You may not have heard about it, but one of the provisions in the recently-adopted 2022 budget legislation is a new law often called the ENABLERS Act.
The ENABLERS Act imposes new duties on lawyers and other "gatekeepers" to U.S. financial and commercial transactions.
The ENABLERS Act
The "Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act" creates new obligations for lawyers and other entities that serve as "gatekeepers" for non-U.S. persons gaining access to the U.S. for financial and commercial transactions.
The Act defines "gatekeepers" as those individuals who provide financial, company, trust, or third-party payment services for their clients, including those who form, buy, or sell companies, management money and other assets, process payments or function as trustees. The definition is broad and includes any U.S. person who performs these functions.
The Act empowers the Secretary of the Treasury to adopt regulations that require gatekeepers to:
- Identify and verify the true owners of their corporate clients;
- Collect and report to FinCEN specified information that can be used to guard against corruption, money laundering, the financing of terrorism and other forms of illicit finance;
- Establish anti-money laundering (AML) programs;
- Report suspicious transactions; and
- Establish due diligence policies, procedures and controls in order to "know their customers."
Specifically, in Section 5401, the Act includes within its new rules "any person, excluding any governmental entity, employee, or agent, who engages in any activity which the Secretary [of the Treasury] determines by regulation . . . to be the provision, with or without compensation of (i) corporate or other legal entity arrangement, association, or formation services; (ii) trust services; (iii) third party payment services; or (iv) legal or accounting services - that (I) involve financial activities that facilitate (aa) corporate or other legal entity arrangement, association, or formation services; (bb) trust services; or (cc) third party payment services; and (II) are not direct payments or compensation for civil or criminal defense matters."
Obligations of Gatekeepers Under the ENABLERS Act
To enforce these provisions, the Act:
- Empowers the Treasury Department to work with other governmental agencies to enforce the Act; and
- Requires the Treasury Department to utilize technologies for the collection and sharing of information with law enforcement.
To do so, the Treasury Department must, within one year after the date of enactment, issue a rule to determine what persons fall within the scope of the "gatekeeper" definition and prescribe appropriate requirements. The cumulative effect of the Enablers Act is to impose on law firms, accounting firms, title companies and others, KYC-type duties and responsibilities that are analogous to those already imposed on banks.
Among other things, the Act provides that the new Treasury Department regulation must require gatekeepers to:
''(1) identify and verify account holders and functional equivalents as described in section 5318(l), including by establishing and maintaining written procedures that are reasonably designed to enable the person to identify and verify beneficial owners (as such term is defined in section 5336(a)) of clients; '(2) maintain appropriate procedures, including the collection and reporting of such information as the Secretary may prescribe by regulation, to ensure compliance with this subchapter and regulations prescribed thereunder or to guard against corruption, money laundering, the financing of terrorism, or other forms of illicit finance; (3) establish anti-money laundering programs as described in section 5318(h); '(4) report suspicious transactions as described in section 5318(g)(1); and '(5) establish due diligence policies, procedures, and controls as described in section 5318(i)."
Enforcement of ENABLERS Act
The ENABLERS Act empowers the Treasury Department to conduct random audits of covered gatekeepers within one year after the effective date of the Treasury Department's regulations that implement the Act "and on an ongoing basis thereafter."
The Act requires the Treasury Department to issue a report to Congress within 180 days after the end of each calendar year after the first anniversary of the date of the Treasury Department's final implementing regulations. That annual report must "describe the results of any random audits" conducted under the Act and provide "recommendations for improving the effectiveness of" the Act's requirements.
The Act appropriates $53.3 million, without fiscal year limitation, for the Treasury Department use in conducting the Act, including hiring personnel, adopting information technology, audit, investigatory and review activities, and other purposes.
The Act requires the Treasury Department to adopt a definitive regulation within one year. The Treasury Department missed its regulatory deadline under the Corporate Transparency Act, so there can be no guarantee it will make this latest deadline. Nevertheless, the regulatory regime contemplated by the Enablers Act will impose substantial new obligations on law firms and other transactional gatekeepers.
Key Take-aways from the ENABLERS Act
Between the ENABLERS Act and the Corporate Transparency Act, lawyers and law firms have a great deal of work on their hands over the next few years.
Most law firms have not even begun to take the steps required to implement the Corporate Transparency Act. Most law firms lack the IT systems needed to track their clients on a company-by-company basis and in a way that securely collects beneficial ownership information. The ENABLERS Act piles onto that deficit with additional duties that most law firms are unprepared to fulfil.
Law firms will need to adopt procedures akin to those in place with banks and regulated financial institutions. Law firms will need systems to (1) "identify and verify" their corporate clients and (2) "identify and verify" the beneficial ownership of those corporate clients.
Law firms will need to implement anti-money laundering programs and report "suspicious transactions" to FinCEN, in generally the same way that banks must do so today.
This will be a tall order for law firms that lack (a) any experience in implementing AML compliance programs, (b) the IT systems required to implement an AML compliance program, (c) the experienced staff required to manage an AML compliance program, and (d) the culture of compliance that, in some ways, runs contrary to lawyers' traditional view of their role as advocates for their clients.
Law firms will also struggle to comply with the ENABLERS Act requirement to "report suspicious transactions" since lawyers traditional view themselves as keepers of their clients' secrets. Lawyers and law firms will need to negotiate a difficult passageway through their ethical obligation of client secrecy and their new statutory duty to function as a "gatekeeper."