The U.S. Treasury Wednesday extended by 30 days a prior, rare ruling granting exceptive relief for 90 days related to an ambiguous, potentially burdensome piece of a new beneficial ownership gathering rule for legal entity customers that took effect in May.

The original final rule released by the Financial Crimes Enforcement Network (FinCEN) requires financial institutions to capture beneficial ownership details on certain legal entity customers down to the 25 percent level, or more on a “risk-based basis,” and list a top-level person who exercises managerial control.

Institutions can chiefly rely on what companies provide about their flesh-and-blood owners on a self-certification form.

To read all the details on the latest extension, click here. To read the full, prior 90-day interpretive guidance, click here.

The genesis of the latest 30-day extension dates back nearly four months to a persnickety piece of FinCEN guidance meant to illumine and ease implementation – but ended up bringing more consternation than clarity.

At issue is that roughly a month before the May 11 compliance deadline, FinCEN on April 3 released a set of questions and answers (Q&As) that, while meant to ease fears, promote compliance and address niggling details, had at the time introduced a host of unexpected snags, including new uncertainty about how federal regulators could deem compliance practices “reasonable” and if examiners should even be able to make those judgments in the first place.

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The fulcrum behind the recent extension relates to bank products that renew annually and, under the new rule, would require a bank to reach out and get verbal, written or email confirmation that beneficial ownership details haven’t changed.

What further complicates the matter is that when CD’s annually rollover, they technically become a new account, which, in turn, would require the bank to reach out to the company or owner to make sure no beneficial ownership details have changed.

If the bank can’t get a verbal, written or email response, the bank would, technically, not be in compliance with the new rules and could face regulatory scrutiny or penalties.

Such a dynamic, if allowed to fester, say powerful banking groups, legislators and analysts, could result in banks spending an inordinate amount of time and resources on what may end up being fruitless customer outreach, open new regulatory vulnerabilities or even cause banks to drop low-risk, profitable accounts – simply because clients haven’t responded quickly enough.

Though the rule is mainly geared to address an outstanding vulnerability in U.S. financial crime defenses, it also enshrined two compliance best practices: customer risk ranking and transaction monitoring. Those requirements are untouched in the exceptive relief redoubts.

The latest 30-day interpretive ruling, in lock step with the previous 90-day ruling, targets “certain financial products and services that automatically rollover or renew (i.e., certificate of deposit (CD) or loan accounts) and were established before the Beneficial Ownership Rule’s Applicability Date, May 11, 2018.”

The exception began retroactively on May 11, 2018 and was set to expire today.

Part and parcel of the challenge for FinCEN is that some of the wording in the guidance from the conflictive April Q&As made it nigh verbatim into a tome replete with more concrete compliance scrivening, the didactic document regulators use to judge bank compliance programs: the interagency anti-money laundering (AML) exam manual.

The new examination procedures, released on the same day in May as the rule took effect, replaced those in the current “Customer Due Diligence — Overview and Examination Procedures” section of the Federal Financial Institution Examination Council’s (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual.

 ACFCS has it covered when it comes to beneficial ownership:

  • To read ACFCS coverage of the original 90-day exception, click here.
  • To read recent ACFCS coverage of the various issues tied to the new rules or FAQs, please click here.
  • To read the latest FAQs from April, click here.
  • To read FAQs from 2016, click here.
  • To read the original final rules, click here.
  • To read prior ACFCS coverage of the rule, click here.

Flagrant FAQs

The cacophonous din of frustration from powerful banking groups, including the storied Clearing House Association (CHA), the National Association of Federal Credit Unions (NAFCU), and the Mid-Size Bank Coalition of America (MBCA), boiled over in public comments and letters to Congress.

The groups expressed their concerns in early May as they, and analysts interviewed by ACFCS, cited a bevy of potential pitfalls in the current state of beneficial ownership rules and guidance, including:

  • Ownership: Is the 25 percent ownership level a “floor or ceiling?” That could change depending on the risk of the firm, transparency of its ownership structures and believability of its self-certification responses or pickiness of the examiner.
  • Lawsuit: If the bank follows what appears to be required by the FAQs, the bank could get sued by individuals and regulators because the questions were released without industry feedback.
  • Lawsuit II: If the bank follows what is in the FAQs, and waits until a customer responds to new ownership questions, that could cause a delay in a business being able to pay their suppliers or settle invoices. The business then could possibly sue the bank for breaching a contract because the bank held up a payment or transaction.
  • Deadline: institutions still don’t know what examiners will be looking for because agencies haven’t yet released an updated interagency exam manual.
  • Control: It’s still unclear when, how or what news could constitute a reason for a bank to doubt the sworn statements of someone who may exert “managerial control.”
  • Control II: How does a bank detail control for incorporated clubs, like the Boy Scouts or Lions Clubs? Does a bank name the President of the overall club or a local leader?
  • Renewables: When a certificate of deposit (CD) comes up for a re-up, it constitutes a new “account.” But if the bank attempts to contact the customer to ensure no ownership details changed, and the person rebuffs, it could leave the bank vulnerable.

Pressure points

Another issue is where some of the onus of capturing beneficial ownership details could fall.

The pressure of the rule can fall disproportionately on front-line staff and learners who, in many instances compared to compliance officers, have the least understanding of complicated ownership structures.

Overall, many believe even the new requirements to capture beneficial ownership details in the U.S. are just a stopgap measure, one weak in comparison to what is happening in Europe and United Kingdom.

As part of broad AML compliance changes, those countries have chosen to capture corporate ownership details at the company formation level and are planning to publish the data in registers available to the public or certain parties, including banks, law enforcement and watchdog groups.

Many of the domestic, longer terms solutions were discussed at a hearing in May, with groups calling for greater coordination between federal investigators and regulators – in a sense changing the power dynamic to allow banks to focus on riskier entities worthy of deeper dive beneficial ownership battles, while requesting leniency from on-the-ground examiners.

“Any viable solution should be one that includes closer collaboration between FinCEN and the federal functional regulators and greater authority for FinCEN to establish BSA examination and enforcement priorities across these agencies and similarly to control interpretations of BSA rules,” wrote Carlton Greene, a partner at Crowell & Moring, LLP, who was also a former chief counsel at FinCEN and top official at the U.S. Treasury’s Office of Foreign Assets Control, in witness statements in May.

FinCEN, by design, is “uniquely positioned to understand the threats posed by illicit finance and to understand the regulatory trade-offs needed to address those threats,” he stated.

In addition to the benefits to FinCEN’s mission, such an approach “also could substantially lessen the burdens for regulated financial institutions, and give them greater freedom to innovate and partner with FinCEN to find better solutions to illicit finance threats,” he wrote, echoing Congressional conclusions in prior hearings at the tail end of 2017 and earlier this year.