FinCEN overreaches on beneficial ownership

The Democrats in Congress weren’t making much progress with their silly attempt to force a federal mandate down the throats of state officials who register and regulate corporations.  Despite arm-twisting and getting the Obama administration on board with Sen. Levin’s “incorporation transparency” bill, and getting Time magazine to write a glowing piece about the proposed law, the bill’s sponsors are stuck.

So what have they done?  Pres. Obama’s Treasury Department has established a rule that Congress could not get passed as a law.  Rather than getting the states to hunt down the “beneficial owners” (ie, the true owners of the corporation), the new rules established by FinCEN, an agency within Treasury, will require banks to discover the beneficial owners of all their commercial accounts.  This burden on the compliance division of banks will not be well-received by the business end of a still recovering financial sector.

Giving the states an unfunded mandate through a law would be bad enough, but imposing a costly regulation on the private sector through a backdoor rule is even worse.

This rule will not prevent terrorist financing or secret business activities by Iran.  The effect will be to increase tax revenues to the federal government by forcing banks to figure out what entities may be subject to additional American taxes.  If it is discovered that the customer is subject to a foreign tax, it may well be that the State Department will be lobbying the governments of those countries for a reciprocal law or rule to target Americans who off-shore their wealth.

The rule will also gum up the works at American financial institutions by creating new regulations that banks will have to pay for by increasing bank fees for ordinary customers.

From Complinet with a hat tip to Bachir El Nakib:

U.S. Treasury proposes due diligence and beneficial ownership clarifications for financial firms

Mar 01 2012 Brett Wolf

U.S. financial institutions’ obligations to know their customers have for years been implicit in anti-money laundering rules, but the time has come for an explicit rule to clarify and strengthen those requirements, especially with regard to accounts held by legal entities, the U.S. Treasury Department said on Wednesday.

Treasury’s Financial Crimes Enforcement Network (FinCEN), proposed such a rule and called for industry feedback. It cited concerns about “shell” companies that aid money laundering, terrorism financing, weapons proliferation and tax evasion by hiding the identities of participants from law enforcement authorities in the United States and abroad.

Ideally, financial institutions can mitigate such risks by conducting customer due diligence (CDD), which involves obtaining so-called “beneficial ownership” information necessary to reveal the people behind the legal documents.

Although AML regulations stemming from the USA Patriot Act clearly require CDD and more thorough enhanced due diligence measures in the relatively high-risk private banking and correspondent banking arenas, there is more ambiguity in other business lines, sources say.

Still, financial institutions are clearly required to know their customers well enough to develop a risk profile and spot transactions that are suspicious, which requires knowing who is behind accounts, FinCEN says.

“The explicit requirement that a financial institution know its customers, and the risks presented by its customers, is basic and fundamental to both serving those customers and implementing a program that protects a financial institution from abuse by illicit actors,” said FinCEN Director James Freis, Jr. “The comments we receive will help us balance the information needs of law enforcement with the responsibilities placed on the financial industry.

“Broad public input … will assist FinCEN in considering a CDD obligation that would bring consistency and uniformity both within and across financial institution sectors. With this consistency, FinCEN seeks to disrupt the ability of criminals to hide their assets behind the shroud of anonymity.”

Lack of “uniformity and consistency”

FinCEN expressed concern that its efforts over the past decade to highlight and clarify financial institutions’ obligations with regard to CDD and the collection of beneficial ownership information may have been insufficient. Specifically, it said it was “concerned that there is a lack of uniformity and consistency in the way financial institutions address these implicit CDD obligations and collect beneficial ownership information within and across industries.”

It cited a beneficial ownership survey it conducted in 2008 and industry reaction to guidance it issued a year later, both of which it said suggested that not all financial institutions understood their obligations. It also cited recent regulatory actions against several banks and broker-dealers, including the high-profile actions targeting HSBC Bank USA and Wachovia Bank (now part of Wells Fargo).

It added that it envisions a requirement obliging financial institutions to collect beneficial ownership information for all account holders, with possible “limited exceptions based upon lower risk.”

FinCEN’s proposal is primarily aimed at banks, brokers-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities. However, it said it is also considering extending a rule to money services businesses, insurance companies, casinos, non-bank mortgage lenders or originators and other entities with AML program rules.

Historical challenge has new implications

Determining beneficial ownership of certain corporate accounts has long been a challenge for U.S. financial institutions, primarily because some states do not collect the information during the incorporation process. Some financial institutions have argued that the government is in a better position to determine beneficial ownership and therefore should shoulder the burden.

FinCEN’s proposal notes that Treasury’s “strategy” to address “ongoing abuse of legal entities” will also depend on Congress enacting a law requiring that the states collect beneficial ownership information…

Obama names fool to lead on terror finance, sanctions

"These books make me look smart"

The White House has announced that Stuart Levey, the Treasury Department’s Undersecretary for Terrorism and Financial Intelligence, will resign.  His replacement will be Democrat lawyer David S. Cohen, the current Assistant Secretary for Terrorist Financing.  Cohen doesn’t deserve his current job, much less a promotion.  The Republicans in the Senate need to resist and grill Cohen during confirmation hearings.  Here’s why:

1. Cohen has praised Treasury’s efforts at containing terrorist financing to Al Qaeda while failing to recognize the contribution of the U.S. military in the war against terrorism.  It is largely the military pursuit and elimination of insurgent and terrorist financiers and cell leaders that has pushed Al Qaeda closer to insolvency.  It has not been the men in navy blue suits inside the beltway. 
2. Cohen “is pleased with the contribution that Saudi Arabia” has made in combating the financing of terrorism.  Pleased?  Cohen’s statements on Saudi Arabia are for public show and border on outright lies.  His statements to more than one media outlet have been made to highlight a spirit of cooperation with the Muslim world and to paint a picture of Pres. Obama’s effectiveness at using “soft” power.  The reality is that Saudi cooperation in the financial war on terror is limited to public statements, meager proof, and multiple examples of Saudi duplicity.  Relatedly, Cohen has downplayed the role of the Middle East in international terrorist financing.  At a speech to the Washington Institute for Near East Policy, Cohen addressed terrorist financing problems in Mexico, North Korea, Africa, and getting slightly closer, Afghanistan and Pakistan.  He spoke some about Iran and Hezbollah, ignored Yemen, and left out Saudi Arabia’s role in funding Al Qaeda and the Taliban entirely.
3. Cohen supports Carl Levin’s dreadful incorporation transparency bill which would deepen the federalization of what has historically been a state role—the incorporation of businesses.  The bill would require additional disclosures by companies, additional paperwork by the state incorporation agencies, and would subject the states to turn over records on their businesses to Washington, D.C., and even to foreign countries upon request.  Contrary to what supporters say, the bill would not help expose the Iranian or terrorist shell companies of tomorrow—it is a bill designed to discourage foreign companies to offshore their revenues in the U.S. in the vein hope that foreign countries will reciprocate by helping the U.S. crackdown on its own tax deadbeats.  Cohen’s support for the bill was a deviation from the Treasury policy stated by another assistant secretary who testified under oath before Congress that no new laws are necessary to fight terrorist financing.  Cohen’s position also put him at odds with current FinCEN director Jim Freis, who has a less rigid approach toward beneficial ownership.  That makes Cohen the odd man out among the assistant secretaries he will be supervising if confirmed. 
4. More broadly speaking, sanctions are the last bow in Pres. Obama’s quiver against a nuclearizing Iran.  Either the Obama administration is or is not serious about enforcing those sanctions, about bringing more nations on board with those sanctions (particularly Europe and Russia), and about keeping the sanctions tight.  Letting the well-respected Levey go and selecting a lightweight like David Cohen suggests that Pres. Obama is no longer serious in this approach.  More menacingly, that suggests that the Obama administration no longer has a genuine plan for containing Iran’s nuclear ambitions.

Reuters reports that the announcement of Levey’s replacement “comes as the United States and its allies appear likely to make a push for stiffer sanctions on Iran… U.S. officials emphasized they did not think the staff change would stem the momentum for the drive to put the financial squeeze on Iran or to choke off access by militant groups to international sources of money.  ‘It will have no effect on policy, or on our ability to execute the president’s policy,’ U.S. Treasury Secretary Timothy Geithner said.”

Really, Tim?  But is it not informative that the question is being asked?

Weekly term: beneficial owner

There are two types of owners in this world:  those who own it on paper, and those who really own it.  The “beneficial owner” is a fancy way of referring to the real owner.

The Financial Action Task Force, the foremost anti-money laundering international body, offered this definition of beneficial ownership in their publication, The Financial War on Terrorism:  A Guide*:

Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the person on whose behalf a transaction is being conducted.  It also incorporates those person who exercise ultimate effective control over a legal person or arrangement.

This is especially relevant within the context of jihadist financing because Saudi Arabia, Iran, their “charities,” their millionaires, and their terrorist groups use shell companies, front investors, puppet charities, correspondent banks, secret terror cells, and other cat’s-paw forces to buy assets in the West.  The hidden actor is the beneficial owner.

The Incorporation Transparency and Law Enforcement Assistance Act, a bill sponsored by Sen. Carl Levin, is still lingering around in the Senate.  Levin says that S. 569 would help expose beneficial ownership of, for example, Iranian-backed ventures.  In theory, that would be a good thing, but when you read the actual bill it’s actually just a law to help foreign countries crackdown on tax evasion by their own citizens doing business in America, and the bill’s “beneficial owner”… is Carl Levin…

*FATF, The Financial War on Terrorism:  A Guide (Paris:  OECD Publications Service, 1999).