 of the Gramm-Leach-
Bliley Act (12 U.S.C. 6809)) shall take into account'' certain factors,
which are further described in Section III.A.
Second, section 6101(b) requires the Secretary, in consultation
with the Attorney General, appropriate Federal functional regulators,
relevant State financial regulators, and relevant national security
agencies, to establish and make public government-wide anti-money
laundering and countering the financing of terrorism priorities (AML/
CFT Priorities) and, in consultation with the Federal functional
regulators and relevant State financial regulators, to promulgate
regulations, as appropriate, to incorporate those priorities into
revised program rules. FinCEN issued the AML/CFT Priorities on June 30,
2021.\17\ Further, section 6101(b) requires that the incorporation of
the AML/CFT Priorities, as appropriate, into risk-based AML/CFT
programs must be included as a measure on which financial institutions
are supervised and examined for compliance with those obligations.
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\17\ See AML/CFT Priorities (June 30, 2021), available at
https://www.fincen.gov/news/news-releases/fincen-issues-first-national-amlcft-priorities-and-accompanying-statements. As required
by 31 U.S.C. 5318(h)(4)(C), the AML/CFT Priorities are consistent
with Treasury's National Strategy for Combating Terrorist and Other
Illicit Financing (May 16, 2024), available at https://home.treasury.gov/news/press-releases/jy2346. The AML/CFT Priorities
are supported by Treasury's National Risk Assessments on Money
Laundering, Terrorist Financing, and Proliferation Financing (Feb.
7, 2024), available at https://home.treasury.gov/news/press-releases/jy2080. As also required by 31 U.S.C. 5318(h)(4)(B), the
Secretary, in consultation with the Attorney General, Federal
functional regulators, relevant State financial regulators, and
relevant national security agencies, must update the AML/CFT
Priorities not less frequently than once every four years.
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Third, section 6101(b) expands the BSA's program rule requirement
to include a reference to CFT in addition to AML.
Fourth, section 6101(b) provides that the duty to establish,
maintain, and enforce an AML/CFT program shall remain the
responsibility of, and be performed by, persons in the United States
who are accessible to, and subject to, oversight and supervision by,
the Secretary and the appropriate Federal functional regulator.
As described in more detail below, in proposing this rule, FinCEN
has taken into account the factors specified in section 6101(b), and
the proposed rule would implement the new statutory requirements.\18\
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\18\ 31 U.S.C. 5318(h)(2)(B).
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C. FinCEN's Effectiveness Advance Notice of Proposed Rulemaking (ANPRM)
Prior to the enactment of the AML Act, FinCEN published an ANPRM
seeking public comment on potential regulatory amendments to increase
the effectiveness of the current program rules (Effectiveness
ANPRM).\19\ The Effectiveness ANPRM sought public comment on a number
of issues, including whether FinCEN should define an ``effective and
reasonably designed'' \20\ AML program as one that: (1) ``identifies,
assesses, and reasonably mitigates the risks resulting from illicit
financ[e] activity--including terrorist financing, money laundering,
and other related financial crimes--consistent with both the
institution's risk profile and the risks communicated by relevant
government authorities as national AML priorities;'' \21\ (2) ``assures
and monitors compliance with the recordkeeping and reporting
requirements of the BSA;'' \22\ and (3) ``provides information with a
high degree of usefulness to government authorities consistent with
both the financial institution's risk assessment and the risks
communicated by relevant government authorities as national AML
priorities.'' \23\ The Effectiveness ANPRM signaled FinCEN's intention,
even prior to the AML Act, for AML/CFT programs to provide financial
institutions greater flexibility in the allocation of resources and
greater alignment of priorities across industry and government,
resulting in the enhanced effectiveness and efficiency of AML/CFT
programs.\24\
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Additionally, the Effectiveness ANPRM sought comment on whether FinCEN
should amend its regulations to explicitly require financial
institutions to implement risk assessment processes and whether FinCEN
should publish AML priorities that financial institutions would
incorporate into their risk assessments.\25\ Congress enacted the AML
Act shortly after FinCEN received comments on the Effectiveness ANPRM,
and as a result, many of the Effectiveness ANPRM's proposals have been
superseded by statutory amendments.
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\19\ Anti-Money Laundering Program Effectiveness, 85 FR 58023
(Sept. 17, 2020), available at https://www.federalregister.gov/documents/2020/09/17/2020-20527/anti-money-laundering-program-effectiveness.
\20\ Id. at 58026.
\21\ Id.
\22\ Id.
\23\ Id.
\24\ Id. at 58023.
\25\ Id. at 58028.
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FinCEN received 111 comments in response to the Effectiveness ANPRM
during the 60-day comment period. While responses to specific questions
and proposals varied, many commenters generally supported the goals of
the Effectiveness ANPRM. There was broad agreement that the rulemaking
was an important opportunity to modernize AML programs in order to
manage ML/TF risks more effectively and efficiently. Commenters
requested that FinCEN avoid amending its regulations in a manner that
would increase overall AML compliance costs.
Some comments covered specific topics that would later be addressed
in section 6101 of the AML Act and that are related to the proposed
rule. For example, many commenters supported the Effectiveness ANPRM's
concepts of ``effective'' and ``reasonably designed'' AML programs.
However, some commenters requested additional information or action
from FinCEN, noting that prioritizing and allocating resources can be
challenging if there is regulatory ambiguity or unclear or inconsistent
examiner expectations. Other commenters recommended that any
requirements for effective and reasonably designed programs be tailored
based on a financial institution's size, activities, or other
characteristics.
Commenters also offered a variety of views on the Effectiveness
ANPRM's risk assessment proposal, with some commenters noting that
conducting a risk assessment is standard industry practice. However, a
common concern was that a regulation requiring a risk assessment would
be too prescriptive, rather than allowing for an appropriate level of
flexibility. Many commenters also advocated for the flexibility to
assess risks in a manner tailored to the financial institution's size,
activities, or other characteristics.
Finally, commenters expressed widespread concern about added burden
on financial institutions, especially burden related to updating AML
programs to incorporate national AML priorities. Even though many
commenters generally supported the publication of national AML
priorities, multiple commenters emphasized the difficulties financial
institutions would face if they had to update their AML programs too
frequently. Several commenters also requested that FinCEN provide more
information on how financial institutions would be required to
incorporate the national AML priorities into their AML programs.
D. Other Prior Work
FinCEN has also gained information and experience relevant to the
proposed rule through: (1) the recommendations from the AML
Effectiveness (AMLE) working group of the Bank Secrecy Act Advisory
Group (BSAAG); \26\ (2) other work related to the AML Act; and (3) work
related to the Corporate Transparency Act (CTA).\27\ In preparing the
proposed rule, FinCEN consulted with the Department of Justice,
relevant Departmental offices and operating bureaus of the Department
of the Treasury (Treasury), Federal functional regulators, relevant
State financial regulators, and relevant national security
agencies.\28\
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\26\ The BSAAG was established by the Annunzio-Wylie Anti-Money
Laundering Act. The BSAAG consists of representatives from Federal
agencies and interested persons and financial institutions subject
to the regulatory requirements of the BSA. The BSAAG is the means by
which the Treasury receives advice on the reporting requirements of
the BSA and informs private sector representatives on how the
information they provide is used.
\27\ The CTA is Title LXIV of the FY21 NDAA. Division F of the
FY21 NDAA is the AML Act, which includes the CTA. Section 6403 of
the CTA, among other things, amends the BSA by adding a new section
5336, Beneficial Ownership Information Reporting Requirements, to
subchapter II of Chapter 53 of Title 31, United States Code.
\28\ With this proposed rulemaking, FinCEN consulted with the
Federal functional regulators and relevant State financial
regulators as required under AML Act, section 6101(b). Additionally,
as noted in the ``Interagency Statement on the Issuance of the AML/
CFT National Priorities,'' (June 30, 2021), available at https://www.fincen.gov/news/news-releases/fincen-issues-first-national-amlcft-priorities-and-accompanying-statements, ``although not
required by the AML Act, the [Board of Governors of the Federal
Reserve System (FRB), the Federal Deposit Insurance Corporation
(FDIC), the National Credit Union Administration (NCUA), and the
Office of the Comptroller of the Currency (OCC), collectively, the
``Agencies,''] plan to revise their BSA regulations, as necessary,
to address how the AML/CFT Priorities will be incorporated into
banks' BSA requirements.'' To promote consistency and clarity,
FinCEN consulted with the Agencies, and other Federal functional
regulators, including the Federal Housing Finance Agency (FHFA), the
Commodity Futures Trading Commission (CFTC), the Internal Revenue
Service (IRS), and the staff of the Securities and Exchange
Commission (SEC). FinCEN also consulted with relevant Departmental
offices and operating bureaus of the United States Department of the
Treasury, including, among others, the Office of Terrorism and
Financial Intelligence (TFI), the Office of Domestic Finance, the
Office of Terrorist Financing and Financial Crimes (TFFC), and the
Office of Foreign Assets Control (OFAC), and other government
stakeholders such as State financial regulators, the Department of
Justice (DOJ), and other relevant law enforcement and national
security agencies.
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III. Overview of the Proposed Rule
The AML Act provides FinCEN with an opportunity to reevaluate the
requirements of AML/CFT programs at financial institutions as part of
the broader initiative to ``strengthen, modernize, and improve'' the
U.S. AML/CFT regime.\29\ Among other objectives, the proposed rule
seeks to promote effectiveness, efficiency, innovation, and flexibility
with respect to AML/CFT programs; support the establishment,
implementation, and maintenance of risk-based AML/CFT programs; and
strengthen the cooperation between financial institutions and the
government. FinCEN, in consultation with the appropriate Federal
functional regulators, intends for these updates to: (1) reinforce the
risk-based approach for AML/CFT programs; (2) make AML/CFT programs
more dynamic and responsive to evolving ML/TF risks; (3) ultimately
render AML/CFT programs more effective in achieving the purposes of the
BSA; \30\ and (4) reinforce the focus of AML/CFT programs toward a more
risk-based, innovative, and outcomes-oriented approach to combating
illicit finance activity risks and safeguarding national security, as
opposed to public perceptions that such programs are focused on mere
technical compliance with the requirements of the BSA.
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\29\ See supra note 13.
\30\ 31 U.S.C. 5311.
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The proposed rule would also establish a new statement, explained
further in the section-by-section analysis, describing the purpose of
the AML/CFT program requirement, which is to ensure that a financial
institution implements \31\ an effective, risk-based, and reasonably
designed AML/CFT program to identify, manage, and mitigate illicit
finance activity risks that: complies with the BSA and the requirements
and prohibitions of FinCEN's implementing regulations; focuses
attention and resources in a manner consistent with the risk profile of
the financial institution; may include consideration and evaluation of
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innovative approaches to meet its AML/CFT compliance obligations;
provides highly useful reports or records to relevant government
authorities; protects the financial system of the United States from
criminal abuse; and safeguards the national security of the United
States, including by preventing the flow of illicit funds in the
financial system. Additionally, as discussed further below, the
proposed rule would amend the program rule for financial institutions
to incorporate the AML/CFT Priorities into a new mandatory risk
assessment process as part of effective, risk-based, and reasonably
designed AML/CFT programs.
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\31\ Consistent with its long-standing and authoritative
interpretation, FinCEN continues to interpret the term ``implement''
throughout the proposed rule to mean not only to develop and create
an ``effective, risk-based, and reasonably designed'' AML/CFT
program, but also to effectuate that program and ensure that it is
followed in practice.
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A. Factors That FinCEN Considered Pursuant to Section 6101(b)(2)(B) of
the AML Act
Effective, risk-based, and reasonably designed AML/CFT programs are
critical for protecting national security and the integrity of the U.S.
financial system. As described in section 6101(b)(2)(B)(ii) of the AML
Act, effective AML/CFT programs safeguard national security and
generate significant public benefits by preventing the flow of illicit
funds in the financial system and by assisting law enforcement and
national security agencies with the identification and prosecution of
persons attempting to launder money and undertake other illicit
activity through the financial system.\32\ Likewise, section
6101(b)(2)(B)(ii) of the AML Act provides that AML/CFT programs should
be ``reasonably designed to assure and monitor compliance'' with the
BSA and its implementing regulations and be risk-based.\33\ As
described in more detail in section IV of this supplementary
information section, the proposed rule advances these objectives by
explicitly requiring financial institutions to have ``effective, risk-
based, and reasonably designed'' AML/CFT programs and by describing the
minimum components for an AML/CFT program to be effective, risk-based,
and reasonably designed. By including ``effective, risk-based, and
reasonably designed'' as an explicit regulatory requirement, FinCEN
intends to provide clarity that AML/CFT programs must be effective,
risk-based, and reasonably designed in order to promote and ultimately
yield useful outcomes that support the purposes of the BSA.\34\
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\32\ 31 U.S.C. 5318(h)(2)(B)(iii).
\33\ 31 U.S.C. 5318(h)(2)(B)(iv).
\34\ 31 U.S.C. 5311(2); 31 U.S.C. 5318(h)(2).
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FinCEN and the Agencies have previously encouraged financial
institutions to adopt risk-based AML/CFT programs,\35\ but the proposed
rule would codify this expectation into the program rules as described
above and explicitly require financial institutions to develop a risk
assessment process that would serve as the basis for the financial
institution's risk-based AML/CFT program. The risk assessment process
would need to identify, evaluate, and document the financial
institution's risks, including consideration of: (1) the AML/CFT
Priorities, as appropriate; (2) the ML/TF risks of the financial
institution, based on its business activities, including products,
services, distribution channels, customers, intermediaries, and
geographic locations; and (3) reports filed by financial institutions
pursuant to 31 CFR chapter X. As described in more detail in section IV
of this supplementary information section, the proposed rule also
includes a provision that financial institutions update their risk
assessment, using the process proposed in this rule, on a periodic
basis, including, at a minimum, when there are material changes to
their ML/TF risk profiles.
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\35\ See Joint Statement on Risk-Focused Bank Secrecy Act/Anti-
Money Laundering (BSA/AML) Supervision (July 22, 2019), available at
https://www.fincen.gov/news/news-releases/joint-statement-risk-focused-bank-secrecy-actanti-money-laundering-supervision, in which
FinCEN and the Agencies remind financial institutions that
compliance programs are to be risk-based in order to enable
directing of attention and resources commensurate with their risk
profile.
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FinCEN intends for a financial institution's risk assessment
process to promote programs that are appropriately risk-based and
tailored to the AML/CFT Priorities and the financial institution's risk
profile. Under the proposed rule, financial institutions would be
required to integrate the results of their risk assessment process into
their risk-based internal policies, procedures, and controls. This
requirement would also enable financial institutions to focus their
attention and resources in a manner consistent with the risk profile of
the financial institution that takes into account higher-risk and
lower-risk customers and activities. The proposed rule also includes a
requirement for financial institutions to incorporate the reports filed
with FinCEN pursuant to this chapter into their risk assessment
process. This internal feedback mechanism would ensure that financial
institutions are considering their BSA filings as part of the ongoing
risk assessment process, which would better enable financial
institutions to manage their ML/TF risks. The specifics of a financial
institution's particular risk assessment process should be determined
by each institution based on its own customers and business activities;
as stated in section 6101(b) of the AML Act, risk-based programs
generally should ensure that financial institutions direct more
attention and resources to higher-risk customers and activities. FinCEN
anticipates that in doing so, the proposed rule would promote a more
risk-based and more effective AML/CFT regime.
FinCEN recognizes that financial institutions are committing
substantial resources and funds for a public benefit, notably, to
fulfill the purposes of the BSA and support law enforcement and
national security efforts.\36\ The AML Act requires the Secretary and
Federal functional regulators, in establishing minimum standards for
AML/CFT programs, to consider that financial institutions are spending
private compliance funds for a public and private benefit, including
protecting the U.S. financial system from illicit finance activity
risks.\37\ Through this proposed rule, FinCEN seeks to ensure that
private compliance funds are focused in a manner consistent with the
risk profile of the financial institution, generate highly useful
reports and information to relevant government authorities in
countering money laundering and the financing of terrorism, and
safeguard the national security of the United States, including by
preventing the flow of illicit funds in the financial system. As
discussed in the next section, the AML Act requires the Secretary to
implement a number of provisions to enhance BSA reporting, such as
reviewing, streamlining, and assessing BSA recordkeeping and reporting
thresholds and filing processes, that would act in concert with the
proposed rule to promote a more risk-based and more effective AML/CFT
regime.\38\
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\36\ FinCEN notes a June 2019 Senate Banking hearing in which
testimony by a financial institution representative summarized the
results of an empirical study of 19 U.S. financial institutions and
their spending of private compliance funds towards AML/CFT
compliance. Specifically, the study revealed 19 U.S financial
institutions employing 14,000 individuals, spending approximately
$2.4 billion and utilizing as many as over 20 different information
technology systems per financial institution. See Senate Committee
on Banking, Housing, and Urban Affairs full hearing entitled,
``Outside Perspectives on the Collection of Beneficial Ownership
Information'' (June 20, 2019), available at https://www.banking.senate.gov/hearings/outside-perspectives-on-the-collection-of-beneficial-ownership-information. See also infra
section VII.4.a.
\37\ AML Act, section 6101(b) (Establishment of national exam
and supervision priorities--Anti-money laundering programs).
\38\ AML Act, sections 6204 (Streamlining requirements for
currency transaction reports and suspicious activity reports) and
6205 (Currency transaction reports and suspicious activity reports
thresholds review).
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[[Page 55432]]
The proposed rule is also consistent with the BSA's requirement for
the Secretary to consider the extension of financial services to the
underbanked and facilitating financial transactions while preventing
criminal persons from abusing formal or informal financial services
networks.\39\ Through its emphasis on risk-based AML/CFT programs, the
proposed rule seeks to provide financial institutions with the
flexibility to serve a broad range of customers and avoid one-size-
fits-all approaches to customer risk that can lead to financial
institutions declining to provide financial services to entire
categories of customers. For instance, declining to provide services to
entire categories of customers without appropriately considering the
risks posed by the particular customer. Such excluded customers may
include correspondent banks, money services businesses, non-profits
serving high-risk jurisdictions, individuals from specific ethnic or
religious communities, or justice-impacted individuals. Specifically,
by basing an AML/CFT program on a risk assessment process that takes
into account a financial institution's specific business activities,
the proposed rule seeks to provide financial institutions with the
flexibility to extend financial services based on their individual
evaluation of their ML/TF risks and their ability to manage their
customer relationships, among other considerations. This flexibility
would allow such financial institutions to respond to changing
circumstances and evolving risk profiles, including through the use of
emerging technologies that support financial transactions across
communities and borders, which may enable financial institutions to
reach underbanked individuals, maintain financial relationships with
underserved communities, and facilitate financial activities that serve
international humanitarian and development needs. An effective, risk-
based, and reasonably designed AML/CFT program may enable, as a general
matter, the extension of financial services to appropriately identified
and risk-managed non-profit organizations, money services businesses,
correspondent banks, and other individuals or companies that have been
historically subject to barriers in accessing or maintaining financial
services.
---------------------------------------------------------------------------
\39\ 31 U.S.C. 5318(h)(2)(B)(ii).
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The proposed rule would also provide financial institutions with
the ability to modernize their AML/CFT programs to responsibly innovate
while still managing ML/TF risks, as the financial services industry
continues to innovate over time. Consistent with previous guidance,\40\
FinCEN encourages financial institutions to manage customer
relationships on a case-by-case basis, and the proposed rule would
provide financial institutions with the framework to make such
evaluations and provide financial services accordingly.
---------------------------------------------------------------------------
\40\ See Joint Statement on the Risk-Based Approach to Assessing
Customer Relationships and Conducting Customer Due Diligence (July
6, 2022), available at https://www.fincen.gov/news/news-releases/joint-statement-risk-based-approach-assessing-customer-relationships-and.
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FinCEN views the proposed rule as an important component and
furtherance of Treasury's April 2023 de-risking strategy report to
support financial inclusion, as appropriate. The report identified a
range of customer types and their challenges related to obtaining and
maintaining bank accounts and other financial services.\41\ The report
discusses implications of de-risking, which can increase the use of
financial services that exist outside of that regulated financial
system and thereby undermine the purposes of the BSA by making it
harder to detect and deter illicit finance. Moreover, de-risking
hampers the flow of development funding and humanitarian relief causing
economic damage in strategically important regions. The report
highlights the importance of effective, risk-based, and reasonably
designed AML/CFT programs in promoting financial inclusion and
mitigating the effects of de-risking to national security and law
enforcement interests.
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\41\ See the U.S. Department of the Treasury 2023 De-Risking
Strategy, available at https://home.treasury.gov/news/press-releases/jy1438.
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B. Proposed Rule and Broader Implementation of the AML Act
The proposed rule, by modernizing program rules toward a more
effective and risk-based AML/CFT regime, would be a key step in the
broader implementation of the AML Act. Other key steps that FinCEN is
pursuing include promoting feedback loops among FinCEN, law
enforcement, financial institutions, and financial regulators, as
appropriate; creating more opportunities for public-private
partnerships; developing and implementing examiner training;
reinforcing support for risk-focused supervision and examination;
encouraging innovation and pilot programs; and continuing to promote a
culture of compliance.
In particular, FinCEN intends for the proposed rule to work in
concert with other sections of the AML Act. Briefly, as described
further below, these include sections 6103 (FinCEN Exchange), 6107
(Establishment of FinCEN Domestic Liaisons), and 6206 (Sharing of
threat pattern and trend information), in which the AML/CFT Priorities
and their incorporation into risk-based programs are to feed into
``critical feedback loops.'' \42\
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\42\ See supra note 13.
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Various feedback loops currently exist between the U.S. government
and financial institutions, though prior to the AML Act, they have been
limited in scope, frequency, and the type of feedback shared.\43\ For
example, law enforcement provides feedback in terms of subjects of law
enforcement interest through the section 314(a) process to over 34,000
points of contact at over 14,000 financial institutions.\44\ As another
example of a current feedback loop, law enforcement may issue subpoenas
to financial institutions on subjects of law enforcement investigations
that may be based upon or referenced in the BSA reports filed by
financial institutions. Other examples of current feedback loops
include government efforts through which law enforcement establishes
public-private partnerships with financial institutions to target
financial networks and third-party facilitators that launder illicit
proceeds, such as the U.S. Immigration and Customs Enforcement-Homeland
Security Investigations' ``Project Cornerstone'' and the Federal Bureau
of Investigation's (FBI's) Money Mule Initiative.\45\
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\43\ In addition to the more recent programs from the AML Act,
FinCEN has had several information sharing initiatives in place
prior to this legislation. These initiatives include the BSAAG, the
Law Enforcement Awards Program, the section 314 Program, FinCEN
Advisories, and FinCEN Exchange. See Kenneth A. Blanco, Testimony
for the Record, U.S. Senate Committee on Banking, Housing and Urban
Affairs (Nov. 29, 2018), available at https://www.fincen.gov/news/testimony/testimony-fincen-director-kenneth-blanco-senate-committee-banking-housing-and-urban.
\44\ See FinCEN's 314(a) Fact Sheet, Financial Crimes
Enforcement Network, U.S. Department of the Treasury, available at
https://www.fincen.gov/sites/default/files/shared/314afactsheet.pdf.
\45\ See Cornerstone, U.S. Immigration and Customs Enforcement-
Homeland Security Investigations, U.S. Department of Homeland
Security, available at https://www.ice.gov/outreach-programs/cornerstone; see Money Mule Initiative, U.S. Department of Justice,
available at https://www.justice.gov/civil/consumer-protection-branch/money-mule-initiative.
---------------------------------------------------------------------------
Additionally, Treasury, FinCEN, financial regulators, and law
enforcement provide informal feedback to financial institutions on
broader
[[Page 55433]]
trends in AML/CFT threat patterns and best practices to address those
risks, such as through direct communications to financial institutions,
remarks at conferences, and participation in industry events. FinCEN
and other components of Treasury's Office of Terrorism and Financial
Intelligence also use BSA data to provide feedback to both domestic and
international financial institutions through the issuance of guidance,
advisories, trend analyses, enforcement actions, risk assessments, and
remarks by Treasury officials. Recognizing the key role of this
feedback in establishing, implementing, and maintaining effective,
risk-based, and reasonably designed AML/CFT programs, FinCEN will
continue building on existing efforts to provide feedback to financial
institutions.
In addition to the required publication of the AML/CFT Priorities,
several provisions of the AML Act advance this goal of feedback loops,
including: (1) the recognition of the FinCEN Exchange as a public-
private information sharing partnership among law enforcement agencies,
national security agencies, financial institutions, and FinCEN; \46\
(2) the requirement for FinCEN to establish an Office of Domestic
Liaison with liaisons located across the country to facilitate
information sharing between financial institutions and FinCEN, as well
as their Federal functional regulators, State bank supervisors, and
State credit union supervisors; \47\ (3) the establishment of a
supervisory team of relevant Federal agencies, private sector experts,
and other stakeholders to examine strategies to increase cooperation
between the public and private sectors; \48\ (4) the requirement for
FinCEN to periodically publish threat pattern and trend information
regarding the preparation, use, and value of SARs filed by financial
institutions; \49\ (5) the requirement that the Attorney General
provide an annual report on the use of BSA data derived from financial
institutions' BSA reporting; \50\ and (6) the requirement that FinCEN,
to the extent practicable, provide particularized feedback to financial
institutions on their SARs.\51\
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\46\ 31 U.S.C. 310(d).
\47\ 31 U.S.C. 310(f) and (g).
\48\ AML Act, section 6214 (Encouraging information sharing and
public-private partnerships).
\49\ AML Act, section 6206 (Sharing of threat pattern and trend
information).
\50\ AML Act, section 6201 (Annual [Attorney General] reporting
requirements).
\51\ AML Act, section 6203 (Law enforcement feedback on
suspicious activity reports). FinCEN intends to coordinate with the
Department of Justice, appropriate Federal functional regulators,
State bank supervisors, or State credit union supervisors on
feedback solicited under this AML Act provision.
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Taken together, these provisions of the AML Act and the proposed
rule provide a starting point for more robust feedback loops among
FinCEN, law enforcement, financial regulators, and financial
institutions. A more robust feedback loop would further enable
financial institutions to generate highly useful BSA reports that can
assist relevant government authorities with investigations,\52\
prosecutions, and convictions; identification of trends and typologies
of illicit finance activity; national risk assessments; enforcement;
anti-corruption efforts; the validation of information received from
other sources; and engagement with foreign jurisdictions and other
stakeholders. Financial institutions recognize the general utility of
BSA reports in maintaining the integrity of the U.S. financial system,
but have requested particularized feedback.\53\ Notably, section 6203
of the AML Act requires FinCEN, in coordination with financial
regulators and the Department of Justice, to solicit feedback, to the
extent practicable, from financial institutions on SARs and discuss
general trends in suspicious activity observed by FinCEN.\54\
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\52\ Internal Revenue Service Criminal Investigation (IRS-CI)
noted how the agency uses BSA data in its financial crime
investigations. More than 83 percent of IRS-CI criminal
investigations over a three-year period that were recommended for
prosecution had a primary subject with a related BSA filing.
Convictions in those cases resulted in average prison sentences of
38 months, $7.7 billion in asset seizures, $256 million in
restitution, and $225 million in asset forfeitures. See IRS press
release, ``BSA data serves key role in investigating financial
crimes'' (Jan. 18, 2023), available at https://www.irs.gov/compliance/criminal-investigation/bsa-data-serves-key-role-in-investigating-financial-crimes. Also, FinCEN reported in its FinCEN
Year in Review for Fiscal Year 2022 that BSA filings from Fiscal
Year 2020 through Fiscal Year 2022 supported a significant portion
of investigations by the FBI. Specifically, BSA filings supported 46
percent of active investigations of transnational criminal
organizations, 39.6 percent of active Organized Crime Drug
Enforcement Task Force investigations with FBI participations, 36.3
percent of active complex financial crimes investigations, 27.5
percent of active public corruption investigations, 20.6 percent of
active international terrorism investigations, and 15.7 percent of
active FBI investigations. See ``FinCEN Year in Review for FY
2022,'' available at https://www.fincen.gov/news/news-releases/fincen-fiscal-year-2022-review.
\53\ See GAO report, ``Bank Secrecy Act: Agencies and Financial
Institutions Share Information but Metrics and Feedback Not
Regularly Provided'' (Aug. 2019), available at https://www.gao.gov/assets/gao-19-582.pdf.
\54\ AML Act, section 6203(a) (Law enforcement feedback on
suspicious activity reports).
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The AML Act also recognizes the importance of supervision and
examination of financial institutions in the success of AML/CFT
programs and the integrity of the U.S. financial system more
broadly.\55\ To further those objectives with the proposed rule, and to
supplement existing training delivered with the Agencies, FinCEN
intends to consult with law enforcement stakeholders across Federal,
State, Tribal, and local law enforcement agencies, and the Federal
Financial Institutions Examination Council (FFIEC), to establish annual
Federal examiner training as required under 31 U.S.C. 5334, as added by
section 6307 of the AML Act.\56\ FinCEN intends for this training to
achieve the following statutory purposes: train examiners on potential
risk profiles and warning signs examiners may encounter during
examinations; provide financial crime patterns and trends; address de-
risking and the effects of de-risking on the provision of financial
services; and reinforce the purpose of AML/CFT programs, and why such
programs are necessary for regulatory, supervisory, law enforcement,
and national security agencies, and the risks those programs seek to
mitigate. Additionally, this training can help examiners evaluate
whether AML/CFT programs are appropriately tailored to address ML/TF
risk rather than focused on perceived check-the-box exercises. Examiner
training on the high-level context for the purpose of AML/CFT programs
would also focus on the overall effectiveness of AML/CFT programs and
consider the highly useful quality of their outputs, in addition to a
focus on compliance with the BSA and FinCEN's implementing regulations.
---------------------------------------------------------------------------
\55\ For example, the AML Act notes that the incorporation of
the AML/CFT Priorities, as appropriate, into the risk-based programs
established by financial institutions shall be included as a measure
on which a financial institution is supervised and examined for
compliance with the BSA. 31 U.S.C. 5318(h)(4)(E).
\56\ 31 U.S.C. 5334, as added by AML Act, section 6307 (Training
for examiners on anti-money laundering and countering the financing
of terrorism).
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In addition to examiner training, FinCEN intends to increase the
frequency and level of engagement with financial regulators. The AML
Act requires FinCEN's Domestic Liaison to solicit and receive feedback
from ``financial institutions and examiners of Federal functional
regulators regarding their examinations under the Bank Secrecy Act and
communicate that feedback to FinCEN, the Federal functional regulators,
and State bank supervisors.'' \57\ Moreover, in coordination with
financial regulators, FinCEN's Domestic Liaison, among other things, is
expected to perform outreach to financial institutions,
[[Page 55434]]
receive feedback from financial institutions and examiners regarding
their examinations, act as a liaison between financial institutions and
financial regulators with respect to information sharing matters
involving the BSA and regulations promulgated thereunder, and promote
coordination and consistency of supervisory guidance from FinCEN and
financial regulators.\58\ The AML Act requires FinCEN, to the extent
practicable, to solicit feedback from a variety of financial
institutions ``to review the [SARs] filed by those financial
institutions and discuss trends in suspicious activity observed by
FinCEN,'' and provide such feedback to financial regulators during the
regularly scheduled examination.\59\ FinCEN views these measures as
complements to the proposed rule in terms of effective supervision and
examination.
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\57\ 31 U.S.C. 310(g)(5)(A)(ii).
\58\ 31 U.S.C. 310(g)(5)(A)(i), (iii) and (iv).
\59\ See supra note 54.
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One of the AML Act's purposes is to ``encourage technological
innovation and the adoption of new technology by financial institutions
to more effectively counter money laundering and the financing of
terrorism.'' \60\ FinCEN recognizes that automated transaction
monitoring systems have the potential to generate a significant number
of alerts that are not necessarily indicative of suspicious
activity.\61\ While FinCEN and the Agencies have previously encouraged
responsible innovation,\62\ a number of sections in the AML Act
``provide[ ] for dedicated staff and multiple fora to support public-
private collaboration and advancement'' of innovation.\63\ For example,
section 6207 of the AML Act establishes a BSAAG subcommittee on
innovation and technology to ``encourage and support technological
innovation in the areas of [AML/CFT] and proliferation; and to reduce [
] obstacles to innovation that may arise from existing regulations,
guidance, and examination practices related to [BSA] compliance.'' \64\
Also, section 6209 requires FinCEN to pursue a testing methods
rulemaking that considers innovative approaches such as machine
learning or other enhanced data analytics processes for systems used by
financial institutions for BSA compliance, that may include automated
transaction monitoring systems.
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\60\ See supra note 16.
\61\ See supra note 36. In 2017, 17 U.S financial institutions
``collectively reviewed approximately 16 million AML alerts and
filed over 633,000 SARs, with an implied aggregate conversion rate
to SARs of 4 percent.''
\62\ The AML Act builds on prior interagency efforts encouraging
financial institutions to take innovative approaches to combating
money laundering, terrorist financing, and other illicit finance
activity threats. See Joint Statement on Innovative Efforts to
Combat Money Laundering and Terrorist Financing (Dec. 3, 2018),
available at https://www.fincen.gov/news/news-releases/treasurys-fincen-and-federal-banking-agencies-issue-joint-statement-encouraging.
\63\ See supra note 13 at 732-733.
\64\ AML Act, section 6207 (Subcommittee of Innovation and
Technology) requires the establishment of a Subcommittee on
Innovation and Technology within BSAAG to ``encourage and support
technological innovation in the area of anti-money laundering and
countering the financing of terrorism and proliferation; and to
reduce [] obstacles to innovation that may arise from existing
regulations, guidance, and examination practices related to
compliance of financial institutions with the Bank Secrecy Act.''
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This proposed rule encourages innovation to detect and disrupt
illicit finance activity, and better direct private compliance funds
and resources in a more risk-based manner. The proposed rule's specific
inclusion of encouraging innovation is consistent with FinCEN's prior
and ongoing commitment to work with financial institutions to explore
innovative ways for financial institutions to increase AML/CFT program
efficiency and effectiveness. For example, even prior to the AML Act,
as part of FinCEN's broader focus on innovation, FinCEN has considered
applications for exceptive relief from financial institutions seeking
to automate certain BSA reporting processes. FinCEN and the Agencies
also issued a statement in December 2018 that encouraged banks and
credit unions to take innovative approaches to combat money laundering,
terrorist financing, and other illicit finance threats.\65\ In light of
the AML Act's purpose to encourage technological innovation and
adoption of new technology by financial institutions, FinCEN will
continue to coordinate, as appropriate, with Federal functional
regulators to evaluate similar applications in the future and seek to
act as a resource for financial institutions interested in pursuing
pilot programs or otherwise introducing innovative approaches to their
AML/CFT programs.
---------------------------------------------------------------------------
\65\ See supra note 62.
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The effectiveness of implementation of the proposed rule by
financial institutions would, to a large extent, depend on the strength
of their cultures of compliance. As described in FinCEN's 2014
advisory,\66\ a culture of compliance involves demonstrable support and
visible commitment from leadership, the dedication of adequate
resources to AML/CFT compliance, effective information sharing
throughout the financial institution, qualified and independent
testing, and understanding across leadership and staff levels of the
importance of BSA reports. Together with appropriate resourcing,\67\
adherence to these principles is critical to ensuring that AML/CFT
programs are not mere ``paper programs'' that do not, in practice,
affect financial institutions' decision-making with respect to illicit
finance activity risks. A strong culture of compliance not only depends
on an independent compliance function that is sufficiently empowered by
senior management with effective oversight by the board of directors,
or by an equivalent governing body, but also on the prioritization of
AML/CFT compliance throughout the organization. This prioritization
allows AML/CFT compliance to be appropriately embedded into financial
institutions' commercial decision-making--particularly with respect to
the products and services offered by the financial institution--rather
than a mere checklist item to be considered after-the-fact. A financial
institution's culture of compliance can support implementation of each
of the required program components as well as the effectiveness of the
program as a whole.
---------------------------------------------------------------------------
\66\ See FIN-2014-A007, Advisory to U.S. Financial Institutions
on Promoting a Culture of Compliance (Aug. 11, 2014) (``A financial
institution can strengthen its BSA/AML compliance culture by
ensuring that (1) its leadership actively supports and understands
compliance efforts; (2) efforts to manage and mitigate BSA/AML
deficiencies and risks are not compromised by revenue interests; (3)
relevant information from the various departments within the
organization is shared with compliance staff to further BSA/AML
efforts; (4) the institution devotes adequate resources to its
compliance function; (5) the compliance program is effective by,
among other things, ensuring that it is tested by an independent and
competent party; and (6) its leadership and staff understand the
purpose of its BSA/AML efforts and how its reporting is used.''),
available at https://www.fincen.gov/resources/advisories/fincen-advisory-fin-2014-a007. As part of a broader effort to modernize the
AML/CFT regime, alongside this proposed rule, FinCEN is reviewing
this and other guidance and welcomes views on whether and what type
of additional guidance is needed.
\67\ See infra section IV.D.3 for further discussion on
appropriate resourcing.
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FinCEN is committed to working with financial institutions,
financial regulators, law enforcement, and other stakeholders to
provide financial institutions with the regulatory framework and
guidance necessary to establish, implement, and maintain effective,
risk-based, and reasonably designed AML/CFT programs. Additionally,
FinCEN views this rulemaking and related work pursuant to the AML Act
to be part of a long-term broader initiative to modernize and
strengthen AML/CFT programs; communication with financial institutions;
and risk-focused examination and supervision for compliance with
FinCEN's program
[[Page 55435]]
rules and other applicable BSA requirements.
IV. Section-by-Section Analysis
The section-by-section analysis describes the specific proposed
changes to the program rules. Section IV.A. describes the proposed
introductory statement on the purpose of an AML/CFT program
requirement. Section IV.B. addresses the proposed incorporation of CFT
into the program rules. Section IV.C. discusses the proposed definition
of ``AML/CFT Priorities.'' Section IV.D. describes the proposed
components of an effective, risk-based, and reasonably designed AML/CFT
program, including: (1) a risk assessment process; (2) internal
policies, procedures, and controls; (3) a qualified AML/CFT officer;
(4) ongoing employee training; (5) periodic independent testing; and
(6) other components, depending on the type of financial institution.
Section IV.E. describes the proposed requirement that financial
institutions have documented AML/CFT programs that will be made
available to relevant agencies. Section IV.F. covers the proposed AML/
CFT board approval and oversight requirements.
A. Statement on the Purpose of an AML/CFT Program Requirement
FinCEN is proposing a statement at 31 CFR 1010.210(a) describing
the purpose of an AML/CFT program requirement, which is to ensure a
financial institution implements an effective, risk-based, and
reasonably designed AML/CFT program to identify, manage, and mitigate
illicit finance activity risks that: complies with the BSA and the
requirements and prohibitions of FinCEN's implementing regulations;
focuses attention and resources in a manner consistent with the risk
profile of the financial institution; may include consideration and
evaluation of innovative approaches to meet its AML/CFT compliance
obligations; provides highly useful reports or records to relevant
government authorities; protects the financial system of the United
States from criminal abuse; and safeguards the national security of the
United States, including by preventing the flow of illicit funds in the
financial system.
While the proposed statement of purpose is new, it is not intended
to establish new obligations separate and apart from the specific
requirements set out for each type of financial institution in the
proposed rule or impose additional costs or burdens beyond those
requirements. Rather, this language is intended to summarize the
overarching goals of requiring financial institutions to have
effective, risk-based, and reasonably designed AML/CFT programs, which
are reflected in the specific requirements for each financial
institution. These goals include financial institutions appropriately
identifying, managing, and mitigating risk in order to prevent the flow
of illicit funds in the financial system in a risk-based manner as well
as providing highly useful reports to relevant government authorities,
or in cases where financial institutions may not have reporting
obligations under the BSA, highly useful records to relevant government
authorities. The proposed statement of purpose is also intended to
encourage responsible innovation and reinforce the risk-based nature of
these programs so financial institutions can focus their resources and
attention in a manner consistent with their risk profiles, taking into
account higher-risk and lower-risk customers and activities.
B. Inserting the Term ``CFT'' Into the Program Rules
Section 6101(b)(2)(A) of the AML Act amends 31 U.S.C. 5318(h)(1) to
reference ``countering the financing of terrorism'' \68\ in addition to
``anti-money laundering'' when describing the requirement to establish
an AML/CFT program. FinCEN proposes to update 31 CFR chapter X to
reflect this new statutory language, including by adding a new
definition of ``AML/CFT program'' at proposed 31 CFR 1010.100(ooo). The
new definition would define ``AML/CFT program'' as a system of internal
policies, procedures, and controls meant to ensure ongoing compliance
with the BSA and the requirements and prohibitions of 31 CFR chapter X
and to prevent an institution from being used for money laundering,
terrorist financing, or other illicit finance activity risks. The
proposed rule also would replace existing parallel terms in 31 CFR
chapter X such as ``anti-money laundering program'' and ``compliance
program'' with the defined term ``AML/CFT program.''
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\68\ Countering the financing of terrorism (CFT) includes laws,
rules, regulations, or other measures intended to detect and disrupt
the solicitation, collection, or provision of funds to support
terrorist acts or terrorist organizations, or other violent
extremist groups.
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The inclusion of ``CFT'' in the program rules is not anticipated to
establish new obligations, insofar as the USA PATRIOT Act already
requires financial institutions to account for risks related to
terrorist financing. Accordingly, FinCEN expects that any changes to
existing AML/CFT programs from these amendments described in this
subsection are likely to be technical in nature.
C. Defining ``AML/CFT Priorities''
As required under 31 U.S.C. 5318(h)(4)(A), FinCEN published the
AML/CFT Priorities on June 30, 2021. The AML/CFT Priorities focus on
threats to the U.S. financial system and national security and are
related to predicate crimes associated with money laundering, terrorist
financing, and other illicit finance activity risks. FinCEN is
proposing to add a new definition of ``AML/CFT Priorities'' at 31 CFR
1010.100(nnn) to support the promulgation of regulations pursuant to 31
U.S.C. 5318(h)(4)(D). According to the proposed definition, ``AML/CFT
Priorities'' would refer to the most recent statement of AML/CFT
Priorities issued pursuant to 31 U.S.C. 5318(h)(4). In consultation
with the Attorney General, Federal functional regulators, and relevant
national security agencies, FinCEN is required to update the AML/CFT
Priorities not less frequently than once every four years.\69\
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\69\ 31 U.S.C. 5318(h)(4)(B).
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The proposed definition of ``AML/CFT Priorities'' would not itself
establish new obligations, and FinCEN does not anticipate that
inclusion of this definition alone would impose additional costs or
burdens on financial institutions. However, as described in the next
section, the proposed rule's requirements for incorporating AML/CFT
Priorities as part of a risk assessment process would introduce new
obligations.
D. ``Effective, Risk-Based, and Reasonably Designed'' AML/CFT Program
Requirements
The AML Act notes that effective AML/CFT programs safeguard
national security and generate significant public benefits by
preventing the flow of illicit funds in the financial system and
assisting law enforcement and national security agencies with the
identification and prosecution of persons attempting to launder money
and undertake other illicit finance activity through the financial
system.\70\ The AML Act further provides that AML/CFT programs are to
be ``risk-based'' and ``reasonably designed to assure and monitor
compliance with the requirements of [the BSA].'' \71\ FinCEN is
proposing to
[[Page 55436]]
implement these statutory provisions by explicitly requiring financial
institutions to establish, implement, and maintain effective, risk-
based, and reasonably designed AML/CFT programs. For AML/CFT programs
to be risk-based requires financial institutions to identify and
understand their exposure to ML/TF risks through a risk assessment
process, explained further below, that considers internal measures of
risk based upon an evaluation of business activities, including
products, services, distribution channels, customers, intermediaries,
and geographic locations. Financial institutions would integrate the
results of their risk assessment process into risk-based internal
policies, procedures, and controls in order to manage and mitigate
their ML/TF risks, provide useful information to government
authorities, and further the purposes of the BSA.
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\70\ 31 U.S.C. 5318(h)(2)(B)(iii).
\71\ 31 U.S.C. 5318(h)(2)(B)(iv). See also 31 U.S.C. 5311(2)
(stating that one of the purposes of the BSA is to ``prevent the
laundering of money and the financing of terrorism through the
establishment by financial institutions of reasonably designed risk-
based programs to combat money laundering and the financing of
terrorism'').
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Most of FinCEN's program rules already specify that financial
institutions are required to have a reasonably designed program;
reasonably designed ``policies, procedures, and internal controls;'' or
both.\72\ For example, existing program rules, at various points,
require that financial institutions' AML programs must be ``reasonably
designed'' and that financial institutions' ``policies, procedures, and
internal controls'' must be ``reasonably designed'' (emphasis
added).\73\ Because of the key importance of this concept in the AML
Act, the proposed rule standardizes the requirement for a ``reasonably
designed'' AML/CFT program for all financial institutions regulated
under the BSA and subject to program rule requirements to avoid any
potential perceived differences between the two previous articulations
of the requirement. However, explicitly requiring AML/CFT programs to
be effective and risk-based will be a change for some financial
institutions.\74\
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\72\ See applicable program rules located at 31 CFR
1021.210(b)(1) (casinos), 1022.210(a) and (d)(1) (MSBs),
1023.210(b)(1) (broker-dealers), 1024.210(a) and (b)(1) (mutual
funds), 1025.210(a) (insurance companies), 1026.210(b)(1) (futures
commission merchants and introducing brokers in commodities),
1027.210(a)(1) (dealers in precious metals, precious stones or
jewels), 1028.210(a) (operators of credit card systems),
1029.210(a)(loan or finance companies), and 1030.210(a)(housing
government sponsored enterprises) (each requiring that a financial
institution's AML program as a whole; its implementation of internal
policies, procedures, and controls as part of the AML/CFT program;
or both must be ``reasonably designed''). In addition, banks with a
Federal functional regulator must have compliance programs that are
``reasonably designed to assure and monitor [for compliance with the
BSA]'' pursuant to 12 U.S.C. 1818(s), 12 U.S.C. 1786(q)(1), and the
Agencies' regulations at 12 CFR 21.21(c)(1), 208.63(b), 326.8(b)(1),
and 748.2(b)(1). There is currently no such requirement for banks
lacking a Federal functional regulator.
\73\ Compare 31 CFR 1022.210(a) (MSBs) with 31 CFR
1023.210(b)(1) (brokers or dealers in securities). See section IV
that further describes existing FinCEN regulations requiring
``reasonably designed'' compliance programs, internal controls, or
both.
\74\ There are references to effective programs in the program
rules for financial institutions located at 31 CFR 1022.210 (MSBs);
1025.210 (insurance companies); 1027.210 (dealers in precious
metals, precious stones, or jewels); 1028.210 (operators of credit
card system); 1028.210 (loan or finance companies); and 1030.210
(housing government sponsored enterprises). Program rules explicitly
requiring effective programs will be a change for the program rules
for financial institutions located at 31 CFR 1020.210 (banks);
1021.210 (casinos and card clubs); 1023.210 (brokers or dealers in
securities); 1024.210 (mutual funds); and 1026.210 (futures
commission merchants and introducing brokers in commodities).
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An effective, risk-based, and reasonably designed AML/CFT program
would focus attention and resources in a manner consistent with the
financial institution's risk profile that takes into account higher-
risk and lower-risk customers and activities, and would need to
include, at a minimum: (1) a risk assessment process that serves as the
basis for the financial institution's AML/CFT program; (2) reasonable
management and mitigation of risks through internal policies,
procedures, and controls; (3) a qualified AML/CFT officer; (4) an
ongoing employee training program; (5) independent, periodic testing
conducted by qualified personnel of the financial institution or by a
qualified outside party; and (6) other requirements depending on the
type of financial institution, such as CDD requirements.
Congress made clear that risk-based AML/CFT programs are to
``better focus[ ] [financial institutions'] resources to the AML
task.'' \75\ The proposed rule intends to achieve these objectives for
AML/CFT programs that can identify, manage, and mitigate illicit
finance activity risks, but also direct attention and resources in a
risk-based manner.\76\ This approach to attention and resources is
reflected at the overall program requirement for an effective, risk-
based, and reasonably designed AML/CFT program that is to influence
every program component. While financial institutions may have
previously applied a risk-based approach to risk management and
resource allocation, the proposed rule establishes a relationship
between the two concepts, and proposes a risk assessment process as a
requirement to structure and rationalize a reasonable approach. This
process would facilitate a financial institution's ability to identify
illicit finance activity risks and suspected illicit activity so a
financial institution can better focus attention and resources, assess
customer risks in a more sophisticated and refined manner, and provide
more targeted, highly useful BSA reports to law enforcement and
national security agencies. Moreover, the proposed rule contemplates
any risk-based considerations of a financial institution's attention
and resources to be subject to an appropriate governance framework that
is documented or otherwise supported.
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\75\ See supra note 13.
\76\ See 31 U.S.C. 5318(h)(2)(B)(iv)(II), as added by AML Act
section 6101(b)(2)(B)(ii).
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As explained in the subsections that follow, the ways in which
financial institutions approach the implementation of these components
can be crucial to whether the resulting AML/CFT program is effective,
risk-based, and reasonably designed. Each of the components does not
function in isolation; instead, each component complements the other
components, and together form the basis for an AML/CFT program that is
effective, risk-based, and reasonably designed in its entirety. This
holistic approach extends to the collection and use of information to
identify and mitigate ML/TF risks, the consideration of resources, and
the ongoing calibration of the AML/CFT program consistent with
financial institution's risk assessment process.
Additionally, as described in the proposed rule, financial
institutions would have to establish, implement, and maintain
effective, risk-based, and reasonably designed AML/CFT programs. The
current program rules use inconsistent terms across financial
institutions to describe establishing, implementing, and maintaining
AML/CFT programs. For example, some program rules use ``develop''
instead of ``implement.'' \77\ FinCEN is therefore proposing to apply
the same set of terms to all the program rules to improve consistency.
FinCEN does not intend for these changes to substantively change
current regulatory expectations.
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\77\ For example, compare 31 CFR 1021.210(b)(1) (casinos) with
31 CFR 1023.210(a) (broker-dealers) in which casino program rules
require each casino to ``develop and implement'' a written program
whereas broker-dealer program rules require the broker-dealer to
``implement[ ] and maintain[ ]'' a written program.
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1. Risk Assessment Process
The majority of the proposed AML/CFT program components are
substantially similar to the existing statutory and regulatory
requirements for financial institutions. However, FinCEN is proposing
certain additions
[[Page 55437]]
and modifications to modernize and strengthen financial institutions'
AML/CFT programs. In particular, FinCEN is proposing a risk assessment
process requirement that would facilitate a financial institution's
understanding of its specific illicit finance activity risks and enable
more dynamic identification, prioritization, and management of those
ML/TF risks. Under the proposed rule, a risk assessment process would
need to include consideration of the AML/CFT Priorities, among other
items, to account for emerging and evolving ML/TF risks. The results of
the risk assessment process would then inform the other components of a
financial institution's AML/CFT program.
Under the proposed rule, to have an effective, risk-based, and
reasonably designed AML/CFT Program, a financial institution would need
to establish a risk assessment process to serve as the basis of the
AML/CFT program. While many financial institutions identify, evaluate,
and document their ML/TF risks through a risk assessment process that
may be conducted on a periodic basis, and may be documented as a point-
in-time exercise, FinCEN intends for financial institutions to utilize
a dynamic and recurrent risk assessment process not only to assess and
understand a financial institution's ML/TF risks, but also to
reasonably manage and mitigate those risks. Specifically, the proposed
rule would require the financial institution's risk assessment process
to identify, evaluate, and document the financial institution's ML/TF
risks, including consideration of: (1) the AML/CFT Priorities issued by
FinCEN, as appropriate; (2) the ML/TF risks of the financial
institution based on the financial institution's business activities,
including products, services, distribution channels, customers,
intermediaries, and geographic locations; and (3) reports filed by the
financial institution pursuant to 31 CFR chapter X. Financial
institutions would have to review and update their risk assessment
using the process proposed in this rule on a periodic basis, including,
at a minimum, and particularly when there are material changes to the
financial institution's ML/TF risks.
The inclusion of a risk assessment process that serves as the basis
of a risk-based AML/CFT program is supported by several provisions of
the AML Act, including section 6101(b), which states that AML/CFT
programs should be risk-based,\78\ and section 6202, which contemplates
a risk assessment process by requiring SARs to ``be guided by the
compliance program of a covered financial institution with respect to
the Bank Secrecy Act, including the risk assessment processes of the
covered institution that should include a consideration of [the AML/CFT
Priorities].'' \79\ Additionally, FinCEN, other domestic supervisory
agencies,\80\ and international bodies such as the Financial Action
Task Force (FATF) \81\ have noted that a risk assessment process can be
a critical tool for a reasonably designed AML/CFT program because
financial institutions need to understand the risks they face to
effectively mitigate those risks and achieve compliance with the BSA or
foreign AML/CFT laws. While a risk assessment process is common
practice among many financial institutions, the requirement that
financial institutions have a risk assessment process when developing
their AML/CFT programs is not stated in a uniform manner for financial
institutions under the current program rules.\82\ Therefore, the
proposed rule's addition of a risk assessment process to the program
rules will be a new explicit regulatory requirement for some types of
financial institutions, as described below.
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\78\ 31 U.S.C. 5318(h)(2)(B)(iv)(II).
\79\ 31 U.S.C. 5318(g)(5)(C).
\80\ See supra note 35. The Joint Statement on Risk-Focused Bank
Secrecy Act/Anti-Money Laundering Supervision in 2019 (joint
supervision statement) underscored the importance of a risk-based
approach to AML/CFT compliance. The joint supervision statement
noted that a risk-based AML/CFT program enables a bank to allocate
compliance resources commensurate with its risk. The joint
supervision statement further emphasized that a well-developed risk
assessment assists examiners in understanding a bank's risk profile
and evaluating the adequacy of its AML/CFT program.
\81\ The FATF, of which the United States is a founding member,
is an international, inter-governmental task force whose purpose is
the development and promotion of international AML/CFT standards and
the effective implementation of legal, regulatory, and operational
measures to combat money laundering, terrorist financing, the
financing of proliferation, and other related threats to the
integrity of the international financial system. The FATF assesses
over 200 jurisdictions against its minimum standards, known as FATF
Recommendations. In its interpretive note to FATF Recommendation 1
on assessing risks and applying a risk-based approach, FATF noted
that ``[b]y adopting a risk-based approach, competent authorities
[and] financial institutions . . . should be able to ensure that
measures to prevent or mitigate money laundering and terrorist
financing are commensurate with the risks identified, and would
enable them to make decisions on how to allocate their own resources
in the most effective way.'' Available at https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html. Further, as detailed in FATF Recommendation 1
and in accompanying non-binding guidance, financial institutions and
designated non-financial businesses and professions (DNFBPs) need
not conduct a stand-alone proliferation financing (PF) risk
assessment if existing processes (for example, within the framework
of their existing targeted financial sanctions and/or compliance
programs) can adequately identify proliferation financing risks and
ensure mitigation measures are commensurate with those risks. The
proposed rule would be consistent with FATF guidance on this topic.
\82\ The current program rules referring to some form of risk
assessment are located at 31 CFR 1025.210(b)(1) (insurance
companies); 31 CFR 1027.210(b) (dealers in precious metals, precious
stones, or jewels); 31 CFR 1028.210(b) (operators of credit card
systems); 31 CFR 1029.210(b)(1) (loan or finance companies); and 31
CFR 1030.210(b)(1) (housing government sponsored enterprises). Note
there is significant variation in the specific language in the
regulations.
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Under some program rules, financial institutions--such as insurance
companies and loan and finance companies--are explicitly required to
``[i]ncorporate policies, procedures, and internal controls based upon
. . . [an] assessment of the . . . risks associated with its products
and services.'' \83\ Under other program rules, financial
institutions--such as casinos and MSBs--must develop either policies,
procedures, and internal controls, or independent testing
``commensurate with the risks'' posed by their products.\84\ Because a
risk assessment process is a necessary predicate to developing risk-
based internal policies, procedures, and controls for this proposed
rule, FinCEN has determined this latter category of program rules to
implicitly require risk assessment processes. The proposed rule's
addition of a risk assessment process to the program rules will be a
new, explicit regulatory requirement for some types of financial
institutions, specifically banks, casinos, MSBs, broker-dealers, mutual
funds, futures commission merchants, and introducing brokers in
commodities.\85\ Though many types of financial institutions have risk
assessment processes despite the absence of a formal requirement, the
proposed rule would put into regulation existing expectations and
practices. Thus, the proposed rule standardizes the requirement for a
risk assessment process across the different types of financial
institutions subject to program rules.
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\83\ See applicable program rules located at 31 CFR 1025.210
(insurance companies); 1029.210 (loan or finance companies).
\84\ See applicable program rules located at 31 CFR 1021.210
(casinos and card clubs); 1022.210 (MSBs); 1025.210 (insurance
companies); 1027.210 (dealers in precious metals, precious stones,
or jewels); 1028.210 (operators of credit card system); 1029.210
(loan or finance companies); and 1030.210 (housing government
sponsored enterprises).
\85\ The current program rules without explicit risk assessment
requirements are located at 31 CFR 1020.210 (banks); 1021.210
(casinos and card clubs); 1022.210 (MSBs); 1023.210 (broker-
dealers); 1024.210 (mutual funds); and 1026.210 (futures commission
merchants and introducing brokers in commodities).
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For a financial institution that already has a risk assessment
process as a matter of practice, the proposed rule may not be a change
from its current practice.
[[Page 55438]]
However, the proposed rule would explicitly require the risk assessment
process to incorporate the AML/CFT Priorities, as appropriate, the ML/
TF risks of the financial institution, and a review of the reports
filed by the financial institution pursuant to 31 CFR chapter X. In
general, financial institutions that are not explicitly required to
have a risk assessment process as part of their current program rules
would have new obligations under the proposed rule. Thus, the costs or
burdens of implementation would be based on a financial institution's
risk profile; however, the risk-based nature of the proposed rule is
intended to enable a financial institution to better focus its
attention and resources in a manner consistent with its risk profile,
as discussed further in this section.
With respect to the implementation of an AML/CFT program that is
based on a risk assessment process, each AML/CFT program would be
different in practice because it would depend on the specific
applicable activities and risk profile of a financial institution.
Consequently, consistent with section 6101(b) of the AML Act, under the
proposed rule, a financial institution would need to focus its
attention and resources in a manner consistent with its risk profile,
taking into account higher-risk and lower-risk customers and
activities.\86\ A financial institution's risk assessment process can
provide valuable insight into how limited compliance resources and
attention can be effectively and efficiently deployed to address
identified risks, and to comply with the requirements of the BSA and
promote outcomes for law enforcement and national security purposes. In
addition, the inclusion of the AML/CFT Priorities into the risk
assessment process can help financial institutions understand areas in
which their efforts are more likely to support areas of national
importance. Through this particular type of risk-based approach, a
financial institution can further tailor its AML/CFT program so that it
improves the ability to address current and emerging risks, responds to
changes in risk profile, and maximizes the public and private benefits
of its compliance efforts.
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\86\ 31 U.S.C. 5318(h)(2)(B)(iv)(II).
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Finally, a financial institution would have flexibility in how it
would document the results of the risk assessment process. As proposed,
a financial institution would not be required to establish a single,
consolidated risk assessment document solely to comply with the
proposed rule. Rather, various methods and approaches could be used to
ensure that a financial institution is appropriately documenting its
risks.\87\ Regardless of the approach, the information obtained through
the risk assessment process should be sufficient to enable the
financial institution to establish, implement, and maintain an
effective, risk-based, and reasonably designed AML/CFT program.
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\87\ In sections 2.1 and 2.2 of FATF Guidance for a Risk-Based
Supervision (Mar. 2021), available at http://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-supervision.html, FATF described some approaches for financial
institutions to consider in assessing their ML/TF risks. One common
approach involves assessing inherent risks, mitigation efforts, and
residual risks. According to FATF, inherent risks refer to ``ML/TF
risks intrinsic to a [financial institution's] business activities
before any AML/CFT controls are applied''; mitigation efforts refer
to ``measures in place within [a financial institution] to mitigate
ML/TF risks''; and residual risks refer to ``ML/TF risks that remain
after AML/CFT systems and controls are applied to address inherent
risks.''
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a. Factors for Consideration
i. The AML/CFT Priorities
The AML/CFT Priorities set out the priorities for the AML/CFT
policy as required by the AML Act. Section 6101 of the AML Act provides
that the review and incorporation by a financial institution of the
AML/CFT Priorities, as appropriate, into a financial institution's AML/
CFT program must be included as a measure on which a financial
institution is supervised and examined for compliance with the
financial institution's obligations under the BSA and other AML/CFT
laws and regulations.\88\ FinCEN is implementing this statutory
requirement by proposing that financial institutions review and
consider the AML/CFT Priorities as part of their risk assessment
process. The inclusion of the AML/CFT Priorities in the risk assessment
process is meant to ensure that financial institutions understand their
exposure to risks in areas that are of particular importance at a
national level, which may help financial institutions develop more
effective, risk-based, and reasonably designed AML/CFT programs. The
proposed rule notes that under 31 U.S.C. 5318(h)(4)(B), FinCEN is
required to update the AML/CFT Priorities not less frequently than once
every four years. Whenever the AML/CFT Priorities are updated,
financial institutions would not be required to incorporate prior
versions of the AML/CFT Priorities. Financial institutions would only
be required to incorporate the most up-to-date set of AML/CFT
Priorities into their risk-based AML/CFT programs.
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\88\ 31 U.S.C. 5318(h)(4)(E).
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FinCEN anticipates that some financial institutions may ultimately
determine that their business models and risk profiles have limited
exposure to some of the threats addressed in the AML/CFT Priorities,
but instead have greater exposure to other ML/TF risks. Additionally,
some financial institutions' risk assessment processes may determine
that their AML/CFT programs already sufficiently take into account
some, or all, of the AML/CFT Priorities. In any case, any changes in
costs or burdens would be based on the results of a risk assessment
process and its impact on the AML/CFT program, including how to review
and, as appropriate, take into account the AML/CFT Priorities before
making these determinations.
ii. Identifying and Evaluating ML/TF and Other Illicit Finance Activity
Risks
FinCEN does not intend for a financial institution to exclusively
focus their risk assessment process on the AML/CFT Priorities. Rather,
the AML/CFT Priorities are among many factors that financial
institutions should consider when assessing their institution-specific
risks. In addition to the AML/CFT Priorities, the proposed rule would
require a risk assessment process to also incorporate consideration of
other illicit finance activity risks of the financial institution based
on its business activities, including products, services, distribution
channels, customers, intermediaries, and geographic locations.\89\
These factors are generally consistent with current risk assessment
processes of some financial institutions.
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\89\ The program rule for dealers in precious metals, precious
stones, or jewels (31 CFR 1027.210) will retain the current risk
assessment factors that are tailored to the practices at these
financial institutions.
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Although FinCEN believes that some financial institutions are
generally familiar with these concepts, ``distribution channels'' may
be a new term for some financial institutions. FinCEN considers
``distribution channels'' to refer to the methods and tools through
which a financial institution opens accounts and provides products or
services, including, for example, through the use of remote or other
non-face-to-face means.
The term ``intermediaries'' may also be a new term for some
financial institutions. Since financial institutions have a variety of
financial relationships beyond customers and counterparties, such as
service providers, vendors, or third parties, that may pose ML/TF risks
[[Page 55439]]
to the U.S. financial system, the proposed rule includes the term
``intermediary'' so that financial institutions could consider customer
and non-customer relationships into their risk assessment process.
FinCEN considers ``intermediaries'' to include broadly other types of
financial relationships beyond customer relationships that allow
financial activities by, at, or through a financial institution. An
intermediary can include, but not be limited to, a financial
institution's brokers, agents, and suppliers that facilitate the
introduction or processing of financial transactions, financial
products and services, and customer-related financial activities.\90\
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\90\ While intermediaries in the financial institution context
generally are not tied to customer relationships, in other contexts,
FinCEN has also referred to an ``intermediary'' as: ``a customer
that maintains an account for the primary benefit of others, such as
the intermediary's own underlying clients. For example, certain
correspondent banking relationships may involve intermediation
whereby the respondent bank of a correspondent bank acts on behalf
of its own clients. Intermediation is also very common in the
securities and derivatives industries. For example, a broker-dealer
may establish omnibus accounts for a financial intermediary (such as
an investment adviser) that, in turn, establishes sub-accounts for
the intermediary's clients, whose information may or may not be
disclosed to the broker-dealer.'' Customer Due Diligence
Requirements for Financial Institutions, 79 FR 45151, 45160
(proposed Aug. 4, 2014).
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Thus, for certain financial institutions, such as banks, an
``intermediary'' can include an intermediary financial institution,
which is a receiving financial institution other than the transmittor's
financial institution or the recipient's financial institution, in
relation to certain funds transfer requirements applicable to
banks.\91\ FinCEN notes that an intermediary may have its own
independent obligations to comply with the BSA if it meets the
definition of a financial institution subject to the BSA and FinCEN's
implementing regulations.\92\ FinCEN welcomes comments on whether
additional clarity is warranted and whether any other factors should be
considered.
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\91\ See 31 CFR 1010.410 for funds transfer recordkeeping
requirements concerning payment orders by banks. See 31 CFR
1010.410(f)(1)-(2) for certain funds transfer requirements
applicable to a transmittor's financial institution and intermediary
financial institution.
\92\ See 31 CFR chapter X for financial institutions subject to
applicable BSA requirements.
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Aside from the AML/CFT Priorities, financial institutions also may
find other sources of information to be relevant to their risk
assessment processes. These may include information obtained from other
financial institutions, such as emerging risks and typologies
identified through section 314(b) information sharing \93\ or payment
transactions that other financial institutions returned or flagged due
to ML/TF risks that the originating financial institution may not have
identified. It also could include internal information that a financial
institution maintains. Such internal information may include, for
example, the locations from which its customers access the financial
institution's product, services, and distribution channels, such as the
customer internet protocol (IP) addresses or device logins and related
geolocation information.
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\93\ See FinCEN's 314(b), Financial Crimes Enforcement Network,
U.S. Department of the Treasury, available at https://www.fincen.gov/section-314b.
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Additional sources of information that may be useful to consider
can include feedback from FinCEN, law enforcement, and financial
regulators, as applicable. For example, if a financial institution
receives feedback from law enforcement about a report it has filed or
potential risks at the financial institution, the financial institution
should incorporate that information into its risk assessment process.
Similarly, financial institutions may consider information identified
from responding to section 314(a) requests. Additionally, a financial
institution may find that there are FinCEN advisories or guidance that
are particularly relevant to the financial institution's business
activities. In that case, it would be appropriate for the financial
institution to consider the information contained in relevant
advisories or guidance when evaluating its ML/TF risks.
Regardless of the source of information, the risk assessment
process contemplates steps to ensure the information on which they are
relying to assess risks is reasonably current, complete, and accurate.
Similarly, the analysis performed in connection with the risk
assessment process--particularly any analysis that relies on the
exercise of discretion or judgment--should be documented, and subject
to oversight and governance. A financial institution's taking of such
steps would support the conclusion that the financial institution's
AML/CFT program is effective, risk based, and reasonably designed to
determine the financial institution's ML/TF risk profile. A financial
institution designing its required internal policies, procedures, and
controls to reasonably manage and mitigate ML/TF risks would further
support such a conclusion. FinCEN welcomes comments on whether
additional clarity is needed regarding the timeliness, completeness,
and accuracy of the information, analysis, and documentation required
as part of the risk assessment process.
iii. Review of Reports Filed Pursuant to 31 CFR Chapter X
As the risk assessment process would serve as the foundation for a
risk-based AML/CFT program, the proposed rule would require financial
institutions to review and evaluate reports filed by the institution
with FinCEN pursuant to 31 CFR chapter X, such as SARs, CTRs, Forms
8300, and other relevant BSA reports. These reports can assist
financial institutions in identifying known or detected threat patterns
or trends to incorporate into their risk assessments and apply to their
risk-based policies, procedures and internal controls. This type of
review may also help financial institutions minimize a type of SAR
filing characterized by some industry sources as a ``defensive filing''
and focus on generating highly useful reports to relevant government
authorities. Financial institutions not subject to SAR requirements
should consider the suspicious activity that their AML/CFT programs
have identified.\94\ Since the detection of suspicious activities and
filing of reports are among the most important cornerstones of AML/CFT
programs, many financial institutions may already incorporate a review
of SARs and CTRs into their AML/CFT programs, as SARs and CTRs can
provide a more complete understanding of a customer's or the financial
institution's overall ML/TF risk profile and signal areas of emerging
risk as their products and services evolve and change.
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\94\ For example, certain types of financial institutions, such
as operators of credit card systems, are not subject to the BSA
requirement to file SARs. Should these financial institutions
voluntarily file SARs, those reports should be reviewed as part of
the risk assessment process.
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FinCEN would welcome comments on the benefits and burdens that this
added provision to review reports filed by the financial institution
may present.
b. Frequency
The proposed rule would require financial institutions to update
their risk assessment using the process proposed in the rule, on a
periodic basis, including, at a minimum, when there are material
changes to the financial institution's risk profile. Generally, a
periodic basis would be frequent enough to ensure the risk assessment
process accurately reflects the ML/TF risks of the financial
institution and any changes to the AML/CFT Priorities, or events that
change the financial
[[Page 55440]]
institution's risk profile in light of those priorities.\95\ This
requirement includes updating the risk assessment using the process
proposed in this rule in response to events or other circumstances that
materially change the financial institution's risk profile. The
proposed rule would not specify the frequency for when a financial
institution is to update its risk assessment, but a financial
institution may find advantages in articulating and defining a minimum
risk-based schedule.
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\95\ See supra note 17. As defined in the proposed rule, the
AML/CFT Priorities refer to the most recent statement of AML/CFT
National Priorities issued pursuant to 31 U.S.C. 5318(h)(4), which
are required to be updated at least once every four years. Financial
institutions would have to ensure that their risk assessment
processes take into account changes to the AML/CFT Priorities as
they become available.
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At a minimum, financial institutions would be required to have
their risk assessment updated using the process proposed in this rule,
when there are material changes in their products, services,
distribution channels, customers, intermediaries, and geographic
locations. For example, a financial institution might need to update
its risk assessment using the process proposed in this rule, when new
products, services, and customer types are introduced or existing
products, services, and customer types undergo material changes, or the
financial institution as a whole expands or contracts through mergers,
acquisitions, sell-offs, dissolutions, and liquidations. Given the
variety of financial institution types, risk profiles, and activities,
some financial institutions may decide to maintain continuous
approaches to their risk assessment, while other financial institutions
may determine to employ a regularly scheduled point-in-time reviews of
their risk assessment. However, regardless of the specific frequency of
updating their risk assessment, effective, risk-based, and reasonably
designed AML/CFT programs require financial institutions to reasonably
incorporate current, complete, and accurate information responsive to
ML/TF developments into their risk assessment process, and not simply
maintain static risk assessments.
FinCEN welcomes comments on whether additional clarity is needed
regarding the similarities and differences between a risk assessment
process and a risk assessment, particularly with respect to the
frequency and material changes warranting financial institutions to
update their risk assessment using the process proposed in this rule.
2. Internal Policies, Procedures, and Controls
The proposed rule would require AML/CFT programs to ``reasonably
manage and mitigate [ML/TF] risks through internal policies,
procedures, and controls that are commensurate with those risks and
ensure ongoing compliance with the [BSA]'' and its implementing
regulations. The BSA requires financial institutions to develop
``internal policies, procedures, and controls'' as part of their AML/
CFT programs.\96\ Consistent with this statutory obligation, FinCEN
regulations already require financial institutions to have internal
controls to ensure compliance, and the majority of the current program
rules also refer to policies and procedures.\97\ The proposed rule
would update the requirements to apply more uniform language,
consistent with the formulation of ``internal policies, procedures, and
controls'' from 31 U.S.C. 5318(h)(1)(A), across financial institutions.
The proposed rule would recognize the critical role that internal
policies, procedures, and controls have in managing and mitigating
risk, and would explicitly state that internal policies, procedures,
and controls must be commensurate with a financial institution's
risks.\98\ Also, as discussed further below, the proposed rule would
also explicitly provide that financial institutions may use innovative
approaches to meet compliance obligations under the BSA.
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\96\ 31 U.S.C. 5318(h)(1)(A).
\97\ See applicable program rules located at 31 CFR
1022.210(d)(1) (MSBs), 1023.210(b)(1) (broker-dealers),
1024.210(b)(1) (mutual funds), 1025.210(b)(1) (insurance companies),
1026.210(b)(1) (futures commission merchants and introducing brokers
in commodities), 1027.210(b)(1) (dealers in precious metals,
precious stones, or jewels), 1028.210(b)(1) (operators of credit
card systems), 1029.210(b)(1) (loan or finance companies), and
1030.210(b)(1) (housing government sponsored enterprises).
\98\ Proposed 31 CFR 1028.210 would retain the existing elements
of the internal policies, procedures, and controls that are specific
to the operators of credit card systems.
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The proposed rule would require financial institutions to
reasonably manage and mitigate illicit finance activity risks through
internal policies, procedures, and controls that are commensurate with
those risks. The level of sophistication of the internal policies,
procedures, and controls should be commensurate with the size,
structure, risk profile, and complexity of the financial institution.
However, the proposed rule would not specifically set out the means to
do so. Rather, the proposed rule would require financial institutions
to reasonably manage and mitigate risks using internal policies,
procedures, and controls based on their institution-specific ML/TF
risks using the required risk assessment process. An effective, risk-
based, and reasonably designed AML/CFT program would incorporate the
results of the risk assessment process through appropriate changes to
internal policies, procedures, and controls to manage ML/TF risks. Some
financial institutions may determine that their AML/CFT programs
already have sufficient internal policies, procedures, and controls
commensurate with their respective risks in light of FinCEN's existing
regulations. In any case, while the proposed rule may not impose new
obligations, any changes in the costs or burdens would be based on how
the risk assessment process impacts the AML/CFT program.
Additionally, the proposed rule provides financial institutions
with the regulatory flexibility to consider innovative approaches to
comply with BSA requirements, including determining not only the total
amount of resources, but also the nature of those resources. The
proposed rule's inclusion of innovation reflects one of the AML Act's
key purposes of ``encourage[ing] technological innovation and the
adoption of new technology by financial institutions to more
effectively counter money laundering and financing of terrorism.'' \99\
Consistent with this purpose set out in the AML Act, FinCEN aims to
encourage instances where a financial institution finds it beneficial
to consider and evaluate technological innovation and, as warranted by
the financial institution's risk profile, implement new technology or
innovative approaches in combating financial crime. Additionally, a
financial institution may find it beneficial to consider whether the
AML/CFT program appropriately uses the financial institution's existing
internal capabilities, technologies, product lines, and data. For
example, if the financial institution's marketing or relationship
management teams use internet or app-based data for commercial
purposes, it would be reasonable for that financial institution's AML/
CFT program to consider using similar technology or approaches in
managing and mitigating the financial institution's ML/TF risks.
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\99\ See supra note 16.
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In addition to informing resource and innovation considerations,
the risk assessment process must also support the ongoing
implementation and maintenance of internal policies, procedures, and
controls that are commensurate with those risks and ensure ongoing
compliance with the
[[Page 55441]]
BSA and its implementing regulations. For example, as explained
previously, the risk assessment process should include a review of
reports filed pursuant to the BSA. A financial institution's ongoing
and historical review of suspicious transactions that it has identified
may help the financial institution determine whether new procedures or
more targeted controls would identify certain suspicious activity more
quickly or with greater precision. Such a review could improve the
financial institution's ability to assess and identify ML/TF risks,
generate highly useful reports, and focus attention and resources in a
manner consistent with the risk profile of the financial institution
that takes into account higher-risk and lower-risk customers and
activities.
In light of proposed requirements to maintain an updated risk
assessment using the process proposed in this rule, a financial
institution may find a basis to update its internal policies,
procedures, and controls, including based on the financial
institution's review of BSA reports and underlying suspicious
activities. For example, a financial institution may decide to
incorporate typology or similar information into its internal policies,
procedures, and controls after reviewing a suspicious transaction that
was identified only after another financial institution had rejected or
flagged it for AML/CFT-related reasons. Consistent with the risk-based
approach to internal policies, procedures, and controls, a financial
institution would update those controls, provided that the financial
institution can ensure its internal policies, procedures, and controls
continue to be commensurate with its risk profile. This risk-based
approach to maintaining internal policies, procedures, and controls, as
a program component, allows financial institutions to reasonably manage
and mitigate AML/CFT risk.
3. AML/CFT Officer
The proposed rule would provide that an AML/CFT program must
designate one or more qualified individuals to be responsible for
coordinating and monitoring day-to-day compliance with the requirements
and prohibitions of the BSA and FinCEN's implementing regulations
(hereinafter referred to as the AML/CFT officer, formerly referred to
as the BSA officer). Consistent with 31 U.S.C. 5318(h)(1)(B), all
financial institutions that are required to have an AML/CFT program
must already have a designated AML/CFT officer, although there are
slight variations in the specific language used in the program rules
for different types of financial institutions. The proposed rule
provides technical changes to promote clarity and consistency across
the program rules. Additionally, FinCEN is updating the reference from
``BSA officer'' to ``AML/CFT officer'' to formally reflect the CFT
considerations for this role under section 6101 of the AML Act.\100\
This change also is consistent with the updated terminology of AML/CFT
program.
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\100\ 31 U.S.C. 5318(h)(1), as amended by AML Act, section
6101(b)(2)(A) (Establishment of national exam and supervision
priorities), which now references ``countering the financing of
terrorism'' in addition to ``anti-money laundering'' when describing
the requirement to establish an AML program.
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Inherent in the statutory requirement that a financial institution
designate an AML/CFT officer as part of a program reasonably designed
to achieve compliance with the BSA is the expectation that the
designated individual is qualified to ensure and monitor compliance
with the BSA and FinCEN's implementing regulations. Accordingly, for an
AML/CFT program to be effective and reasonably designed to ensure and
monitor compliance with the BSA, the compliance officer must be
qualified. Whether an individual is sufficiently qualified as an AML/
CFT officer will depend, in part, on the financial institution's ML/TF
risk profile, as informed by the results of the risk assessment
process. Among other criteria, a qualified AML/CFT officer would have
the expertise and experience to adequately perform the duties of the
position, including having sufficient knowledge and understanding of
the financial institution as informed by the risk assessment process,
U.S. AML/CFT laws and regulations, and how those laws and regulations
apply to the financial institution and its activities.
In addition, the AML/CFT officer's position in the financial
institution's organizational structure must enable the AML/CFT officer
to effectively implement the financial institution's AML/CFT program.
The actual title of the individual responsible for day-to-day AML/CFT
compliance is not determinative, and the AML/CFT officer for these
purposes need not be an ``officer'' of the financial institution. The
individual's authority, independence, and access to resources within
the financial institution, however, are critical. Importantly, an AML/
CFT officer should have decision-making capability regarding the AML/
CFT program and sufficient stature within the organization to ensure
that the program meets the applicable requirements of the BSA. The AML/
CFT officer's access to resources may include the following: adequate
compliance funds and staffing with the skills and expertise appropriate
to the financial institution's risk profile, size, and complexity; an
organizational structure that supports compliance and effectiveness;
and sufficient technology and systems to support the timely
identification, measurement, monitoring, reporting, and management of
the financial institution's ML/TF and other illicit finance activity
risks. An AML/CFT officer that has multiple additional job duties or
conflicting responsibilities that adversely impact the officer's
ability to effectively coordinate and monitor day-to-day AML/CFT
compliance generally would not fulfill this requirement.
To promote consistency and reduce redundancy, the proposed rule
would remove some examples of what it means to coordinate and monitor
day-to-day compliance with AML/CFT requirements that are currently
listed in the program rules for MSBs; insurance companies; dealers in
precious metals, precious stones, or jewels; operators of credit card
systems; loan or finance companies; and housing government sponsored
enterprises.\101\ For example, those program rules currently provide
that an AML/CFT officer is responsible for updating the financial
institution's AML/CFT program and ensuring that employees are educated
or trained in accordance with the financial institution's AML/CFT
program training obligation. Although these responsibilities would no
longer be listed in the rule text for those programs, they would
reasonably be within the scope of responsibilities of an AML/CFT
officer by virtue of the proposed rule's requirements for an effective,
risk-based, and reasonably designed AML/CFT program.
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\101\ See applicable program rules located at 31 CFR
1022.210(d)(2) (MSBs), 1025.210(b)(2) (insurance companies),
1027.210(b)(2) (dealers in precious metals, precious stones, or
jewels), 1028.210(b)(2) (operators of credit card systems),
1029.210(b)(2) (loan or finance companies), and 1030.210(b)(2)
(housing government sponsored enterprises).
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Likewise, the proposed rule would remove redundant provisions in
the current program rules for dealers in precious metals, precious
stones, or jewels; operators of credit card systems; loan or finance
companies; and housing government sponsored enterprises that require
AML/CFT officers to ensure that the financial institution's AML/CFT
program is implemented effectively.\102\
[[Page 55442]]
Although the proposed rule would remove that specific language, the
AML/CFT officer would nonetheless be required to ensure that the
program is implemented effectively by virtue of the proposed rule's
requirement that AML/CFT officers coordinate and monitor day-to-day
compliance.
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\102\ See applicable program rules located at 31 CFR
1027.210(b)(2)(i) (dealers in precious metals, precious stones, or
jewels), 1028.210(b)(2)(i) (operators of credit card systems),
1029.210(b)(2)(i) (loan or finance companies); and 1030.210(b)(2)(i)
(housing government sponsored enterprises).
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Similarly, the proposed rule would delete an unnecessary reference
from current 31 CFR 1022.210(d)(2)(i) that provides that an MSB's AML/
CFT officer must ensure that the MSB properly files reports, and
creates and retains records, in accordance with the BSA. These
activities are and would remain part of the AML/CFT officer's duty to
monitor and coordinate day-to-day compliance, so it is not necessary to
separately list them in the rule. This deletion and the removal of the
other redundant references will ensure the program rules use consistent
language across different types of financial institutions.
Therefore, these provisions of the proposed rule related to AML/CFT
officers would not impose new obligations on financial institutions.
Any changes in costs or burdens associated with this program component
under the proposed rule would be based on how the risk assessment
process impacts the AML/CFT program.
4. Training
The BSA requires AML/CFT programs to include an ``ongoing employee
training program.'' \103\ This statutory requirement is reflected in
the current program rules, which all contain a training requirement.
The proposed rule would amend these requirements to provide that, to be
effective, risk-based, and reasonably designed, an AML/CFT program
would need to include an ongoing employee training program that is also
risk-based. The training program would be focused on areas of risk as
identified by the risk assessment process and whose periodicity of
training would be dependent on a financial institution's risk
profile.\104\ FinCEN recognizes that financial institutions may have
employees and non-employees who may have a variety of roles and
responsibilities in relation to the AML/CFT program. The risk-based
nature of an AML/CFT program provides flexibility for financial
institutions to identify both employees and non-employees who must be
trained on an ongoing basis. The proposed rules, however, would retain
certain provisions addressing methods of training for insurance
companies, loan or finance companies, and housing government sponsored
enterprises that are specific to these types of financial
institutions.\105\
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\103\ 31 U.S.C. 5318(h)(1)(C).
\104\ The current training requirements are at 31 CFR
1020.210(a)(2)(iv) and (b)(2)(iv) (banks), 1021.210(b)(2)(iii)
(casinos), 1022.210(d)(3) (MSBs), 1023.210(b)(4) (broker-dealers),
1024.210(b)(4) (mutual funds), 1025.210(b)(3) (insurance companies),
1026.210(b)(4) (futures commission merchants and introducing brokers
in commodities), 1027.210(b)(3) (dealers in precious metals,
precious stones, or jewels), 1028.210(b)(3) (operators of credit
card systems), 1029.210(b)(3) (loan or finance companies), and
1030.210(b)(3) (housing government sponsored enterprises).
\105\ See applicable program rules located at 31 CFR
1025.210(b)(3) (insurance companies), 1029.210(b)(3) (loan or
finance companies), and 1030.210(b)(3) (housing government sponsored
enterprises).
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Although financial institutions are already required to have
training as part of their AML/CFT programs, there is some variation in
the specific text of the different program rules.\106\ For example, the
proposed rule conforms to the statutory formulation of ``ongoing
employee training'' whereas the current rules are directed at
appropriate persons or appropriate personnel. Other than to remain
consistent with the BSA, FinCEN intends these changes to have no
substantive impact on the training requirements. As another example,
the current rules for casinos and MSBs specify that training must
include the identification of unusual or suspicious transactions, which
are topics that FinCEN would expect AML/CFT programs for all financial
institutions to cover in training.\107\ Likewise, the current rules for
MSBs; dealers in precious metals, precious stones, or jewels; and
operators of credit card systems include ``education'' in addition to
training.\108\ FinCEN does not view the distinction between
``training'' and ``education'' to be substantive and would expect
training to include relevant education. The proposed rule would
therefore remove these references to promote consistency.
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\106\ See applicable program rules located at 31 CFR
1020.210(a)(2)(iv) and (b)(2)(iv) (banks), 1021.210(b)(2)(iii)
(casinos), 1022.210(d)(3) (MSBs), 1023.210(b)(4) (broker-dealers),
1024.210(b)(4) (mutual funds), 1025.210(b)(3) (insurance companies),
1026.210(b)(4) (futures commission merchants and introducing brokers
in commodities), 1027.210(b)(3) (dealers in precious metals,
precious stones, or jewels), 1028.210(b)(3) (operators of credit
card systems), 1029.210(b)(3) (loan or finance companies), and
1030.210(b)(3) (housing government sponsored enterprises).
\107\ See applicable program rules located at 31 CFR
1021.210(b)(2)(iii) (casinos) and 1022.210(d)(3) (MSBs).
\108\ See applicable program rules located at 31 CFR
1022.210(d)(3) (MSBs), 1027.210(b)(3) (dealers in precious metals,
precious stones, or jewels), and 1028.210(b)(3) (operators of credit
card systems).
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Another variation in the current program rules is the inclusion of
the term ``ongoing.'' The BSA specifies that the employee training
program be ``ongoing'' \109\ and the current rules that apply to
several types of financial institutions specify that training must be
``ongoing,'' \110\ while the other program rules do not include the
word ``ongoing.'' \111\ As with other components of an effective, risk-
based, and reasonably designed AML/CFT program, the training
requirement would be based on a financial institution's risk assessment
process, and the content of the training and frequency with which it
would occur would depend on the financial institution's risk profile
and the roles and responsibilities of the persons receiving the
training.
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\109\ 31 U.S.C. 5318(h)(1)(C).
\110\ See applicable program rules located at 31 CFR
1023.210(b)(4) (broker-dealers), 1024.210(b)(4) (mutual funds),
1025.210(b)(3) (insurance companies), 1026.210(b)(4) (futures
commission merchants and introducing brokers in commodities),
1027.210(b)(3) (dealers in precious metals, precious stones, or
jewels), 1029.210(b)(3) (loan or finance companies), and
1030.210(b)(3) (housing government sponsored enterprises).
\111\ See applicable program rules located at 31 CFR
1020.210(a)(2)(iv) and (b)(2)(iv) (banks), 1021.210(b)(2)(iii)
(casinos), 1022.210(d)(3) (MSBs), and 1028.210(b)(3) (operators of
credit card systems).
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As part of the relationship and interaction between and among
program components, FinCEN generally would expect the contents of
training to be responsive to the results of the risk assessment process
and incorporate current developments and changes to AML/CFT regulatory
requirements or information available to the financial institution.
Examples for sources of training information are the AML/CFT
Priorities; relevant Treasury and FinCEN actions and publications; the
financial institution's internal policies, procedures, and controls;
and an understanding of the financial institution's business
activities, including products, services, distribution channels,
customers, intermediaries, and geographic locations in terms of ML/TF
risks, including any material changes to the financial institutions'
ML/TF risk profile.\112\ Overall, the training program should be
sufficiently targeted to the roles and responsibilities of employees.
While the proposed rule's training requirement is
[[Page 55443]]
not a new obligation, any costs or burdens associated with this program
component would be based on how the risk assessment process impacts the
AML/CFT program.
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\112\ As discussed earlier, in this context, material changes to
a financial institution's ML/TF risks can refer to changes in the
ML/TF risk profile due to the introduction of new, or expansion of
existing products, services, customer types and geographic
locations, and changes in other relevant risk assessment criteria.
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5. Independent Testing
The AML Act did not change the BSA's requirement that each
financial institution includes an independent audit function to test
its AML/CFT program.\113\ Based on this statutory requirement, the
program rules already require such programs to include independent
testing.\114\ The proposed rule would modify the existing program rules
to require each financial institution's program to include independent,
periodic AML/CFT program testing to be conducted by qualified personnel
of the financial institution or by a qualified outside party. FinCEN
considers these changes to be consistent with long-standing
requirements for independent testing and not substantive, but invites
comments on their impact, if any, on the current program rules. Similar
to other program components, any costs or burdens associated with this
program component would be based how the risk assessment process
impacts the AML/CFT program.
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\113\ 31 U.S.C. 5318(h)(1)(D).
\114\ See applicable program rules located at 31 CFR
1020.210(a)(2)(ii) and (b)(2)(ii) (banks), 1021.210(b)(2)(ii)
(casinos), 1022.210(d)(4) (MSBs), 1023.210(b)(2) (broker-dealers),
1024.210(b)(2) (mutual funds), 1025.210(b)(4) (insurance companies),
1026.210(b)(2) (futures commission merchants or introducing broker
in commodities), 1027.210(b)(4) (dealers in precious metals,
precious stones, or jewels), 1028.210(b)(4) (operators of a credit
card system), 1029.210(b)(4)(loan or finance companies), and
1030.210(b)(4) (housing government sponsored enterprises).
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The purpose of independent testing is to assess the financial
institution's compliance with AML/CFT statutory and regulatory
requirements, relative to its risk profile, and to assess the overall
adequacy of the AML/CFT program. This evaluation helps to inform the
financial institution's board of directors and senior management of
weaknesses or areas in need of enhancement or stronger controls.
Typically, this evaluation includes a conclusion about the financial
institution's overall compliance with AML/CFT statutory and regulatory
requirements and sufficient information for the reviewer (e.g., board
of directors, senior management, AML/CFT officer, outside auditor, or
an examiner) to reach a conclusion about the overall adequacy of the
AML/CFT program. Under the proposed rule, independent testing could be
conducted by qualified personnel of the financial institution, such as
an internal audit department, or by a qualified outside party, such as
outside auditors or consultants.
Additionally, while financial institutions retain some flexibility
regarding who conducts the audit or testing, the proposed rule would
continue to require that testing be independent. Financial institutions
that do not employ outside auditors or consultants or that do not have
internal audit departments may comply with this requirement by using
qualified internal staff who are not involved in the function being
tested. For these financial institutions and financial institutions
with other types of arrangements for independent testing, the AML/CFT
officer or any party who directly, and in some cases, indirectly
reports to the AML/CFT officer, or an equivalent role, would generally
not be considered sufficiently independent.\115\ Any individual
conducting the testing, whether internal or external, would be required
to be independent of other parts of the financial institution's AML/CFT
program, including its oversight. For financial institutions that
engage outside auditors or consultants, the financial institution would
be required to ensure that the outside parties conducting the
independent testing are not involved in functions related to the AML/
CFT program at the financial institution that may present a conflict of
interest or lack of independence, such as AML/CFT training or the
development or enhancement of internal policies, procedures, and
controls. Additionally, for the purposes of the independent testing
component, qualified outside parties would not include government
agencies, entities, or instrumentalities, such as a financial
institution's Federal or State functional regulators. Financial
institutions with less complex operations, and lower risk profiles may
consider utilizing a shared resource as part of a collaborative
arrangement to conduct testing, as long as the testing is
independent.\116\
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\115\ This is consistent with current 31 CFR 1022.210, which
provides that independent testing review may be conducted by an
officer or employee of the MSB so long as the tester is not the AML/
CFT officer. Similarly, current 31 CFR 1025.210, 1029.210, and
1030.210 provide that independent testing at insurance companies,
loan or finance companies, and housing government sponsored
enterprises, respectively, may be conducted by a third party or by
any officer or employee of the financial institution, other than the
AML/CFT officer. Likewise, 31 CFR 1027.210(b)(4) and 1028.210(b)(4)
provide that independent testing of a dealer in precious metals,
precious stones, or jewels or an operator of a credit card system,
respectively, can be conducted by an officer or employee of the
institution, so long as the tester is not the AML/CFT officer or a
person involved in the operation of the AML/CFT program. The
criteria to meet the independent requirement for independent testing
at U.S. operations of foreign financial institutions may include a
review of the reporting arrangements between the party conducting
the independent testing and the AML/CFT Officer, or equivalent
management function such as a head of business line or a general
manager, to assess any conflicts of interests and the level of
independence with the party conducting the independent testing.
\116\ See Interagency Statement on Sharing Bank Secrecy Act
Resources (Oct. 3, 2018), available at https://www.fincen.gov/news/news-releases/interagency-statement-sharing-bank-secrecy-act-resources.
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The proposed rule also would require any party who conducts
independent testing to be ``qualified.'' The current rules for broker-
dealers, mutual funds, and futures commission merchants and introducing
brokers in commodities already explicitly require outside parties
conducting the independent testing to be qualified,\117\ but under this
proposed rule, having qualified parties conduct independent testing
will be a standardized requirement for all financial institutions. The
knowledge, expertise, and experience necessary for a party to be
qualified to conduct independent testing would depend, in part, on the
financial institution's ML/TF risk profile. As with the AML/CFT officer
component, FinCEN generally would expect qualified independent testers
to have the expertise and experience to satisfactorily perform such a
duty, including having sufficient knowledge of the financial
institution's risk profile and AML/CFT laws and regulations.
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\117\ See applicable program rules located at 31 CFR
1023.210(b)(2) (broker-dealers), 1024.210(b)(2) (mutual funds), and
1026.210(b)(2) (futures commission merchants and introducing brokers
in commodities).
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FinCEN would expect the frequency of the periodic independent
testing to vary based on each financial institution's risk profile,
changes to its risk profile, and overall risk management strategy, as
informed by the financial institution's risk assessment process.\118\
More frequent independent testing may be appropriate when errors or
deficiencies in some aspect of the AML/CFT program have been identified
or to verify or validate mitigating or remedial actions. A financial
institution may find it appropriate to conduct additional independent
testing when there are material changes in the financial institution's
risk profile, systems, compliance staff, or processes. Additionally,
the frequency of
[[Page 55444]]
independent testing may be influenced by other factors, such as the
regulations of self-regulatory organizations (SROs) applicable to
certain types of financial institutions.\119\
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\118\ This is consistent with the requirements in current 31 CFR
1021.210 (casinos), 1022.210 (MSBs), 1025.210 (insurance companies),
1027.210 (dealers in precious metals, precious stones, or jewels),
1028.210 (operators of credit card systems), 1029.210 (loan or
finance companies), and 1030.210 (housing government sponsored
enterprises).
\119\ For example, FINRA Rule 3310(c) provides for annual (on a
calendar-year basis) independent testing for compliance to be
conducted by member personnel or by a qualified outside party,
unless the member does not execute transactions for customers or
otherwise hold customer accounts or act as an introducing broker
with respect to customer accounts (e.g., engages solely in
proprietary trading or conducts business only with other broker-
dealers), in which case such independent testing is required every
two years (on a calendar-year basis). FINRA Rule 3310.01 further
provides that all members should undertake more frequent testing
than required if circumstances warrant.
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While this program component is not a new obligation under the
proposed rule, any additional costs or burdens associated with this
component would be based on a risk assessment process and the impact on
the AML/CFT program and a financial institution's risk profile.
6. Other Components of an Effective, Risk-Based, and Reasonably
Designed AML/CFT Program
The proposed rule would retain additional existing AML/CFT program
rule requirements with minimal conforming changes. These provisions are
generally only applicable to certain types of financial institutions
but are still important parts of the program rules. For example, some
of the existing program rules contain provisions related to CDD, the
use of automated systems, suspicious activity reporting, recordkeeping,
the role of agents and brokers, and other topics. These provisions
would remain substantively unchanged.
With respect to the CDD requirements, the proposed rule would
retain the current CDD provisions for banks, broker-dealers, mutual
funds, and futures commission merchants and introducing brokers in
commodities.\120\
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\120\ See applicable program rules located at 31 CFR
1020.210(a)(2)(v) and (b)(2)(v) (banks), 1023.210(b)(5) (broker-
dealers), 1024.210(b)(5) (mutual funds), and 1026.210(b)(5) (futures
commission merchants and introducing brokers in commodities).
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All of the CDD requirement sections retain a cross-reference to the
beneficial ownership information collection requirements for legal
entity customers established by FinCEN's CDD Rule that are codified at
31 CFR 1010.230. The substance of the CDD Rule, and therefore the
obligations of these covered financial institutions, may change as a
result of FinCEN's revision of that rule, which is required under the
CTA, and which must be completed by January 1, 2025.\121\ Until that
rulemaking process is completed, FinCEN is not planning to propose
changes to financial institutions' CDD requirements.
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\121\ See supra note 27. Section 6403(d) of the AML Act, a
provision of the CTA, requires FinCEN to revise its CDD Rule no
later than one year after the effective date of the regulations
promulgated under 31 U.S.C. 5336(b)(4). As those regulations went
into effect on January 1, 2024, the CDD Rule must be revised no
later than January 1, 2025.
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a. Documented, Available AML/CFT Programs
Financial institutions already must have written AML/CFT programs,
but there is some variation in the specific language used for different
types of financial institutions.\122\ The proposed rule would provide a
consistent standard by requiring that an AML/CFT program, and each of
its components, be documented \123\ and that such documentation be made
available to FinCEN or its designee, which can include the appropriate
agency with delegated examination authorities by FinCEN,\124\ or the
appropriate SRO.\125\ In addition to promoting consistency across the
program rules, these clarifications are intended to help financial
institutions develop a structured AML/CFT program understood across the
enterprise. FinCEN does not intend for there to be a substantive change
related to modifying the operative term from ``in writing'' or
``written'' to ``documented.'' While the proposed rule is not
establishing a new obligation with respect to program documentation,
any additional costs or burdens would be based on a risk assessment
process and its impact on the AML/CFT program and underlying
components.
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\122\ Current 31 CFR 1020.210(b) requires banks lacking a
Federal functional regulator to establish, maintain, and make
available a written anti-money laundering program. Banks with a
Federal functional regulator are required to have written anti-money
laundering programs under the regulators' existing rules. See 12 CFR
21.21(c)(1), 208.63(b)(1), 326.8(b)(1), and 748.2(b)(1). The current
program rules require other types of financial institutions to have
written programs at 31 CFR 1021.210(b)(1) (casinos), 1022.210(c)
(MSBs), 1023.210 (broker-dealers), 1024.210(a) (mutual funds),
1025.210(a) (insurance companies), 1026.210 (futures commission
merchants and introducing brokers in commodities), 1027.210(a)(1)
(dealers in precious metals, precious stones, or jewels),
1028.210(a) (operators of credit card systems), 1029.210(a) (loan or
finance companies), and 1030.210(a) (housing government sponsored
enterprises).
\123\ The proposed requirements for the AML/CFT program to be
documented would be at 31 CFR 1020.210(b) (banks), 1021.210(b)
(casinos), 1022.210(b) (MSBs), 1023.210(b) (broker-dealers),
1024.210(b) (mutual funds), 1025.210(b) (insurance companies),
1026.210(b) (futures commission merchants and introducing brokers in
commodities), 1027.210(b) (dealers in precious metals, precious
stones, or jewels), 1028.210(b) (operators of credit card systems),
1029.210(b) (loan or finance companies), and 1030.210(b) (housing
government sponsored enterprises).
\124\ 31 CFR 1010.810(b).
\125\ For broker-dealers, FinCEN recognizes the SEC as the
Federal functional regulator, and registered national securities
exchanges or a national securities association, such as the
Financial Industry Regulatory Authority (FINRA), as the SROs for
member broker-dealers. Similarly, for futures commission merchants
and introducing brokers in commodities, FinCEN recognizes the CFTC
as the Federal functional regulator, and the National Futures
Association (NFA) as the SRO.
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b. AML/CFT Program Approval and Oversight
The proposed rule would require a financial institution's AML/CFT
program to be approved and overseen by the financial institution's
board of directors or, if the financial institution does not have a
board of directors, an equivalent governing body. For financial
institutions without a board of directors, the equivalent governing
body can take different forms. For example, for some small financial
institutions, the equivalent governing body might be a sole proprietor,
owner(s), general partner, trustee, senior officer(s), or other persons
that have functions similar to a board of directors, including senior
management. For the U.S. branch of a foreign bank, the equivalent
governing body may be the foreign banking organization's board of
directors or delegates acting under the board's express authority.\126\
The proposed rule specifies that approval encompasses each of the
components of the AML/CFT program. Alternatively, some financial
institutions might have other individuals or groups with similar status
or functions as directors. Such individuals may include Chief Executive
Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal
Officer, Chief Compliance Officer, Director, and individuals with
similar status or function. Also, groups with oversight
responsibilities may include board committees such as compliance or
audit committees as well as a group of some, or all of these
individuals with aforementioned titles, as senior management that can
provide effective
[[Page 55445]]
oversight of the AML/CFT program to comply with the proposed rule.\127\
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\126\ The Federal Reserve, the FDIC, and the OCC each require
the U.S. branches, agencies, and representative offices of the
foreign banks they supervise operating in the United States to
develop written BSA compliance programs that are approved by their
respective bank's board of directors and noted in the minutes, or
that are approved by delegates acting under the express authority of
their respective bank's board of directors to approve the BSA
compliance programs. ``Express authority'' means the head office
must be aware of its U.S. AML program requirements and there must be
some indication of purposeful delegation.
\127\ See, e.g., SEC Form BD, Schedule A, Item 2(a).
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Although some financial institutions must already obtain board
approval for their AML/CFT programs, or be subject to oversight by a
board of directors, or an equivalent governing body, this approval and
oversight requirement will represent a change in requirements for other
financial institutions. For example, pursuant to the current program
rules, a mutual fund's AML/CFT programs must be approved by the board
of directors or trustees,\128\ and a bank lacking a Federal functional
regulator must have an AML/CFT program that is approved by the board of
directors or equivalent governing body within the bank.\129\ Banks with
a Federal functional regulator already must have board approval for
their AML/CFT programs under their regulators' existing rules.\130\
Broker-dealers; insurance companies; futures commission merchants and
introducing brokers in commodities; dealers in precious metals,
precious stones, or jewels; operators of credit card systems; loan or
finance companies; and housing government sponsored enterprises
currently must obtain senior management level approval for their AML/
CFT programs.\131\ The existing program rules for casinos and MSBs do
not contain specific board approval or oversight requirements.\132\
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\128\ See applicable program rule located at 31 CFR 1024.210(a)
(mutual fund).
\129\ See applicable program rule located at 31 CFR 1020.210(b)
(banks lacking a Federal functional regulator).
\130\ See 12 CFR 21.21(c)(1), 208.63(b)(1), 326.8(b)(1), and
748.2(b)(1).
\131\ See applicable program rules located at 31 CFR 1023.210
(broker-dealers), 1025.210(a) (insurance companies), 1026.210
(futures commission merchants and introducing brokers in
commodities), 1027.210(a)(1) (dealers in precious metals, precious
stones, or jewels), 1028.210(a) (operators of credit card systems),
1029.210(a) (loan or finance companies), and 1030.210(a) (housing
government sponsored enterprises).
\132\ See applicable program rules located at 31 CFR 1021.210
(casinos) and 1022.210 (MSBs).
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The proposed rule would modify the program rules to make the AML/
CFT program approval and oversight requirements consistent across
financial institution types. FinCEN is proposing to require board or
board-equivalent approval and a new explicit requirement for oversight,
explained further below, to ensure that there is sufficient oversight
over AML/CFT programs by the governing bodies of financial
institutions.\133\ Finally, the proposed rule would plainly require
that the AML/CFT program be subject to board oversight, or oversight of
an equivalent governing body. With this oversight requirement, the
proposed rule makes clear that board approval of the AML/CFT program
alone is not sufficient to meet program requirements, since the board,
or the equivalent governing body, may approve AML/CFT programs without
a reasonable understanding of a financial institution's risk profile or
the measures necessary to identify, manage, and mitigate its ML/TF
risks on an ongoing basis. The proposed new oversight requirement
contemplates appropriate and effective oversight measures, such as
governance mechanisms, escalation and reporting lines, to ensure that
the board (or equivalent) can properly oversee whether AML/CFT programs
are operating in an effective, risk-based, and reasonably designed
manner. In some instances, the proposed rule's focus on board oversight
may be a new obligation and require changes to the frequency and manner
of reporting to the board, which in turn may result in additional costs
and burdens; however, the risk-based nature of the proposed rule is
intended to enable financial institutions to better focus their
attention and resources in a manner consistent with their risk
profiles.
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\133\ The proposed AML/CFT program approval and oversight
requirements would be at 31 CFR 1020.210(b) (banks), 1021.210(b)
(casinos), 1022.210(b) (MSBs), 1023.210(b) (broker-dealers),
1024.210(b) (mutual funds), 1025.210(b) (insurance companies),
1026.210(b) (futures commission merchants and introducing brokers in
commodities), 1027.210(b) (dealers in precious metals, precious
stones, or jewels), 1028.210(b) (operators of credit card systems),
1029.210(b) (loan or finance companies), and 1030.210(b) (housing
government sponsored enterprises).
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c. Establishing, Maintaining, and Enforcing an AML/CFT Program by
Persons in the United States
Section 6101(b)(2)(C) of the AML Act, codified at 31 U.S.C.
5318(h)(5), provides that the duty to establish, maintain, and enforce
a financial institution's AML/CFT program shall remain the
responsibility of, and be performed by, persons in the United States
who are accessible to, and subject to oversight and supervision by, the
Secretary and the appropriate Federal functional regulator.\134\ The
proposed rule would incorporate this statutory requirement in the
program rules by restating that the duty to establish, maintain, and
enforce the AML/CFT program must remain the responsibility of, and be
performed by, persons in the United States who are accessible to, and
subject to oversight and supervision by, FinCEN and the financial
institution's Federal functional regulator, if applicable.\135\
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\134\ 31 U.S.C. 5318(h)(5).
\135\ Not all financial institutions that are required to have
AML/CFT programs have Federal functional regulators pursuant to 15
U.S.C. 6809.
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FinCEN recognizes financial institutions may currently have AML/CFT
staff and operations outside of the United States, or contract out or
delegate parts of their AML/CFT operations to third-party providers
located outside of the United States. This may be to improve cost
efficiencies, to enhance coordination particularly with respect to
cross-border operations, or other reasons. FinCEN has requested comment
on a variety of potential questions that may arise for financial
institutions as they address this statutory requirement, including
questions about the scope of the statutory requirement and the
obligations of persons that are covered. FinCEN will evaluate comments
on these points in considering whether any amendments would be
appropriate in a final rule.
d. Other Changes for Modernization, Clarification, and Consistency
In addition to the previously described changes, the proposed rule
would make other revisions to modernize the program rules and promote
clarification and consistency. The majority of these changes are
technical, such as renumbering provisions, amending cross-references,
and updating statutory references based on changes to the BSA from the
AML Act. There are minor, non-substantive updates being proposed to
requirements for financial institutions subject to Customer
Identification Program (CIP) rules \136\ in which references to BSA/AML
programs are updated to AML/CFT programs.
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\136\ The CIP rules are located at 31 CFR 1020.220 (banks),
1023.220 (brokers or dealers in securities), 1024.220 (mutual
funds), and 1026.220 (futures commission merchants and introducing
brokers in commodities).
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Additionally, as required under section 6101(b), FinCEN consulted
with a number of Federal functional regulators, particularly the
Agencies to inform this rulemaking and coordinate updates to the bank
program rules. The proposed rule is removing the requirement for banks
to comply with the program rule of its Federal functional regulators as
the program rules for banks are consistent.
The proposed rules for broker-dealers and futures commission
merchants and introducing brokers in commodities would retain
requirements to comply with the rules, regulations, or requirements of
their SROs that govern
[[Page 55446]]
such programs, provided the rules, regulations, or requirements of the
SRO governing such programs have been made effective under the
Securities Exchange Act of 1934 for broker-dealers, or the Commodity
Exchange Act for futures commission merchants or introducing brokers in
commodities, by the appropriate Federal functional regulator in
consultation with FinCEN.\137\
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\137\ See supra note 125.
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The following sections describe changes that are more significant.
i. Combining the Bank Rules
Since 2020, banks lacking a Federal functional regulator have been
subject to substantially similar AML/CFT program requirements as banks
with a Federal functional regulator.\138\ The proposed rule would
combine the program rules for banks with a Federal functional regulator
(31 CFR 1020.210(a)) and banks lacking a Federal functional regulator
(31 CFR 1020.210(b)). The most significant difference between the
existing program rules is that 31 CFR 1020.210(b)(3) requires banks
lacking a Federal functional regulator to: (1) have their AML programs
approved by the board of directors or, if the bank does not have a
board of directors, an equivalent governing body within the bank; and
(2) make a copy of its AML program available to FinCEN or its designee
upon request. As previously discussed, the proposed rule would
explicitly apply the approval, oversight, and availability requirements
to all financial institutions, so it would no longer be necessary to
have two sets of program rules for banks. Therefore, the proposed rule
would consolidate 31 CFR 1020.210(a) and (b) into a single set of rules
applicable to all banks.
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\138\ See Customer Identification Programs, Anti-Money
Laundering Programs, and Beneficial Ownership Requirements for Banks
Lacking a Federal Functional Regulator, 85 FR 57129 (Sept. 15,
2020), available at https://www.federalregister.gov/documents/2020/09/15/2020-20325/financial-crimes-enforcement-network-customer-identification-programs-anti-money-laundering-programs.
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ii. Conforming and Modernizing Program Rules
For purposes of consistency and clarity, the proposed rule would
conform certain elements of the program rules for casinos and MSBs to
the program rules for banks; brokers or dealers in securities; mutual
funds; insurance companies; futures commission merchants and
introducing brokers in commodities; dealers in precious metals,
precious stones, or jewels; operators of credit card systems; loan or
finance companies; and housing government sponsored enterprises.
Additionally, for casinos, the proposed rule would remove the
following requirement in 31 CFR 1021.210(b)(2)(vi): ``(vi) For casinos
that have automated data processing systems, the use of automated
programs to aid in assuring compliance.'' Similarly, for MSBs, the
proposed rule would remove the following requirement in 31 CFR
1022.210(d)(1)(ii): ``(ii) Money services businesses that have
automated data processing systems should integrate their compliance
procedures with such systems.'' The removal of the automated data
processing requirement is not to eliminate any applicable, substantive
requirements to comply with the BSA for casinos and MSBs, but the
removal is intended to reflect the risk-based approach taken with
across the various other program rules that may allow consideration of
the use of automated data processing systems.
iii. Compliance and Implementation Dates
The proposed rule would remove certain compliance dates from the
existing program rules.
Current 31 CFR 1022.210(e), 1027.210(c), 1029.210(d), and
1030.210(d) contain compliance and implementation dates for MSBs;
dealers in precious metals, precious stones, or jewels; loan or finance
companies; and housing government sponsored enterprises, respectively.
The proposed rule would retain implementation dates for MSBs and
dealers in precious metals, precious stones, or jewels, respectively,
since they set the time frames in which those specific financial
institution types are required to comply once they conduct certain
activities or thresholds that subject them to AML/CFT program
requirements. The proposed rule would also update the citations for
these provisions (to 31 CFR 1022.210(d) and 1027.210(e)) to reflect
other changes made to 1022.210(d) and 1027.210(e).
The proposed rule, however, would amend these provisions as well as
those of other types of financial institutions, such as loan or finance
companies and housing government sponsored enterprises, to remove
compliance dates that have passed and have no meaningful relevance to
the applicability of AML/CFT program requirements to those financial
institution types.
iv. Compliance With Other Rules
For clarification and consistency, the proposed rule would delete
certain unnecessary cross-references to other regulations.
Specifically, the proposed rule would no longer state that banks,
broker-dealers, and futures commission merchants and introducing
brokers in commodities must comply with the 31 CFR 1010.610 and
1010.620 due diligence requirements for foreign correspondent and
private banking accounts.\139\ Additionally, the proposed rule would no
longer state that banks must comply with the regulation of its Federal
functional regulator. Those regulations apply even without the cross-
references in the program rules, so FinCEN is proposing to remove the
cross-references to streamline the program rules and promote
consistency. FinCEN does not intend for these changes to have any
substantive effect.
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\139\ See applicable program rules located at 31 CFR 1020.210
(banks), 1023.210 (broker-dealers), and 1026.210 (futures commission
merchants and introducing brokers in commodities).
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V. Final Rule Effective Date
Given that the proposed rule would affect many parties, including
financial institutions, FinCEN is proposing an effective date of six
months from the date of issuance of the final rule to allow sufficient
time for review and implementation. FinCEN solicits comment on the
proposed effective date.
VI. Request for Comment
FinCEN welcomes comment on all aspects of the proposed amendments
but specifically seeks comment on the questions below. FinCEN
encourages commenters to reference specific question numbers when
responding.
Comments submitted in response to this proposed rule will be
summarized and included in the request for Office of Management and
Budget (OMB) approval. Comments will become a matter of public record.
Comments are invited on: (a) whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility; (b) the
accuracy of the agency's estimate of the burden of the collection of
information; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; (d) ways to minimize burden of the
collection of information on respondents, including through the use of
technology; and (e) estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services required to provide
information.
Purpose Statement
1. Does the statement of purpose clearly define the goals of an
effective,
[[Page 55447]]
risk-based, and reasonably designed AML/CFT program? If not, what
changes would you recommend?
2. Should FinCEN incorporate the purpose statement into the rule
text itself and if so, how?
Incorporation of AML/CFT Priorities
3. How can FinCEN make the AML/CFT Priorities most helpful to
financial institutions in the context of the proposed rule?
4. What steps are financial institutions planning to take, or can
they take, to incorporate the AML/CFT Priorities into their AML/CFT
programs? What approaches would be appropriate for financial
institutions to use to demonstrate the incorporation of the AML/CFT
Priorities into the proposed risk assessment process of risk-based AML/
CFT programs?
a. Is the incorporation of the AML/CFT Priorities under the risk
assessment process as part of the financial institution's AML/CFT
program sufficiently clear or does it warrant additional clarification?
b. What, if any, difficulties do financial institutions anticipate
when incorporating the AML/CFT Priorities as part of the risk
assessment process?
Risk Assessment Process
5. The proposed rule would require a financial institution to
establish a risk assessment process. Are there other approaches for a
financial institution to identify, manage, and mitigate illicit finance
activity risks aside from a risk assessment process?
6. To what extent would the risk assessment process requirement in
the proposed rule necessitate changes to existing AML/CFT programs?
Please specify how and why. To the extent it supports your response,
please explain how the proposed risk assessment process requirement
differs from current practices.
7. Should a risk assessment process be required to take into
account additional or different criteria or risks than those listed in
the proposed rule? If so, please specify.
8. Financial institutions may discern there is a difference between
a risk assessment and a risk assessment process. What would be those
differences? Should the proposed rule distinguish between a risk
assessment and a risk assessment process? If not, please comment on
what additional information would be useful.
9. For financial institutions with an established risk assessment
process, what is current practice for governance of the process? For
example, is the risk assessment process approved and overseen by a
financial institution's board of directors, compliance committee, or
senior level compliance official(s)?
10. Is the explanation of ``distribution channels'' discussed in
the preamble consistent with how the term is generally understood by
financial institutions? If not, please comment on how the term is
generally understood by financial institutions.
11. Is the explanation of the term ``intermediaries'' discussed in
the preamble consistent with how the term is generally understood by
financial institutions? If not, please comment on how the term is
generally understood by financial institutions.
12. The proposed rule would require financial institutions to
consider the reports they file pursuant to 31 CFR chapter X as a
component of the risk assessment process. To what extent do financial
institutions currently leverage BSA reporting to identify and assess
risk? Are there additional factors that should be considered with
regard to this proposed requirement?
13. For financial institutions with an established risk assessment
process, what is the analysis output? For example, does it include a
risk assessment document? What are other methods and formats used for
providing a comprehensive analysis of the financial institution's ML/TF
and other illicit finance activity risks?
Updating the Risk Assessment
14. Should financial institutions be required to update their risk
assessment using the process proposed in this rule, at a regular,
specified interval (such as annually or every two years) or based on
triggers such as the introduction of new products, services,
distribution channels, customer categories, intermediaries, or
geographies? Please comment on whether the proposed rule should also
specify a particular frequency for the financial institution to update
its risk assessment using the process proposed in this rule. If so,
what time frame would be reasonable? What factors might a financial
institution consider when determining the frequency of updating its
risk assessment using the process proposed in this rule? Should
financial institutions be required to document, and provide support,
what they determine to be an appropriate frequency to update their risk
assessments?
15. The proposed rule uses the term ``material'' to indicate when
an AML/CFT program's risk assessment would need to be reviewed and
updated using the process proposed in this rule. Does the rule or
preamble warrant further explanation of the meaning of the term
``material'' used in this context? What further description or
explanation, if any, would be appropriate?
16. Please comment on whether a comprehensive update to the risk
assessment using the process proposed in this rule is necessary each
time there are material changes to the financial institution's risk
profile, or whether updating only certain parts based on changes in the
financial institution's risk profile would be sufficient. If the
response depends on certain factors, please describe those factors.
Effective, Risk-Based, and Reasonably Designed
17. Do financial institutions expect any changes to any existing
AML/CFT programs under the proposed rule, which explicitly sets out
that AML/CFT programs be effective, risk-based, and reasonably
designed?
18. The proposed rule is part of the establishment of national
examination and supervision priorities under section 6101 of the AML
Act. In what ways would a financial institution demonstrate that it has
``effective, risk-based, and reasonably designed'' AML/CFT programs?
19. The AML Act affirms that financial institutions' AML/CFT
programs are to be ``risk-based, including ensuring that more attention
and resources of financial institutions should be directed toward
higher-risk customers and activities, consistent with the risk profile
of a financial institution, rather than toward lower risk customers and
activities.'' \140\ Does the proposed rule address this AML Act
provision? If not, please comment on what would be useful to support
resource allocation in this way.
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\140\ 31 U.S.C. 5318(h)(2)(B).
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20. FinCEN issued its guidance on the culture of compliance in 2014
and described the connection between a culture of compliance and the
effectiveness of a financial institution's AML/CFT program. How have
financial institutions incorporated this guidance into their
organizations? How would financial institutions expect the proposed
rule to impact their culture of compliance? What challenges do
financial institutions face in developing and maintaining a culture of
compliance? Are there aspects to culture of compliance that would
benefit from additional clarification based on the proposed rule? Would
there be significant value to financial institutions in updating this
advisory? If so, what type of additional guidance is needed?
[[Page 55448]]
21. What methods or approaches have financial institutions used to
support their attention and resource considerations?
22. How do financial institutions expect the proposed rule affect
their current methods or approaches used to support their attention and
resource considerations?
23. How would financial institutions identify certain customers or
activities are lower risk and higher risk before making changes to its
compliance resources? Would financial institutions expect to document,
based on a risk assessment process, that a product, service,
distribution channel, customer, or geographic location is lower risk or
higher risk before making changes to its compliance resources? What
factor(s) and supporting evidence would be appropriate to include in
such potential documentation?
24. Do financial institutions anticipate any challenges in
assigning resources to a higher-risk product, service, or customer type
that is not related to an AML/CFT Priority? Are there any additional
changes or considerations that should be made?
Metrics for Law Enforcement Feedback
25. How should FinCEN consider soliciting and providing feedback
from law enforcement about the highly useful BSA reports or records by
financial institutions that can be incorporated into AML/CFT programs?
26. How should FinCEN approach the requirements in section 6203 of
the AML Act to provide financial institutions with specific feedback on
the usefulness of their SAR filings? Is there information in FinCEN's
``Year in Review'' publications that FinCEN should consider as part of
particularized SAR feedback?
De-Risking and Financial Inclusion
27. The proposed rule encourages the consideration of innovative
approaches to help financial institutions more effectively comply with
the BSA and FinCEN's implementing regulations, and provide highly
useful information to relevant government authorities. These approaches
can include the adoption of emerging technologies, such as machine
learning or artificial intelligence, that can allow for greater
precision in assessing customer risk, improving efficiency of automated
transaction monitoring systems by reducing false positives, or reducing
overall costs and improving commercial viability with certain customer
types and jurisdictions.
a. FinCEN invites further comments on how technology and innovation
can mitigate de-risking and encourage lower cost access to financial
services and activities across communities and borders.
b. FinCEN also invites further comments on how to ensure that
technology and innovation do not diminish access to financial services
for the unbanked or underserved communities or prompt other related de-
risking concerns.
28. A factor that FinCEN considered in prescribing the minimum AML/
CFT standards is ``[t]he extension of financial services to the
unbanked and the facilitation of financial transactions, including
remittances, coming from the United States and abroad in ways that
simultaneously prevent criminals from abusing formal or informal
financial services networks.'' \141\ Related to this factor, are there
unique or specific considerations for the safe and easy transfer of
financial transactions abroad, particularly for humanitarian aid and
development funding, with respect to the proposed rule?
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\141\ See supra note 39.
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29. FinCEN invites comments on additional aspects of financial
access challenges for correspondent banks, money services businesses,
non-profits servicing high-risk jurisdictions, or specific communities
or groups, including but not limited to ethnic and religious
communities, and justice-impacted individuals of which Treasury should
be aware with respect to the proposed rule, if finalized.
Other AML/CFT Program Components
30. The proposed rule would make explicit a long-standing
supervisory expectation for certain financial institutions that the
AML/CFT officer be qualified and that independent testing be conducted
by qualified individuals. Please comment on whether and how the
proposed rule's specific inclusion of the concepts: (1) ``qualified''
in the AML/CFT program component for the AML/CFT officer(s); and (2)
``qualified,'' ``independent,'' and ``periodic'' in the AML/CFT program
component for independent testing, respectively, may change these
components of the AML/CFT program.
31. In the process of standardizing the role and responsibilities
of the AML/CFT officer, the proposed rule removed from various existing
program rules the description of AML/CFT officers in terms of the type
of duties, the coordination and monitoring of day-to-day compliance,
and the creation, filing and retention of records in accordance with
the BSA.\142\ What are the advantages and disadvantages to FinCEN's
approach?
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\142\ To promote consistency and reduce redundancy, the proposed
rule would remove some examples of what it means to coordinate and
monitor day-to-day compliance with AML/CFT requirements that are
currently listed in the program rules for MSBs; insurance companies;
dealers in precious metals, precious stones, or jewels; operators of
credit card systems; loan or finance companies; and housing
government sponsored enterprises. See applicable program rules
located at 31 CFR 1022.210(d)(2) (MSBs), 1025.210(b)(2) (insurance
companies), 1027.210(b)(2) (dealers in precious metals, precious
stones, or jewels), 1028.210(b)(2) (operators of credit card
systems), 1029.210(b)(2) (loan or finance companies), and
1030.210(b)(2) (housing government sponsored enterprises).
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Duty To Establish, Maintain, and Enforce an AML/CFT Program in the
United States
32. Please address if and how the proposed rule would require
changes to financial institutions' AML/CFT operations outside the
United States. Some financial institutions have AML/CFT staff and
operations located outside of the United States for a number of
reasons. These reasons can range from cost efficiency considerations to
enterprise-wide compliance purposes, particularly for financial
institutions with cross-border activities. Please provide the reasons
financial institutions have AML/CFT staff and operations located
outside of the United States. Please address how financial institutions
ensure AML/CFT staff and operations located outside of the United
States fulfill and comply with the BSA, including the requirements of
31 U.S.C. 5318(h)(5), and implementing regulations?
33. The requirements of 31 U.S.C. 5318(h)(5) (as added by section
6101(b)(2)(C) of the AML Act) state that the ``duty to establish,
maintain and enforce'' the financial institution's AML/CFT program
``shall remain the responsibility of, and be performed by, persons in
the United States who are accessible to, and subject to oversight and
supervision by, the Secretary of the Treasury and the appropriate
Federal functional regulator.'' Is including this statutory language in
the rule, as proposed, sufficient or is it necessary to otherwise
clarify its meaning further in the rule?
34. Please comment on the following scenarios related to persons
located outside the United States who perform actions related to an
AML/CFT program:
a. Do these persons who perform duties that are only, or largely,
ministerial, and do not involve the exercise of significant discretion
or judgment subject to statutory
[[Page 55449]]
requirements related to the duty of establishing, maintaining, and
enforcing financial institutions' AML/CFT programs? What types of
functions, ministerial or otherwise, may not be subject to these
statutory requirements?
b. Do these persons have a responsibility for an AML/CFT program
and perform the duty for establishing, maintaining, and enforcing a
financial institution's AML/CFT program? Please comment on whether
``establish, maintain, and enforce'' would also include quality
assurance functions, independent testing obligations, or similar
functions conducted by other parties.
35. How would financial institutions expect the requirements in 31
U.S.C. 5318(h)(5) to affect their AML/CFT operations that may be
currently based wholly or partially outside of the United States, such
as customer due diligence or suspicious activity monitoring and
reporting systems and programs?
36. Please comment on implementation of the requirements in 31
U.S.C. 5318(h)(5) for ``persons in the United States''?
a. What AML/CFT duties could appropriately be conducted by persons
outside of the United States while remaining consistent with the
requirements in 31 U.S.C. 5318(h)(5)? Should all persons involved in
AML/CFT compliance for a financial institution be required to be in the
United States, or should the requirement only apply to persons with
certain responsibilities performing certain functions? If the
requirement should only apply to persons with certain responsibilities
performing certain functions, please explain which responsibilities and
functions these should be.
b. Should ``persons in the United States'' as established in 31
U.S.C. 5318(h)(5) be interpreted to apply when such persons are
performing their relevant duties while physically present in the United
States, that they are employed by a U.S. financial institution, or
something else?
c. How would a financial institution demonstrate ``persons in the
United States,'' as established in 31 U.S.C. 5318(h)(5), are accessible
to, and subject to oversight and supervision by, the Secretary and the
appropriate Federal functional regulator?
37. Please comment on if and how the requirements in the proposed
rule and 31 U.S.C. 5318(h)(5) should apply to foreign agents of a
financial institution, contractors, or to third-party service
providers. Should the same requirements apply regardless of whether
persons are direct employees of the financial institution?
Innovative Approaches
38. The proposed rule provides for the consideration of innovative
approaches to help financial institutions more effectively comply with
the BSA, but does not require that institutions use such approaches.
Should alternative methods for encouraging innovation be considered in
lieu of a regulatory provision?
39. Under the proposed rule, a financial institution's internal
policies, procedures, and controls may provide for ``consideration,
evaluation, and, as warranted by the [financial institution's] risk
profile and AML/CFT program, implementation of innovative approaches to
meet compliance obligations[.]'' Please comment on the following issues
related to this provision.
a. Is this provision sufficiently clear on what financial
institutions can consider, evaluate, and implement with respect to
innovative approaches, while also meeting their compliance obligations?
b. Does this provision provide sufficient regulatory flexibility
for financial institutions to implement innovative approaches if
appropriate?
c. Are there aspects of the proposed rule that may be considered
barriers to innovation or that would add regulatory burden?
d. Please describe what innovative approaches and technology
financial institutions currently use, or are considering using,
including but not limited to artificial intelligence and machine
learning, for their AML/CFT programs. What benefits do financial
institutions currently realize, or anticipate, from these innovative
approaches and how do they evaluate their benefits versus associated
costs?
40. Are there specific further considerations that FinCEN should
take into account in the proposed rule related to how financial
institutions may use technology and innovation to increase the
effectiveness, risk-based nature, and reasonable design of AML/CFT
programs?
Board Approval and Oversight
41. Is the proposed rule's requirement for board (or equivalent
governing body) approval and oversight of AML/CFT programs consistent
with current industry practice? Does the requirement for the AML/CFT
program to be approved and overseen by an appropriate governing board
need additional clarification?
42. Should the proposed rule specify the frequency with which the
board of directors or an equivalent governing body must review and
approve and oversee the AML/CFT program? If so, what factors are
relevant to determining the frequency with which a board of directors
should review and approve the AML/CFT program?
43. How does a financial institution's board of directors, or
equivalent governing body, currently determine what resources are
necessary for the financial institution to implement and maintain an
effective, risk-based and reasonably designed AML/CFT program?
Technical Updates
44. FinCEN is proposing changes to the program rules of various
financial institution types for the purposes of clarity and
consistency. FinCEN generally views these changes as technical updates,
and not substantive. FinCEN invites comments on any of the proposed
changes to the program rules. In particular, FinCEN welcomes comments
with respect to the following:
a. FinCEN is considering updates to the rules for casinos and card
clubs and MSBs related to automated data processing systems. These
updates are intended to harmonize program rules with other types of
financial institutions. FinCEN is not removing any BSA requirements
applicable to casinos and card clubs and MSBs.
b. FinCEN is considering updates to the rules of financial
institutions that cross-reference another regulatory agency's
requirements and authorities (e.g., banks, broker-dealers, mutual
funds, and futures commission merchants and introducing brokers in
commodities). These updates are intended to harmonize program rules
with other types of financial institutions.
Implementation
45. Is the proposed effective date of six months from the date of
the issuance of the final rule appropriate? If not, how long should
financial institutions have from the date of issuance of the final
rule, and why?
VII. Regulatory Impact Analysis
FinCEN has analyzed the proposed rule as required under Executive
Orders 12866, 13563, and 14094 (E.O. 12866 and its amendments), the
Regulatory Flexibility Act (RFA),\143\ the Unfunded Mandates Reform Act
of 1995 (UMRA),\144\ and the Paperwork
[[Page 55450]]
Reduction Act (PRA).\145\ This proposed rule has been determined to be
a ``significant regulatory action'' under Section 3(f)(1) of E.O. 12866
and its amendments, as it is expected to have an annual effect on the
economy of $200 million or more. Pursuant to the RFA, FinCEN has
included an Initial Regulatory Flexibility Analysis (IRFA) under the
expectation that the proposed rule may have a significant impact on a
substantial number of certain types of affected small entities.\146\
Furthermore, pursuant to the UMRA, FinCEN anticipates that the proposed
rule, if implemented, would result in an expenditure of more than $183
million annually by State, local, and Tribal governments or by the
private sector.\147\
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\143\ 5 U.S.C. 601 et seq.
\144\ 2 U.S.C. 1532(a).
\145\ 44 U.S.C. 3506(c)(2)(A).
\146\ This economic expectation is sensitive to certain key
assumptions about how covered financial institutions would respond
to the proposed requirements. FinCEN is requesting public comment
regarding if it would instead be more reasonable to certify that the
proposed rule would not have a significant economic impact on a
substantial number of small entities. See infra section VII.F.
\147\ The UMRA requires an assessment of mandates with an annual
expenditure of $100 million or more, adjusted for inflation. 2
U.S.C. 1532(a). FinCEN has not anticipated material changes in
expenditures for State, local, and Tribal governments, insofar as
they would not participate in the primary activities of monitoring
or enforcing compliance of the newly proposed requirements in a way
that differs from current involvement, thereby incurring novel
incremental costs. But because the proposed rule would affect
entities in the private sector that are covered financial
institutions, FinCEN has considered expenditures these private
entities may incur, pursuant to the UMRA, as part of the regulatory
impact in its assessment below.
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As described above, the proposed rule would require financial
institutions to establish, implement, and maintain effective, risk-
based, and reasonably designed AML/CFT programs with certain minimum
components, including a mandatory risk assessment process and board
oversight.\148\ The proposed rule also would require financial
institutions to review AML/CFT priorities and incorporate them, as
appropriate, into risk-based programs. The proposed rule would also
establish a new statement describing the purpose of the AML/CFT program
requirement.\149\ In so doing, FinCEN contemplates a number of benefits
for covered financial institutions, law enforcement, and the general
public that would flow from a better harmonized standard of program
requirements, more clearly aligned with national priorities, that
better empowers effective deployment of resources to necessary AML/CFT
efforts and activities.
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\148\ See generally supra section IV.D; see specifically
discussion of risk assessment processes supra section IV.D.1; see
also discussion of board oversight requirements supra section
IV.D.6.b.
\149\ See supra section III.
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The following regulatory impact analysis (RIA) first describes the
broad economic analysis FinCEN undertook to inform its expectations of
the proposed rule's impact and burden.\150\ This is followed by certain
pieces of additional and, in some cases, more specifically tailored
analysis as required by E.O. 12866 and its amendments,\151\ the
RFA,\152\ the UMRA,\153\ and the PRA,\154\ respectively. Requests for
comment related to the RIA--regarding specific findings, assumptions,
or expectations, or with respect to the analysis in its entirety--can
be found in the final subsection \155\ and have been previewed and
cross-referenced throughout the RIA.
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\150\ See infra section VII.A.
\151\ See infra section VII.B.
\152\ See infra section VII.C.
\153\ See infra section VII.D.
\154\ See infra section VII.E.
\155\ See infra section VII.F.
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A. Assessment of Impact
Consistent with certain identified best practices in regulatory
economic analysis, the assessment of impact conducted in this section
begins with an overview of some broad economic considerations,\156\
identifying, among other things, the need for the policy
intervention.\157\ Next, the analysis turns to details of the current
regulatory requirements and background practices against which the
proposed rule would introduce changes, establishes baseline estimates
of the number of covered financial institutions, and identifies certain
other groups of entities that FinCEN expects could be affected in a
given year.\158\ The analysis then briefly reviews the content of the
proposed rules with a focus on the specifically relevant elements of
the proposed definitions and requirements that most directly inform how
FinCEN contemplates compliance with the proposed requirements would be
operationalized.\159\ Next, the analysis proceeds to outline the
estimated costs to the respective affected parties that would be
associated with such operationalization as well as the anticipated
attendant benefits.\160\ Finally, the assessment concludes with a brief
discussion of select alternative policies FinCEN considered and could
have proposed, including an evaluation of the relative economic merits
of each against the expected value of the rule as proposed.\161\
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\156\ See infra section VII.A.1.
\157\ See E.O. 12866, Regulatory Planning and Review, 58 FR
51736 (Oct. 4, 1993), sec. 1(b)(1) (``Each agency shall identify the
problem that it intends to address (including, where applicable, the
failures of private markets or public institutions that warrant new
agency action) as well as assess the significance of that
problem.''); see also OMB Circular A-4 (2023), ``Section 5.
Identifying the Potential Needs for Federal Regulatory Action.''
\158\ See infra section VII.A.2.
\159\ See infra section VII.A.3.
\160\ See infra section VII.A.4.
\161\ See infra section VII.A.5.
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1. Broad Economic Considerations
In performing its assessment of impact, FinCEN took into
consideration certain fundamental economic problems that the proposed
rule is expected to address \162\ as well as the general social and
economic costs that may ensue from an AML/CFT regime that is
ineffective.\163\
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\162\ This analysis has been undertaken in compliance with the
requirements of E.O. 12866 and its amendments. As discussed in OMB
Circular A-4, section 5, ``if an agency identifies that a regulation
is necessary to implement or interpret a statute, that does not end
the inquiry. Instead, analysts should conduct reasonable inquiries
to identify any relevant potential needs for regulatory action--such
as correcting a market failure--because doing so may inform the
analysis of important categories of benefits and costs.''
\163\ The extent to which these broad economic considerations
apply uniformly to the various components of the proposed rule may
in some instances be limited. FinCEN's analysis is not intended to
speak to (or in place of) the views of Congress regarding the
fundamental economic problems that animate the proposed rule but are
expected to be generally consistent with what AML Act section
6101(b), as promulgated, was intended to accomplish. The discussion
in this section pertains primarily to the components of the rule
that are being proposed at FinCEN's discretion.
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As recent economic analysis in other FinCEN rulemaking has already
highlighted, illicit finance activity risks can impose profound
societal and economic costs.\164\ While the costs borne by society due
to illicit finance activity risks are generally incalculable, ``[in
2023] an estimated $3.1 trillion in illicit funds flowed through the
global financial system.'' \165\ To combat these risks, financial
institutions are required, among other measures, to establish AML/CFT
programs and comply with the BSA and FinCEN's implementing regulations.
Effective AML/CFT programs ``safeguard national security and generate
significant public benefits by preventing the flow of illicit funds in
the financial system and by assisting law enforcement and national
security
[[Page 55451]]
agencies with the identification and prosecution of persons attempting
to launder money and undertake other illicit activity through the
financial system.'' \166\ Consequently, impediments to the
effectiveness of AML/CFT programs reduce the public benefits these
programs can provide and can facilitate criminal activities that
threaten public safety and economic well-being.
---------------------------------------------------------------------------
\164\ See, e.g., Notice of Proposed Rulemaking, Anti-Money
Laundering Regulations for Residential Real Estate, 89 FR 12424,
12444 (Feb. 16, 2024) (discussing the social costs of crimes that
can be facilitated by money laundering), available at https://www.federalregister.gov/documents/2024/02/16/2024-02565/anti-money-laundering-regulations-for-residential-real-estate-transfers; see
also U.S. Department of Justice, Bureau of Justice Statistics,
``Costs of Crime,'' available at https://bjs.ojp.gov/costs-crime.
\165\ Nasdaq, 2024 Global Financial Crime Report, available at
https://www.nasdaq.com/global-financial-crime-report.
\166\ 31 U.S.C. 5318(h)(2)(B)(iii).
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FinCEN considered, and--in part--has proposed this rulemaking to
help alleviate, certain underlying economic problems that can impede
the effectiveness of AML/CFT programs.\167\ These include potential
problems that flow from the presence of certain information asymmetries
and certain reporting-related externalities. The expected benefits of
the proposed rule, as discussed below,\168\ are therefore linked by the
extent to which the new and amended program requirements would address
these fundamental economic problems because doing so would enhance AML/
CFT program effectiveness and thereby ``strengthen, modernize and
improve'' the U.S. AML/CFT regime.\169\
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\167\ See OMB Circular A-4 (2023), citing Richard E. Just,
Darrell L. Hueth, & Andrew Schmitz, ``The Welfare Analysis of Public
Policy: A Practical Approach to Project and Policy Evaluation''
(2004) (``Modeling underlying market, institutional, or behavioral
distortions is a standard starting point for conducting benefit-cost
analysis of a regulatory action or other government
intervention.'').
\168\ See infra section VII.A.4.a.
\169\ See supra note 13.
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First, certain impediments to an effective AML/CFT program can
arise as a consequence of information asymmetries.\170\ As part of its
broader efforts to prevent or mitigate the flow of illicit finance
through the U.S. financial system, Congress established the BSA to
counter these risks through a combination of public and private sector
measures. For the private sector, those measures take the form of
program, reporting, recordkeeping, and in some cases, registration
requirements. Private sector entities are thus enlisted to perform
certain tasks to further the objectives of the BSA in the course of
their ordinary business operations. As FinCEN and other financial
regulators generally do not observe, monitor, or participate in these
day-to-day ordinary business operations, the precise amount of effort
or the full scope of activities a private business undertakes that
supports the work of U.S. national security, intelligence, and law
enforcement against illicit finance activity may not be directly
observable, fully measurable, or verifiable, though the scope may be
correlated with certain observable activities that can be quantified or
otherwise measured. However, when the identification of illicit
behavior is in some way stochastic or dependent on the joint
probability of commission and detection, the observable indicia of a
covered financial institution's full scope of efforts cannot fully
represent those efforts.\171\ This wedge between effort and
observability can distort the incentives covered financial institutions
face because it can create a gap between what makes a program more
economically efficient and what makes it more effective in furtherance
of the BSA objectives and other national priorities.
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\170\ In economic terms, these may take the form of hidden
action problems, hidden information problems, or a combination of
the two, but all cases have the potential to limit the effectiveness
of a covered financial institution's program efforts because of the
disincentives or the non-remunerated costs the information asymmetry
imposes on either party to the transaction. For a general
introduction, see, e.g., Andreu Mas-Colell, Michael D. Whinston, &
Jerry R. Green, ``Microeconomic Theory'' (1995), ch. 14; for a more
detailed review, see Patrick Bolton & Mathias Dewatripont,
``Contract Theory'' (2005).
\171\ An alternative model-framework that is similarly
applicable in the setting and can yield comparable results treats
effort as multidimensional. See, e.g., Holmstrom, B. and P. Milgrom,
``Multi-task Principal Agent Analyses: Incentive Contracts, Asset
Ownership, and Job Design.'' Journal of Law, Economics, and
Organizations (1991).
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Second, private sector measures create externalities, both positive
and negative; and because both certain benefits and certain costs of
AML/CFT program activities are not internalized by the covered
financial institution, this can also distort the incentives it faces
and the program activities in undertakes. With the AML Act, Congress
recognized ``[f]inancial institutions are spending private compliance
funds for a public and private benefit, including protecting the United
States financial system from illicit finance risks.'' \172\ In stating
this, Congress highlights certain positive externalities for which a
covered financial institution is not fully compensated. Economic theory
would suggest that this inability to reap the full benefits of its
efforts can disincentivize such a covered financial institution from
undertaking the socially optimal level of program activities.
Exacerbating this phenomenon is the concurrent reality that, by
participating in the U.S. financial system, the same covered financial
institution also benefits from the public good quality of the AML/CFT
program activities undertaken by other covered financial institutions,
which can also have disincentivizing effect. Therefore, the positive
externalities generated by AML/CFT program activities may doubly
distort a covered financial institution's incentives away from
effective, socially optimal levels (i.e., levels that appropriately
support BSA objectives and adequately promote national security)
because: (1) the institution is not fully compensated for the benefits
that its program creates, and (2) the institution is able to benefit
from the program activities undertaken by other institutions.
---------------------------------------------------------------------------
\172\ 31 U.S.C. 5318(h)(2)(B)(i).
---------------------------------------------------------------------------
At the same time that the presence of positive externalities may
under-incentivize effective AML/CFT program activity, other problems
can flow from certain negative externalities. FinCEN notes that while
the production of effective deterrence and timely, useful information
for law enforcement or national security purposes creates a public
good, the converse is also true. Deterrence of legitimate economic
activities and the production of information that is not useful, while
it may be of no perceived value, is not cost-free. While FinCEN
acknowledges that covered institutions often bear the direct costs of
these limited-value activities, such institutions are generally not
forced to internalize the broader social costs including: the dilutive
effects to reported information,\173\ which can increase search costs
to law enforcement and national security agencies; the costs to the
U.S. government and the public of processing and storing records of
private financial transactions that are of limited actionable value;
and forgone or deterred economic activity that would not have been
counter to BSA objectives, including select de-risking activities and
the systematic underservice of certain groups by the financial services
industry. Because the full scope of these costs is not internalized,
this can distort the incentives of covered financial institutions
towards the overproduction of reports and investment in activities that
detract from the overall effectiveness of the AML/CFT regime.
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\173\ See El[ouml]d Tak[aacute]ts, ``A Theory of `Crying Wolf':
The Economics of Money Laundering Enforcement,'' Journal of Law,
Economics, & Organization (2011), pp. 32-78, available at http://www.jstor.org/stable/41261712 (finding ``excessive reporting, called
`crying wolf', can dilute the information value of reports and how
more reports can mean less information.'').
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The intention of the proposed program rule is to mitigate the
potential for these kinds of distortions of covered financial
institutions' incentives, whether from information asymmetries or
externalities, to limit the
[[Page 55452]]
effectiveness of their AML/CFT programs individually and consequently
the national AMF/CFT regime. Additionally, FinCEN anticipates the
proposed rule, by emphasizing the risk-based and reasonably designed
criteria of an AML/CFT program, may enhance resource allocation by
improving the alignment between program requirements and the elements
of a covered financial institution's compliance burden that are
unobservable. Such gains are considered a source from which the
anticipated economic benefits of the proposed rule may flow in
preventing money laundering and financing of terrorism with
improvements to detecting, preventing, and identifying illicit
financial activity.
2. Institutional Baseline and Affected Parties
In proposing this rule, FinCEN considered the incremental impacts
of the proposed requirements relative to the current state of the
affected markets and their participants.\174\ This baseline analysis of
the parties that would be affected by the proposed rule, their current
obligations, and current program compliance activities satisfies
certain analytical best practices by detailing the implied alternative
of not pursuing the proposed, or any other, novel regulatory
action.\175\ In each case, for amended and new requirements, the RIA
has attempted to identify the discrete incremental expected economic
effects of each component of the proposal as precisely as practicable
against this baseline; nevertheless, in certain cases only a
qualitative assessment can be made.
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\174\ This baseline also forms the counterfactual against which
the quantifiable effects of the rule are measured; therefore,
substantive errors in or omissions of relevant data, facts, or other
information may affect the conclusions formed regarding the general
and/or economically significant impacts of the rule.
\175\ See E.O. 12866, section 1(a) (``In deciding whether and
how to regulate, agencies should assess all costs and benefits of
available regulatory alternatives, including the alternative of not
regulating.'').
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As a first step in the process of isolating these anticipated
marginal effects, FinCEN undertook an assessment of the current
landscape of the covered financial institutions that would be affected
by the proposed rule, including their current regulatory requirements,
the current population and relevant sub-population sizes of the various
types of covered financial institutions, and certain relevant economic
features of their current compliance activities. Certain other
categories of persons and entities that FinCEN expects to be affected
by the proposed rule are also enumerated and briefly discussed. FinCEN
acknowledges that the discussion below does not include an assessment
of the baseline level of general compliance with existing program
requirements and must therefore caveat that the incremental effects
estimated in subsequent sections below \176\ are based on the
presumption of full compliance with the current rules. No attempt is
made to estimate a baseline population of currently non-compliant
entities that FinCEN qualitatively might expect to be differently
affected by the rule because it is unclear that the proposed rule
would, independently, alter the compliance choices already made by
those covered financial institutions.
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\176\ See infra section VII.A.4.b; see also infra sections VII.C
and VII.E.
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a. Regulatory Baseline
FinCEN began its baseline analysis by taking into account the
salient features and variation in the existing framework of regulatory
requirements for the covered financial institutions that would be
affected by the proposed program rule, including the existence of
concurrent statutory requirements, regulatory requirements at the
State-level, or the presence of other regulatory regimes with which a
covered financial institution must concurrently comply. In particular,
the analysis takes into account the current program rule requirements
that the proposed rulemaking would amend and to which it would add new
requirements as well as the broader framework of AML/CFT compliance
requirements that each type of covered financial institutions' program
is meant to guide and ensure are met.\177\
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\177\ See supra section IV.D for a description of current
program requirements, and the proposed amendments.
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Tables 1 and 2 below provide a brief overview of certain features
of the current program requirements that various components of the
proposed rule would further harmonize and illustrate the extent to
which elements of the proposal do (or do not) mark a departure from
current, baseline requirements.
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b. Baseline of Affected Parties
FinCEN has identified the following populations as the primary
populations the proposed rule is expected to affect directly.\178\
These are: (1) covered financial institutions; (2) regulators and other
compliance examiners; and (3) law enforcement and national security
agencies.
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\178\ Effects on the general public, while important and
potentially substantial, are expected to be indirect.
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i. Covered Financial Institutions
The parties expected to comply with the proposed new requirements
and amendments to existing requirements include all covered financial
institutions as defined in 31 CFR 1010.100(t) and with existing program
obligations prescribed in 31 CFR chapter X, parts 1020 through 1030,
[[Page 55456]]
including banks; casinos; MSBs; broker-dealers; mutual funds; insurance
companies; futures commission merchants and introducing brokers in
commodities; dealers in precious metals, precious stones, or jewels;
operators of credit card systems; loan or finance companies; and
housing government sponsored enterprises.\179\
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\179\ See supra note 1; see also supra section I.
\180\ 31 CFR 1010.100(t).
\181\ 13 CFR 121.201; see generally infra section VII.C.
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Table 3 (below) reports FinCEN's most recent annual estimates of
the total number of entities that meet the respective regulatory
definitions of covered financial institutions.\180\ Based on these
estimates, FinCEN expects that the proposed rule would affect
approximately 298,000 total financial institutions, of which
approximately 291,000 would qualify as small financial institutions for
IRFA purposes.\181\
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ii. Regulators and Other Compliance Examiners
Because AML Act section 6101(b) requires that the incorporation of
the AML/CFT Priorities, as appropriate, into risk-based AML/CFT
programs must be included as a measure on which financial institutions
are supervised and examined for compliance with those obligations,\182\
the proposed rule is expected to directly affect FinCEN as well as
other Federal financial regulators and other compliance examiners,\183\
including approximately 8,000 to 10,000 Federal examiners.\184\ FinCEN
additionally anticipates being uniquely affected as the agency to which
certain AML/CFT program-related reports are submitted and as the entity
that then coordinates how that information may in turn support law
enforcement and national security efforts.\185\
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\182\ See supra section II.B.
\183\ See supra section III.B.
\184\ These figures represent an approximate number of Federal
examiners provided by Federal functional regulators with AML/CFT
supervisory responsibilities. These estimates do not include persons
performing examinations on behalf of SROs, though FinCEN expects
that such parties may also be affected.
\185\ See supra section III.B (discussion of additional FinCEN
activities).
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iii. Law Enforcement and National Security Agencies
The proposed rule is intended to support the efforts of law
enforcement and the national security agencies by promoting AML/CFT
program design and implementation that is responsive and better
tailored to these entities' evolving needs.\186\ FinCEN estimates that
approximately 14,000 users currently directly access and make use of
reports and other data provided to FinCEN in compliance with AML/CFT
program requirements and other applicable BSA requirements.\187\
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\186\ See supra section III.B.
\187\ Statement of FinCEN Director Andrea Gacki before the House
Committee on Financial Services (Feb. 14, 2024), available at
https://www.fincen.gov/news/testimony/statement-fincen-director-andrea-gacki-house-committee-financial-services.
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c. Current Market Practices
FinCEN took certain data and features of the covered financial
institutions' current practices into consideration when estimating the
expected incremental impact of the proposed rule. Among these features
were the presence of third-party services, industry-specific
associations, or other organizations that currently facilitate
compliance with BSA/AML requirements as well as information about the
costs of currently operating AML/CFT programs.
General public commentary has at times suggested that maintaining
an AML/CFT program under current practice is considered costly or
burdensome by covered financial institutions and, in some cases, of
perceived limited value.\188\ However, a paucity of publicly available
data exists that would facilitate forming an estimate of the aggregate
burden--to the U.S. economy, generally, or to the unique industry
groups to which the proposed rules would apply, specifically--of
program compliance as it has been understood and operationalized to
date. Absent more reliable comprehensive baseline data, it will not be
feasible for FinCEN to estimate (with any meaningful degree of
certainty) or assess either the substitutability of activities or the
potential for aggregate cost savings covered institutions might benefit
from in complying with the proposed rule.\189\ Despite this and other
limits to generalization, FinCEN determined it would still be valuable
to incorporate existing baseline market data, including certain
publicly available estimates \190\ of the costs of compliance with the
current program rules, as a benchmark against which the proposed new
and amended requirements might be assessed, including estimates FinCEN
has previously published to provide notice and to solicit public
comment.\191\
---------------------------------------------------------------------------
\188\ See Comments to Advance Notice of Proposed Rulemaking,
Anti-Money Laundering Program Effectiveness, 85 FR 58034 (Sept. 17,
2020), available at https://www.regulations.gov/docket/FINCEN-2020-0011/comments. See also Comments to Request for Information, Review
of Bank Secrecy Act Regulations and Guidance, 86 FR 71201 (Dec. 15,
2021), available at https://www.regulations.gov/docket/FINCEN-2021-0008/comments.
\189\ Nevertheless, for the reasons articulated below, such
benefits are anticipated to be strictly non-zero, positive for some
groups of covered financial institutions (See infra section
VII.A.4.a).
\190\ See FDIC Supporting Statement to OMB Control No. 3064-
0087: Procedures for Monitoring Bank Secrecy Act Compliance (July
17, 2023), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202304-3064-005; FRB Supporting Statement to
OMB Control No. 7100-0310: Recordkeeping Requirements of Regulation
H and Regulation K Associated with the Procedures for Monitoring
Bank Secrecy Act Compliance (May 17, 2022), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202205-7100-004;
OCC Supporting Statement to OMB Control No. 1557-0180: Minimum
Security Devices and Procedures, Reports of Suspicious Activities,
and Bank Secrecy Act Compliance Program--12 CFR parts 21 and 163
(Mar. 14, 2022), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202203-1557-002; NCUA Supporting Statement
to OMB Control No. 3133-0108: Monitoring Bank Secrecy Act Compliance
(Sept. 12, 2023), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202308-3133-009.
\191\ See FinCEN Supporting Statement to OMB Control No. 1506-
0035: Anti-Money Laundering Programs for Insurance Companies, Non-
Bank Residential Mortgage Lenders and Originators, and Banks Lacking
a Federal Functional Regulator (Oct. 29, 2020), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202010-1506-011;
FinCEN Supporting Statement to OMB Control No. 1506-0020: Anti-Money
Laundering programs for money services business, mutual funds,
operators of credit card systems, and providers of prepaid access
(Oct. 29, 2020), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202010-1506-009; FinCEN Supporting Statement
to OMB Control No. 1506-0051: AML Program Requirements for Casinos
(Feb. 24, 2021), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202102-1506-004; FinCEN Supporting Statement
to OMB Control No. 1506-0030: Anti-Money Laundering Programs for
Dealers in Precious Metals, Precious Stones, or Jewels (Oct. 29,
2020), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202010-1506-010.
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[[Page 55459]]
Tables 4 and 5 (below) summarize certain features of the current
market practices associated with BSA compliance as reported by the
Federal agencies that regulate banks and credit unions, which comprise
one of the eleven types of covered financial institutions to which the
proposed rule would apply.
[GRAPHIC] [TIFF OMITTED] TP03JY24.090
As table 4 illustrates, there can be considerable variation in how
AML/CFT program compliance, as a component of broader BSA compliance,
is contemplated to be operationalized. This includes variations in the
types of work/labor that are expected to be involved in current
(baseline) program activities, the wages at which that labor can be
obtained, and the total burden of time needed to meet current
obligations. Table 5 further demonstrates that within a category of
covered financial institution, by type, the burden of compliance can
also vary substantially with the size and complexity of the covered
institution. Both table 4 and table 5 also highlight certain variation
across Federal agencies in how the work of compliance is conceptualized
in terms of discrete components, and thus why they might reasonably
differ in expectations about the economic impact of the same proposed
requirements.
[[Page 55460]]
Table 6 summarizes the baseline of how FinCEN has historically
conceptualized the discrete components of program compliance for
different types of covered financial institutions and present its
associated estimates of burden. Applying the composite wage used
elsewhere in this analysis,\192\ the estimated aggregate annual burden
of compliance with baseline requirements for these covered financial
institutions would be approximately $33.8 million annually. FinCEN
notes that because its own previously published expected burden and
time costs may, in many cases, appear low, the anticipated change in
burden associated with the time needed to perform the proposed new
compliance activities might seem relatively large. This magnitude of
change, in FinCEN's views, reflects less that the proposed rules'
requirements are expected to in fact introduce such a comparatively
large increase in the burden of compliance and more that, despite the
relative absence of public feedback asserting that current (previously
published) burden estimates may be inadequate or providing
substantiating data that is broadly generalizable, certain recent
assessments of PRA-related burden may significantly underrepresent the
full costs of complying with the current program rules.\193\ In part,
this may be the result of historical differences in interpretation of
what ``recordkeeping'' and ``reporting'' are, for accounting purposes,
intended to encompass. FinCEN notes that it has been iteratively
updating its burden estimates as better and more data becomes
incorporated into improved estimation methods subject to feedback via
the public notice and comment process. For example, in FinCEN's recent
proposal to apply program and SAR requirements to certain investment
advisers,\194\ FinCEN estimated costs between $17,000 and $25,000 to
maintain an AML/CFT program conforming to current requirements in the
years following initial start-up. If those burden estimates were
generalizable to all existing covered financial institutions with
program requirements, the annual program burden would be between $5.1
and $7.5 billion.
---------------------------------------------------------------------------
\192\ See infra section VII.E.3 for a discussion of composite
wage estimation.
\193\ See supra note 191.
\194\ See supra note 2.
\195\ See supra notes 190 and 191.
---------------------------------------------------------------------------
BILLING CODE 4810-02-P
[[Page 55461]]
[GRAPHIC] [TIFF OMITTED] TP03JY24.091
[[Page 55462]]
[GRAPHIC] [TIFF OMITTED] TP03JY24.092
As highlighted in the regulatory baseline in Section VII.A.2.a
(table 2), certain types of covered financial institutions are already
required to obtain approval from their board or senior management. For
these entities,
[[Page 55463]]
therefore, the incremental burden of the proposed requirement for board
oversight of the AML/CFT program may be somewhat smaller than for
financial institutions that do not currently have a formal requirement.
As previously discussed, limited data is publicly available to estimate
the baseline burden associated with board approval requirements for
covered financial institutions or properly assess any potential
substitutability of that activity with the proposed requirement for
board oversight. However, table 7 presents some estimates of this
monetized burden that have been previously published and subject to
public notice and comment. Imputing an average per financial
institution cost of obtaining board approval from these estimates and
applying that to the remaining covered financial institutions for which
data is not available suggests the baseline board approval burden would
be approximately $4 million annually across all covered financial
institutions with a current regulatory requirement, of which
$398,777.61 is based on published and publicly reviewed data.
[GRAPHIC] [TIFF OMITTED] TP03JY24.093
BILLING CODE 4810-02-C
3. Description of Proposed Requirements
For purposes of the RIA, FinCEN considered the various components
of the proposed rule--including its proposed amendments to existing
rules and proposed new requirements--with a view towards the specific
features or elements that are expected to generate, either directly or
indirectly, an economic benefit or cost, or lead to changes in market
participant incentives in a way that may generate either economic
benefits or costs.\196\ Additionally, for components of the proposed
rule that FinCEN analysis has not assigned a quantified burden (in
[[Page 55464]]
hours or dollar-value), the reason for doing so is briefly described
below.
---------------------------------------------------------------------------
\196\ See infra section VII.A.4.
---------------------------------------------------------------------------
a. New or Amended Language and Definitions
As discussed in further detail in section IV.B, FinCEN is proposing
certain changes to the program rules. One category of amendments
provided by the proposed rule is the introduction of a purpose
statement at 31 CFR 1010.210(a) and certain definitional revisions.
These changes are proposed with a view to improve the consistency and
alignment of the program rules across the categories of covered
financial institutions.
First, FinCEN is proposing to include a purpose statement at 31 CFR
1010.210(a) that would articulate the overarching goals and objectives
of an AML/CFT program.\197\ While the proposed purpose statement would
not introduce new requirements, the statement articulates FinCEN's
views of the goals of an AML/CFT program against which a program's
effectiveness and reasonableness of design could be assessed. FinCEN
has not assigned a quantified cost to this component of the proposed
rule in the following burden analysis but is soliciting public comment
about its potential burden.\198\
---------------------------------------------------------------------------
\197\ See supra section IV.A.
\198\ See supra section VI.
---------------------------------------------------------------------------
Second, FinCEN is proposing to replace the existing terms in 31 CFR
chapter X such as ``anti-money laundering program'' and ``compliance
program'' with the newly defined term ``AML/CFT program,'' which would
standardize the incorporation of the phrase ``countering the financing
of terrorism'' into the stated objectives of a program's effective,
risk-based, and reasonable design.\199\ This amendment to existing
language would newly insert CFT-language into the program requirements
for only two of the eleven types of covered financial institutions--
banks and broker-dealers in securities. As discussed in section IV.B,
the existing requirements in 31 CFR chapter X already include CFT-
language for the majority of existing program rules \200\ as the USA
PATRIOT Act required financial institutions to account for risks
related to terrorist financing. Accordingly, FinCEN expects that any
changes to existing AML/CFT programs from these amendments described in
this subsection are likely to be more technical than substantive in
nature.
---------------------------------------------------------------------------
\199\ See supra section IV.B.
\200\ The current program rules with CFT-language are located at
31 CFR 1021.210(b)(2)(ii) (casinos); 31 CFR 1022.210(a) (MSBs); 31
CFR 1024.210(a) (mutual funds); 31 CFR 1025.210(a) (insurance
companies); 31 CFR 1026.210(b)(1) (futures commission merchants and
introducing brokers in commodities); 31 CFR 1027.210(a)(1) (dealers
in precious metals, precious stones, or jewels); 31 CFR 1028.210(a)
(operators of credit card systems); 31 CFR 1029.210(a) (loan or
finance companies); and 31 CFR 1030.210(a) (housing government
sponsored enterprises).
---------------------------------------------------------------------------
Third, FinCEN also proposes to define ``AML/CFT Priorities'' such
that when the term is used throughout 31 CFR chapter X (the proposed
rule would concurrently be standardizing the language and order of
program requirements across the eleven types of covered financial
institutions' respective program sections), it is clear that only the
most recently published version \201\ of the AML/CFT Priorities is
being referenced. The extent to which defining the priorities this way
may have an effect on expected burdens would depend on how path-
dependent programmatic best-practices would otherwise be and the
magnitude of changes in AML/CFT Priorities between one publication and
the next.
---------------------------------------------------------------------------
\201\ See supra note 17.
---------------------------------------------------------------------------
Another component of the proposed rule is a number of technical
amendments that, without introducing or removing requirements, would
make several other non-substantive changes. These changes include the
consolidation of the two bank program rules (one for banks with a
Federal functional regulator and one for banks without) into one
framework; removal of compliance dates from the program rules; \202\
and the removal of certain cross-references to other regulations.
FinCEN expects the costs, if any, associated with these provisions to
be de minimis, and that there would be non-quantifiable benefits to
having clarity and consistency across the program rules.
---------------------------------------------------------------------------
\202\ See supra section IV.D.6.d.iii.
---------------------------------------------------------------------------
b. New or Amended Requirements
As discussed in greater detail in Section IV, the proposed rule
includes, among others, new requirements such as a risk assessment
process that incorporates the AML/CFT Priorities (as newly defined),
which is itself incorporated into the covered financial institution's
AML/CFT program (which would be newly required to be ``effective, risk
based, and reasonably designed''), and board oversight provision that
may result in substantive economic effects.
As discussed in Section IV.D.1, existing regulations already
require insurance companies; dealers in precious metals, precious
stones, or jewels; loan or finance companies; and housing government
sponsored enterprises to perform some type of assessment of ML risks.
FinCEN believes that most of the remaining financial institutions
already have some risk assessment process in place.\203\ However, the
proposed rule would require incorporating the AML/CFT Priorities and
the specific additional factors.\204\ Furthermore, financial
institutions that do not already have a risk assessment process would
need to develop one.\205\
---------------------------------------------------------------------------
\203\ See supra section IV.D.1.a.ii and iii.
\204\ Id.
\205\ Id.
---------------------------------------------------------------------------
Section IV additionally details certain component indicia that a
program is effective, risk-based, and reasonably designed that do not
markedly differ from existing program components and are therefore not
expected to have a substantive economic effect, including the
designation of AML/CFT officers. There are no substantive changes to
these requirements under the proposed rule. Additionally, under the
proposed rule, the policies, procedures, and internal controls must now
reasonably manage and mitigate risks, but existing policies, procedures
and internal controls may already be doing this. FinCEN notes that
training is identified as a fourth important component effective, risk-
based, reasonably designed AML/CFT programs. Under the proposed rule,
no substantive changes are being made to the training requirements.
However, the employee training tools and protocols may need to be
updated to reflect the other changes set forth under this rule. In the
cost estimates below, this component is included in the estimated
burden of program updates. Finally, all financial institutions must
already conduct independent testing, and the proposed rule would not
make substantive changes to this requirement.
The proposed rule establishes a requirement for a financial
institution's board of directors, or an equivalent governing body, to
provide oversight of the AML/CFT program. As discussed above, some
financial institutions may already subject their AML/CFT programs to
board oversight. However, this oversight requirement will represent a
change in requirements for other financial institutions. This new
oversight requirement is expected to have a substantive economic effect
since the proposed rule makes clear that board approval of the AML/CFT
program alone is not sufficient to meet the new oversight requirements,
since a board may approve the AML/CFT program without a reasonable
understanding of a financial institution's risk profile or the measures
[[Page 55465]]
necessary to identify, manage, and mitigate its ML/TF risks on an
ongoing basis. The proposed new oversight requirement contemplates
appropriate and effective oversight measures, such as governance
mechanisms, escalation and reporting lines, to ensure that the board
can properly oversee whether AML/CFT programs are operating in an
effective, risk-based, and reasonably designed manner. Accordingly, a
financial institution may need to implement changes to the frequency
and manner of reporting to the board that are expected to result in
additional costs and burdens.
The proposed rule would also newly incorporate the existing
statutory requirement that a covered financial institution's activities
to establish, maintain, and enforce a financial institution's AML/CFT
program remain the responsibility of, and be performed by, persons in
the United States who are accessible to, and subject to oversight and
supervision by, the Secretary and the appropriate Federal functional
regulator.\206\ While compliance with this newly introduced
requirements could result in non-trivial expenses or logistical burdens
for certain covered financial institutions, such costs may not readily
distinguishable from the costs incurred as result of a concurrent need
to satisfy statutory requirements. As such, FinCEN has not attempted to
quantify the incremental burden uniquely attributable to this component
of the proposed rule throughout the following analyses.
---------------------------------------------------------------------------
\206\ See supra section IV.D.6.c.
---------------------------------------------------------------------------
4. Anticipated Economic Effects
Ideally, a regulatory impact analysis would be able to identify and
monetize, with a high degree of certainty, all of a regulation's
attendant economic effects. This would then allow policymakers to
comparatively evaluate different regulatory options' costs and benefits
and select the option with the greatest net benefits. In practice,
however, financial regulations include both cost and benefit components
that cannot be quantified with any degree of certainty, making simple
cost-benefit comparisons potentially misleading, ``because the
calculation of net benefits in such cases does not provide a full
evaluation of all relevant benefits and costs.'' \207\ In its analysis,
FinCEN has therefore sought to include an evaluation of certain
foreseeable non-quantified economic effects in addition to quantified
costs to more comprehensively assess the potential net benefit of the
proposed rule and select alternatives. Additionally, because program
rules are a minimum standard,\208\ FinCEN preemptively qualifies its
analysis as likely to overstate both the costs and the benefit of the
proposed rule to covered financial institutions that already strive for
best practices or whose programs already meet or surpass the proposed
requirements. However, because the lack of an incremental effect for
these institutions would affect both costs and benefits, it should not,
affect an assessment of the overall balance of net effects as the
differences on both sides should offset each other.
---------------------------------------------------------------------------
\207\ OMB Circular A-4 (2023), at 5.
\208\ See supra section I.
---------------------------------------------------------------------------
a. Benefits \209\
---------------------------------------------------------------------------
\209\ FinCEN recognizes the distinction between benefits that
accrue to a given party as the result of costs incurred by another
(i.e., a transfer; see OMB Circular A-4 (2023), Chapter 9) and
benefits that exceed or are otherwise independent of costs (such as
net benefits) and acknowledges that conflating the two could lead to
an overestimate of the expected economic benefit of the proposed
rule. To clarify this distinction in the following section,
``benefit'' is intended in the transfer sense when used as a verb
and is intended to denote an expected net benefit when used as a
noun.
---------------------------------------------------------------------------
The proposed rule is anticipated to result in certain
nonquantifiable benefits to covered financial institutions, law
enforcement and national security agencies, other Federal agencies, and
the general public. As discussed in Section VII.A.1, these benefits are
expected to flow from the extent to which the new and amended program
requirements are better able to address the fundamental economic
problems that might otherwise limit current AMF/CFT program and regime
effectiveness.
The proposed rule may result in benefits to certain covered
financial institutions individually. In other instances, groups of
covered financial institutions may benefit collectively.
The risk assessment process requirement would require every covered
financial institution to engage in a risk assessment process as well as
to review and evaluate SARs, CTRs, and other relevant information under
the proposed rule. While some financial institutions already engage in
such practices, the proposed rule would require every financial
institution under the BSA to undertake such a process. For the
individual affected covered financial institution, this could better
enable the entity to understand its own illicit finance activity risks
and could help it detect threat patterns or trends that would then be
incorporated into its risk assessment process.
Among other things, the proposed rule would also enable financial
institutions to utilize a holistic approach that would integrate
consideration and calibration of illicit finance activity risks
throughout the AML/CFT program and more broadly the financial
institution, allowing them to not only better understand their risks
but also adjust their focus and attention to shifting risks on a more
dynamic basis. This holistic approach is expected to empower a covered
financial institution to be more responsive to evolving illicit finance
activity risks or equally responsive at lower cost. The proposed
requirement that financial institutions have a board (or equivalent
governing body) oversee the AML/CFT program may also enhance
responsiveness, as certain financial institutions may benefit from the
decisive nature of their board's (or equivalent governing body) or
senior management's direction. Additionally, by explicitly allowing
(but not requiring) financial institutions to use technological
innovation, financial institutions may be better-positioned to incur
benefits from being encouraged to use newer methods to identify and
thwart illicit finance activity risks with a broader view to value of
doing so.\210\
---------------------------------------------------------------------------
\210\ See supra section VII.A.1 for a discussion of current
impediments to technology uptake.
---------------------------------------------------------------------------
The proposed changes in AML/CFT program requirements may also
reduce the distortion in incentives of certain covered financial
institutions that currently benefit disproportionately from the
positive externalities of other institutions by more explicitly
limiting their ability to underinvest in their own efforts. While this
would result in an incremental change in expenditures to the affected
covered financial institutions, both peer institutions and the affected
financial institution may benefit from the change. FinCEN anticipates
that financial institutions would also incur benefits from being better
positioned to identify, deter, and detect illicit financial activity
because financial crime not only impacts the public at large, but can
also disrupt financial institutions directly impacted by financial
crime or used as conduits to facilitate such crimes. Moreover,
financial institutions with ineffective AML/CFT programs are exposed to
the risks of criminal, regulatory, and civil investigations, penalties,
and actions, where restrictions to engage in mergers and acquisitions
may be applied to certain covered financial institutions with
ineffective AML records.\211\ Thus financial institutions with
effective, risk-based, and reasonably designed programs would incur
tangible benefits
[[Page 55466]]
in avoiding litigation costs, investigation costs, and monetary
penalties associated with ineffective AML/CFT programs.
---------------------------------------------------------------------------
\211\ See USA PATRIOT Act, Public Law 107-56, 115 Stat. 318,
section 327 (Oct. 26, 2001).
---------------------------------------------------------------------------
Further, as a result of the collective enhancements to a covered
financial institution's AMF/CFT program, the institution itself, or the
group of financial institutions to which it belongs, may also
experience reputational benefit if they come to be viewed as better
insulated from such disruptions and/or potentially become generally
perceived as more reliable or transparent in their financial services
or activities.
The proposed rule may also benefit U.S. national security,
intelligence, and law enforcement efforts against illicit finance
activity risks, including money laundering and terrorist financing. The
proposed changes that would render AML/CFT programs more risk-based,
including a risk assessment process requirement and ensuring that AML/
CFT programs focus attention and resources in a manner consistent with
financial institutions' risk profiles, would increase the likelihood
that the information provided to law enforcement and national security
agencies from AML/CFT programs would be highly useful. Moreover, under
the proposed rule, financial institutions would be able to focus
resources and attention consistent with their risk profiles, allowing
AML/CFT programs to shift in response to evolving risks that the
financial institutions may face. Such risk-focused structure of AML/CFT
programs would lead to information that enhances U.S. agencies' ability
to investigate, prosecute, and disrupt financing of terrorism, other
transnational security threats, and domestic and transnational illicit
financial activity.
The proposed rule's requirement to incorporate the AML/CFT
Priorities would further promote AML/CFT programs to produce
information that is highly useful to law enforcement, particularly with
respect to specific threats to U.S. financial system and national
security that have been identified as government-wide priorities, as
the AML/CFT Priorities, which have been issued in consultation with
various U.S. and State government agencies,\212\ would be incorporated
into financial institutions' risk assessment processes as appropriate.
As such, law enforcement efforts with respect to these AML/CFT
Priorities, such as investigations and prosecutions, data analytics,
and policy analysis and decision making, would benefit. There is also
corollary benefit from the proposed rule in reducing BSA records and
reporting that are not highly useful since such ``not highly useful''
records and reports degrade the ability of law enforcement and national
security to efficiently and effectively identify illicit finance
activity relevant to their investigations, prosecutions, and risk
assessments. Additionally, the proposed rule would provide financial
institutions with the flexibility to innovate responsibility. In doing
so, law enforcement and national security efforts may reap the benefits
of financial institutions' utilization of technological innovation to
detect and disrupt illicit financial activity.
---------------------------------------------------------------------------
\212\ The agencies include Treasury's Offices of Terrorist
Financing and Financial Crimes, Foreign Assets Control (OFAC), and
Intelligence and Analysis, as well as the Attorney General, Federal
functional regulators, relevant State financial regulators, and
relevant law enforcement and national security agencies. See supra
note 28.
---------------------------------------------------------------------------
Finally, the proposed rule is expected to benefit the public.
FinCEN anticipates that this public benefit would result from both the
potential for a more effective AML/CFT regime to better deter illicit
activity and the potential for a better calibrated regime to reduce
certain low value activities and unintended social costs. The proposed
rule is expected to enhance the deterrent effect of AML/CFT programs.
The proposed rule's focus on effective and risk-based programs would
better help financial institutions identify and detect illicit
financial activity as well aid in government agencies' ability to
disrupt threats. Such enhanced detection would aid in deterrence of
illicit financial activity and ultimately enhance transparency and
financial integrity in the financial system. While FinCEN expects the
proposed rule to enhance the deterrent effect of current AML/CFT
programs at covered financial institutions, it is difficult to estimate
how much additional economic loss the proposed requirements would
prevent. FinCEN lacks data that would be necessary to quantify how much
money laundering and the financing of terrorism could be reduced as a
result of the proposed rule, or how much other illegal activity would
be curbed by this reduction in money laundering and terrorist
financing.\213\ However, money laundering and other illicit financing
is related to human trafficking, drug trafficking, terrorism, public
corruption, the proliferation of weapons of mass destruction, fraud,
and other crimes and illicit activities that cause substantial monetary
and nonmonetary damages.\214\ Thus despite an inability to precisely
quantify the magnitude of anticipated effects, qualitatively, FinCEN
anticipates that by reducing money laundering and broader illicit
finance activity risks, and by extension its associated crimes, the
proposed rule would create economic benefits by reducing those harms.
---------------------------------------------------------------------------
\213\ See infra section VII.F for a request for comment about
the availability of such data.
\214\ For further discussion of the harms and risks associated
with money laundering, see Treasury, National Strategy for Combating
Terrorist and Other Illicit Financing (2018), available at https://home.treasury.gov/system/files/136/nationalstrategyforcombatingterroristandotherillicitfinancing.pdf;
see also Treasury, National Money Laundering Risk Assessment (2024),
available at https://home.treasury.gov/system/files/136/2024-National-Money-Laundering-Risk-Assessment.pdf.
---------------------------------------------------------------------------
This proposed rule is also intended, among other considerations, to
ensure that AML/CFT programs are ``risk-based, including ensuring that
more attention and resources of financial institutions should be
directed toward higher-risk customers and activities, consistent with
the risk profile of a financial institution, rather than toward lower-
risk customers and activities.'' \215\ To the extent that this
programmatic direction would redirect attention and resources from
their current uses, the proposed rule may reduce the expense of time
and money on activities that do not create value. Additionally, it may
reduce other social costs as previously discussed in FinCEN's broad
considerations.\216\
---------------------------------------------------------------------------
\215\ 31 U.S.C. 5318(h)(2)(B)(iv)(II).
\216\ See supra section VII.A.1 for a discussion of negative
externalities.
---------------------------------------------------------------------------
b. Costs
In its general analysis of the proposed rule's economic impact,
FinCEN considered the incremental burdens that compliance would
engender for the various parties it expects to be affected by the rule.
This includes: (1) covered financial institutions for whom FinCEN is
the primary regulator, (2) covered financial institutions primarily
regulated by other agencies, and (3) FinCEN. The anticipated total
burden to these groups of affected parties, collectively, is between
approximately $545 and $918 million in a year when substantive program
updating is necessary and between approximately $478 and $ 851 million
in a year when updates are more modest.\217\
---------------------------------------------------------------------------
\217\ For purposes of these topline estimates, which include all
banks, FinCEN has assumed that the regulatory burden of the proposed
rule to banks supervised by the Agencies would be comparable to the
novel program costs expected to be incurred by other covered
financial institutions other than the board oversight provision, to
which banks supervised by the Agencies are already subject. To the
extent that such an assumption differs from practice, these topline
estimates may be of more limited value than those provided in
further detail in the remaining analysis, which generally exclude
banks with a Federal functional regulator (see infra section VII.C;
see also infra section VII.E).
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[[Page 55467]]
FinCEN notes that, where quantified, the costs articulated below
reflect only the monetized value of the time (at current market rates)
that the various affected parties, in general and on average, are
expected to need to spend on newly complying with the rule as
proposed.\218\ FinCEN acknowledges that this approach does not lend
itself to a facile assessment of the expected net benefit of the rule
in dollar terms because no comparable monetization of certain
opportunity costs, general equilibrium effects, or the benefits is
feasible. Nevertheless, where possible, the analysis has taken these
into consideration and includes certain qualitative assessments of
anticipated benefits and costs.
---------------------------------------------------------------------------
\218\ FinCEN assumes that the burden estimates calculated in
this analysis are the average impact associated with each component
of the proposed rule. However, FinCEN recognizes that in practice,
there would be heterogeneity across institutions regarding the
estimated impact associated with each of these components.
[GRAPHIC] [TIFF OMITTED] TP03JY24.094
i. Affected Financial Institutions
As an aggregate of its estimates of total average costs, FinCEN has
calculated that the potential quantifiable time costs to covered
financial institutions associated with this proposed rule could be as
much as approximately $1.06 billion ($263.1 million + $797.7 million)
each year in those years that require covered financial institutions to
conduct a more substantive review and revision to an existing program
(such as when a risk assessment process must be formalized, the newest
FinCEN AML/CFT priorities are published, or there is a material change
to the risk profile of covered financial institutions) and up to
approximately $996.8 million in years characterized by little or no
substantive changes. These estimates should be interpreted as an upper
bound of expected time costs because they were formed to anticipate a
realized state of the world in which all affected covered financial
institutions must either undertake maximum effort to substantively
revise their programs ($1.06 billion) or, in the absence of substantive
changes, nevertheless engage the maximum level of board oversight of
AML/CFT program activities ($996.8 million). Given that many financial
institutions already have robust or sufficiently effective AML/CFT
programs, FinCEN considers the likelihood of this outcome to be low.
These aggregate estimates reflect average \219\ per institution
compliance burden estimates as detailed in table 11. These estimates
are described in further detail below.\220\
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\219\ FinCEN notes that because, in its approach to calculating
expected time costs, different burden estimates apply (1) to
different types of covered financial institutions, and (2) to
different sizes of covered financial institutions, average values
may not meaningfully represent the economic burden that any single,
particular covered financial institution may expect to incur.
\220\ See table 11 for a summary of costs per type of financial
institution.
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Program Updates--FinCEN assumes it would take small financial
institutions a full business day, or eight (8) hours, and large
institutions three (3) business days, or 24 hours, to formalize or
update their current risk assessment processes-like activities to
conform to the specifications of the proposed rule and accordingly
update general policies, procedures, and internal controls and training
materials in a year when substantive updates to an existing program are
required. Financial institutions will also need to maintain and
continue to evaluate the appropriateness of their risk assessment
processes in years without substantive changes, but FinCEN expects
those costs to be modest, requiring an expected six hours at a small
covered financial institution and 18 hours at large financial
institutions ongoing operational expenses.
Therefore, FinCEN estimates the incremental compliance burden for
substantively updating the appropriate components of an effective,
risk-based, and reasonably designed program would be approximately $850
per small financial institution \221\ and approximately $2,550 per
large financial institution.\222\ Correspondingly, FinCEN anticipates
the cost to small financial institutions would be approximately $640--
and the cost to large financial institutions $1,900--in years when
substantive updates are not required.
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\221\ (8 hours x $106.30 per hour).
\222\ (24 hours x $106.30 per hour).
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FinCEN notes that while the proposed rule requires written
documentation of an AML/CFT program and each of its components,
financial institutions already are required, either expressly or
tacitly, to have written programs. While financial institutions may
need to update their documentation to reflect the changes in the
proposed rule, FinCEN has incorporated this cost into the burden
estimates discussed below for ensuring an effective and reasonably
designed program described above.
[[Page 55468]]
Therefore, to avoid duplicative counting of burden, FinCEN assumes this
requirement of having written documentation imposes no additional
burden on financial institutions.
Board Oversight--Tables 9 and 10 provide details of how FinCEN
burden estimates for the proposed board oversight requirement were
derived. The range in burden hours, because of how it is incorporated
into final cost estimate using a composite wage,\223\ can be
interpreted as reflecting a six (24) hour burden per board member per
year (where a small (large) board consists of three (seven) members)
for boards that already have (do not have) a current board or senior
management oversight program requirement. Or it can be interpreted as
one (four) hours of work by each of the six occupational categories
that comprise the composite wage per board member per year for boards
that already have (do not have) a current board or senior management
oversight program requirement.
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\223\ See infra section VII.E.3 for a description of composite
wage calculation.
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[[Page 55471]]
Overall, FinCEN estimates the potential quantifiable costs to
covered financial institutions associated with the proposed rule could
be as much as approximately $918 million in a hypothetical year that
requires all covered financial institutions to make substantive program
updates requiring maximal board oversight, and as little as
approximately $478 million in a hypothetical year in which no
substantive update is required at any covered financial institution and
minimal board oversight is required. While these estimates may give the
impression that the proposed rule would impose a substantial burden,
FinCEN notes that they would equate to an average cost per covered
financial institution of approximately $3,500 and $1,600 respectively.
FinCEN notes that certain other expenses may accrue to certain
types of covered financial institutions in the event that non-routine
updates to technological infrastructure is required. FinCEN has not
included an estimated technological component but is requesting comment
in the event that such costs are expected to be broadly relevant or
unavoidable for a substantial number of affected financial
institutions.\224\
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\224\ See infra section VII.F.
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ii. Government Costs
To implement the proposed rule, FinCEN expects to incur certain
operating costs that would include approximately $2.99 million in a
year that FinCEN publishes updates to its priorities and approximately
$1.73 million each year in which priorities are unchanged from the most
recent publication. These estimates include anticipated expenses
related to stakeholder outreach and informational support, compliance
monitoring, and potential enforcement activities as well as certain
incremental increases to pre-existing administrative and logistic
expenses.
While such operating costs are not typically considered part of the
general economic cost of a proposed rule, FinCEN acknowledges that this
treatment implicitly assumes that increased resources commensurate with
any novel operating costs exist. If this assumption does not hold, then
operating costs associated with a rule may impose certain economic
costs on the public in the form of opportunity costs from the agency's
forgone alternative activities and those activities' attendant
benefits. Putting that into the context of this proposed rule, and
benchmarking against FinCEN's actual appropriated budget for fiscal
year 2024 ($190,193,000),\225\ the corresponding opportunity cost could
resemble forgoing up to 1.57 (0.91) percent of current activities
annually in years with (without) newly published AML/CFT priorities.
However, to the extent that activities FinCEN would undertake as a
function of the proposed rule would functionally substitute for or
otherwise replace foregone activities, such an estimate likely
overstates the potential economic costs to FinCEN and, consequently,
the public.
---------------------------------------------------------------------------
\225\ Further Consolidated Appropriations Act, 2024, Public Law
118-47 (Mar. 23, 2024) div. B.
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However, FinCEN notes that these estimates do not include the
potential costs borne by other regulators or entities engaged in
informational outreach, examinations (such as those by SROs), or
related enforcement activities as a consequence of the proposal, and
acknowledges that, as such, the cost estimates here will understate the
burden of activities required to promote compliance with the rules as
proposed and the full scope of government costs.
iii. Clients or Customers of Affected Financial Institutions
In proposing this suite of amendments to the existing program
requirements, FinCEN is mindful of concerns certain parties may have
regarding the potential for unintended effects, or other indirect
costs, that would be borne by the clients or customers of affected
financial institutions. For instance, there may be concerns about the
risk of increased inequities in access to financial services (or other
consequences of overbroad de-risking strategies) and the potential for
inequalities in report-filing on the basis of characteristics unrelated
(or insufficiently related) to the underlying nature of risk reported.
FinCEN's general expectation is that the advancements in this
proposed rule toward more effective, risk-based, and reasonably
designed programs would generally reduce, not increase, such burdens
and benefit such persons who may otherwise face unduly limited--or a
complete absence of--access to the services of various financial
institutions. This is because FinCEN expects that, in complying with
changes in the proposed rule, if adopted, financial institutions would
be more empowered to provide services in a manner that is more
appropriately tailored to their respective risk profiles (as identified
by their risk assessment processes), which would incorporate client
risk profiles. Thus, by reducing those institutions' prior
disincentives to providing underserved communities with more efficient
levels of services and access to the U.S. financial system, FinCEN
expects that financial institutions and customers would benefit from
the increase in economic activity.
FinCEN invites comment on its evaluation of potential economic
burden that would be borne by clients or customers of affected
financial institutions under this proposed rule. This may include data,
studies, or anecdotal evidence.
5. Consideration of Policy Alternatives
FinCEN considered several alternatives to the currently proposed
rule. The alternatives described below are scenarios that may, incur
reduced burdens for certain affected financial institutions. However,
for the reasons described below, FinCEN decided not to pursue these
alternatives.
a. Risk Assessment Process Alternatives
The first alternative would be to not require a formal risk
assessment process for financial institutions that do not already have
such a requirement. Risk assessments would be required under the
proposed rule as a component of an effective and reasonably designed
program. Removing the risk assessment process requirement in this
alternative scenario could eliminate the most costly component of the
proposed rule for entities that do not have any formal risk assessment
process already in place. Existing regulations already require
insurance companies; dealers in precious metals, precious stones, or
jewels; loan or finance companies; and housing government sponsored
enterprises to have some type of risk assessment process. Furthermore,
FinCEN believes that most of the remaining financial institutions
already have some risk assessment process in place. While FinCEN does
not know how many financial institutions do not have a formal risk
assessment process in place, FinCEN believes the number would be few,
but not requiring a formal risk assessment would be a cost savings for
this subset of financial institutions. FinCEN believes that on average
it could take approximately six weeks for a financial institution that
does not currently have a process in operation to implement a formal
risk assessment process. By not requiring a formal risk assessment
process, this would result in a per affected institution implementation
cost savings of approximately $25,512.\226\
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\226\ (6 weeks x 5 days per week x 8 hours per day x $106.30 per
hour).
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[[Page 55472]]
While this alternative could reduce costs for certain financial
institutions, it would result in certain limitations. First, it would
not ensure regulatory consistency of AML/CFT program rules across all
financial institutions. Second, as previously described, FinCEN
believes that risk assessments are a critical component of having an
effective and reasonably designed AML/CFT program because identifying
risks is a necessary step in implementing a risk-based AML/CFT program.
Section 6101(b) of the AML Act also affirms that AML/CFT programs
should be risk-based.\227\ For these and other reasons, FinCEN decided
not to propose this alternative. Instead, FinCEN built flexibility into
the risk assessment requirement by directing institutions to focus on
their risk assessment process rather than on a specific, singular
approach. Introducing this regulatory flexibility under the proposed
rule would allow institutions to use any of various methods and
approaches to comply with the proposed rule's risk assessment process
requirement.\228\
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\227\ 31 U.S.C. 5318(h)(2)(B)(iv)(II).
\228\ See supra section IV.D.1. See also note 19 where
commenters to the Effectiveness ANPRM offered a wide spectrum of
views on the proposed risk assessment requirement, with many
commenters noting that risk assessment is a standard practice and
encouraging flexibility. A common concern in comments was that a
risk assessment regulation would be too prescriptive, rather than
allowing for an appropriate level of flexibility. For example,
industry commenters requested that financial institutions have the
ability to determine how to incorporate the proposed national AML
priorities into their respective AML/CFT programs and that they be
provided with sufficient time to make those changes. The commenters
also advocated for the flexibility to assess risks in a manner
tailored to the institution's specific activities and risk profile.
---------------------------------------------------------------------------
b. An Alternative Effective Date for Small Entities
FinCEN acknowledges that, because of both (1) the baseline
heterogeneity in types of covered financial institutions, and (2) the
variation in resource-availability across the size spectrum of
institutions by type of entities that would be affected by the proposed
rule, achieving compliance within six months of the final rule's
adoption may be more burdensome for some affected parties than others.
To this end, FinCEN considered proposing an alternative effective date
of one year following the adoption of the final rule for small covered
financial institutions.\229\ FinCEN considered specifically this scope
of accommodation because of the meaningful differences in baseline
requirements and industry characteristics that define such categories
of covered financial institutions.\230\ For these small entities, that
would allow for an additional six months to transition to compliance
with the final rule as adopted than what is being proposed.
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\229\ See 13 CFR 121.201 for the size standards applied to small
covered financial institutions as defined by the Small Business
Administration (SBA).
\230\ See discussion supra section VII.A.2.c; see also
discussion infra section VII.C.2.
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FinCEN is not proposing to adopt this graduated approach at this
time for a number of reasons. One practical area of concern relates to
how small, for purposes of the accommodation, would be operationally
defined. Unlike certain other Federal agencies, which have adopted
agency-specific size categories \231\ informed by practice, or, in
cases like the SEC and the NCUA, engaged with the Small Business
Administration (SBA) to adopt agency-specific definitions of ``small,''
\232\ FinCEN has not yet undertaken such activities. While prescribed
definitions for small entities in industries (as organized by North
American Industry Classification System (NAICS) codes) that include
small covered financial institution are provided by the SBA in 13 CFR
121.201, FinCEN considers these thresholds unlikely to have
contemplated the need for deliberated tailoring to a specific break-
point at which time accommodations would be most efficiently assigned
for purposes of FinCEN rules generally and the proposed program rule
specifically. As such, these size cut-offs may not be the most
appropriate for use in determining which financial institutions
affected by the proposed rule should be allowed an additional six
months to transition. FinCEN concluded that further agency-specific
research and engagement with small covered financial institutions and
their advocates would be necessary before an informed decision about
the appropriate size threshold for additional time accommodations can
be made.
---------------------------------------------------------------------------
\231\ See supra note 190.
\232\ See, e.g., SEC definitions of small broker-dealer (17 CFR
240.0-10(c)) and small mutual fund/investment company (17 CFR 270.0-
10(a)); NCUA IRPS 81-4, 46 FR 29248 (June 1, 1981), available at
https://www.federalregister.gov/citation/46-FR-29248; NCUA IRPS 87-
2, 52 FR 35213 (Sept. 18, 1987), available at https://ncua.gov/files/publications/irps/IRPS1987-2.pdf. (In 1981, the NCUA defined
small credit union for purposes of the RFA, as any credit union
having less than one million dollars in assets. IRPS 87-2 superseded
IRPS 81-4 but continued to define small credit unions for purposes
of the RFA as those with less than one million dollars in assets.)
---------------------------------------------------------------------------
Second, FinCEN considered the relative benefits of an extended
transition period as weighed against the potential costs and risks
associated with delayed compliance. Because of the relatively large
proportion of entities that would meet the SBA's prespecified size
thresholds, this accommodation would lead to less than one out of every
five affected financial institutions being required to comply in the
year following the final rule. Therefore, an additional six month
accommodation would in practice lead to an additional year before the
majority of covered financial institutions would undertake the
activities newly required by the proposed rule, several years after
Congress originally expressed a belief that the promulgation of and
adherence to these rules is necessary and in the public interest. In
the event that FinCEN has underappreciated the relative value to
affected small businesses that the alternative additional three months
to transition compliance to the proposed new and amended program
requirements would afford, public comment is being solicited.\233\ In
particular, FinCEN is requesting comments that include data or
qualitative information that would assist in quantifying this value.
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\233\ See infra section VII.F.
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[[Page 55473]]
B. E.O. 12866 and Its Amendments
E.O. 12866 and its amendments direct agencies to assess the costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, and public health and
safety effects; distributive impacts; and equity). E.O. 13563
emphasizes the importance of quantifying both costs and benefits,
reducing costs, harmonizing rules, and promoting flexibility. E.O.
13563 also recognizes that some benefits are difficult to quantify and
provides that, where appropriate and permitted by law, agencies may
consider and discuss qualitatively values that are difficult or
impossible to quantify.\234\
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\234\ E.O. 13563, Improving Regulation and Regulatory Review, 76
FR 3821 (Jan. 21, 2011), section 1(c) (``Where appropriate and
permitted by law, each agency may consider (and discuss
qualitatively) values that are difficult or impossible to quantify,
including equity . . . and distributive impacts.'')
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This proposed rule has been designated a ``significant regulatory
action''; accordingly, it has been reviewed by the Office of Management
and Budget (OMB).
---------------------------------------------------------------------------
\235\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
C. Initial Regulatory Flexibility Analysis
When an agency issues a rulemaking proposal, the RFA \235\ requires
the agency either to provide an initial regulatory flexibility analysis
(IRFA) with a proposed rule or certify that the proposed rule would not
have a significant economic impact on a substantial number of small
entities. Because the proposed rule may have a significant economic
impact on a substantial number of small entities in certain affected
industries, FinCEN undertook the following analysis. In the event that
FinCEN has potentially overestimated the anticipated economic burden of
the proposed rule, and certification would instead be more appropriate,
public comments to this effect--including studies, data, or other
evidence--are invited.\236\
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\236\ See infra section VII.F.
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1. The Proposed Rule: Objectives, Description, and Legal Basis
The proposed rule would amend FinCEN's regulations that prescribe
the minimum requirements for AML/CFT programs for financial
institutions as described in section IV.D.
The objectives of the proposed rule are to increase the
effectiveness, efficiency, and flexibility of AML/CFT programs; to
support the establishment, implementation, and maintenance of risk-
based AML/CFT programs; to strengthen the cooperation between financial
institutions and the government; for improvements to be more responsive
to evolving ML/TF risk; and to reinforce the focus of AML/CFT programs
toward a more risk-based and innovative approach to combating financial
crime and safeguarding national security.
The legal basis for the proposed rule is the AML Act of 2020. The
purposes of the AML Act, among others, include to ``modernize anti-
money laundering and counter the financing of terrorism laws to adapt
the government and private sector response to new and emerging
threats''; ``to encourage technological innovation and the adoption of
new technology by financial institutions to more effectively counter
money laundering and the financing of terrorism''; and ``to reinforce
that the anti-money laundering and countering the financing of
terrorism policies, procedures, and controls of financial institutions
shall be risk-based'' \237\ as part of the broader initiative to
``strengthen, modernize, and improve'' the U.S. AML/CFT regime.
Specifically, section 6101(b)(2)(B)(ii) of the AML Act of 2020 provides
that Treasury, when prescribing minimum standards for AML/CFT programs,
take into account as a factor that AML/CFT programs should be
``reasonably designed to assure and monitor compliance with the BSA and
its implementing regulations and be risk based.'' \238\ FinCEN intends
for this new regulatory requirement to provide clarity that AML/CFT
programs must be effective, risk-based, and reasonably designed such
that they yield useful outcomes that support the purposes of the BSA.
The proposed rule would meet these objectives.
---------------------------------------------------------------------------
\237\ AML Act, section 6002(2)-(4) (Purposes).
\238\ 31 U.S.C. 5318(h)(2)(B)(9)(iv)(II).
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The proposed rule would, among other things,\239\ establish a new
statement describing the purpose of the AML/CFT program requirement,
which is to ensure that a financial institution implements an
effective, risk-based, and reasonably designed AML/CFT program that:
(1) identifies, manages, and mitigates illicit finance risks; (2)
complies with the requirements of the BSA and implementing regulations;
(3) focuses attention and resources in a manner consistent with the
risk profile of the financial institution; (4) includes consideration
and evaluation of innovative approaches to meet its AML/CFT compliance
obligations; (5) provides highly useful reports or reports to relevant
government authorities; (6) protects the financial system of the United
States from criminal abuse; (7) and safeguards the national security of
the United States, (8) including by preventing the flow of illicit
funds into the financial system.
---------------------------------------------------------------------------
\239\ See supra section IV for a discussion of proposed rule;
see also supra section VII.A.3 for a summary discussion of proposed
rule.
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In addition, with this proposed rule, FinCEN is addressing its
first AML/CFT Priorities. FinCEN published the first AML/CFT Priorities
on June 30, 2021, as required under 31 U.S.C. 5318(h)(4)(A). In the
proposed rule, FinCEN is proposing to add a new definition of ``AML/CFT
Priorities'' at 31 CFR 1010.100(nnn) to support the promulgation of
regulations pursuant to 31 U.S.C. 5318(h)(4)(D). According to the
proposed definition, ``AML/CFT Priorities'' would refer to the most
recent statement of AML/CFT Priorities issued pursuant to 31 U.S.C.
5318(h)(4).
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\240\ See ``Statistics of U.S. Businesses'' (SUSB), available at
https://www.census.gov/programs-surveys/susb.html. The annual SUSB
only includes receipts data once every five years, with 2017
(published in 2021) being the most recent survey year.
\241\ FinCEN does not apply survey population proportions to
229,161 agent MSBs, as FinCEN believes all agent MSBs are small.
FinCEN also does not apply survey proportions for operators of
credit card systems, FHLBs, and GSEs, as they are all large.
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2. The Expected Impact on Small Entities
To identify whether a financial institution is small, FinCEN
incorporated both the Small Business Administration's (SBA's) latest
annual size standards for small entities in a given industry and data
from certain other Federal agencies. FinCEN also uses receipts data
from the U.S. Census Bureau's publicly available 2017 Statistics of
U.S. Businesses survey (Census survey data) as a proxy for
revenue.\240\ FinCEN applies SBA size standards (whether by annual
revenue or by employment size) to the corresponding industry in the
2017 Census survey data and determine what proportion of a given
industry is deemed small, on average. \241\ FinCEN considers a
financial institution to be large if it has total annual revenues (or
employees) greater than the SBA's annual small size standard for that
industry. FinCEN considers a financial institution to be small if it
has total annual revenues (or employees) less than the annual SBA small
entity size standard for that industry. FinCEN applies these estimated
proportions to FinCEN's current financial institution counts for each
industry other than banks with a Federal functional regulator to
approximate the proportion
[[Page 55474]]
of current small financial institutions. Using this methodology,
approximately [293,000] small financial institutions and approximately
[5,400] large financial institutions would be affected by the proposed
rule. FinCEN estimates the following proportion of each group of
covered financial institutions by type consists of entities that would
be considered small by the respective standard of small (see table 12
below).
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FinCEN has further estimated the proposed rule may impose the
following aggregated average costs on small entities by type of covered
financial institution in table 13 below.\242\
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\242\ Because FinCEN and the Agencies are concurrently proposing
program rules that each include an RFA-required analysis, FinCEN
estimates here are limited to the covered financial institutions not
already covered in the Agencies' analysis.
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[[Page 55475]]
[GRAPHIC] [TIFF OMITTED] TP03JY24.099
These estimates correspond to the itemized burdens that are
expected to be associated reporting, recordkeeping, and compliance
requirements of the proposed rule as described above in Section
VII.A.4.b.i and as calculated
[[Page 55476]]
below in Section VII.E. Tables 14 and 15 below summarize the portions
that pertain to small entities.
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[GRAPHIC] [TIFF OMITTED] TP03JY24.101
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3. Other Matters: Duplicate, Overlapping, Conflicting, and Alternative
Requirements
FinCEN is unaware of any existing Federal regulations that would
overlap or conflict with the proposed rule.\243\
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\243\ 5 U.S.C. 603(b)(5) (requiring initial regulatory
flexibility analysis to identify, to the extent practicable, an
identification, to the extent practicable, all relevant Federal
rules which may duplicate, overlap, or conflict with the proposed
rule).
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Additionally, FinCEN has considered certain alternatives to the
proposed rule that take into consideration the expected costs and
potential benefits to small entities.\244\ As discussed in greater
detail in Section VII.A.5, the first alternative FinCEN considered
would be to not require a covered financial institution that has not
already done so to formalize its risk assessment activities into a risk
assessment process. While FinCEN acknowledges that this may
significantly reduce the costs of compliance with the proposed rule for
those institutions, it would not ensure regulatory consistency of AML/
CFT program rules across all financial institutions. Additionally,
because FinCEN believes that risk assessments are a critical component
of having an effective and reasonably designed AML/CFT program, this
alternative would risk undermining the objective of the rule because
identifying risks in a well-designed, consistent manner is a necessary
step in implementing an effective risk-based AML/CFT program.
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\244\ See supra section VII.A.5.
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The second alternative FinCEN considered was to propose a delayed
effective date for smaller entities that would provide an additional
six months to come into compliance with the final rule. FinCEN has
determined that at this time it lacks sufficient evidence that the
current thresholds (that would be used to determine which entities are
eligible for the additional time accommodation) would generate a
meaningfully beneficial staggered adoption, given that they were not
originally designed with this use case in mind. It is not clear that
the programmatic costs of an additional six months to come into
compliance would appropriately be offset by the benefits to qualifying
small entities, particularly when measured against the potential risks
that might accompany a full year in delayed compliance for the vast
majority \245\ of financial institutions. The public, generally, and
small entities, specifically,\246\ have been invited to provide comment
on these alternatives.
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\245\ FinCEN notes that, as depicted in table 12, for categories
of affected financial institutions that include small businesses (as
defined by the existing SBA thresholds), such entities are expected
to constitute 41 to 100 percent (on average, 84.4 percent) of the
respective affected categories.
\246\ See supra section VII.F.
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D. Unfunded Mandates Reform Act
The UMRA requires that an agency prepare a statement before
promulgating a rule that may result in expenditure by the state, local,
and Tribal governments, in the aggregate, or by the private sector, of
$183 million or more in any one year ($100 million in 1995, adjusted
for inflation).\247\ Section 202 of UMRA also requires an agency to
identify and consider a reasonable number of regulatory alternatives
before promulgating a rule. FinCEN believes that the preceding
assessment of impact,\248\ generally, and consideration of policy
alternatives,\249\ specifically,
[[Page 55477]]
satisfy the UMRA's analytical requirements, but invites public comment
on any additional factors that, if considered, would materially alter
the conclusions of the RIA.\250\
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\247\ 2 U.S.C. 1532(a).
\248\ See supra section VII.A.
\249\ See supra section VII.A.5.
\250\ See infra section VII.F.
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E. Paperwork Reduction Act
The reporting requirements in the proposed rule are being submitted
to OMB for review in accordance with the PRA.\251\ Under the PRA, an
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid
control number assigned by OMB. Written comments and recommendations
for the proposed information collection can be submitted by visiting
www.reginfo.gov/public/do/PRAMain. Find this particular document by
selecting ``Currently Under Review--Open for Public Comments'' or by
using the search function. Comments are welcome and must be received by
September 3, 2024. In accordance with requirements of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing
regulations, 5 CFR part 1320, the following information concerning the
collection of information as it relates to the amendments to covered
financial institutions' AML program regulations is presented to assist
those persons wishing to comment on the information collection.
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\251\ See 44 U.S.C. 3506(c)(2)(A).
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1. Description of Impacted Financial Institutions and OMB Control
Numbers
OMB Control Numbers: 1506-0020, 1506-0030, 1506-0035, and 1506-
0051.
FinCEN has historically accounted for the existing reporting and
recordkeeping burdens associated with the program rules using the
following OMB control numbers: 1506-0020 (MSBs, mutual funds, and
operators of credit card systems); 1506-0030 (dealers in precious
metals, precious stones, or jewels); 1506-0035 (insurance companies,
loan or finance companies, and banks lacking a Federal functional
regulator); and 1506-0051 (casinos). FinCEN does not maintain existing
OMB control numbers for the AML/CFT program requirements for banks,
\252\ brokers-dealers, futures commission merchants or introducing
brokers in commodities,\253\ or housing government sponsored
enterprises,\254\ but has elsewhere in the RIA provided certain
estimates of the anticipated compliance burden,\255\ including the
general paperwork-related burden for all financial institutions that
would be impacted by the proposed rule but for whom those costs are not
otherwise counted under another agency's control number or analysis.
---------------------------------------------------------------------------
\252\ Banks with a Federal functional regulator have OMB control
numbers that are maintained by the Agencies, as follows: 1) OCC (OMB
control number 1557-0180); 2) FRB (OMB control number 7100-0310); 3)
FDIC (OMB control number 3064-0087); and 4) NCUA (OMB control number
3133-0108).
\253\ See FinCEN, Anti-Money Laundering Programs for Financial
Institutions Interim Final Rule, 67 FR 21110 (Apr. 29, 2002),
available at https://www.federalregister.gov/documents/2002/04/29/02-10452/financial-crimes-enforcement-network-anti-money-laundering-programs-for-financial-institutions. In the 2002 interim final rule,
FinCEN noted it was appropriate to implement section 5318(h)(1) of
the BSA with respect to brokers or dealers in securities and futures
commission merchants through their respective SROs, because the
Securities and Exchange Commission (SEC) and the Commodity Futures
Trade Commission (CFTC) and their SROs significantly accelerated the
implementation of AML programs for their regulated financial
institutions. Accordingly, 31 CFR 1023.210 and 31 CFR 1026.210
provided that brokers or dealers in securities, and futures
commission merchants and introducing brokers in commodities,
respectively, would be deemed to be in compliance with the
requirements of section 5318(h)(1) of the BSA if they comply with
any applicable regulation of their Federal functional regulator
governing the establishment and implementation of AML programs. As
noted earlier, FinCEN recognizes the SEC as the Federal functional
regulator, and registered national securities exchanges or a
national securities association, such as the Financial Industry
Regulatory Authority (FINRA), as the SROs for member broker-dealers.
Each SRO may have its own AML program requirements (see, e.g., FINRA
Rule 3310). The CFTC's SRO is the National Futures Association
(NFA). The AML program requirements for futures commission merchant
and introducing brokers in commodities are set out in NFA Rule 2-
9(c). The SROs are not required to comply with the PRA. Therefore,
there are no OMB control numbers for the AML program regulatory
requirements of brokers or dealers in securities, futures commission
merchants, and introducing brokers in commodities.
\254\ The PRA does not apply to the collection of information by
one Federal agency (FinCEN) from another Federal entity (the housing
GSEs).
\255\ See generally supra section VII.A; see specifically supra
section VII.A.4.b.
---------------------------------------------------------------------------
This scoping of the population for purposes of PRA estimates avoids
double counting the reporting and recordkeeping burdens of the proposed
rule for entities regulated by the Agencies. FinCEN separately notes
that certain covered financial institutions not already covered by an
existing control number may undertake new reporting and recordkeeping
activities as a consequence of the proposed rule that would not be
reflected in the burden estimates below.\256\ Thus, the total burden
estimates associated with the rule as discussed in Section VII.A.4.
will exceed the values in this section. Nevertheless, the accounting of
burden estimates for OMB purposes, when aggregated across the relevant
control numbers, should be generally comparable for the common program-
related components considered in both this and the Agencies' respective
analytical exercises to the extent that the same assumptions about
incremental burden apply.\257\
---------------------------------------------------------------------------
\256\ See infra note 259.
\257\ FinCEN notes that the Agencies' concurrently released
program rule NPRM includes certain other components that are not
included in this rulemaking's proposed program amendments and new
requirements, for example, a proposed codification of customer due
diligence requirements.
---------------------------------------------------------------------------
FinCEN further notes that it is only estimating the paperwork
burden associated with the specific program components proposed in this
notice of proposed rulemaking (NPRM) in this PRA analysis, as other
components of the full burden associated with existing program rules
are concurrently open to public comment in connection with the renewal
of certain OMB control numbers.\258\ FinCEN has also recently solicited
public comment on burden estimates associated with applying the
requirements of the existing program rules to certain registered
investment advisers and exempt reporting advisers (collectively,
investment advisers).\259\ The incremental reporting and recordkeeping
burden associated with an update from the current program requirements
to those proposed in this NPRM for those investment advisers, should
they become subject to program rule requirements, is not included in
this analysis.
---------------------------------------------------------------------------
\258\ See FinCEN, Agency Information Collection Activities;
Proposed Renewal; Comment Request; Renewal Without Change of Anti-
Money Laundering Programs for Certain Financial Institutions, 89 FR
29427 (Apr. 22, 2024)), available at https://www.federalregister.gov/documents/2024/04/22/2024-08529/agency-information-collection-activities-proposed-renewal-comment-request-renewal-without-change-of.
\259\ See supra note 2.
---------------------------------------------------------------------------
Estimated Number of Respondents: 298,565 financial
institutions.\260\
---------------------------------------------------------------------------
\260\ This estimate includes all financial institutions in table
15 where the agency OMB control numbers leads with `FinCEN' or is
listed as `N/A.'
---------------------------------------------------------------------------
Table 16 below, represents the same population estimates from the
baseline analysis above, but appends the respective agency OMB control
numbers to illustrate the differences in aggregate estimates that are
attributable to the inclusion or exclusion of covered financial
institutions accounted for under other agency's control numbers or
unassigned to a control number. This is followed by table 17, which
includes only the covered financial institutions whose burdens are
estimated in this PRA, grouped by their respective control numbers.
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2. Estimated Annual Burden Hours
The annual paperwork burden and cost estimates in this analysis are
associated with creating or updating an effective and reasonably
designed AML/CFT program (Action A) and board/senior management
oversight of the AML/CFT (Action B) as discussed in greater detail
above.\261\ Table 18 below presents the estimates of the total burden
per firm by type, combining Actions A and B.
---------------------------------------------------------------------------
\261\ See supra section VII.A.4.b.i.
---------------------------------------------------------------------------
The estimated hourly burden associated with each portion of the
annual estimate is as follows:
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BILLING CODE 4810-02-C
3. Estimated Annual Cost
FinCEN recognizes that a covered financial institution's allocation
choices between labor and technology utilized to comply with the
proposed incremental changes to existing programs will vary by the
facts and circumstances of the affected financial institution. FinCEN
further recognizes that within the allocation of labor, the allocation
of certain tasks to persons employed in different occupational roles
may vary systematically by type of covered financial institution
affected. For these reasons, among others, assigning a general wage or
cost of time to the anticipated burden hours estimated above is an
imprecise exercise. Nevertheless, to facilitate a generalized analysis
for purposes of the PRA, FinCEN identified six roles and corresponding
staff positions involved in maintaining an AML/CFT program in order to
estimate the hourly costs associated with the burden hour estimates
calculated above. Those are: (1) general oversight (providing
institution-level process approval); (2) general supervision (providing
process oversight); (3) direct supervision (reviewing operational-level
work and cross-checking all or a sample of the work product against
their supporting documentation); (4) clerical work (engaging in
research and administrative review and filing and producing the AML/CFT
program on request); (5) legal compliance (ensuring the reporting
process is in legal compliance); and (6) computer support (ensuring
feasibility of electronic submission and housing reports internally).
Throughout the analysis, FinCEN uses an estimated compensation rate
of approximately $106.30 per hour as the equally weighted mean wage
across these six categories to represent the cost of time based on
occupational wage data from the U.S. Bureau of Labor Statistics
(BLS).\262\ The most recent occupational wage data from the BLS
corresponds to May 2022 wages, released in May 2023. FinCEN took the
equally-weighted average of reported hourly wages for six occupations
across nine financial industries that currently have BSA compliance
requirements.\263\ Included financial industries were identified at the
most granular NAICS code available for banks (as defined in 31 CFR
1010.100(d)); casinos; MSBs; broker-dealers; mutual funds; insurance
companies; futures commission merchants and introducing brokers in
commodities; dealers in precious metals, precious stones, or jewels;
operators of credit card systems; and loan or finance companies. This
resulted in an average hourly wage estimate of approximately $74.86.
Multiplying this hourly wage estimate by a benefit factor of 1.42 \264\
produces the fully loaded hourly compensation amount of approximately
$106.30 per hour. As such, FinCEN estimates that, in general and on
average,\265\ the time cost of each hour of burden is approximately
$106.30.
---------------------------------------------------------------------------
\262\ See Bureau of Labor Statistics website, ``May 2022
National Occupational Employment and Wage Estimates,'' available at
https://www.bls.gov/oes/current/oessrci.htm.
\263\ Consistent with the burden analysis for FinCEN's
publication ``Agency Information Collection Activities; Proposed
Renewal; Comment Request; Renewal without Change of Anti-Money
Laundering Programs for Certain Financial Institutions,'' FinCEN
uses hourly wage data for the following occupations: chief
executives, financial managers, compliance officers, and financial
clerks. FinCEN also includes the hourly wages for lawyers and
judicial clerks, as well as for computer and information systems
managers. See 85 FR 49418 (Aug. 13, 2020), available at https://www.federalregister.gov/documents/2020/08/13/2020-17696/agency-information-collection-activities-proposed-renewal-comment-request-renewal-without-change-of.
\264\ The ratio between benefits and wages for private industry
workers is (hourly benefits/(hourly wages) = 0.42, as of December
2023. The benefit factor is 1 plus the benefit/wages ratio, or 1.42.
See U.S. Bureau of Labor Statistics, ``Employer Costs for Employee
Compensation Historical Listing,'' available at https://www.bls.gov/web/ecec/ececqrtn.pdf. The private industry workers series data for
December 2023 is available at https://www.bls.gov/web/ecec/ecec-private-dataset.xlsx.
\265\ ``In general'' reflects that the estimate would not be an
appropriate representation of expected costs to outliers (e.g.,
financial institutions with AML programs with complexities that are
uncommonly higher or lower than those of the population at large).
``On average'' refers to the mean of the distribution of each subset
of the population.
---------------------------------------------------------------------------
Table 19 below applies this cost estimate to the anticipated
aggregate burden hours by type of covered financial institutions under
two scenarios intended to function as upper and lower bounds of
anticipated costs. Scenario 1 (``Total--Substantive Change'') assumes
that all covered financial institutions must undertake the work
necessary to make a substantive change or update to their existing
program,\266\ and therefore presents a range of upper bound values.
Scenario 2 (``Total--General''), the lower bound, assumes that while
certain de minimis updates and board oversight occur, no covered
financial institution needs to make substantive changes to either its
existing program or its existing level of board oversight.\267\
---------------------------------------------------------------------------
\266\ See discussion supra section VII.A.4.b.i.
\267\ Where a ``substantive change to board oversight''
comprises a move from no pre-existing board program approval
requirement to the proposed required board oversight.
---------------------------------------------------------------------------
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BILLING CODE 4810-02-C
4. Summary of Burden and Cost Estimates
Throughout its analysis, FinCEN has attempted to be mindful of the
heterogeneity in affected covered financial institutions and to present
estimates that would facilitate readers', and potential commenters',
understanding of FinCEN's expectations of impact with respect to their
unique facts and circumstances. To facilitate this type of evaluation,
estimates have been presented in range format. Nevertheless, FinCEN
recognizes that to fulfill certain obligations, it is necessary to
condense a range of foreseeable outcomes to certain point estimates,
however imprecisely such estimates might represent expectations. For
purposes of the topline numbers in this PRA analysis, FinCEN
conservatively applies the upper-bound values of its range of cost
estimates and treats all hours spent on compliance-related activities
as associated with recordkeeping. Public comment is invited on the
suitability of this approach.\268\
---------------------------------------------------------------------------
\268\ See infra section VII.E.5; see also infra section VII.F
for requests for comment on the PRA analysis.
---------------------------------------------------------------------------
Estimated Number of Respondents: 284,320.
Estimated Total Annual Responses: as required.
Estimated Total Annual Recordkeeping Burden: 7,204,570 hours.
Estimated Total Annual Recordkeeping Cost: $765,845,768.04.
5. General Request for Comments Under the Paperwork Reduction Act
Comments submitted in response to this proposed rule will be
summarized and included in a request for OMB approval. All comments
will become a matter of public record. Comments are invited on the
following categories: (a) whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility; (b) the
accuracy of the agency's estimate of the burden of the collection of
information; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; (d) ways to minimize the burden of the
collection of information on reporting persons, including through the
use of technology; and (e) estimates of capital or start-up costs and
costs of operation, maintenance, and purchase of services required to
provide information.
F. Additional Requests for Comment
Baseline Estimates
46. Are FinCEN's baseline expectations about the current prevalence
of a risk assessment process reasonably accurate? What proportion of
covered financial institutions currently have a risk assessment
process?
47. For a given type of covered financial institution, what form
does a risk assessment process take at present? How much does a typical
financial institution spend to implement their current risk assessment
processes? How much does a typical small institution spend to implement
their current risk assessment processes?
48. Because the proposed rule would encourage but not require
technological innovation, FinCEN's estimates of regulatory cost do not
include a line item of technology cost per institution. Is this
approach reasonable? If not, please explain.
49. What is the likelihood that a covered financial institution or
group of covered financial institutions, by type, will invest in
updating or new technology as a result of the rule as proposed? Are
there modifications to the proposed rule that would significantly
increase (or decrease) this likelihood? If so, please describe. Where
possible, please explain why the described modification is expected to
change the likelihood.
Potential Efficiencies and Burden
50. As described the RIA, FinCEN has attempted to quantify certain
identifiable sources of burden that would result from the changes
described in the proposed rule. Are there additional categories of
burden that FinCEN should articulate and quantify as part of its
calculated burden estimates? If so, what are they, and what is the
estimated burden per financial institution? Conversely, if any of the
categories of burden in the estimates should not be included, identify
those categories and explain why.
51. FinCEN's analysis has estimated certain costs associated with
the burden of compliance with current program requirements. Would
implementing any changes necessary to comply with the proposed rule be
expected to increase or decrease that amount and by how much? For
example, are there any current compliance costs that would be reduced
by the shift to a risk-based regime that encourages innovation?
52. With respect to the economic analysis, in its entirety, are
there comments as to the specific findings, assumptions, or
expectations?
IRFA
53. FinCEN has provided estimates of the anticipated financial
burden on small institutions pursuant to requirements under the RFA.
Are there specific sources of empirical evidence or data that would
suggest these estimates should be revised? Please provide either
qualitative or quantitative evidence that would support the suggested
alternative cost estimates.
54. FinCEN estimates of expected economic burden suggest that, for
certain types of covered financial institutions, the proposed rule may
have a significant impact on a substantial number of small entities. To
the extent that this expectation is based on assumptions about
necessary changes in activity relative to current program-related
activities, would certification to the contrary be more appropriate?
55. FinCEN is requesting data, studies, or anecdotal evidence that
would otherwise demonstrate that compliance with current program
requirements generally suggests small entities would not incur
incremental time burden and costs as estimated.
56. Please provide comments on the relative value assigned by
FinCEN to affected small businesses that the alternative additional
three months to transition to compliance would allow. Would an
alternative effective date of nine months following the adoption of the
final rule (that is, an additional three months to transition to
compliance with the final rule as adopted), be a more appropriate
effective date for small entities?
57. Is there other data or qualitative information that would
assist in quantifying the value of the relative benefits of an extended
transition period for compliance, against the potential costs and risks
associated with delayed compliance?
UMRA
58. FinCEN does not expect the proposed rule to result in any new
or economically significant burdens to State, Local, or Tribal
governments. Is this assumption reasonable? If not, what studies, data,
or anecdotal evidence should be taken into consideration that would
update this expectation?
PRA
59. FinCEN invites comments on the general appropriateness and
usefulness of the methodological approach it employed to provide its
PRA-specific estimates for public review, including the construction of
the wage estimate and the conservative use of the maximum burden value
as a point-
[[Page 55484]]
estimate of aggregate annual burden and costs. For example, would the
average of a weighted range have been more informative?
List of Subjects
31 CFR Part 1010
Administrative practice and procedure, Aliens, Authority
delegations (Government agencies), Banks and banking, Brokers, Business
and industry, Commodity futures, Currency, Citizenship and
naturalization, Electronic filing, Federal savings associations,
Federal-States relations, Foreign persons, Holding companies, Indian--
law, Indians, Indians--Tribal government, Insurance companies,
Investment advisers, Investment companies, Investigations, Law
enforcement, Penalties, Reporting and recordkeeping requirements, Small
businesses, Securities, Terrorism, Time.
31 CFR Part 1020
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Investigations,
Penalties, Reporting and recordkeeping requirements, Securities,
Terrorism.
31 CFR Part 1021
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities.
31 CFR Part 1022
Administrative practice and procedure, Banks and banking, Currency,
Foreign banking, Foreign currencies, Gambling, Investigations,
Penalties, Reporting and recordkeeping requirements, Securities.
31 CFR Part 1023
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Gambling, Investigations, Penalties,
Reporting and recordkeeping requirements, Securities.
31 CFR Part 1024
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities.
31 CFR Part 1025
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities.
31 CFR Part 1026
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Gambling, Investigations, Penalties,
Reporting and recordkeeping requirements, Securities.
31 CFR Part 1027
Administrative practice and procedure, Banks and banking, Currency,
Foreign banking, Foreign currencies, Gambling, Investigations,
Penalties, Reporting and recordkeeping requirements, Securities.
31 CFR Part 1028
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities.
31 CFR Part 1029
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities, Terrorism.
31 CFR Part 1030
Administrative practice and procedure, Banks and banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities, Terrorism.
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Chapter X
Authority and Issuance
For the reasons set forth in the preamble, the U.S. Department of
the Treasury and Financial Crimes Enforcement Network propose to amend
31 CFR parts 1010, 1020, 1021, 1022, 1023, 1024, 1025, 1026, 1027,
1028, 1029, and 1030 as follows:
PART 1010--GENERAL PROVISIONS
0
1. The authority citation for part 1010 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 2006, Pub. L. 114-41, 129 Stat. 457; sec. 701, Pub. L. 114-74,
129 Stat. 599; sec. 6403, Pub. L. 116-283, 134 Stat. 4605.
0
2. Amend Sec. 1010.100 by revising paragraphs (e) and (r) and adding
paragraphs (nnn) and (ooo) to read as follows:
Sec. 1010.100 General definitions.
* * * * *
(e) Bank Secrecy Act. Certain parts of the Currency and Foreign
Transactions Reporting Act, its amendments, and the other statutes
relating to the subject matter of that Act, have come to be referred to
as the Bank Secrecy Act. These statutes are codified at 12 U.S.C.
1829b, 12 U.S.C. 1951-1960, 18 U.S.C. 1956, 18 U.S.C. 1957, 18 U.S.C.
1960, and 31 U.S.C. 5311-5314 and 5316-5336 and notes thereto.
* * * * *
(r) Federal functional regulator. (1) The Board of Governors of the
Federal Reserve System;
(2) The Office of the Comptroller of the Currency;
(3) The Board of Directors of the Federal Deposit Insurance
Corporation;
(4) The National Credit Union Administration;
(5) The Securities and Exchange Commission; or
(6) The Commodity Futures Trading Commission.
* * * * *
(nnn) AML/CFT Priorities. As used in this chapter, AML/CFT
Priorities means the most recent statement of Anti-Money Laundering and
Countering the Financing of Terrorism National Priorities issued
pursuant to 31 U.S.C. 5318(h)(4).
(ooo) AML/CFT program. As used in this chapter, an AML/CFT program
means a system of internal policies, procedures, and controls meant to
ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter and to prevent an
institution from being used for money laundering, terrorist financing,
or other illicit finance activity risks. The minimum requirements for a
financial institution's AML/CFT program are governed by the applicable
regulatory part.
0
3. Revise Sec. 1010.210 to read as follows:
Sec. 1010.210 Purpose of Anti-Money Laundering/Countering the
Financing of Terrorism (AML/CFT) Program Requirement.
(a) The purpose of this section is to ensure that a financial
institution implements an effective, risk-based, and reasonably
designed AML/CFT program to identify, manage, and mitigate illicit
finance activity risks that: complies with the Bank Secrecy Act and the
requirements and prohibitions of this chapter; focuses attention and
resources in a manner consistent with the risk profile of the financial
institution; may include consideration and evaluation of innovative
approaches to meet its AML/
[[Page 55485]]
CFT compliance obligations; provides highly useful reports or records
to relevant government authorities; protects the financial system of
the United States from criminal abuse; and safeguards the national
security of the United States, including by preventing the flow of
illicit funds in the financial system.
(b) Each financial institution (as defined in 31 U.S.C. 5312(a)(2)
or (c)(1)) should refer to subpart B of its chapter X part for any
additional anti-money laundering program requirements.
PART 1020--RULES FOR BANKS
0
4. The authority citation for part 1020 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
5. Revise Sec. 1020.210 to read as follows:
Sec. 1020.210 AML/CFT program requirements for banks.
A bank must establish, implement, and maintain an effective, risk-
based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
bank's risk profile that takes into account higher-risk and lower-risk
customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the bank's AML/CFT program, including implementation of the
components required under paragraphs (a)(2) through (6) of this
section. The risk assessment process must:
(i) Identify, evaluate, and document the bank's money laundering,
terrorist financing, and other illicit finance activity risks,
including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the bank based on the bank's business
activities, including products, services, distribution channels,
customers, intermediaries, and geographic locations; and
(C) Reports filed by the bank pursuant to this chapter;
(ii) Provide for updating the risk assessment using the process
required under this paragraph (a)(1) on a periodic basis, including, at
a minimum, when there are material changes to the bank's money
laundering, terrorist financing, or other illicit finance activity
risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a bank's consideration,
evaluation, and, as warranted by the bank's risk profile and AML/CFT
program, implementation of innovative approaches to meet compliance
obligations pursuant to the Bank Secrecy Act and this chapter.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program;
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified bank personnel or by a qualified outside party;
and
(6) Include appropriate risk-based procedures for conducting
ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to identify and report
suspicious transactions and to maintain and update customer
information. For purposes of this paragraph, customer information must
include information regarding the beneficial owners of legal entity
customers (as defined in Sec. 1010.230 of this chapter);
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (6) of this section, must be documented
and approved by the bank's board of directors or, if the bank does not
have a board of directors, an equivalent governing body. Such
documentation must be made available to FinCEN or its designee upon
request. The AML/CFT program must be subject to oversight by the bank's
board of directors, or equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
0
6. Amend Sec. 1020.220 by revising paragraphs (a)(1) and (a)(6)(iii)
to read as follows:
Sec. 1020.220 Customer identification program requirements for banks.
(a) * * *
(1) In general. A bank required to have an AML/CFT program under
the regulations implementing 31 U.S.C. 5318(h), 12 U.S.C. 1818(s), or
12 U.S.C. 1786(q)(1) must implement a written Customer Identification
Program (CIP) appropriate for the bank's size and type of business
that, at a minimum, includes each of the requirements of paragraphs
(a)(1) through (5) of this section. The CIP must be a part of the AML/
CFT program.
* * * * *
(6) * * *
(iii) The other financial institution enters into a contract
requiring it to certify annually to the bank that it has implemented
its AML/CFT program, and that it will perform (or its agent will
perform) the specified requirements of the bank's CIP.
* * * * *
PART 1021--RULES FOR CASINOS AND CARD CLUBS
0
7. The authority citation for part 1021 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
8. Revise Sec. 1021.210 to read as follows:
Sec. 1021.210 AML/CFT program requirements for casinos.
A casino must establish, implement, and maintain an effective,
risk-based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
casino's risk profile that takes into account higher-risk and lower-
risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the casino's AML/CFT program, including implementation of the
components required under paragraphs (a)(2) through (6) of this
section. The risk assessment process must:
(i) Identify, evaluate, and document the casino's money laundering,
terrorist financing, and other illicit finance activity risks,
including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the casino based on the
[[Page 55486]]
casino's business activities, including products, services,
distribution channels, customers, intermediaries, and geographic
locations; and
(C) Reports filed by the casino pursuant to this chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the
casino's money laundering, terrorist financing, or other illicit
finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a casino's consideration,
evaluation, and, as warranted by the casino's risk profile and AML/CFT
program, implementation of innovative approaches to meet compliance
obligations pursuant to the Bank Secrecy Act and this chapter.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program, including
training in the identification of unusual or suspicious transactions,
to the extent that the reporting of such transactions is required by
this chapter, by other applicable law or regulation, or by the casino's
own administrative and compliance policies;
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified casino personnel or by a qualified outside
party;
(6) Include procedures for using all available information to
determine:
(i) When required by this chapter, the name, address, social
security number, and other information, and verification of the same,
of a person;
(ii) The occurrence of any transactions or patterns of transactions
required to be reported pursuant to Sec. 1021.320; and
(iii) Whether any record as described in subpart D of part 1010 of
this chapter or subpart D of this part must be made and retained;
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (6) of this section, must be documented
and approved by the casino's board of directors or, if the casino does
not have a board of directors, an equivalent governing body. Such
documentation must be made available to FinCEN or its designee upon
request. The AML/CFT program must be subject to oversight by the
casino's board of directors, or equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
0
10. Amend Sec. 1021.410 by revising paragraph (b)(10) to read as
follows:
Sec. 1021.410 Additional records to be made and retained by casinos.
* * * * *
(b) * * *
(10) A copy of the AML/CFT program described in Sec. 1021.210.
* * * * *
PART 1022--RULES FOR MONEY SERVICES BUSINESSES
0
11. The authority citation for part 1022 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
12. Revise Sec. 1022.210 to read as follows:
Sec. 1022.210 AML/CFT program requirements for money services
businesses.
A money services business, as defined by Sec. 1010.100(ff) of this
chapter, must establish, implement, and maintain an effective, risk-
based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
money service business's risk profile that takes into account higher-
risk and lower-risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the money services business's AML/CFT program, including
implementation of the components required under paragraphs (a)(2)
through (5) of this section. The risk assessment process must:
(i) Identify, evaluate, and document the money services business's
money laundering, terrorist financing, and other illicit finance
activity risks, including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the money services business based on the
money services business's business activities, including products,
services, distribution channels, customers, intermediaries, and
geographic locations; and
(C) Reports filed by the money services business pursuant to this
chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the money
services business's money laundering, terrorist financing, or other
illicit finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks, ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a money services business's
consideration, evaluation, and, as warranted by the money services
business's risk profile and AML/CFT program, implementation of
innovative approaches to meet compliance obligations pursuant to the
Bank Secrecy Act and this chapter.
(i) Internal policies, procedures, and controls developed and
implemented under this section must include provisions for complying
with the requirements of this chapter including, to the extent
applicable to the money services business, requirements for:
(A) Verifying customer identification, including as set forth in
paragraph (a)(2)(iii) of this section;
(B) Filing reports;
(C) Creating and retaining records; and
(D) Responding to law enforcement requests.
(ii) A person that is a money services business solely because it
is an agent for another money services business, as set forth in Sec.
1022.380(a)(3), and the money services business for which it serves as
agent, may by agreement allocate between them responsibility for
development of internal policies, procedures, and controls required by
this paragraph (a)(2). Each money services business will remain solely
responsible for implementation of the requirements set forth in this
section, and nothing in this paragraph (a)(2) relieves any money
services business from its obligation to establish, implement, and
maintain an effective AML/CFT program.
[[Page 55487]]
(iii) A money services business that is a provider or seller of
prepaid access must establish, implement, and maintain procedures to
verify the identity of a person who obtains prepaid access under a
prepaid program and obtain identifying information concerning such a
person, including name, date of birth, address, and identification
number. Sellers of prepaid access must also establish, implement, and
maintain procedures to verify the identity of a person who obtains
prepaid access to funds that exceed $10,000 during any one day and
obtain identifying information concerning such a person, including
name, date of birth, address, and identification number. Providers of
prepaid access must retain access to such identifying information for
five years after the last use of the prepaid access device or vehicle;
such information obtained by sellers of prepaid access must be retained
for five years from the date of the sale of the prepaid access device
or vehicle.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program; and
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the money services business or by a
qualified outside party.
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (5) of this section, must be documented
and approved by the money services business's board of directors or, if
the money services business does not have a board of directors, an
equivalent governing body. Such documentation must be made available to
FinCEN or its designee upon request. The AML/CFT program must be
subject to oversight by the money services business's board of
directors, or equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program shall remain the responsibility of, and be performed by,
persons in the United States who are accessible to, and subject to
oversight and supervision by, FinCEN and the appropriate Federal
functional regulator.
(d) A money services business must develop and implement an anti-
money laundering program that complies with the requirements of this
section on or before the end of the 90-day period beginning on the day
following the date the business is established.
PART 1023--RULES FOR BROKERS OR DEALERS IN SECURITIES
0
12. The authority citation for part 1023 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
13. Revise Sec. 1023.210 to read as follows:
Sec. 1023.210 AML/CFT program requirements for broker-dealers.
A broker-dealer must establish, implement, and maintain an
effective, risk-based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
broker-dealer's risk profile that takes into account higher-risk and
lower-risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the broker-dealer's AML/CFT program, including implementation of
the components required under paragraphs (a)(2) through (6) of this
section. The risk assessment process must:
(i) Identify, evaluate, and document the broker-dealer's money
laundering, terrorist financing, and other illicit finance activity
risks, including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the broker-dealer based on the broker-
dealer's business activities, including products, services,
distribution channels, customers, intermediaries, and geographic
locations; and
(C) Reports filed by the broker-dealer pursuant to this chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the broker-
dealer's money laundering, terrorist financing, or other illicit
finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a broker-dealer's
consideration, evaluation, and, as warranted by the broker-dealer's
risk profile and AML/CFT program, implementation of innovative
approaches to meet compliance obligations pursuant to the Bank Secrecy
Act and this chapter.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program;
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the broker-dealer or by a qualified
outside party; and
(6) Include appropriate risk-based procedures for conducting
ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to identify and report
suspicious transactions and to maintain and update customer
information. For purposes of this paragraph, customer information must
include information regarding the beneficial owners of legal entity
customers (as defined in Sec. 1010.230 of this chapter).
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (6) of this section, must be documented
and approved by the broker-dealer's board of directors or, if the
broker-dealer does not have a board of directors, an equivalent
governing body. Such documentation must be made available to FinCEN or
its designee upon request. The AML/CFT program must be subject to
oversight by the broker-dealer's board of directors, or equivalent
governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
(d) The AML/CFT program must comply with the rules, regulations, or
requirements of the broker-dealer's self-regulatory organization that
govern such programs, provided that the rules, regulations, or
requirements of the self-regulatory organization governing such
programs have been made effective under the Securities Exchange Act of
1934 by the appropriate Federal functional regulator in consultation
with FinCEN.
[[Page 55488]]
0
14. Amend Sec. 1023.220 by revising paragraphs (a)(1) and (a)(6)(iii)
to read as follows:
Sec. 1023.220 Customer identification programs for broker-dealers.
(a) * * *
(1) In general. A broker-dealer must establish, document, and
maintain a written Customer Identification Program (``CIP'')
appropriate for its size and the type of business that, at a minimum,
includes each of the requirements of paragraphs (a)(1) through (5) of
this section. The CIP must be a part of the broker-dealer's AML/CFT
program required under 31 U.S.C. 5318(h).
* * * * *
(6) * * *
(iii) The other financial institution enters into a contract
requiring it to certify annually to the broker-dealer that it has
implemented its AML/CFT program, and that it will perform (or its agent
will perform) the specified requirements of the broker-dealer's CIP.
* * * * *
PART 1024--RULES FOR MUTUAL FUNDS
0
15. The authority citation for part 1024 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
16. Revise Sec. 1024.210 to read as follows:
Sec. 1024.210 AML/CFT program requirements for mutual funds.
A mutual fund must establish, implement, and maintain an effective,
risk-based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
mutual fund's risk profile that takes into account higher-risk and
lower-risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the mutual fund's AML/CFT program, including implementation of the
components required under paragraphs (a)(2) through (6) of this
section. The risk assessment process must:
(i) Identify, evaluate, and document the mutual fund's money
laundering, terrorist financing, and other illicit finance activity
risks, including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the mutual fund based on the mutual fund's
business activities, including products, services, distribution
channels, customers, intermediaries, and geographic locations; and
(C) Reports filed by the mutual fund pursuant to this chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the mutual
fund's money laundering, terrorist financing, or other illicit finance
activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a mutual fund's consideration,
evaluation, and, as warranted by the mutual fund's risk profile and
AML/CFT program, implementation of innovative approaches to meet
compliance obligations pursuant to the Bank Secrecy Act and this
chapter.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program;
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the mutual fund or by a qualified
outside party; and
(6) Include appropriate risk-based procedures for conducting
ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to identify and report
suspicious transactions and to maintain and update customer
information. For purposes of this paragraph, customer information must
include information regarding the beneficial owners of legal entity
customers (as defined in Sec. 1010.230 of this chapter).
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (6) of this section, must be documented
and approved by the mutual fund's board of directors or, if the mutual
fund does not have a board of directors, an equivalent governing body.
Such documentation must be made available to FinCEN or its designee
upon request. The AML/CFT program must be subject to oversight by the
mutual fund's board of directors, or equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
0
17. Amend Sec. 1024.220 by revising paragraphs (a)(1) and (a)(6)(iii)
to read as follows:
Sec. 1024.220 Customer identification programs for mutual funds.
(a) * * *
(1) In general. A mutual fund must implement a written Customer
Identification Program (``CIP'') appropriate for its size and type of
business that, at a minimum, includes each of the requirements of
paragraphs (a)(1) through (5) of this section. The CIP must be a part
of the mutual fund's AML/CFT program required under the regulations
implementing 31 U.S.C. 5318(h).''
* * * * *
(6) * * *
(iii) The other financial institution enters into a contract
requiring it to certify annually to the mutual fund that it has
implemented its AML/CFT program, and that it will perform (or its agent
will perform) the specified requirements of the mutual fund's CIP.
* * * * *
PART 1025--RULES FOR INSURANCE COMPANIES
0
18. The authority citation for part 1025 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
19. Revise Sec. 1025.210 to read as follows:
Sec. 1025.210 AML/CFT program requirements for insurance companies.
An insurance company must establish, implement, and maintain an
effective, risk-based, and reasonably designed AML/CFT program
applicable to its covered products.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
insurance company's risk profile that takes into account higher-risk
and lower-risk
[[Page 55489]]
customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the insurance company's AML/CFT program, including implementation
of the components required under paragraphs (a)(2) through (5) of this
section. The risk assessment process must:
(i) Identify, evaluate, and document the insurance company's money
laundering, terrorist financing, and other illicit finance activity
risks associated with its covered products, including consideration of
the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the insurance company based on the insurance
company's business activities, including products, services,
distribution channels, customers, intermediaries, and geographic
locations; and
(C) Reports filed by the insurance company pursuant to this
chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the
insurance company's money laundering, terrorist financing, or other
illicit finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for an insurance company's
consideration, evaluation, and, as warranted by the insurance company's
risk profile and AML/CFT program, implementation of innovative
approaches to meet compliance obligations pursuant to the Bank Secrecy
Act and this chapter. Internal policies, procedures, and controls
developed and implemented by an insurance company under this section
must include provisions for integrating the company's insurance agents
and insurance brokers into its AML/CFT program and for obtaining all
relevant customer-related information.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program. An insurance
company may satisfy this requirement with respect to its employees,
insurance agents, and insurance brokers by directly training such
persons or verifying that persons have received training by another
insurance company or by a competent third party with respect to the
covered products offered by the insurance company; and
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the insurance company or by a
qualified outside party. The testing must include an evaluation of the
compliance of the insurance company's insurance agents and insurance
brokers with their obligations under the AML/CFT program applicable to
its covered products.
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (5) of this section, must be documented
and approved by the insurance company's board of directors or, if the
insurance company does not have a board of directors, an equivalent
governing body. Such documentation must be made available to FinCEN or
its designee upon request. The AML/CFT program must be subject to
oversight by the insurance company's board of directors, or equivalent
governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
(d) An insurance company that is registered or required to register
with the Securities and Exchange Commission as a broker-dealer in
securities will be deemed to have satisfied the requirements of this
section for its broker-dealer activities to the extent that the company
is required to establish and has established an AML/CFT program
pursuant to Sec. 1023.210 of this chapter and complies with such
program.
PART 1026--RULES FOR FUTURES COMMISSION MERCHANTS AND INTRODUCING
BROKERS IN COMMODITIES
0
20. The authority citation for part 1026 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
sec. 701, Pub. L. 114-74, 129 Stat. 599.
0
21. Revise Sec. 1026.210 to read as follows:
Sec. 1026.210 AML/CFT program requirements for futures commission
merchants and introducing brokers in commodities.
A futures commission merchant and an introducing broker in
commodities must establish, implement, and maintain an effective, risk-
based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
risk profile of the futures commission merchant or introducing broker
in commodities that takes into account higher-risk and lower-risk
customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the AML/CFT program, including implementation of the components
required under paragraphs (a)(2) through (6) of this section. The risk
assessment process must:
(i) Identify, evaluate, and document the risks of the futures
commission merchant or introducing broker in commodities, including
consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the futures commission merchant or
introducing broker in commodities based on its business activities,
including products, services, distribution channels, customers,
intermediaries, and geographic locations; and
(C) Reports filed by the futures commission merchant or introducing
broker in commodities pursuant to this chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the money
laundering, terrorist financing, or other illicit finance activity
risks of the futures commission merchant or introducing broker in
commodities;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, or other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a futures commission
merchant's or an introducing broker's in commodities consideration,
evaluation, and, as
[[Page 55490]]
warranted by the futures commission merchant's or introducing broker's
in commodities risk profile and AML/CFT program, implementation of
innovative approaches to meet compliance obligations pursuant to the
Bank Secrecy Act and this chapter.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program;
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the futures commission merchant or
introducing broker in commodities or by a qualified outside party;
(6) Include appropriate risk-based procedures for conducting
ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to identify and report
suspicious transactions and to maintain and update customer
information. For purposes of this paragraph, customer information must
include information regarding the beneficial owners of legal entity
customers (as defined in Sec. 1010.230 of this chapter); and
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (6) of this section, must be documented
and approved by the board of directors or, if the futures commission
merchant or introducing broker in commodities does not have a board of
directors, an equivalent governing body. Such documentation must be
made available to FinCEN or its designee upon request. The AML/CFT
program must be subject to oversight by the board of directors, or
equivalent governing body, of the futures commission merchant or
introducing broker in commodities.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
(d) The AML/CFT program must comply with the rules, regulations, or
requirements of the futures commission merchant's or introducing
broker's in commodities self-regulatory organization that govern such
programs, provided that the rules, regulations, or requirements of the
self-regulatory organization governing such programs have been made
effective under the Commodity Exchange Act by the appropriate Federal
functional regulator in consultation with FinCEN.
0
22. Amend Sec. 1026.220 by revising paragraphs (a)(1) and (a)(6)(iii)
to read as follows:
Sec. 1026.220 Customer identification programs for futures commission
merchants and introducing brokers.
(a) * * *
(1) In general. Each futures commission merchant and introducing
broker must implement a written Customer Identification Program (CIP)
appropriate for its size and the type of business that, at a minimum,
includes each of the requirements of paragraphs (a)(1) through (5) of
this section. The CIP must be a part of each futures commission
merchant's and introducing broker's AML/CFT program required under 31
U.S.C. 5318(h).
* * * * *
(6) * * *
(iii) The other financial institution enters into a contract
requiring it to certify annually to the futures commission merchant or
introducing broker that it has implemented its AML/CFT program, and
that it will perform (or its agent will perform) the specified
requirements of the futures commission merchant's or introducing
broker's CIP.
* * * * *
PART 1027--RULES FOR DEALERS IN PRECIOUS METALS, PRECIOUS STONES,
OR JEWELS
0
23. The authority citation for part 1027 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.
0
24. Amend Sec. 1027.100 by revising paragraph (b)(4) to read as
follows:
Sec. 1027.100 Definitions.
* * * * *
(b) * * *
(4) For purposes of this paragraph (b) and Sec. 1027.210, the
terms ``purchase'' and ``sale'' do not include the purchase of jewels,
precious metals, or precious stones that are incorporated into
machinery or equipment to be used for industrial purposes, and the
purchase and sale of such machinery or equipment.
* * * * *
0
25. Revise Sec. 1027.210 to read as follows:
Sec. 1027.210 AML/CFT program requirements for dealers in precious
metals, precious stones, or jewels.
A dealer must establish, implement, and maintain an effective,
risk-based, and reasonably designed AML/CFT program applicable to the
purchase and sale of covered goods.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
dealer's risk profile that takes into account higher-risk and lower-
risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the dealer's AML/CFT program, including implementation of the
components required under paragraphs (a)(2) through (6) of this
section. The risk assessment process must:
(i) Identify, evaluate, and document the dealer's money laundering,
terrorist financing, and other illicit finance activity risks,
including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the dealer based on its business activities,
including products, services, distribution channels, customers,
intermediaries, and geographic locations;
(C) As applicable, the reports filed by the dealer pursuant to this
chapter;
(D) The extent to which the dealer engages in transactions other
than with established customers or sources of supply, or other dealers
subject to this rule; and
(E) Whether the dealer engages in transactions for which payment or
account reconciliation is routed to or from accounts located in a
country whose government has been identified by the Department of State
as a sponsor of international terrorism under 22 U.S.C. 2371;
designated as non-cooperative with international anti-money laundering
principles or procedures by an intergovernmental group or organization
of which the United States is a member and with which designation the
United States representative or organization concurs; or designated by
the Secretary of the Treasury pursuant to 31 U.S.C. 5318A as warranting
special measures due to money laundering concerns;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the
broker's money
[[Page 55491]]
laundering, terrorist financing, or other illicit finance activity
risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, or other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a dealer's consideration,
evaluation, and, as warranted by the dealer's risk profile and AML/CFT
program, implementation of innovative approaches to meet compliance
obligations pursuant to the Bank Secrecy Act and this chapter. The
internal policies, procedures, and controls must assist the dealer in
identifying transactions that may involve use of the dealer to
facilitate money laundering, terrorist financing, or other illicit
finance activity, including provisions for making reasonable inquiries
to determine whether a transaction involves money laundering or
terrorist financing, and for refusing to consummate, withdrawing from,
or terminating such transactions. Factors that may indicate a
transaction is designed to involve use of the dealer to facilitate
money laundering or terrorist financing include, but are not limited
to:
(i) Unusual payment methods, such as the use of large amounts of
cash, multiple or sequentially numbered money orders, traveler's
checks, or cashier's checks, or payment from third parties;
(ii) Unwillingness by a customer or supplier to provide complete or
accurate contact information, financial references, or business
affiliations;
(iii) Attempts by a customer or supplier to maintain an unusual
degree of secrecy with respect to the transaction, such as a request
that normal business records not be kept;
(iv) Purchases or sales that are unusual for the particular
customer or supplier, or type of customer or supplier; and
(v) Purchases or sales that are not in conformity with standard
industry practice;
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program; and
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the dealer or by a qualified
outside party.
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (5) of this section, must be documented
and approved by the dealer's board of directors or, if the dealer does
not have a board of directors, an equivalent governing body. Such
documentation must be made available to FinCEN or its designee upon
request. The AML/CFT program must be subject to oversight by the
dealer's board of directors, or equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN.
(d) To the extent that a retailer's purchases from persons other
than dealers and other retailers exceeds the $50,000 threshold
contained in Sec. 1027.100(b)(2)(i), the AML/CFT program required of
the retailer under this paragraph need only address such purchases.
(e) A dealer must develop and implement an anti-money laundering
program that complies with the requirements of this section on or
before six months after the date a dealer becomes subject to the
requirements of this section.
PART 1028--RULES FOR OPERATORS OF CREDIT CARD SYSTEMS
0
26. The authority citation for part 1028 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.
0
27. Revise Sec. 1028.210 to read as follows:
Sec. 1028.210 AML/CFT program requirements for operators of credit
card systems.
An operator of a credit card system must establish, implement, and
maintain an effective, risk-based, and reasonably designed AML/CFT
program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
operator's risk profile that takes into account higher-risk and lower-
risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the AML/CFT program, including implementation of the components
required under paragraphs (a)(2) through (5) of this section. The risk
assessment process must:
(i) Identify, evaluate, and document the operator's money
laundering, terrorist financing, and other illicit finance activity
risks, including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the operator of a credit card system based on
the operator's business activities, including products, services,
distribution channels, customers, intermediaries, and geographic
locations; and
(C) As applicable, reports filed by the operator pursuant to this
chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the
operator's money laundering, terrorist financing, or other illicit
finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, or other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks, ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for an operator's consideration,
evaluation, and, as warranted by the operator's risk profile and AML/
CFT program, implementation of innovative approaches to meet compliance
obligations pursuant to the Bank Secrecy Act and this chapter. An
operator's AML/CFT program must incorporate internal policies,
procedures, and controls designed to ensure the following:
(i) That the operator does not authorize, or maintain authorization
for, any person to serve as an issuing or acquiring institution without
the operator taking appropriate steps, based upon the operator's money
laundering, terrorist financing, or other illicit finance activity risk
assessment, required by paragraph (a)(1) of this section, to guard
against that person issuing the operator's credit card or acquiring
merchants who accept the operator's credit card in circumstances that
facilitate money laundering or the financing of terrorist activities;
and
(ii) For purposes of making the risk assessment required by
paragraph (a)(1) of this section, the following persons are presumed to
pose a heightened risk of money laundering or terrorist financing when
evaluating whether and under what circumstances to authorize, or to
maintain authorization for, any such
[[Page 55492]]
person to serve as an issuing or acquiring institution:
(A) A foreign shell bank that is not a regulated affiliate, as
those terms are defined in Sec. 1010.605(g) and (n) of this chapter;
(B) A person appearing on the Specially Designated Nationals and
Blocked Persons List issued by the Department of the Treasury's Office
of Foreign Assets Control;
(C) A person located in, or operating under a license issued by, a
country whose government has been identified by the Department of State
as a sponsor of international terrorism under 22 U.S.C. 2371;
(D) A foreign bank operating under an offshore banking license,
other than a branch of a foreign bank if such foreign bank has been
found by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act (12 U.S.C. 1841, et seq.) or the International
Banking Act (12 U.S.C. 3101, et seq.) to be subject to comprehensive
supervision or regulation on a consolidated basis by the relevant
supervisors in that jurisdiction;
(E) A person located in, or operating under a license issued by, a
jurisdiction that has been designated as non-cooperative with
international anti-money laundering principles or procedures by an
intergovernmental group or organization of which the United States is a
member, with which designation the United States representative to the
group or organization concurs; and
(F) A person located in, or operating under a license issued by, a
jurisdiction that has been designated by the Secretary of the Treasury
pursuant to 31 U.S.C. 5318A as warranting special measures due to money
laundering concerns;
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program; and
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the operator or by a qualified
outside party.
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (5) of this section, must be documented
and approved by the operator's board of directors or, if the operator
does not have a board of directors, an equivalent governing body. Such
documentation must be made available to FinCEN or its designee upon
request. The AML/CFT program must be subject to oversight by the
operator's board of directors, or equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
PART 1029--RULES FOR LOAN OR FINANCE COMPANIES
0
28. The authority citation for part 1029 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
0
29. Revise Sec. 1029.210 to read as follows:
Sec. 1029.210 AML/CFT program requirements for loan or finance
companies.
A loan or finance company must establish, implement, and maintain
an effective, risk-based, and reasonably designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
loan or finance company's risk profile that takes into account higher-
risk and lower-risk customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the AML/CFT program, including implementation of the components
required under paragraphs (a)(2) through (5) of this section. The risk
assessment process must:
(i) Identify, evaluate, and document the loan or finance company's
money laundering, terrorist financing, and other illicit finance
activity risks, including consideration of the following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the company based on the company's business
activities, including products, services, distribution channels,
customers, intermediaries, and geographic locations; and
(C) Reports filed by the loan or finance company pursuant to this
chapter;
(ii) Provide for updating the risk assessment using the process
required under paragraph (a)(1)(i) of this section on a periodic basis,
including, at a minimum, when there are material changes to the
company's money laundering, terrorist financing, and other illicit
finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks, ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a loan or finance company's
consideration, evaluation, and, as warranted by the loan or finance
company's risk profile and AML/CFT program, implementation of
innovative approaches to meet compliance obligations pursuant to the
Bank Secrecy Act and this chapter. Internal policies, procedures, and
controls developed and implemented by the loan or finance company under
this section must include provisions for integrating the loan or
finance company's agents and brokers, and for obtaining all relevant
customer-related information.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program. A loan or finance
company may satisfy this requirement with respect to its employees,
agents, and brokers by directly training such persons or verifying that
such persons have received training by a competent third party with
respect to the products and services offered by the loan or finance
company; and
(5) Include independent, periodic AML/CFT program testing to be
conducted by the qualified loan or finance company personnel or by a
qualified outside party. The testing must include an evaluation of the
compliance of the loan or finance company's agents and brokers with
their obligations under the AML/CFT program.
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (5) of this section, must be documented
and approved by the company's board of directors or, if the loan or
finance company does not have a board of directors, an equivalent
governing body. Such documentation must be made available to FinCEN or
its designee upon request. The AML/CFT program must be subject to
oversight by the loan or finance company's board of directors, or
equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and
[[Page 55493]]
be performed by, persons in the United States who are accessible to,
and subject to oversight and supervision by, FinCEN and the appropriate
Federal functional regulator.
Sec. 1029.320 [Amended]
0
30. Amend Sec. 1029.320 by removing paragraph (g).
PART 1030--RULES FOR HOUSING GOVERNMENT SPONSORED ENTERPRISES
0
31. The authority citation for part 1030 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1960; 31 U.S.C. 5311-5314
and 5316-5336; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
0
32. Revise Sec. 1030.210 to read as follows:
Sec. 1030.210 AML/CFT program requirements for housing government
sponsored enterprises.
A housing government sponsored enterprise must establish,
implement, and maintain an effective, risk-based, and reasonably
designed AML/CFT program.
(a) An effective, risk-based, and reasonably designed AML/CFT
program focuses attention and resources in a manner consistent with the
bank's risk profile that takes into account higher-risk and lower-risk
customers and activities and must, at a minimum:
(1) Establish a risk assessment process that serves as the basis
for the AML/CFT program, including implementation of the components
required under paragraphs (a)(2) through (5) of this section. The risk
assessment process must:
(i) Identify, evaluate, and document the housing government
sponsored enterprise's money laundering, terrorist financing, and other
illicit finance activity risks, including consideration of the
following:
(A) The AML/CFT Priorities issued pursuant to 31 U.S.C. 5318(h)(4),
as appropriate;
(B) The money laundering, terrorist financing, and other illicit
finance activity risks of the housing government sponsored enterprise
based on its business activities, including products, services,
distribution channels, customers, intermediaries, and geographic
locations; and
(C) Reports filed by the housing government sponsored enterprise
pursuant to this chapter;
(ii) Provide for updating the housing government sponsored
enterprise's risk assessment using the process required under paragraph
(a)(1)(i) of this section on a periodic basis, including, at a minimum,
when there are material changes to the housing government sponsored
enterprise's money laundering, terrorist financing, and other illicit
finance activity risks;
(2) Reasonably manage and mitigate money laundering, terrorist
financing, and other illicit finance activity risks through internal
policies, procedures, and controls that are commensurate with those
risks and ensure ongoing compliance with the Bank Secrecy Act and the
requirements and prohibitions of this chapter. Such internal policies,
procedures, and controls may provide for a housing government sponsored
enterprise's consideration, evaluation, and, as warranted by the
housing government sponsored enterprise's risk profile and AML/CFT
program, implementation of innovative approaches to meet compliance
obligations pursuant to the Bank Secrecy Act and this chapter.
(3) Designate one or more qualified individuals to be responsible
for coordinating and monitoring day-to-day compliance;
(4) Include an ongoing employee training program. A housing
government sponsored enterprise may satisfy this requirement by
training such persons or verifying that such persons have received
training by a competent third party with respect to the products and
services offered by the housing government sponsored enterprise; and
(5) Include independent, periodic AML/CFT program testing to be
conducted by qualified personnel of the housing government sponsored
enterprise or by a qualified outside party.
(b) The AML/CFT program and each of its components, as required
under paragraphs (a)(1) through (5) of this section, must be documented
and approved by the housing government sponsored enterprise's board of
directors. Such documentation must be made available to FinCEN or its
designee upon request. The AML/CFT program must be subject to oversight
by the housing government sponsored enterprise's board of directors, or
equivalent governing body.
(c) The duty to establish, maintain, and enforce the AML/CFT
program must remain the responsibility of, and be performed by, persons
in the United States who are accessible to, and subject to oversight
and supervision by, FinCEN and the appropriate Federal functional
regulator.
Sec. 1030.320 [Amended]
0
33. Amend Sec. 1030.320 by removing paragraph (g).
Andrea M. Gacki,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2024-14414 Filed 6-28-24; 8:45 am]
BILLING CODE 4810-02-P