Institutions oppose FinCEN beneficial owner rule, while anti-corruption groups applaud

If the comment letters pouring in to the Financial Crimes Enforcement Network in response to the February 29 release of its “Advance Notice of Proposed Rulemaking” are any indication, the new potential customer due diligence requirements outlined in that 37-page document have few friends in the banking, investment, legal and gaming industries.

In the Advance Notice (ANPR), FinCEN said it was considering a rule requiring certain companies regulated under the Bank Secrecy Act to take steps to identify the beneficial owners of accounts they house, setting the table for a drastic revamping of customer due diligence at financial institutions. After three and a half months in which the agency solicited public comment on the ANPR, FinCEN has received more than 60 comment letters, including hundreds of pages of sharply worded responses from dozens of corporations, legal associations and trade groups representing major players in the financial sector. The comment period on the ANPR ended yesterday, after FinCEN extended the deadline to June 11 from its original closing date of May 4.
While anti-corruption advocates at non-profit organizations like Global Financial Integrity and Global Witness have voiced support for the proposed rules, the letters of organizations as diverse as the American Bar Association, Financial Services Roundtable, Investment Company Institute, and trade groups representing credit unions, small banks and casinos all express serious concerns or outright rejection of the potential new beneficial ownership obligations.

FinCEN spokesperson Steve Hudak said he could not respond directly to comment letters, but noted the agency was “early on in the process” of developing rules, and would carefully consider the feedback it received.

Beneficial ownership rule most controversial of FinCEN customer due diligence proposals

The new potential rule on identifying beneficial owners is only one of four customer due diligence (CDD) proposals in the ANPR, but it is by far the most controversial. The other three potential CDD rules outlined – identifying and verifying customers, understanding the nature of customer accounts, and conducting ongoing due diligence – are already routine at most financial institutions, and as FinCEN notes, implied by existing BSA regulations.

In its ANPR, FinCEN says the new beneficial owner rule might be as simple as, “…institutions shall identify the beneficial owner(s) of all customers, and verify the beneficial owners’ identity pursuant to a risk-based approach.”

FinCEN has not determined who would be subject to the final regulations. The 22-year-old Treasury Department agency may extend the proposed beneficial owner rule to all “covered financial institutions,” meaning those that fall under the BSA regulations as specified in Title 31, USC Sec. 5312(a)(2), where “financial institution” is defined.

Cost, sophistication of proposed rules is questioned

For many organizations and businesses, the expected cost of collecting and verifying beneficial ownership information is unsurprisingly the primary complaint.

“As currently contemplated, the ANPR would impose compliance costs and obligations on financial institutions that may dwarf the compliance costs of the existing AML regime by orders of magnitude,” says the Financial Services Roundtable, a deep-pocketed trade group representing 100 of the largest banks, investment firms and credit card companies in the US, including CitiGroup, Bank of America and Wells Fargo.

Letters from groups representing smaller businesses, such as the Independent Community Bankers of America and the National Association of Federal Credit Unions, raise concerns on employee training and the level of sophistication required to comprehend beneficial ownership structures. The Community Bankers letter says “understanding the complex legal documents” involved in determining the beneficial owners of business customers would require “advanced business acumen” beyond the skills of many smaller bank employees.

Unraveling and verifying beneficial ownership of corporations may tax even the largest financial institutions, say some commentators, and may not ultimately reveal much about who is controlling an account.

“Many ownership structures are multilayered and complex. It would be a significant burden (and in some instances impossible) for financial institutions to research and verify all direct and indirect legal entity owners…,” the Roundtable says in its letter. “We question whether the proposed definition will lead to the gathering of useful, actionable information on beneficial ownership.”

Some letters dismiss need for express rules, propose voluntary approach as alternative

Some letters call for FinCEN to scrap the proposed rules entirely. The Roundtable, for one, says the proposal to identify beneficial owners is “fundamentally flawed.” It instead requests institutions be left to identify beneficial owners at their discretion, subject to their own risk analysis of the customer and account. FinCEN already stated in its ANPR that 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 American Bar Association also argues against what it calls a “burdensome and rigid ‘one-size-fits-all’ approach.” Concerned the beneficial owner rule would require attorneys to report confidential client information when opening trust funds on behalf of their clients, the ABA instead advocates voluntary reporting of beneficial owners of client accounts.

The ABA also fears that the ANPR may be an attempt by FinCEN to assert regulatory control over law firms.”The ABA has long opposed attempts by Congress or federal agencies to regulate lawyers and law firms as ‘financial institutions’ under the Bank Secrecy Act,” says its comment letter.

“If adopted in their current form, those proposals… could undermine both the confidential lawyer-client relationship and traditional state court regulation of lawyers.

Knowing true owners difficult without US government action, say friends and foes

Most say that when it comes to identifying beneficial owners of companies or legal entities,  requiring institutions to collect information is half the battle. Supporters and detractors both say in their comment letters that the dearth of beneficial ownership information collected by the US government at the time of company formation hamstrings due diligence efforts.

“Most states in the U.S. allow the anonymous incorporation of companies and other legal persons, without any process of identification or verification, or any ongoing due diligence,” notes Global Financial Integrity, an anti-corruption advocacy group.  The group says that while it supports the FinCEN ANPR, it views the rules as inadequate if not backed by US legislation and  international agreements regulating the collection of beneficial ownership information at an entity’s formation.

Other organizations echo this argument. FinCEN’s ANPR says that it expects customers will provide information on the beneficial owners of an account at the time they open it, but many commentators note that they currently have no database or other source to corroborate what a customer might tell them. “Until such time as states are required to obtain and verify beneficial ownership information at the time of entity formation, it is practicably impossible… to reliably verify the accuracy and completeness of beneficial ownership information related to most entities,” says the Investment Company Institute, a trade association for US investment firms, in its comment letter.

This means that financial criminals can still circumvent an institution’s due diligence by simply lying about the beneficial owners behind businesses, says Global Financial Integrity. “If the entity was created as part of a chain to deceive, it is almost certain that [the customer opening the account] will not have accurate information,” the organization states in its letter.

Levin bill stalled in US Senate would increase transparency in beneficial ownership

As several comment letters note, the US Senate is  considering the Incorporation Transparency and Law Enforcement Assistance Act introduced by Senator Carl Levin in August 2011. That legislation would require persons to divulge the beneficial owners of a company or legal entity to state agencies at the time of its formation. Its chances of being enacted by the current Congress are slim, as Levin has introduced similar legislation several times since 2008 with no avail.

FinCEN has not indicated when it will finalize the rules, and with Congressional action at a standstill, doubts linger.

As David Cohen, Assistant Secretary for Terrorist Financing at the US Department of the Treasury, noted in 2009 Congressional testimony on the issue, “no country that is even remotely on par with the United States in terms of its economy has been able to solve this problem effectively.”

View all comment letters on the ANPR here