REAL ID Act of 2005 … REAL Beneficial Owners Act of 2019?

Can something like the REAL ID Act of 2005 be used to solve the beneficial ownership issue?

Without a national registry of beneficial ownership (BO) information, banks can collect BO information, but have no way to verify it

The REAL ID Act of 2005 compelled the 50 states to have their citizens’ state-issued identification documents meet certain minimum requirements and issuance standards … could a similar thing be done to compel the 50 states to have their state-created legal entities meet certain minimum requirements for beneficial ownership information?

The REAL ID Act of 2005 established minimum security standards for state-issued driver’s licenses and identification cards by prohibiting Federal agencies from accepting non-compliant state-issued driver’s licenses and identification cards that do not meet the Act’s minimum standards. The REAL ID Act was a way for the Federal Government to compel (sort of) the fifty states to meet certain standards for their drivers’ licenses. The Federal Government essentially told the fifty states “you have the power to issue state drivers’ licenses, and you can do what you’d like, but if you want those licenses to be used for any federal purposes, such as accessing Federal facilities, entering nuclear power plants, and, notably, boarding federally regulated commercial aircraft, then they have to meet our standards.”

The REAL ID Act’s genesis was the attacks of 9/11. It enacted recommendations from the July 2002 National Strategy for Homeland Security and the July 2004 9/11 Commission Report that the Federal Government “set standards for the issuance of sources of identification, such as driver’s licenses.” The REAL ID Act was included in the Emergency Supplemental Appropriation for Defense, the Global War on Terror, and Tsunami Relief Act of 2005 (PL 109-13, 119 Stat. 231 at 302), and the actual ID provisions are in Title II, Improved Security for Drivers’ Licenses and Personal Identification Cards, section 202, “minimum document requirements and issuance standards for federal recognition.” (Section 204 provides for grants to states to implement the document requirements and issuance standards).

The main part of section 202 provides:

REAL ID Act regulations weren’t finalized until January 2008, at which time it was clear that it would take billions of dollars and many years to get states into compliance. States were originally required to be compliant by May 2008 (the regulations weren’t published until January 2008). That deadline was extended multiple times to 2009, then 2011, then 2013, then 2015, and extended again to January 22, 2018. As of April 2018, only thirty states were compliant and the remaining twenty had obtained extensions. For those with non-compliant driver’s licenses issued by compliant states, they have until October 1, 2020 to get a compliant driver’s license.

To find out more about the REAL ID Act requirements, California’s DMV site has a good section: CA DMV on REAL ID Act

Can’t Board an Airplane … Can’t Bid on Federal Contracts

How could something like the REAL ID Act help banks with the beneficial ownership issue? Like driver’s licenses, creation of legal entities is left to each state, and (anecdotally) only three states currently require the collection and verification of beneficial ownership information.

Like they did to effectively compel the fifty states to issue individuals’ driver’s licenses that met federal standards, the federal government could pass a law that would prevent entities created in states that do not meet certain Beneficial Ownership standards from bidding on and winning federal government contracts. In other words, those states would not be compelled to collect, verify, and maintain accurate beneficial ownership information on state-incorporated legal entities, but would need to have an incorporation regime that did so if it wanted those legal entities to be able to bid on federal government contracts.

This might be a radical idea, full of legal and regulatory pitfalls. There might be dozens of reasons why it can’t work. But it might work. Or something similar could work (it doesn’t have to be about bidding on federal contracts).  But there must be something that could work. As Arthur C. Clarke wrote, “new ideas pass through three phases: it can’t be done; it probably can be done, but it’s not worth doing; I knew it was a good idea all along!”

One word of further caution. It will have taken fifteen years for all states to comply with the REAL ID Act of 2005 requirements. Hopefully it wouldn’t take states fifteen years to comply with the REAL Beneficial Owners Act of 2019.

FinCEN Director Ken Blanco testifies on the new CDD/Beneficial Ownership Rule

House Financial Services Committee – FinCEN Director Blanco Written Testimony 5-16-18

What is interesting is what Director Blanco did not have to testify about the enforcement of the new rule. He wrote, in part:

“Although we expect covered institutions to be ready on May 11, 2018, to begin timely and effective implementation of the policies, procedures, and controls required under the CDD Rule—and we are pleased to have heard from many in industry that they were ready—we also understand that institutions, regulators and other stakeholders may need a little extra time to smooth out any wrinkles. This is the case whenever we issue a new rule, the purpose of which is always to enhance our AML regime and not to serve as a vehicle for punishing financial institutions. There is always an understandable expectation that industry’s fine-tuning of its implementation, and the government’s fine-tuning of the examination process itself, takes time and that new questions often emerge after implementation begins. We have spoken with our counterparts, including the Federal Banking Agencies, the U.S. Securities and Exchange Commission, and the Commodity Futures Trading Commission, to discuss these issues. We are all committed to ensuring that covered financial institutions are able to implement the rule effectively, and in a way that makes practical sense.

Our goal in this rule is to gain the transparency needed to protect the U.S. financial system and to prevent, deter, detect and disrupt money laundering, terrorist financing, and other serious crimes. It is important for us to continue to work with our regulatory partners, their examiners and financial institutions to achieve these objectives through compliance with the rule. It is equally important, however, to understand that seamless implementation does not happen
overnight and, for some areas, we all will need time to benefit from cumulative practical experiences with the new rule as part of the process. In the meantime, we would encourage financial institutions to alert their examiners to any issues early on, and to share such concerns with FinCEN. We will continue to work with industry and regulators to understand and help address any concerns.”

This passage needs to be read carefully. Essentially, there is an expectation that financial institutions’ programs are ready on May 11th, but those institutions and their regulators “may need a little extra time to smooth out any wrinkles.” And that “new questions often emerge after implementation begins” and “we will all need time to benefit from cumulative practical experiences with the new rule”.  But what does not appear? Any statement that there will be a period of forbearance. Based on a strict reading of this testimony, covered financial institutions should expect that their programs will be judged as of May 11, and like with everything in BSA/AML, that judgment will be impacted by the environment the financial institution finds itself in at the time of judgment, not the environment it was in at the time of implementation. So beware! When being audited or examined in 2019 or 2020 for your compliance with the CDD Rule, look to the environment at that time – not as it was in May 2018 – for how your program will be judged as it was in May 2018.

Beneficial Ownership – a Centralized Registry is the Key!

Requiring financial institutions to collect the (one to five) names and PII of what may or may not be the beneficial owners of a legal entity customer, as well as the name and “certification” of the representative of the legal entity that those are, indeed, the beneficial owner(s) of the legal entity, is a positive step. But without a centralized registry of beneficial ownership, it is an incomplete exercise.

A great blueprint for a centralized registry can be found in a December 2017 paper written by Mora Johnson of Publish What You Pay Canada. In “Building a Transparent, Effective Beneficial Ownership Registry: Lessons Learned and Emerging Best Practices From Other Jurisdictions”, Ms. Johnson provides a succinct list of the eight features a beneficial ownership registry must have. Her focus is on Canada, which has 14 provincial and territorial company registries, so much can be learned from this in applying it to the 50 state registries in the United States. Those eight features are:

  1. All legal entities
  2. Centralized registry
  3. Open to the public
  4. Verified information
  5. Skilled, empowered registrar(s)
  6. Prompt information updates
  7. Adequate data standards
  8. Intelligent design considerations (e.g., drop-downs and legal entity identifiers)

The report is available at http://www.pwyp.ca/images/documents/PWYP-Canada-CRBO-Policy-English-INTERACTIVE.pdf

Beneficial Ownership is less than a month away

I’m predicting some chaos, lots of gnashing of teeth and wringing of hands, Media and Social Media !WTF?! and Congressional !Calls to Action! as we hit the formal implementation date of May 11th. It’s then (by the way, May 11th is a Friday) that unsuspecting small business owners (and the bookkeepers of those owners) will descend upon confused and unprepared bankers across the country and be asked to fill in a form listing as many as four owners as well as (or) the single person who has effective control of the company (won’t THAT conversation be interesting in some mom-and-pop businesses?).

This requirement has been in the works for more than 20 years – in the mid-1990s there was a call for obtaining beneficial ownership information in the private banking space (Congressional hearings and the New York Fed’s 1997  “Guidance on Sound Practices Governing Private Banking Activities”) and for high risk accounts (such as the 1999 National Money Laundering Strategy that called for a study to provide recommendations to Treasury on “how to assure that [high risk] accounts are traceable to their beneficial interest holders”). We saw beneficial ownership get picked up in the Patriot Act in 2001 (notably the second “Special Measure” in section 311 and for private banking due diligence in section 312), and we saw the U.S. get buffeted in its 2006 FATF Mutual Evaluation results for failing to meet the requirements of Recommendations 33 and 34. All of which led to the 2012 ANPRM, the 2014 NPRM, and the 2016 Final Rule which gave us until May 11, 2018 to implement a beneficial ownership regime.  We’re one month away … it is going to get very interesting … and my notes will get a little thicker:

Next Generation of AML?

There is a lot of media attention around the need for a new way to tackle financial crimes risk management. Apparently the current regime is “broken” (I disagree) or in desperate need of repair (what government-run program isn’t in need of repair?).

  1. Customer- and account-based transaction monitoring is a thing of the past: relationship-based interaction monitoring and surveillance is the NextGen.
  2. Single entity SAR filers are a thing of the past: 314(b) associations and joint filings are the NextGen.
  3. A lot of FinTech companies really want AML to be like classical music, where every note is carefully written, the music is perfectly orchestrated, and it sounds the same time and time again regardless of who plays it … but AML is more like jazz: defining, designing, tuning, and running effective anti-money laundering interaction monitoring and customer surveillance systems is like writing jazz music … the composer/arranger (FinTech) provides the artist (analyst) a foundation to freely improvise (investigate) within established and consistent frameworks, and no two investigations are ever the same.
  4. The federal government has the tools in its arsenal: it simply needs to use them in more courageous and imaginative ways. Tools such as section 311 Special Measures and 314 Information Sharing are grossly under-utilized.
  5. CTRs are the biggest resource drain in BSA/AML. Because of regulatory drift, CTRs are de facto SAR-lites … get back to basic CTRs and redeploy the resources used in the ever-expanding aggregation requirements to better SARs.
  6. And remember the “Clash of the Titles” … the protect-the-financial-system (filing great SARs) requirements of Title 31 (Money & Finance … the BSA) are trumped by the safety and soundness (program hygiene) requirements of Title 12 (Banks & Banking), and financial institutions act defensively because of the punitive measures in Title 18 (Crimes & Criminal Procedure) and Title 50 (War … OFAC’s statutes and regulations). There is a need to harmonize the Four Titles and how financial institutions are examined against them. BSA/AML people are judged on whether they avoid bad TARP results (from being Tested, Audited, Regulated, and Prosecuted) rather than being judged on whether they provide actionable, timely intelligence to law enforcement. As the great Hugh MacLeod wrote: “I do the work for free. I get paid to be afraid …”

FinCEN publishes FAQs on the new Customer Due Diligence/Beneficial Ownership Rule

FinCEN published the long-awaited, and much-anticipated, FAQs on the new customer due diligence/beneficial ownership rule, which comes into effect on May 11th.  Brett Wolf, writing for Thomson Reuters, included the following in a story titled “U.S. Treasury releases beneficial­ ownership guidance as rule looms”:

“One  noteworthy  omission  from  the  FAQ  document  was  guidance  on  interaction  with  the  so-­called  legal  entity  customer representative, the person who ‘walks into the branch to open the account,’ and who is to attest to the accuracy of the beneficial ownership information provided to the bank, said Jim Richards, who recently left his position as the Bank Secrecy Act officer at Wells Fargo.  The  idea  was  that  the  attestation,  a  signature,  would  provide  prosecutors  with  ‘someone  to  go  after’ if  false  ownership information were provided to banks, said Richards, who has founded RegTech Consulting LLC. It remains unclear what the consequences would be, and how banks are required to react, if a legal entity customer representative were to refuse to sign the attestation, he said.

“‘I thought the FAQs would say something about that, because if you look at the preamble to the final rule, there is a reference to the Department of Justice seeing that attestation as a significant part of the form,’ Richards said.”

“He added that the FAQs related to Currency Transaction Reports (CTRs) ‘are a trap for those that fail to consider beneficial owners when aggregating cash transactions for CTR purposes.’”


Take a close look at Questions 32 and 33 – if the bank has knowledge, then it must include beneficial owners in the CTR when they are or appear to be the actual beneficiaries of the cash transactions. This standard – if the bank has knowledge – is a trap for banks that are struggling with aggregating all cash transactions across all delivery channels (branches, ATMs, cash vaults) across multiple accounts. Be cautious! And make sure you are on the same page as your auditors and examiners when it comes to whether you have actual knowledge.

Another interesting answer was to Question 30 – the meaning of the word “equipment” for the so-called “leased equipment” exemption. In what could be an omission or miss by FinCEN is the inclusion of aircraft in the type of equipment that is exempt from beneficial ownership information. This seems to be the opposite of what some of those in Congress that are looking for more transparency with aircraft ownership. See, for example, the Aircraft Ownership Transparency Act of 2017, HR 3544 introduced by Rep Stephen Lynch (D. MA). That bill requires full and clear beneficial ownership information for all FAA registered aircraft.

More to come on beneficial ownership … and expect some chaos as the May 11 implementation date draws near, and the public (and media and Congress) become aware of what banks will be asking for.