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US banks have said the Treasury’s beneficial ownership rules do not facilitate combating illicit finance and should be withdrawn.
Bankers argue that the proposed beneficial ownership registry rules will limit banks’ access to the registry to such an extent “that it will effectively be useless” and will result in “a dual reporting regime for both banks and small businesses”.
The letter, signed by the American Bankers Association (ABA) and 51 state bankers association, states the banking industry has long supported the creation of a registry, as well as the goals of the underlying legislation, the Corporate Transparency Act (CTA).
These goals are combating illicit finance through the registry while reducing the regulatory burden on both small businesses and regulated entities.
“However, we believe that the proposal is fatally flawed, and it will not accomplish either of these objectives,” the bankers say.
The proposed rule is the second in a series of three regulations designed to establish the registry.
In the first regulation, the Financial Crimes Enforcement Network (FinCEN) established the scope of information that must be reported to the registry, who must report that information and when it must be reported.
The second proposal describes how FinCEN will regulate access by authorised recipients to the beneficial ownership registry.
Under this proposed rule, banks will not be able to run open-ended queries and will receive an electronic transcript of the requested information after identifying the specific company to which the information belongs.
Money services businesses, cryptocurrency exchanges and other financial institutions that are considered to have a heightened money laundering risk will not be allowed to access the registry.
The banks highlight that in the current form, the registry would have “limited, if any,” value to banks.
Part of the reason is that FinCEN narrowly defines the scope within which banks may use the registry, restricting it to those instances where banks are required to identify and verify beneficial owners of their legal entity customers under the existing customer due diligence (CDD) rules.
This means that, in most cases, the registry will provide the same information that customers provide to banks through the banks’ CDD processes.
Meanwhile, by restricting the use of that information to CDD, banks will not be allowed to use that information to comply with their wider anti-money laundering (AML) obligations, which include monitoring customer transactions, reporting suspicious activity and sanctions screening.
Although several groups of companies are required to submit their beneficial owners to the registry, banks highlight that there are no mechanisms to verify the accuracy and reliability of such information.
In addition, the proposed form in which companies must submit that information contains a box that says the firm is “unable to identify all beneficial owners” or “unknown” through which they could circumvent the reporting obligation.
As banks will not be able to rely on the registry or use it for wider AML purposes, the letter says they will need to maintain an alternative duplicative system to highlight and correct discrepancies and which could be used for broader AML compliance.
Because this would require hiring additional staff, banks are asking FinCEN to consider technological solutions, such as an application programming interface or a secure portal, where banks could securely and efficiently access the registry.
Everyone agrees rule must be changed
A couple of issues raised in the bankers’ letter were also criticised by the Financial Accountability and Corporate Transparency (FACT) Coalition.
It emphasised that the beneficial ownership information must be validated and verified and banks should be allowed to use the obtained information in their broader AML and sanctions screening responsibilities.
“FinCEN only gets one shot at this final rule,” said Ian Gary, executive director of the FACT Coalition.
“At a time when the Biden Administration has raised the profile of the international fight against corruption, Treasury’s FinCEN needs to avoid stumbling this close to the finish line.”
At the same time, House Financial Services Committee chair Patrick McHenry claims the proposal “deviates from the statute and congressional intent”.
“This new process was never designed to undermine the requirement that financial institutions identify and verify the beneficial owners of their legal entity customers,” the lawmaker said.
“It was not designed to be used by financial institutions only at account opening. And it was not intended to impose duplicative requirements on financial institutions.”
The statements were made ahead of the closing date of the Treasury’s consultation on the proposed rule, which ended on February 14.
