Risk-Based AML/CFT Reform: What Financial Institutions Need to Know About the Joint Banking Agency and FinCEN Proposals

**Alan Kaplinsky** (0:07)
Welcome to the award-winning Consumer Finance Monitor podcast, where we explore important new developments in the world of consumer financial services and what they mean for your business, your customers and the industry. This is a weekly show brought to you by the Consumer Financial Services Group at the Ballard Spahr Law Firm. And I'm your host, Alan Kaplinsky, the founder, former practice group leader for 25 years, and now Senior Counsel of the Consumer Financial Services Group at Ballard Spahr. And I'll be moderating today's program. For those of you who want more information, either about the topic we're going to be talking about today, or any other thing in the world of consumer finance, don't forget about our blog, consumerfinancemonitor.com.
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So let me tell you a little bit about our topic today.
It's a topic we revisit from time to time when things are happening in the area. It's not strictly a consumer finance topic for sure. You can categorize it under bank regulation or criminal law.
But it is very important to those that do work in the consumer finance area. So, on April 7th of this year, the FDIC, the Comptroller of the Currency, and the NCUA jointly issued a notice of proposed rulemaking entitled, quote, anti-money laundering, encountering the financing of terrorism programs. I guess you could say sometimes it's referred to by the shorthand of AML-CFT.
The proposal represents a coordinated interagency effort to modernize and in some respects really recalibrate the regulatory framework governing AML and CFT compliance. It was published in the Federal Register on April 10th, and the comment period expires on June 9th. Importantly, this interagency proposal of the banking regulators aligns with the parallel initiative announced by the Financial Crimes Enforcement Network, or affectionately called FinCEN, also on the same date on April 7th, and it put forth its own proposed rule to modernize AML CFT programs. FinCEN emphasized this proposal is designed to move institutions toward a risk-based, effective programs rather than mere compliance checklists, with a particular focus on ensuring that institutions are continuously identifying and updating risks as the risks evolve over time. The FinCEN rule was also published in the Federal Register on April 10th, and the comment period expires on June 9th. Taken together, these developments reflect a broader government-wide effort to rethink how AML CFT compliance is structured and evaluated.
The proposal is particularly notable because it seeks to more fully implement the mandate of the Anti-Money Laundering Act of 2020, which directed regulators to move toward a more risk-based, effectiveness-oriented approach to AML compliance. In fact, one of the recurring themes in the proposal is that AML CFT programs should not simply be check-the-box exercises, but instead should be reasonably designed to assure and monitor compliance in a manner that's tailored to each institution's unique risk profile. The agencies emphasize that point quite clearly. In the Notice of Proposed Rulemaking, they state that an institution's AML CFT program should be designed to identify, manage and mitigate risks based on the institution's products, services, customers and geographic exposures. That language, especially when viewed alongside FinCEN's emphasis on continuously updating risk assessments, signals a continued shift away from rigid, static compliance frameworks and toward dynamic risk driven programs. At the same time, however, this proposal is not purely deregulatory or flexible in nature. No, it's not time to take your foot off the gas. It also reflects an effort to codify and harmonize longstanding supervisory expectations across federal banking agencies and the NCUA. In other words, while institutions may gain some flexibility in how they design their programs, they should not expect a reduction in scrutiny. If anything, the focus of a shift toward demonstrating effectiveness over time as risks evolve. The agencies also released a number of accompanying materials, including a press release, a financial institution letter, an OCC bulletin, and a statement from acting FDIC Chairman Travis Hill. The materials reinforce the message that regulators are seeking greater clarity, consistency and accountability in AML CFD compliance. For example, in his statement, Travis Hill underscored the importance of ensuring that AML requirements are efficient, risk-focused and appropriately tailored, while still meeting the core objective of protecting the financial system from illicit finance. That balancing act between flexibility and rigor is really at the heart of these proposals. So before we dive into the details, I'm very pleased to introduce my guest today, and that is Celia Cohen. Celia is a partner in the Manhattan Office of Ballard Spahr. She is a member of the White Collar Defense and Investigations Group. She represents individual and corporate clients in internal and government investigations and white collar criminal defense. With a focus on advising on wire fraud, securities fraud, issues involving virtual currency, bribery, corruption, health care fraud matters, and importantly, for purposes of our podcast today, anti-money laundering matters.