The current global regulatory landscape presents significant challenges, particularly due to the increasing tendency of U.S. regulators to extend their authority beyond national borders. This “export” of U.S. rules and regulations, part of the expanding reach of US and European regulators, encompasses various compliance issues, including taxation, anti-money laundering (AML), bribery, corruption, and sanctions enforced by the Office of Foreign Assets Control (OFAC). The financial services sector is experiencing profound disruptions from a confluence of factors—complex regulatory requirements, aging legacy systems, outdated operating models, and rapid advancements in digital innovation and fintech. These changes have intensified the compliance burden on financial institutions worldwide, with increased regulatory scrutiny and severe penalties for non-compliance.

Heightened Stakes for Financial Institutions

The stakes are exceptionally high for financial institutions, as regulatory actions have led to extensive investigations, sanctions, and even the resignation of top executives. The U.S. has notably intensified its enforcement mechanisms through recent legislative measures, including the Anti-Money Laundering Act of 2020 (AMLA) which is part of the National Defense Authorization Act for Fiscal Year 2021, not to be confused with the Anti-Money Laundering Authority (also AMLA),. This act, along with the U.S. Strategy on Countering Corruption and the 2022 National Strategy for Combating Terrorist Financing, reflects a robust commitment to enhancing AML enforcement and compliance. The sanctions imposed against Russia and Belarus further illustrate the evolving regulatory landscape, highlighting how U.S. regulators are expanding their reach to impose compliance on foreign entities.

The Role of Whistleblower Programs

The AMLA is poised to be a transformative piece of legislation, potentially the most significant since the USA PATRIOT Act of 2001. It introduces various changes, particularly enhancing the existing whistleblower program, which has historically seen minimal engagement due to limited incentives. The AMLA and the subsequent Anti-Money Laundering Whistleblower Improvement Act of 2022 significantly increase potential rewards for whistleblowers, allowing them to receive up to 30% of monetary penalties exceeding $1 million. This change aims to encourage reporting of AML and OFAC violations, akin to the successful SEC whistleblower program established by the Dodd-Frank Act in 2010. This emphasis on whistleblower incentives is part of a broader strategy by regulators to strengthen enforcement and compliance across borders.

Navigating Compliance Challenges

Financial institutions must prepare for an uptick in whistleblower activity, which could lead to costly internal investigations, regardless of the whistleblower’s location. In March 2024, the U.S. Department of Commerce, Treasury, and Justice released a “Compliance Note” underscoring the obligations of foreign businesses, especially financial institutions, to adhere to U.S. sanctions and export control laws. This note emphasizes that non-U.S. companies engaging with sanctioned entities may face severe repercussions, including criminal prosecution. The European Union is also aligning its regulatory framework to ensure compliance with international standards, reflecting a concerted effort by both U.S. and European regulators to extend their influence.

Another critical aspect of the regulatory environment is the indirect reach of U.S. regulations through American banks that offer services to foreign institutions. This trend has been exacerbated by a broader de-risking strategy, where U.S. banks impose stringent compliance requirements on their foreign counterparts. This has led to the termination of correspondent banking relationships, particularly impacting institutions in Latin America, which have struggled to maintain access to essential banking services.

Conclusion

The evolving global regulatory landscape poses significant challenges for financial institutions as U.S. regulators extend their reach beyond national borders. With stringent enforcement mechanisms, particularly through the Anti-Money Laundering Act of 2020, institutions must prioritize robust compliance strategies to mitigate risks of severe penalties and reputational damage. The expanding reach of U.S. and European regulators adds complexity, as both regions align their frameworks to ensure transparency and accountability. The emphasis on whistleblower programs highlights the need for institutions to foster supportive environments for reporting, as compliance pressures continue to grow globally.