This Week in AML

How is FinCEN Doing on Beneficial Ownership?

The Subcommittee on National Security, Illicit Finance, and International Financial Institutions of the US House Financial Services Committee held a hearing this week on the Potential Consequences of FinCEN’s Beneficial Ownership Rulemaking. The hearing focused on the proposed beneficial ownership information registry proposed by FinCEN under the Corporate Transparency Act. John and Elliot discuss the testimony given by the witnesses and statements of the committee members.



How is FinCEN Doing on Beneficial Ownership? - TRANSCRIPT

Elliot Berman: Hi, John. How are you today?

John Byrne: Hi, Elliot. Like everybody else around the country and the world, we're all dealing with unbelievable heat. And it is pretty interesting. They are the dog days of summer, but still, I know a lot of people are suffering more than we are in Northern Virginia, but it's been pretty hot and sticky here.

Elliot Berman: Yeah, we've been fortunate. We had some pretty hot weather for us earlier in the summer. The last number of days here in Milwaukee have been upper 70s, low humidity. So actually just gorgeous days, but I'm sure we have some hot weather coming. Often August is the hot month here. So I would expect whatever we get, it'll be a little hotter and a little more uncomfortable, but certainly nothing like what's happening in a lot of parts of the US, and Europe and the rest of the world.

John Byrne: Right. So a couple things. Right before the week started the Treasury Secretary Janet Yellen, announced an appointment of a actual director of FinCEN. So we've had a acting director for quite a while, but they announced the appointment of Andrea Gacki, who was currently the director of OFAC.

So well known to the AML sanctions compliance world and, been at OFAC for a number of years, according to the introduction. Starts, I believe, August 1st. So she'll have a lot on her plate. This hopefully will help FinCEN move on some of the many projects they have under AMLA. So that was announced late last week, and obviously relevant to our listening audience.

Elliot Berman: Yes. And that kind of leads us into what we wanted to talk about this week. As you mentioned last week a subcommittee of House Financial Services held a hearing this week, actually Tuesday. Regarding let me get the exact title, Potential Consequences of FinCEN's Beneficial Ownership Rulemaking.

And this was the Subcommittee on National Security, Illicit Finance, and International Financial Institutions. And I know that you and I both watched the live stream. What's your takeaway?

John Byrne: A couple things struck me. One is the scope of the hearing did not include a government witness. So there was nobody from the Treasury Department or anywhere else that could talk to the rulemaking. So that gives you a sense of what they were attempting to accomplish, which is clearly there are issues with the rulemaking. There's no question. We have identified them. Our clients have identified them.

So there definitely needed to be a hearing that focused on that. But I think there was no ability to be responsive to a lot of the criticism. Again, very valid criticism. Maybe there'll be follow ups once there's the new director takes her role, but a couple of things struck me.

They had representatives from a financial institution, actually, a Missouri bank that we know pretty well central bank in Jefferson City because we knew the former BSA officer. There is now retired, and then somebody representing NFIB, as well as Gary Kalman from Transparency International. Gary, a friend of our podcast, he's been on our webinars before.

What I took away from it is the committee seems bent on a delay in the final reg, which they're not wrong in suggesting that for a variety of reasons, the minority talked a lot about the lack or the cuts in funding by the House recently, a major cuts in funding and questioning whether or not this regulation and some of the other reports and other regulations in AMLA can get handled if they're going to have to lay off 19% of the workforce.

So there was two sets of issues being discussed. That's what I took away from it. But I also again, very valid criticisms about the scope of the rule based on what our clients have been telling us for a number of months.

Elliot Berman: Agreed. The current deadline or I should say effective date of the regulation is January 1st, 2024. And then there are several deadlines related to when existing companies would need to supply information to the registry and when new companies that are formed after that deadline would need to do it.

And there was a lot of discussion about that. Another big piece of the conversation was the lack of, or the limited, maybe that's fairer, limited amount of information that has made its way into the marketplace to assist small businesses in being aware of their obligation under the regulation and then prepare for it.

That there has not been a, I guess I'd say a comprehensive campaign to raise awareness with only five and a half months to go to the first trigger date. It seems as though that a delay is probably reasonable. I don't know that it needs to be a year, but that would depend just on how much effort both FinCEN and the various trade associations get together and put behind educating folks. There was also a lot of the phrase beyond the intent of Congress meaning that the regulations somehow are different than the Corporate Transparency Act language itself. That took up a fair amount of the time and conversation.

What did you think about those comments?

John Byrne: They're not wrong technically and legally. The question is, does this happen with other rulemakings? And it does. A lot of times you'll get directions on timing and the agency will come to a different conclusion. So is that a major change of congressional intent?

I leave that for others. Your earlier point about education, though, it's clear that's more than problematic. We both can remember when Bank Secrecy Act regs were rolled out, whether they were, CIP or late 80s requirements, that sort of thing that the banks are not suggesting you put it on the banks, but the banks working with the government would put out a lot of educational brochures and information This certainly is, I argue, is low hanging fruit.

Once you decide what the reg is gonna look like, it's easy to help. Look what Department of Homeland Security does on organized retail crime. They put out all this information or on guidance on anti-human trafficking. There's a lot of models out there. So the fact that FinCEN apparently, we don't know for sure, hasn't even begun the process of figuring out how to do education. It's a problem.

And, I think you said offline if groups like NFIB and the ABA and others would work with the government on an educational rollout, now that everything is more, technologically efficient, you can put a lot of information out there. So I think the concern that members had that nobody knows this is coming a little bit hyperbolic in my view, but it is fair to say that there's been no public statements on this. So I think that's a very fair criticism.

I do want to mention one other thing real quick. The banker that we talked about Pete Selenke from Central Trust Bank, which is a $19 billion bank, a big institution. One of the things he said in both his response to questions and in his written testimony is one of the big gaps I feel in the regulation based on our clients input in the community's comments. And that is the inability of the reg as currently constituted to allow financial institutions to use the beneficial ownership information in the registry for broader BSA compliance purposes.

It makes no sense to say that you could only use it to verify the accuracy of the information that you couldn't use it for suspicious activity report determination, that sort of thing. In Pete's testimony, he has a pretty extensive section on that and I think that didn't get as much play as it should have.

But I think that's a big, big problem with the reg is the access limitation.

Elliot Berman: Yes. And if I remember correctly, to get access, even for the limited purpose, I believe that banks have to get customer consent. I want to protect my privacy rights, as does everybody else, but if the registry, which again, the purpose of the beneficial ownership registry at the highest level is to create transparency into the ownership of entities so that shell corporations and other artificial mechanisms are not used to shield illegal activity and illicit funds.

And if you're going to do that then I think the countries that have already put their registries in place and are active the general trend is there isn't a requirement to get customer approval and a broader use again, not unlimited broad use, but a broader use in the anti-money laundering compliance space is what in most other countries.

John Byrne: One other thing I'd mentioned from the testimony, the NFIB witness said both in his oral and in his comments in response to questions that NFIB has long opposed the reporting requirements. So they don't want this at all. So I think that's something you got to factor in as well.

I think he said at one point, this is the most burdensome regulation ever crafted in the history of small business, which is more than a little silly. But they have very valid points on education. They have valid points that there is penalties for noncompliance. So all that stuff needs to be factored in.

But sometimes in some of these, and I've done a lot of hearings in my life, you put in statements like that, you lose a little bit of credibility. So you've got to be careful with that because you have some very valid points and they do. But you start off with that as you're jumping off point I'm not sure how serious you can take. Are they really going to support talking to their members about this whenever it's finalized? That's also something to think about. And then they mentioned that the law was snuck into the National Defense Authorization Act. The witness knows that not right.

The only way it's able to move now given the way Congress. We knew all about it throughout that process. So putting that in there, too, you know again words matter and I just thought I'd point that out. So but my opinion only not the opinion of RightSource or Elliot Berman.

Elliot Berman: Yeah, and just to put context around your last comment. The Corporate Transparency Act was 10 years in the making. When it was put in to the National Defense Authorization Act and then passed, it had been 10 years in development and as Gary Kalman from Transparency International testified and responded in his response to questions, it was a heavily negotiated piece of legislation with many parties at the table.

And yes, I think the slipped in perspective doesn't really give the full picture of how we got where we are.

John Byrne: Your point about Gary, Gary also mentioned a group that we know very well, Polaris, and he said this in his testimony that there's a study by Polaris back in 2018 that points out that anonymous companies play an outsized role in hiding identity of criminals behind trafficking, specifically massage businesses. 6,000 illicit massage businesses. Only 28% of them have actual persons listed on the business registration records. So there's need for corporate transparency. But of course, FinCEN needs to do a much better job of crafting this reg with the stakeholders, even though it's an open notice of public rulemaking.

I think, given all the information they got Tuesday should help them go back to the drawing board and make some adjustments. So I think everybody agrees with that goal. We come at it from different directions, but I do think yesterday's hearing did shine a light on a lot of the gaps in something that not should be easy, but should be efficient and accurate.

Elliot Berman: Agreed. So what else do you have coming through the pipeline that we want to share with our listeners?

John Byrne: I think I mentioned some of these last week, so they're still on, on my list. But doing an interview on sanctions, with the head of a sanctions certification group going to do something more in antiquities. Also in the class I teach at George Mason I was pleased to have a complete global expert on asset forfeiture, Stef Cassella talk to my class last evening, and he's agreed to sit down for a interview in a couple of weeks. And that'll be a focus on some House legislation that he finds extremely problematic for the use of asset forfeiture as a both law enforcement and national security tool, because it would, among other things increase the burden of proof regarding asset forfeiture. So more to come on that. We'll do it probably mid to late August.

So it may be something that you can listen to toward the end of the next month or early September. So working on that. And of course, on July 27th, we have our webinar on, the June plenary of FATF, with three great folks that will talk to us both about what happened and what's the practical impact on institutions in the US and globally.

Elliot Berman: And you can register for the webinar by coming to our website, amlrightsource.com. And if you scroll down a little bit, a little nice blue box will pop up with a link in it, and that'll take you to the registration page. And please do that. There's still time to get a virtual seat. John, you have a wonderful week and weekend, and I will talk with you next week. Bye bye.