The US Financial Crimes Enforcement Network on February 29 took one of the most significant steps any financial regulatory agency has ever taken to unmask fronts who hide the ownership of financial accounts of financial criminals. In its “Advance Notice of Proposed Rulemaking,” FinCEN laid the groundwork for a Bank Secrecy Act regulation that would impose new duties on some financial institutions to upgrade customer due diligence and step up efforts to identify beneficial owners of accounts they house. Coupled with other recent government measures, the FinCEN action intensifies the crackdown on the ruses of financial criminals to hide dirty money.
Is it possible a pre-existing government master plan is steadily emerging that introduces, unifies and intensifies the overall global effort against financial crime?
Some telling developments in the past few months — President Obama’s announcement of the creation of a new “Financial Crimes Unit” in his State of the Union address, significant possible budget increases for regulatory and law enforcement agencies to fight financial crime, proposed broad IRS regulations implementing the Foreign Account Tax Compliance Act (FATCA), and the US-supported amendments of the Paris-based Financial Action Task Force’s “40 Recommendations” to include tax evasion and beneficial owners — suggest a coordinated global approach to attack financial crime more frontally.
The Notice of proposed regulations last week by the Financial Crimes Enforcement Network on customer due diligence and beneficial ownership may be the most enduring threat to financial criminals that do business or hide money in the United States.
One widely-respected veteran of anti-money laundering and financial crime regulatory compliance at financial institutions says the proposed FinCEN rules, if implemented, will bring about “massive, fundamental changes that will materially impact the industry at a level we haven’t seen since the passage of the Patriot Act in 2001.”
Beneficial owners now sporadically identified by financial institutions
The proposed FinCEN regulation is aimed at the heart of the device financial criminals use to hide their control of financial crime proceeds. An essential part of an effective counter-financial crime strategy is the uncovering of the layers of obfuscation the criminals construct to hide their ownership.
Uncovering beneficial ownership is the most neglected and most difficult part of counter-financial crime efforts worldwide.
Generally, a beneficial owner is a person or entity who owns or profits from an asset, account or property without having his or her name linked to it. Presently, there are no regulations requiring financial institutions to identify the beneficial owners of accounts, except for private banking accounts and foreign financial institution correspondent accounts, according to FinCEN.
FinCEN says financial institutions may choose to identify beneficial owners of other accounts “based on [their] risk assessment.” The vast majority of accounts, like retail banking and brokerage accounts, are not subject to heightened scrutiny to confirm or uncover beneficial owners.
Many financial institutions already follow “customer due diligence” procedures, or CDD, that govern the collection of information and verify the identity of persons who open and hold accounts. These procedures typically apply only to an account’s nominal owner, leaving the beneficial owner, if any, unknown. Procedures to identify beneficial owners, outside the two exceptions, are inconsistent or nonexistent at many institutions, says FinCEN.
Rules would require beneficial owner identification for first time
FinCEN says it is considering “expanding the requirement to obtain beneficial ownership information to all customers.” The proposed BSA regulation would make beneficial owner identification a “new express regulatory obligation.”
FinCEN says the rule might be as simple as,”… [financial] institutions shall identify the beneficial owner(s) of all customers, and verify the beneficial owners’ identity pursuant to a risk-based approach.”
“The explicit requirement that a financial institution know its customers, and the risks presented by its customers, is basic and fundamental to both serving those customers and implementing a program that protects a financial institution from abuse by illicit actors,” said James Freis, Director of FinCEN, in a statement on the release of the Notice.
The agency says it would consider exempting certain accounts and businesses, and allow institutions to forgo identifying beneficial owners where it “may not be warranted given the [anti-money laundering/counter terrorist financing] risk or other factors.”
The 22-year-old Treasury Department bureau may extend the proposed new beneficial owner rule to all “covered financial institutions,” meaning those that fall under its BSA regulatory purview, as specified in Title 31, USC Sec. 5312(a)(2), where “financial institution” is defined. FinCEN says it has not determined who would be subject to the final regulations.
Person opening an account will be expected to identify beneficial owner
FinCEN expects that “the individual opening the account… will identify its beneficial owner, and that covered financial institutions will generally be able to rely upon the beneficial ownership information presented by the customer,” unless they doubt the information or believe there are money laundering or terrorist financing risks involved.
The Notice guides institutions on two possible procedures they could follow to verify beneficial owners. In one, they would verify that the beneficial owner exists “by using procedures similar to those currently required [under the BSA],” but “applied to the identified beneficial owner rather than to an individual customer.”
In the other, the institutions would verify that the beneficial owner named by the person who opened the account is the real beneficial owner.
FinCEN seeks comments on these procedures and says it is looking for a standard that is “reasonable and practicable, and sufficient to form a reasonable belief that the financial institution knows the identity or status… of the beneficial owner.”
FinCEN may narrow definition of ‘beneficial owner,’ facilitate compliance
The agency is thinking of refining the definition of a beneficial owner to a narrower, technical description in the case of legal entities, such as corporations, limited liability companies, limited partnerships, and other organizations. FinCEN now defines a beneficial owner as “an individual who has a level of control over… the funds or assets in the account that…enables the individual, directly or indirectly, to control, manage or direct the account.”
The new proposed definition would define a legal entity’s beneficial owner as “each of the individual(s) who, directly or indirectly” holds more than a 25% ownership stake in the entity. If no one has a 25% stake, the beneficial owner would be an “individual that has at least as great an [ownership stake] in the entity as any other individual,” as well as the person most responsible “for managing or directing the regular affairs of the entity.”
The proposed “specific and limited definition,” FinCEN says, makes it easier for financial institutions to deal with the “vast array of complex ownership structures of legal entities that may become customers.”
FinCEN proposal a part of wider Treasury efforts to regulate beneficial ownership
Regulation of beneficial ownership in the US has been a contentious issue for several years. In 2006, the FATF criticized the US for not complying with standards to identify beneficial ownership. Senator Carl Levin, of Michigan, the most active financial crime expert in the US Congress and author of most of the financial crime provisions of the USA Patriot Act of 2001, has said the failure of the US to regulate beneficial ownership hurts international counter-financial crime operations.
A FinCEN report of May 2011 quoted Jennifer Shasky Calvery, the Chief of the Justice Department’s Asset Forfeiture and Money Laundering Section, as saying that “the lack of beneficial ownership information… not only damages our reputation, but also undermines our efforts to join with foreign counterparts in a global offensive against organized crime and terrorism.”
FinCEN says the proposed regulations are “one key element of a broader U.S. Department of the Treasury strategy to enhance financial transparency in order to strengthen efforts to combat financial crime.”
One part of the strategy involves “working with Congress to promote legislation that enhances transparency of legal entities.” That refers to the Incorporation Transparency and Law Enforcement Assistance Act, which Senator Levin has labored mightily to pass for several years. The bill has been opposed by offshore secrecy havens and the secretaries of state in the United States, who view their incorporation laws as a good revenue source. That law would require states to identify the beneficial owners of corporations in their jurisdiction.
Notice gives guidance on ‘effective’ customer due diligence programs
In addition to identifying beneficial ownership, FinCEN lays out what it says are three other essential elements of a financial institution’s due diligence program. It proposes to cover each of them in its rules:
- Initial due diligence on customers – “Covered financial institutions shall identify, and on a risk-basis verify, the identity of each customer… such that the institution can form a reasonable belief that it knows [the customer’s] true identity.”
- Understanding the nature and purpose of account — “Covered financial institutions shall understand the nature and purpose of the account… for the purpose of assessing the risk and identifying and reporting suspicious activity.”
- Conducting ongoing CDD — “… covered financial institutions shall establish and maintain appropriate policies [for] conducting on-going monitoring of all customer relationships, and additional CDD as appropriate.”
These proposed rules augment requirements already in place, including customer identification procedures mandated under Section 326 of the USA Patriot Act. The rules, FinCEN says, will “codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations.”
FinCEN seeks public comment on various points
FinCEN seeks comment from affected institutions and persons on 10 listed questions, including:
- “Aside from policies and procedures (concerning) beneficial ownership, what changes would be required in a financial institution’s CDD processes (by) adoption… of an express CDD rule?
- “How do financial institutions currently obtain beneficial ownership information?”
- “What information should be required… to identify, and verify on a risk basis, the identity of the beneficial owner?”
Comments must be received by May 4, 2012, which is 60 days after the Notice appeared in the Federal Register. They may be sent in via www.regulations.gov or by mail addressed to FinCEN, P.O. Box 39, Vienna, VA 22183. Other regulators and law enforcement agencies have also been invited to share their comments.
“Broad public input… will assist FinCEN in considering a CDD obligation that would bring consistency and uniformity both within and across financial institution sectors,” said Freis in a statement on the release of the Advance Notice. “With this consistency, FinCEN seeks to disrupt the ability of criminals to hide their assets behind the shroud of anonymity.”