Recent Anti-Corruption Legislation and its Potential Impact on Businesses

Legislation intended to fight corruption on a global scale may mean added compliance burdens for US businesses

Key takeaways:

• Multiple bills addressing corrupt practices on a global scale are progressing through the US Congress.

• Two measures directed at fighting money laundering that were introduced as part of the national defense bill last year recently became law.

• Critics predict the new laws will diminish company owners’ privacy rights and increase compliance costs for small businesses.

• Lawmakers are also focusing on corporate officials with bills addressing financial accountability, and government agencies are investigating pandemic-related fraud and market manipulations.

The US Congress is targeting corruption this session, with several bills addressing the issue winding their way through the legislative process. These initiatives add to anti-corruption measures passed by the previous Congress in last year’s national defense bill. 

As corporations continue to deal with the disruptive effects of COVID-19 on their operational capabilities, their anti-corruption compliance may have decreased in priority. But the government’s increased enforcement attention could require businesses to rethink their compliance strategies. 

It is too early to say how much of this legislative activity will develop into regulations. But while proponents argue the need for increased anti-corruption measures, critics say the new laws would infringe on the privacy of private company owners. They also warn of significantly increased compliance costs that may be prohibitively expensive for smaller businesses.

Changes to existing anti-corruption regulations

In January 2021, Congress passed the Anti-Money Laundering Act (AMLA) and its associated Corporate Transparency Act (CTA). Both acts became law on New Year’s Day 2021 through congressional override of a presidential veto. 

The AMLA and its related legislation give the US Financial Crimes Enforcement Network (FinCEN) increased regulatory oversight, including establishing a registry of “natural owners” or beneficiaries of “reporting companies” that have been traditionally used to transfer wealth. 

The CTA regulates new entity formation by requiring the name, date of birth, current address, and unique identification number of all a company’s beneficial owner(s). The law defines a beneficial owner as someone who: 

• Exercises substantial control over the entity, or
• Owns or controls 25% or more of its ownership interests.

This measure has raised privacy concerns among some critics. Importantly, the CTA prohibits public access to beneficial ownership information or through FOIA requests or otherwise. Also, larger private entities will be exempt from the law’s reporting provisions if they have a physical presence in the US, employ more than 20 people, and report revenues of more than $5 million. Most financial services institutions and most churches, charities, and other non-profit organizations are also exempt because they are already subject to heightened regulatory scrutiny.

The laws govern assets in the US and offshore tax havens. They are designed to give the government’s enforcement agencies greater access to ownership information of suspicious companies and ban anonymous shell companies. The laws are also intended to shift the burden of due diligence from financial institutions to the federal government. But opponents of the laws believe that rather than moving the responsibility away from financial institutions, they create an “unfunded mandate” to increase internal surveillance and compliance efforts. 

In response to questions and concerns from the banking industry, the Federal Reserve’s Board of Governors, along with FDIC, OCC, FinCEN, issued a statement in April on using model risk management to comply with AMLA and Bank Secrecy Act legislation. 

Other anti-corruption legislative initiatives

Both the House of Representatives and the Senate are contemplating some version of the Countering Russian and Other Overseas Kleptocracy Act, or “CROOK” Act. 

The bill intends to promote international efforts against corruption by foreign officials and other foreign persons and strengthen the enforcement power of the existing Foreign Corrupt Practices Act. Senator Ben Cardin (D–MD), a sponsor of the CROOK Act, is also a co-sponsor of the Combating Global Corruption Act, which requires the State Department to produce a public report that evaluates each country on its compliance with “internationally recognized anti-corruption norms and standards.” These two bills, if enacted without substantial revisions, will build upon the AMLA and the CTA. 

Lawmakers are also targeting those accused of corrupt business practices closer to home. Senator Jack Reed (D–RI) introduced a bill in June 2021 “to ensure that irresponsible corporate executives, rather than shareholders, pay fines and penalties.” Reed’s bill is a reintroduction of the Corporate Management Accountability Act, which asks each publicly traded company to “disclose its policies on whether senior executives or shareholders bear the costs of paying the company’s fines and penalties.”

In addition, government agencies are increasing scrutiny on pandemic-related crime. The regulatory authorities that were on high alert during the earlier months of the COVID-19 lockdowns are still pursuing allegations of white-collar crime in the areas of CARES Act abuses, insider trading, market manipulation, and accounting fraud. 

If the regulatory environment tightens as more legislation is introduced and enacted, organizations may need to carefully scrutinize and adapt their anti-corruption compliance programs. 

Johnston Clem Gifford designs and conducts internal investigations for companies facing the regulatory, reputational, or litigation risks presented by corruption allegations. Contact us online or by calling (214) 974-8000.