The Need for a FinCEN Database

Terri Luttrell, CAMS-Audit
November 21, 2019
Read Time: min

The importance of CDD and EDD around beneficial ownership

Customer due diligence (CDD) and enhanced due diligence (EDD) have become common phrases in the anti-money laundering community. The Financial Action Task Force (FATF) led the way as the first international body to set global standards on beneficial ownership in 2003 as part of a strong CDD program. In 2014, FATF clarified their standards and published the Guidance on Transparency and Beneficial Ownership. This was long before the United States passed legislation in 2018 to unveil the secrecy of legal entity ownership. Passage of stronger CDD rules became the Federal Financial Institutions Examination Council’s (FFIEC) 5th pillar of a strong BSA program. Included in the U.S. CDD rule was the requirement to capture beneficial ownership information.

According to FATF, anonymous shell companies are one of the most widely used methods for laundering the proceeds of crime and corruption. This was brought to light by the Panama Papers and Paradise Papers, the history making data leaks which exposed many individuals across the globe as the beneficial owners of tax haven shell companies, including prominent United States citizens. FATF, the global standard for fighting money laundering and terrorist financing, published best practices in October 2019 to help countries pierce the ownership veil of legal entities and prevent their misuse for crime and terrorism.

What are the most common challenges addressed in the FATF best practices?

FATF best practices identify the most common challenges that countries face in ensuring that the beneficial owner(s) is identified and suggests key features of an effective system. These challenges include:

  • Inadequate risk assessment for misuse of legal entities
  • Inadequate procedures for ensuring that beneficial ownership information is accurate and up to date
  • Inadequate mechanisms to ensure competent authorities had timely access to beneficial ownership information
  • Insufficient measure to address the risks of bearer shares and nominee shareholder arrangements
  • Lack of effective sanctions on companies which failed to provide accurate and up to date information on beneficial ownership
  • Inadequate procedures for monitoring the quality of assistance received from other countries
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What are the three parts of the recommended multi-pronged approach?

One of FATF’s suggested best practices for beneficial ownership in to use a flexible and multi-pronged approach to ensure that beneficial ownership information is obtained by companies and are up to date and available to financial institutions. When using several sources of information to determine beneficial ownership, it is often more effective in preventing the misuse of shell companies for criminal purposes. The three prongs of FATF’s recommendations for identifying beneficial owners are:

  • Existing Information Approach – using existing sources such as open source records, tax documents, stock exchanges, and other public databases
  • Company Approach – requiring companies themselves to obtain and hold up-to-date information on beneficial owners
  • Registry Approach – requiring company registries to obtain and hold up-to-date information on beneficial owners

For U.S. financial institutions, using all three recommended prongs in today’s beneficial ownership environment is impossible as the U.S. does not have a public registry for beneficial ownership information. The 2018 CDD legislation, which amends the Bank Secrecy Act, requires financial institutions to gather beneficial information ownership for owners of 25% or more and for controlling persons, but the financial institution does not need to verify that the information given by the company is correct. Without a public registry, this burden would be significant and costly.

Is a national beneficial ownership database in the works?

The U.S. has continued to be under scrutiny by FATF for not having strong beneficial ownership regulations to prevent the use of shell companies for nefarious purposes. Many countries throughout the globe are far above the U.S. in lifting the veil of secrecy to disrupt money laundering and terror financing through shell companies.

Through AML modernization reform legislation, Congress is attempting to rectify this issue. In October of 2019, the House of Representatives passed to the Senate the Corporate Transparency Act, H.R, 2513, which would direct FinCEN to create a national database that banks could use to verify beneficial ownership information. The bill requires that certain new and existing companies file beneficial ownership information to FinCEN if the ownership is 25% or more or if an individual receives substantial economic benefits from the assets of the company. The bill further imposes a civil penalty and authorizes criminal penalties for noncompliance.

If passed, the FinCEN registry would enable financial institutions to verify information collected directly from the companies and would satisfy the recommendations of FATF’s multi-prong approach. The importance of avoiding FATF’s scrutiny, which could lead to possible sanctions against the U.S., is one important aspect to this legislation passing. Perhaps the true reason to pass this legislation is for the U.S. to step up along with other countries to give best efforts to preventing money laundering and terror financing, in the U.S. and as a major player in the world’s fight against financial crime.

Other FATF beneficial ownership resources:

About the Author

Terri Luttrell, CAMS-Audit

Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size. She has successfully worked with institutions in developing BSA/OFAC programs, optimizing various automated solutions, and streamlining processes while ensuring all regulatory requirements are met. As the Compliance and Engagement Direcgtor at Abrigo, Terri provides insights that contribute and support long-term banking strategies based on analysis of market and industry trends, competitor developments, and financial and regulatory technology changes. She is an audit-certified anti-money laundering specialist and a board member of the Central Texas chapter of the Association of Certified Anti-Money Laundering Specialists (ACAMS). Terri earned her bachelor’s degree in business administration, specializing in business and finance, from the University of North Texas.

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