The top banking agencies of the United States, in conjunction with the U.S. Treasury, have attempted to delineate more clearly what banks should do in crafting financial crime compliance programs related to following laws, regulations or guidance – a likely response to widespread criticism in the recent implementation of new rules to capture beneficial ownership details.

Regulators, including the Office of the Comptroller of the Currency and Federal Reserve, likely issued the guidance on supervisory guidance recently to address industry criticisms that examiners can fault bank anti-money laundering (AML) programs solely on their subjective interpretation of already murky guidance.

Specifically, the statements are likely related to the industry debacle that occurred in the aftermath of the recent U.S. Treasury’s Financial Crimes Enforcement Network’s (FinCEN) beneficial ownership rule coming into effect.

At issue was that just weeks before the May 11, 2018 deadline, FinCEN released dozens of questions and answers (Q&As), which in some ways contrasted with perceived expectations and current regulations – forcing the financial sector to choose between which one to follow.

The “guidance on guidance” is likely a “response to criticisms brought up by the Clearing House,” and other associations, which were “very critical of the rulemaking process” and related last minute guidance around the beneficial ownership rule, said Jim Richards, the principal and founder of RegTech Consulting and the former AML/BSA compliance officer for Wells Fargo.

The top complaint revolved around annual rollover products that, under current banking laws, mean they become a new account each year, requiring the bank to reach out to accountholders to ensure that no beneficial ownership data has changed.

If the bank can’t get a formal response by mail, emails or phone calls, theoretically, the bank could have been in violation of the new ownership obligations.

The April 3 Q&As, while meant to ease fears, promote compliance and address niggling details, also ended up introducing a host of unexpected snags, including new uncertainty about how federal regulators could deem compliance practices “reasonable” and if they should even be able to make those judgements in the first place.

Further making a confusing situation even worse was that on the day the beneficial ownership rules were to take effect, May 11, the regulatory groups behind the AML interagency exam manual – the bible for all groups subject to financial crime obligations – pulled some of the language related to account responsibilities straight from the FinCEN Q&A guidance, further cementing that several nigh impossible scenarios must somehow be followed.

The original final rule, released in May of 2016, 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 the latest FAQs, 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.

Guidance created more consternation than clarity

Here are some examples of where the latest FAQs have caused consternation in the ranks of many banks, which could have led to the latest guidance on guidance:

  • 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.

Two stays, then permanent exceptive relief

In the wake of the industry outcry, FinCEN released two stays of the thorny parts of the regulation before finally issuing permanent exceptive relief earlier this month. To view the release, click here.

In response, the agencies in the recently released guidance stated clearly: “Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.”

Rather, supervisory guidance “outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area,” according to regulators.

To read ACFCS coverage of the Congressional hearings related to the FinCEN beneficial ownership rule and related industry pushback, tangles and tribulations, click here.

To watch the hearing and read witness statements, click here.

Regulators promise to only criticize on violations of law, not guidance

Some other key areas regulators worked to clarify in the recent guidance:

  • The agencies intend to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance.
  • Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.
  • The agencies will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.
  • The agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions.

Even now, though, after the dust has settled, there is what could be perceived as a minor hiccup when you look at the various regulations where AML obligations are housed, said Richards, who has more than 30 years of compliance experience in top posts.

For example, if you look at regulations for an AML program at 31CFR1020.210[b], it includes the four historical AML duties – policies and procedures, a compliance officer, training and an independent review – but it also has the updated obligations for the new beneficial ownership duties.

But if you go to 12CFR21.21[c], it still only references the classic “four pillars,” he said, with the apparent understanding that the new beneficial ownership CDD rules are included in the area of “internal controls.”