The US is gearing up for change in its onerous anti-money laundering, counter-terrorist financing and sanctions regimes – much to the relief of many banks. Jane Monahan reports. 

Gary Kalman

Among the multiple challenges banks face in complying with the US’s anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations is the sheer load of work, time and money that is required.

In testimony to the House Financial Services committee on June 28, Greg Baer, president of The Clearing House (TCH) Association, said that the estimated cost of compliance for the largest US commercial banks, which the association represents, is expected to grow to more than $8bn in 2017.

At the other end of the spectrum, Lloyd Devaux, president and chief executive of Sunstate Bank in southern Florida, with just $200m in assets, said in testimony to the same committee, on behalf of the Florida Bankers Association, that more than 15% of his total full-time staff now work AML/CFT compliance. He outlined the onerous process, which starts with the bank 'risk rating' any customer that opens an account and determining the type of transactions they are likely to engage in.

Then, if there is any sort of suspicious activity in the account, the bank has to file a Suspicious Activity Report (SAR). If there are large cash transactions of $10,000 or more, it has to report that in a Currency Transaction Report (CTR). And, every other week, it also has to check to see if it has customers that are a match against a US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) list, where law enforcement has concerns about money laundering and terrorist financing.

Applying the pressure

But AML/CFT regulations are not the end of the story. The Treasury Department’s Office of Financial Asset Control (OFAC) has been busy in the first eight months of president Donald Trump’s administration, ramping up new sanctions against seven Middle Eastern countries, North Korea, Venezuela and, most recently, Russia, while sanctions against Cuba and Iran, which declined during the previous government, have been stepped up.

Ross Marrazzo, managing director of New York-based Treliant Risk Advisors, says: “Any additional sanctions put more pressure on banks to comply with the law. If you look historically at what happens when there’s a very robust regulatory regime, banks seem to recoil to reduce risk.”

Much has been written about the costs of 'de-risking' by banks, which many believe is at least in part a result of the US’s AML/CFT regulations and sanctions regime. The steep US government fines levied against banks for sanctions violations in recent years have had a chilling effect. To mention just one report, in a June 2016 discussion note, the International Monetary Fund noted that the “pressure on correspondent banking relationships could disrupt cross-border flows, including trade finance and remittances, potentially undermining financial stability, inclusion, growth and development goals.”

Potential for change?

One development fuelling banks’ hope for change is the Treasury Department’s review of regulations. It has requested feedback and comments on how FinCEN’s AML/CFT regulations and OFAC’s sanctions regime may be improved and streamlined. Responses were due by the end of July and the Treasury Department’s findings are expected to be released later in 2017.

Seemingly anticipating this review, TCH held extensive discussions with stakeholders and outlined several reforms in a report in February. A chief recommendation in this report is that FinCEN should reclaim sole supervisory authority of AML/CFT for the largest, most internationally active US financial institutions.

TCH’s view, in summary, is that the AML/CFT programme for banks, rather than being risk based and focused on helping law enforcement and encouraging innovative approaches by banks, has instead become drowned in policies, procedures and metrics – for example, the quantity of computer alerts generated, suspicious activity reports filed and compliance employees hired.

James Richards, head of global financial crimes risk management at Wells Fargo, the third largest US bank by assets, says: “Our primary function in AML is to provide actionable, timely intelligence to law enforcement – and banks do that through the SAR and CTR regime.”

However, he continues: “Bank regulators (for example, the Federal Reserve Bank, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) are safety and soundness regulators. With that, they are properly concerned about whether we have policies, procedures and documented processes, with less focus on whether SARs are providing actionable intelligence for law enforcement. That’s the disconnect the entire industry is working to close.”

A bifurcated regime

Another change that Mr Richards thinks is urgently needed is for the US to introduce a “bifurcated AML/CFT regime”. He draws a parallel to the differentiation in the way safety and soundness standards and oversight are applied, depending on whether the banks are large and complex enough to need a strict Comprehensive Capital Analysis and Review (CCAR) stress testing, with a more lenient version of CCAR for US regional banks or no CCAR at all for those banks deemed small enough not to need it.

Highlighting the scale of the difference, out of a total of 960,000 SARs filed in 2016 by approximately 13,000 US depository institutions, the four largest US banks – JPMorgan Chase, Bank of America, Wells Fargo and Citigroup – filed about half of the total, the TCH report said. “When you start doing the mathematics, aside from the Big Four, the remaining institutions would take years to file what we file in one day,” says Mr Richards.

Meanwhile, another development that has already happened – and one which bankers have welcomed – is that on June 28 five members of the US Congress representing both parties introduced bills in the House and the Senate that would force US states (which have the right of incorporation in the US) to collect and maintain information on the real or beneficial owners of anonymous companies when they are formed. The proposed legislation also obliges the states to keep the beneficial ownership information up to date and set up either state-wide registries/databases with this information (the Senate version) or, if they prefer to opt out, allow FinCEN to both collect and maintain the beneficial ownership information and establish a centralised registry (the House version).

The registry may be accessed by government agencies, such as the Interior Department, Justice Department and Treasury Department, and law enforcement. But what is significant for banks is that for the first time this information will also be available to financial institutions.

Well-timed proposals

In May 2016, FinCen issued a new customer due diligence rule, which comes into effect in May 2018, that makes it compulsory for banks, brokers, mutual funds and other financial institutions to start collecting and identifying the beneficial owners of companies, partnerships and trusts when these entities open new accounts.

Banks will be obliged to do this in two ways. First, they must obtain and verify the identity of a person who has a substantial economic interest in the company, defined as holding 25% or more of the equity of the company, partnership or trust. And, second, they must identify a person who exercises management control over the company. In both cases the bank has to obtain the name, address, date of birth and social security number (or a passport number if a foreigner) and the information has to be maintained and updated if there are any changes.

But Robert Rowe, associate chief counsel of the American Bankers Association, and Wells Fargo’s Mr Richards both agree that all that banks can do when they collect this information is verify that it belongs to a known human being. “We have no way to verify that these people are actually the beneficial owners,” says Mr Rowe.

Reinforcing this point, Mr Richards highlights a clear dividing line as to the amount of information an institution may obtain depending on customer type. He explains: “There are essentially two kinds of customer relationship: managed and non-managed. Managed relationships are found in private banking, wealth management and commercial banking. Non-managed, or mass-market banking, is found in retail banking, credit card businesses and so on. Simply put, the nature of the managed relationship businesses allows for a broader and deeper understanding of customers. That is also reflected in the expectations of regulators.”

On the other hand, if US states were also obliged to collect anonymous companies’ beneficial ownership information, that would provide banks with another tool in their AML/CFT arsenal to verify and check the information they collect.

Gary Kalman, head of FACT Coalition, an alliance of non-governmental organisations advocating financial transparency, says: “Banks and credit unions have responsibilities to make sure their institutions are not being used for illicit finance. If the states or FinCEN were to collect beneficial ownership information and make it available to institutions, then that would be a step in helping them meet those responsibilities. It would reduce costs and liability. There are huge benefits for the financial services industry if the proposed bills were to pass.”

For this reason, the entire US banking industry is supporting the legislation, including TCH Association, representing the biggest US banks; the Independent Community Bankers Association, representing small banks; and the National Association of Federally-Insured Credit Unions.

Success in sight?

Congressmen, bankers and financial transparency activists believe this time round the legislation could succeed. While different legislative versions failed on several previous occasions, many say there is now a consensus that something needs to be done.

One reason is the growing momentum to end the use of shell companies with anonymous ownership. Last year’s Panama Papers incident, which saw 11.5 million documents leaked from offshore law firm Mossack Fonseca, heightened awareness of just how much secrecy surrounds anonymous companies. While such companies can be used for entirely legitimate purposes, they are often exploited by tax offenders, drug traffickers, terrorist financiers and kleptocrats to hide their illicit gains.

Furthermore, the Financial Action Task Force (FATF), a 36-member inter-governmental organisation that has responsibility for developing AML/CFT international standards and recommendations, said in its 2016 mutual evaluation report of the US that “the lack of timely access to adequate, accurate and beneficial ownership information remains one of the most fundamental gaps” in the country’s AML/CFT framework.

It also said that the financial sector “bears too much of the burden in respect of required measures” under the US AML/CFT system.

Additionally, the US is trailing behind other advanced economies, including the EU, and even some African countries in the collection of anonymous companies’ beneficial ownership information and the setting up of registries. Such registries will soon be completely public in the UK, Denmark and Norway.

Shruti Shah, who participated in the US FATF evaluation and is vice-president of programmes and operations at Coalition for Integrity, says: “The train has already left the station in the move for greater worldwide transparency. I don’t think the US can stand back from that momentum for long.”

Thawed opposition

Meanwhile, support for the legislation is coming from other domestic constituencies, not just the banks, and there are signs that many states and corporations are not so intractably opposed as in the past.

Delaware, Wyoming and Nevada, which have developed a lucrative business from forming thousands of anonymous companies each year, are still resistant. However, based on conversations with other secretaries of state, Mr Kalman believes that there is less concern about the House version as this allows them to opt out and let FinCEN do the work, while also retaining the states’ right of incorporation.

Senator Sheldon Whitehouse, a Democrat from Rhode Island, also does not expect states’ opposition to the proposed legislation to be as monolithic as before. He says: “There is one specific angle that I think helps advance the legislation: the attention to Russia’s election interference [alleged interference in the 2016 US elections to favour a Donald Trump win], and the highly expert reports that have been written on the subject. These point very clearly to the role of shell corporations in masking both Russian election interference and Russian corruption efforts that power up that interference.”

He adds: “I think it is going to be very hard for secretaries of state to run for re-election against opponents who challenge them on the grounds they are the protectors of shell corporations used by criminals.” Mr Whitehouse is a co-sponsor of the True Incorporation Transparency for Law Enforcement Act in the US Senate and also a member of the Senate Judiciary Committee investigating the Trump campaign’s collusion with Russia during the US elections. Mr Trump has expressed scepticism about the investigation; Russia has denied the allegations.

Meanwhile, breaching the US Chamber of Commerce’s previous united front against beneficial ownership legislation, the Small Business Majority, which claims to represent 28 million small businesses, and other small business groups have announced their undivided support.

Finally, key Republican Party leaders in the House of Representatives, including congressman Jeb Hensarling, who is a Texas Republican and chairman of the House Financial Services Committee, as well as the chairman of a brand new subcommittee on Terrorism and Illicit Finance that he established this year, have spoken out about the importance of obtaining beneficial ownership information and how this should be a congressional priority.

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