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October 15, 2021

Pandora Papers Fallout: Proposed US Legislation Targets “Enablers” of Money Laundering

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PANDORA PAPERS FALLOUT: PROPOSED US LEGISLATION TARGETS “ENABLERS” OF MONEY LAUNDERING

The release of the Pandora Papers, a leak of approximately 12 million documents, exposed how foreign leaders and private actors use tax havens to conceal their wealth, with the United States a destination of choice. For example, reports indicate that trust companies in Sioux Falls, South Dakota, established nearly 30 trusts connected to people or companies accused of corruption, human rights abuses or other wrongdoing in some of the world’s poorest countries. Because financial institutions are required to conduct due diligence on their customers and report suspicious transactions, the Pandora Papers provide evidence that corrupt actors rely increasingly on non-bank entities and individuals who are not required to comply with such requirements.

On October 6, 2021, a bipartisan group of legislators, consisting of Reps. Tom Malinowski (D-NJ), Maria Elvira Salazar (R-FL), Steve Cohen (D-TN), and Joe Wilson (R-SC), introduced a bill in response to the release of the Pandora Papers, titled the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act (the “ENABLERS Act”). The ENABLERS Act would impose rigorous due diligence requirements on these so-called enablers by requiring them to investigate non-U.S. clients seeking to move money and assets into the U.S. financial system, thus closing loopholes that remain open to corrupt actors seeking to move money into the United States illicitly. The Pandora Papers and subsequent proposed legislation comes at a time when global corruption and anti-money laundering is already under the microscope, and aligns with recent U.S. legislation to increase oversight and enforcement in this space. Whether the bill gains support in a divided Congress and is ultimately passed in its current form remains to be seen, but the issues addressed by it are those that typically garner bipartisan attention and action.

The ENABLERS Act would require the U.S. Department of the Treasury to create due diligence rules on source of funds for service providers such as investment advisors, art dealers, attorneys involved in financial activity, company service providers, accountants, public relations professionals, and third-party payment providers by December 31, 2023. It would also require enablers to have established due diligence programs by June 30, 2024.

Who Would Be Captured by the ENABLERS Act?

The ENABLERS Act would subject certain entities and individuals to U.S. anti-money laundering requirements by including within the definition of “financial institution” (as defined in 31 U.S.C. § 5312(a)(2)) a slew of service providers who could potentially enable money laundering activities in the United States. Those “enablers” include:

  • a person engaged in the business of providing investment advice for compensation;
  • a person engaged in the trade in works of art, antiques, or collectibles, including a dealer, advisor, consultant, custodian, gallery, auction house, museum, or any other person who engages as a business in the solicitation or the sale of works of art, antiques, or collectibles;
  • an attorney, law firm, or notary involved in financial activity or related administrative activity on behalf of another person;
  • a trust or company service provider, including:
    • a person involved in forming a corporation, limited liability company, trust, foundation, partnership, or other similar entity or arrangement;
    • a person involved in acting as, or arranging for another person to act as, a registered agent, trustee, or nominee to be a shareholder, officer, director, secretary, partner, signatory, or other similar position in relation to a person or arrangement;
    • a person involved in providing a registered office, address, or other similar service for a person or arrangement; or
    • any other person providing trust or company services, as defined by the Secretary of the Treasury;
  • a certified public accountant or public accounting firm;
  • a person engaged in the business of public relations, marketing, communications, or other similar services in such a manner as to provide another person anonymity or deniability; and
  • a person engaged in the business of providing third-party payment services, including payment processing, check consolidation, cash vault services, or other similar services designated by the Secretary of the Treasury.

What Will Be Required of “Enablers”?

The ENABLERS Act would direct Treasury to issue rules that require such enablers to (i) report suspicious transactions; (ii) establish anti-money laundering programs; (iii) establish due diligence policies, procedures, and controls; and (iv) identify and verify their account holders. The ENABLERS Act would direct Treasury to exclude from such requirements any government agency and any attorney or law firm that uses a paid trust or company service provider, including any paid entity formation agent, operating within the United States. In addition, the ENABLERS Act would specifically prohibit Treasury from exempting any of the above-listed enablers from regulatory requirements.

Treasury would also be directed, not later than 90 days after the date of the enactment of the ENABLERS Act, to issue a rule requiring domestic title insurance companies to obtain, maintain, and report to the Secretary of the Treasury information on the beneficial owners of entities that purchase or sell residential or commercial real estate in transactions in which such domestic title insurance companies are involved. This proposed requirement builds upon the ultimate beneficial ownership requirements within the National Defense Authorization Act for Fiscal Year 2021 applicable to corporations and limited liability companies, which, although ultimately included within the final January 2021 legislation, faced some scrutiny by Congress. This would represent a significant expansion of existing requirements under the Financial Crimes Enforcement Network’s (“FinCEN”) geographic targeting orders, which are limited to a dozen U.S. metropolitan areas and to all-cash purchases of residential real estate.[1]

“Gatekeeping” Strategy

The ENABLERS Act would require that Treasury, through FinCEN, establish a task force to develop an “ambitious, comprehensive, and multi-year United States Government strategy to impose anti-money laundering safeguards on all necessary gatekeeper professions.” Such strategy would need to include a description of efforts to impose anti-money laundering safeguards on all necessary gatekeeper professions, including art dealers, investment advisors, real estate professionals, lawyers, accountants, trust or company service providers, public relations professionals, dealers of luxury vehicles, money service businesses, and other similar professions. By imposing reporting requirements on such gatekeepers, the bill would move the United States closer in line with the U.K.’s anti-money laundering regime. Treasury would also be required, through FinCEN, to designate and authorize a federal or state agency to enforce anti-money laundering requirements for each type of “financial institution” (as defined in 31 U.S.C. § 5312(a)(2)) and advance the regulatory rulemaking required under the ENABLERS Act.

Widening the Net

If enacted, the ENABLERS Act would introduce new due diligence requirements and compliance costs for many service providers that cater to international clients. While large-scale operations may have the capacity and financial wherewithal to meet such requirements (to the extent they are not doing so already), small- and medium-sized business and professional services firms may require significant investment and training in order to keep up with their responsibilities.

Footnotes

[1]  FinCEN Geographic Targeting Order Covering Title Insurance Companies (Apr. 29, 2021).

Authors and Contributors

Mark Chorazak

Partner

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7100

+1 212 848 7100

New York

Katherine J. Stoller

Partner

Litigation

+1 212 848 5441

+1 212 848 5441

New York

Philip Urofsky

Partner

Litigation

+1 202 508 8060

+1 202 508 8060

Washington DC

Simon Dodds

Of Counsel

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5156

+44 20 7655 5156

London

Danforth Newcomb

Of Counsel

Litigation

+1 212 848 4184

+1 212 848 4184

New York