AML Compliance Guidelines: United States

AML Regulations in USA

In USA the major AML regulatory bodies which play critical roles in ensuring the integrity of the U.S. financial system are:

OFAC (Office of Foreign Assets Control):
An office of the U.S. Department of the Treasury that administers and enforces economic and trade sanctions based on US foreign policy and national security goals. It targets foreign countries, terrorists, international narcotics traffickers, and those involved in activities related to weapons of mass destruction.

FinCEN (Financial Crimes Enforcement Network):
A bureau of the U.S. Department of the Treasury that safeguards the financial system from illicit use, combats money laundering, and promotes national security through the collection, analysis, and dissemination of financial intelligence.

The Office of Foreign Assets Control (OFAC)

Specially Designated Nationals (SDN) List

• OFAC publishes a list of individuals and companies owned or controlled by, or acting on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers.
• All U.S. persons, including banks and other financial institutions, are prohibited from dealing with SDNs wherever they may be located, and all SDN assets are blocked.

Blocked Assets and Prohibitions: (31 C.F.R. Part 501.603)

• U.S. persons must block (i.e., freeze) assets of individuals/entities that appear on the SDN list and report the blocking action to OFAC within 10 business days.
• Transactions by U.S. persons involving blocked assets (property in which a sanctioned country or national has an interest) are generally prohibited unless licensed by OFAC.

Sectoral Sanctions Identifications (SSI) List

• This is a list of persons operating in sectors of the Russian economy identified by the Secretary of the Treasury. Directives define the specific prohibitions associated with each sector.
• U.S. persons cannot engage in certain types of activities with entities on this list.

Foreign Sanctions Evaders (FSE) List (Executive Order 13608)

• This list includes foreign individuals and entities determined to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions on Syria or Iran
• U.S. persons are generally prohibited from dealing with FSEs

Reporting Obligations

• 31 C.F.R. Part 501.604 for blocked transactions
• 31 C.F.R. Part 501.605 for rejected transactions
• Blocked and rejected transactions must be reported to OFAC

Licensing & Authorizations

• In certain situations, OFAC issues licenses that permit activities otherwise prohibited by sanctions.
• These can be general licenses (applying to all U.S. persons) or specific licenses (for specific parties/entities).

The Bank Secrecy Act

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) Requirements: (31 CFR § 1020.210)

• Under the BSA, financial institutions are mandated to have CDD procedures as a core element of their AML programs. This involves identifying and verifying the identity of their customers.
• As PEPs are often seen as posing a higher risk due to their position and potential for corruption, financial institutions may be required to apply EDD when dealing with PEPs. EDD might involve additional checks on the source of funds, regular updates to the PEP’s profile, and heightened transaction monitoring.

Customer Identification Program (CIP): (31 CFR § 1020.220)

• As part of the BSA, financial institutions are required to implement a CIP to verify the identities of their customers. This program serves as the first line of defense against illicit actors, and institutions often incorporate sanction screening into this process to ensure they are not inadvertently doing business with sanctioned individuals or entities.

Suspicious Activity Reporting (SAR): (31 CFR § 1020.320)

• Institutions are required by the BSA to file SARs for any transactions that are suspected to involve illicit funds or appear suspicious. Given the higher risks associated with PEPs, transactions involving them may be more closely scrutinized, and any suspicious activity could result in a SAR being filed.

Customer Due Diligence (CDD) Final Rule: (31 CFR § 1010.230)

• In 2016, FinCEN issued the CDD Final Rule, which became mandatory in May 2018. This rule emphasizes the need for financial institutions to identify and verify the identity of the beneficial owners of legal entity customers.

Patriot Act (Amendment to BSA)

Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern: (Section 311)

• The Secretary of the Treasury can require domestic financial institutions to take certain “special measures” against foreign jurisdictions, institutions, or transactions deemed to be of “primary money laundering concern.”
• These measures can include requiring increased recordkeeping, reporting of certain transactions, or even prohibiting or imposing conditions on the opening or maintaining of correspondent or payable-through accounts.
• This section inherently suggests a need for sanction screening to ensure no business is conducted with entities from jurisdictions of concern.

Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks: (Section 313)

• This section prohibits U.S. financial institutions from maintaining a correspondent account in the U.S. for foreign shell banks.
• Financial institutions are required to take reasonable steps to ensure that correspondent accounts of foreign banks are not being used by shell banks.
• Sanction screening can assist in identifying and ensuring compliance with these restrictions.

Forfeiture of Funds in U.S. Interbank Accounts: (Section 319(b))

• This section allows U.S. authorities to seize funds from correspondent bank accounts held at U.S. banks by foreign banks if those funds are subject to a forfeiture.
• It underscores the need for U.S. banks to know their foreign bank customers and to monitor transactions.

Special Due Diligence for Correspondent Accounts and Private Banking Accounts: (Section 312)

• Financial institutions are required to apply enhanced due diligence to correspondent accounts established, maintained, administered, or managed in the U.S. for foreign financial institutions.
• It mandates that institutions conduct enhanced scrutiny of private banking accounts held by non-U.S. persons to detect and report any suspicious transactions. This scrutiny is especially critical when the nominal account holder is a senior foreign political figure,or any immediate family member or close associate of such a figure.
• This provision seeks to identify the source of funds deposited into these accounts and to detect and report suspicious transactions that might signify money laundering or other illicit activities.

Verification of Identification: (Section 326)

• Financial institutions are mandated to verify the identity of individuals seeking to open an account.
• Institutions must establish a Customer Identification Program (CIP) that outlines procedures for verifying an individual’s identity. This includes collecting basic information such as name, date of birth, address, and identification number.
• As part of the CIP, institutions must ensure that individuals are not on government lists of known or suspected terrorists.
• Customers must be informed that their identity is being verified. This notice is typically provided during the account opening process.
• The Act promotes coordination with regulatory agencies to help institutions develop effective CIPs and ensure compliance with Section 326.

Anti-Money Laundering Act 2020

Beneficial Ownership Reporting (Section 6403)

• This provision mandates companies to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), aiming to deter the misuse of shell corporations for various illicit purposes, including evading sanctions.

Improving FinCEN’s Database (Section 6206)

• The AMLA emphasizes the modernization and technological enhancement of FinCEN’s database.

International Cooperation (Section 6504)

• The Act underlines the importance of international cooperation and coordination on AML initiatives.

Expanded Scope (Sections 6505 and 6509)

• The AMLA expands the BSA’s applicability to businesses dealing in antiquities and considers a study on the illicit trade in art. Both markets have been avenues for evading sanctions.

Increased Penalties (Section 6307)

• The AMLA enhances penalties for violating major provisions of the BSA. This implicitly encourages stronger compliance measures, including rigorous sanction screening.

Pilot Program on Sharing of Suspicious Activity Reports (SARs) within a Financial Group (Section 6212)

• This section enables FinCEN to set up a pilot program to allow a financial institution to share SARs with its foreign branches, subsidiaries, and affiliates.

Annual Reporting Requirement (Section 6216)

• This section mandates that FinCEN report annually to Congress on its efforts to combat illicit finance.

References

1. Office of Foreign Assets Control
2. Bank Secrecy Act (BSA)
3. USA PATRIOT Act
4. The Anti-Money Laundering Act of 2020