INVESTMENTS IN FINCEN AND THE PROGRESS OF THE BENEFICIAL OWNERSHIP REGISTRY
On April 1, 2021, Treasury’s Financial Crimes Enforcement Network (FinCEN) took the first step in what will be a months-long rulemaking process to enact the CTA, issuing an Advanced Notice of Proposed Rulemaking that requested public comment. FinCEN is required to issue a final rule implementing the registry by January 1, 2022, of next year. Then, the next step will be for FinCEN to issue a Notice of Proposed Rulemaking (NPRM) outlining its implementation plan and once again seeking public comment.
The process is being watched closely by the financial services industry as the final rule could have a significant impact on the customer due diligence (CDD) obligations of banks and other financial institutions.
“When FinCEN publishes the NPRM for beneficial ownership, they, and we, would welcome comments on how the registry would actually work and ultimately how it could be used for CDD purposes, which has some implications for combating corruption,” Rembrandt explained.
On September 24, the Financial Crimes Enforcement Network (FinCEN) issued an advanced notice of proposed rulemaking seeking comments on the implementation of a provision of AMLA 2020 requiring that dealers in antiquities, an industry that has been largely unregulated until now, be subject to AML rules under the BSA. For years, lawmakers and watchdogs have expressed concerns that bad actors have been exploiting the secrecy of the antiquities trade to facilitate money laundering and terrorist financing. Recent headlines on the looting of cultural heritage sites in the Middle East and the sale of artifacts from these sites on the black market have amplified these concerns.
The AMLA 2020 requires regulation of the antiquities trade by amending the BSA to include antiquities dealers, including advisors, consultants, or any other person who engages as a business in the solicitation or the sale of antiquities. BSA-regulated entities must implement rigorous procedures to prevent illicit financial activity and ensure compliance with the law, including monitoring transactions for red flags as to potential misconduct, reporting suspicious activity, and conducting robust customer due diligence. Under this rubric, there is a range of requirements applied to different types of regulated entities. FinCEN’s notice seeks practical comments on how best to implement the statute’s requirements for the antiquities trade.
FinCEN’s notice invites comments on a wide range of questions that will help them identify who qualifies as a dealer in antiquities, what an antiquity is, and what effective know-your-customer requirements should look like in the antiquities market. To answer these questions, FinCEN may take a similar path to the one it followed in extending the BSA to the trade of precious metals, stones, and jewels in 2005. However, FinCEN is seeking comments on how AML risks in the antiquities trade arise and, based on those comments, may impose more or less burdensome requirements on dealers in this space, including potentially requiring suspicious activity reporting.
Antiquities Market
Background
First, FinCEN is seeking information on the basics of the antiquities trade in order to define the categories of entities and individuals who may be subject to the regulations. The agency wants to know if there are any commonly understood definitions for the roles and responsibilities of those involved in the trade. It also asks how to distinguish a work of art from an antiquity. Further, the notice requests information about how antiquities transactions take place—are they leveraged or paid for in cash? FinCEN would also like to know where the funds for a transaction typically originate. Moreover, the agency is seeking input as to the breakdown of the antiquities market based on the value of the transactions (e.g., X% of all transactions are above $Y), which may be helpful to the agency in setting value thresholds to determine both what market players should be regulated and what types of transactions should be subject to reporting requirements.
Flow and Exchange of Information
Second, FinCEN wants to know about the antiquities market’s current experience with money laundering and other illicit financial activity. For instance, to what information do those in a transaction typically have access? What information does the buyer receive in relation to the seller and to what information is or should the buyer be entitled? What information does the seller receive in relation to the buyer and the payment? FinCEN also wants to know why this information might be withheld in some transactions. FinCEN then asks what areas of the antiquities market are particularly vulnerable to illicit financial activity. The agency wants to understand if these factors might be based on geography and how foreign-based participants may affect the risk factors in a particular transaction.
Current AML Standards
Third, FinCEN is seeking comments on how the antiquities market currently addresses such risks. The agency seeks comments about any safeguards the market is currently implementing to protect against illicit financial activity. For instance, the agency wishes to understand the type of due diligence market participants currently conduct in different types of transactions and which market participants can most effectively identify and guard against illicit financial activity.
Implementation of Final Rules
Finally, FinCEN requests detailed comments as to how its final rules should be implemented to most effectively address money laundering in the antiquities market. FinCEN wants to explore how feasible it would be to distinguish antiquities transactions by amount and purpose (e.g., for-profit v. not-for-profit activity) and how to approach setting these limits. FinCEN would also like to understand how the burden of the existing regulatory framework for financial institutions would affect the antiquities trade. For example, how would know-your-customer requirements apply in this context and what potential negative effects might disclosures have on the trade?
While the scope and breadth of these new rules remains uncertain, bringing the antiquities trade under the BSA regulatory framework will undoubtedly be a sea change for a well-established, global industry that, until now, has operated free of regulation. Interested market participants have until October 25 to submit comments as to the many critical aspects of this rule. Particularly given the agency’s relative unfamiliarity with this industry, the comments FinCEN receives have the potential to significantly affect the final rulemaking process.
We will continue monitoring developments and provide an update as these regulations take shape. In the meantime, interested parties should consult with counsel regarding the potential implications of the FinCEN’s notice in relation to their particular business and consider whether comments on any aspect of the agency’s proposal would be prudent.
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