The Small Business Administration (SBA) defines a depository institution (including a credit union) as a small business if it has assets of $550 million or less. We observed that under the existing requirement for financial institutions to report suspicious activity, they must file SARs on a transaction that, among other things, has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.[80] When a financial institution detects suspected money laundering or fraud, its employees must investigate further to determine whether the activities warrant filing a SAR with FinCEN. It could also include information indicating a possible change in beneficial ownership, when such change might be relevant to assessing the risk posed by the customer. It also may vary depending on the type of entity opening the account. This calculation uses the $300 billion estimate for annual illicit proceeds generated in the United States on page 2 of U.S. Department of the Treasury. Office of the Press Secretary. Rather, the great majority of mutual fund investors purchase shares through an intermediary, such as a securities broker-dealer, and therefore the mutual fund has no direct relationship with them. The report suggests that the ease of concealment plays a primary role in the execution of many financial crimes. We presume that the commenters believe that insurance companies subject to an AML program requirement and to State regulation present a lower risk profile, and should therefore be excluded. For example, a few commenters challenged the notion that the beneficial ownership requirement would result in criminal actors actually providing information to financial institutions that would be valuable to law enforcement agencies; these commenters noted that such actors could simply provide false information, or hire straw men for the sole purpose of opening accounts. required for verifying the identity of customers that are individuals under paragraph (a)(2) of Start Printed Page 29408the applicable CIP rule,[45] We address other requests for exemptions from the beneficial ownership requirement in the discussion of 1010.230(h) below. FinCEN considered a number of alternatives to the proposed rule. Sources: U.S. Department of Justice, Assets Forfeiture Program. Financial Crimes Enforcement Network (FinCEN), Customer Due Diligence Requirements for Financial Institutions, 77 FR 13046 (March 5, 2012). Commenters raised a number of points regarding the ownership prong. The conclusion of the order-of-magnitude assessment probably would not be materially changed by gathering additional data unless the current data points are outliers. As a part of broker-dealers' SAR reporting obligations, they must necessarily have an understanding of the nature and purpose of a customer relationship in order to determine whether a transaction is not the sort in which the particular customer would normally be expected to engage. A number of commenters urged clarification of the proposed definition of legal entity customer, and many urged expansion of the proposed exclusions from the definition to include, for example, accounts opened to participate in employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) and accounts for foreign publicly traded companies, regulated financial institutions, and governmental entities. In the NPRM, we proposed an exclusion from the definition of legal entity customer for charities and nonprofit entities that are described in sections 501(c), 527, or 4947(a)(1) of the Internal Revenue Code of 1986, which have not been denied tax exempt status, and which are required to and have filed the most recently due annual information return with the Internal Revenue Service. In short, the proposal served to codify existing supervisory and regulatory expectations as explicit requirements within FinCEN's AML program requirement in order to make clear that the minimum standards of CDD, as articulated, include ongoing monitoring of all transactions by, at, or through the financial institution. may prescribe minimum standards for programs established under paragraph (1). The final rule, like the proposed rule, defines "reporting companies" to include both U.S. domestic companies and foreign companies registered to do business in any U.S. state or tribal jurisdiction. http://www.treasury.gov/about/organizational-structure/offices/Pages/The-Executive-Office-for-Asset-Forfeiture.aspx (accessed October 8, 2015). 157. Although a futures commission merchant's customer identification program will not apply when it is operating solely as an executing broker in a give-up arrangement, the futures commission merchant's anti-money laundering program should contain risk-based policies, procedures, and controls for assessing the money laundering risk posed by its operations, including its execution brokerage activities; for monitoring and mitigating that risk; and for detecting and reporting suspicious activity. FIN-2007-G001. We estimate that 10-year quantifiable costs range from $1.15 billion to $2.15 billion in present value using a seven-percent discount rate and from $1.3 billion to $2.5 billion using a three-percent discount rate. Exemptions from the Ownership Prong Certain legal entity customers are subject only to the control prong of the beneficial ownership requirement, including: A pooled investment vehicle operated or advised by a financial institution not excluded under paragraph 31 CFR 1010.230(e)(2); and Reuter, Peter, and Edwin Truman. National Money Laundering Risk Assessment. Accordingly, 1010.230(b)(2) has been amended to require that at a minimum, these procedures must contain the elements[44] The final rule also leaves unchanged the 23 categories of entities specifically exempted from the CTA's BOI reporting requirements. Comment letter from Credit Union National Association, January 22, 2016, page 4. Furthermore, there may be legal entities for which there are no natural persons who satisfy the ownership prong; without the control prong, this would create a loophole for legal entities seeking to obscure their beneficial ownership information. This view is equivalent to the inclusion of perpetrators' wellbeing in overall social welfare, for example, when evaluating a crime-reducing policy. [175] Moreover, FinCEN lacks the authority to impose such an information collection requirement upon the IRS, and because of the sensitive nature of tax information and the many statutory restrictions on the use of such information in order to protect taxpayers' privacy, legislative changes to the tax code would be required. Even the verified identity of a natural person whose status as a beneficial owner has not been verified provides law enforcement and regulatory authorities with an investigatory lead from whom they can develop an understanding of the legal entity. [139] 34. Rather, FinCEN expects covered financial institutions to rely upon the representations of such customers, absent knowledge to the contrary. As discussed more fully in the Section-by-Section Analysis addressing the amendments to the AML program rules, FinCEN does expect financial institutions to update this information based on risk, generally triggered by a financial institution learning through its normal monitoring of facts relevant to assessing the risk posed by the customer. (h) Exemptions. 5318(h)(1), as well as the elements of the minimum standard of CDD that are not otherwise already accounted for in either the existing AML regulatory scheme (i.e., CIP) or in the proposed beneficial ownership requirement. FinCEN only obtained five self-reported IT upgrade costs estimates with broad ranges. We too adopt this approach in the RIA, using external costs as the relevant concept for the cost of crime, meaning that any reduction in funds involuntarily transferred from victim to offender would constitute a benefit of the CDD rule. As it does for banks, the term customer risk profile is used to refer to the information gathered about a customer to develop the baseline against which customer activity is assessed for suspicious transaction reporting. In their view, this made the CDD rule an impermissible tax upon financial institutions. For clarity, FinCEN notes that in any such case the legal entity customer would nonetheless be required to identify an individual under the control prong. That is, should the financial institution learn as a result of its normal monitoring that the beneficial owner of a legal entity customer may have changed, it should identify the beneficial owner of such customer. 80. They also questioned the value of the information provided when there are no means of verifying the person's status as a beneficial owner. Accordingly, in the final rule, 1010.230(b)(1) is revised to state that covered financial institutions must identify the beneficial owner(s) of each legal entity customer at the time a new account is opened, unless the customer is otherwise excluded or the account is exempted. Combating Transnational Organized Crime: International Money Laundering as a Threat to Our Financial System, Before the Subcommittee on Crime, Terrorism, and Homeland Security, H. Comm. Given the lack of specific estimates for small entities, FinCEN is not able to include an estimate or range of estimates for this expense for the FRFA. However, because statistical data does not exist regarding either the average number of beneficial owners of legal entity customers of small institutions or how many such accounts they establish in any time period, FinCEN sought comment on these questions. Consistent with the Proposed Rule, key categories of exempted legal entities include: . For these reasons, we believe an exclusion for State-regulated insurance companies is appropriate, and we have accordingly added to the final rule an exclusion for an insurance company that is regulated by a State as paragraph (e)(2)(xii).[69]. . The definition of legal entity customer also does not include natural persons opening accounts on their own behalf. Rather, as it relates to broker-dealers' SAR requirements, we expect this information to be used at least in some cases in determining whether a particular flagged transaction is suspicious. We discuss the spillovers addressed by the CDD rule in more detail below. The rule further outlines a range of activities that could constitute substantial control of a reporting company. 180. To facilitate institutions' abilities to rely upon the Certification Form, the proposed Certification Form included a section that required the individual opening the account on behalf of a legal entity customer to certify that the information provided on the form is true and accurate to the best of his or her knowledge. FinCEN believed that the proposed rule would not have a significant economic impact on a substantial number of small entities, and certified that it would not. Nonprofit Bylaws: Suggestions for What to Include. For example, a paper mill that pollutes a river by releasing wastewater may negatively affect recreational fishermen downstream who may find fewer fish or be unable to eat the fish they catch due to the pollution. 44. Law enforcement commenters, however, identified significant benefits to the collection of beneficial ownership information, regardless of financial institutions' ability to verify ownership status. FinCEN expects that such flexibility will facilitate the implementation of the beneficial ownership requirementsome commenters noted that giving financial institutions flexibility in integrating this requirement would substantially reduce resource outlays to change customer onboarding processes and to train front-line employees. (a) In general. In its certification FinCEN noted that financial institutions periodically update their IT systems, and that small financial institutions typically outsource their IT requirements to vendors, which would incorporate the required modifications into the programs that they supply to small financial institutions at minimal additional cost. The second limitation serves to mitigate the principal money laundering vulnerability in some of these accountsto wit, the possibility of a cash refundby requiring the identification and verification of beneficial ownership information when the initial remittance is made or when a refund actually occurs. Annual Reports to Congress (eds. When such unquantifiable benefits and costs are likely to be important, one should carry out a threshold, or breakeven analysis to evaluate their significance. As FinCEN stated in the proposal, depending on the facts and circumstances, other relevant facts could include basic information about the customer, such as annual income, net worth, domicile, or principal occupation or business, as well as, in the case of longstanding customers, the customer's history of activity. 2015. Throughout this analysis, we use a no action baseline, meaning that we compute and discuss costs and benefits of the final rule relative to a situation where the rule is not adopted. Accordingly, we expect this element to be construed fully consistently with the SAR rule and associated guidance for mutual funds. The abuse of legal entities to disguise involvement in illicit financial activity is a longstanding vulnerability that facilitates crime, threatens national security, and jeopardizes the integrity of the financial system. As described above in the sections addressing banks and broker-dealers, we believe that this change to the ongoing monitoring provision is more consistent with current practice, and therefore, with the nature of the obligationthat is, when mutual funds detect information relevant to assessing the risk of a customer relationship during the course of their normal monitoring, they would then be expected to update customer information. To understand the types of transactions in which a particular customer would normally be expected Start Printed Page 29424to engage necessarily requires an understanding of the nature and purpose of the customer relationship, which informs the baseline against which aberrant, suspicious transactions are measured. ;; Guidance from the Staffs of the Department of the Treasury and the U.S. Securities and Exchange Commission, Question and Answer Regarding the Broker-Dealer Customer Identification Program Rule (31 CFR 103.122) (October 1, 2003), available at http://www.fincen.gov/statutes_regs/guidance/html/20031001.html;; Guidance from the Staffs of the Department of the Treasury and the U.S. Commodity Futures Trading Commission, Frequently Asked Question regarding Customer Identification Programs for Futures Commission Merchants and Introducing Brokers (31 CFR 103.123), available at http://www.fincen.gov/statutes_regs/guidance/html/futures_omnibus_account_qa_final.html;; FinCEN, Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Futures Industries, FIN-2006-G009 (May 10, 2006), available at http://www.fincen.gov/statutes_regs/guidance/html/312securities_futures_guidance.html. We were able, however, to obtain incremental IT cost estimates specific to a few financial institutions during one-on-one calls. The NPRM proposed a new requirement for covered financial institutions to identify the natural person or persons who are beneficial owners of legal entity customers opening new accounts, subject to certain exemptions, and to verify the identity of the natural person(s) identified. We address the specific comments regarding the various assumptions underlying our analysis below. Those criminals may incur the costs of taking those steps, and perhaps ongoing costs in the form of using less convenient and costlier financial services. Some commenters also requested that FinCEN exclude other low-risk entities from the definition of legal entity customer. In the preliminary RIA, we used 15 and 30 minutes for the low and high scenario average increases, respectively, in onboarding time per account, but some commenters objected to these values as being too low. FinCEN has considered all of the arguments in favor of lowering the ownership threshold to 10 percent, and we decline to make this change in the final rule. Anti-Money Laundering Program Rule Amendments, B. Rather, we expect futures commission merchants and introducing brokers to utilize the customer risk profile information as necessary or appropriate during the course of complying with their SAR requirementsas we understand is consistent with current practicein order to determine whether a particular transaction is suspicious. (g) New account. (5) Appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: (i) Understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and, (ii) Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. FinCEN has the legal authority for this action in the Bank Secrecy Act (BSA), which authorizes FinCEN to impose AML program requirements on all financial institutions[1] To further develop our cost data following the NPRM comment period, we identified and assessed all of the comment letters that raised the cost issue with specificity, and substantiated the assertion that FinCEN underestimated the costs associated with implementing the CDD rule with data or a narrative explanation. National Money Laundering Risk Assessment. Due to the uncertainties associated with attributing future changes in asset recovery to the final CDD rule, we do not estimate the magnitude of this potential effect, but even a hypothetical 5 percent increase on the five-year average of $2.9 billion for the DOJ forfeitures alone would exceed $145 million in additional assets recovered. The second section reports quantitative estimates of certain costs; the third section provides a qualitative discussion of benefits and those costs that we cannot quantify; the fourth and final section employs a breakeven analysis to make the case for the adoption of the final rule. Given this lack of usable data, and because FinCEN understands that the majority of financial institutions purchase their systems for entering and storing customer data rather than building the systems internally, we also sought similar information from several of the major vendors that provide these AML/CFT-compliant IT systems. 5318(h)(1) if the futures commission merchant or introducing broker in commodities implements and maintains a written anti-money laundering program approved by senior management that: (1) The establishment and implementation of policies, procedures, and internal controls reasonably designed to prevent the financial institution from being used for money laundering or the financing of terrorist activities and to achieve compliance with the applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder; (2) Independent testing for compliance to be conducted by the futures commission merchant or introducing broker in commodities' personnel or by a qualified outside party; (4) Ongoing training for appropriate persons; (c) Complies with the rules, regulations, or requirements of its self-regulatory organization governing such programs, provided that the rules, regulations, or requirements of the self-regulatory organization governing such programs have been made effective under the Commodity Exchange Act by the appropriate Federal functional regulator in consultation with FinCEN. [149] 99. One of the constituent racketeering enterprises was alleged to have moved millions of dollars in unlawful gambling proceeds through a network of shell companies[13] which may also conduct legitimate business activity, to disguise the deposit, withdrawal, or transfer of illicit proceeds that are intermingled with legitimate funds. Increased incarcerations may incur greater variable costs (such as food, clothing, and dwellings), and personnel costs at Federal penitentiaries (guards and other staff, and their workspaces, training, and equipment). 29. McCollister, Kathryn, Michael French, and Hai Fang. The Economic Cost of Crime. Working paper, University of Cincinnati (2013). As a general matter, FinCEN does not expect covered financial institutions' compliance with this regulatory requirement to be assessed against a lower threshold. For instance, real illicit proceeds (including from illicit drug sales) are assumed to be $309 billion and almost $383 billion in 2016 and 2025, respectively. FinCEN discussed with vendors the changes that would result from the adoption of the proposed rule and the likely additional costs that would be charged to customers in order to achieve compliant systems. on NARA's archives.gov. FinCEN viewed this part of the rulemaking as not imposing new requirements, but rather making explicit the activities that covered financial institutions are already expected to undertake, based on guidance and supervisory expectations, in order to satisfy their existing obligations to detect and report suspicious activities. Table 5 shows that the value of assets forfeited to the U.S. Department of Justice Forfeiture Fund has exceeded $1.5 billion every year from 2010 to 2014 and has exceeded $4 billion in two of those years,[148] We reiterate our understanding that, consistent with existing obligations, financial institutions are already taking a risk-based approach to collecting information with respect to various persons associated with trusts in order to know their customer,[57] Although no small entities estimated the cost for this, an industry trade association stated that small banks would incur expenses of nearly $13,000 to develop and administer the training. the material on FederalRegister.gov is accurately displayed, consistent with 2 This guidance provides examples and answers to commonly asked questions regarding the final rules 3 that FinCEN issued in December, 2008 and June . Applying Becker's model to criminals allows us to evaluate how the new policy would affect the level of illicit activity. Several commenters sought clarification as to whether a financial institution must identify and verify a legal entity customer's beneficial owners each time it opens a new account at the institution after the rule's compliance deadline, or whether the requirement applies only the first time it opens a new account at such institution. For these purposes, customer information shall include information regarding the beneficial owners of legal entity customers (as defined in 1010.230). Several trade association commenters identified a variety of sources of costs that were not widely applicable to the institutions they represented. 156. FinCEN has reconsidered the PRA burden estimates published in the proposal, based on the comments received to the proposal and the preliminary RIA and IRFA, and publishes below its revised estimates. Start Preamble AGENCY: Financial Crimes Enforcement Network ("FinCEN"), Treasury. These include the fact that, in order to qualify for the exemption, the financial institution would effectively need to verify each of the following: 1. This is because FinCEN understands that approximately 3,000 small credit unions have five or fewer employees. One commenter questioned the need to incorporate the nature and purpose element into the AML program rules for broker-dealers if it is an inherent part of suspicious activity reporting. Affected public: Certain financial institutions, and businesses or other for-profit and not-for-profit entities. A few commenters asserted that our time estimates for onboarding were too low. As noted in the RIA, because of the lack of actual estimates of such costs, we have not included them in the aggregate quantified costs of the rule. We note that neither the Federal futures laws nor the National Futures Association's rules explicitly require firms to create a customer risk profile or a formal risk score for all customers. Commenters also sought clarification regarding various scenarios where 25 percent or greater equity interests of a legal entity customer are held in such a manner that the interest is not ultimately owned, directly or indirectly, by any individual. [116] The CDD Rule provides important exclusions and exemptions for pooled investment vehicles, as well as other entity types. We believe that the provision inserted into 1010.230(b)(2) of the final rule describing the extent to which the financial institution may rely on the information provided by the customer strikes the right balance between the need to minimize burden upon covered financial institutions and the risk of abuse of legal entities for illicit purposes. 85. In addition, customer due diligence also includes conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. For complete information about, and access to, our official publications We also reject the notion that amending the AML program rules in this way is an incorporation-by-reference of other regulatory schemes outside of the scope of FinCEN's statutory authority. The large empirical literature on the economics of crime shows convincing evidence that higher probabilities of apprehension and conviction (usually in the form of stronger police presence) tend to reduce crime rates through some combination of incapacitation and deterrence.[140]. The information was provided by the SEC as of December 31, 2014. In its certification FinCEN noted that financial institutions generally conduct periodic training of their employees for BSA compliance and that this new requirement would be included in that periodic training. 69. Unlike the situation at the time of the 2007 EU study referred to above, the majority of FATF members (as well as many other jurisdictions) are now in compliance with the FATF customer due diligence standards; as a result of which there are few safe havens in the world (not just advanced economies) where financial institutions are not required to obtain beneficial ownership information about legal entities when they open an account. In 2006, prosecutors indicted a number of individuals for their roles in supporting a long-running nationwide drug trafficking organization. Charities Partially Exempted from New Beneficial Ownership Rule See FinCEN et al., Interagency Interpretive Guidance on Customer Identification Program Requirements under Section 326 of the USA PATRIOT Act, FAQs: Final CIP Rule 6 April 28, 2005, page 6, available at http://www.fincen.gov/statutes_regs/guidance/pdf/faqsfinalciprule.pdf. 246.22 Periodic review of the QRM definition, exempted three-to-four unit residential mortgage loans, and community-focused residential mortgage exemption The commenter urged FinCEN to remove this term from the final rule or provide additional opportunities for comment because of this lack of understanding. publication in the future. This assertion is an inaccurate characterization of our approach to IT costs. (1) Covered financial institutions are exempt from the requirements to identify and verify the identity of the beneficial owner(s) set forth in paragraphs (a) and (b)(1) and (2) of this section only to the extent the financial institution opens an account for a legal entity customer that is: (i) At the point-of-sale to provide credit products, including commercial private label credit cards, solely for the purchase of retail goods and/or services at these retailers, up to a limit of $50,000; (ii) To finance the purchase of postage and for which payments are remitted directly by the financial institution to the provider of the postage products; (iii) To finance insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker; (iv) To finance the purchase or leasing of equipment and for which payments are remitted directly by the financial institution to the vendor or lessor of this equipment.
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