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Congress, keep AML reform in the defense spending bill

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The House recently passed a defense spending bill that could be used to clear a path for one of the most significant anti-money-laundering legislations since the 2001 Patriot Act.

The pending National Defense Authorization Act included sweeping and long-overdue reforms to the Bank Secrecy Act, that address information sharing, new technology and outdated regulations, among other things. But the most meaningful change for banks could be a new national registry of beneficial owners of legal entities.

The information in the registry would be critical for law enforcement agencies, allowing them to pierce the opacity of shell companies used for money laundering and other illicit purposes.

The contours of the legislation have yet to be hammered out. It was not included in the Senate version passed Thursday but is expected to be added during bicameral negotiations.

A final version would likely contemplate that legal entities incorporated anywhere in the U.S. must provide the Financial Crimes Enforcement Network with the personal information of their beneficial owners — and update that information regularly.

The legislation would also authorize Fincen to share registry data with local, state, tribal and federal law enforcement agencies, as well as with foreign authorities. And financial institutions would be able to access it for Bank Secrecy Act compliance purposes, provided they obtain the customer’s consent.

The enactment of this registry would not be the first effort to capture information on the beneficial owners of legal entities.

Fincen’s Customer Due Diligence (CDD) Rule — which took effect two years ago after a lengthy rulemaking and implementation process — requires banks, brokers and other entities to identify and verify beneficial owners of companies that open an account. It also requires institutions to include procedures in their AML programs to understand the nature and purpose of the accounts, monitor transactions for suspicious activity and keep account information up to date.

The CDD Rule was an important step in promoting financial transparency and combating illicit finance, but it wasn’t very efficient in doing so.

It created an elaborate and complicated regulatory scheme, with banks and other financial services companies as middlemen in collecting highly sensitive information from customers. It misallocates resources, requiring covered institutions to collect this information from all non-excluded customers, without regard for the risks posed.

Additionally, unscrupulous customers can subvert the system by providing incomplete or inaccurate information. Though its goals are laudable, the CDD rule’s approach is highly inefficient and far from the most effective way to obtain this critical data.

And it’s about to become redundant, too. The proposed Corporate Transparency Act would require legal entities to provide the same information on beneficial owners directly to Fincen, calling into question why banks and other covered institutions should continue to do so — and divert scarce compliance resources away from higher-risk customers and services.

This law, if passed and implemented, would provide Fincen with the opportunity to revise the CDD Rule and eliminate the requirement that these institutions collect beneficial ownership information on their legal-entity customers.

To the extent that institutions must continue to collect such information, they should be able to obtain it directly from the registry, rather than from their customers.

Since failure to provide complete and accurate information to Fincen would be subject to civil and criminal penalties, institutions should be able to rely on the information obtained from the registry.

At the very least, Fincen should make the CDD Rule more risk-focused, only requiring the collection of beneficial ownership information directly from customers in cases that pose the greatest risk.

Fincen should also consider only requiring institutions to verify or confirm the identities of beneficial owners of a legal entity once — when the first account is opened — not every time the customer opens a new account, so long as the institution has a reasonable belief that it knows the beneficial owners’ true identities. And that the customer commits to keeping its beneficial ownership information updated.

Institutions could use the registry for their own due diligence purposes and to confirm the accuracy of the information obtained from the customer.

The enactment of the Corporate Transparency Act would be a significant achievement that would greatly assist law enforcement and go a long way toward promoting financial transparency.

But it also presents a golden opportunity for Fincen to revisit the beneficial ownership requirements of the CDD Rule, harmonize it with the new legislation and make it a more effective and efficient tool to combat money laundering and other forms of illicit finance. Let’s hope it is not an opportunity lost.

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AML Money laundering Compliance FinCEN Transaction laundering
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