Probably no rule promulgated by the Financial Crimes Enforcement Network under the Bank Secrecy Act, since the ill-fated Know Your Customer regulation of the late 1990s, has generated as much heat as the agency’s March proposed rule that would require banks, broker-dealers and others to dig behind named accountholders to unmask the true “beneficial owners” hiding behind the paperwork.
The proposed regulation, which plays an important but unstated role in the global crackdown on corruption and tax evasion, has raised a tempest in the financial sector. Now, with their risk and compliance officers, lawyers and lobbyists in tow, diverse financial institutions, trade associations and law enforcement agencies are clamoring to say their piece at a rare public hearing on July 31 on the proposed rule.
The hearing at the US Treasury Department in Washington, will focus on 11 questions that FinCEN enunciated in its July 9 announcement. The Treasury agency said the questions were inspired by the 90 “comment” letters it received from interested parties after it issued the “Advanced Notice of Proposed Rulemaking” in March.
Robert Rowe, Senior Counsel at the American Bankers Association, told ACFCS.org that FinCEN has been “inundated by requests to attend” the hearing because “the interest in this issue is extensive.” He said even the ABA has not been confirmed for speaking slot at the hearing because of speaking requests.
“A lot of people in the field are in the same boat,” he added. The deadline to register to attend or speak is July 24.
FinCEN Public Affairs Director, Steve Hudak, told ACFCS.org that while the agency has not typically held public hearings on proposed rules in recent years, the beneficial owner issue “is well-suited for gathering as much information as possible” it in the early stage of developing the proposed rules.
FinCEN looking to financial institutions for guidance on rule
FinCEN’s notice of the hearing contained the areas where it needs public guidance and “detailed information”:
- “How and when financial institutions (now) obtain beneficial ownership information,” including the factors and processes they use. Presently, they must only collect beneficial ownership data on correspondent and private banking accounts of non-US persons.
- How and if financial institutions now verify beneficial ownership information they get from customers.
- Costs financial institutions now incur in obtaining and verifying beneficial ownership information and the expected costs for doing the same things under the proposed rule.
- “Potential alternative definitions” of beneficial owner to that provided in the proposed rule, and why they would be preferable for institutions.
- “How identifying beneficial owners enhances a financial institution’s ability to manage risk.”
- How institutions expect to assess risk when they collect beneficial owner information. Many letters urged FinCEN to adopt a risk-based approach to obtaining this information instead of requiring it to be gathered for each customer. FinCEN seeks details on the factors and “red flags” institutions would use in risk assessments.
- How institutions now conduct due diligence on trust accounts, including how they assess risk on these accounts and the information they collect on trustees.
- The differences in gathering beneficial ownership information from foreign legal entity customers compared to domestic ones.
- If and how institutions identify or ascertain that legal entities are “shell companies.”
Unearthing shell company owners is crucial, say US enforcement agencies
What is a “shell company” and how to collect beneficial ownership information on them has emerged as a crucial issue in the debate over the proposed rule. Prosecutors and law enforcement agencies have voiced strong support for the beneficial owner rule as a way to improve data on financial criminals lurking behind shells.
One such supporter is the Asset Forfeiture and Money Laundering Section (AFMLS) of the US Department of Justice.
On June 11, the department’s principal money laundering unit wrote in its comment letter, “The lack of available beneficial ownership information is a significant impediment to law enforcement’s ability to identify individuals who mask their criminal behavior behind a shell or front company. The proposed… requirement will help alleviate this problem.”
Financial institutions and trade associations counter by saying many US states collect very limited information when a company is incorporated under state laws, making identifying beneficial owners of shell companies difficult or impossible. They say the US state and federal governments must improve transparency when companies are created before the beneficial owner information collected by institutions is of real use to enforcement agencies.
Beneficial owner definition is a point of battle for corruption groups, enforcement agencies
Several institutions and trade associations, including the American Bankers Association and SIFMA, say FinCEN’s proposed beneficial owner definition is overly broad and unworkable. They say it would require them to unravel complex corporate structures and identify beneficial owners who have no actual control over accounts.
Anti-corruption organizations and some law enforcement agencies, on the other hand, argue that the definition is too narrow and would allow many hidden beneficial owners to escape detection.
“First and foremost, we plan to address the definition of beneficial owner,” says E.J. Fagan, a spokesman for advocacy group Global Financial Integrity, which will be attending the FinCEN hearing. “We expect that’s where the real fight will be.”
FinCEN gets high marks for outreach, as feedback continues unabated
Critics and allies of the proposed rule have commended FinCEN for its solicitation of public guidance and broad involvement in the rulemaking process. “It’s still an investigatory process at this point,” says Rowe.
The association spokesman adds that the hearings may reveal how much work remains to be done before the rules become a reality. FinCEN has not indicated its next steps, which, as always for federal regulatory agencies, will be announced in the Federal Register. Once the rules are final they are codified in the Code of Federal Regulation. The present Bank Secrecy Act regulations are found in 31 CFR Part III.
“I don’t think FinCEN initially considered all the other legal entities that are out there, like pensions and trust accounts [that are affected by the proposed rule],” Rowe says. “It’s been a learning curve for the agency.”