On April 27, the House Committee on Financial Services’ Subcommittee on Financial Institutions and Consumer Credit held a hearing discussing the implementation of the Financial Crimes Enforcement Network (FinCEN) Customer Due Diligence (CDD) rule. The CDD rule specifically requires that banks, brokers, and other financial institutions gather and verify the identities of the actual individuals who own and control a company when that company opens an account with the financial institution.
The panel that testified at this hearing consisted of Greg Baer, the President of the Clearing House Association; Dalia Martinez, executive vice president of the International Bank of Commerce; Gary Kalman, the executive director of the Financial Accountability & Corporate Transparency (FACT) Coalition; and Carlton Greene, a partner representing Crowell & Moring LLP.
The hearing was devoted to discussing the efforts financial institutions have taken to update anti-money laundering (AML) procedures and to see if any processes can be implemented to identify and verify beneficial ownership information. Mr. Baer stated that the Clearing House Association believes that the FinCEN’s CCD rule and its beneficial ownership requirement can provide law enforcement with useful information as it seeks to learn more about suspect companies, but his concerns rested on the guidance used to interpret to the rule for enforcement.
The rule itself requires covered financial institutions to reconfirm the beneficial owners of a customer each time the customer opens an account. Baer described this as burdensome for customers that routinely open multiple accounts on the same day or within a short period of time. Baer said, “for example, title companies can open multiple accounts daily to assist in closing real estate transactions” and he mentioned how large companies frequently open accounts for multiples reasons. Baer believes that the costs for customer convenience in of reconfirming ownership with each new account do not appear to have a corresponding benefit.
Rep. Steve Pearce (R-NM) voiced his concerns on terrorist organizations using “shell” or inactive companies as vehicles for clandestine financial transactions. Shell companies usually employ very few or no workers, do not actually conduct business, and allow owners to handle money while remaining anonymous. Pearce stated that “bad guys” use shell companies to fund illicit activities. Pearce believes that while the rule is intended to help law-abiding customers achieve financial success, it is doing the opposite. “The law-abiding citizen can’t be financially successful because the market is rigged by people who have shell companies” saws Baer. Pearce feels that the U.S. has become a haven for shell companies because of lax legislation.
The existing Beneficial Ownership Rule requires customer identification and verification, and sufficient understanding of the nature and purpose of a customer to develop an accurate risk profile. FinCEN’s mandated changes take effect in May 2018.
For the entry in the Federal Register that summarized the rule, click here.