by Stephanie Brooker, M. Kendall Day, Ella Capone, Chris Jones, and Ben Schlichting

In this piece, we analyze some of the most important mid-year trends and developments in AML regulation and enforcement thus far in 2024.  Overall, 2024 has been very active, including key proposed and finalized rules, DOJ policy initiatives, and a notable judicial opinion discussed below.  For a longer version of this piece, please visit Gibson Dunn’s website.

New Rules

In 2024, the Financial Crimes Enforcement Network (“FinCEN”) has been active in releasing new and proposed rules to, most notably, expand coverage of the Bank Secrecy Act (“BSA”) to certain residential real estate transactions and investment advisers, both industries which had long been FinCEN priorities.  The agency also released a notable proposed rule to update AML Program requirements for all financial institutions.

1. FinCEN Creates New Reporting Obligations for Non-Financed Residential Real Estate Transfers

On February 7, 2024, FinCEN issued a long-awaited Notice of Proposed Rulemaking (“NPRM”) to apply certain AML requirements to U.S. residential real estate transactions.[1]  FinCEN moved quickly and recently issued the final rule on August 28, 2024 (hereinafter the “Real Estate Rule”).[2]

The Real Estate Rule requires certain professionals involved in real estate closings and settlements to report information to FinCEN about non-financed transfers of residential real estate to certain legal entities and trusts.[3]  Specifically, the Real Estate Rule covers non-financed transfers of various types of residential real estate, including single-family houses, townhouses, condominiums, cooperatives, and other buildings designed for occupancy by one to four families.[4]  A transaction is considered “non-financed” if it does not involve an extension of credit issued by a financial institution required to maintain an AML program and file Suspicious Activity Reports (“SARs”).[5]  There are exemptions from the Rule Estate Rule for some common, low-risk types of transfers such as transfers resulting from death, divorce, or to a bankruptcy estate.[6]

The Real Estate Rule identifies persons required to file a report (“Reporting Person(s)”) through a “cascade” framework which assigns the reporting responsibility in sequential order to various persons who perform closing or settlement functions for residential real estate transfers.[7]  The cascade is as follows: (1) the person listed as the closing agent; (2) the person who prepares the closing statement; (3) the person who files the transfer document (e.g., deed) with the recordation office; (4) the person who underwrites an owner’s title insurance policy for the transferee; (5) the person who disburses the greatest amount of funds in connection with the transfer; (6) the person who provides an evaluation of the status of the title; and (7) the person who prepares the deed or similar legal instrument.[8]  Alternatively, persons specified in this list can designate by written agreement who will serve as a Reporting Person for the transfer.[9] 

Reports are required to include certain information, including:

• The legal entity or trust receiving ownership of the property;
• The beneficial owners of the transferee entity or transferee trust;
• Certain individuals signing documents on behalf of the transferee entity or transferee trust during the reportable transfer;
• The transferor (e.g., the seller);
• The residential real property being transferred; and
• Total consideration and certain information about any payments made.[10]

Notably, a change from the proposed rule is that FinCEN added a “reasonable reliance” standard, which expressly allows persons to rely on information provided by others.[11]  Reports are due within 30 days of the transfer.[12]  The rule will take effect December 1, 2025.[13]

2. FinCEN Expands the BSA to Cover Investment Advisers

On February 13, 2024, FinCEN issued another long-awaited proposal to once again propose to extend BSA/AML coverage to certain investment advisers.[14]  And on August 28, 2024, FinCEN issued the final Investment Advisers Rule, which adds certain investment advisers to the list of businesses classified as “financial institutions” under the BSA.[15]  Specifically, the Investment Advisers Rule covers two types of advisers: (1) those that are registered or required to register with the U.S. Securities and Exchange Commission (“SEC”) (unless they are registered solely because they are (i) mid-sized advisers, (ii) multi-state advisers, or (iii) pension consultants, as well as (iv) RIAs that do not report any assets under management (AUM) on Form ADV); and (2) those that report to the SEC as Exempt Reporting Advisers.[16]  For investment advisers based outside of the United States, the Investment Advisers Rule only applies to advisory activities that (i) take place within the United States, including through the involvement of U.S. personnel or (ii) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.[17]

Under the Investment Advisers Rule, covered investment advisers will be required to, among other things, implement risk-based AML/CFT programs, file SARs with FinCEN, and keep records relating to the transmittal of funds that equal or exceed $3,000.[18]  The Investment Advisers Rule also applies information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions.[19]  Notably, the Investment Advisers Rule exempts from an investment adviser’s obligations (i) mutual funds, (ii) certain bank and trust company-sponsored collective investment funds, and (iii) investment advisers subject to the rule that are advised by the investment adviser.[20]

FinCEN delegated examination/supervisory authority to the SEC, given the SEC’s expertise in supervising the investment adviser industry.[21]  Compliance with the rule will be required by January 1, 2026.[22]

Relatedly, on May 13, 2024, FinCEN and the SEC also jointly issued an NPRM setting forth the proposed Customer Identification Program (“CIP”) requirements for the investment advisers covered by the Investment Advisers Rule.[23]  Specifically, covered investment advisers would be required to develop a CIP that includes risk-based procedures for determining and verifying the identity of customers to the extent reasonable and practicable.[24]  At a minimum, covered investment advisers would, like other financial institutions, be required to obtain within a reasonable time each customer’s name, date of birth or formation, address, identification number, and any other information necessary to form a reasonable belief the adviser knows the true identity of each customer.[25]  To date, FinCEN has not published a final rule for this NPRM.

3. FinCEN Proposes Updates to AML Program Requirements

In June, FinCEN separately issued another long-awaited NPRM to implement updates to the AML Program requirements for financial institutions geared towards modernizing the regulations.[26]  This was a requirement of the Anti-Money Laundering Act of 2020 (“AML Act”).  The proposed rule would add language to the AML program regulations to codify the regulatory expectation that AML programs must be “effective, risk-based, and reasonably designed … to identify, manage, and mitigate illicit finance activity risks.”[27]  Further, the NPRM proposes adding a few new requirements to the current AML program obligations for all financial institutions:

• Risk Assessment Process: All financial institutions would need to establish a “dynamic and recurrent risk assessment process” to enable each institution to understand its particular AML/CFT risks and to reasonably manage and mitigate those risks.[28] Financial institutions would need to periodically “identify, evaluate, and document” their AML/CFT risks, including by consideration of FinCEN’s BSA/AML Priorities, the institution’s business, operational, and customer characteristics, and SAR and other BSA reports filed by the institution.[29]  FinCEN’s BSA/AML Priorities focus on specific crimes that often generate illicit proceeds, including corruption, cybercrime, terrorist financing, fraud, transnational criminal organization activity, drug trafficking organization activity, human trafficking and human smuggling, and financing of certain state-sponsored weapons programs (known as proliferation financing).[30]  If adopted, institutions would need to review these priorities and consider ways in which their products, services, distribution channels, intermediaries, and payment patterns conceivably facilitate said crimes.[31]  The resulting risk assessment, as periodically updated, should then inform how the institution’s AML/CFT Program and each of its components are developed and updated to include risk-based internal policies, procedures, and controls designed to mitigate identified risks.[32] 
• Board Approval and Oversight: All AML/CFT programs would need to be approved and overseen by the institution’s Board of Directors or an equivalent governing body. It would also require Board approval of not just a primary AML/CFT Program document, but also “each of the components of the AML/CFT program.”[33]  In the NPRM, FinCEN further explained that the oversight requirement would be distinct from the approval requirement and would require “appropriate and effective oversight measures … to ensure that the board (or equivalent) can properly oversee whether AML/CFT programs are operating in an effective, risk-based, and reasonably designed manner.”[34]   
• On-shore Compliance: The NPRM would also implement the AML Act’s requirement that financial institutions with “the duty to establish, maintain, and enforce the AML/CFT program must remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to oversight and supervision by FinCEN and [any] Federal functional regulator.”[35] FinCEN acknowledged that financial institution may have AML/CFT staff and operations outside of the United States for reasons such as cost or efficiency—which may conflict with the onshoring proposal as stated.[36]  As such, the agency has “requested comment on a variety of potential questions that may arise for financial institutions as they address this statutory onshoring requirement.”[37] 

A central purpose of this NPRM is to modernize the BSA regulations by clarifying and streamlining the AML Program requirements, including by making them more consistent across financial institution types.  These changes may prove useful to regulated entities, as it may help them better understand their obligations and better appreciate what specific steps must be taken to develop an effective AML/CFT program.  The comment period on this proposal ran through September 3.[38]

Following FinCEN’s lead, on July 19, 2024, other agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency) issued their own NPRMs designed to facilitate the creation of similar risk-based compliance programs.[39]  Financial institutions subject to these agencies’ regulatory regimes will be tasked with similarly monitoring FinCEN’s AML/CFT priorities to look for ways to implement those requirements into its own internal auditing/risk-assessment processes.[40] 

Policies

The first half of 2024 also featured notable program announcements from DOJ relating to AML, including its new whistleblower policy.

4. DOJ Announces New Programs to Foster Reporting of Corporate AML Violations and Other Crimes

This year, FinCEN’s AML whistleblower program is starting to come online.  In February 2024, for instance, FinCEN Director Gacki testified that FinCEN has already received over 100 tips.[41]

In parallel, DOJ has announced an individual voluntary self-disclosure program to further incentivize reporting of potential corporate misconduct.  On April 15, 2024, the Criminal Division of DOJ announced the Pilot Program on Voluntary Self-Disclosure for Individuals (the “Pilot Program”), which clarifies the circumstances under which DOJ will offer non-prosecution agreements (“NPAs”) to individuals who voluntarily disclose original information about corporate criminal misconduct.[42]  The Pilot Program sets forth various criteria a reporting individual must satisfy in order to receive an NPA.[43]  A reporting individual must disclose original information that is non-public and not otherwise known to the DOJ.[44]  The original information must also relate to a specified list of offenses that includes:[45]

• Violations by financial institutions involving money laundering or fraud;
• Violations related to the integrity of financial markets;
• Violations related to foreign corruption and bribery;
• Violations related to healthcare fraud or illegal healthcare kickbacks;
• Violations related to fraud or deception of the U.S. in relation to federally funded contracting (not including healthcare fraud); and
• Violations relating to bribes or kickbacks paid to domestic public officials.

Beyond the subject-matter requirements, there are several other limitations on eligibility for an NPA through the Pilot Program.  Disclosure of the original information must be voluntary, meaning it (1) must be made before any government request or inquiry into the issue, (2) the reporting individual must have no preexisting obligation to report the information to the Criminal Division, and (3) the disclosure must occur in the absence of any government investigation or threat of imminent disclosure of the information to the government or the public.[46]  The disclosure must also be truthful and complete, including any misconduct that the reporting individual participated in or is aware of.[47]  The reporting individual must agree to “fully cooperate” with and provide “substantial assistance” to DOJ in its investigation.[48]  The reporting individual must also agree to repay any profits obtained from the reported misconduct and pay restitution to victims.[49]  Finally, the reporting individual must not be involved in terrorist activity, violent crime, or certain sexual offenses, and cannot be a CEO, CFO, or organizer of the scheme.[50]

The Pilot Program comes alongside the DOJ’s announcement of its financial reward program for corporate whistleblowers, which was formally enacted on August 1, 2024.[51]  Companies following these developments should evaluate and continue to invest in compliance programs that help to identify misconduct and encourage internal detection and reporting of potential violations, particularly those relating to allegations of money laundering or other criminal activity. 

Relevant Case Law

5. Recent Acquittal on Section 1957 Charges Highlights Potential Importance of Tracing Requirements

In April, a federal court in Arizona issued a notable money laundering decision in U.S. v. Lacey.[52]  Michael Lacey, who had previously been convicted at trial, allegedly participated in a money laundering conspiracy stemming from the DOJ’s allegations that a website Lacey helped operate, Backpage.com, was primarily a tool for the promotion of prostitution in violation of the Travel Act.[53]  As relevant here, Lacey moved for acquittal of his convictions under 18 U.S.C. § 1957, the money laundering statute prohibiting the use of illicit proceeds in a financial transaction of $10,000 or more.[54]  The statute does not offer guidance on how to determine when use of these proceeds triggers liability if they are comingled with “clean” money in a single account, leading to a circuit split on the issue of tracing.[55] 

Here, the government’s theory had been that “all” proceeds from Backpage.com resulted from criminal activity.  But the court held that the government failed to sufficiently prove that fact at trial, given that some ad revenue purportedly came from legitimate sources.[56]  This decision reaffirmed the Ninth Circuit’s unique tracing requirement—which “rejects the presumption that proof that some criminally derived funds exist in an account means that a subsequent transfer of funds … involves those [same] criminally derived funds.”[57]  This decision stands in contrast to opinions from other circuits, some of which presume any money transferred from a mixed accounts is tainted.[58]  But in the Ninth Circuit, even if the government shows a “great majority” of the funds in an account constitute illicit proceeds, this is insufficient to support a violation of Section 1957.[59]  Thus, in ordering the acquittal, the district court reaffirmed that Section 1957’s scope is somewhat cabined, at least in the Ninth Circuit.

Conclusion

2024 has thus far been notable in the AML enforcement space.  We anticipate that the rest of the year will be similarly active, as FinCEN continues to implement its new and proposed rules, as well as other requirements from the AML Act, while the Justice Department remains focused on investigating cases involving money laundering and similar misconduct.

Footnotes

[1] Press Release, Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FinCEN Proposes Rule to Combat Money Laundering and Promote Transparency in Residential Real Estate (Feb. 7, 2024), https://www.fincen.gov/news/news-releases/fincen-proposes-rule-combat-money-laundering-and-promote-transparency; 88 Fed. Reg. 12424 (Feb. 16, 2024), https://www.federalregister.gov/documents/2024/02/16/2024-02565/anti-money-laundering-regulations-for-residential-real-estate-transfers.

[2] Press Release, Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FinCEN Issues Final Rules to Safeguard Residential Real Estate, Investment Adviser Sectors from Illicit Finance (Aug. 28, 2024), https://www.fincen.gov/news/news-releases/fincen-issues-final-rules-safeguard-residential-real-estate-investment-adviser; Fact Sheet: FinCEN Issues Final Rule to Increase Transparency in Residential Real Estate Transfers, https://www.fincen.gov/sites/default/files/shared/RREFactSheet.pdf; Real Estate Reports Frequently Asked Questions, https://www.fincen.gov/sites/default/files/shared/RREFAQs.pdf [“Real Estate FAQ”]; 89 Fed. Reg. 70258 (Aug. 29, 2024), https://www.federalregister.gov/documents/2024/08/29/2024-19198/anti-money-laundering-regulations-for-residential-real-estate-transfers.

[3] 89 Fed. Reg. at 70258. 

[4] 89 Fed. Reg. at 70265-66; Real Estate FAQ B.2.

[5] 89 Fed. Reg. at 70266.

[6] Id. at 70266-69.

[7] Id. at 70270-72.

[8] Id. at 70270-72.

[9] Id. at 70270-72; 70290.

[10] Id. at 70291-93; Real Estate FAQ D.1.

[11] 89 Fed. Reg. at 70258; 70263.

[12] Id. at 70275.

[13] Id. at 70277.

[14] Press Release, Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FinCEN Proposes Rule to Combat Illicit Finance and National Security Threats in Investment Adviser Sector (Feb. 13, 2024), https://www.fincen.gov/news/news-releases/fincen-proposes-rule-combat-illicit-finance-and-national-security-threats.

[15] Fact Sheet: FinCEN Issues Final Rule to Combat Illicit Finance and National Security Threats in the Investment Adviser Sector, Aug. 28, 2024, https://www.fincen.gov/sites/default/files/shared/IAFinalRuleFactSheet-FINAL-508.pdf; 89 Fed. Reg. 72156 (Sept. 4, 2024), https://www.govinfo.gov/content/pkg/FR-2024-09-04/pdf/2024-19260.pdf.

[16] 89 Fed. Reg. at 72167-70.

[17] Id. at 72172.

[18] Id. at 72189-204.

[19] Id. at 72204-06.

[20] Id. at 72182-83.

[21] Id. at 72206-207.

[22] Id. at 72207.

[23] Press Release, Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, SEC, FinCEN Propose Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers (May 13, 2024), https://www.fincen.gov/news/news-releases/sec-fincen-propose-customer-identification-program-requirements-registered.

[24] Id. at 44575.

[25] Id. 

[26] Press Release, Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FinCEN Issues Proposed Rule to Strengthen and Modernize Financial Institutions’ AML/CFT Programs (June 28, 2024), https://www.fincen.gov/news/news-releases/fincen-issues-proposed-rule-strengthen-and-modernize-financial-institutions.

[27] 89 Fed. Reg. 55428, 55435 (July 3, 2024), https://www.federalregister.gov/documents/2024/07/03/2024-14414/anti-money-laundering-and-countering-the-financing-of-terrorism-programs.

[28] Id. at 55437.

[29] Id.

[30] Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, Anti-Money Laundering and Countering the Financing of Terrorism National Priorities (June 30, 2021), https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20(June%2030%2C%202021).pdf.

[31] 89 Fed. Reg. 55428 at 55436.

[32] Id.

[33] Id. at 55444.

[34] Id. at 55445.

[35] Id. at 55545; 31 U.S.C. § 5318(h)(5).

[36] 89 Fed. Reg. at 55455.

[37] Id.

[38] Id. at 55446.

[39] Press Release, Interagency Statement on the Issuance of the AML/CFT Program Notices of Proposed Rulemaking (July 19, 2024), https://www.fincen.gov/sites/default/files/shared/Interagency-Statement-on-the-Issuance-of-the-AML-CFT-Program-Notices-of-Proposed-Rulemaking-FINAL.pdf.

[40] Id.

[41] Press Release, Statement of FinCEN Director Andrea Gacki before the House Committee on Financial Services (Feb. 14, 2024), https://www.fincen.gov/news/testimony/statement-fincen-director-andrea-gacki-house-committee-financial-services.

[42] Press Release, U.S. Dep’t of Justice, Criminal Division Pilot Program On Voluntary Self-Disclosures For Individuals (Apr. 15, 2024), https://www.justice.gov/criminal/criminal-division-pilot-program-voluntary-self-disclosures-individuals.

[43] Memorandum, U.S. Dep’t of Justice, The Criminal Division’s Pilot Program on Voluntary Self-Disclosures for Individuals 2–3 (Apr. 15, 2024), https://www.justice.gov/criminal/media/1347991/dl?inline.

[44] Id. at 2.

[45] Id.

[46] Id. at 2–3.

[47] Id. at 3.

[48] Id.

[49] Id.

[50] Id.

[51] Dep’t of Justice Corporate Whistleblower Awards Pilot Program (Aug. 1, 2024), https://www.justice.gov/criminal/media/1362321/dl?inline.  Please see our recent alert for further details. 

[52] United States v. Lacey, No. CR-18-00422-001-PHX-DJH (D. Ariz. Apr. 23, 2024).

[53] Press Release, U.S. Dep’t of Justice, Backpage Principals Convicted of $500M Prostitution Promotion Scheme (Nov. 17, 2023), https://www.justice.gov/opa/pr/backpage-principals-convicted-500m-prostitution-promotion-scheme.

[54] 18 U.S.C. § 1957; see also Criminal Resource Manual, 2101 (Money Laundering Overview), U.S. Dep’t of Justice, https://www.justice.gov/archives/jm/criminal-resource-manual-2101-money-laundering-overview (“Prosecutions under 18 U.S.C. § 1957 arise when the defendant knowingly conducts a monetary transaction in criminally derived property in an amount greater than $10,000, which is in fact proceeds of a specified unlawful activity.”).

[55] See Audrey Spensley, Untangling Laundered Funds: The Tracing Requirement Under 18 U.S.C. § 1957, 75 Stanford L.R. 1157, 1160 (2023).

[56] Lacey, No. CR-18-00422-001-PHX-DJH at 57.

[57] Id. (citing United States v. Rutgard, 116 F.3d 1270, 1292-93 (9th Cir. 1997)).

[58] Id. at 56 (The Ninth Circuit “rejects the presumption that proof that some criminally derived funds exist in an account means that a subsequent transfer of funds out of that account [automatically] involves those criminally derived funds.”); see also Spensley, supra, note 55, at 1173 (the Second, Third, and Eleventh Circuits, for instance, presume any transaction from a comingled account is tainted).

[59] Lacey, No. CR-18-00422-001-PHX-DJH at 57.

Stephanie Brooker and M. Kendall Day are Partners, Ella Capone is Of Counsel, and Chris Jones and Ben Schlichting are Associates at Gibson Dunn & Crutcher LLP. A longer version of this post was originally published on the firm’s blog.

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