2024: A Year of Transformation in U.S. Anti-Money Laundering Regulations

New Rules, New Challenges for Financial Institutions

2024 has been a pivotal year for U.S. anti-money laundering (AML) regulations, marked by final rules that reshape financial compliance landscapes and proposed changes that promise to tighten regulations further. Financial institutions and related entities must not only keep pace with these developments but also use innovative technologies to ensure compliance.

Finalized AML Rules and Requirements

The flurry of regulatory activity in 2024 was led spearheaded by several key finalized rules. Notably, the Financial Crimes Enforcement Network (FinCEN) introduced the Residential Real Estate Rule, requiring the reporting of non-financed transfers of residential real property. Specifically, this rule mandates that transfers to legal entities or trusts, excluding transfers resulting from death or divorce, be reported via a new regulatory report, the Real Estate Report. This rule aims to reduce illicit money flowing through the real estate sector, marking a significant step toward transparency in this sector.

Furthermore, investment advisers, long considered a regulatory blind spot, have been subjected to FinCEN’s AML/CFT program requirements, mandating registered investment advisors (RIAs) and exempt reporting advisors (ERAs) to establish AML/CFT programs akin to those of banks. RIAs and ERAs must file Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) and comply with record-keeping rules and elements of the USA PATRIOT Act. Foreign-located investment advisers advising U.S. entities are similarly obligated, underscoring the broad scope of FinCEN’s regulatory reach.

Proposed AML Rules and Requirements

Alongside these finalized rules, 2024 also saw several proposed AML regulations. A key proposal seeks to enact elements of the U.S. AML Act of 2020 to refine AML/CFT programs by codifying the risk assessment requirement, emphasizing the risk-based approach, and focusing on effective outcomes. This proposal encourages financial institutions to tailor their programs according to risk profiles and offers a departure from the one-size-fits-all model, aiming to prevent de-risking — a phenomenon where institutions indiscriminately cut ties with clients perceived as high-risk.

In cooperation with the Securities and Exchange Commission (SEC), FinCEN also introduced a proposed rule to expand Customer Identification Program (CIP) requirements to RIAs and ERAs, enhancing scrutiny over customer identities to prevent illicit financial activities.

Additionally, the Federal Deposit Insurance Corporation (FDIC) proposed regulations meant to strengthen record-keeping for bank deposits received from third-party, non-bank companies held in custodial accounts and address risks related to these third-party arrangements.

Preparation Should Be a Strategic Effort

Financial institutions need a strategic approach to navigate these regulatory changes. For RIAs and ERAs, the immediate task involves developing comprehensive AML/CFT programs. Those with existing broker-dealer AML programs can extend them to their advisory operations, ensuring that each program is tailored to the specific risks of the advisory business. Similarly, real estate and non-bank entities need to review current practices and upgrade systems to meet new reporting and record-keeping obligations.

Training will be crucial, as many entities are entering uncharted regulatory territory. Training programs should focus on regulatory requirements, risk assessments and risk management strategies, and specialized controls to include the integration of essential compliance technologies. Institutions must also assess their data infrastructure to ensure that it supports compliance activities, especially in the realm of CIP and beneficial ownership documentation.

Harnessing the Proper RegTech Mix for Effective Compliance & Risk Management

Amidst these regulatory shifts, technology plays a pivotal role and it is imperative that institutions and firms find the right mix of technology to ensure effective risk management and compliance.

• AI-Driven Transaction Monitoring:AI-driven solutions are invaluable for transaction monitoring and anomaly detection, helping institutions identify suspicious activities that may not be apparent through traditional methods. AI can also streamline the SAR drafting process, ensuring consistent and thorough reporting.
• Entity Resolution and Network Analysis:These tools are essential for understanding the relationships between investors and transactions, particularly in investment advisory/asset management, where investor transaction volumes may be low, but the stakes are high. By visualizing connections, these technologies aid in identifying hidden risks related to beneficial ownership and transactional behavior typologies.
• Customer Risk Assessment and Management:Flexible and adaptive risk assessment tools are crucial for institutions dealing with diverse customer bases. Institutions will need flexibility in choosing risk factors and weightings, carving out customer segmentation, and a single view of customer risk, whereby various types of alerts are synthesized to present a comprehensive risk profile.
• Generative AI and copilots:Generative AI can revolutionize the investigative process by quickly generating SAR narratives and investigation summaries. AI-driven copilot tools enhance efficiency by providing investigators with quick, consolidated insights, minimizing the time spent sourcing and analyzing information across disparate systems.

2024 stands as a transformative year for U.S. AML regulations, with finalized and proposed rules poised to impact a variety of institutions and sectors significantly. The onus is on these entities to adapt swiftly, using the right mix of technology to meet regulatory demands while optimizing their resources to focus on risk-driven processes. With thoughtful integration of technological innovations, institutions can not only comply with new anti-money laundering regulations but also strengthen their overall AML efforts in a rapidly evolving financial landscape.

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