STOPPING DOMESTIC SOURCES OF INTERNATIONAL TERRORIST FINANCING: AMENDING THE ANTI-MONEY LAUNDERING ACT OF 2020.

• Author: Rosenthal, Jon

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1. INTRODUCTION

   In 1989, G-7 member states founded the Financial Action Task Force (hereinafter FATF) in order to thwart drug cartel money laundering and to uphold the legitimacy of international financial transactions. (1) Less than a year later, the FATF revealed "Forty Recommendations" to address international drug cartel money laundering. (2) Following the terrorist attacks of September 11, 2001, the FATF broadened its mission to "combating terrorist financing activity" and unveiled "Eight Special Recommendations," along with additional suggestions for how countries can better monitor questionable transactions. (3) Today, thirty-seven countries and two regional organizations follow FATF recommendations for Anti-Money Laundering (hereinafter AML) and Countering the Financing of Terrorism (hereinafter CFT), and engage in peer reviews to evaluate FATF members' respective implementation of the recommendations. (4) [*128] In 2016, the peer review of the United States found that while American banks and financial institutions in the aggregate adequately implement AML and CFT recommendations, the AML regulatory regime over "certain institutions and businesses" were "non-compliant." (5) Promulgating a National Strategy for [*129] Combatting Terrorist and Other Illicit Financing, the Treasury Department noted that a "whole-of-government approach" was needed "to guide the public and private sectors in addressing 21st century illicit finance challenges." (6)

   This Note explores how inadequacies within former domestic AML and CFT regulations may have contributed to financial backing for international terrorism. (7) Part II explains both international and domestic efforts to stop international terrorist financing. (8) Part III illustrates how inadequate regulation over certain capital market participants has hindered the United States' counterterrorism efforts and resulted in the United States being non-compliant with international standards. (9) Part [*130] IV explains that in January of 2021, Congress overrode a presidential veto of the National Defense Authorization Act (hereinafter NDAA) which, inter alia, included the Anti-Money Laundering Act of 2020 (hereinafter AMLA), sought to revamp domestic AML and CFT legislation to address 21st century challenges more effectively. (10) In conclusion, Part V will reiterate [*131] the importance of the United States' full compliance with FATF recommendations. (11)

2. HISTORY

   1. The Creation of FATF

      In the 1980s, drug cartels amassed significant wealth through money laundering practices and benefited from easy access to international trade. (12) Criminal actors across the world participated in various financial institutions to conceal illegal transactions. (13) In 1989, G-7 member states established the FATF to confront these drug cartels. (14) The following year, the [*132] FATF published its Forty Recommendations, intending to strengthen both national and international financial regulations and to foster more robust international cooperation in the global fight against drug cartel money laundering. (15) The FATF's Forty Recommendations developed a mutual evaluation system to monitor its members' adherence and weaknesses. (16) The FATF has always sought to (1) support countries' adherence with its recommendations, (2) enhance multilateral co-operation, and (3) proactively enact any necessary practices. (17)

      In the 1990s, the FATF twice extended its duration and added new members. (18) Within two months after the September 11th attacks, the FATF issued eight Special Recommendations to specifically address counterterrorism measures. (19) Concurrently, [*133] as the FATF broadened the scope of its AML recommendations, the global economy saw an increase in "gross international' capital flows." (20) This increase in international financial flows in an ever-shifting global financial marketplace presented new challenges for the FATF. (21)

   2. Amending the Bank Secrecy Act through Title III of USA PATRIOT ACT

      Domestically, individual nations must address their own financial infrastructure and customs in order to collaborate across borders, enact legal consequences for illicit behavior, and intercept funds linked to terrorist financing. (22) In 1970, Congress passed the Bank Secrecy Act (hereinafter "BSA") which mandated [*134] that banks institute reporting and identification requirements for cash transactions over $ 10,000. (23) Following the attacks of September 11th, on October 26, 2001, President George W. Bush signed into law the International Money Laundering Abatement and Anti- Terrorist Financing Actof 2001 through Tile III of USA PATRIOT ACT. (24) Inter alia, this act amended portions of the BSA and was specifically designed to "increase the strength of United States measures to prevent, detect, and prosecute international' money laundering and the financing of terrorism." (25)

3. FACTS

   1. Structure of the U.S. Financial System

      The United States financial system supports economic transactions throughout the entire world. (26) Over the past 30 [*135] years, commercial banks, securities firms, and insurance companies have largely organized under the umbrella of a single financial holding company. (27) In 2014, the top five largest banks possessed half of the assets of the entire banking industry. (28) Concurrently, innovation and developments in the delivery of financial services have expanded businesses' options for sources of obtaining capital. (29) Today, many U.S. companies will finance their operations through equity and/or debt from capital markets rather than banks. (30) Capital market participants also consist [*136] of both public and private "asset management companies" that operate "funds," defined as "collective investment vehicles that pool money from various individual or institutional investor clients and invest on their behalf for financial returns." (31) Private asset management companies that operate pooled investment funds face different regulatory obligations compared to their public equivalents. (32) The Investment Company Act of 1940 ("ICA") specifically exempts private funds from its regulatory purview. (33) In the absence of Securities and Exchange Commission (hereinafter SEC) registration, these funds form, operate, [*137] and make investments, but the identity of the funds' "beneficial owners" are not always disclosed. (34)

   2. Business Entity Choice and Beneficial Ownership

      In the United States, legally organized businesses select a "business entity" in the form of a sole proprietorship, partnership, corporation, or Limited Liability Company (LLC). (35) However, these companies may still nevertheless operate and/or store profits in different countries. (36) Over the past few decades, newly formed domestic entities have primarily selected the LLC [*138] Form. (37) In 2018, over 70% of business entities formed in Delaware elected the LLC corporate form. (38) LLC's have "the governance flexibility and tax advantages of a partnership with the limited liability protections of a corporation." (39) In lieu of shareholders, the LLC corporate entity form typically consists of members who contribute their capital in exchange for membership interest in the entity. (40) The organizational structure and simplicity of the formation process provides ample opportunities for criminal actors to use the LLC form as a "shell" company for [*139] illegal activity. (41) In 2019, seeking to increase regulation over this new business entity and the long standing corporate form, the House of Representatives passed the Corporate Transparency Act (hereinafter CTA) "to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies, and for other purposes." (42)

      As of January 2021, the AMLA now mandates beneficial ownership disclosure for new business entities and will require that existing companies make similar disclosures in the future. (43) [*140] The AMLA defines a beneficial owner as an individual who "i) "exercises substantial control over the entity, or ii) owns or controls not less than 25 percent of the ownership interests of the entity." (44)

   3. How Terrorists Finance Their Operations

      Under United States Code, international terrorism "involves violent acts or acts dangerous to human life" and "appear to be intended to intimidate or coerce a civilian population; to influence the policy of a government by intimidation or coercion; or to affect the conduct of a government...." (45) While the definitions of "terrorist" "terrorist groups," and "terrorism" may be subjective, "the majority of the definitions have a common basis -terrorism is the use of violence and the imposition of fear to achieve a particular purpose." (46) The FATF designed [*141] its additional post 9/11 "special recommendations" as a baseline approach to "suppress the financing of terrorism and terrorist acts!' (47)

      International terrorist operations are largely funded by both individual countries and private sector participants. (48) In 2018, the United States Treasury Department noted that "the [*142] most common type of TF [terrorist financing] activity in the United States involves individuals who knowingly provide funds to terrorists, terrorist groups, or their supporters abroad." (49) In contrast to traditional money laundering schemes where proceeds from an illegal endeavor appear legal, terrorist funding tends to flow from legal sources. (50) Terrorists often rely on a "Hawala" (transfer) system whereby legitimate businesses and individuals annually send roughly USD400 billion to terrorist organizations. (51) Hawala operates as global "remittance system" whereby individuals facilitate money transfers through "extensive use of connections such as...