In this latest ACFCS Compliance Roundup, the U.S. Treasury issues temporary exceptive relief related to a persnickety piece of the just-released “beneficial ownership” rule, related FAQs and interagency guidance, the head of the country’s financial intelligence unit answers to Congress on remaining implementation tangles and Europe states it will clash with the U.S. on secondary sanctions against Iran after reneging on a historic joint-country deal.

These updates have direct import to financial institution compliance programs as ambiguities in legislation and related guidance can open the door to regulatory scrutiny and penalties, particularly in something as high-profile as the country’s first formal fusillade against the criminal bastion of corporate opacity.

The ability to capture beneficial ownership details, or lack thereof, also has tendrils threading their way to the already complex and writhing world of international sanctions compliance.

As it stands now, with the Trump administration deciding to withdraw from the 2015 deal with Iran to ease sanctions for certain proliferation considerations, and now the European Commission deciding to fight enforcing secondary sanctions, global banks are caught in the middle choosing which master to serve – and potentially which government to anger.

This puts even more pressure on large financial institutions with extensive international correspondent networks.


These institutions must be more wary of potentially engaging in transactions with sectors now off limits under the quickly-evaporating U.S. piece of the Iran deal – including automotive, aerospace and energy, for instance – and be more aggressive in peering behind complex ownership structures for ties to now-banned entities, regions or their regional Iranian proxies, such as Turkey.

In wake of compact withdrawal, EU Commission invokes “blocking statute” forbidding EU firms from complying with U.S. extraterritorial sanctions against Iran

The European Commission Friday stated it was formally challenging the U.S. on Iran sanctions after the Trump Administration’s withdrawal from the multi-country Joint Comprehensive Plan of Action (JCPOA) – the Iran nuclear deal, with the aftershocks being that some countries, and their financial sectors, may have to choose which jurisdiction to incur government non-compliance wrath.

The European Union is “fully committed to the continued, full and effective implementation of the Iran nuclear deal,” so long as Iran also respects its obligations, the bloc said in a statement. The U.S. unveiled the unwinding of Iranian sanctions relief in Treasury guidance, which have to be completed in two 90-day tranches. To review the guidance in ACFCS coverage, click here.

The decision by the U.S. to reinstate sanctions “has the potential to have a negative impact on European companies, which have invested in Iran in good faith since the deal was signed,” according to the commission, adding that the lifting of nuclear-related sanctions is an essential part of the JCPOA.

As such, the European Union is set to be at loggerheads with the U.S. in being “committed to mitigating the impact of US sanctions on European businesses and taking steps to maintain the growth of trade and economic relations between the EU and Iran that began when sanctions were lifted.”

The current plan for than is multi-pronged, including:

  1. Launched the formal process to activate the Blocking Statute by updating the list of US sanctions on Iran falling within its scope. The Blocking Statute forbids EU companies from complying with the extraterritorial effects of US sanctions, allows companies to recover damages arising from such sanctions from the person causing them, and nullifies the effect in the EU of any foreign court judgements based on them. The aim is to have the measure in force before August 6, 2018, when the first batch of US sanctions takes effect.
  2. Launched the formal process to remove obstacles for the European Investment Bank (EIB) to decide under the EU budget guarantee to finance activities outside the European Union, in Iran. This will allow the EIB to support EU investment in Iran and could be useful in particular for small and medium-sized companies.
  3. As confidence building measures, the Commission will continue and strengthen the ongoing sectoral cooperation with, and assistance to, Iran, including in the energy sector and with regard to small and medium-sized companies.
  4. The Commission is encouraging Member States to explore the possibility of one-off bank transfers to the Central Bank of Iran. This approach could help the Iranian authorities to receive their oil-related revenues, particularly in case of US sanctions which could target EU entities active in oil transactions with Iran. But depending on the timing of those transactions and if they are in U.S. dollars or done through a bank with a U.S. correspondent connection, it could be considered a sanctions violation.

The European Parliament and the Council will have a period of two months to object to the measures, once proposed, before they enter into force, according to the commission.

“As long as the Iranians respect their commitments, the EU will of course stick to the agreement of which it was an architect – an agreement that was unanimously ratified by the United Nations Security Council and which is essential for preserving peace in the region and the world,” European Commission President Jean-ClaudeJuncker said.

FinCEN issues 90-day exceptive relief for renewable, rollover products in interpretative ruling on new beneficial ownership obligations

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) Wednesday issued a rare ruling granting exceptive relief for 90 days related to an ambiguous, potentially burdensome piece of new beneficial ownership obligations for legal entity customers that took effect Friday.

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.

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 are two bedrock anti-money laundering (AML) processes given significant ink in the interagency exam manual – unlike the beneficial ownership rule, which was only updated related to examiner expectations on Friday, the same day the rule became effective.

The crux of the ruling has to do with 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 – a dynamic that, if allowed to fester, could drain bank resources, open a new regulatory vulnerability or even cause banks to drop accounts.

The interpretive 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 begins, retroactively, on May 11, 2018, and will expire on August 9, 2018.

At issue 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.

To read the full interpretive guidance, click here.

The short, two-page ruling occurred on the same day FinCEN Director Kenneth Blanco testified before Congress on issues and industry concerns related to the customer due diligence rule, referred to in industry as the beneficial ownership rule.

ACFCS has it covered when it comes to beneficial ownership:

  • To read recent ACFCS coverage of the various issues tied to the new rules or FAQs, please click here.
  • 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.

In Congressional hearing, FinCEN head agrees FAQs have caused unintended industry consternation, but is committed to measured, practical enforcement of foibles, fumbles

In the hearing, Blanco stated FinCEN was committed to fair, measured implementation of the beneficial ownership rule, with the bureau already urging federal banking and securities regulators not to play gotcha, noting that there are always unexpected compliance snags for new rules that take time to iron out “in a way that makes practical sense.”

Although FinCEN expects covered institutions to be ready on the May 11 deadline, the bureau also understands that “institutions, regulators and other stakeholders may need a little extra time to smooth out any wrinkles.”

The new rule is meant to bolster the financial system against criminals and their illicit financial flows and “not to serve as a vehicle for punishing financial institutions,” Blanco said in prepared testimony.

“There is always an understandable expectation that industry’s fine-tuning of its implementation, and the government’s fine-tuning of the examination process itself, takes time and that new questions often emerge after implementation begins.”

Overall, he further reinforced that banks can rely chiefly on what legal entities say on a self-certification form and generally don’t “have to go beyond what is provided, unless it has reason to believe that the information provided is unreliable,” though that reason is, in itself, one of the many ambiguities borne out and brought to the fore in in the controversial Frequently Asked Questions released in early April.

Here are some examples of where the FAQs caused consternation in the ranks of banks:

  • 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.

The interpretative ruling directly related to the CD and renewable issue unearthed in the FAQs.

Even with some issues still amorphous and unaddressed, Blanco admitted the opacity gaps in the U.S. and, globally, can’t be allowed to continue.

“The misuse of legal entities to disguise illicit activity has been a key vulnerability in the U.S. financial system,” he said.

“Corporate structures have facilitated anonymous access to the financial system for criminal activity and terrorism,” Blanco said. “Narcotraffickers, proliferation financiers, money launderers, terrorists and other criminals have been able to establish shell companies, which then use accounts at financial institutions, directly or indirectly, without ever having to reveal who ultimately is behind the transactions being facilitated.”

This dynamic also has direct ties to law enforcement investigations and bank requirements to risk rate customers.

“This has made it difficult for law enforcement to pursue investigative leads, and for financial intelligence units to produce those leads in the first instance,” Blanco said. “And, just as important, this has made it difficult for financial institutions to apply effective risk-based AML programs.”

To view the hearing or Blanco’s witness statement, click here.

On deadline day, FFIEC releases new beneficial ownership, CDD exam rules, with key details on verification expectations

On the issue of what examiners expect, that was, technically, addressed on Friday, the same day as the beneficial ownership rule deadline.

The Federal Financial Institutions Examination Council (FFIEC) on that day issued new examination procedures related to the beneficial ownership rule, which apply to banks, savings and loan associations, savings associations, credit unions, and branches, agencies, and representative offices of foreign banks.

The new examination procedures replace those in the current “Customer Due Diligence — Overview and Examination Procedures” section of the FFIEC’s Bank Secrecy Act/Anti-Money Laundering Examination Manual.

In addition, the group developed a new overview and examination procedures section of the beneficial ownership requirements for legal entity customers part of the manual, according to the update.

As is mentioned earlier, banks and other covered financial institutions must comply with the rule beginning Friday. Some excerpts in the exam manual update include:

  • A bank may rely on the information supplied by the individual opening the account on behalf of the legal entity customer regarding the identity of its beneficial owner(s), provided that it has no knowledge of facts that would reasonably call into question the reliability of such information.
  • If a legal entity customer opens multiple accounts a bank may rely on the pre-existing beneficial ownership records it maintains, provided that the bank confirms (verbally or in writing) that such information is up-to-date and accurate at the time each account is opened.
  • A bank need not establish the accuracy of every element of identifying information obtained, but must verify enough information to form a reasonable belief that it knows the true identity of the beneficial owner(s) of the legal entity customer.
  • The bank’s procedures for verifying the identity of the beneficial owners must describe when it uses documents, non-documentary methods, or a combination of methods.

To read the full FFIEC release, click here.