In the waning days of 2020, many Canadians watched the political events unfolding in the United States, including Congress's first and only override of a Presidential veto during the Trump administration. However, few noted that the recently passed National Defence Authorization Act (the "Act"), which ultimately passed with bipartisan support, contains some important changes to anti-money laundering ("AML") enforcement in the U.S.1
The Act represents one of the most significant developments in the country's AML regime in decades. Notably, the Act establishes a mandatory registry of beneficial ownership for all U.S. corporations, effectively banning anonymous shell companies. The Act also strengthens the government's ability to seek foreign bank records, which may have a direct impact on Canadian banks and financial institutions.
The current regime and the proposed legislation
The current AML regimes in both the U.S. and Canada are based in large part on client identification requirements – referred to as "know your client" rules or "KYC" – including the collection and verification of beneficial ownership information of private banking customers. A "beneficial owner" is the real person who ultimately owns, controls, or benefits from a company or trust fund and the income it generates. In the AML context, beneficial ownership information is used to prevent the abuse of corporate vehicles for money laundering or other criminal purposes.
The primary change proposed by the new legislation is a shift in responsibility: identifying beneficial owners was previously the responsibility of banks holding accounts or providing other financial services to corporate entities. Now, all U.S. corporations will have to register the identity of their beneficial owners themselves in a database operated by the US Treasury Department's Financial Crimes Enforcement Network ("FinCEN"). Ownership data will not be made public. This is a component of the legislation's broader aim to modernize the Bank Secrecy Act, the primary American AML law. Other measures include the creation of two new subcommittees of the Bank Secrecy Act Advisory Group, focusing on innovation and technology and information security and confidentiality, as well as the establishment of a whistleblower program for those reporting AML violations.2
This is a fundamental shift in how AML enforcement is approached in the U.S. Money laundering is often possible through complex corporate structures set up across various jurisdictions. The measures proposed in the Act would have the effect of mitigating the impact of anonymous shell companies, strengthening financial data collection methods and increasing international cooperation between financial crime units.
The Act also provides a new mechanism to enable the US Department of Treasury and the Department of Justice ("DOJ") to subpoena foreign bank records during criminal investigations and civil forfeiture actions. Such subpoenas may be issued to any foreign bank that maintains a correspondent account in the U.S. This subpoena power is not limited to the records of the correspondent account, but includes the ability to subpoena records outside the U.S. The Act prohibits the courts from quashing or modifying the subpoena on the sole grounds that compliance would conflict with foreign laws – foreign banks who do not comply may face monetary penalties and potential restrictions from doing business with U.S. banks.
This shift in obligations away from the banks and into the hands of private sector entities reflects two broader trends pushed by both legislators and advocates in the AML space in recent years: increased reliance on the private sector, and a push for the centralized registration of beneficial ownership information.
U.S. and Canadian authorities have increasingly relied on incentivizing corporate self-reporting for AML and other white collar compliance purposes in recent years. The principle underlying this trend is an expectation that companies are best positioned to internally investigate compliance concerns, relying on private corporate cooperation rather than traditional law enforcement.
In the AML context, both in Canada and the U.S., financial institutions and other regulated entities – which may include banks, depository institutions, broker-dealers, mutual funds, insurance companies, trust companies and a range of other financial intermediaries – are subject to a host of obligations including KYC, maintaining a compliance program and reporting of suspicious transactions and activity.3 The government relies on these private sector entities to identify, collect, and verify data for corporate entities and submit this data to the relevant regulators. This data includes beneficial ownership information required to ensure AML compliance, and the identification of "politically exposed persons" and other specified entities to ensure sanctions compliance.
In the white collar context more broadly – in particular in relation to corruption – the use of deferred prosecution agreements ("DPAs") to incentivize companies to self-report illicit behaviour has further entrenched this reliance on the private sector. As we have previously written, DPAs enable the suspension of an outstanding investigation or prosecution and the resolution of corruption and white collar crime allegations through a negotiated settlement in which the company agrees to comply with certain measures. Negotiating a DPA is generally dependent on self-reporting of the conduct and cooperation of the accused party with law enforcement. U.S. authorities have been using DPAs to address corporate crime since the 1990's, and, while limited in practice to date, legislative amendments now enable their use in Canada, the UK, and France.
By making private corporations themselves subject to AML reporting obligations, the proposed legislation significantly shifts the burden for KYC from banks to private companies. This step has been advocated for by civil society organizations. Transparency International has been recommending governments establish mandatory public registers that disclose the beneficial ownerships of corporate entities,4 which it contends can help authorities recover stolen assets, prosecute criminals and deter others, and generally contribute to sustainable development, a fairer business environment and public trust. While the register proposed by the amended legislation is private, not public, it is a step in this direction nonetheless.
Impact on Canada
Money laundering has faced intense scrutiny in recent years in Canada, with a recent report by the Criminal Intelligence Service estimating that between $45 and $113 billion is laundered annually through Canada. In response to the 2019 Maloney Report [PDF] and 2018 German Report [PDF] detailing the extent of money laundering in British Columbia, the Commission of Inquiry into Money Laundering in British Columbia (the "Cullen Commission") has been established and tasked with determining where and how money laundering is taking place and why it has been allowed to happen, as well as whether and how it can be prevented. The Cullen Commission's hearings are ongoing. Canada may also see additional broader AML scrutiny as a result of the recent leak of suspicious activity reports collected by FinCEN. Previous leaks of information, including the Panama Papers, have shed light and renewed attention on money laundering in Canada in the past.
It remains to be seen whether Canada and other jurisdictions will follow the U.S.'s lead and develop a register of beneficial ownership, whether public or private. This is an areas to watch as the government continues to implement programs to foster post-pandemic economic recovery.
In addition, the expanded subpoena power under the Act for foreign bank records may create significant legal implications for Canadian banks from which U.S. authorities seek production. In particular, in the absence of a corresponding Mutual Legal Assistance Treaty request to Canadian authorities, a U.S. subpoena may not constitute a binding process under Canadian law. Although Canadian banks may opt to make voluntary production to cooperate with U.S. authorities or to avoid sanction for U.S. counterparts under the Act or otherwise, they may not be able to rely on compulsion of law exceptions to relevant privacy and confidentiality laws, among others. Canadian companies faced with subpoenas, document requests or other investigative proceedings from U.S. or other foreign authorities should seek the advice of counsel.
1. The House of Representatives approved the legislation on December 8, 2020. The Senate approved the legislation on December 11, 2020. The legislation passed by what was deemed a "veto proof" majority. However, it remains to be seen whether representatives will exercise the veto override. See also, Edward Helmore, "Senate overrides Donald Trump's veto of defense spending bill", The Guardian, January 1, 2021, online: https://www.theguardian.com/us-news/2021/jan/01/senate-overrides-donald-trump-veto-defense-spending-bill.
2. Brett Wolf, "US Senate passes defense bill with new anti-money laundering measures", Thomson Reuters, December 15, 2020, online: https://www.thomsonreuters.com/en-us/posts/corporates/defense-bill-anti-money-laundering/.
3. US AML Legislation includes the 31 U.S.C. 310 The Bank Secrecy Act, and Public Law 107-56 The PATRIOT Act.
4. See Transparency International, "Recommendations on Beneficial Ownership Transparency for Open Government Partnership National Action Plans", online: https://images.transparencycdn.org/images/Rec-on-Beneficial-Ownership-Transparency-for-OGP-action-plans-FINAL.pdf.
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