Bill Would Create BSA Whistleblower Program

First Post in a Two-Post Series

Last week, the House Financial Services Committee released three proposed bills to codify many of the reform ideas that have arisen in an ongoing conversation among financial agencies, law enforcement, financial institutions, and commentators regarding the Bank Secretary Act (“BSA”) and Anti-Money-Laundering (“AML”) and Combating the Financing of Terrorism (“CFT”) laws. These reform topics include information sharing, resource sharing, and technological innovation — all of which have been repeat topics for this blog.

One proposed bill — entitled as the “To make reforms to the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” — seeks to reform the BSA and AML laws (the “BSA/AML Reform Bill”) and is divided into three main sections: Strengthening the Treasury; Improving AML/CFT Oversight; and Modernizing the AML System. Through the three sections, common themes emerge, including an emphasis on: BSA/AML regulation as a matter of national security; the need for cooperation among both the public/private sectors as well as the international community; and the need to encourage innovation as the technological conduits for financial crimes continue to evolve.  The BSA/AML Reform Bill is extremely detailed, with many various provisions, and we merely will summarize its major points here.

Next week, we will blog on one of the other proposed bills, The Corporate Transparency Act of 2019, which seeks to ensure that persons who form legal entities in the U.S. disclose the beneficial owners of those entities.

Strengthening the Treasury

Under Title I of the BSA/AML Reform Bill, the declaration of purpose of the BSA in 31 U.S.C. § 5311 would include adding the goals of seeking “to protect our national and collective security, [and] to safeguard the integrity of the international financial system.” This proposed language would emphasize more the CFT aspect of the BSA, which currently describes its purpose as seeking “to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.”

The BSA/AML Reform Bill also would create Privacy and Civil Liberties Officers within each financial regulator, the Financial Crimes Enforcement Network (“FinCEN”), and the Internal Revenue Service (“IRS”). These officers would be consulted regarding regulation developments and review, information sharing activities, and the evaluation and regulation of new technologies. A related Privacy and Civil Liberties Council would be formed to coordinate efforts.  The injection of privacy and civil liberties officers would be a major philosophical change to the BSA, which traditionally has focused on the gathering and reporting of information regarding those using the U.S. financial system, in order to guard against crime.

This bill emphasizes the need for international coordination and directs the Secretary of the Treasury to work with the Secretary’s foreign counterparts. The bill further would create a Treasury Attaché Program, through which the Secretary of the Treasury would appoint an attaché with BSA/AML expertise to be co-located in the U.S. embassy who would perform outreach with respect to BSA/AML issues and establish and maintain relationships with foreign counterparts.

On the domestic front, the bill would create FinCEN domestic liaisons tasked with specific geographic regions of the U.S. to provide support to both public and private-sector entities with respect to FinCEN. The bill also would establish the FinCEN Exchange, an initiative discussed by FinCEN Director Blanco last month, which would “facilitate the voluntary public-private information sharing partnership among law enforcement, financial institutions and FinCEN.”

Improving AML/CFT Oversight

Title II of the BSA/AML Reform Bill continues the theme of encouraging international cooperation by amending the BSA to allow financial institutions to share suspicious activity reports (“SARs”) with their foreign branches, subsidiaries, and affiliates for the purposes of combating illicit finance risks. Under the bill, the Secretary of the Treasury could impose limitations on this information sharing if the SAR “is subject to countermeasures imposed by the Federal Government,” or the Secretary — in consultation with the Civil Liberties and Privacy Officer of FinCEN — determine that the privacy and confidentiality of such information cannot be reasonably protected. The bill does not specify the procedures for allowing these disclosures, but directs that within 180 days after enactment, the Secretary of the Treasury shall issue regulations to carry out this amendment.

This section also follows up on the October 2018  Interagency Statement on Sharing BSA Resources that outlined instances of possible collaborative arrangements among banks to share resources to manage their BSA/AML obligations more efficiently and effectively. As we previously blogged, FinCEN has recognized that resource sharing arrangements could greatly benefit smaller institutions in particular. The bill allows sharing of compliance resources through such collaborative arrangements by amending 31 U.S.C. § 5318. The bill further directs the Secretary of Treasury and appropriate supervising agencies to conduct an outreach program to provide financial institutions with best practices for sharing resources. The bill makes clear that there is no requirement for financial institutions to share resources.

Creation of BSA Whistleblower Incentives

In a major development, the bill would create BSA whistleblower incentives by enacting a new section to provide awards for “covered judicial or administrative actions,” meaning “any judicial or administrative action brought by FinCEN under the BSA that results in monetary sanctions exceeding $1,000,000.” To earn an award, the whistleblower must provide “original information” leading to a successful enforcement of a covered judicial or administrative action. The bill defines “original information” as information derived from the independent knowledge or analysis of the whistleblower; not known to FinCEN from any other source; and not exclusively derived from allegations made in judicial or administrative hearings, government reports or other government sources, or the news media, unless the whistleblower was the source of that information.  Qualifying whistleblowers would receive an amount between 10%-30% of the total collected monetary sanctions imposed by the action.

The bill provides the Secretary of the Treasury with the discretion to establish additional rules for the issuance of the awards. The amount of the award would be at the discretion of the Secretary, but the FinCEN staff would play a role and would meet with the whistleblower to determine the significance of the contribution of the information and other relevant factors. The bill bars whistleblowers from recovery of an award when the person acquired the knowledge through employment with law enforcement, the Department of Justice, or regulatory agencies. Awards also would be denied to any whistleblower who is convicted of a crime related to the proceeding, gains the information through required audits of financials statements, or fails to submit information in such form as FinCEN requires.

Finally, this bill imposes additional punishments on individuals who violate the BSA. Specifically, individuals found to have committed an egregious violation – meaning a felony committed knowingly and willfully – will be barred from serving on the board of directors of a public company for a 10-year period from the date of such finding.

Modernizing the AML System

Title III of this bill builds upon recent discussions regarding the need to encourage financial institutions to develop innovative solutions to BSA/AML compliance and enforcement – as discussed in the Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing issued by federal financial regulatory agencies last year.

This bill would amend the BSA to encourage “financial institutions to consider, evaluate, and where appropriate, responsibly implement innovative approaches” to BSA/AML compliance. The bill would provide the Secretary of the Treasury discretion to provide exemptions to financial institutions “where necessary to facilitate testing and potential use of new technologies and other innovations.”

The bill further would create by statute an Innovation Lab within each applicable financial agency. These Innovation Labs would provide outreach to law enforcement, financial intuitions, and other persons (including vendors and technology) with respect to innovation and new technologies used to comply with BSA. The Innovation Labs also would support the implementation of such innovation and new technologies. Finally, the bill would create an Innovation Council comprised of the directors of each Innovation Lab and the director of FinCEN. This council would coordinate innovation related activities and issue an annual report to Congress regarding innovation activities and any legislative recommendations.

Take Away

Overall, this proposed bill demonstrates the Financial Services Committee has heard the call to modernize the BSA and AML/CFT regulations. The bill seeks to clarify the purpose of the BSA to protect national security. The bill proposes measures promote the efficient sharing of resources and information and encouraging innovation in the technologies and approaches used to combat money laundering and other financial crimes.  And, the bill sets forth a process for establishing a BSA whistleblower program. This is part of a larger effort to refine the way our government and financial institutions approach the detection and prevention of financial crimes. We will continue to provide updates on these ongoing efforts.

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Jessica C. Watt

wattj@ballardspahr.com |  302.252.4449 | view full bio

Jessica assists clients with white collar criminal defense, including conducting internal investigations, responding to subpoenas for documents and testimony, cooperating with ongoing investigations, and making presentations to the DOJ prior to indictment. Jessica’s white collar practice includes matters involving advice regarding AML and BSA compliance, as well as defending against alleged violations of the False Claims Act and other fraud and regulatory offenses.

Jessica also practices complex commercial litigation, with experience in cases involving breach of contract, fraud, and disputes related to lending and finance agreements. Her corporate litigation work includes matters of corporate control, corporate governance, statutory and contractual disputes, statutory demands for inspection of corporate books and records, and breach of fiduciary duties.