On July 18, 2024, the U.S. Department of the Treasury (Treasury) submitted identical letters to U.S. Representatives Josh Gottheimer (D-N.J.), Brad Sherman (D-Calif.) and Blain Luetkemeyer (R-Mo.), warning that recently enacted state laws prohibiting banks from making decisions based upon so-called “ESG” related factors could present significant national security risks by “imped[ing] financial institutions’ compliance with crucial national securities authorities” that Treasury administers.
Treasury’s letter identified Florida House Bill 989 (“HB 989”) as one such law. Treasury asserted that HB 989 “severely restricts” the factors that a financial institution may consider when assessing risks, limiting those factors to “quantitative” standards. Treasury stated that financial institutions consider factors that are not quantitative when assessing the risk that a customer may engage in illicit activity, such as money laundering or terrorist financing, as required under the Bank Secrecy Act (BSA) and AML/CFT program requirements. Identification of “red flags and unusual transactional patterns,” and consideration of where a customer does business, the services the customer requests, and the bank’s ability to manage risks are critical qualitative factors that are appropriate for banks to consider when identifying and managing risks, according to Treasury’s letter.
Treasury also expressed concern over other requirements of HB 989, notably prohibitions on considering a customer’s “affiliations” and factors “related to the person’s business sector.” Treasury noted that it is unclear whether these prohibitions allow banks to assess a customer’s association with designated terrorist groups or engagement in business sectors at higher risk for illicit activity – all facts which are relevant to risk-based assessments under the BSA and U.S. sanctions laws. Further, Treasury warned that laws such as HB 989 that require state regulators to respond to customer complaints by providing reports of investigative findings directly to customers who submitted them, could alert bad actors to the existence of confidential suspicious activity reports, because of the information that is expressed, implied or even omitted from those reports.
These requirements led Treasury to raise concerns about HB 989 and similar state laws that may interfere with a financial institution’s ability to comply with national security requirements as these “heighten the risk that international drug traffickers, transnational organized criminals, terrorists, and corrupt foreign officials will use the U.S. financial system to launder money, evade sanctions, and threaten our national security.”
The Treasury Department letter was sent in response to a jointly issued letter dated July 8, 2024, from Representatives Gottheimer, Sherman, and Luetkemeyer, addressed to Treasury, the Office of the Comptroller of the Currency (OCC), and Treasury’s Financial Crimes Enforcement Network (FinCEN). In the July 8 letter, Representatives Gottheimer, Sherman, and Luetkemeyer expressed concerns that recently enacted or proposed state laws may threaten national security and undermine America’s collective efforts to fight financial crime and protect against terrorism, by posing significant challenges to financial institutions that must comply with BSA/AML requirements and be able to effectively manage and control financial crime risks. The letter expressed concern that these state laws “risk fracturing the national banking system” by creating conflicts with federal laws intended to combat money laundering and terrorist financing. The Representatives called on Treasury, FinCEN, and the OCC to act to protect the integrity of these federal requirements from the harmful effect of state laws that would, in effect, jeopardize America’s security and the continued stability and safety of national banks.
While HB 989 remains unchallenged, we are beginning to see movement at the federal level in raising conflict of law concerns over HB 989 and similar state fair access laws. Although the ultimate outcome remains uncertain, it is important for banks and other financial institutions that are subject to HB 989 to monitor these developments closely.