Category: Beneficial Ownership & Customer Due Diligence

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 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.’”

http://www.complinet.com/global/news/news/article.html?ref=198813&bulletin=spotlight&region=_10239

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.