As May 11th, 2018 approaches, financial institutions across the United States continue to work towards ensuring their compliance with the latest set of regulations introduced by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury that monitors financial data and proceedings in order to better combat financial crime and terrorist financing. The new legislation aims at both clarifying and strengthening customer due diligence (CDD) requirements for a variety of entities including federally regulated banks, securities brokers and dealers, and mutual funds, among others, extending the reach of current demands to the opening of new accounts. In the past, federal authorities have had their fair share of difficulties in identifying beneficial ownership – individuals defined as having 25% or more equity interest of a legal entity customer – of shell companies potentially engaged in illicit activity, due in large part to inadequate identification regulations. Thus the most noteworthy portion of the legislation contains new requirements for banks to both identify and verify the identities of the true beneficial owners of legal entity customers, in addition to making any necessary enhancements to their anti-money laundering (AML) practices – i.e. information collection, customer monitoring, and record-keeping.
Although U.S. banks have had advanced warning on the fast-approaching requirements (FinCEN’s “Final Rule” came into effect on July 11, 2016) the alterations seen within compliance departments of both prominent and small scale financial institutions throughout the country in response to these burdensome new obligations have been drastic, and have left these entities in a period of relative uncertainty, not to mention sending their compliance costs through the roof. While additional FinCEN guidance is expected in the coming weeks that may bring answers to apprehensive compliance officers, many have speculated that the move to increased AML due diligence could have profound ramifications on the global financial system, a collective network that the U.S. influences greatly. Others believe that the new regulations had been put off for far too long, and have allowed the significant issue that is concealing illicit financial activity within the U.S. to grow to unprecedented levels. The article “FinCEN AML compliance: between a rock and a hard place”, cited in BSA News Now on March 22nd, 2018, analyzes several challenges the new regulations pose to both U.S. financial institutions and those they are engaged in business with. Navigating through the robust regulatory landscape seen in 2018 is difficult in its own right, and the stakes that accompany the maintenance of compliance are only raised by the constant threat of financial penalties and subsequent reputational damage for even the most miniscule of errors. A contributing factor to potential faults is detailed in the text, as writer Angela Bilbow quotes an industry executive who states “financial institutions are caught between the systemic challenges of not having information from government authorities about an entity’s beneficial ownership at the outset of corporate formation and having to answer to their own regulators about it, such that they then have the responsibility to reach out to other stakeholders after the fact through their customer identification programme and other due diligence mechanisms to try and piece it together” (Bilbow, 2018). While data sharing practices have begun to commence between the U.S. and foreign countries as part of a global movement towards increasing financial security, these practices may also put the protection of important data at risk, specifically during the cross-border transfers of such information.
Another area of concern stemming from increased scrutiny in the sanctions compliance realm involves de-risking, a hot-button topic across the financial sector. The term “de-risking” pertains to instances that are becoming commonplace in today’s society, where financial institutions generally based in well-developed countries (i.e. the United States and United Kingdom) terminate or restrict their business accounts with certain categories of customer based on the perceived regulatory risks involved in dealing with said individuals. This practice has grown exponentially over the course of the past five years alone, and continues to have a crippling economic impact on numerous lesser-developed and “high-risk” countries around the world. Analysts believe the new regulations could have negative effects on transactions and deal flow, especially if banks begin to “superimpose requirements on potential customers and clients that go above and beyond what FinCEN is asking” (Bilbow, 2018). This could see banks setting an even lower threshold than the 25% beneficial ownership mark that FinCEN has called for, potentially dropping down to as low as 10% to ensure they have covered all bases in this regard. Given the wide variety of ways the new legislation can – and has already been – construed by compliance executives of American financial institutions, the turmoil surrounding the situation prior to the receipt of additional guidance is evident.
The article concludes pointing out one of the flaws of the rules, with the writer finding that because FinCEN is only requiring identity verification as opposed to their status, “there is really no way to prove that in fact an individual is an indirect owner of a company, because it does not necessarily exist in a particular central registry as part of a corporate formation.” However, she follows by writing that “the thinking is that at least if these identities are captured, that will help and have a disciplining effect”, which will in turn lead to easier enforcement of the rules” (Bilbow, 2018). With time ticking down on the due date for compliance with the new regulations, the FinCEN legislation appears to still be a work in progress.