How Fincen Tried to Limit Pain in 'Beneficial Owner' Plan

WASHINGTON — The Financial Crimes Enforcement Network is closer to requiring banks to identify "beneficial" owners, but is also attempting to make the rules more palatable to institutions.

Banks have long been subject to strict regulations on identifying their customers. But in an effort to combat the use of front companies to launder money, a recent Fincen proposal would require that institutions know the real person who stands behind or controls any legal entity owning an account.

While some lament naming beneficial owners as just another regulatory burden, others applaud Fincen for listening to industry concerns and trying to limit the impact of the rule. When Fincen first floated the requirement two years ago, it received harsh criticism from the industry. But the latest version announced late last month would exempt existing accounts and leave banks off the hook to verify ownership structures, among other accommodations

"It will be a burden, but in the big scheme of things this could have been far worse," said Kevin Petrasic, a partner at Paul Hastings.

The proposal would add and clarify what steps banks must do to perform "customer due diligence." Some of those steps — including the need to understand customer relationships and conduct ongoing monitoring to update customer information — are already part of existing anti-money laundering regulations, but the new rule would strengthen them. (Banks have until Oct. 3 to comment on the plan.)

In contrast, identifying beneficial owners would be a new obligation. A customer opening a new account on behalf of a legal entity would have to provide a standard certification form listing anyone who owns at least 25% of the business. The form would also include the name of one person with "significant responsibility" for managing the legal entity, such as the chief executive officer or general partner.

"The use of legal entities in a non-transparent way to move money globally is an extremely significant law enforcement issue," Jennifer Shasky Calvery, Fincen's director, said in an interview. "Often times, a cash-intensive front company may be a great place to first put cash into the financial system and then launder it from there."

Some industry representatives say beneficial ownership requirements should only be applied when a customer poses higher risk. They say applying them across the board is overkill.

"Historically, the concern was foreign shell corporations — that, I have no argument with. But once you start broadening it to banks needing to know beneficial owners for all of their customers, that is just going way too far," said L. Richard Fischer, a partner at Morrison & Foerster. "It is an extreme compliance obligation for financial institutions."

But others say comment letters and five public hearings held by the Treasury Department — following the release of the 2012 "advance notice of proposed rulemaking" — helped convince Fincen that certain accommodations were needed.

As a result, the proposal would apply only to new accounts, although officials and others say banks may end up asking existing accountholders for the information as well.

Meanwhile, banks only need to verify the identity of a beneficial owner, not that that person actually is the owner or controlling party. Fincen also said banks would not need to identify beneficial owners for legal entities already exempt from earlier rules on customer identification programs, which includes regulated financial institutions. Other exempted legal entities include publicly traded companies and certain charities. Observers also praised Fincen's inclusion of a sample form to give customers.

"Obviously, they did listen to the comments that came out through the letters and outreach sessions, and made some adjustments," said Robert Rowe, vice president and senior counsel at the American Bankers Association. "One of the major changes was not requiring banks to verify the information — because we can't."

But some critics warned Fincen may have been too amenable, allowing launderers too much room to navigate the new rules.

Ross Delston, a former Federal Deposit Insurance Corp. lawyer who consults on AML issues, said Fincen — in addition to requiring beneficial owner information for new accounts — should more explicitly require banks to take a risk-based approach in obtaining the information for existing customers as well.

"If banks are unhappy, there may be some very happy criminals right now," Delston said. "The correct way to do it — that would be consistent with international standards — would be to" require the standard "for new accounts, but also for existing accounts to the extent that a risk-based approach suggests they should be documented. … They should have been more specific about that, saying, 'Here's when you do it.'"

Calvery said the agency "was very keen" on the proposal being balanced.

"We took into account what we were hearing from industry and where we could make smart accommodations to focus on the burden while also achieving the overall goals that we need to keep the integrity of the U.S. financial system and to aid law enforcement," she said.

She added that banks may ultimately start collecting the information for existing accounts even if Fincen does not require that. "We think over time that that is likely to be adopted as a best practice," she said.

Still, the collection of beneficial ownership information is a significant compliance adjustment for banks not already doing it, and many observers said Fincen should provide more clarification, including about which individuals must be identified as those controlling the legal entity.

"There will be questions and wrinkles. Banks have to identify the persons with significant responsibility for managing the entity. Well, who is that? How many people is that?" said Karen Thomas, executive vice president for government relations and public policy at the Independent Community Bankers of America. "It's just not without burden. It's not that banks can't comply. They can and they always do. … But it just takes away from their ability to serve customers."

But Petrasic said the impact will be limited since the need to identify beneficial owners can be incorporated into existing customer identification programs, rather than the bank needing to start from scratch.

"It's more additive than a wholesale new burden," he said. "It did seem to me that Fincen made a determined effort to try to be as … user-friendly as possible in terms of the additional burden that's being imposed on the institutions."