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ANALYSIS: Congress and Regulators Encourage AML RegTech in 2021

Jan. 20, 2021, 9:16 AM

In December, Congress and federal banking regulators ended the annus horribilis of 2020 with a flurry of actions to encourage the growth of innovative solutions that could relieve current anti-money laundering (AML) regulatory compliance burdens.

The Anti-Money Laundering Act of 2020 (AMLA), enacted as part of the 2021 National Defense Authorization Act (NDAA), includes several provisions that address regulatory technology (RegTech) innovation directly or require regulators to consider actions that will involve RegTech. Even ahead of Congress’s mandate, the Office of the Comptroller of the Currency (OCC) on Dec. 17 and the Federal Deposit Insurance Corporation (FDIC) on Dec. 15 issued proposed rules that would give each agency greater flexibility to authorize innovative RegTech solutions to suspicious activity report (SAR) filing requirements by its regulated institutions.

RegTech Innovation in the NDAA

Streamlined filing of BSA reports, an objective of multiple provisions of the AMLA as well as regulators’ initiatives discussed below, is a likely application for RegTech. Section 6202 amends the BSA to require that FinCEN, in consultation with state and federal financial regulators, shall “establish streamlined, including automated, processes” to permit the filing of “noncomplex” categories of reports that reduce burdens imposed on persons required to report and do not diminish the usefulness of the reporting.

Similarly, section 6204 requires that the departments of the Treasury, Justice, and Homeland Security, federal and state financial regulators, and other relevant stakeholders undertake a review of the filing requirements for SARs and currency transaction reports (CTRs) to reduce unnecessarily burdensome regulatory requirements. Reviews should take into consideration whether the process for electronic submission of reports can be improved with greater automation.

Section 6208 of the AMLA mandates that the Financial Crimes Enforcement Network (FinCEN) and each federal functional regulator appoint an “Innovation Officer.” The Innovation Officer’s duties are to provide outreach to outside parties on “innovative methods, processes, and new technologies” that may assist in Bank Secrecy Act (BSA) compliance, and to “provide technical assistance or guidance relating to the implementation of responsible innovation and new technology by financial institutions” and related persons, including “service providers, vendors and technology companies.”

FinCEN also must now consider establishing a process for issuing no-action letters, under AMLA Section 6305, and RegTech innovations are likely to be frequent subjects for no-action relief requests. FinCEN will conduct the assessment in consultation with the Attorney General, the federal functional regulators, state bank and credit union supervisors, and other federal agencies as appropriate. Within 180 days of the enactment of the NDAA, the Secretary of the Treasury will submit a report to Congress and propose rulemakings to implement its findings and determinations.

The AMLA also creates a mechanism for regulators’ high-level leadership to receive financial industry advice, specifically on RegTech innovation. Section 6207 creates a Subcommittee on Innovation and Technology in the Bank Secrecy Act Advisory Group (BSAAG), the panel of representatives from federal regulators, law enforcement, the financial industry, and trade groups that advises the Treasury Department on BSA-related developments. The subcommittee’s mission is to advise on means to effectively encourage and support technological innovation in AML and countering the financing of terrorism and proliferation, and to reduce obstacles to innovation that may arise from existing regulations, guidance, and examination practices.

Regulators’ SAR Filing Initiatives

Federal banking regulators have proposed rules intended to enable them to streamline SAR filing requirements and allow greater use of RegTech.

The OCC and FDIC proposals would allow each agency to issue exemptions from SAR filing requirements under its regulations, with the stated purpose of making it possible to grant relief for innovative solutions intended to meet BSA reporting requirements more efficiently and effectively. The proposals are open for public comment for 30 days after their publication in the Federal Register, and final rules may then be adopted.

These rules and the AMLA amendments to the BSA are likely to be the first of numerous federal initiatives to encourage increased use of RegTech in 2021 and beyond. Industries covered by the BSA, FinTech service providers, and other affected groups should follow developments in Congress and relevant regulatory agencies for further initiatives.

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