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Will A New US Administration Bring Banking Regulation Reforms?

With a GDP of around $21.4 trillion, the US is the largest economy in the world and its financial sector reflects this. As such, the regulatory bodies that create the frameworks that guide and manage this powerful sector have taken years to develop. There exists a mosaic of agencies and organizations that oversee financial markets and companies.

These regulatory bodies are formed by governments or other organizations to ensure that the financial markets and the companies that form part of the general financial ecosystem are fair and function smoothly. The last few years have seen major changes in the way that the US government operates and handles financial sector reforms. The question now, is will a new administration make further waves in a sector that has had to weather so much change over the last few years?

Some Recent History on American Banking Regulations

To set the scene, some recent historic events show how the administration in the US can have a wide and sweeping impact on the finance sector.

In 2008, the world experienced the financial crash. In 2010, to rectify some of the underlying causes of the crash, the Obama administration set in place the Dodd-Frank Act. This added greater controls over the financial sector to help prevent a repeat of the crash. The act was designed to help curb excessive risk-taking in the financial sector; provisions included:

Accountability: Wall Street and not the taxpayers would be accountable for decisions and pay the price of those decisions

Responsibility: Proprietary trading was separated from the business of banking. This was based on the “Volcker Rule” used to prevent banks from owning, investing, or sponsoring hedge funds, private equity funds, or proprietary trading operations for their own profit and unrelated to serving customers.

The crash began a series of reforms to add greater controls across the entire ecosystem of financial services. This included wide-reaching Anti-Money Laundering (AML) and Anti-Corruption Reforms (ACR). These latter reforms came out shortly after the revelations of corruption revealed by the ‘Panama Papers”. The papers, involved people from over 200 countries and evidenced wide-spread fraud by Mossack Fonseca clients, showing money laundering, sanction dodging, and tax avoidance.

In 2017, shortly after the Panama Papers made the headlines, Obama’s administration included reforms impacting:

Customer Due Diligence (CDD): This required financial institutions to conduct CDD checks on customers to verify their identity. The agency overseeing this back then, and who continues to do so now, is FinCEN.

Beneficial ownership controls: Legislation mandating the collection of beneficial ownership information.

Foreign ownership rules: To provide employer identification number (EIN) to the IRS,

As the Obama administration came to a close, and the 2016 election loomed, Trump made promises that he would deregulate the banks if he was elected. He reasoned that the regulations were holding back US business. After his 2016 inauguration, Trump held true to his promise. In 2017, Trump signed a directive hitting back at the Obama administration, Dodd-Frank Act. In fact, there have been so many regulatory changes, in the financial space and other sectors, during the Trump administration, that deregulation trackers have been set up to keep watch. Back in 2016, Giuliani described Trump as running an “aggressively anti-regulatory administration.” However, Trump pulled back from making any significant changes to the Bank Secrecy Act (BSA).

Now, as we enter a post-Trump era, will the financial regulation landscape once again, feel the tide of change?

Banking Regulations in 2020 and Beyond

The latest election has caused waves the world over. Whilst Biden has been announced as the winner, Trump continues to cause upheaval and uncertainty. But what is likely to happen in terms of banking and financial sector regulations when the new administration takes office?

The financial regulatory landscape that Biden enters represents a mix of controls over anti-money laundering (AML), counter terrorism financing, suspicious activity reports (SARs), enforcement actions, corporate transparency, and also includes the regulation of cryptocurrencies. Within this milieu of controls, a new ‘Panama Papers-esque’ event has occurred, the FinCEN SARs scandal. This debacle involved $2 trillion worth of payments made under suspicious circumstances; payments that had been flagged using the SARs system but not followed up. Global major banks were involved in the FinCEN scandal.

Beyond this scandal, the issuance of fines continues unabated. In 2020, three U.S. banks were fined almost half of the $11.39 billion paid by banks globally for non-compliance with financial regulations.

Many of the issues that were flagged by the FinCEN scandal and that continue to haunt financial regulatory compliance are down to timing. The FinCEN files demonstrated the nature of the slowness to act. The crime already being months old before any action was taken; a case of shutting the door after the horse has bolted.

Areas where Biden could, and hopefully will act, is in the tightening up of the whole area of transparency. The FinCEN Final Rule has pushed the onus on discovery and transparency back onto the financial institution and away from relying solely on the use of SARs. This points to a more proactive as well as transparent approach to anti-fraud in a financial context. Even Trump, with the sweeping reforms made during his office, kept away from making any real changes to the AML requirements of the financial sector. Biden, it is assumed, will not only maintain but strengthen AML and CDD/KYC checks. One of the areas where this is already happening is in Beneficial Ownership. This area is being tackled by the “FinCEN Final Rule”.

However, the US is also set to create a federal register of beneficial ownership, under the “Corporate Transparency Bill”. Under the bill, companies will be required to disclose true, beneficial owners at the time a company is set up. This helps to prevent the creation and use of anonymous shell companies to circumvent law enforcement and hide money. The Financial Action Task Force (FATF) has pushed for this, saying that the lack of CDD to verify the identity of beneficial owners was a “significant shortcoming”. Notably, the UK has a register held by Companies House, and the EU directed member states to create registers of beneficial owners in 2020.

As we saw when Trump entered office, sweeping reforms can happen on the flourish of a pen. It is likely that as Biden settles into the Whitehouse that transparency will take center stage and the changes seen with the FinCEN Final rule and Beneficial Ownership will be hardened.

Preparing for Change with Smart Tech

No industry likes change, and for a heavily regulated sector such as finance, change can be a serious challenge. Any administration change in the US, or indeed in any country, will result in new hoops to jump through. Regulations are often complex and take time, money, and expertise to establish compliance. Any change, good or bad, is a challenge for an FI. However, since the 2008 crash and the 2016 election, there has been the entry to the market of smart technologies that can be applied to complex anti-money laundering checks, including sanction list checks. Intelligent approaches to data capture and analysis have provided tools flexible enough to weather change. Platforms that can provide real-time insight into customers for KYC/CDD purposes, provide the flexible risk-based determination that can meet the new and exacting requirements of the FinCEN rule on beneficial ownership. Blockchain based sanction screening, too, provides automated revisions, reducing the risk of human error and fraud. Blockchain-based sanction list models also offer the type of transparency that the Biden administration may seek.

While we wait to see what, if any, new reforms will be placed at the door of the financial sector, we can at least feel secure in the knowledge that the technology industry continues to innovate around change and ensure the sector has the tools to cope, no matter what regulators throw their way.

Contact us today to speak to one of our financial crime experts.  

 

 

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