FATF chastises U.S. on beneficial ownership, oversight of attorneys, real estate, Swiss on sharing

By Brian Monroe
December 8, 2016

The global AML standards-setting body gave the United States its lowest possible ratings for preventing criminals from laundering money using shell companies, and the oversight of attorneys and real estate agents, black marks tarnishing the country’s overall powerful framework to counter financial crime.

Those are some of the findings from a mutual evaluation of the U.S. released last week by the Paris-based Financial Action Task Force (FATF), which sets international anti-money laundering (AML) standards. In its latest round of evaluations, the FATF has reviewed more than two dozen countries, this week releasing its evaluation of longtime bank secrecy haven Switzerland.

As for the United States, FATF evaluators highlighted many of the same deficiencies as a prior review in 2006, chiefly failings tied to requiring that corporate beneficial ownership (BO) details are gathered at company formation and made available to law enforcement.

The problem of opaque corporate ownership was an issue given top billing on the world’s stage after the Panama Papers scandal revealed how terrorists, criminals and the corrupt can hide illicit assets behind murky ownership structures.

This FATF review – which did give the U.S. high marks tied to its oversight of banks, sharing of information and tackling terror financing – is also the first for the U.S. under more stringent evaluations focusing on effectiveness rather than technical compliance.

The effectiveness component examines certain concrete metrics in the fight against financial crime, including the number of high-level investigations and convictions, assets seized and illicit funds forfeited.

FATF reports are widely respected and scrutinized tomes that banks and other countries rely on to get financial crime risk scores for given jurisdictions. Currently, those findings could factor into even keeping a bank account.

Many large banks are “de-risking” from certain countries due to perceived crime risks, giving FATF reports even more weight and leverage on both sides of the issue – for a bank, if the score is bad, the institution can more easily justify dropping correspondent connections, while, conversely, a country with improved scores could lobby for more international banking support.  

On the whole, the U.S. has a “well-developed and robust” AML and counter-terrorist financing (AML/CFT) regime through which “it is effectively investigating and prosecuting money laundering and terrorist financing,” according to FATF.

“However, the system has serious gaps that impede timely access to beneficial ownership information.”

As well, supervision of the banking and securities sectors “appears to be robust as a whole,” according to FATF, cognizant of the intense scrutiny state and federal regulators are giving U.S. financial institutions and a further acknowledgement of domestic AML and sanctions penalties that have soared into the billions of dollars, the highest in the world.  

In fact, the financial sectors “bear most of the burden in respect of required measures under the Bank Secrecy Act (BSA),” the country’s lead AML rules. 

FATF blesses U.S. enforcement approaches

Financial institutions (FIs), in general, have “an evolved understanding of ML/TF risks and obligations,” and have systems and processes for implementing preventive measures, including for on-boarding customers, transaction monitoring and reporting suspicious transactions, says FATF.

And when banks falter in their AML objectives, the U.S. has a “range of sanctions that it can and does impose” on financial institutions as well as an “array of dissuasive remedial measures, including informal supervisory actions. These measures seem to have the desired impact on achieving the supervisory objectives.”

But FATF noted that the same depth of oversight and enforcement doesn’t fully extend to non-bank entities, such as lawyers, company formation agents and certain real estate operations.

“While the U.S. placed a strong supervisory focus on the casino sector in recent years, the lack of comprehensive AML/CFT supervision for other designated non-financial businesses and professions is a significant supervisory gap.”

“As expected for the United States, in terms of beneficial ownership information, law enforcement agencies are not able in some scenarios to get access to information in a timely manner” or in some cases not at all,” said Selvan Lehmann, the project manager for the Basel AML Index, the world’s only composite index that ranks countries numerically for all financial crime risks.

“There is still a struggle nationwide to get consistent, systematic access to beneficial ownership details.”

In the aftermath of Panama Papers scandal, the largest data leak in history, that “is an issue,” Lehmann said. “That is why FATF has certainly focused on that problem, giving more recognition to the dangers of anonymous shell companies.”

Even so, taking a broader look, FATF acknowledged that the U.S. has “strong law enforcement investigations and cooperation in terms of effectiveness,” he said, noting that under the new methodology, the country has “one of the best ratings so far” of any of the 26 countries evaluated to date.

The group behind the Basel AML Index released a comparative analysis of FATF scores, weighting effectiveness more highly than technical compliance, which put the U.S. at No. 2, just behind Spain and several places better than Switzerland, at No. 5.

‘Fundamental changes’ needed to fix beneficial ownership gaps

But where the U.S. has its most serious shortcomings, and must make “fundamental improvements,” according to FATF, is tied to capturing beneficial ownership details and making them available to either law enforcement, banks or creating a public register.

Some U.S. lawmakers, even broad, bipartisan groups, have tried to release bills to address those gaps, but the efforts have never come to fruition.

The Obama administration proposed legislation to mandate companies to disclose beneficial owners in May, but Congress has not introduced the bill, a U.S. Treasury official said in a call with reporters, according to Reuters.

Without such a bill, the official said, “the US will continue to lag behind our global partners.”

In a bid to button up the issue at some level, the U.S. Treasury finalized rules requiring banks to request and capture beneficial ownership details at account opening, but institutions have no way to verify what they are told.

“The Federal authorities have a good understanding of the risks of complex structures of legal persons and arrangements being used to hide ownership and launder money,” according to the group. “However, serious gaps in the legal framework prevent access to accurate beneficial ownership information in a timely manner.”

In some cases, the country’s most significant vulnerabilities converge, according to FATF, which scored the U.S. as non-compliant, its lowest rating, tied to beneficial ownership and oversight of designated non-financial business, such as those involved in company formation.

“Lawyers, accountants, high-end real estate agents and trust and company service providers” who work in selling or creating companies for individuals and corporates are not subject to “comprehensive AML/CFT requirements, and are not systematically applying basic or enhanced due diligence processes,” according to FATF.  “this is further exacerbated by the deficiencies in the BO requirements.”

In some cases that has resulted in federal prosecutors dropping cases because the resources needed to puncture through impermeable corporate veils did not justify the unsure prosecutorial outcomes, according to FATF. 

Action plan focuses on eliminating SAR thresholds, ownership gaps

In an action plan that the U.S. must complete before it’s next FATF evaluation, the group laid out several priorities for the country to buttress outstanding vulnerabilities. They are:

·         Capture and make beneficial ownership information available to competent authorities in a timely manner, by requiring that such information is obtained at the Federal level.

·         Implement beneficial ownership requirements under the AML rules coming into force in 2018, and require these entities to be directly covered and obligated to collect company formation details. Those requirements should be applied to investment advisers, lawyers, accountants, trust and company service providers and certain real estate-related entities, as identified in recent geographic targeting orders (GTOs).

·         Issue guidance to clarify the scope of the immediate SAR reporting requirement, in order to make it clear that the requirement applies below the otherwise applicable thresholds; and conduct a focused risk review of the existing SAR reporting thresholds and the 60/30 day reporting deadlines.

·         Improve the visibility of AML and State level activities and statistics, including via improved data collection and sharing, for a clearer nation-wide picture of the adequacy of AML efforts at all levels.

·         The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) should continue to expand its use of tools such as the GTO and 314 (a) requests, and further its proactive dissemination of strategic and operational intelligence products to law enforcement.

·         Create a new law that would strengthen value-based asset forfeiture, so if investigators can’t find the money, but know the value, they can seize a corresponding piece of value and assets from criminal entities, without having to prove the house or cars were bought with illicit assets.

The poor rankings for the U.S. on corporate ownership details relate to certain states making secrecy a sales pitch, with Delaware at the top of the list, said a former compliance officer at a large bank who has been stymied when trying to collect these details.

“That FATF hit the U.S. hard on corporate transparency is not surprising when Delaware has one of the strictest identity rules in the world, maybe more so than Singapore and Panama,” said the person. “The report also notes that the people who should be asking for or collecting that information, company formation agents, attorneys and those in real estate, also have very weak oversight. That is a big problem.”

But the problem is likely also an intractable one.

“As long as certain states exist in this way and sell corporate secrecy, the U.S. will be singled out by FATF,” said the person, who asked not to be named.

“But it will take more than Congress and politicians to change that,” said the individual. “The real culprits are those working behind the scenes with power, wealth and political influence. They are the real ones controlling U.S. tax havens and they will do anything to protect their interests and keep their secrecy.”

Under new effectiveness regime, U.S. flourishes

But it’s not secret the U.S. is tough on crime, and that bears out in the effectiveness figures. 

Under the more rigorous effectiveness regime, most countries have seen overall scores fall because while they may have improve technical compliance, and put more laws on the books, they have failed to actually show the laws are being implemented effectively by law enforcement, regulators or covered financial institutions.

That is not the case with the United States, according to FATF.

The U.S. “aggressively pursues high-value confiscation and has been very effective, as the considerable value of confiscations each year demonstrates,” according to FATF, noting the country captured more than $4.4 billion in illicit assets in 2014.

Federal law enforcement agencies make “good use of their extensive investigation capabilities and intelligence,” according to FATF. “Authorities pursue a wide variety of money laundering activity, in particular complex and high-dollar value criminal offences, resulting in over 1,200 money laundering convictions per year.”

The U.S. also has a “substantially effective system for international cooperation, and provides good quality and constructive mutual legal assistance and extradition,” according to the group.

In tandem, national coordination and cooperation on AML/CFT issues has “improved significantly” since the last evaluation, in particular in areas representing the most risk, including counter-terrorism, counter-proliferation and related financing issues.

“Terrorism and its financing have the highest priority, and the U.S. is highly effective in this area,” says FATF. “It proactively and aggressively investigates, prosecutes and convicts individuals for terrorist financing and can capture any form of material support.”

FATF notes that although the U.S. suffered the most high-profile terrorist attack in its history on 9/11, the changes since 2001 across the board, from investigations to intelligence, banks to bureaucrats, make it much more difficult for terror groups and their financiers to move funds into this country and gather support for a major operation.

“The U.S. appears to have kept terrorist funds out of its financial system to a large extent by effectively implementing targeted financial sanctions,” according to the report. “Proliferation financing is also a high priority for the U.S. and it has effectively frozen large volumes of assets through its sanctions programs.”

Switzerland improving, but CDD, international sharing hurdles remain

FATF also noted improvements in Switzerland’s efforts tied to financial crime, praising it for better mutual assistance and sharing with international authorities in certain cases and expanding its enforcement focus tied to grand corruption cases.

But the Swiss have struggled to keep current with stronger customer due diligence standards, particularly for longtime customers, a nod to the preferential treatment given to wealthy foreigners in ages past. The country also at times can’t share data on customers when requested by foreign authorities if regional banks have not already filed a suspicious transaction report on the subject.

“The bad news for the Swiss is that the FATF mutual evaluation of their AML/CFT framework gave them failing grades in ways that have confirmed the long-held storyline about their compliance or lack thereof,” said Ross Delston, a Washington, DC-based independent anti-money laundering expert.

The Swiss received failing grades on customer due diligence, private banking and the effectiveness of sanctions against firms that fail to comply with laws and regulations, he said.

That is “even worse news for countries being looted by rulers whose confidence in corruption allows them to plunder without remorse and transfer their plunder without too many questions being asked,” Delston said.  “The status quo is still recognizable.”

“The errant ratings are enough to automatically place the Swiss on enhanced follow-up, which means continued scrutiny by the FATF to determine if they are strengthening their framework,” he said. “But they will be in good company, in the same crowded boat as the USA and Canada, both of which received failing ratings recently.”