The objectives of a recent Financial Crimes Enforcement Network
The agency’s Customer Due Diligence rule went into effect earlier this year. It requires banks, brokers and other entities to collect information about any individuals who own or control companies when those companies open an account. It also requires the institutions to include procedures in their anti-money-laundering program to understand the nature and purpose of the accounts, monitor them for suspicious activity and keep account information up to date.
Broadly speaking, Fincen designed the rule to enhance financial transparency. By identifying a legal entity’s beneficial owners, financial institutions can better understand and manage their AML risks. And, more importantly, law enforcement and regulators can more easily combat money-laundering and other financial crimes.
While the requirements of the rule are relatively straightforward, changing business operations to accommodate them is not. In response, regulators gave banks and other financial services companies a two-year implementation period between issuance of the final rule and its effectiveness. During that time, covered companies deployed multidisciplinary project teams to extensively revise customer onboarding policies and procedures, IT systems and recordkeeping requirements as well as work to retrain relevant staff and management.
Efforts to implement the rule are sunk costs but now companies must continue to expend resources to comply. Unlike Fincen’s earlier Customer Identification Program rule — which is customer-based, in that it only applies when a new customer opens an account — the CDD rule is account-based. That means the information must be updated every time a new account is opened or when some other event triggers an update of the information that has been collected. The requirements of the rule live as long as the relationship does.
The resulting costs are significant, and they may end up being more than anticipated. As regulators begin to review compliance with the rule, they will inevitably find shortcomings and gaps that ripen into supervisory and enforcement actions, requiring additional changes to policies, procedures and systems.
Companies offering financial accounts will consider the cost of compliance relative to the profitability of a relationship in deciding whether to onboard a new customer, or maintain an existing one. Given the legitimate concerns about de-risking, it is not hard to see how companies wrestling with the compliance obligations of the CDD rule further diminish access to banking services for customers that pose heightened AML risk — often due to factors beyond their control. This especially threatens businesses whose relationships are less profitable to the institution.
All of these costs might be worth it if this was the best way to verify the identities of beneficial owners who own or control an entity. It is not.
While the information that is collected under the rule will surely add value to law enforcement, it creates an elaborate and complicated regulatory scheme, with banks and financial services companies as the middleman in collecting highly sensitive information from their customers.
Moreover, it can be subverted by unscrupulous customers that do not provide complete or accurate information. The current approach is not only highly inefficient but also is not the most effective way to obtain this critical information.
A far better way would be to require companies to disclose their beneficial owners at the time of incorporation. The information could then be stored in a centralized registry within the government and made directly available to law enforcement and regulatory agencies.
Earlier this year, Reps. Blaine Luetkemeyer, R-Mo., and Steven Pearce, R-N.M., introduced
Lawmakers on both sides of the aisle are reportedly considering another AML reform bill. Let’s hope that any bill that gets enacted contains the deleted provision and requires companies to disclose the identities of beneficial owners at the time of incorporation. That would be a far more sensible approach than continuing to make banks, brokers and asset managers, among others, the middlemen in collecting and verifying the identities of beneficial owners.
