A month into U.S. beneficial ownership rule, compliance uncertainties remain

More than a month after the U.S. Treasury Department’s rule requiring the collection of beneficial ownership information came into force, bankers still have questions about regulatory expectations, and some of those concerns may not be addressed until examiners begin probing institutions’ procedures, experts said at a financial crime compliance conference in New York on Friday.

Some of the bankers’ top concerns were raised by a Frequently Asked Questions (FAQs) document Treasury’s Financial Crimes Enforcement Network (FinCEN) issued on April 3, eight days before the compliance deadline. “I thought things were pretty clear and then a week before May 11, which was our kick off date for being required to be in compliance, we got FAQs from FinCEN that seemed to raise questions around (issues) a number of us already thought were clear,” Rick Small, director of the financial crimes program at BB&T, said last week at the conference held by the Association of Certified Anti-Money Laundering Specialists (ACAMS).

The industry concern that is “getting the most traction” relates to rollovers of certificates of deposit and renewals of lines of credit, Small said. The new rule, which is aimed at lifting the corporate veil that has long concealed accounts and assets held by criminals, requires the collection and verification of the true, or “beneficial” owners of newly opened legal entity accounts. However, existing accounts are exempted until specific activity triggers a collection requirement or the customer opens a new account. “In this day and age, where we have for example a customer with a certificate of deposit that is coming due and they … say ‘roll it over for another term’ I’ve never believed that is a new account,” Small said.

But one of the FinCEN FAQs (Question 12) suggested that rollovers of certificates of deposit and renewals of lines of credit constitute new client-customer relationship and trigger the beneficial ownership collection requirement. Although banks will be permitted to ask customers who have provided ownership information to certify that they will notify the bank of any changes in relation to rollovers and renewals, the FAQ indicates customers who have never provided the information would be required to do so, Small said. “That’s great news, except for there a big gap, which is that if you weren’t doing beneficial owner (and) controlling person collection … prior to May 11 – which I think a lot of us were not – you have those existing customers that are grandfathered in until they do something new or different, and the FAQ is saying that something new or different is a rollover. That is a big deal,” Small said. Temporary relief FinCEN issued a “ruling” on May 16 that states the bureau will hold the issue regarding rollovers and renewals in abeyance until August while it considers the issue. “This exception begins, retroactively, on May 11, 2018, and will expire on August 9, 2018.

During this time, FinCEN will determine whether and to what extent additional exceptive relief may be appropriate for such financial products and services that were established before May 11, 2018, but are expected to rollover or renew after such date,” the ruling states. There is no “understanding” of whether the temporary exemption granted by FinCEN will become permanent, but “that is the hope,” Small said. He added that in the wake of the FAQ, BB&T changed its beneficial ownership collection form to include a customer certification for rollovers and renewals.

New accounts The rule does not require banks to collect beneficial ownership information on existing accounts, but the bank must gather the information when an existing customer opens a new account and to then confirm nothing has changed every time a new account is opened, said Dan Stipano, who in 2016 left his post as deputy chief counsel of the Office of the Comptroller of the Currency. “If it’s six accounts, say within a six-month period, you’re going to have to go back to that customer six times and say ‘Hey, has anything changed?’ It sounds a little bit nutty to me and I don’t know why that’s really necessary,” Stipano said. “Maybe some of that relief that’s been applied to rollovers could be applied generally to existing customers.”

Once you have a verified a customer’s identity and they “have pledged to give you notice of any changes, maybe that ought to be enough for all customers,” said Stipano, now a partner with law firm Buckley Sandler LLP. “It’s bad from a customer perspective. I’d be saying ‘You just asked me this like two months ago why do I have to confirm it again if nothing has changed?’ It sounds crazy.” BB&T already has begun hearing from customers concerned about the new beneficial ownership collection requirements, Small said. “I wouldn’t say it’s thousands, but we are getting several questions through our relationship managers where they are saying ‘Can you get me a copy of the regulation, our customer is asking for it?'” Small said.

One key issue settled? The “debate that went on for a year or more” regarding the beneficial ownership rule’s information collection threshold seems to have been settled and the requirement is that banks collect data on all those who own 25 percent or more of a legal entity, Small said. Some of “our regulatory colleagues” had suggested that taking a risk-based approach, banks might want to collect “well below 25 percent” for higher-risk customers, although the rule was “very clear” that collection was required at 25 percent, Small said. “I think we have resolved it. I think examinations are going to tell a different story, or may, if we start getting challenged about why we have not thought about dropping below (25 percent),” Small said. However, Patriot Act Section 312 requires collection at the 10 percent threshold for foreign correspondent banking, and that requirement remains in effect, said Susan Galli, president of Galli AML Advisory LLC. “It is, therefore, important that banks document how they have risk-rated their clients,” Galli said. While Small agreed, he noted that the beneficial ownership rule threshold is clearly 25 percent and there is no “gray area,” even if other regulations have different requirements. He said he is very cautious about even considering voluntarily going beyond what the beneficial ownership rule requires. “To me, that is a very big, slippery slope,” Small said. “If you decide on a risk-based basis that you want to go below the 25 percent because you are keying it against your customer risk-scoring methodology … I am quite convinced that the next question you will get (from your examiner) will be ‘Is your methodology correct? Are you picking up everything high-risk as you should be?'” Stipano agreed and said that at this point, based on pronouncements from FinCEN and other regulators, he does not believe any bank is going to be cited by examiners under the beneficial ownership rule “because they are not going down to something below 25 percent.” “I don’t think there is any basis for that,” he said. “But I think … that if you choose to go to a lower level on a risk basis, then your methodology for assessing those risks and for making those decisions is all subject to examiner scrutiny and perhaps criticism,” Stipano said. Stipano added, however, that “there are ways, if (examiners) want to, they could attempt to enforce at a lower level.” “They could use their safety and soundness authority. They could say that ‘For these customers it’s unsafe and unsound for you not to treat 10 percent as the threshold,” he said. “You could get criticized on that basis.” Government agencies must be “on the same page” In response to a question, Stipano said there “is not always consensus” between FinCEN, which drafts U.S. anti-money laundering rules, and the regulatory agencies that examine for compliance with the rules. “I’m not going to say there is a disconnect, but there could be. I think FinCEN, just from the public statements that I’ve heard may be a little bit more sensitive to the concerns about the regulatory burden that’s being created by this rule,” Stipano said. He added that when he was in a leadership role at OCC and would speak at industry conferences bankers would tell him and other senior regulatory policy makers “you guys sound really reasonable, but you don’t sound like my examiner at all.” “So, getting all parts of the government, getting the regulators on the same page with FinCEN, and getting the examiners in the field on the same page with their policy makers, that is all very important,” he said.

Published 15-Jun-2018 by Brett Wolf, Regulatory Intelligence

(By Brett Wolf, Regulatory Intelligence, St. Louis)

Produced by Thomson Reuters Accelus Regulatory Intelligence 26-Jun-2018

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