By Mark S. Nelson, J.D.
The Senate last week passed its version of the FY24 National Defense Authorization Act (NDAA) with a number of amendments that touch on subjects within banking and securities law, including crypto, ESG, AI, CFIUS, and numerous provisions that may impact business deals that involve China. The Senate version of the NDAA passed by a vote of 86-11. The House passed its version of the NDAA recently as well, but that bill was loaded with GOP provisions on social issues that make it far more difficult to enact into law than the Senate version. The two versions of the NDAA will now go to conference.
Crypto AML provisions. Thus far, the only federal blockchain law enacted has to do with the reporting of taxable transactions to the IRS, and it was attached to must-pass legislation and has been the subject of further legislative attempts to clarify its scope. For the second Congressional session in a row, the number of bills seeking to address the entirety of crypto regulation is growing, but lawmakers are still focused on enacting smaller pieces of the crypto regulatory puzzle such as, this time, anti-money laundering (AML) rules.
Two provisions contained in a manager’s amendment to the NDAA, agreed to by a vote of 94-3, would bring some regulatory oversight into play regarding AML and crypto and afford the Treasury Department an opportunity to pitch new laws to Congress. First, Treasury, in consultation with the federal functional regulators (the Fed, OCC, FDIC, NCUA, SEC, and CFTC), would have to establish a risk-focused examination and review process to assess: (1) the adequacy of reporting obligations and AML programs for financial institutions; and (2) financial institutions’ compliance with AML and countering the financing of terrorism requirements.
Second, the NDAA would require Treasury to report to Congress on the use by crypto entities of certain technologies, including anonymity-enhancing technologies (e.g., mixers and tumblers) and the prevalence of these technologies regarding, among other things, sanctioned entities. The provision also would have Treasury study the use of privacy-enhancing technologies, legal approaches taken by other jurisdictions regarding anonymity-enhancing and privacy-enhancing technologies, and make recommendations to Congress for new laws on these topics.
The NDAA amendment has its roots in two bills previously introduced in the Senate: the Lummis-Gillibrand Responsible Financial Innovation Act and the Digital Asset Anti-Money Laundering Act. The former is sponsored by Sens. Cynthia Lummis (R-Wyo) and Kirsten Gillibrand (D-NY), while the latter is sponsored by Sens. Elizabeth Warren (D-Mass) and Roger Marshall (R-Kan).
CFIUS and agriculture. Several years ago, the statute governing the activities of the Committee on Foreign Investment in the U.S. (CFIUS) was significantly revised, primarily to orient CFIUS to issues involving transactions that may involve the Chinese Communist Party, but which also apply more generally to transactions involving other countries. The Senate version of the NDAA would include a provision that expands membership on CFIUS to include the Secretary of Agriculture in a nonvoting, ex officio capacity.
The amendment was offered because of lawmakers’ desire to include agricultural interests among the list of topics addressed by CFIUS. Current CFIUS members include the Secretary of the Treasury, Secretary of Homeland Security, Secretary of Commerce, Secretary of Defense, Secretary of State, Attorney General, Secretary of Energy, Secretary of Labor (nonvoting, ex officio), and the Director of National Intelligence (nonvoting, ex officio). Under current law, the president may add other executive departments, agencies, or offices as deemed appropriate.
The amendment was offered by Sen. Mike Rounds (R-SD) and was approved by a vote of 91-7.
Thrift Savings Fund, investment screening. A raft of bills has been introduced to prevent the federal Thrift Savings Fund from making ESG-related investments. Among those bills, are House and Senate versions that would bar the TSF from buying a "security of concern." The term "security of concern" would be mean a security listed on an exchange in a country of concern, by a company incorporated in a country of concern, or for which more than 50 percent of the company's revenue is generated in a country of concern. A "country of concern" is any country reported to Congress by the Director of National Security as a threat to U.S. national security. The bill has been previously introduced in different forms, but its main target is investments in China.
The Senate version of the TSF bill, sponsored by Sen. Marco Rubio (R-Fla), was not included in the Senate version of the NDAA, having been defeated as an amendment by a vote of 55-42.
On a related note, however, a bill pressed by Sen. John Cornyn (R-Texas) did make it into the Senate version of the NDAA via an amendment. The bill would require a screen for certain investments by U.S. persons in covered sectors, including advanced semiconductors and microelectronics, AI, quantum information science and technology, hypersonics, satellite-based communications, and networked laser scanning systems with dual-use applications. There would be reporting obligations, penalties for violations, and a de minimis exception. The amendment was approved by a vote of 91-6.
AI watermarks. Congress has held a number of hearings on potential legislation to create a federal artificial intelligence (AI) regulatory agency. Panelists have often recommended that the federal government impose a labeling requirement on materials generated by AI systems. Suggestions have ranged from a red frame around AI-generated text, as offered by Stewart Russel (co-author of a leading AI textbook) in reply to a question from Sen. Amy Klobuchar (D-Minn) during recent testimony before the Senate Judiciary Committee’s Subcommittee on Privacy, Technology, and the Law, to something resembling an electronic watermark not unlike those commonly used on paper texts.
Clearly, the development of such watermarks in not a forgone technological conclusion because the Senate has included in its version of the NDAA a provision (Sec. 218) requiring the Secretary of Defense to hold a “Generative AI Detection and Watermark Competition.” Participants in the competition would include federally-funded research and development centers, the private sector, the defense industrial base, academia, government agencies, and other participants deemed appropriate by the Secretary of Defense. The competition’s goal would be to research AI watermarks and then to facilitate moving such labels from prototype to production.
The AI watermark provision was included in the base text of the NDAA introduced earlier this month.
Global corruption; international trade. Two additions to the Senate version of the NDAA would impact how the U.S. views China’s rise as an economic power and, in another context, how the U.S. fights global corruption.
The first amendment, sponsored by Sen. Mitt Romney (R-Utah), would require the U.S. to advocate in international organizations to which the U.S. and China belong to change China’s status from “developing nation” to “developed nation.” A Congressional finding states that the change would be appropriate because China has now become the second largest economy in the world. The change, if brought into effect, would impact U.S. treaty negotiations, trade negotiations, and China’s status in various global organizations. The Romney amendment was agreed to by voice vote.
Another amendment, sponsored by Sen. Ben Cardin (D-Md), would have the U.S. judge whether other governments around the world have adopted minimum standards for the elimination of corruption. The amendment would address corrupt government officials as well as “any company, in which a person or entity...has a significant stake, which is responsible for, or complicit in, an act of corruption.” The Cardin amendment was agreed to by voice vote.