U.S. regulators: 25 percent beneficial ownership collection threshold only a “starting point”

Aside from the often lamented $10,001 cash transaction reporting threshold, it was perhaps the most thoroughly debated numerical trigger in the annals of U.S. anti-money laundering regulation – the 25 percent threshold for collection of beneficial ownership information for legal entity accounts enshrined in the Customer Due Diligence rule issued last May.

But on Monday, regulators shared the game-changing revelation that this linchpin figure applies only to low-risk accounts and that higher-risk business may require a lower threshold, and they did so not in an explanatory document, but via a nine-minute discussion at a conference in Las Vegas.

Regulators delivered the guidance to a packed crowd of compliance professionals, many of whose institutions already were well into the process of preparing their banks for the May 2018 implementation deadline based on what some considered a clear-cut collection threshold, as the U.S. seeks to do more to stop criminals from hiding behind legal entities. Now, bankers are concerned that the tentative compliance regimes they have assembled may need to be hastily remade, guided by even vaguer blueprints.

“I think that’s a real problem,” Rick Small, director of the financial crimes compliance program at BB&T, said after regulators he joined for a panel discussion broke the news. “I think this is going to create a significant challenge for the industry in terms of saying, ‘Well, we’re not only going to look at the rule now, we’re going to look at other things that you should be thinking about in your whole risk management process.'”

The regulatory pronouncement, the stated purpose of which was to end a rumor that banks with stricter regimes could in fact loosen their standards to the 25 percent mark, came from representatives of the Federal Reserve Board of Governors and Treasury’s Financial Crimes Enforcement Network (FinCEN), which issued the rule 16 months ago.

FinCEN’s Customer Due Diligence (CDD) rule, which took more than half a decade to finish and involved countless hours of public- private sector discussions, including seemingly endless talk regarding the proper collection threshold, in the end raised few hackles, in large part because banks felt they had gotten their way with a figure that was more lenient than the 10 percent some feared.

Now, however, it appears that banks either were the victims of regulatory bait and switch, or many bankers simply misunderstood the rule. This assumes, of course, that the regulators’ verbal remarks bear out and no decision is made to reverse course once the private sector reacts.

Small called for additional clarity on the beneficial ownership requirements, perhaps in the form of a Frequently Asked Questions (FAQs) document, and asked that it be provided “right away” because “the vast majority of organizations have already decided where they are going to put that threshold.”

Risk-based requirements trump rule

The interpretation of the rule, which was arrived at by viewing the new rule through the lens of longstanding AML obligations, was delivered by Suzanne Williams, deputy associate director of the Federal Reserve’s division of supervision and regulation.

Every bank should already be taking a risk-based approach to its requirement to have a Customer Identification Program (CIP) and the CIP should spell out when a bank will “look through” to collect information on the people behind legal entity accounts, especially in risky lines of business like private banking, Williams said.

“So, if as part of that – as many banks have – you have decided… to collect at a 10 percent threshold… there is nothing in the new rule that means you should stop doing that,” Williams, a well-known figure on the anti-money laundering conference circuit, told an audience of more than 2,000 at the event held by the Association of Certified Anti-Money Laundering Specialists (ACAMS).

She added that there are many “exclusions and exemptions” in the CDD rule, such as trusts, which do not fall within its definition of legal entities for the purposes of the beneficial ownership requirement.

“However, I would be surprised if already you don’t collect some beneficial ownership information on certain types of trusts that you put in a higher risk category,” she said. “That’s why I feel this point is really important.”

There are two elements of beneficial ownership, the “technical aspect of the 25 (percent) which is going to have its impact for your legal entity customers that are low risk, and then there is what you do of beneficial ownership as one of the four components of the CDD program rule,” Williams said.

She added that the idea the rule would allow banks to relax existing thresholds for collection ownership information was a “misconception.”

“There was never intended to be a rolling back of the supervisory expectation, or there’s no change in the CIP requirement,” she said.

Many banks, including some institutions that had for years drilled down more deeply, believed the 25 percent figure outlined in the rule was a universal requirement and were planning to use it exclusively not withstanding risk, say consultants. The lack of clarity and the
regulators’ remarks on Monday are apt to leave many banks scrambling to determine the correct course of action, they say. Risk-based thresholds such as those hinted at on Monday could raise the costs of compliance considerably for larger institutions.

Banker: “I never read that from the rule.”

For BB&T’s Small, the regulators’ statements did not seem to come from within the four corners of the rule.

“A lot of us have been saying ‘I’m sticking to 25 percent, I don’t see any reason to go lower and I think that works on my risk- management process.’ Now I’m thinking the first thing that’s going to happen the first time I get examined on this is I’m going to be challenged about why I didn’t go below 25 percent,” he said. “It sounds to me like now we’re thinking about bootstrapping in from other provisions to say ‘Well, if you have higher risk, you should go lower.’ I never read that from the rule.”

In what seemed to be an off-the-cuff interpretation, Andrea Sharrin, associate director of the policy division at FinCEN, backed Williams, stating “I think you do have to look at what ought to be the appropriate percentage for the risk that you are facing.”

“I think that 25 percent was intended as an international standard – there were a lot of factors that went in – it could have been higher, it could have been lower, and that is like the starting point, 25 percent, but that doesn’t mean that you should…,” she said without completing her thought as the audience – both in-person and online – hung on her every word.
Sharrin said FinCEN plans to issue additional guidance as the implementation date approaches.
Mum’s the word for OCC and FINRA

Spencer Doak, director of anti-money laundering policy with the Office of the Comptroller of the Currency (OCC) was also on the panel, but he declined to offer a position, saying instead, “I will stay out of the CDD discussion.”

Perhaps ironically, an OCC examiner provided the first hint that regulators might be inclined to demand risk-based thresholds. Thomson Reuters Regulatory Intelligence has confirmed that one of the largest U.S. banks recently expressed interest in relaxing its 10 percent threshold to 25 percent but was rebuffed by the examiner who demanded it explain how its financial crime risks had changed in a way that warranted the move.

The story spread through the AML community like wildfire, yet no one knew if the examiner’s approach would be supported by regulatory agencies since it is not unheard of for “rogue” examiners to take untenable positions. Bankers got their answer, although not the one they hoped for, on Monday.

Sarah Green, a senior enforcement and policy official with the Financial Industry Regulatory Authority (FINRA) who was on Monday’s panel, chose to remain mum on the issue.

As first reported by Regulatory Intelligence, the OCC and other bank regulators plan to make public their examination procedures prior to May 2018.

Regulatory Intelligence also broke the news that FINRA plans to issue a so-called regulatory notice outlining brokerage firms’ compliance obligations resulting from the CDD rule.

Published 26-Sep-2017 by
 Brett Wolf, Regulatory Intelligence

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