WASHINGTON — As the U.S. prepares to face the results of an evaluation by the Financial Action Task Force for its anti-money-laundering and terrorist financing efforts, there are signs that it might receive a poor grade.
The International Monetary Fund said earlier this month that despite Canada's robust infrastructure, its framework was weakened by large loopholes. That does not bode well for the U.S., which has a similar framework in place, observers said.
"Many of the deficiencies that were pointed out in the Canada report would also apply to the U.S.," said Ross Delston, a Washington-based attorney and AML compliance expert.
The IMF report, which was adopted by the FATF as its official evaluation of Canada's AML framework, generally applauded authorities' "good understanding of most of Canada's money laundering and terrorist financing … risks."
But it cited flaws, including an AML exemption enjoyed by the country's lawyers and notaries. That "loophole" extends south to the U.S., where lawyers and other advisers participating in the establishment of new firms do not have to comply with the host of Bank Secrecy Act and other anti-money-laundering requirements.
This exemption was highlighted in May when the Treasury Department's Financial Crimes Enforcement Network released its long-awaited rule on beneficial ownership.
Through the rule, Fincen raised the bar on how much information banks must obtain from a company's owners before opening an account. But critics said the rule failed to address the core issue, because bad actors can mask themselves at the moment a company is created.
"Since law firms aren't required to conduct customer due diligence and to verify beneficial ownership, they're not subject to the rigorous standards that banks are," Delston said.
As a result, the true owners of a company could easily be shielded from a bank, despite the institution's best efforts.
"Banks are coming on after a company is formed," Delston said. "All they have to rely on is a self-certification of the owner."
The Treasury Department also announced in May it would urge Congress to pass a bill requiring new companies to disclose beneficial ownership information to authorities at the moment of formation.
The U.S., which underwent an FATF evaluation in recent months and is awaiting its latest report card, has previously been chastised for these failings.
In the FATF's 2006 feedback, the corporation formation loophole "was a black eye for the U.S.," said David Chenkin, a managing partner at Zeichner, Ellman & Krause.
"The U.S. is trying to be a world leader in the fight against money laundering and terrorism financing," Chenkin added. "[But] at the end of the day, folks could open up corporations or LLCs in the U.S., anonymously."
U.S. regulators were also roundly criticized last time for the intelligence gap addressed in the beneficial ownership rule: companies' ability to open up new bank accounts in relative anonymity.
But because Fincen's rule won't take effect until 2018 — well after the FATF releases its report — it is likely the rule will not be taken into account.
"The U.S. handed in its homework after the due date," Delston said. "As would be true with any homework assignment, it might not be counted at all."
Still, the U.S. can expect to score better than Canada on a number of issues — including the effectiveness of law enforcement and the level of authority the government's financial intelligence body has to follow up on initial leads sent by institutions.
The "U.S. will clearly do better regarding their law enforcement results versus Canada," said John Byrne, the executive vice president of the Association of Certified Anti-Money Laundering Specialists. He added that Fincen oversees two "very positive information exchanges."