Several large banking associations are asking the U.S. Treasury to reconsider, and potentially even extend by one year, the deadline of new beneficial ownership rules coming online this month, chiefly due to ambiguities and concerns created by a just-released Q&A document meant to bring clarity and needed guidance.

Powerful banking groups, including the storied Clearing House Association (CHA), the National Association of Federal Credit Unions (NAFCU), and the Mid-Size Bank Coalition of America (MBCA), expressed their concerns this week in public comments and a Congressional hearing related to the Financial Crimes Enforcement Network’s (FinCEN) new customer due diligence rule, dubbed the beneficial ownership rule.

At issue is that roughly a month before the May 11 compliance deadline, FinCEN on April 3 released a set of questions and answers (Q&As) that, while meant to ease fears, promote compliance and address niggling details, has introduced a host of unexpected snags, including new uncertainty about how federal regulators could deem compliance practices “reasonable” and if they should even be able to make those judgements in the first place.

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.

Even a top legislator agreed that enforcement of the rule’s compliance deadline should be pushed.

Due to the late stage in which the Q&As were released, and potential associated “significant changes” banks and other financial institutions will “undoubtedly face compliance issues with FinCEN’s customer due diligence rule,” Blaine Luetkemeyer (R-MO) said. “Delayed implementation and enforcement of this important rule is the most responsible way to ensure that financial institutions are able to comply.”

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. These are two bedrock anti-money laundering (AML) processes given significant ink in the interagency exam manual – unlike the beneficial ownership rule.

Through nearly 40 questions, FinCEN tackled a bevy of issues related to the rule, including intermediated securities relationships, reliance on international public beneficial ownership lists, what renewal products trip new customer thresholds, pitfalls when nominating nominees, and more.

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.

Here are some some examples of where the latest FAQ has caused consternation in the ranks of many 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.

Do banks tag ownership on a per-account or per-customer basis?  

Other amorphous tangles include whether the bank delineates ownership focusing on accounts or individuals, and the possibly biggest unknown: regulatory subjectivity and even authority, according to Greg Baer, president of The Clearing House Association, which is the country’s oldest banking association, dating back to 1853, and is owned by the 25 largest commercial banks.

The association detailed two concerns with the CDD rule: first, that it requires financial institutions to identify beneficial owners on a per-account basis and not a per-customer basis and second, its preamble “does not explicitly affirm FinCEN’s sole ultimate authority to determine CDD standards, and rather appears to leave the door open for further ad hoc interpretations by examiners.”

The guidance released in April didn’t quell these fears, but actually “exacerbated these concerns,” Baer said.

Currently, he said, the new rule requiring banks reconfirm the beneficial owners of an existing customer each time that same customer opens an additional account is “extremely burdensome to the point of being unworkable for institutions that routinely open multiple accounts on the same day, or within a short period of time, for customers.”

For example, he added, that title or escrow customers “can open multiple accounts daily to assist in closing real estate transactions.”

Furthermore, large corporations “can open multiple accounts in a day or within a few days to assist with business related needs including general checking, lines of credit for business operations, lending, and to facilitate investment strategies,” making re-checking and detailing ownership, particularly attempting to get ahold of customers for assurances, not feasible, Baer said.

More strain on compliance equates to more costs overall

Those scenarios could result in very onerous situations for banks. How burdensome, you ask?

Compliance with the CDD rule is “very expensive and burdensome,” according to Dalia Martinez, Executive Vice President of Operations International Bank of Commerce (IBC), who was speaking at the hearing on behalf of the MBCA.

Overall, IBC has spent 2,912 hours in design and testing, and 7,859 hours in training 2,142 employees and officers preparing to comply with this regulation.

At the same time, the pressure of the rule can fall disproportionately on front-line staff and learners who, in many instances compared to compliance officers, have the least understanding of complicated ownership structures, Martinez said.

Many of the solutions proffered at the hearing revolved around closer coordination between federal investigators and regulators – in a sense changing the power dynamic to allow banks to focus on riskier entities worthy of deeper dive beneficial ownership battles, while requesting leniency from on-the-ground examiners.

“Any viable solution should be one that includes closer collaboration between FinCEN and the federal functional regulators and greater authority for FinCEN to establish BSA examination and enforcement priorities across these agencies and similarly to control interpretations of BSA rules,” wrote Carlton Greene, a partner at Crowell & Moring, LLP, who was also a former chief counsel at FinCEN and top official at the U.S. Treasury’s Office of Foreign Assets Control.

FinCEN, by design, is “uniquely positioned to understand the threats posed by illicit finance and to understand the regulatory trade-offs needed to address those threats,” he stated.

In addition to the benefits to FinCEN’s mission, such an approach “also could substantially lessen the burdens for regulated financial institutions, and give them greater freedom to innovate and partner with FinCEN to find better solutions to illicit finance threats,” he wrote, echoing Congressional conclusions in prior hearings at the tail end of 2017 and early this year.

Removing regulatory decision-making entirely

But there is a more radical version of that idea, according to Baer.

The solution: taking beneficial ownership exam duties out of the hands of examiners altogether by having FinCEN absorb back some of its exam duties currently delegated to regulators.

He estimated that an examination team of only 25-30 people at FinCEN “could replicate the existing work of the federal banking agencies” and the IRS at the largest, most internationally active institutions.

“More importantly, a dedicated FinCEN exam team for this small subset of large institutions could receive appropriate security clearances, meet regularly with end users and other affected parties, receive training in big data and work with other experts in government,” Baer stated.

They in turn would be supervised by Treasury officials with law enforcement, national security, and diplomatic perspectives on “what is needed from an AML/CFT program—not bank examiners with no experience in any of those disciplines,” he said.

As a result, when FinCEN “turned to writing rules in this area, like the CDD rule, it would do so informed by its experience in the field,” Baer said. “It would see the whole battlefield, and promote innovative and imaginative conduct that advanced law enforcement and national security interests, rather than auditable processes and box checking.”