May 4, 2012
This information is offered in response to March 5, 2012 FinCEN request for comment on an ANPRM on Customer Due Diligence Requirements. I am an independent trainer in the banking industry. The opinions expressed are my own. I am not compensated for offering them and do not know if they also reflect the views of my clients or business associates. The time available requires that I comment only on the elements of the ANPRM regarding explicit requirements to identify beneficial owners.
There is no industry debate regarding the fact that the ownership of a U.S. entity should be transparent; law enforcement should be able to identify a legal entity’s beneficial owners. The ANPRM devotes a great deal of verbiage to explaining something that most bankers would acknowledge as desirable.
The state governments that spawn creatures of statute such as corporations and LLCs should obtain this information and require that it be updated routinely. It does not follow that because the states fail to do it then the banks can or should do it.
Banks can certainly ask corporations for a complete list of their shareholders or a shorter list of shareholders that meet any conceivable definition of a “beneficial owner.” They can require an updated list at regular intervals. They can even require that the corporate secretary’s signature on the list be under seal. Shoot, they can “go for the gold” and require that the list be executed under penalties of perjury!
What they cannot do is verify that the information they receive is correct.
Honest people will tell them the truth. Dishonest people will lie. Individuals who establish dummy corporations for the purpose of laundering money are not going to accurately identify their principals simply because a bank requests it. The ANPRM describes the practical and legal equivalent of a customer identification program that omits the portion dealing with documentary or non documentary verification; it is patently worthless.
In order to retain my opinion that FinCEN as an organization is as smart as its employees whom I have met, it was necessary to develop a theory as to why the organization would put forth such a lame idea. Evidence of the apparent impetus is found in the quote offered from a government official who said the lack of beneficial owner information “…not only damages our reputation, but also undermines our efforts to join with foreign counterparts in a global offensive against organized crime and terrorism.” Our reputation? I would have assumed our concerns were on a higher plane.
My conclusion, supported by other observations and references to international standards in the ANPRM, is that this is about nothing but making our FIU look good to its international peers.
My relevant international experience is very limited, but I understand there are many countries where the offices chartering legal entities require the provision and maintenance of owner information for those entities. They make that information available to law enforcement. It is even available to U.S. banks when they open accounts for those same non U.S. entities. Thus, it is may be much easier to identify the beneficial owners of a non U.S. entity than it is to identify the beneficial owners of a corporation charted in the same state where the bank is located.
Requiring U.S. banks to do what is done by governments in other parts of the world and assuming the information they accumulate is correct will not improve our “reputation” in the long term. The weakness in our efforts will eventually become apparent.
FinCEN holds no sway over state governments. It cannot impede what has been described as “the race to the bottom” in determining which states can create the least traceable ownership connections to the entities they sanction. The solution obviously lies with the federal government. I’m aware that efforts are underway there.
However, until the states obtain the information and can provide a source of verification for the information provided to banks, it’s ludicrous to assume banks can accumulate ownership information on which law enforcement could reasonably rely. FinCEN needs to press its case with the federal government and, after it is successful, direct banks to accumulate verifiable information.
As for the rest of the proposal, I note that it repeatedly acknowledges the fact that many banks already have adequate due diligence processes in this area. Accordingly, I simply wonder why a regulation is even necessary. While the ANPRM devotes a number of words to this question, they do not incorporate an explanation. Again, I fear it is all for the sake of international appearances.
Thank you for your consideration.
After I wrote this, someone more knowledgeable of international issues confirmed to me that this ANPRM was indeed born of a U.S. failure to meet certain FATF standards. I have no objection to banks being required to obtain this information, but doing it under circumstances where it cannot be verified holds form above substance; it is simply a waste of time.
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In this world you must be oh so smart or oh so pleasant. Well, for years I was smart. I recommend pleasant.
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