Amendment to the ENABLERS Act in the National Defense Authorization Act 2023

Amendment to the ENABLERS Act in the National Defense Authorization Act 2023

October 13, 2022

On July 14, 2022, the U.S. House of Representatives adopted an amendment to the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security (ENABLERS) Act as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2023 (H.R.7900). This revised legislation intends to impose stronger anti-money laundering (AML) and due diligence obligations on professional service providers, such as certain groups of lawyers, accountants, trust companies, and investment advisors (so-called “gatekeepers” and “enablers”) for their potential role in aiding money laundering and terrorist financing within the U.S. financial system. It should be noted that although the House passed this amended version of the Act, the U.S. Senate’s version of NDAA FY 2023 (S.4543) is with the Senate Committee on Armed Services pending a vote, and it to date does not include a version of the ENABLERS Act.

Who Does the ENABLERS Act Cover?

The ENABLERS Act was initially introduced in October 2021 by a bipartisan group – Representatives Tom Malinowski (D-NJ), Maria Elvira Salazar (R-FL), Steve Cohen (D-TN), and Joe Wilson (R-SC) – in response to the release of the Pandora Papers a few days prior. The Act’s original intention was to expand the definition of a “financial institution” under the Bank Secrecy Act (BSA) and seek requirements for AML programs and due diligence obligations for seven groups, including “investment advisors; dealers in art, antiquities, and collectibles; lawyers ‘involved in financial activity on behalf of another person’; trust or company service providers; accountants; public relations firms that ‘provide another person with anonymity or deniability’; and third-party payment providers.” However, the House’s bill in July removed three of these seven original targeted professions – investment advisors, art dealers, and public relations firms.

Further, the House’s amendment provided the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the bureau deemed responsible to review and impose its rules, the ability to determine such requirements of the Act on gatekeepers including, but not limited to, the need to establish AML programs, suspicious activity reporting requirements, and due diligence policies for client identification and verification. However, the House bill currently provides a general outline of the affected businesses that it covers and provides an overview of the requirements that FinCEN may impose for each category of business. Within one year after the date of the bill’s enactment (July 14, 2023), the Secretary of the Treasury Department must define the affected persons deemed “gatekeepers” noted above that fall within the “financial institution” category and advise on the appropriate requirements.

Implications and Potential Conflicts for “Gatekeepers”

The ENABLERS Act has led some of the groups within the above-identified potential “gatekeepers” to assess future implications of the requirements and submit responses in opposition to the Act, such as a joint letter by the S Corporation Association and 74 trade associations that outlines the disproportionate burden the Act places on this broad new group of businesses deemed “enablers.” Additionally, the American Bar Association (ABA) voiced its opposition and maintains that lawyers are to “remain independent of federal regulation and oversight.” The ABA contends that trust between attorney and client must be preserved, and the proposed suspicious activity reporting requirements set forth in the Act would conflict with the foundation of attorney client privilege, whereby enlisting requirements for attorneys to report on their clients’ activity undermines the process of non-disclosure of privileged and confidential client information. Further, the ABA indicates that it relies upon the high ethical obligations in the practice of law and points to the various published guidance and ethics opinion materials, such as the Model Rules of Professional Conduct and its collaborative publishing “A Lawyer’s Guide to Detecting and Preventing Money Laundering,” to educate lawyers on the risks of money laundering. The ABA “believes the model rules are stringent enough to minimize illegal and unethical conduct and the facilitation of illicit conduct yet flexible enough to preserve the necessary trust in the lawyer-client relationship.” It is considering possible amendments to the model rules regarding the client due diligence obligations of lawyers.

Implications and Considerations for Financial Institutions

While the ENABLERS Act requires further clarification, and questions remain on the specified requirements for the identified “gatekeeper” groups, financial institutions should assess the potential implications and effects the Act may have on their AML programs and any future compliance requirements. Financial institutions will want to assess their products and services provided and associated risk profiles of their client base to assess any immediate or major effect to established AML programs and due diligence processes.

The proposed requirements of the Act at this time focus and apply to the grouping of “enablers” outside of regulated financial institutions. However, dependent on the future further clarifications and parameters of the Act and requirements from FinCEN, financial institutions could face obligations that potentially include requesting the AML program of any outside counsel/law firm (or any other identified “gatekeeper” as defined in the Act) that they may work with to assess and perform due diligence on these entities. As such, financial institutions should continue to monitor for updates to the Act and for any future implications to its business structure and business dealings with any “gatekeepers” defined by the Act.

If your financial institution would like to discuss developing or enhancing its policies, procedures, and monitoring processes related to the ENABLERS Act requirements or any other BSA/AML/OFAC issues, please contact Stout today.

Authors: Anna Caplan and Uday Gulvadi