United States

U.S. Senate Committee hearings focus on anti-money laundering and BSA


On Feb. 6, 2018, two U.S. Senate committees held hearings that included discussions and testimony on beneficial ownership, customer due diligence and the regulatory environment for cryptocurrency.

The U.S. Senate Committee on the Judiciary heard testimony regarding proposed legislation that would require greater transparency during the incorporation process to consistently identify company owners when the company is formed. First, Acting Deputy Assistant Attorney General M. Kendall Day from the Department of Justice Criminal Division described the ways corporate structures promote anonymity that allows criminal organizations and money-launderers to circumvent the U.S.’s anti-money laundering laws.

One avenue criminals use to gain access to the U.S. financial system is through the misuse of corporate structures. Corporate structures are formed pursuant to state-level registration requirements, which vary widely from state to state. However, these requirements focus on company officers, directors and managers. No state has specific registration requirements for individuals who ultimately own or control legal entities—also known as beneficial ownership—upon formation of these entities. Under the current system, criminals conceal the nature, purpose or ownership of their accounts and the sources of their income through the use of front companies, shell companies or nominees. According to Mr. Day’s testimony, “Financial Action Task Force (FATF), the inter-governmental body responsible for developing and promoting policies to protect the global financial system against money laundering and other threats, highlighted this issue as one of the most critical gaps in the United States’ compliance with FATF standards in its most-recent evaluation.”

Mr. Day supported steps taken by the Treasury Department through the Customer Due Diligence Final Rule (CDD Rule) that require financial institutions to identify beneficial ownership of companies that open new bank accounts beginning May 2018. He noted, however, that the CDD Rule is only one step toward greater transparency and more effective legal frameworks that will dissuade criminals from misusing corporate structures to evade anti-money laundering laws.

Following Mr. Day’s testimony, Brian O’Shea from the U.S. Chamber of Commerce provided his testimony challenging the virtues of beneficial ownership requirements calling the Senate proposal

S. 1454, the True Incorporation Transparency for Law Enforcement (TITLE) Act overly broad. Mr. O’Shea noted the proposed paperwork requirements, and civil and criminal penalties would significantly encumber law-abiding, small and medium business owners with regulatory burden impeding their ability to foster job creation and economic growth.

Also, on Feb. 6, the chairpersons of the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) testified before the Senate Committee on Banking, Housing and Urban Affairs about the agencies’ regulatory efforts within the cryptocurrency industry. Both highlighted AML concerns regarding cryptocurrency and asked Congress for stricter federal oversight of cryptocurrency trading.

Jay Clayton, chairperson of the SEC, focused on the risks to investors in his statement, “A number of concerns have been raised regarding the cryptocurrency and initial coin offering (ICO) markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation. The ability of bad actors to commit age-old frauds with new technologies coupled with the significant amount of capital—particularly from retail investors—that has poured into cryptocurrencies and ICOs in recent months and the offshore footprint of many of these activities has only heightened these concerns.”

Christopher Giancarlo, chairperson of the CFTC, noted specifically, “Current law does not provide any U.S. federal regulator with such regulatory oversight authority over spot virtual currency platforms operating in the United States or abroad.”  He supported federal regulation of virtual currency platforms tailored to the risks posed including: data reporting, capital requirements, cybersecurity standards, measures to prevent fraud and price manipulation, and anti-money laundering, and “know your customer” protections.