Banks struggle to unmask true account owners for looming AML rule

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WASHINGTON — Financial institutions were given a demanding compliance job two years ago when regulators required them to begin tracking the true owners of business clients. But with the rule set to take effect in May, the biggest challenge may be getting customers on board with the plan.

The 2016 rule by the Financial Crimes Enforcement Network is meant to allay concerns about money laundering by bad actors hiding behind shell companies. Yet executives say some customers are balking at the new steps that will be required when they open an account.

“We believe it’s really important to ‘know your customer’ ” said Kathryn Petralia, president and co-founder of Kabbage, the Atlanta-based online small-business lender. But “I guarantee” collecting information on all owners “is going to divert customers and slow down the process of opening an account.” She estimated the rule will apply to between 20% and 30% of Kabbage’s clients.

The customer due diligence rule, which takes effect May 11, requires banks, credit unions and other financial institutions to report the “beneficial owners” of a legal entity opening an account or applying for certain credit. The reporting requirement applies to anyone with a controlling interest or at least a 25% ownership stake.

Most bankers say they are prepared for the rule, but sometimes the businesses that need to submit the information are not, particularly those that have multiple legal entities with different owners.

Fincen has considered the rule since 2012, but the threat of bad actors disguising themselves has grown in light of high-profile incidents, such as Russian trolls’ use of shell companies and fake names in their attempt to influence the 2016 election.

Most bankers said they are prepared for complying with the rule but sometimes the businesses that need to submit the information are not, particularly those that have multiple legal entities with different owners.

“Some of the more complex property management groups that open up a new LLC for every project . . . we’ve had to provide them with a certain amount of information to understand why we are doing this,” said Erik Vingelen, a senior vice president overseeing Bank Secrecy Act and anti-money-laundering compliance at the $9.5 billion-asset Banner Bank in Walla Walla, Wash. “As far as complaints and objecting, there’s some of that.”

On Tuesday, Fincen released a “frequently asked questions” document to help offer further guidance on the rule that many bankers said was creating some confusion, particularly among clients with more complex corporate structures.

In order to open a business account, the applicant must provide a list to the bank of every individual who owns at least a 25% stake in the company. This includes providing the owner’s social security or passport number, regardless of whether that individual is a direct or indirect owner.

Experts say this can be time-consuming for the business customer opening a bank account and creates complications when the ownership structure includes other legal entities, not just individuals.

For example, financial institutions making loans through auto dealerships — that operate as the indirect lender — are struggling to get dealers to provide the beneficial ownership names for their customers, said David Pommerehn, associate general counsel and vice president at the Consumer Bankers Association.

“Getting the dealerships to collect this information is another hurdle for this space,” he said. Indirect auto lenders “can’t make those loans without collecting the data.”

Vingelen, speaking at the CBA’s annual conference in Orlando last month, said for certain business accounts — such as casino accounts — Banner Bank may charge a fee to customers if it takes the bank longer to verify beneficial ownership information.

“I don’t think they like to pay additional fees” but “if someone was to leave, they’d probably pay the same price at another institution and find out right away,” Vingelen said when asked how customers would respond to higher fees.

Fincen estimated that the cost of compliance in the first year would be roughly $370 million to $520 million. Training staff is projected to be the most expensive area, but client costs were second, ranging between $21 million and $61 million. Client costs could take up a larger proportion of those costs over the longer term.

“Close to half of the costs incurred over 10 years would be borne by customers in additional time spent opening accounts, with the other half due to additional staff time devoted to training, compliance, and account onboarding at the roughly 29,000 covered institutions,” Fincen said in its analysis of the rule filed in the Federal Register in May 2016.

Despite those added costs, Fincen said the rule is necessary to “provide information that will assist law enforcement in financial investigations, help prevent evasion of targeted financial sanctions, improve the ability of financial institutions to assess risk, facilitate tax compliance, and advance U.S. compliance with international standards and commitments.”

Yet it is difficult to determine whether the rule would prevent activities such as Russian trolling leading up to the 2016 election, because businesses can also choose not to provide their beneficial ownership information simply by writing “not applicable” in the form created by Fincen.

“All the customer has to do is check the box that this doesn’t apply to them,” Petralia said. “It’s regulation without any teeth or way for the financial institution to verify the information.”

Petralia, like many in the industry, would prefer that the government create a federal registry with beneficial owner information derived from the data submitted when a business applies to form a legal entity within a state.

Some note that clients are taken aback when a financial institution, versus a government authority, asks for beneficial owner information.

Businesses “can be a little resistant to providing that information because it’s the credit union asking for that information, not because they understand it’s the regulatory environment,” said Alexander Monterrubio, director of regulatory affairs at the National Association of Federally-Insured Credit Unions. “Anything that the government can do to minimize the level of invasiveness, I think is going to be a positive thing.”

Various lawmakers have proposed creating a federal system to track beneficial ownership, but those bills have not moved forward. And implementing such a system poses challenges because some states do not collect the same information on legal entities. Reps. Blaine Luetkemeyer, R–Mo., and Steve Pearce, R–N.M., earlier this year proposed a federal system for companies to disclose the beneficial owner at the time of incorporation.

“There is such diversity across states that nobody is sure how to get a handle on this,” said Rob Rowe, vice president at the American Bankers Association.

In the case of Russian trolling, this Fincen rule “would make it more difficult for them to do what they were doing,” said Rowe, though he cautioned that criminals are creative. “But that’s the great unknown: Is this the solution to some of those situations?”

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