‘Fine-Tuning’ Likely for New Money Laundering Reporting Rule

By Jacob Rund

A “period of fine tuning” should be expected for both financial institutions and regulators dealing with new customer verification obligations, the head of the Treasury Department’s anti-money laundering unit said May 16.

Financial Crimes Enforcement Network Director Kenneth Blanco told the House Financial Services Committee’s Terrorism and Illicit Finance Subcommittee that “it will take time” to perfect both industry compliance and regulatory oversight of an account supervision rule that went into effect May 11.

FinCen is committed to working with other agencies and industry members to ensure covered financial institutions are implementing the rule “effectively, in a way that makes practical sense,” Blanco said. “We understand that it won’t happen overnight.”

The bureau’s customer due diligence rule was adopted by the Obama administration two years ago as part of amendments to the 1970 Bank Secrecy Act to better identify owners of small companies that could be money laundering fronts for organized crime or terrorist groups. FinCEN, a bureau in Treasury Department’s Office of Terrorism and Financial Intelligence, gave financial institutions the interim time to prepare to comply with the rule, which adds to other screening requirements designed to detect criminal activity.

The rule instructs certain federally regulated banks and federally insured credit unions, mutual funds, and other financial institutions to maintain procedures for identifying the “beneficial owners” of “legal entity customers” like limited liability companies or LLCs.

Banks must must now collect information to determine the identity of the “beneficial owner” — direct or indirect holders of at least 25 percent of equity interests — when a new account is opened. Covered financial institutions also must gather data to pinpoint any individual with control of, or responsibility to manage, a legal entity customer.

Companies trading publicly on U.S. exchanges are exempt under the rule, but companies only trading on foreign exchanges are still subject to the added review requirements.

Cost of Compliance

Republicans on the subcommittee questioned Blanco about the difficulty of compliance. Subcommittee Vice Chairman Robert Pittenger (R-N.C.) asked whether it’s accurate to say that the new rule makes financial institutions weigh convenience and customer experience against costs of compliance.

“Yes, one could assume that’s a valid assessment,” Blanco replied. But, he added, the industry, including customers, benefit from a safe financial system. Securing that system should be the focus of any questions about impact, rather than the costs, he said.

FinCen tweaked some of the due diligence requirements since the rule’s adoption based on comments from industry participants, Blanco said. He also said that the bureau has an open dialogue with the industry, and it’s providing temporary exemptive relief from the rule for certain financial products.

FinCen, a bureau in the Treasury Department’s Office of Terrorism and Financial Intelligence, said when the rule went into effect that it is meant to “improve financial transparency and prevent criminals and terrorists from misusing companies” to disguise illicit activities and launder money. The bureau reviews financial transactions to detect money laundering and other financial system abuses. It also enforces reporting and recordkeeping requirements for financial institutions.

Treasury Secretary Steve Mnuchin, a Trump appointee, named Blanco as FinCen director in November. Blanco was a longtime prosecutor with the Justice Department, where he held various positions including acting assistant attorney general for the Criminal Division.

To contact the reporter on this story: Jacob Rund in Washington at jrund@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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