U.S. financial institutions may gain far more flexibility in the steps they take to identify the individuals who control or manage the legal entities they serve if the latest iteration of legislation to create a national database of beneficial owners becomes law.
Congress released a final text of the National Defense Authorization Act, or NDAA, on Thursday, two weeks after a trio of Democratic lawmakers previewed a deal they made with Republicans to secure inclusion of the ownership database in the annual defense spending bill, along with a spate of other reforms to the U.S. anti-money laundering regime.
Whereas previous versions vaguely required changes to the four-year-old customer due diligence rule to reflect the existence of the database, the latest text of the now 3652-page omnibus bill explicitly directs the Treasury Department to remove “paragraphs (b) through (j)” of the relevant section of the U.S. Code within a year of building the system, and, if warranted, replace those paragraphs with language crafted to avoid supervisory duplication.
The six paragraphs that the bill now aims to scrap establish which types of clients qualify as legal entities under the rule, define “beneficial owner” as a person who holds at least a 25 percent stake in such an entity or manages its operations on a regular basis, and outline the obligation for financial institutions to collect and sometimes vet data on such individuals during the onboarding process.
They also spell out the types of financial products to which the CDD rule applies, from savings accounts to safety deposit boxes and loans. Only the rule’s opening paragraph, which simply calls for institutions to develop written and “reasonably designed” procedures to understand the true owners of their corporate clients, would survive.
The change marks a victory for banks, which have regularly complained of the burden posed by the CDD rule in the years before and after the measure’s finalization in May 2016, and argued that their collection of ownership data would become duplicative and unnecessary after the establishment of a government database.
Like previous versions, the current bill would allow financial institutions to access the database as part of their continuing CDD compliance obligations, but only after obtaining the consent of the customer subject to the inquiry.
“It is nevertheless surprising, especially that Treasury or law enforcement would sign off on this,” said Dan Stipano, former deputy chief counsel for the Office of the Comptroller of the Currency. “It would leave a bare bones rule that does not impose specific requirements on institutions for verifying the identities of beneficial owners.”
The trimmed-down framework could open the door for institutions to collect ownership data at their own thresholds, and based only on their view of the risk posed by each particular client, said Stipano, now an attorney with the Buckley Sandler law firm in Washington, D.C.
Other financial institutions may instead opt to maintain their current beneficial ownership controls in light of the time, resources and effort they poured into developing them over the past four years, he said.
Rep. Patrick McHenry (R-NC), ranking member of the House Financial Services Committee and a staunch opponent of the NDAA’s beneficial ownership provisions, hailed the change Thursday as one of several he secured in exchange for giving his blessing to the reforms.
McHenry also praised the bill’s new requirement that investigators first obtain approval from the heads of their agencies before accessing the database.
The AML portion of the NDAA otherwise appears to track closely with the Corporate Transparency Act, a bill introduced by Rep. Carolyn Maloney (D-NY) in May 2019 that later incorporated other reforms pitched by Rep. Emanuel Cleaver (D-MO) in the COUNTER Act, as well as with a Senate companion bill.
A combined version of the House bills won initial approval in October of last year and again in July, when lawmakers included it in the NDAA. The third bill, the ILLICIT CASH Act, stalled in the Senate.
Banks, investment advisers, trusts and other entities not covered by the beneficial ownership mandate would no longer have to submit a form to justify their exemptions as was previously intended, Erica Hanichak, director of government affairs at the FACT Coalition, an advocacy group in Washington, D.C., wrote in an email to moneylaundering.com.
As a result of other, more minor revisions to the NDAA, unless they make any subsequent changes to their corporate structure, U.S. businesses would have to report their owners to FinCEN only one time after the database goes online rather than file annual updates as earlier versions of the bill mandated.
“If you own your coffee shop for the next 20 years, you only have to fill out one piece of paper,” Hanichak wrote in the email.
The NDAA, which also includes amendments to U.S. sanctions programs as well as thousands of provisions covering the Defense Department’s budget and other military and national security issues, is expected to advance to a final vote this month after becoming law in each of the past 59 years.
President Donald Trump, however, has repeatedly threatened to veto this year’s text over a proposal to rechristen U.S. military bases named after Confederate leaders, as well as over lawmakers’ refusal to use the bill to revise a telecommunications law that now shields social media firms such as Twitter and Facebook from legal liability stemming from content posted by their users.
Contact Valentina Pasquali at email@example.com
|Topics :||Anti-money laundering , Know Your Customer|
|Document Date:||December 4, 2020|