A Guide to Anti-Money Laundering for Crypto Firms

What is the Dodd-Frank Act?

AML Compliance Knowledge & Training

In the wake of the 2008 financial crisis, the US government looked at ways to better regulate the behavior of banks, and to protect consumers. 

The subsequent Dodd-Frank Act became one of the most important articles of US financial legislation, introducing new regulations and significant compliance obligations for banks and other financial institutions.

What is Dodd-Frank Legislation?

The Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as Dodd-Frank) was named for its proponents, Senator Chris Dodd and Congressman Barney Frank. 

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010 after receiving bipartisan support. It promoted financial market integrity in line with G20 commitments, and established a number of new government agencies to oversee various aspects of the US financial system. 

The Dodd-Frank Act Purpose & What It Means for Compliance

Dodd-Frank was intended to restore confidence in the US financial system, avoid a repeat of the 2008 crisis, and end the era of taxpayer-funded bailouts for “too big to fail” banks. 

With that in mind, the Dodd-Frank Act introduced a range of regulatory changes designed to improve the stability and oversight of banks and financial institutions, including 243 new compliance rules for firms operating in the financial sector. 

Dodd-Frank has cross-border application, meaning its provisions may also apply to non-US financial institutions. This makes understanding counterparty and transactional nexus to the US key, even for non-US firms. 

What did the Dodd-Frank Act do?

Dodd-Frank legislation eliminated ineffective regulatory agencies, introduced new agencies, and merged others. The US Office of Thrift Supervision, for example, was eliminated, with its responsibilities transitioned to the Federal Deposit Insurance Corporation (FDIC). 

In addition, the Dodd-Frank Act created a number of new agencies: the Consumer Financial Protection Bureau (CFPB) was set up to provide oversight for credit card and mortgage crimes, while the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) were created to ensure that financial institutions would not need to be bailed out by the US government. 

Under new rules, all regulatory agencies are required to submit annual reports to Congress detailing their accomplishments over the past 12 months and setting out their goals. Other key changes included:

  • Stress tests – In addition to reporting requirements, the Dodd-Frank Act introduced a requirement for banks and financial institutions to conduct annual stress tests in order to prepare for unforeseen adverse situations and crises. These tests use hypothetical financial scenarios to explore firms’ ability to maintain stability when facing challenges. Where the stress tests reveal weaknesses or vulnerabilities, the Federal Reserve may take action, including capping share dividends, to ensure the firm in question can weather any sustained negative effects.
  • High risk derivatives – Under the Dodd-Frank Act, the Securities and Exchange Commission (SEC) was given the authority to regulate the trade of derivatives which, in practice, includes the exchange of stocks, bonds, commodities, and currencies. Where those instruments are found to present high levels of risk, the SEC can take action to prevent financial institutions from creating new crises.
  • Federal Reserve Act – Dodd-Frank legislation amended the Federal Reserve Act to strengthen the new regulatory standards that it introduced. The amendments specifically addressed loopholes that had contributed to the 2008 financial crisis, and the recession that followed.
  • Sarbanes-Oxley Act – The Dodd-Frank Act strengthened the Sarbanes-Oxley Act, which sets out rules regarding CEOs’ personal responsibilities for accounting errors, and for the protection of corporate whistleblowers. Under the Dodd-Frank rule, the statutory limit for an employee submitting a claim against their employer was increased to 180 days (from 90). It also established a bounty reward program, entitling whistleblowers to up to 30% of the settlement proceeds of successful litigations against companies that violate financial regulations.
  • Non-financial institutions – Certain non-financial institutions must abide by Dodd-Frank rules. Specifically, insurance agencies and currency exchanges that carry out large transactions and play an important role in the US economy must comply with federal compliance rules.
  • Hedge Fund Registration – The mismanagement of hedge funds was a significant contributing factor to the financial crisis. Accordingly, Dodd-Frank legislation introduced a requirement for hedge funds to register with the SEC and provide a range of information about their business practices, including trades and portfolios.

Dodd-Frank Volcker Rule

Another significant change under Dodd-Frank legislation was the introduction of the Volcker Rule in 2014, which aims to prevent banks from engaging in the kind of speculative trading that created the 2008 crisis. 

The rule prohibits banks from using, owning or sponsoring hedge funds and private equity firms for profit, and prevents the purchase and sale of securities, derivatives, commodity futures, and options, in order to discourage banks from taking too much risk. 

Under the Dodd-Frank Volcker Rule, banks may only trade when it’s necessary to run their business, such as currency trading, or when they’re working on behalf of customers. And they cannot offer services that create a material conflict of interest, expose the bank to high-risk assets or trading strategies, or generate instability within the bank or US financial system. 

In 2020, the FDIC relaxed some Dodd-Frank Volcker Rule restrictions. This included lowering bank capital requirements and enabling banks to invest in venture-capital funds.

Influence of Dodd-Frank Legislation on Wider US AML Policy

New measures to protect anti-money laundering (AML) whistleblowers, are modeled after the Dodd-Frank Act’s provisions.

Formerly, the Department of the Treasury had the discretion to distribute awards to whistleblowers, but not the obligation to award payments. Payments were capped at $150,000 and, as such, were said to have little impact on money laundering enforcement.

AMLA seeks to change that by eliminating the government’s discretion to pay an award and mandating payments, increasing the potential amount of whistleblower awards, and providing additional protection specific to money laundering whistleblowers. As expected, certain classes of individuals, such as regulatory and law enforcement officials and those who participated in the wrongdoing, are prohibited from receiving an award.

Amendments to the Dodd-Frank Act

Like other legislation aimed at significant financial reform, Dodd-Frank has faced broad criticism. Many opponents argue that the Act does not go far enough to prevent another financial crisis, while its reforms do little to decrease the likelihood of banks and financial institutions needing government bailouts in the future. 

In contrast, some Dodd-Frank critics argue that the Act’s regulatory reforms are too stringent and infringe on the Constitutional rights of financial institutions.

In 2018, under the Trump administration, some aspects of Dodd-Frank legislation were rolled back to counter what the President called “..the crippling Dodd-Frank regulations that are crushing community banks and credit unions nationwide. They were in such trouble. One size fits all — those rules just don’t work.” Changes included:

  • Exempting smaller and regional banking institutions (with less than $10bn in assets) from the Dodd-Frank Volcker Rule
  • Smaller banks exempted from reporting more detailed data on borrowers
  • Increasing the amount of assets that certain financial institutions could hold before becoming “too big to fail” and requiring government bailouts 
  • Banks with more than $250bn in assets no longer automatically subjected to the toughest federal regulations, including the yearly stress test

In 2020, the Supreme Court ruled that the director of the Consumer Financial Protection Bureau (CFPB) – a body set up under the Dodd-Frank Act – could be fired at will by the US president, but that the bureau itself remained constitutional. The ruling followed a three-year battle by the Trump administration to deconstruct the body.

Despite further efforts to amend the scope of Dodd-Frank legislation, with references to it as a “wartime crisis tool”, as of 2022, major aspects of the Act remain in place. However, former Federal Reserve Chair and current US Treasury Secretary Janet Yellen has suggested further reform is needed.

“I personally think we need a new Dodd-Frank,” Yellen said during a 2020 webinar. “We need to change the structure of FSOC and beef up its powers to be able to deal more effectively with all of the problems that exist within the shadow banking sector.”

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Originally published July 1, 2014, updated June 14, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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