Photo by Allen Allen;

On December 3, 2018, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network (FinCEN), the National Credit Union Administration, and the Office of the Comptroller of the Currency (together “the agencies”), issued a joint statement encouraging banks to test and implement innovative approaches to meeting their Bank Secrecy Act/Anti-Money Laundering (BSA/AML) obligations. The agencies hope to harness private sector innovation to better protect the financial system from financial crime and to allow financial institutions to make better use of limited compliance resources. The agencies identify in particular risk identification, transaction monitoring, and suspicious activity reporting as obligations that can benefit from innovation. They also identify internal financial intelligence units, artificial intelligence, and digital identity technologies as innovations that can help advance AML programs.

To foster innovation without fear of criticism, the agencies have laid out policies for how they will interact with banks piloting new technologies.

  • First, while the agencies may provide feedback, banks that pilot innovative technologies should not be subject to supervisory criticism for any failures in such pilot programs.
  • Second, “pilot programs that expose gaps in current BSA/AML compliance programs will not necessarily lead to supervisory action.” For example, “when banks test or implement artificial intelligence-based transaction monitoring systems and identify suspicious activity that would not otherwise have been identified under existing processes, the agencies will not automatically assume that banks’ existing processes are deficient.”
  • Third, the implementation of innovative approaches in banks’ BSA/AML programs “will not result in additional regulatory expectations.”
  • Fourth, FinCEN will consider requests for exceptive relief under 31 C.F.R. § 1010.970 to promote the testing of new technologies, provided that banks maintain the overall effectiveness of their AML programs.

The agencies’ joint statement did make clear, though, that while innovation is critical to continued protection against money laundering and other financial crime actors, it is not an excuse to fail to comply with current BSA/AML requirements. Banks “must continue to meet their BSA/AML compliance obligations, as well as ensure the safety and soundness of the bank, when developing pilot programs and other innovative approaches.” In making such determinations, “bank management should prudently evaluate whether, and at what point, innovative approaches may be considered sufficiently developed to replace or augment existing BSA/AML processes.” Such a decision should also address other factors like third-party risk management, compliance with other applicable laws and regulations, and issues of customer privacy. Banks also are encouraged to engage early with regulators regarding such programs to promote the agencies’ understandings of these programs and as “a means to discuss expectations regarding compliance and risk management.” Each of the agencies has committed to establishing projects or offices to support engagement on the implementation of such innovations.

The joint statement comes against a backdrop of continued increases for many banks in the costs of operating compliant AML programs, and continued enforcement – such as the recent $598 million settlement with federal regulators of alleged AML violations by US Bank — emphasizing the need for greater resourcing of AML programs. This has led many banks to consider innovations that might make compliance more efficient and reduce costs, but also has led Congress to consider other measures, such as changing BSA reporting thresholds. The new statement appears to be an effort by the agencies to resolve this resource tension by favoring innovation. It complements another recent guidance document from the same agencies encouraging smaller banks to share compliance resources where possible.

Practical Considerations

 

A number of new products and services offer real opportunities for banks to improve their transaction monitoring and other AML processes, resulting in stronger programs and reduced cost. However, banks should ensure that pilot projects and other innovations do not compromise their ability to effectively operate their current BSA/AML compliance programs. One way this can happen is migrating from previous methods to new technologies before the latter have been properly tested. For example, money transmitter MoneyGram International recently was required to pay an additional $125 million penalty, and had its deferred prosecution agreement extended, for AML program failures that occurred after it transitioned to a new fraud interdiction system that turned out to be ineffective. Another way this can happen is if the resources needed to administer a pilot project take away from resources needed to operate existing aspects of an AML program. The agencies have made clear that while they will not necessarily subject any failed pilot programs to supervisory criticism, they will continue to scrutinize banks’ current processes for any deficiencies, and expect them to remain compliant while testing new methods.

On November 15, 2018, FinCEN issued revised Geographic Targeting Orders (GTOs), once more expanding its scrutiny of “all-cash” purchases (i.e., those without bank loans or other external financing) in the luxury residential real estate market. FinCEN broadened the geographic scope of the orders, lowered the purchase amount threshold for each covered area, and added purchases that involve virtual currencies to the mandatory reporting list. Along with the GTOs, FinCEN also released frequently asked questions to clarify, among other things, the methods of payment covered and requirements for verification of beneficial ownership information.

The New GTOs

The new GTOs apply to title insurance companies, and any of their subsidiaries and agents, engaging in a “Covered Transaction.” A Covered Transaction is one in which a legal entity purchases residential real property:

  • In the amount of $300,000 or more.
  • Without a bank loan or other similar form of external financing.
  • Using in part currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency.
  • In the following covered areas:
    • The Texas counties of Bexar, Tarrant, or Dallas.
    • The Florida counties of Miami-Dade, Broward, or Palm Beach.
    • The Boroughs of Brooklyn, Queens, Bronx, Staten Island, or Manhattan in New York City.
    • The California counties of San Diego, Los Angeles, San Francisco, San Mateo or Santa Clara.
    • The city and county of Honolulu in Hawaii.
    • The Nevada county of Clark.
    • The Washington county of King.
    • The Massachusetts counties of Suffolk or Middlesex.
    • The Illinois county of Cook.

The new, uniform $300,000 reporting threshold is significantly lower than the thresholds in previous GTOs and also eliminates a previous practice of varying the thresholds by covered location.

Insurance companies that engage in the above listed activities must report the Covered Transaction to FinCEN by filing a FinCEN Currency Transaction Report. The report must be filed within 30 days of the closing of the Covered Transaction through the Bank Secrecy Act (BSA) E-Filing system. The insurance company must provide certain information in its report, such as information about the identity of the individual responsible for representing the Legal Entity and information about the identity of the Beneficial Owner(s) of the Legal Entity. A Beneficial Owner is defined for the purpose of these reports as an individual “who, directly or indirectly, owns 25 percent or more of the equity interests of the Legal Entity purchasing real property in the Covered Transaction.” Once the Beneficial Owner has been identified, the insurance company must obtain and record a copy of the Beneficial Owner’s driver’s license, passport, or other similar identifying documentation. The GTOs also require the insurance company to retain all records relating to compliance with the order for five years from the last day that the order is effective. These records must be stored in a reasonably accessible manner and must be made available to FinCEN upon request. This order is effective beginning November 17, 2018 and continues until May 15, 2019.

Along with the new orders, FinCEN also issued new frequently asked questions (FAQs). These clarify for the first time that, in identifying beneficial owners, a title insurance company may reasonably rely on information provided by third parties involved in the transaction.

The Likelihood of Rulemaking

In the past, FinCEN has hinted that the information collected through the GTOs could lead to the creation of regulations in this sector. Most recently, in the press release accompanying the newest GTOs, FinCEN remarked that these GTOs will further assist in tracking illicit funds and inform its future regulatory efforts in this area. This time it seems that FinCEN could actually be moving forward with regulations. Earlier in November, FinCEN announced through the Office of Management and Budget that it will issue an Advance Notice of Proposed Rule Making (ANPRM) “soliciting information regarding various businesses and professions, including real estate brokers that could be covered by the BSA as persons involved in real estate closings and settlements.” FinCEN previously considered regulation of “persons involved in real estate closings and settlements” in a 2003 ANPRM, but never issued a final rule.  FinCEN’s repeated extension and expansion of its GTOs suggests it may be collecting the data to support another try at regulations for such persons.

Practical Considerations

FinCEN’s clarification that title insurers may reasonably rely on the representations of third parties about who their beneficial owners are is a helpful limitation on the risk title insurers face in complying with their obligations. They still must ensure though, in order for reliance to be reasonable, that they are not aware of information that contradicts the assertions of who has the requisite beneficial ownership.

One practical consideration for banks that we have identified before is that FinCEN, in an August 22, 2017, advisory, has encouraged real estate brokers, escrow agents, title insurers, and other real estate professionals—to voluntarily file SARs to report any suspicious transactions relating to real estate. Banks and other BSA-regulated financial institutions should be aware of this when considering whether to file SARs for any part of such transactions that touches them, to avoid situations where such parties file SARs but the regulated financial institution fails to do so.

 

 

On December 1, a day after signing the new U.S.-Mexico Canada Agreement (USMCA), President Trump suggested to the press that he would formally notify Canada and Mexico of U.S. withdrawal from the existing NAFTA, in order to pressure Congress to pass USMCA in 2019.

Meanwhile, on December 6, U.S. Trade Representative Robert Lighthizer met with Rep. Nancy Pelosi (D-California), House Democratic Leader and expected Speaker of the House for the 116th Congress, on USMCA. Lighthizer had expressed the wish during the USMCA negotiations that the final agreement would attract substantial bipartisan support.  Following the meeting, Pelosi noted a number of positive aspects of the new agreement, but concluded that the USMCA lacked “real enforcement on the labor and environmental protection[s].” Other House Democrats including Rep. Richard Neal (D-Massachusetts) and Rep. Bill Pascrell. Jr. (D-New Jersey), who are expected to be chairs of the House Ways and Means Committee and the Ways and Means Trade Subcommittee respectively, have made similar statements.

These events set the stage for the debate in Congress over the fate of the newly signed USMCA in 2019.

While some Republicans have expressed concerns about the agreement[1], USMCA will likely face a greater challenge in the Democratic-majority House than in the Republican Senate. Despite some changes to NAFTA that may appeal to Democrats (such as limitations on investor-state dispute settlement and a wage-based rule of origin for autos), we expect the Democrats to seek additional concessions from the Administration, in particular on the enforceability of USMCA’s labor and environmental provisions.

Depending on the scope and magnitude of the changes sought by Democrats, any concessions might not require formally reopening negotiations with Canada and Mexico, which would likely delay USMCA passage. Democrats could seek to include any such changes in the implementing legislation or through side-letters or other types of political agreements with Mexico and Canada. The Democrats led by Pelosi have struck an agreement on labor and trade with Republicans in the past—the so called “May 10” Agreement in 2007 that Democrats reached with the George W. Bush Administration that added labor provision to pending and future U.S. trade agreements.

If needed in renewed talks with Canada and Mexico, the United States could use another point of leverage—prior to the USMCA entering into force, the President must certify that both Canada and Mexico have taken the necessary domestic steps to comply with their respective FTA commitments on “day one” of the agreement, according to TPA procedures.  Accordingly, implementation of the agreement can be delayed until all such steps have been taken.

If domestic disagreements over USMCA escalate, however, and lawmakers are not able to reach a resolution with the Trump Administration, we may see the President continue to raise the possibility of U.S. withdrawal from NAFTA. As we’ve previously noted, the President initiating NAFTA withdrawal would likely come with significant obstacles, both legal and political, and there is significant uncertainty over how Congress and in particular the Democrats will react. Congress would have a number of tools to oppose the President’s unilateral withdrawal from NAFTA—the question is if it would have the will to use them.

 

[1] A group of 40 Republicans criticized USMCA for its protections for LGBTQ workers. However, the final text version of USMCA included a footnote essentially excepting the United States from implementing any policy changes related to the LGBTQ commitment.

Webinar – Thursday, January 17, 2019
1:00 – 2:30 pm EST

What can government contractors expect in 2019?  Join the Crowell & Moring team on Thursday, January 17 at 1:00 pm to discuss likely trends for the coming year.  We’ll cover a variety of topics including cost and DCAA matters, bid protests, cybersecurity, congressional oversight, international and national security issues, claims, ethics/compliance, digital transformation, small business, False Claims Act, and so much more.

Presenters include some of the most experienced practitioners in the field. We hope you will join us for this free and informative webinar.

 

For questions about this webinar, please email Denise Giardina at DGiardina@crowell.com.

 

On November 28, the International Organization for Standardization (ISO) released the first ever draft global standard for unmanned aircraft systems (UAS) operations. The standard, titled Draft International Standard for Unmanned Aircraft Systems Operations, represents an important step in standardizing UAS operations around the world. Although ISO will publish the standard for global adoption starting in 2019, compliance is not mandatory. The standard is nevertheless important because the Federal Aviation Administration (FAA) and sister agencies worldwide will likely use it as a foundation for future rulemaking. Operators, service providers, and manufacturers should thus strongly consider early adoption of the standard in preparing for forthcoming regulation.

The draft, ISO 21384-3, is the first in a four-part series of UAS standards that ISO is currently developing. The next three draft standards are to address general specifications, manufacturing, and unmanned traffic management. This maiden draft addresses operational procedures, making it particularly relevant to anyone who operates UAS for commercial purposes. The draft standard covers safety, autonomous operations, data protection, and overall operational etiquette.

The standard, not surprisingly, first directs UAS operators to follow the existing statutes and regulations of the operators’ jurisdictions. But it also provides guidance for use in the absence of specific regulations. For instance, for commercial operators in the United States flying under the FAA’s Small UAS Rule (Part 107), the standard includes recommendations for properly logging flights, implementing a safety management system, employing training and maintenance standards, and updating UAS hardware and software. Many commercial UAS operators agree that those subjects are valuable and important for the continued development of the UAS industry, but the FAA has not yet addressed them in a formal rulemaking. The ISO draft standard may prompt reconsideration of the value of (or need for) formal rules in these areas and others it covers.

The ISO has invited drone professionals, academics, businesses, and the general public to submit comments on the draft standard. Those comments are due by January 21, 2019. Given the likelihood that the draft standard will influence upcoming FAA rules, among others, businesses that utilize UAS technology would be well-advised to review the draft standard and consider what comments they might contribute. Even businesses that do not yet employ UAS technology would be well served to focus, since new applications for UAS are rapidly emerging in a host of industries, including in the agricultural, maritime, insurance, construction, and energy sectors.

 

Safe drone implementation is transforming businesses and municipalities, resulting in significant cost savings, improved workplace safety, and more reliable work product. A standards-led adoption of drone technology promises to allow commercial operators to integrate drone operations into their business models safely and confidently.

Photo by Guillaume Bolduc on Unsplash;

On December 1, President Trump and President Xi reached agreement on the margins of the G20 in Buenos Aires to delay an increase on the third, $200 billion tranche of Section 301-related tariffs from 10% to 25%, which was originally set to take place January 1. According to the White House, the two sides will now begin a 90-day period of talks to resolve “structural” issues around IP theft, non-tariff barriers, and forced technology transfer. The White House said the tariff increase would be implemented at the end of the 90-day period if no agreement is reached.

According to the White House, China has also agreed to “purchase a not yet agreed upon, but very substantial amount of agricultural, energy, industrial and other product from the United States to reduce the trade imbalance.” Soybeans, other agricultural products, and energy products were reportedly included. China has not yet indicated whether this commitment will take the form of a policy change (such as a reduction in retaliatory tariffs on U.S. agriculture exports) or whether it will be left up to private-sector entities (as when EU Commission President Jean-Claude Juncker committed to purchasing U.S. soybeans as part of its agreement last July).

Following the meeting, President Trump said China also agreed to reduce 40% tariffs (25% of which is retaliation for U.S. tariffs) on U.S. automobile exports, though China has not confirmed that it will do so.

The latest agreement is a small, but positive step toward repairing the U.S.-China trade relationship. It likely postpones the risk of a fourth tranche of tariffs on another $267 billion in Chinese imports, which the Trump administration has previously threatened to impose, beyond the 90-day period. President Trump’s appointment of U.S. Trade Representative (USTR) Robert Lighthizer, who managed to conclude the renegotiation of NAFTA, as the lead for the 90-day talks suggests that serious negotiations will take place.

However, the gulf between what the U.S. is purportedly seeking—structural and meaningful economic reform—and what China seems currently prepared to offer remains wide. Much will depend on the Trump administration’s level of ambition. Companies with interest in China should ensure that the U.S. government is aware of opportunities to address their trade issues in China as well as the specific business risks arising from the current trade conflict (in particular any risks to U.S. jobs and economic growth).

 

 

 

Brussels, Belgium

On Tuesday, November 20, the European Commission announced a political agreement with EU member states on a new framework for foreign direct investment (FDI) screening. The legal text for the framework still needs to be finalized and released. The announcement can be found here.

According to the Commission, the new framework will provide a mechanism for the Commission and EU member states to request information and raise concerns related to FDI screening, without restricting the ultimate authority of an individual EU member state to determine who can invest within its borders. The framework will also provide for “short business-friendly deadlines” and confidentiality requirements for EU members’ FDI screening regimes and will permit the Commission to issue opinions on FDI cases involving several Member states or EU-wide interests.

Currently only 12 of the 28 EU member states—Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the UK—have formal FDI screening systems in place. The new framework could provide a basis for the remaining EU members to develop such systems.

 

After the legal text is finalized, the framework still needs to be submitted for formal approval by the European Parliament and the Council of the European Union. Separately, the Commission is still conducting an in-depth technical study on current FDI flows related to strategic sectors and technologies for expected release before the end of the year.

The Congressional election on November 6, 2018 produced a new split Congress with a House Democratic majority and a Senate Republican majority starting in January 2019. The difference between the outgoing 115th Congress, with a Republican House and Senate, and the 116th Congress starting in 2019 will be significant for U.S. businesses.

While the divided Congress brings opportunities to advance bipartisan legislation involving infrastructure, energy, and pharmaceuticals, the new House Democratic majority in the 116th Congress will produce a series of new committee chairs who will use their power to oversee and investigate the Trump Administration, U.S. businesses that have benefited from the Republicans’ deregulatory agenda of the past two years, and even some businesses on less friendly terms with the Trump Administration.

One of the first examples of this will be in the energy and environmental sectors. The expected chairman of the House Energy & Commerce Committee has already announced plans to hold oversight hearings in the new year focusing on the chemical industry and implementation by the U.S. Environmental Protection Agency of the recent amendments to the Toxic Substances Control Act. The House Energy & Commerce Committee along with the House Science, Space, and Technology Committee and the House Natural Resources Committee are also planning a series of hearings on the Trump Administration’s plans to address climate change and regulate greenhouse gas emissions. The leadership of EPA, the Department of Energy, and the Department of the Interior can expect to testify on Capitol Hill to explain why they are replacing the Clean Power Plan and Waters of the U.S. rule, rolling back environmental protections for federal lands, and favoring oil and gas companies and the mining industry, as opposed to promoting renewable energy and protections for endangered species. These committees will likely also summon senior executives of those same oil and gas, mining, and related energy companies to explain what role they have had in influencing the Trump Administration’s regulatory reform agenda and why they are not taking more proactive measures to address climate change and global warming. Furthermore, House Democrats are likely to revive the Select Committee on Energy Independence and Global Warming, which was discontinued by Republicans following the Red Wave of the 2010 midterm elections.

Another example of this will be the health care industry. The same House Energy & Commerce Committee, and its Subcommittee on Health, will require the leadership of the U.S. Department of Health and Human Services, the Centers for Medicare and Medicaid Services, and the Food and Drug Administration to explain what they are doing to reduce drug pricing. Although this issue resonates personally with the President and is one that the Administration has already begun to address, the House Democrats will demand that the Administration do more to make drug prices cheaper for Americans. Thus, the same committee will also call on senior executives of U.S. drug manufacturers, health insurance companies, pharmacy benefit managers, and others to press them for plans and commitments to reduce drug prices. They will likewise press some of these same companies on their actions with regard to curbing the opioid crisis.

A final example will be the financial services industry. The House Financial Services Committee, among others, under the control of Democrats, will bring senior leaders from the Treasury Department, Consumer Financial Protection Bureau, and other agencies to Capitol Hill to explain why they have moderated the consumer protections in the Dodd-Frank Act and given more power and flexibility to banks and financial institutions. They will likewise bring the leaders of some of those institutions up to Capitol Hill to explain their behavior and the risks they might pose to the U.S. economy.

On November 15th, the Crowell & Moring Government Affairs Group held a webinar entitled – “Post-Midterm Elections: What to Expect in 2019.” The webinar covered the following topics:

  • How will the election results impact the November and December 2018 lame duck session?
  • Will Nancy Pelosi return to the Speaker’s chair?
  • Who will lead the major committees of each chamber?
  • What issues are most ripe for bipartisan compromise in the new Congress?
  • Does the 116th Congress promise legislative productivity or political posturing and gridlock?
  • Will House Democrats exercise their newly gained majority for rigorous oversight and investigations of the Trump Administration to the exclusion of significant policy work?
  • How would increased oversight by House Democrats affect industries that have benefited from the Trump Administration’s regulatory reform agenda, and can these industries expect to be the target of any increased oversight?
  • Are Senate Republicans prepared to work on a bipartisan basis to pass legislation or will that chamber spend much of the next two years on judicial confirmations?
  • Which health care issues are likely to dominate the headlines in 2019?
  • Can the two parties find any common ground on energy and environment issues?

The Crowell & Moring Government Affairs team brings experience that includes former senior staff to U.S. Senate Majority Leader Mitch McConnell (R-KY) and U.S. Senate Minority Leader Charles E. Schumer (D-NY), former Congressional healthcare, environmental and investigative staff from both House and Senate personal offices and Committees, and legal and regulatory professionals with extensive experience representing organizations on health care, environmental, and trade matters before the U.S. government.

 

On November 19, 2018, the Bureau of Industry and Security (BIS) published an advance notice of proposed rulemaking (ANPRM) seeking comments on implementation of Section 1758 of the Export Control Reform Act of 2018. This section requires Commerce, in consultation with DoD and other CFIUS member agencies, to define “emerging technologies” sufficiently significant to U.S. national security interests to impose some level of export controls over the technology and potentially to trigger mandatory declarations of any foreign investment in companies involved in the development and production of such technology.

This ANPRM identifies certain broad categories of emerging technologies (largely consistent with technologies identified in the 2018 DIUx China Report) and seeks recommendations on defining specific technologies within these categories or others to control considering such factors as on the status of the technology development in the U.S. and other countries and the potential impact – pro or con – of such controls on U.S. technological superiority.

Comments are due by December 19, 2018; BIS will issue a separate ANPRM for “foundational technologies.”

 

On October 10, Treasury announced interim regulations to implement certain provisions of the Foreign Investment Review Modernization Act (FIRRMA), which President Trump signed into law on August 13, 2018.

As part of that announcement, Treasury will initiate a pilot program imposing mandatory declarations on transactions involving certain sensitive sectors. That pilot program is due to go into effect on November 10, 2018 and will cover 27 “pilot program industries.” One of the questions for analysis that has emerged is to what extent those sectors intersect with Made in China 2025 priority industries.

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