Massive anti-money laundering reform suggests busy year for US regulators

The United States has passed huge reforms to its anti-money laundering regime, bringing digital asset exchanges and others dealing in digital assets further within the reach of regulators. The reforms, introduced via the Anti Money Laundering Act of 2020, became law on January 1, 2021, as part of the country’s sweeping annual defense bill.

The reforms address the Bank Secrecy Act (BSA), a central pillar of the U.S. AML regime. You might recall that the Bank Secrecy Act obliges financial institutions—such as digital asset exchanges—to actively detect, monitor and report potential money laundering activity. It is the tool being used to prosecute the BitMEX founders for willfully failing to implement anti-money laundering measures as required by law. Violations of the Bank Secrecy Act can result in criminal fines, jail time, or both.

The reforms greatly reinforce the application of the regime to digital asset operators, create new penalties for violations and increase existing ones—all of which spell a coming wave of regulatory enforcement within the industry.

Reforms take aim at digital asset companies

A key focus of the reforms is modernization. It has long been the position of FinCEN, the agency in charge of enforcing the BSA, that the existing rules apply to digital assets and the companies trading or otherwise dealing in them. Now, in case of any doubt, this has been made explicit: the reforms broaden many key definitions to include reference to ‘value that substitutes for currency’—in other words, digital assets.

For example, the definition of ‘financial institution’—those businesses who are required to comply with the BSA’s AML provisions—now includes:

• ‘a business engaged in the exchange of currency, funds, or value that substitutes for currency or funds’
• ‘a licensed sender of money or any other person who engages as a business in the transmission of funds or value that substitutes for currency

The definition of ‘money transmitting business’ is similarly expanded to include any business or person who engages as a business in the transmission of ‘currency, funds, or value that substitutes for currency.’

As a result, organizations dealing in digital assets are now much more likely—if not certainly—to be required to establish, maintain and monitor an AML program within their business. Failure to do so adequately will attract fines and potential jail time.

The potential penalties for failing to comply with the BSA have also been increased. Now, violations can be punished by additional fines equal to the amount of profit earned as a result of each breach. Those who commit an ‘egregious’ breach of the BSA will be barred from sitting on the boards of any financial institution in the U.S. for 10 years. And, if any breach is perpetrated by somebody working for a financial institution, they will be required to repay to their employer any bonus received in the year in which the breach took place.

The BSA are also being afforded additional resources in order to aid in the push for regulatory modernization. It includes an expansion of FinCEN’s human resource, creating a number of dedicated roles including dedicated Bank Security Act ‘Innovation Officers tasked with liaising between law enforcement and financial institutions on, among other things, novel technologies being employed by criminals and financial institutions.

Reforms spell danger for criminal exchanges

The reforms—in particular the new resources being afforded to BSA enforcement and the broadening of its penalties—suggest that regulators are getting ready for a widespread campaign of enforcement against digital asset exchanges and other entities within the community. This builds upon a 2020 which saw some of the more infamous digital asset players get hit with civil lawsuits and criminal charges, but it comes at the tail end of a period in which criminal digital asset exchanges have operated with apparent impunity.

The comments made by the sponsoring senators after the reforms were confirmed similarly suggest a renewed focus on the industry for U.S. lawmakers.

“For too long, our anti-money laundering laws haven’t kept up with the rapidly evolving methods that criminals use for illicit financial activities,” said Alabama Senator Doug Jones.

In a press release celebrating legislation, the sponsoring Senators also listed “ensuring the inclusion of current and future payment systems in the anti-money laundering-combating the financing of terrorism regime (AML-CFT) by updating the definition of “coins and currency” to include digital currency.

The decision to specifically legislate for employee responsibility for AML breaches will also add to what must be an uneasy relationship between those employed organizations profiting from the facilitation and perpetration of crime on their platforms. Employees can already be subject to the penalties of the BSA, and now removing the possibility of any incentives from their employers should further disincentivize employees of organizations in breach of their AML obligations of taking a ‘just following orders’ approach to their work.

That renewed focus has now, thankfully, translated into the largest reforms to the US AML regime since the passing of the USA PATRIOT Act in 2001. They hope now is that the certainty provided to the likes of FinCEN and other regulators in overseeing the digital asset industry—and the fangs added to the BSA in the form of increased penalties—will now translate into more indictments for the Crypto Crime Cartel.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple and 
Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.